APPLYING VODOPICH's INTEGRATION of ELLIOTT and GANN to the LONG-TERM STUDY of the DOW JONES INDUSTRIAL AVERAGE 2 Blethyn Hulton

APPLYING VODOPICH'S INTEGRATION OF ELLIOTT AND GANN TO THE LONG-TERM STUDY OF THE DOW JONES INDUSTRIAL AVERAGE 2 Blethyn Hulton

INTRODUCTION enduring value of a Gann line is its slope (rise/run, or number of points per trading period), which is determined for each tradable In Trading For Profit With Precision Timing, Don Vodopich enhances the based on historical observation, or in Vodopich’s words, “The proper analysis of Elliott Waves by attaching Gann lines to wave starting points. scale Gann line work is one which has worked in the past.”1 Appen- With this approach, Vodopich studies a variety of futures markets in the short- dix 1 reproduces Gann-line slopes of various tradables, as determined term as is appropriate for trading. The purpose of this research is to apply by Vodopich and John Murphy in their respective works. Vodopich’s technique to the long-term study of the stock market, specifically the Dow Jones Industrial Average (DJIA), which was the focus of Elliott’s work. AMENDMENT TO VODOPICH’S METHOD The period covered is Supercycle Wave (V) as counted by Frost & Prechter, The author has changed the practice of Vodopich’s approach in which began in 1932. The Vodopich analysis breaks down the present cycle of four ways; generally, the changes relax some of the original rules, Cycle-degree (i.e., Supercycle Wave (V)) as well as certain Primary, Intermedi- improving their application to the study of the stock market. The ate, and Minor cycles within it. first change is to start the Gann line at the beginning of wave 3 rather BACKGROUND than wave 1. In the stock market, the thorough retracement of wave 2 would most often slice through any line started at the beginning of Vodopich argues that the slope of the line from the start of an wave 1; and as a result, the Gann line would not as effectively indicate impulse wave to its end can be known in advance because the “slope support through wave 3. The second change is to accept, using ana- 1 is particular to the tradable.” For example, the slope of an impulse lytic judgment, a Gann-line slope which varies from that dictated by wave of several months’ length in T Bond futures always has a slope historical observation. As will become evident in the examples, of .10 points (about 3 ticks) per trading day. Such a line is a Gann Vodopich’s method is more useful during the more volatile 5th wave line since unlike a trendline its slope can be known at its starting than in the 3rd wave. A wave 3 is so strong that it does not need as point, but like a trendline it identifies support and resistance. Chart much analytic aid; and so the author works with trial-and-error dur- 1 demonstrates how such a Gann line attached to an impulse wave ing wave 3 to find the line that will work for him thereafter, in waves might work in theory. The Gann line would indicate support up 4 and 5. The third change is to allow the slope of a component wave through the top of impulse wave 3, would be firmly broken by wave 4, to be a round multiple (e.g, 1.5x, 2x, 2.5x) of the parent wave, not and would indicate resistance thereafter up to the end of the im- necessarily an integer multiple. And finally, the author views the pulse wave, the end of wave 5. Vodopich convergence to be not the end of the trend, but rather a Chart 1 point in time and/or price where the reward/risk ratio drops dra- Gann Lines Drawn Onto Elliott Impluse Wave matically. As the examples will demonstrate, the momentum built up through wave 5 may well carry price beyond the intersection of the Gann lines; and if price stalls there, the market may trade side- ways before reaching a new high. In either case, the reward/risk ratio falls, suggesting a change in asset allocation. And the Vodopich convergence alerts one to the greater risk as well as the prospect of a reversal. Chart 2 T Bond Futures Contract from April '97 to January '98

In Vodopich’s work, the slope of the Gann line belonging to any component wave is an integer multiple of the slope of its parent. Further, as Chart 1 shows, the Gann lines of various fifth waves of lesser degrees intersect the parent wave at its end; this intersection is labelled a “Vodopich Convergence” in Chart 1. Vodopich analyzes both impulse and corrective Elliott waves with Gann lines, but this study examines only impulse waves since long- term stock market moves are such waves. Gann lines have tradition- ally been associated with particular angles, such as 45 degrees; but Chart 2 demonstrates an amended Vodopich analysis of T Bond this is a carryover from the days of manual charting. The angle of a futures from April ’97 through January ’98; the chart plots the 12/97 trendline depends on the aspect ratio of the chart and how price and contract through November ’97 and the 3/98 contract thereafter. time are scaled. In the electronic era, when most charts conform to The impulse wave begins at the 4/11/97 low of 105.788; but the first the aspect ratio of the computer screen or the laser-printed page, the Gann line, with a slope of .10 points/trading day, is drawn from the

20 MTA JOURNAL • Spring-Summer 2001 start of wave 3 at 107.75 on 5/27. Inspecting the chart, one can see expressed in relative, percentage change rather than absolute point that the “.10 line” did reveal support up through the wave 3 top on change just as such charts plot price on a logarithmic scale rather 8/1, capturing the late June correction. Note that a line drawn from than a linear scale3; and all percent slopes discussed here are annu- the beginning of wave 1 with the same slope would have sliced through ally compounded. As the reader will see, the slope of the Gann line the ensuing rally, rendering the Gann line useless. for the largest cycle under study (the cycle of Cycle-degree) is 8.5% Wave 4 of this rally ended at the 8/26 low of 111.438, firmly break- per year, and the slopes of the Gann lines for all component waves ing the “.10 line.” Both during wave 4 and after, this same line iden- are round multiples of that. A final note is that for the highs and tified resistance until January ‘98. The second Gann line begins the lows in the DJIA used to mark the endpoints of waves, theoretical 3rd wave within wave 5, at the 9/11 low of 111.938. It has a slope of highs and lows are reported before May 1991 and actual highs and .15 points per trading day, 1.5x the slope of the line attached to the lows thereafter. parent wave. The “.15 line” indicated support through late Novem- Table 1 ber ’97. After that line was firmly broken by the 4th wave within wave Frost & Prechter's Count of Millennial, Century and 5, the last Gann line was drawn from the low of 117.78 1 on 12/9/97 Generational Waves (using the 3/98 contract). The slope chosen for this line was .20 points per day, 2x the slope of the original Gann line and 1.33x the slope of the second line. This slope is chosen in part because it di- rects the line to the intersection of the first and second Gann lines. This intersection, a Vodopich convergence, at 124.5 in mid-January 1998, is near the intraday high of 124.28 on 1/12/98 (using the 3/98 T Bond futures contract), which remained the high for several months. This demonstration of Vodopich’s integration of Elliott and Gann supports its theoretical argument, that an Elliott impulse wave is associated with a Gann line whose slope “has worked for the tradable in the past”1; that Gann lines of component waves have slopes that are round multiples of the slope of the parent wave; that these Gann lines indicate support through wave 3 and resistance thereafter; and that the Vodopich convergence, the intersection of the Gann lines, identifies a point in time/and or price (both time and price in this case) at which the reward/risk ratio drops substantially. Appendix 2 contains the dates and prices of the Elliott waves discussed above with relevant Fibonacci ratios. Readers familiar with the T Bond action in 1998 know that after the January high, T-Bonds corrected until April ’98 and then rallied to a historic high in October. This price movement raises the ques- tion whether there was a larger cycle operating which this Vodopich analysis did not capture. The issue of a hierarchy of cycles is central THE PRESENT MINUTE CYCLE (MINOR CYCLE WAVE to the long-term Elliott Wave analysis of the stock market, the focus 5) - THE BULL MARKET FROM 1994 TO THE PRESENT of this research and of Elliott’s original study. Chart 3 plots weekly bars of the bull market from March ’94 APPLYING GANN TO LONG-TERM BULL MARKETS through March ’98. This bull market, which corresponds to Minor Cycle Wave 5, has a Gann-line slope of 34% per year, 4x the slope of Referring to a hierarchy of cycles in the Elliott Wave, Frost & Supercycle Wave (V). Although the Minute Cycle began at the 4/4/ Precther stated that “as far as we can determine, then, all waves both 2 94 low of Dow 3552.47, the Gann line begins at Wave iii, 3638.62 on have and are component waves.” Frost & Prechter demonstrated 11/23/94; and as Gann lines should, this line indicated support until this idea with the Dow Jones Industrial Average, and Table 1 lists the Wave iii top of 5796.10 on 5/23/96. their hierarchy of waves as well as the labelling of those waves to be After the “34% line” was firmly broken in the mid-’96 correction, discussed here. If one combines Elliott’s argument for a complete Wave v began (Wave iv ended) at Dow 5182.31 on 7/16/96. The hierarchy of waves with Vodopich’s argument that for any “target” second Gann line starts at the beginning of Wave 3 within v, at 5561.46 wave the Gann-line slopes of component waves are round multiples on 9/3/96, drawn with a slope of 51% per year, 1.5x the slope of the of the Gann-line’s slope for the “target” wave, then with any one im- first Gann line (its parent wave) and 6x the slope of 8.5%. Note that pulse-wave Gann line, one should be able to find the Gann-line slopes as Vodopich’s method would indicate, price rose during Wave 3 within for all parent and component waves throughout the hierarchy. 5 in between the first, “34% line,” indicating resistance, and the sec- In search of these Gann lines, this research examines Primary, ond, “51% line,” indicating support. Price broke the support of the Intermediate, Minor, and Minute cycles from 1945 to 1997, begin- second Gann line after the top of Wave 3 within 5, at Dow 7112.10 on ning with the present Minute cycle, which began in 1994. This pre- 3/11/97. The third and final Gann line of this Minute Cycle (Minor sentation departs from the standard Elliott Wave analysis, which is to Cycle Wave 5) is drawn from the 6356.77 low on 4/14/97, which cor- work inward from the parent wave to the component waves, in order responds to the beginning of the Wave iii within 5 within v. The to highlight the current cycle, with which readers are most familiar. slope of this line is 102% per year, 2x the slope of the second Gann The largest cycle under study, the cycle of Cycle-degree from the 1932 line drawn for this cycle and 3x the first. Appendix 3 contains the low, will be presented last. dates and prices of the Elliott waves discussed above with relevant Since this is a long-term study of the Dow, Gann-line slopes are Fibonacci ratios.

21 MTA JOURNAL • Spring-Summer 2001 Chart 3 Price firmly breaking the Gann line (as the July ’96 correction The Present Minute Cycle (Minor Cycle Wave 5) broke the “34% line”) is reason to suspect a wave 4 correction. Upon Dow Jones Industrial Average from 1994-1997 resumption of the uptrend, one draws the second Gann line, repeat- ing the evaluative process that led to the first. Now, however, during the wave 3rd wave within the 5th wave, one watches for the second Gann line to indicate support while the first line indicates resistance; and this happened in Minor Cycle Wave 5 from September ’96 through March ’97. With the third Gann line, drawn after the second is broken, one is approaching either the end of the impulse wave, or, as is the case in Chart 3, a significant change in trend, reducing the reward/risk ratio. The third Gann line confirms the intersection of the first two; and as price approaches the Vodopich convergence, one can adjust one’s equity exposure for the expected higher volatility and lower reward/risk ratio. The Vodopich convergence is not a reversal signal. As has been discussed in the T Bond futures represented in Chart 2 as well as the U.S. equity bull markets shown in Charts 3 and 5, more often than not, the trend resumes after a Vodopich convergence, albeit with greater volatility and after some consolidation. This likelihood points out a limitation in the author’s use of Vodopich’s integration of El- In summary, Chart 3 demonstrates a Vodopich analysis of a long- liott and Gann, since the addition of Gann lines leaves part of the term (32 month) Elliott impulse wave of the Dow. The first and sec- impulse wave unmeasured. An addendum to this paper examining ond Gann lines, at 34%/yr. and 51%/yr., indicate support through the price action from August ’97 to the present addresses the ques- the 3rd wave of their cycle and resistance thereafter. However, the tion of how to analyze such price action. third Gann line, the “102% line,” performed differently from the first two, indicating support through the 3rd wave but never resis- THE CURRENT PRIMARY CYCLE (CYCLE WAVE V) - tance. All three lines intersected in late July ’97, near the 8/7/97 THE BULL MARKET FROM 1974 high of 8299.49. And while this Vodopich convergence did not mark the absolute high, it did indicate the time and price after which price Chart 4 plots monthly bars of the DJIA from the 1974 low through movement became more volatile. The Dow did not break the 8299 March 1998 and indicates the particular wave count for this Primary high for six months, in February ’98; and from August ’97 through cycle which the Vodopich analysis suggests. For reference, note that August ’98, the Dow suffered two significant corrections, -16% in Chart 3 (covering the period from 1994 onward) fits in the upper October ’97 and -21% in July/August ’98. right hand corner of Chart 4. Note also that the “34% line” in Chart The discussion of Minor Cycle Wave 5 is also a practical example 4 is the same line of the same slope from Chart 3. The Vodopich analysis of this period leads to a different wave count than that sug- of how one applies Elliott and Gann to long-term stock market im- 5 pulse waves. Early into what one believes is a 3rd impulse wave, early gested by Frost & Prechter ; and that wave count, in turn, leads to 1995 for the cycle in Chart 3, one draws a Gann line whose slope is a two important conclusions. The Vodopich analysis suggests first that round multiple of the slope of the parent-wave Gann line; at the time, the entire period from 1982 to the present is Primary Cycle Wave this is an academic exercise since the Gann line does nothing to es- ((3)) and second that the 1990 high, not the 1987 high, was the top tablish that the cycle has begun its 3rd wave. The inability of a Gann of Intermediate Wave (3) within ((3)). The argument here for the line to contribute to the assessment of a 3rd wave is no drawback revised wave count is one of “fit” rather than “proof.” The explana- since 3rd waves are the easiest of all waves to spot. In the words of tion fits the market action to date. However, it does not provide a Frost & Prechter, “Third waves are wonders to behold. They are strong perfect Elliott wave count, nor is it the necessarily the count that and broad, and the trend at this point is unmistakable. Increasingly would have presented itself at various times in the past. favorable fundamentals enter the picture as confidence returns . . . . In this count, the Primary Cycle (Cycle-degree Cycle Wave V) be- Such points invariably produce breakouts, ‘continuation’ gaps, vol- gins at the 12/9/74 low; and the first Gann line, with a slope of 12.75%, ume expansions, exceptional breadth, major Dow Theory trend con- begins at the 8/31/82 low of 769.98, which in this count represents firmations and runaway price movement.”4 the start of Primary Wave ((3)). Here again, the integration of El- Relying on other measures, then, to validate the wave 3, one can liott and Gann is iterative; neither the wave count nor the Gann line experiment with Gann lines of two or three different slopes (e.g., were fixed before adding the other. The choice for the Gann-line 1.5x, 2x, 2.5x the slope of the parent wave) to find the line that best slope and the start-date for drawing it (with the wave count implied indicates support. In the latter half of a 3rd wave, in late 1995 for by this choice) are made in an effort to find the best wave count and Minor Cycle Wave 5, one should expect to find the single Gann line Gann line for the price action that followed. that best indicates support through the 3rd wave. The analyst must What is fixed in a Vodopich analysis is that the Gann line’s slope be careful not to create a Gann line that is too tight, whose slope is must be a round multiple of the Gann-line slope of the parent wave too steep; such a line probably belongs to the 3rd wave within wave 3, (12.75%/yr = 1.5 x 8.5%/yr.) and that the Gann line indicates sup- not wave 3 overall. To check that the Gann line chosen is proper port until it is firmly broken by the 4th wave in the cycle, wave ((4)) and not too steep, the author draws a price channel, using the Gann in this case. As one can see from Chart 4, the “12.75% line” has line as its lower boundary. The usefulness of this technique is based remained consistently beneath the market lows after 1982, i.e., the on the author’s observation that price channels are common and lows in 1984, 1987, 1990, and 1994. easy to see in 3rd waves.

22 MTA JOURNAL • Spring-Summer 2001 Chart 4 Table 2 The Current Primary Cycle Projections of Gann Lines to August 7, 1997 and (Primary Waves ((1)) through ((3)) Cycle-degree Cycle Wave V) Comparison with Actual High for Dow Jones Industrial Average Dow Jones Industrial Average from 1974-1997

There is no satisfactory Vodopich breakdown of Intermediate Wave (5), the bull market from 1990 to the present; a wave count for Wave (5) is included in Appendix 4 with relevant Fibonacci ratios. Wave (5) is different in that it is concave. In the author’s observation, it is more common for an impulse wave to look convex, to bow upward, because the 3rd wave advances strongly with less volatility than the A wave count of the Intermediate Cycle within Primary Wave ((3)) 5th wave; and it is this convexity that allows a Gann line to indicate supports the author’s argument for the parent-wave count and is in- support through the third impulse wave and resistance thereafter. In cluded in Chart 4. A Gann line with a slope of 17%/yr. begins at the Intermediate wave (5), price advanced +70.0% through the top of 7/25/84 low of Dow 1078.9, which starts Intermediate Wave (3) within Minor wave 3 in January 1994; but from that top of Dow 3985.95, Primary Wave ((3)). The slope of the line is 2x the slope of Supercycle price advanced more, +108%, through the 8/7/97 top of 8299.49. Wave V (8.5%/yr.) and 1.33 x 12.75%, the slope of the parent wave, This anomaly is consistent with the unusual economic recovery in Primary Wave ((3)). Further, the Gann line indicates support for the U.S. after the 1991 recession. The postrecession earnings boom the price movement up to a certain point, the 1990 top. However, it did not come in 1991 and 1992 as would normally be the case; the does not indicate meaningful resistance thereafter; price remains well boom came in 1994 through 1997.6 And the early, slow advance in under the “17% line” between 1990 and 1997. (The importance of stock prices reflected the early, modest growth in earnings. the “17% line” is discussed later). In the wave count implied by this Gann line, the 1990 top, not the PRIMARY CYCLE (CYCLE WAVE III) - THE BULL 1987 top, represents the end of Intermediate Wave (3), thereby low- MARKET FROM 1942 TO 1972 ering the significance of the 1987 crash by one degree in the Elliott wave count. This wave count finds validity in the following Fibonacci Chart 5 ratios. The ratio of Wave (3) to Wave (1) is 2.63 (+180.3%:+68.7%); The Primary Cycle from 1942-1972 (Cycle-degree cycle Wave III) and within Wave (3), the ratio of Wave 5 to Wave 3 is .63 (+87.1%: Dow Jones Industrial Average +137.9%). This wave count is unusual in that the high of wave 5 (Dow 3024.30) was not much beyond the high of wave 3 (2746.65 in August ’87). However, the Vodopich analysis of the T Bond futures contract yields a wave count that is similar in that the later, marginal high with the less dramatic correction emerges as the 3rd wave top. In Chart 2, the marginal high in November immediately precedes the breaking of the Gann line, thereby suggesting the wave 3 top, even though a more dramatic correction followed the slightly lower October high. The final point to support the argument for the 1990 top as the end of wave (3) is that the 1990 correction (Intermediate Wave (4) in this count) corresponded to a larger economic phenom- enon, the 1991 recession. Appendix 4 contains the dates and prices of the Elliott waves discussed above, Primary Wave ((3)) and Inter- mediate Wave (3), with relevant Fibonacci ratios. Further, as one can see in the upper right hand corner of Chart 4, the “17% line” intersects two other lines, the “34% line” (the same Chart 5 plots monthly bars of the DJIA from 1942 to 1972, the “34% line” from Chart 3) and the line labelled “8.5%/yr.” The “8.5% bull market between World War II and the Vietnam War; and the line” is the Gann line drawn from the 1942 low; and it contributes to Vodopich analysis confirms Frost & Prechter’s wave count for this a Vodopich convergence, an intersection of two or more Gann lines, period (Cycle Wave III).7 Wave III of Supercycle Wave (V) began at around the time and price of the same Vodopich convergence in Chart the 4/28/42 low of Dow 92.92; and from here the Gann line with the 3, occurring near the Dow’s 1997 high of 8299.49 on 8/7/97. As one slope of 8.5%/yr. is drawn. This line clips the 6/13/49 low of 161.5, can see in Table 2, which projects the five Gann lines to 8/7/97, all which marks the start of Primary Wave ((3)) within Cycle Wave III. price projections are within .32% to 3.24% of the actual high. The And from this point, a Gann line is drawn with a slope of 12.75%/yr., accuracy of these projections, based on five Dow prices from 1942 to 1.5 x 8.5%/yr., the slope of the parent wave. The “12.75% line” indi- 1997, demonstrates the insight gained from adding Gann lines to cates support during Wave ((3)), capturing the pullbacks in 1953 long-term Elliott impulse waves. and 1957, until it is broken in the early 1960s. In this way, the “12.75%

23 MTA JOURNAL • Spring-Summer 2001 line” validates Frost & Prechter’s count of the Wave ((3)) top in 1958.7 The first two Gann lines in Chart 6 intersect at Dow 29,000 in The second Gann line for Cycle Wave III is drawn from the start 2012, and this intersection represents a price and/or time target for of Wave (3) within ((5)), at 558.06 on 10/32/62. Its slope of 25.5%/ Supercycle Wave (V). This target is not necessarily the end of the yr. is 2x the slope of the Gann line of the parent wave, and 3x the cycle. In Charts 2 through 5, price continued to rise or trend side- slope of 8.5%, the slope of the grandparent wave, Cycle Wave III. ways after a Vodopich convergence. However, in all cases the volatil- This second Gann line behaves as a third Gann line often does, not ity also increased dramatically, reducing the reward/risk ratio sub- indicating resistance once broken; and no third Gann line emerges stantially; regardless of the price movement after 2012, one can ex- from the analysis of this period to confirm the intersection of the pect much higher volatility, frustrating long-term market analysis. first two. The first two lines do intersect in early 1966 around Dow This Wave (V) target differs from H. S. Dent’s projection in The 1250, and this marked Frost & Prechter’s Cycle Wave III top in time Roaring 2000s of Dow 35,000 in 2008 for a methodological reason. but not in price. In the chart with the 35,000 target, Dent has drawn a trendline with Here again, the Vodopich convergence does not signal a reversal about the same slope as the “12.75% line” in Chart 6, although Dent but rather the beginning of a period in which volatility increases sub- starts the line from the September ’84 low, not the September ’82 stantially with some advance in price. The 1973 Dow peak of 1051.7 low used here. His 35,000 target comes from a parallel, channel line exceeds the 1966 peak by 5.7%; but in between the peaks the Dow from the 1987 high, projected to 2008, the time of the market peak suffers two corrections, -25% in 1966 and -36% in 1968-70. Frost & suggested by his demographic analysis.8 The methodological differ- Prechter’s use of complex wave patterns to analyze this period is taken ence between Dent’s forecast and the one suggested here is that Dent as support for the argument that the portion of a trend after the believes that the price channel, bound underneath by the trendline Vodopich convergence is inherently more difficult to analyze with similar to the “12.75% line,” continues until the market top. The the Elliott Wave. To analyze the time from 1966 to 1982, Frost & Vodopich analysis concludes that the trendline will be broken by the Prechter’s original (1978) count labels the period from 1966 to 1974 4th wave, Primary Wave ((4)), and that once broken it will serve as as an expanding triangle; but in 1982, Prechter favored a double- resistance during the 5th wave, Primary Wave ((5)). As resistance three wave count, ending Cycle Wave IV in 1982.5 then, the “12.75%” line marks the upper boundary of price move- An addendum to this paper analyzes the Dow following the ment, not the lower boundary, as it seems to for Dent. Vodopich convergence in August ’97. In this real-time post-conver- Chart 6 includes a third Gann line, sloping upwards towards Dow gence analysis, the author will suggest how to deal with such a pe- 29,000 in 2012 at the compound annual rate of 25.5%. Since the riod. Dow has yet to complete Primary Wave ((3)), this is a tentative Gann line for Primary Wave ((5)); its purpose is to outline a possible sce- THE CURRENT CYCLE OF CYCLE-DEGREE nario for the final wave. The slope of the line is 2x the slope of the (SUPERCYCLE WAVE (V) ) - Gann line of the parent wave, Cycle Wave V, and 3x the slope of the THE BULL MARKET FROM 1932 TO THE PRESENT “grandparent” wave, Supercycle Wave (V). As incredible as it might be to think of the stock market rising 25% per year for several years, Chart 6 Chart 3, charting the Dow from 1994, shows periods when the mar- The Bull Market from 1932-Present ket advanced at a faster pace. Further, in the 1920s, the Dow rose Dow Jones Industrial Average 24.9% per year (compounded) from the August ’21 lowest close of 63.90 to the September ’29 highest close of 381.17. Thus, it is important to be open minded to the prospect of the market scoring 20% plus annual returns before dividends during the next decade. Fur- ther, as has been shown in other charts, one can expect the slopes of component waves to be round multiples of the slope of Primary Wave ((5)). For example, using a base slope of 25.5%/yr., the Gann line of Intermediate Wave (3) within Wave ((5)) might have a slope of 38.25%/yr. (1.5x 25.5%/yr). The long-term application of Vodopich’s integration of Elliott and Gann has ignored corrective waves because the author has not found a consistent methodology for them; as a result there is no means in this analysis to measure how far Primary Wave ((4)) might run. Frost & Prechter’s guideline is that “corrections, especially when they are fourth waves, tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus.”9 In the Elliott Wave count Chart 6 plots quarterly (3 month) bars of the Dow Jones Indus- presented here, Frost & Prechter’s guideline suggests that Primary trial Average from 1910 to the present along with three Gann lines Wave ((4)) will end in the range of Intermediate Wave (4) of ((3)) and Cycle Wave turning points. The first two Gann lines, with slopes (the 1990 correction), Dow 2344.31 to 3024.26. of 8.5% and 12.75%, are identical to the lines with the same slopes in This target for Primary wave ((4)) and the “25.5% line” from Chart Charts 5 and 4 respectively. As one can see in Chart 6, the Gann lines 6 come together in 2002, which is also the bottom of the next 4-year applied to the Dow from World War II onward indicate support and cycle.10 Note that this intersection represents the start of Intermedi- resistance in the same manner as Gann lines in Charts 2 through 4. ate Wave (3) within ((5)). Primary Wave ((4))would end, in this The first Gann-line, the “8.5% line,” indicates support through Cycle scenario, in 2000 or 2001, followed by Intermediate Waves (1) and Wave III; this line is firmly broken by Cycle Wave IV; but the line does (2) of ((5)). not indicate any meaningful resistance until the summer of 1997, as has been discussed previously.

24 MTA JOURNAL • Spring-Summer 2001 SUMMARY The post-convergence period in the Original Addendum Chart differs from the similar period in Chart 5 in that the Dow rises sub- The purpose of this research has been to apply Vodopich’s inte- stantially after August ’97, but price does not do so after the 1966 gration of Elliott and Gann to the study of long-term impulse waves high. The current advance in price biases the analysis in favor of an in the Dow Jones Industrial Average. The effectiveness of such an impulse wave count rather than a corrective wave count, such as the analysis can be seen by comparing Charts 1 and 6. Chart 1 shows how one used by Frost & Prechter for 1966 to 1982.5 Gann lines should help a wave count; and Chart 6, the DJIA after Original Addendum Chart World War II with Gann lines based on percentage slopes, delineates Cycle Extension After July 1997 a credible wave count for Supercycle Wave (V) and targets its top. Dow Jones Industrial Average (Weekly Bars) Drawing Gann lines from Elliott Wave starting points can help select the best among alternative wave counts; but it does not alter the iterative, trial-and-error process of establishing the count in the Elliott Wave. As Frost & Prechter state, “one can use the market action to confirm the wave count as well use the wave count to confirm the market action.”11 Plotting a Gann line from the suspected start of a 3rd wave is an academic exercise. The Gann line itself does nothing to establish that the cycle has begun a 3rd wave; and only if price finds support at a Gann line during a 3rd wave can one conclude that the line is appropriate. The Gann lines contribute to the evaluation of the cycle only during the latter stage of the 3rd wave and during the 4th and 5th waves. Evidence of the end of the 3rd wave and the start of the 4th wave correction comes from price breaking below the first Gann line of the cycle. During the 5th wave, one repeats the trial-and-error process to create the second Gann line, using the slope of the first Gann As discussed previously, at the 8/7/97 intersection in Chart 3, the line as an aid in choosing the slope of the second. The movement of Dow breaks below the “102% line,” indicating the end of Wave iii price in between the first (now resistance) and second (support) Gann within v of the cycle that began in April ’97. What remains is the lines during a 5th wave gives the analyst confidence in the 5th wave, wave count for Waves iv, v, and beyond. The author prefers to count which the author has found to be more volatile than the well-chan- iv at the 9/11/97 Dow low of 7581.08 and a truncated v at the 10/8/ nelled 3rd wave, thereby obscuring the wave count. Finally, at the 97 high of 8184.70. And this count puts the period in the Original price and/or time target indicated by the intersection of the two Gann Addendum Chart after the October ’97 correction as an extension of lines (perhaps with the confirmation of a third line), the analyst can the present Minute Cycle. reduce market exposure, both confident that the predictable bulk of Overall, the entire price action since October ’97 creates an inel- the profit has been achieved and wary of the much greater volatility egant Elliott Wave, an expanding diagonal pattern. Frost & Prechter that tends to follow a Vodopich convergence. consider the expanding diagonal invalid, but Vodopich disagrees, A general caution must be added about the reliability of the Gann describing it as a “100% reliable top formation.”14 lines in the way they indicate support and resistance. Price may over- The chart shows the first Gann line of the extension starting at throw (rise above) the Gann lines especially near the top of the cycle the 1/12/98 low of Dow 7447.39, drawn with a slope of 51%/yr. The due to the momentum built up through the 5th wave; both Frost & argument for this slope is that since this extension is a component Prechter12 and Vodopich13 have observed such “throwover.” Con- wave of the Minute Cycle from 1994, its slope must be a multiple of versely, price may fall away after breaking below the third Gann line 34%/yr., the slope of the Minute Cycle. Validation of that choice in an impulse wave so that the third line plays no resistance role at comes from the summer ’98 correction, which finds resistance along all. And especially in smaller impulse waves, one may not be able to that line, culminating in the wave 3 top of Dow 9367.84 on 7/20/98. see a third Gann line. However, to the extent that Gann lines con- The author counts the 4th wave to the 10/8/98 low of 7467.75, tribute to finding the correct wave count, they sensitize the analyst to which is a truncated C-wave in the a-b-c correction from July. The other market measures signalling a reversal. argument in favor of finding the low here rather than on 8/31/98 is Finally, the Supercycle Wave (V) target of 29,000 in 2012 must be that the S&P 500 Composite Index made a new low on October 8 as considered preliminary since it lacks the confirmation of the third did various sub-indices (e.g., SOX), and the VIX high in early Octo- Gann line. As we near the top, however, analyzing component waves ber exceeded the August/September high. with Vodopich's approach will help bring that Supercycle high in the From here, the author’s amended Vodopoch analysis fails in its Dow into focus. purpose, to highlight the best among alternative impulse wave counts. ADDENDUM - (4/30/99) For the 5th wave, the favored Gann line begins at the 10/28/98 low of 8328.97, beginning the iii within the 5th with a slope of 102%/yr. This addendum covers the DJIA after the Vodopich convergence While this Gann line indicates well resistance and support, especially in August ’97 (see Chart 3). On a smaller degree, smaller by one from mid-December ’98 to mid-January ’99, the wave count produces Elliott-Wave degree in fact, this period is like the years from 1966 to a short 3, only +12.6%, and so is likely to violate the rule that “wave 3 1973 (see Chart 5). What emerges from analyzing these two periods is never shorter than 1 and 5.15 (Refer to Original Addendum Chart.) is that the price action up to a Vodopich convergence fits well into the A Revised Addendum Chart presents the “102% line” and “204% Elliott Wave hierarchy, but that after the intersection of the Gann lines, line” drawn according to Vodopich’s original rule, from the start of price does not fit neatly into a single cycle that itself fits inside a larger the 1st wave rather than the start of the 3rd wave. The success of cycle. The deep retracements of a post-convergence period undercut these Gann lines in identifying the best wave count suggests there the search for a single impulse wave with inter-related Gann lines.

25 MTA JOURNAL • Spring-Summer 2001 may be a legitimate reason for varying the Gann-line start points. In Appendix 1 the Revised Addendum Chart, the “102% line” begins at the start of Gann Line Slopes of Various Tradables the extension’s wave i within 5, at the 10/8/98 low. This Gann line indicates a top to wave iii within 5 at Dow 9647.96 on 1/8/99, followed by a wave iv triangle. In this count, the 204% line is drawn from Dow 9211.5 on 3/3/99. Here the author reverted to the amended approach, starting the “204% line” at the start of 3 within v within 5. These Gann-lines indicate well resistance and support through the price action to date. Revised Addendum Chart Cycle Extension After July 1997 Dow Jones Industrial Average (Weekly Bars)

Appendix 2 Prices, Dates & Fibonacci Ratios for T Bond Future Contract from April '97 to January '98 While the purpose of this research is to advocate a single method in order to enhance the predictive power of the Elliott Wave, the experience with the “102% line” suggests a flexible approach is needed. In particular, when the second wave is shallow, it makes sense to draw the Gann line from the start of the 1st wave (Vodopich’s approach), and when the 2nd wave is deep, to draw the Gann line from the start of the 3rd wave (the author’s approach). Both Addendum Charts also include the “8.5% line” from 1942 and the “17% line” from 1984, both of which are part of the August ’97 Vodopich Convergence (see Table 2). Throughout the extension, the Dow has had difficulty overcoming the resistance indicated by the “8.5% line” in 1998, and later in the beginning of 1999. Fur- ther, the Dow failed to break above the “17% line” in 1998; and as of this writing, the Dow continues to find resistance at this line. The combination of these Gann lines, especially the “8.5% line” and “17% line,” suggests that Primary Wave ((3)) and its extension are near their peak; and price crossing back below the “8.5% line” and the “17% line” will contribute to an assessment of the beginning of Primary Wave ((4)).

26 MTA JOURNAL • Spring-Summer 2001 Appendix 3 BIBLIOGRAPHY Prices, Dates & Fibonacci Ratios for Minor Cycle Wave 5 ■ Barron’s, New York: Dow Jones & Co., Inc. 1998. ■ Harry S. Dent, Jr., The Roaring 2000s: Building the Wealth and Life Style You Desire in The Greatest Boom in History, New York: Simon & Schuster, 1998; Touchstone, 1999. ■ The Elliott Wave Theorist, Gainesville, GA: Elliot Wave International, Inc., 1998. ■ John J. Murphy, Technical Analysis Of The Futures Markets: A Comprehensive Guide To Trading Methods And Applications, New York: New York Institute Of Finance, 1986. ■ Robert R. Prechter, Jr. & A. J. Frost, Elliott Wave Principle - Key To Market Behavior, Gainesville, GA: New Classics Library, 1995. ■ Martin J. Pring, Technical Analysis Explained, New York: McGraw- Hill, Inc., 1991. ■ Don Vodopich, Trading For Profit With Precision Timing, Greenville, SC: Traders Press, Inc., 1984. BIOGRAPHY This research, submitted to the MTA in May 1999, fulfilled the author’s Phase III requirement of the CMT Program. Mr. Hulton is indebted to his CMT Mentor, Gurney Watson, for his guidance and support. Mr. Hulton is presently Director of Trader Services at the Electronic Trading Group, L.L.C.

ENDNOTES 1. Vodopich, p. 59. 2. Frost & Prechter, p. 25. 3. Ibid, p. 71. 4. Ibid, p. 80. 5. Ibid, p. 283. 6. Barrons, 6/29/98, p. 46 (Interview with Mark Perkins). 7. Ibid, p. 282. 8. Dent, p. 294. 9. Frost & Prechter, p. 67. 10. Pring, p. 255. 11. Frost & Prechter, p. 84. 12. Ibid, p. 73. 13. Vodopich, p. 55. 14. Vodopich, p. 47. 15. Frost & Prechter, p. 31.

27 MTA JOURNAL • Spring-Summer 2001