A presentation for Bloomberg by Richard Morrish A-Venture Capital A presentation for Bloomberg by Richard Morrish A-Venture Capital © A-Venture Capital 2010

 Gann was perceived as the master of stock market with an amazing track record  Yet it is clear that the method is very involved and with lots of rules  Yet it is a system that works well and with a serious ability to provide a view of the future  Gann passed on the knowledge in his writings but it is still a mystery to many including those that have spent time learning the method  Gann is notable for calling the stock market crash of 1929 and surprisingly the Japanese attack on pearl harbour and with it the historic low in the US Equity markets  Yet with all of this, it was clear that there was an element of fundamental analysis to his analysis where he used to fly over crops in the mid west to see the state of the crops

 I believe that it was a combination of the system and also the fundamental approach that made him so good at prediction  I have been using this system for the last 25 years in some form or another and I have refined it considerably during the last 15 years  It is how I was able to predict the 2001 stock market collapse to the day  Also why I was able to call the apex in Oil in 2009 at $142 on CNBC done in December 2008

 It is not simple but the easiest part is the Gann Fan which many apply to the market  The reality is that it works in all markets, so long as there is depth of market and transparency to the market in pricing terms  The key is not to approach it from a short term perspective  I have lectured the world and seen the majority of lectures focus on the short term  The crux of the Gann system is time frame and that is the critical element to why it is successful

 Time frame is key to accurate prediction  In the case of Gann the longer the time frame the better  In the case of markets particularly FX markets, it is best to start with a monthly chart and then work down the time frames  If the monthly chart is drawn correctly it will indentify the trend and which stage we are within the trend  The monthly chart is more powerful to trend than the weekly and the weekly more powerful to the daily.

 The best example to this was the great head and shoulders debate in the S&P in July last year where the market was arguing a head and shoulders top and the end of the Stock market bull.  Yet it was at this point that the market placed a head and shoulders bottom on the weekly chart  Attached to this was a Gann cross point (more of these later) where the longer term charts predicted that we were in the bull phase of a longer term bear market

 Thus it was clear that the longer term patterning had more power than the shorter term patterning and as such the markets attacked the next Gann levels at 1,095 and 1,193 where the market would apex and finish the bull market  These were my predictions on the 17 th July 2009 with a strong correction to the market in September before a yearend rally to test toward the highs at 1,193. This when the market was trading 920 and everyone calling the top  This was done off monthly and weekly charts with a glance at the daily chart  Therefore if you want to predict the future, it starts very much in the deep past

 The critical part of the fanning is to define the driving line  This line many assume to be a 45 degree line but it is not the case from my experience  The driving line is the one that defines the trend rather than a set angle this Gann refers to as the zero line  This comes into harmonic shift which is a process which is not really discussed or used as Gann expressed  Harmonic shift changes the definition of the lines away from the standard lines as the models suggest 1x1 1x3 etc

 All markets have harmonic patterning and this is important in the system  The key element is that markets are like music  They have major and minor moves contained within them rather like major and minor chords in Music  It is this that is also an integral part to the system

 Fanning is placed at significant highs and lows but gain more strength if they are placed of multi cross points  The highs and lows are the definition of the market and necessary to trend identification  All markets have ranges and trends that come and go in cycle and it is important to define these trends and whether we are trading in a bull or bear market  One of Gann’s key points was to define his market as either a bull market or a bear market before trading in it

 This helps in identifying the strength and weakness within a market to be able best to define what kind of market you are trading in  So the fans define this structure for you  I am going to show only a short term take on a market (USDJPY)  In the first instance we define the trend through the weekly and in the second a short term path for the market but we will look at the short term first

 The driving lines are defined in red  The potential shift driving lines are defined in Dark Blue  Explanation of the chart is  Using the previous high and the next low and the current high to define the fanning  The first high takes the driving line as 50% of the high to low range of the next move

 The lines that fan off this are to discover the high to low move of the bear run which should be two lines wide to each move  The market should move in the move two lines below and two lines above to define this move which is what occurs  The top having been established should by definition place the top as significant as the next bear fanning leaves this market with a balanced match line at the high  This means that the market should have established a major high in the current trend

 The uptrend from the low defines off the 50% of the first correction and this now becomes definition line  The market shows us the driving line because this is the one that places the crosses to the other driving line to define the trend we have thus defined this as the driving line for the bull trend  As this market is correctional it should place the high at the third cross point and the second step of the fanning thus because we know that the market had a two line down count, it should be symmetrical and place a two line up count which the market does  The time frame from high to low should also be symmetrical which is the case

 The definition of the low should also be symmetrical which means that the three way cross point off the driving lines from the previous high and the current high should cross and a three down line count strengthens this point from the low  The market must now define the cross point from the second down line and the driving line on the 29 th Jan/1 st February to see whether we have to return to the cross points all marked blue which should become the new driving lines for this market on the first week of March and should be an apex high at 90.80

 The only question is whether we extend to the lowest cross point at or whether we enter a consolidation to the market as the current close cross point holds the market to establish the March crosses which are trend defining  Whichever is the path these will be a case of a trend high being established to the market before the next major bear leg to the market

 Cross points are there as a guide to extension or completion of trends to the market and also a good indication of covering positions or establishing fresh positions  The cross points also delineate the market to redefine the driving lines and the sub counts of two either side to signal the being or end of a trend  It is the cross points which help the trader establish the risk reward to his actions

 As we see in the day chart it is possible to establish the highs and lows and also the time frame to establish these  Defining the cross points also then establish the next significant high/low points at which to draw in further definition for short term trading as these are significant trend signal areas they translate down to 15 minute charts for intraday trading which should be able to give buy/sell or do nothing signals to the trader

 This chart shows the bear trend and that the market is currently within the finalisation stages of a further bear extension which should target 28 th Oct and as the definition of a bear extension  The meeting of the market to place the three line cross and support suggested the correctional rally back to the defined high  Now it is a question of whether this is a high that establishes or continues the bull scenario

 This market appears to be starting the next two and a half years of a bear market  I will not go into the detail here because this is a very simplified chart just to place some illustration to the overall trend within the market

Richard M Morrish Chief Research and Strategist Officer Website: