Gann Global Financial

I intend to open the door on some insights which have an important bearing on all that we do, why it works and why there is a rational reason behind the workings of the markets.

You see when we are dealing with market repetitions, whether they be time periods, price formations, or price reversal patterns, it is true we are looking at the current market action and comparing it to similar price and time relationships as far back as history is available; and again we have the largest historic database in the world.

Psychology of Soybeans

Now with the aid of modern computing power, we are able to literally compare the DNA in the current market situation with all of its historic equivalents. Now, with the use of the Research Engine software application (our in-house price move catalogue) we can quickly create summaries of every historic precedent similar to our current market situation. Now on the one hand this “observation analysis” tells us that price patterns do repeat over and over, but this begs the question of why? In answer to this, there are logical explanations to the why. When we have a statistically relevant pattern which suggests an important leg up or leg down is to take place and we know the reason why, we have added confidence for why a certain move has a high probability of occurring based upon both observation and reason.

On what basis do we know the reason why? Well, the foundational basis for the reason why is because human nature or the psychology of the market is at the core of the price patterns or repetitions we trade off of. During certain sections of market movement, psychology is difficult to quantify, however, at the most important critical market turning points, it is quantifiable. This is when we are moved to action. What do I mean by this? Well, the character flaws in the market participants, such as you and I, manifest themselves collectively in the markets. This is often referred to as crowd behavior.

Now the old market maxim, “the crowd acts as a heard” is very true. Now, many of you have heard of the Arctic animal called the lemming. Now it is a small animal, I believe in the rodent family which lives communally. Now, periodically the community for reasons unknown to scientists runs and hurls itself in mass suicide into the ocean. Now, this partially describes “we do” as typical investors and speculators in the marketplace at the most critical turning points. Now dramatic examples of these were evident at the stock market top in January of 2000 and the real estate top in September of 2006. So as we look at the next chart that we have here, this is the S&P 500 which carries from 1997 to the present top in 2008.

But many of you remember that the market has started its bull market in 1991, culminated in the year 2000 and of course everybody and his brother was long the stock market and bullish in expecting higher prices. I say everyone, obviously that is not true but the typical investor or speculator was caught up in the euphoria of the bull market and it resulted in obviously the longs loading up to the long side into the top. Now, I believe it is important to bring home this point to where you live as a trader or investor. I am going to get personal here. If you are worried about yourself esteem, getting bruised then I suggest that you do not read on. But here is the question I want to ask you. How many of you committed “mass financial suicide” and were banking on higher prices in these two financial markets of the final tops? If that smarts a little, I want you to understand my heart. I do not want you to pay a higher tuition in market losses than need be in getting from point A to point B in your financial continuum of success. In other words I want you to get from point A to point B without paying unnecessary dues.

Now in terms of intermediate moves, the highest probability psychological turning points occur at two places. The first is at the bottom of corrections and bull markets prior to major legs up. The second is the top of corrections in bear markets prior to major legs down. The reason this is so is due to the fact that corrections are due primarily to profit taking. There is no fresh buying or selling which occurs during these corrections and therefore the movements are restrained. Now fortunately, we can quantify the likely extent of these moves based on the price history of corrections. In other words the average time periods of the corrections, the percentage move during the corrections and the percentage retracements of the previous corrections during bull and bear markets tend to repeat from one bull or bear market to the next.

Now, our primary objective as an advisory service is to enter positions at these turning points or corrective lows or highs prior to major legs up in bull markets and major legs down in bear markets. Now, what never ceases to amaze me is the uncanny compulsion of a contingent of subscribers to call our offices when a major move is well underway in the market and we (Gann Global) has not made a recommendation in that market. A classic example of this is the soybean market at this time. Here is the soybean weekly chart where we can see what the soybeans have done.

Obviously, a tremendous bull market that we ourselves in the midst of not too far off the old time high of 12.90 from back in 1973. Now, as I said a classic example of getting a rash of calls from subscribers and members asking, “What should we do?” My answer is, “Where were you and I at the last bull market correction prior to the 60% advance in price that we have experienced?” In other words the purchases should have been made back in August obviously, now that were all the way up above the 2004 high and knocking on the door of the 1973 all time high. The answer to the question is there is nothing that we can do here. We should have been in at this correction and now the market obviously by definition is closer to a final top because we are three and a half, four months into the move now and the market has moved up over 60%. Now, do you honestly think it is advisable to chase into a market after a move of this magnitude? That style is a sure recipe for disaster.

By definition, after a four month 60% advance, you are that much closer to the top as I said. Now, the issue is whether the probabilities are stacked in your favor, or they are not. If you are in the habit of buying after a leg up is well underway, you are going to be hard pressed to compete with those investors and speculators who have a trading plan based upon the objective of entering positions at the start of major moves. In other words they buy on weakness and they sell on strength. Otherwise, you become the crowd instead of trading opposite the crowd. And it is the crowd behavior which enables us to make money.

Now, this report serves as a basically a preface to Part 2 of this soybean report series, which we will publish on Monday, January 14 th. We are going to go in depth into the soybeans because we are in a fascinating place in this market. There is nothing in terms of pulling the trigger and doing anything in the market right now but we want to look at the historic precedents for what is taking place in the beans in the very fascinating historic position and from there we will build some arguments with regard to what to expect based upon the likely forecast that we have in this market.

About James Flanagan & Gann Global Financial:

My name is James Flanagan, and I founded my publishing company, Gann Global Financial (GGF) in 1990. I’m a registered CTA (Commodity Trading Advisor) and I’m a publishing member of the NFA (National Futures Association).

In 1978, while majoring in economics at Claremont McKenna College, I acquired my first book written by W.D. Gann, “How to Make Profits Trading in Commodities.” This set in motion my passion to validate the claims of this early pioneer of market psychology and technical analysis.

After graduating in 1980, I began my career in the Los Angeles office of the futures brokerage firm Maduff & Sons. This was the home office of Sid Maduff who was one of the co-authors of the pork belly contract. This is where I also had the privilege of working with Phyllis Kahn who was one of the earliest and most well known Gann practitioners.

During the succeeding 10 years I worked as a stock and commodity broker finishing his career at Dean Witter in 1990. In April 1990, I launched his first newsletter Past Present Futures which has been in continuous publication since that time. For years during the 1990s I had a live daily television show on the Business Channel in Los Angeles . I’ve been quoted by, or have contributed to virtually every type of financial publication and news service including CNBC. I currently oversee all of the research and research development at GannGlobal.com