W.D. Gann was a famous Wall Street analyst and trader who surmised that markets moved in octaves or 1/8 bands. As complicated as many of Gann's students made his later work out to be, his original simple observation that markets moved in 1/8th bands has stood the test of time. His .375, .50, and .625 levels dovetailed with Fibonacci's .382, .50, and .618.
The long-term 7/8ths line at 110.00 on the Aussie certainly lived up to its Gann billing as the lowest risk level to take a short trade from in 2011. Likewise the 1/8th line on the shorter-term lines put in an impressive showing this past month. Gann called 1/8th the lowest risk point to take a long-trade from, but the jury is still out on this one. Based on its pattern of higher lows over the past 6 months AUDUSD is in a bull phase.
The short-term 4/8ths line held strong as support in the Euro two months running, and it's currently up against the 5/8ths line which Gann called the "top of the pipe" (the pipe is between 3/8th and 5/8th and where Gann surmised price spent the majority of time. Given the overall pattern of lower highs on this chart he seems unlikely EURUSD would be able to mount a serious rally. A break below the long-term 5/8th level at 130.00 opens the door to the long-term 50% level at 120.00
The GBPUSD is firmly in a trading range laid out by the long-term pipe between 5/8ths -- 170.00 -- above and 3/8ths - 150.00 -- below. It's currently also at the top of shorter-term pipe at approximately 162.60. Our guess is that the recent rally above both 50% on the long-term frame and 50% on the short-term frame was a short squeeze based on short liquidation rather than new buying. The double bottom on the short-term 1/8th line at approximately 152.60 lends validation to Gann's theory that this level is the lowest risk point to initiate longs positions from.
The USDCAD failed to penetrate the 5/8th level just above 105.00 on the short-term frame in the late fall of 2011 and has been producing lower highs since. Its failure two weeks ago to break above the 2/8th line on the long-term frame and 4/8ths on the short-term frame points to a possible slow grind lower for price and volatility
The USDCHF is back in the short-term pipe after a trip above it in December and January. The current picture shows price pointing towards 90.00 which is 4/8th on the short-term frame and the vaunted 1/8th on the long-term frame. A price dip to 88.00, or 3/8ths, and the bottom of the pipe on the shorter-term frame would definitely be an area of strong interest for us. Likewise pressing shorts below the long-term 1/8th may not be advised.
The USDJPY is within both its long-term and short-term pipes. Given its still above the 50% level -- 80.00 -- on that short-term time frame it would still be considered a bull phase. A move below that 80.00 likely means a slow grind lower for both price and volatility.
Jay Norris is the Director of Learning at IBUniversity.com and author of Mastering the Currency Market, McGraw-Hill, 2009.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.