Tim Walker
Tim Walker

When W.D. Gann wrote trading examples into his lessons he liked to use the word ‘campaign’. This has a number of connotations and the military analogy is not misplaced. A general waging a war will plan a campaign, with a definite beginning point and specific objective, either short-term or long-term, or possibly both.

On the trading battleground, this means waiting for the right signal for a campaign to begin. These don’t come along every day. In fact, they may appear just a few times in a year or even perhaps once every few years and this can be sobering for traders looking for a way into the market every day.

Gann’s objective was to get traders to wait patiently for a signal that a large move (both in price and time) was about to begin. By getting in early, it is possible to hold a position for weeks or months, reversing positions from long to short and short to long as significant changes in direction occur. This allows the possibility to ‘pyramid’ trades and build up large profits with far less risk than exists for those trading from day to day.

In the Trading Webinar I presented last month we looked at just such a set-up and used the rules from the Smarter Starter Pack, Number One Trading Plan and Ultimate Gann Course, together with Gann’s lessons in the Commodities Course to follow a campaign from start to finish. We used the Cotton market as an example, a campaign that ran for ten months from September, 2010 to July, 2011.

Right now, the Coffee market is presenting an interesting opportunity, as illustrated in the weekly chart below:

Chart 1 – Coffee Weekly Chart

click chart to enlarge

Following a lengthy consolidation period in the first half of 2010, Coffee broke out of its trading range in June and began a massive bull run that saw prices increase by more than 150%. This bull market ended in May, 2011 and in a previous Safety in the Market newsletter, I wrote about some of the long-term cycles around that top.

Since May, prices have worked their way lower but not in the fashion you would expect from a commodity bear market. As you can see, the market is now poised with a triple bottom in October, November and December. Not only are these lows at the level of a previous high in November, 2010, they are also sitting on 50% of the range from the lows of 2010 to the bull market top in May.

Now let’s consider the daily chart to get a closer look at what is going on:

Chart 2 – Daily Chart

click chart to enlarge

I have marked only some of the significant dates on this chart and there is definitely more information here, but I would like to highlight just a few points. Time by Degrees working forward from the May top has given indications to support the strength of turns. The big rally from the August seasonal date low to the 1 September top was followed by three hugely successful ABC short trades. (At least one trader from the August Advanced Trader Coaching group got in on this run.)

With a double bottom on 3 October and 1 November, (the latter being close to 180° from the May top and just a little short of the anniversary of the November, 2010 top), you might have expected a good rally and gone long, especially noting the 50% level in Chart 1.

Now note the two lower tops marked on Chart 2. Use your Gann Retracement tool to measure the range from the 1 September high to the 3 October low and you will see that the first of these tops failed to make the 50% retracement level. Then, after the second bottom on 1 November, price only managed to get to the 62.5% level of the most recent range. Look carefully at the chart and you will see a small triple top. The price was around 240, a natural resistance level in the circle of 360°. Remember these numbers work in Price as well as in Time.

So where does this leave the market now? Gann says that the biggest moves happen from triple bottoms. Therefore, a big rally would be expected from here. But the lack of significant upward movement from the last two lows suggests a potential failure. So how can you know which is happening?

Firstly, watch the recent tops at 240. Price needs to break above this level for you to be confident of higher prices. Depending on the momentum of the move, you would watch each higher top in turn to ascertain the upside potential.

On the other hand, if the market fails to reach this level and falls again to the 220 range, it will be the fourth time at this level. Gann’s rule is that prices usually break through on the fourth attempt. Therefore, on a retest the fourth time you would expect a breakthrough to the downside. If such a strong support level gives way, you could expect significantly lower prices.

In either case, this would be a good time to bring out your trading rules and follow them religiously for a good campaign.

Knowledge is Power!

Tim Walker