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Illustration 5.0

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A countertrend movement that falls within the three to four day period is assumed to keep a strong trend intact. A shorter correction indicates a stronger than normal trend and possibly a "blow-off". A movement exceeding the fourth day indicates the trend may go into a consolidation or reversal. This concept of normal movement against a powerful trend oan be applied to weekly and monthly charts by using three to four weeks and three to four months as the normal life span of intermediate and long term corrections. We will view them later.

Look at the Standard and Poors 500 (Illustration 5.0).

Point (A) is the start of a very powerful trend on December 31, 1986. The first reaction against that trend occurs at Point (B), showing support on the third down day, thus indicating the strong trend is still intact. Point (C) is a one day correction, indicating the strong trend is still very much intact. Point (D) is a countertrend move of only one or two days. Therefore, the trend is still intact and giving higher highs and higher lows.

At Point (E), the price corrects for two days, but exceeds any previous correction in number of points- a warning of what Gann would term an "overbalance of price." The trend is still intact as a double bottom forms at Points (D) and (E). Price then consolidates for two days and runs up for four days. On the fourth day, price forms an outside reversal day down (a higher high, lowsr low and close on low). This pattern is a very bearish sign when forming twin peaks, especially at oyole expiration.

The market then breaks for six days to Point (F), indicating the original powerful trend is over and a new downtrend or sideways movements (consolidation) is starting. Of course, if the trend is in a powerful move down, you would look for upward corrective (oountertrend) moves lasting one to four days, followed by a breaking of the low that was established at Point (F).

Now, look at the S&P 500 (Illustration 5.1). Point (A) is the May 20, 1987 low and the start of a powerful up trend. Point (B) is a two or three day correction, keeping the powerful trend intact. There is a two day correction at Point (C) and Point (D) which finds support on the fourth day down. Both keep the trend intact as at Points (C) and (D), which finds support on the fourth day down. Both keep the trend intact as at Points (E) and (F . At Point (G), the swing low is broken and the correction exceeds the fourth day, indicating the up trend is now over and a consolidation is starting. Notice, after the high at Point (H), price moved down to the old lows then could only rally one day at Point (I), indicating the possible start of a fast move down. That was October 14, 1987.

In Illustration 5.2, IBM stock is moving down from its September, 1987 highs. The first reaction moves up only one day at Point (A), indicating the possibility of a powerful trend in force. The next movements are up in three day sections at Points (B), (C) and (D), all indicate trend continuation. These are followed by a massive break with no reaction exceeding four days up. This keeps the trend intact.

Obviously, you could develop trading strategies from this road map of powerful trends on daily charts, but dont bet everything on this concept. A stock or commodity can correct more than four days and then continue the trend, (Illustration 5.3) This next correction (countertrend) in time will likely be seven to 10 days Point (A). Notice how the three lower high setup developed after Point (A). I was watching this stock then, but did not understand the pattern until February, 6th. This gave me plenty of time to play a twelve-point move down.

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In the instance of a new high or new low following a larger correction than had appeared earlier, will likely produce a momentum divergence. If you study a large number of charts, using the three to four day guideline for correction against the trend (countertrend) movements, its value and applicability will become clear. You will expect reactions against a trend and will be able to better judge trend strength by tne nature of the reactions you see. You may, also, be able to find places to add to positions within a trend.