Technical Analysis (Gann Charts) - Dow and All Ords Nervous

It's been some time since I last put up the monthly graphs and I just thought it was time to revisit both monthly and weekly graphs.




Things to note from the All Ords monthly graph:
i) x=80 is March 1991 and x=280 is Nov 2007
ii) The two gradients Gann +7.5 and Gann+10 has acted as an envelope for most of the 1990s decade.
iii) The period of early 2000s saw the irrational exuberance indicated by the large peak breakout of the envelope.
iv) The GFC made a low but supported by the Gann+7.5 line. The bull run from March 2009 until now saw it rising steeply from the Gann+7.5 and is now just over the Gann+10.
v) Big question is will the Gann+10 act as a resistance or will it break through? The key is to wait for a definite signal.

It is interesting to note that the Gann angles not only act as "Barriers" (ie resistance or support lines) but also as a "Tracker" where the graph actually fluctuates along it.



On the Weekly All Ords graph - If you have been following my blog, about two article ago, I wrote on the "Squaring of Time and Price of the Global Financial Crisis GFC" (Sep 2009). In that article I found that a factor of 52 was key to revealing the square relationship between time and price. So for this Weekly graph, you will notice that I changed the Gann-32 line into a Gann-50 line (tracking the GFC down) and added a Gann+50 line (tracking the post March 2009 recovery). I used 50 because I did some recalculation and the results were better than 52, not to mention 50 is a nice round number.

The result of these changes (compare with previous blogs) is that the new Gann+/-50 track the graph even better. We can use this graph to confirm a change in trend if the current bull run is to end.



On the weekly Dow Jones, we see the graph approaching the Gann-5 and there's no reason why it should not at least touch that line before any pullback. The intersection between Gann-5 and Gann+10 would be interesting to watch.

The recent bull run has gone on for almost 8 months. The bears have become bulls while the bulls have become a little nervous. Many are expecting a pullback of some degree. However, the weekly graphs based on the Gann angles shown here do not indicate any strong resistance soon, with the exception that the monthly All Ords just broke through and important resistance. The market has dropped in the last few days but the key is to wait for confirmation of trend if we are to jump in the opposite direction.

Notes on the Techniques of W.D. Gann

1. Special Number Sequences

1.1 The Full Circle 360

To some, there seems to be something magical about the circle in the way it stands for completeness and repeatability. But putting all mysticism aside, a circle has 360 degrees. Mathematically, there are many consequences that follow from the completeness and repeatability of a circle. Any high school student would have seen how a sine wave is traced out by a circle.

Sequence 1: Circle-16ths

A circle can have its angles equally divided into 4, 8 and 16 as

Degrees         0.0   22.5   45.0   67.5   90.0   112.5   135.0   157.5   180.0   202.5   225.0   247.5   270.0   292.5   315.0   337.5   360.0

Percentages   0.0   6.25   12.5   18.75  25.0   31.25    37.5   43.75    50.0    56.25   62.5    68.75    75.0    81.25   87.5     93.75   100.0

Sequence 2: Circle-12ths

A circle can have its angles equally divided into 3, 6, 12 as

Degrees         0.00   30.0   60.00   90.00   120.0   150.0   180.0   210.0   240.0   270.0   300.0   330.0   360.00

Percentages   0.00   8.33   16.67   25.00   33.33   41.67   50.00   58.33   66.67   75.00   83.33   91.67   100.00

Gann used the Circle-16ths sequence quite often. Why should the numbers in Circle-16ths be so special in the squaring of Price and Time? The reason is that the US dollar is divided into quarters, and not too long ago it had 1/8ths. The stocks in US are also denominated in fractions of 1/4, 1/8 etc. Hence it is natural to use this division. In angles terms, they are represented by 22.5, 45.0, 67.5, 90.0 degrees and so on.

1.2 Seasonal Time Periods

The year starts on March 21 which is the start of Spring Season. The important intervals are:

    May 5  ends   1/8   or 6 1/2 weeks from   March 21 

    Jun 21  ends   1/4   or 13    weeks from   March 21

    Jul  23  ends   1/3   or 17    weeks from   March 21

    Aug 5   ends   3/8   or 19 1/2 weeks from   March 21

    Sep 22 ends   1/2   or 26      weeks from   March 21

    Nov 8   ends   5/8   or 32 1/2 weeks from   March 21

    Nov 22  ends   2/3   or 35     weeks from   March 21

    Dec 21  ends   3/4   or 39     weeks from   March 21

    Feb 4    ends   7/8   or 45 1/2 weeks from   March 21 

    Mar 20  ends   1 year or 52     weeks from   March 21

Technical Analysis - Summary of MACD

Below is a summary of the MACD technique to watch for confirmation in trends and possibly reversal in certain circumstances. The following is an excerpt from Andrew Page's article from Trading Tutors.

1. The MACD line signals upward momentum when in positive territory, and downward momentum when negative. Use this to validate an observed trend in price.

2. The MACD line can signal overbought and oversold positions. The further the line deviates away from zero, the more likely it is we will see a correction in price. Try drawing support and resistance lines for you MACD line to work out what levels typically represent overbought / oversold positions.

3. Buy signals are generated when the MACD line crosses above the signal line. Buy signals are reinforced when the MACD line is in positive territory.

4. Sell signals are generated when the MACD line crosses below the signal line. Sell signals are reinforced when the MACD line is negative.

5. Divergence between the price and MACD histogram signal weakness in the trend (loss of momentum). When you start to see the two diverge, look to the other MACD signals to confirm the end of a trend.

Squaring of Time and Price of the Global Financial Crisis GFC

Source: http://ozstock.blogspot.com

Here is some quick calculations I tried after reading about Gann's technique of squaring Time and Price. It is quite amazing to see how the numbers fall into place. For both the Dow Jones and the All Ordinaries Indices, the calculations are below:

Market Peak at: 8 Oct 2007
Market Bottom at: 2 Mar 2009
Time Difference = 73 weeks

All Ordinaries
High: 6760.1
Low: 3111.7
Difference = 3648.4
Difference divide by 52 = 70.16

Dow Jones
High: 14093.08
Low: 6626.94
Difference = 7466.14
Difference divide by 52, then divide by 2 = 71.8

The Time difference between high and low is 73 weeks. The Price difference for the All Ords is 70.16 (weeks) and Dow Jones is 71.8 (weeks). Both indices are so close to 73 weeks. For those new to Gann analysis, 52 is one of those magic numbers. In Gann's Master Calculator, he often use the square of 52. The number 52 comes from the fact that there are 52 weeks in a year and the data are based on weekly data.

Essentially, the Price is being rescaled by a logical factor which is 52, or a multiple of 52 as in the case of the Dow Jones. I am quite surprised that the numbers turn out so close.

The above analysis was possible because we looked at the past and identified the high and low point. For the future, we cannot really see the next high which started from the low of 2 March 2009. However, we can use the same scaling and perhaps suggest where the current rally may turn down.

Technical Analysis (Gann Charts) - Dow and All Ords Stumble

Source: http://ozstock.blogspot.com

Here is the next monthly update on the Dow and All Ords using Gann angles to analyse future trend. Before looking into the charts, a quick check of the Seasonal Time Periods from Gann shows that we are nowhere close to any important dates. We are now between the August 5th and the September 22 dates (see future blog for complete Seasonal Time Periods)

Firstly, looking at the All Ords, the last 4 weeks has clearly broken the Gann +1/2 angle, question is if it will drop down. The past 4 weeks have also convincing broken the Gann -32 downtrend line and has pushed the 20 day moving average envelope to the limits. So this has been a strong trend that may retrace back to the Gann +1/2 but currently there is no evidence to suggest a stronger, longer pullback although the news seem to suddenly turn negative in the media.



Secondly, the Dow show a similar behaviour, in the past 4 weeks, it convincingly broke the Gann -10 downtrend angle. It may still plunge towards the intersection of the Gann -10 and Gann +10 angles but there is no current evidence to support this. It is also between the two major uptrend Gann angle of Gann +10, Gann +20. Should the upward trend continue, the Gann -5 downtrend angle may be a good reference to look for.



This week will see many Australian companies release their annual results. This will truly test the sentiment and so even though the trend is strongly upward over the last 4 weeks, the fundamentals may have a say this week.

Technical Analysis (Gann Charts) - Dow and All Ords refuses to fall

Source: http://ozstock.blogspot.com

About a month ago, my article (in June) was titled "All Ords headed for June fall?" As you may have guessed, I am bearish, and in the market following my own advice last month. The market actually dropped for a few weeks as forecasted by previous blog, but my mistake was not using a stop loss. Over the last week the market surged strongly. Let's have a look at what the Gann angles say.



Looking at the All Ords graph first, I've added a new (Green line) angle of ratio 32:1 downwards from the 2007 all time high. The angle gradient of 32 is a power of 2, and I've tried others like 16:1, 8:1 and they were quite far off so I settled on 32:1. But see how it turn out to be a resistance angle to the previous rallies since Oct 2007?

Looking closely, it turns out the June fall hugged the 32:1 angle closely and the recent surge broke the resistance emphatically. In absolute terms, the rise is quite small, but the fact that it broke the line warrants further watch, or even good reason to speculate of further rise.




It's only now after the new green line (32:1) has been added to the All Ords, that I realize the Dow Jones chart's pink line marks out a very similar trend. In the Dow Jones chart, the June fall and mid-July rise follow the same pattern along the Gann -10 line as the All Ords. The resistance is not only broken but appears prominently on the up side.

In summary, if the current rise in the market can be sustain for at least two weeks, there is a good case for a strong rally in this bear market.

Warren Buffet's 1981 Formula for quick valuation

http://ozstock.blogspot.com

Here is a short technical note Warren Buffet's 1981 formula. I came across this from the Money Magazine, June 2009 issue. Hence I do not guarantee that Money Magazine's content is correct or even if this is truly a formula used by Warren Buffet. However, after analysing the formula for myself, I see the merit of it. In fact I will be including this so called Buffet's 1981 formula in my future article which explains my 3-fold Valuation method to decide on buying stocks.

The Buffet's 1981 formula is this:

Value = (ROE / Required Return) x Equity Per Share

where
ROE = Rate of Return of the Company of interest (in %). This can be calculated using Net Profit After Tax divided by Total Equity.

Required Return = Pre-tax required rate (in %) that you would like to get for your investment. For example you may wish to use a long term deposit or long term government bond rate for this.

Equity Per Share = the Equity of a company divided by the total number of shares. These figures can be obtained from the company's annual reports.

This is a quick and simple way to value a company, to see if the company is priced more or less than it is of value to you. Your input comes into the Required Return where you can choose how much you expect from this investment.

Then the formula will produce the value of the company per share. Simply compare this with the current price to see if it is over or under priced. Using this model, a company that can generate a higher return on equity is worth more than one that cannot. Also a company that generates a high ROE and is able to retain all of its earnings and continue to make higher returns, is worth more than a business with the same ROE but forced to pay most of its earnings out as dividends.