The Hindu Business Line : Gann's gyan on reading charts

He maintained that future price trends would have a relationship with past price action. He also emphasised that one can expect a change in trend when price, pattern and time coincide.

Gann extensively relied on a concept called "squaring of price with time" for identifying potential change in trend.

Put in simple terms, this concept indicates that when both price and time of the current swing holds a geometrical/mathematical relationship with a price swing in the recent past, the price is said to have squared with time.

Whenever this happens, there is a potential for a change in trend. A study of the recent price action in the Nifty, using Gann methodology reveals interesting pointers.

For instance, the key change in trend since the rally from 920 on April 28, 2003 to the recent swing high of 1658.9 on August 11, 2004 adhered to the Gann's concept of squaring of price and time.

This was also the case when the Nifty touched an all-time high earlier this year and the suffered a sharp decline. The rally from the 920-level to the high of 2014.6 in January 9, 2004, lasted for 256 days and recorded a gain of 1094.6 points.

Interestingly, the subsequent correction to the low of 1292.2 on May 17 had a relationship both in terms of time and value to the earlier rise. The decline of 722.4 points was close to two-thirds or 66.6 per cent (a key Gann support/resistance area) of the earlier rally of 1094.6 points.

It took 129 days for the Nifty to register this decline of 722.4 points. This was about the half the duration of the rally that lifted he Nifty to an all-time high on January 9. (256 days: April 28, 2003 to January 9, 2004). With both time and price squaring on May 17, it was not surprising to notice a change in trend since then.

The Gann methodology appears to have worked with the price action after the low on May 17, 2004. The Nifty recorded a gain of 366.7 points from the low of 1292.2 to the recent high of 1658.9 recorded on August 17, 2004.

The gain of 366.7 points is close to 50 per cent of the earlier drop of 722.45 points (2014.6 minus 1292.2)

In terms of time, Nifty has taken 86 days for the recent rally of 366.7 points to record a high of 1658.9 on August 11; this is about 66.6 per cent or two-third of the earlier decline that lasted for 129 days (January 9 to May 17). Given that both time and price squared on August 11, it is not surprising to notice the sharp reversal in trend since then.

The key question now is when would the next turn happen in terms of time and price? We are working on it and hope to come out with a detailed answer in the forthcoming weeks. Based on preliminary findings, the time window of September 21-September 23 could be a significant for a possible reversal in trend provided the index touches a key price support/resistance during this period.

For trends in the next few weeks, high of 1658.9 on August 11 is a key benchmark. The market is likely to rule weak and as observed in earlier weeks, our view that index could test the 1290-1300 range is still valid. If the Nifty were to, however, break the high of 1658.9, it would be a key indicator of a reversal in trend and would signal a strong upward move.

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