|
In our last article, we focused on W.D.
Gann’s innovative brand
of price and time analysis, especially as pertaining to the time periods
of measured corrections. So-called “runaway moves” comprise
a unique and highly profitable subset among time periods, affording the
alert speculator the greatest opportunity to profit in the shortest time.
During these dramatic moves, options prices traditionally experience
their greatest increases in value.
A runaway move denotes an interval when a market
displays tremendous momentum, with prices traversing great distances
very rapidly. Runaway moves often take place during the first and last
stages of bull and bear markets, although they can occur in the middle
as well. Typically, they begin after what Gann referred to as a “breakaway point.” Quoting
Gann, “After accumulation or distribution at (a) bottom or top
has been completed, there is a breakaway point. When you buy or sell
stock at this point, you make money very quickly. It is a safe point
to buy or sell for quick profit, as the run is on.”
Although characteristics vary from one market
to the next, we can provide a broad “textbook” definition
for a runaway, which most markets tend to follow. In general, whether
up or down, the move usually lasts between 2 and 3 months. Minor corrections
along the way are normally shallow and seldom linger more than 5 trading
days before momentum aggressively resumes in favor of the trend. Because
these minor corrections tend to be so small, they provide some powerful
dynamics relating to profitability:
• They allow for entering the market with very little risk, since
the minor corrections are often very uniform.
• Stop-loss orders can be trailed behind the market as it moves in
your favor, thereby enabling you to lock in a lion's share of profits once
the market reverses.
Systematic pyramiding (adding to profitable positions) during these
moves can significantly enhance prospective returns with only a marginal
increase in risk.
According to Gann, “The big money in pyramiding
is made in the run between accumulation and distribution. Pyramids
should be started after double or triple bottoms.
“Once the market gets away from the accumulation
period and the trend is well defined, reactions are very small. While
accumulation or distribution is taking place, you should trade for
small scalping profits and never attempt to pyramid. Wait until an
accumulation or distribution zone is cleared before buying or selling
a second lot.
“Select markets that exhibit a strong uptrend to pyramid on the
buy side and the ones that show a definite downtrend to sell short. Be
careful about pyramiding at the wrong time. “Wait until the commodity
is very active and has crossed resistance levels before buying more,
and until it has broken out of the zone of distribution before selling
more.
“If the market continues to move in your favor and your stop-loss
order is not triggered, you can continue to buy or sell on the way up
or down, but don’t forget that the more the market moves in your
favor, the nearer the end of the move, and buying must not be increased
near the top after a long move, nor selling increased near the bottom
after a long decline. Never start to pyramid after a long advance or
decline. The chances are against you. Begin pyramiding when the trend
first turns up or down after long moves.”
Gann described 2 proven methods of pyramiding:
1. Buy or sell more as soon as the market breaks into new territory
or makes a new high or low, or
2. Determine the reaction levels and how many points a stock (or commodity)
has corrected from temporary tops or rallied from temporary bottoms,
then buy or sell after reactions of similar size.
A pyramid should always be followed up with a stop-loss order, no matter
what method you use, because your profits must be protected.
As mentioned above, the great advantage of runaway
moves is the ability to buy or sell with a well-defined and small risk.
As a market moves in your favor, you can easily trail stop-loss orders
below or above the greatest correction on the way up or down, since
corrections will tend to be uniform. The first time a market declines
or advances a greater number of points than in previous corrections
(or exceeds corrective time periods from previous runaways), it indicates
an “overbalancing” of
buying or selling pressure, and while final highs or lows may not yet
be in place, the runaway portion of the cycle is complete. Once an overbalancing
takes place, you must exit long positions immediately. There is usually
distribution at the high, but if a market forges a spike top, prompt
defensive action can offer your sole opportunity to get out with your
profits intact.
The more profit you have, the further away from the market you can place
your protective stop so that a natural reaction will not disturb your
pyramid, while in the early stage of the pyramid your stop-loss order
would have to be closer in order to safeguard your original capital.
Between July 31, 2003 and March 22, 2004, the cash price of soybeans
rocketed a climactic 95% in 7 months and 20 days. On a percentage basis,
this stands as the 6th-greatest leg up in the beans in all bull markets
since 1940. Of legs that culminated bull markets, it ranks 3rd behind
the final legs up in 1973 and 1988.
In futures, the stunning 2003-04 advance in soybeans actually consisted of 2 distinct runaway gains measuring a respective
58% and 46% (Figures 1 & 2), each lasting at least 3 months, interrupted
by a near-10% decline.
Looking at soybeans since 1936, we find that single or multiple runaways
occurred 39 times, or almost once very 2 years. Bull markets starting
in 1937, 1942, 1954, 1966, 1972 and 2003 all enjoyed multiple runaway
legs higher.
In our research, we found that these runaway legs up remained in effect
as long as the market did not fall for more than 6 trading days off any
new high, or more than 8.0% in price. In the twin runaway legs in 2003-04,
the minor corrections persisted for only 3, 2, 5 and 4 days. Their respective
percentage declines amounted to just 4%, 5%, 7% and 7%.
With soybeans already well over a year into a tenacious bear market
as of their September 2006 low, and given the documented propensity for
cash beans to bottom in October, such information could soon again prove
helpful.
Watch the latest video here: Soybeans Forecast
Video 
Check
out our Complete
Forecasting Service.
Subscribers: click
here to login and view your subscription
About the Author:
James Flanagan is the president
and founder of Gann Global Financial. In 1978, while majoring in economics
at Claremont McKenna College, he acquired his first book written by
W.D.
Gann, “How
to Make Profits Trading in Commodities.” This set in motion his
passion to validate the claims of this early pioneer of market psychology
and technical analysis. In April 1990, he launched his first newsletter
Past Present Futures which has been in continuous publication since that
time. James Flanagan oversees all of the research and research development
at gannglobal.com.
|
