Squaring Range and Time with Current Conditions - The Educated Analyst

Written by Jeff Greenblatt

Thursday, 18 November 2010 09:39

According to Gann, squaring price range with time is one of the most important and valuable
discoveries he has ever made.  I have found that years after his death, this methodology is as
relevant today as it ever was back in the day. Gann’s price and time squaring methods have
handprints all over the current action. In this article we’ll take a look at how it has affected US
equity markets.

First of all, we go all the way back to the 1987 top in the Dow. The high was 2746 and bottomed
out at 1638 after the crash. That is a range of 1108 points. From that very same 1987 top in the
Dow, to the bottom of the NDX bear in November 2008, was a time span of 1108 weeks. What
makes this more complex is we have a hybrid situation of a Dow range and an NDX bottom.
Nobody ever said this was going to be easy.

By the way, the NASDAQ bottom in 2002 was also 1108. It’s important to note the current
bottom in the NDX is tied geometrically to a range that materialized 21 years before, likely with
an entirely different set of market participants. It’s also important to realize since the current
bottom in technology is tied to events a generation ago, this is likely to be a bottom long term in
nature. We are coming up on 2 years and now not anywhere close to testing it.

(Click image to enlarge)

This is a chart of the SPX from the 2007 top of 1576.09 to the 2009 bottom at 666.79.  The
range is 909.30 points. This would be easy enough, all we have to do is take the high on
October 11, 2007 and project out to the April 26th top in 2010.

The only problem is that it doesn’t work because that comes to 928 days. However, there was
an alternate top in the markets as the NASDAQ and NDX topped on October 31, 2007. The
span in time from October 31, 2007 to April 26, 2010 is 908 (+/-1) calendar days. The market
does a great job of not making it obvious, and nobody ever said this was going to be easy.

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Squaring Range and Time with Current Conditions - The Educated Analyst

Written by Jeff Greenblatt

Thursday, 18 November 2010 09:39

What that calculation told us was this could be an important top, but since it is only tied back to
relationships only 3 years old, it wasn’t likely to be as important as the 1108 sequence that
spanned 21 years. As of this writing, the NDX was already above the April 26th high, but if
range squaring time is so important, how did the April high last only 25 weeks?

As we’ve seen, one way to square price and time is by squaring the range with time. It also
works the other way where we square the time with the range. In the prior examples we used
calendar days. It also works with trading days. In this case our margin for error is greater than
the usual plus or minus one. The NDX had 357 trading days up and a range of 2059 down to
1700, a range of 359 points. Prices turned back up in July after a big selloff including the Flash
Crash in May. Not many people thought the April highs could be challenged so soon.

However, once the square relationship showed up, a retest of the April high became a greater
probability. What is the new square telling us? It is telling us the low in July may be as important
as the high in April. Both are tied either end of the bear market. One scenario would have the
markets in a tight trading range above July and a test of the April peak. Since the April pivot is
of intermediate degree, if most of the market were to take it out we would be heading for a
retest of the 2007 top. Wouldn’t that mean a new bull market? It would but there is only one
problem standing in the way. The most important sector isn’t even close to taking out the April
high.

We have a market and a world economy that is led by the banking and housing sectors. The
BKX has lagged horribly since April and is not even close to testing it, let alone taking it out.
Until the banks can take a leadership role, it is a lower probability that we can get a serious
challenge of the top. But since banks did so horribly in August, it was really a surprise to see the
markets do so well in August and September.

At the end of August another prominent range presented itself. From the top in 2007 to the
bottom, the Dow dropped 7728 points. From the bottom to the August 2010 low was another 77
weeks. The rally was unexpected and was very strong. Given the fact we have the square in
technology back on July 1, there is now 2 key squaring relationships coming off the July pivot
low. On any downturn, this area should act as strong support.

On Monday October 18 the SPX had set a new high and the significance was it was exactly
157.6 weeks off the October 2007 top of 1576. There was perfect symmetry there. That
could’ve been a turn like some of these other examples, however it was taken out only 3 days
later. The implications of violating one of these relationships can be profound. By early

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Squaring Range and Time with Current Conditions - The Educated Analyst

Written by Jeff Greenblatt

Thursday, 18 November 2010 09:39

November the SPX was also above the April high which was 36 points higher than it had been
on October 18.

At the time of this writing, there are several other important square relationships that were
pending. For instance, the NDX had reached 1108 points off the 2008 bottom for the move up
the week of October 25, but had taken it out by a handful of points by the end of the week. The
Dow and SPX had trouble with that high but once it had taken it out, went on to go above April
as well.

Our final square relationship has the NASDAQ top coming in at 2861 in 2007. At 288 calendar
days out on August 15, 2008 a final pivot high was made in the bear market rally as the Russell
2000 put in a new print high that day. While the NASDAQ didn’t confirm it, once price and time
squared in that sequence the real crash part of the bear market accelerated. What the following
chart shows you is the fact when price and time do square it has the potential to create an
important support or resistance line. That general area was retested in April 2010 and once
again in October. Is it a coincidence the 1108 price range relationship is in the same area? My
belief going forward is this line will continue to be an important balance line for the market. It’s
possible markets can wrestle with this area for a considerable amount of time going forward. It
can and will go higher but it’s likely to retest it again.

Gann said this discovery may have been his most important and allowed him to forecast
markets with great accuracy. As you can also see, one has to dig below the surface to find
these relationships because while it’s a simple concept, the market does a good job of
concealing the relationships.

Finally, the flip side of this method is while it is very good at capturing turns, when these
relationships are violated as you’ve seen in the cases of October 18 and 25th, they act as
continuation signals. In the bigger picture, April and its excellent price and time relationships
have been violated. In the case of the NDX we are already considerably higher.

Sometimes they are the only signals the market gives in highly emotional markets.

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