Charting is a fascinating and relaxing hobby for many of us - with the added benefit of giving us something to do on a winter weekend. The basis for it is sound: the pattern on the chart is a reflection of the fundamental backdrop, and it allows us to objectively identify both direction and momentum. In fact there is no study I know of that is more objective than using market generated date only, i.e.: a markets open, high, low, and closing price. Charting is definitely an art form and has many storied students including Charles Dow, R.N. Elliot, and W.D. Gann. While I favor Dow's Theory most of all, and consider our own Risk Tolerance Threshold Theory an extension of it, I respect Elliot's Wave Theory, and have always found Gann's basic octave studies both pragmatic and fascinating. While I'm a firm believer in trend trading, Gann's octave scale is counter-trending in nature. What I do like about Gann Line's is they confirm the fractal nature of markets where what happens on the higher time frame scales - charts - is replicated on the lower time frames.
While Gann's studies apply to many markets, if there is one market over time which I have seen respect Gann lines it is the EURUSD. In the chart in Figure 1 I have set the longer-term Gann Frame to 80.00 and 160.00, and our shorter-term frame to 120.00 and 140.00.
According to Gann, the 7/8ths level, represented by 150.00 in the Euro, would be the best place to go short, because of the risk reward on the trade, while the 4/8ths line, 120.00, would be the 2nd best place to buy. Gann spelled all this out over 75 years ago, and given the price performance over the last couple of years in the Euro, it is hard to refute the man's studies.
Even when we look at the shorter-term frame we see how the 5/8ths level, known as the "top of the pipe" by Gann, proved valid resistance these past few weeks, just as the "bottom of the pipe" proved support in November. ("The Pipe" was the area of the chart between 3/8th and 5/8ths and Gann theorized that price spent the majority of time ranging back and forth between those two levels). One thing that is obvious about this chart, and Gann's studies, is that the Euro cannot go lower without first closing below 1.30. And that is something I plan on hanging my hat on next week.
To see Jay highlight trade set-ups and signals in live markets on the U.S. / London overlap go to Live Market Analysis
Trading is a risky endeavor and not suitable for all investors!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.