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All charts
created with HotTrader Software.
We are going
to start with Gann's bear market "Short" entries first. These principles
work with many markets including stocks and commodities, but we will
use stocks in these illustrations.
"Going
from a Bull to Bear market" - Gann says ...
In "How to
Make Profits in Commodities", W.D Gann says ...
"SECONDARY RALLY
OR LOWER TOP. After a prolonged advance when wheat or any commodity
reached final high and the Bull campaign is over, there is usually
a short severe decline, lasting anywhere from 1 to 2 and possibly
3 weeks or months. After the first sharp decline, the market may remain
in a narrow trading range for 10 days or 2 or 3 weeks, in some cases
even longer."
"After that,
there is a SECONDARY RALLY, sometimes getting up near the OLD TOP
and sometimes not reaching it by many points. Going over past records
you will find that a market seldom fails to have this SECONDARY RALLY.
When this SECONDARY RALLY comes, especially after the TREND has TURNED
DOWN, it is the safest rally on which to SELL SHORT, because the decline
is faster from that time on and rallies smaller."
Below is an example
of this on ANZ Weekly chart. Note that this picture exactly fits Gann's
description - a break of the uptrend, then a large secondary rally
followed by a reasonably fast bear market decline with smaller rallies.
(In order to effectively sell short ANZ, you would have to have bought
put options.)
A further point
that Gann raises is this ... "Sell after the first decline exceeds
the greatest reaction in the preceding Bull Campaign or the last reaction
before the final top" (W.D.Gann Stock Market Course).
For an explanation
of this,
refer
to the chart and commentary below ...
The size of reactions
1, 2, 3, 4 and 5 are marked with white lines. Reactions 1 to 4 occurred
during the bull market phase. Reaction 5 is the first decline that
exceeds the greatest reaction in the preceding bull campaign AND Reaction
5 exceeds the last big reaction before the final top (reaction 4)
AND Reaction 5 breaks the long term uptrend. (We've used a normal
trend line to mark this, not the break of a swing point. This is not
what Gann taught but it is an alternative method that can be used
when you become skilled at recognising the trend channel.)
Places to Sell
...
Gann says that
the safest place to sell is near, that is, just after, the top of
the secondary rally - assuming you can pick this- In the W.D.Gann
Stock Market Course, Gann Writes ... ".SAFEST SELLING POINT
Sell on a secondary
rally after a stock has broken the previous bottoms of several weeks
(Sell Point
2 just after "Top of Secondary Rally" in the picture above) or has
broken the bottom of the last reaction, turning trend down. (Sell
Point 1) This secondary rally nearly always comes after the first
sharp decline in the first section of a Bear Campaign."
and ...
"Sell after the
first decline exceeds the greatest reaction in the preceding Bull
Campaign or the last reaction before the final top." (Sell Point 1).
Important
Points ...
(1) If you are initiating new positions, that is, you are selling
short or buying put options, you must first determine your risk before
entering the trade. Sell Point 1 may require a stop above swing point
5. This stop is a fair distance away in this example and may be too
big for your account size or may cause a severe reduction in value
of a put option if the market went this far against it. If this is
the case you do not take that trade.
(2) Sell
Point 1 in this case could be used for exiting a long position, but
not initiating a new short position if the risk was too great, considering
where you would put your stop - above point 5 top. In other examples
Sell Point 1 can be good for initiating a short position.
(3) Gann
considers Sell Point 2 to be the safest, with a stop above the top
of the secondary rally, although this sell point can be difficult
to define and is actually not used in his standard swing trading method.
There are methods which can be used to define it some of the time,
which we will look at in the screen movies.
(4) Sell
point 3 is used in Gann's swing chart trading method and can be used
subject to you being able to define a point where you would exit the
trade with a stop if the trade goes against you. Gann says put a stop
above the secondary rally.
Further example
...Study this carefully ..Acacia Resources Weekly with 2 Bar Hotswing..
Explanation
...The market falls, going lower than swing bottom 3, and the
fall from swing top 4 to swing bottom 5 is larger than the range from
swing top 2 to swing bottom 3, which is the last and largest reaction
of the preceding bull campaign. The fall below swing bottom 3 "officially"
turns the trend down based on Gann's rules so we are now looking for
the "seconadary rally". Market does a "Secondary Rally" making swing
top 6. which is quite a bit lower than swing top 4. Gann says that
the secondary rally sometimes gets up near the old top (4) and sometimes
does not reach it by many points. In this case it didn't reach it
by many points indicating potential weakness, which was bourne out
by the subsequent bear market. Gann's rules ...
Entry Point
1 - Sell if long and sell short as market goes under swing bottom
3 subject to the risk being acceptable if you put you stop above swing
top 4.
Entry Point 2 - Sell Short as top of secondary rally turns
down (swing top 6). Swing top 6 is a bit above swing bottom 3 (remember
"Support and Resistance in Trends").
Entry Point 3 - Sell short as the market goes below swing bottom
5, subject to you being able to define a suitable stop point - a tick
or two above swing top 6.
Here is what
it looks like on a swing chart ...Carefully go through the preceding
explanation and relate it to the swing chart.
Places
to Buy ...
On page 35 of
the W.D.Gann Stock Market Course, Gann says ...
"SAFEST
BUYING POINT Buy
on a secondary reaction after a stock has crossed (above) previous
weekly tops and the advance exceeded the greatest rally on the way
down from the top."
Example.
Explanation
...
Swing tops 4, 6 and 8 are bear market tops because they are lower
than previous swing tops. Market then goes above swing top 8, falls
back making swing top 10, rises to make swing bottom 11. Swing top
10 is the "Rally" and swing bottom 11 is the secondary reaction.
The advance from
bottom 9 to top 10 exceeded the size of rallies 3 to 4, 5 to 6, and
7 to 8. (I haven't counted 1 to 2).
Entry Point 1 - Buy as market goes above swing top 8, stop
under swing bottom 9.
Entry Point 2 - Buy near the bottom of the secondary reaction
(11) if you could pick it - it's around the price of top 8 in this
example - (remember "Support and Resistance in Trends"). Entry
Point 3 - Buy as the market goes above swing top 10 with a stop
under swing bottom 11. That is, you buy on stop a tick or two above
swing top 10 with a sell stop a tick or two below swing bottom 11.
This would actually have been a good buy because a buy just above
the top of swing top 10 with a sell stop under swing bottom 11 would
have presented little risk because swing bottom 11 is close to swing
top 10.
Here is what
it looks like on a swing chart .Entry Point 3 with its stop, is marked.
Copyright © 2001
Terry Ashman
HotTrader, Australia
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