Runaway Moves (Gann)
Oct 24, 2006
- A runaway move denotes an interval when a market displays tremendous momentum, with prices traversing great distances very rapidly...
In
our last article, we focused on W.D. Gann’s innovative brand of price
and time analysis, especially as pertaining to the time periods of measured
corrections. So-called “runaway moves” comprise a unique and highly profitable
subset among time periods, affording the alert speculator the greatest
opportunity to profit in the shortest time. During these dramatic moves,
options prices traditionally experience their greatest increases in value.
A
runaway move denotes an interval when a market displays tremendous momentum,
with prices traversing great distances very rapidly. Runaway moves often take
place during the first and last stages of bull and bear markets, although they
can occur in the middle as well. Typically, they begin after what Gann referred to as a “breakaway point.”
Quoting Gann, “After accumulation or
distribution at (a) bottom or top has been completed, there is a breakaway
point. When you buy or sell stock at this point, you make money very quickly.
It is a safe point to buy or sell for quick profit, as the run is on.”
Although
characteristics vary from one market to the next, we can provide a broad
“textbook” definition for a runaway, which most markets tend to follow. In
general, whether up or down, the move usually lasts between 2 and 3 months.
Minor corrections along the way are normally shallow and seldom linger more
than 5 trading days before momentum aggressively resumes in favor of the trend.
Because these minor corrections tend to be so small, they provide some powerful
dynamics relating to profitability:
•
They allow for entering the market with very little risk, since the minor
corrections are often very uniform.
• Stop-loss orders can be trailed behind the market as it moves in your favor,
thereby enabling you to lock in a lion's share of profits once the market
reverses.
Systematic
pyramiding (adding to profitable positions) during these moves can
significantly enhance prospective returns with only a marginal increase in
risk.
According
to Gann, “The big money in pyramiding is
made in the run between accumulation and distribution. Pyramids should be
started after double or triple bottoms.
“Once
the market gets away from the accumulation period and the trend is well
defined, reactions are very small. While accumulation or distribution is taking
place, you should trade for small scalping profits and never attempt to
pyramid. Wait until an accumulation or distribution zone is cleared before
buying or selling a second lot.
“Select
markets that exhibit a strong uptrend to pyramid on the buy side and the ones
that show a definite downtrend to sell short. Be careful about pyramiding at
the wrong time. “Wait until the commodity is very active and has crossed
resistance levels before buying more, and until it has broken out of the zone
of distribution before selling more.
“If
the market continues to move in your favor and your stop-loss order is not
triggered, you can continue to buy or sell on the way up or down, but don’t
forget that the more the market moves in your favor, the nearer the end of the
move, and buying must not be increased near the top after a long move, nor
selling increased near the bottom after a long decline. Never start to pyramid
after a long advance or decline. The chances are against you. Begin pyramiding
when the trend first turns up or down after long moves.”
Gann
described 2 proven methods of pyramiding:
1.
Buy or sell more as soon as the market breaks into new territory or makes a new
high or low, or
2. Determine the reaction levels and how many points a stock (or commodity) has
corrected from temporary tops or rallied from temporary bottoms, then buy or
sell after reactions of similar size.
A
pyramid should always be followed up with a stop-loss order, no matter what
method you use, because your profits must be protected.
As
mentioned above, the great advantage of runaway moves is the ability to buy or
sell with a well-defined and small risk. As a market moves in your favor, you
can easily trail stop-loss orders below or above the greatest correction on the
way up or down, since corrections will tend to be uniform. The first time a
market declines or advances a greater number of points than in previous
corrections (or exceeds corrective time periods from previous runaways), it
indicates an “overbalancing” of buying or selling pressure, and while final
highs or lows may not yet be in place, the runaway portion of the cycle is
complete. Once an overbalancing takes place, you must exit long positions
immediately. There is usually distribution at the high, but if a market forges
a spike top, prompt defensive action can offer your sole opportunity to get out
with your profits intact.
The
more profit you have, the further away from the market you can place your
protective stop so that a natural reaction will not disturb your pyramid, while
in the early stage of the pyramid your stop-loss order would have to be closer
in order to safeguard your original capital.
Between
July 31, 2003 and March 22, 2004, the cash price of soybeans rocketed a
climactic 95% in 7 months and 20 days. On a percentage basis, this stands as
the 6th-greatest leg up in the beans in all bull markets since 1940. Of legs
that culminated bull markets, it ranks 3rd behind the final legs up in 1973 and
1988.
In
futures, the stunning 2003-04 advance in soybeans
actually consisted of 2 distinct runaway gains measuring a respective 58% and
46% (Figures 1 & 2), each lasting at least 3 months, interrupted by a
near-10% decline.
Looking
at soybeans
since 1936, we find that single or multiple runaways occurred 39 times, or
almost once very 2 years. Bull markets starting in 1937, 1942, 1954, 1966, 1972
and 2003 all enjoyed multiple runaway legs higher.
In
our research, we found that these runaway legs up remained in effect as long as
the market did not fall for more than 6 trading days off any new high, or more
than 8.0% in price. In the twin runaway legs in 2003-04, the minor corrections
persisted for only 3, 2, 5 and 4 days. Their respective percentage declines
amounted to just 4%, 5%, 7% and 7%.
With soybeans already well over a year into a
tenacious bear market as of their September 2006 low, and given the documented
propensity for cash beans to bottom in October, such information could soon
again prove helpful.
Watch the latest video here: Soybeans Forecast Video 
Take a few minutes to check out the Complete Forecasting Service:
Gann Global
Happy Trading,
James Flanagan,
President and founder of
Gann Global Financial
Previous Gann Global Articles:
Jul 28, 2006
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