The Rule of Eight

01/13/03 11:50:24 AM

by Koos van der Merwe

Markets have moved to decimals. Is W.D.Gann's Rule of Eight still effective?

Security: QQQ
Position: Buy

One of W.D. Gann's techniques for determining projected support and resistance levels was the Rule of Eight. He would look for two major pivot points, and divide the distance between them into eight sections. He believed that because market prices were quoted in eighths, it was natural for prices to drift to these levels, and he was not wrong. Historical studies of charts show that prices did indeed tend to find support or resistance at these levels

Figure 1 shows the QQQ daily index. In the chart I have drawn eight zones of equal distance between the major pivot points A and B. Note how C and D formed a support and resistance level at the 0.25 (25%) and 0.5 (50%) levels respectively. You could therefore use the Rule of Eight to forecast that in a down move, the QQQs would probably find support at the 50% level, which it did. You could also forecast that the 25% level will be a strong resistance level, which it is, and that any break through this level, will find resistance at the 12.5% (0.125) level at $27.69. With a rising stochastic, this is a very real probability.

Figure 1: Rule of Eight. Obsolete?

Graphic provided by: AdvancedGET.

In today's market however, where all prices are quoted in decimals, I believe that the Rule of Eight is like the dinosaur-- effective in its time, but now obsolete. To me, it is logical to assume that rather than using eighths to determine support and resistance levels, tenths should be used, hence the "Rule of Tens."

The following chart is the same chart, but with the distance between the pivot points divided into tenths.

Figure 2: Rule of Ten.

The first thing you notice about the chart is the highs formed by the price at 'E' is spot on the 0.20 (20%) level, whereas on the Rule of Eight's chart, it exceeded the 0.25 (25%) level, being a bit 'fluffy.' Any future projection therefore should also be 'fluffy' whereas using the Rule of Ten, a projection would be more definite.

Does this mean that Gann's Rule of Eight no longer applies? I believe that the Rule of Eight is now obsolete. Whether the Rule of Ten will be as effective from now forward as the Rule of Eight was in the past, is something I will have to find out in the future.

In the meantime, my next resistance level for a rising QQQ is $27.90, the 10% level, and not the $27.69 level as suggested by the Rule of Eight.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Comments

Date:�01/14/03Rank:�3Comment:�Maybe Mr. Singer didn t realize that WD Gann also specified that some Commodities Markets were calculated by Tenths. Stocks may fit this bill, but not all. Thank you J. L. Mason independant

Date:�01/14/03Rank:�5Comment:�

Date:�01/14/03Rank:�2Comment:�

Date:�01/14/03Rank:�4Comment:�

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The Rule of Eight

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