I’m a big believer that the price pattern on a chart is a reflection of everything going on fundamentally in a market. In the words of Cynthia Kase, author of Trading with the Odds, McGraw-Hill, 1998 and energy analyst to the House of Saud, “The chart tells us everything the market knows about itself”. Not that I don’t like a good read on things that are happening in the big wide world which can affect the price of a market I have an interest in, but there is great comfort to be taken in the belief that the simple closing price of a security, currency, or commodity is the final arbiter of market value. It’s just easier that way.
While I like a relatively clean chart to be able to make out that all important closing price, I do rely on the occasional overlay. And one overlay that provides interesting insight, particularly on the historic time frames is your garden variety Gann lines. On the chart below I’ve anchored the lines to the 80.00 and 160.00 levels.
According to W.D. Gann’s analysis market price was best analyzed when broken down into 1/8’s or octaves. When price crosses into a new octave it becomes more likely it will move to the next octave. Some of the individual levels are considered more influential than others. For example 4/8ths or 50% is very influential, and pivotal – approx. 120.00 in EURUSD. Seven-eighths, or .875 is an important level also. It is a tenet of Gann’s teaching that 7/8ths is the least riskiest place to go short – just above 150.00 in EURUSD, while 1/8th the lowest risk place to go long. 5/8ths or .625 is pivotal also and known as the top of the “pipe”. All the octaves are pivotal, and we can see from the chart 6/8ths or .75 – 140.00 is certainly a significant level. While price flirted w/ that level in late 2010 it could not close above it and ended up retreating to the top of the pipe at 130.00. Then after closing above 6/8ths in the late winter of this year price vaulted to nearly 7/8ths.
So what’s next, double top at 7/8ths, or a move on 5/8ths? Not sure, but this sure is a cool chart.