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Christmas Spending Money
Welcome all Safety in the Market traders to 2010, which will undoubtedly be a fantastic year for trading. Forgive me if I begin the New Year (can you seriously believe that we started the new millennium a decade ago!) by looking back at the previous one, but I can’t resist the temptation to talk about the so-called ‘Christmas Rally.’ I’m sure many of you have heard of this phenomenon, and if you attended a seminar in the last couple of months you probably heard us going on and on about it. But what actually is it and how could you have profited from it?
I take my cue from a lesson of Gann entitled Seasonal Changes on Stocks. This lesson was written in 1935 and is just as relevant today. This is what he said:
When stocks make low in December just before or just after the 22nd, a January rise usually follows. [This rally] often culminates around the 3rd to 7th. However, in some years, the January advance lasts until around the 20th to 21st.
Now, you can’t just run out and buy stocks on 22 December hoping they will run up into early January. Note that Gann’s words are ‘when stocks make low…’ So what you would want to see is some price and time harmony in a stock around that date. Let me illustrate with reference to Lihir Gold (LGL).
Chart 1 – LGL in Early December
click chart to enlarge
I ask you, who in their right minds would want to go long in this stock just looking at the chart as it is? LGL, along with Gold itself, had experienced a savage sell-off from a top on 3 December, which was 180° from an earlier top on 2 and 3 June 2009. This previous top had ushered in a decline lasting over 2 months.
This is where you roll up your sleeves and test the position of the market. First, price. Looking at the chart above, what is the first thing that occurs to you? You have a range from a low on 20/21 August to a high on 3 December. So of course you place your Gann Retracement Tool over the range, and behold, the 50% level is 3.09. The current low is holding 2 cents above the 50% level, a sign of support.
Next, time. Looking at Chart 2, you can see that the market is 120° from the low of 20/21 August, 180° from the 23 June (seasonal day) low, and 240° from the 20 April low.
Chart 2 – Time and Price Harmony
click chart to enlarge
We could do more, and if you want an exercise, do some time trend analysis, counting the number of days between tops and bottoms on this chart. You will see even more confirmation. But I’m sure that by now you get the point, and you would be confident to apply Gann’s rule and look for a rally into January.
The next and very important question is, ‘how do I trade it?’ In a situation like this, waiting for an ABC trade is too slow. You may only have a 2-week window to be in and out of the trade, so you need to act quickly, but you need to have rules to follow. In this example, there was a 3rd low of 3.11 on 23 December. On an intra-day chart this would be a triple bottom. You could enter at 3.16 as the market broke the high of 22 December. You could place your stop at 3.10, but a safer place would be 3.08, just under the 50% level.
Chart 3 – Trading The Move
click chart to enlarge
If you waited for a first higher swing bottom, you would not have entered until 31 December, potentially half way into the move. The first ABC long trade didn’t appear until 8 January – far too late. That is not to say that this cannot be a profitable trade. But the point here is that Gann’s rule may only give you a move from around 22 December to around 7 January. Indeed, you might exit this trade on 7 January and go away for a well-earned holiday paid for by the profits.
Knowledge is Power!
Tim Walker
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