Gann Global Financial

With regard to our current stock market forecast, it is a fascinating study when we look back in history and relate what is taking place in our market with the closest historic precedents. On that basis we are going to go through some rationale in this video with respect to the overall DNA in this market, the velocity of the current leg up off the lows, and what we have are some historic precedents. This will give us some very interesting insight into what can take place next. Ultimately for what we believe will be a set up for a major buying opportunity in the stock market.

The first thing I want to revisit very quickly is the DNA of this current leg up. One of the things that we’ve been looking at is, is it following the criteria of a bear market leg, or is it showing the DNA of a leg up in a bull market?

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What Evidence Supports the Stock Market Bearish Arguement?

I can say emphatically now, and this is as was expected, that this market is acting very much like a bull market; a first leg up off a bear market low.

In looking at the greatest legs up in bear markets, looking at the bear side of the equation, the greatest legs up in the bear market, our leg is not acting like that. I want to quickly go through this table and show you why.

The advance that we’ve experienced off the March 6th low to the May 8th high has been 39%; a 39% advance, which, needless to say, is astounding. Two months and two days, and in terms of the velocity of the advance, it would have ranked 4 of 52 having retraced 95% of the preceding leg down.

These are our observations. We made this observation about a week ago. We’re not demonstrating the DNA of a bear market rally. In terms of the percentage move up, only the first bear market rally in The Great Depression experienced an advance exceeding 31%. That was this 1929 47% advance, which is the blue highlight here.

After that, the bear market rally’s during The Great Depression, you can see what they are here.

The second point is, four of the five advances range between 27% and 31%, so 27-31 would have been a normal bear market rally if we were following the 1929 precedent, but we’re up 39% now and this was expected.

It just wasn’t acting like a bear market rally and continues to act like a first leg up in a bull market. If we experience an advance of as much as 33%, and this was a comment made on April 16th, I believe the probabilities will diminish even further for this being a bear market rally.

We’ve all ready put the percentage probability of a final low at 65% by virtue of exceeding the 33% up to 39%. Now, I believe, the probabilities that a final bear market low are in place are probably upwards of 95%.

We’re going to go through some of the stock market analysis next, but that doesn’t mean you go out and buy it. This is a first leg up, there is going to be a correction. There always is.

The percentage retracement has been 95% of the preceding decline. The largest retracement of The Great Depression was 58%, so that final leg down we’ve now retraced 95% of it and the final observation, the bear market rally experienced retracements which exceeded 94%.

Going back to 1886 when we see bear market corrections in overall bear markets, there have only been four which have exceeded a 94% retracement. Ours is a 95% retracement. That’s additional evidence that this is not a bear market rally. The probabilities are just greatly against it.

Why the Stock Market is More Likely to be in a Bull Market

Let’s look at the bull side of the equation. Now we’re looking at the highest velocity legs up in history, of which ours is one. From March 6th to May 9th, two months and two days, this 39% advance ranks as the 5th greatest in terms of rate of gain or velocity. That means that this market is moving very quickly. An average of .63% a little over a half a percent per day during this bull move.

In looking at other advances in history, of all the advances since 1886, only 10 can we put in the same class as this advance in terms of the velocity of this advance.

You can see that those range between 20%, this is rather curious because this is just a one-day rally in 1987 so this was an aberration. It was in the aftermath of the crash, which, of course, we experienced most of the damage since 1987 in one day which was a Black Friday if I’m not mistaken, or a Black Monday. I can’t remember which. Most of the damage was done and by the law of action and reaction it snapped back 20% in one day.

Looking at 1932 though, you can see that it averaged a 1.14% advance. Second leg up after the 1932 lows was a .86%. The 2000 low, of course that is more recent, advanced .69% but only did so in 25 days. It advanced 17% in 25 days. We’ve advanced 39% in two months and two days.

Then we have some of the other key rally’s which occurred. Let’s go through some of the observations. First of all, we’re in a very elite class of advance with very few historic precedents on the order of what we are experiencing.

The current leg up has advanced at a velocity ranking as the 5th greatest of 131 legs up in history (see video). Only the 1987 post-crash advance, first leg up after The Great Depression, and second leg up after The Great Depression, were more violent.

The first advance off the 1932 lows, 112%, I noted that. The 1974 low was a monumental low in the aftermath of a comparable bear market to ours so that is a very important precedent to us to be looking at, and we’ve been doing that for subscribers.

Of all 10 of the highest velocity legs up, five of the ten advanced during the first legs up, so those are of particular interest since our projections are calling this a first leg up in an overall bull market.

What we see is that five of the 10 greatest velocity legs up in history occurred during first legs up. That shouldn’t surprise us. By the law of action and reaction, the fact that we’ve experienced the second greatest bear market in percentage terms results in extreme oversold conditions, panicky conditions into the lows, so there is typically a violent snap-back rally so we are certainly seeing what historic precedence suggests we would see.

The 1907 and 1974 and 2002 first leg advances are relevant precedents but were shorter and less violent than ours.

Making the Case for a Bullish Stock Market Forecast

1974, 2002, 1907 & 1908 were some of the greatest bear markets in history. The ’74 market declined 50%, the 2002 market declined 51%, the 1907 bear market declined, I believe, 47%, so they are in an elite category as far as bear markets.

Three of the four of the greatest bear markets in history had pretty uniform rallies to one another. 1932 was in a category of its own because it had declined 89% so you would expect the first leg would be much more violent.

Our decline, at 58% bear market, ranked as the second greatest bear market behind 1932, a very distant second, so it shouldn’t surprise us that we have experienced a greater first leg up than the ’74, 2002, and ’07 lows.

Nevertheless, we are left with a limited number of precedents in one sense, falling in between the greatest legs down in bear markets. I’m very comfortable with how things are playing out in terms of what would be the logical expectations based on history.

Once these five first legs, high velocity legs up off the lows, in this next chart, the next table, what we look at is the retracements that took place after the legs up, which would tell us, “Okay, if we’re in a first leg up there is going to be a bull market correction.”

That would be something we would be looking at and expecting to take place in our market, and that would be the point at which we would experience our lowest risk opportunity to be a buyer.

So, it’s very interesting as we look at the corrections following those first five legs up, this is what we find which is so fascinating.

In all five instances, once the first legs up were complete the percentage retracements were extreme. Highlighted in the yellow is what percentage retracement is the first leg up, so how much of the first leg was retraced during the correction.

The percentage retracements were extreme, 56%, 79%, 89%, 77%, and 89%. The typical correction after a leg up in a bull market is 62% retracement, so you can see, by virtue of these being very extreme first legs up, also, the corrections were very extreme.

We can infer from this that once the current leg up is complete, a significant correction will take place. If we were to retrace 70% of this current leg up, obviously, that is a very, very significant retracement.

Where I noted the average retracement is 62% so we definitely would expect more of an extreme correction than what would be the norm.

In this chart we have actually charted what the corrections would be if the May 7th high holds. Basis the nearest futures we’ve traded to as high as 929 on May 7th, the 40% advance basis the nearest futures. That’s a huge move.

If we were to experience the same retracements which occurred at the completion of the other five bear markets and first legs up, this is what the retracements would look like in both price and percentage retracement of this first leg up.

I don’t believe that this 929 high is going to hold at this point in time. I believe that we will have further to go to the upside. Once this leg up is complete, though, you can see by this graphic that the corrections are very extreme, 1974 and 1908 in particular, very violent declines.

1987 took a little bit longer but a very significant decline. Not too far away from the 2009 final low, likewise with the 2002, and not too far off the low in 1932. Even in 1974 not too far off.

We have four of the five precedents telling us that we are going to replace the lion’s share of this first leg up. The probabilities do favor that. The probabilities do favor that our correction, once it comes from whatever level it comes, is going to be quite violent and very painful for the longs.

That’s a good thing because we are looking to re-enter investment positions which we exited when the S&P 500 was approximately at 1260, I believe. Actually, our exit point was up here where the blue line is, just above 1250.

Stock Market Trading and Buying Opportunities

We got out of all our investment positions at that point in time and then the whole financial crisis occurred into this March 6th projected final low. Now we have a first leg up we’re looking to be a buyer on a secondary correction.

A first correction in an overall bull market, and once that correction is complete we would anticipate the start of a second leg up in an overall bull market. That’s tactically where we are telling subscribers what we’re looking for, and at the completion of that correction we would look at it both from a speculative standpoint to be a buyer and participate in the second leg up and capture that second leg up, but also as investors.

Speaking to subscribers as investors at the corrective point, we always want to buy on weakness. Buy low, sell high. Buy a correction, don’t chase into a market. We have very good historic precedent for telling us, “Okay, yeah, this has been a phenomenal leg up.”

One of the greatest legs in history but in the aftermath of comparable legs up in history we have this type of action to the downside. Obviously that’s going to be a very depressing. In all of these scenarios we’re going to see some bad news, whatever it’s going to be.

Some, “Oh, no, here we go again” kind of attitude. That is the kind of psychology that we want to see play out on the market so that we can buy into a higher bottom.

A very fascinating place that we find ourselves in the intermediate term, or near term, horizon. We’re trying to anticipate where that correction can start. It’s definitely not beyond the possibility that we would participate on the short side and do a counter trend short trade which is something I only do maybe 10% of the time.

We want to go with the trend, but by virtue of the violence of these corrections, obviously there is going to be significant money made even on the corrections since we would be traveling a great distance in terms of percentage move in a very relatively short period of time.

There you have it. I like how everything is playing out with regard to the markets. If you’re looking at this video first and haven’t seen the posted video on overall commodity prices, that’s very important. The other side of the equation to the stock market is what is happening in commodities.

Both of these markets are confirming that the crisis is over and that bull market up to a 95% probability, we have a bull market in both stocks and commodities.

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