Gann’s general forecast in 1920 was for two bull and two bear campaigns. The ﬁrst bull swing was to culminate around April 22-24 with the bearish reaction ending in mid-June. Another bull rally was to be born in this decline and the ensuing uptrend was to have lasted until August. Gann warned about the last four months of 1920 having serious declines, ending in a panic around December 20.
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When I ﬁrst looked at the year’s actual prices and compared them to his forecast, I thought that Gann was wrong in his general trend prediction. At a superﬁcial glance, it appears that 1920 was simply a bear year. To give me a better perspective, I drew in the swings he predicted on a monthly chart of the actual prices. (see ﬁgure 1) The forecast still didn’t look all that great even with his swings drawn on the actual data. I had to look further into the predicted monthly trends to see what he saw. The two supposedly most bullish months of 1920 and the most critical to his forecast were April and August. Neither month met his bullish expectations. However, if you could visualize a much stronger April and August in ﬁgure 1, it becomes clearer how right he was in calling for two bull and two bear swings that year.
According to the Decennial cycle, years ending in zero have not been the kindest to bullish investors. In this example, the general weakness of the year has muted the rally effort of April and August. Let’s analyze Gann’s forecast further by comparing the transportation index of 1920 to his projected curve of the market. (see ﬁgure 2) As you can see, the railroads were much stronger than the Dow in 1920 and they followed Gann’s prediction much more closely than the industrials. Gann’s prediction was accurately fulﬁlled, we just had to delve deeper into it to see what he saw.
As in my previous articles, I’ll review only the months where Gann gave a speciﬁc monthly trend with the dates for the important highs and lows. I think it is important for you to note that he did not offer a trend every month in his forecasts.
For February, he predicted quite a bearish period. The actual lows occurred on February 25. Thereafter, he said a bullish trend would last until April 2224. Gann stated that there would be some sensational advances in April. In retrospect, the market topped between the eight and the seventeenth and moved lower the balance of the month. Why? Gann said that occasionally interest rates or commodity prices would cause his stock curve to deviate from its intended path. This occurred in April of 1920. The worst bond price decline of the year took place in April as prices dropped from 77.32 to 73.75. Like then, as it is now, stocks can not sustain a full bullish advance when bonds are getting murdered.
The bond curve and actual bond prices will almost always duplicate the projected stock curve and the dates of highs and lows in bonds will mostly match those in stocks. In the forecast section of this article you will see how both bonds and stocks are due to bottom together at the end of May. In ﬁgure 3, I have overlayed bond prices with the Dow Jones prices on the same dates so that you can see the clear similarities. Other commodity prices will also change trend on the dates of changes in trend in the stock market. Compare charts of the Dow, cotton, grains, coffee and sugar to see if reversals in trend are occurring on the same dates in unrelated markets.
Gann thought that June would fall in a cycle of very depressing inﬂuences. He said a rapid decline should occur 7-16, where a bottom should be made. I assume that what he meant was a drop from the seventh to the sixteenth. My curve indicated a top 6-4 to 6-9 and a low to occur 6-16 to 6-23. The actual top was on 6-12 at 93.20 and the-market dropped until 6-22 at the price of 90. 13.
You can see how closely this prediction worked out. I can’t understand why Gann almost always used a bracket of dates when predicting a top or a bottom. My experience proves that there is an exact theoretical date within the bracket at which the top or low should occur. It might be off a day or so but certainly not a week. Sometimes these dates fall on a weekend so you have to watch Friday as well as Monday for the turn.
Another cause of a slight deviation is the release of an important government report which might cause the change in trend to occur a day early. An example of this was the PPI report issued before the market opened on March 17, 1989. The exact date for a predicted top was the eighteenth, a Saturday. The fact that the report would be critical to the market and that it would be released before the opening on the 17 meant that the top would occur on the 16, or a day early. Knowing that the curve was down until March 26 told me before the release of the report that it would not be favorably received.
When a solid trend is indicated by the stock curve, it is possible to anticipate whether a government report will affect the market positively or negatively (depending on which direction the curve is going). This knowledge is of a great beneﬁt because it allows the trader to hold a position which he normally might liquidate.
The reader might also be interested in knowing all discount and prime rate hikes occur on Time Factor cycle dates. My forecast in the last issue of this magazine gave February 23-24 as a Time Factor date. This was the date for a prime rate and discount rate hike. The market sold off sharply and made a low. Getting back to the PPI report for a moment, I would like to mention that based on my method I was able to predict that the top in mid-March probably would be a one day spike top and I told that to a few subscribers of this magazine who contacted me in early March.
After the August highs, Gann saw a deﬁnite down trend in the ﬁnal months of the year. The sharp drop in September occurred but it wasn’t until November and December that the panic really got underway. Gann saw the culmination of a very maleﬁc bearish cycle on December 19-22. Prices dropped from 85.48 in November to 66.75 on December 21. That date marked the exact low just as he said it would a year in advance.
I could like to offer my opinion of what the market will do in May. This article is being mailed to the G&EW on April 26 for publication. I have enclosed a drawing this time so you can see clearly the projection for stock prices. (see ﬁgure 4) The indications are to expect a distribution top between April 25 and May 5. The second Time Factor top is always the safest to short. May 5 may be a double top or higher top that is not known, but I suspect it will be a higher top than April 25. The trend for May should be down, which will correct the recent three waves up since November.
Even without the curve, any trader would know what to expect after the third section up. The 19 should be a reversal date, although it is not shown if it will be a low or a high. My experience tells me to anticipate this to be a low followed by a rally that will fail and cause a ﬁnal low to occur on May 31. I am ignoring holidays and weekends and will just give you the expected dates. Bonds should also make a bottom at the end of May with stocks.
The degree of the decline will tell us more about the trend in the summer. I expect at least a ﬁve percent decline in May. In a bearish year the decline would be much worse. I have not really studied the month of June very carefully, but it seems the trend will be up to at least the 22, and then it should taper off go sideways, possibly down. Any reactions in June prior to the 22 should be minor and should not disturb the three week uptrend. Remember, run your geometric angles up from the low at the end of May. First the 4×1, then the 2×1. This way, if there is a sudden unexpected trend reversal, the breaking of the angles will cause you to stop yourself out of the market and avoid a loss of your proﬁts. I would also advise to keep up geometric angles on the NYFE and the S&P.
Sometimes you will have prices hitting an angle on one of these indexes that is not showing up on the Dow Jones. I use Don Vodopich’s idea of the 45 degree angle being a 1×1, a 26 degree angle being a 1×2, etc. and using Commodity Perspective charts as he suggests in his book, Trading for Proﬁt with Precision Timing. The proper way to use an angle on the Dow is to draw free hand points per calendar day from the theoretical highs or lows. Therefore, a 4×1 in twenty days moves up 80 points from the exact low.
In closing, I would like to offer some price resistance levels that I do not think the Dow can penetrate before it makes the expected decline in May.
Based on the above resistance levels and knowing that the time for the rally is due to end no later than 5-5, I would not expect the Dow to go beyond the 2458 level before a decline sets in.
- Gann‘s Annual Forecasts – Part III By Chuck Carpino