Retracements

One area of Gann's price rules deals with retracements.

A retracement is a price reversal from the direction of the current price trend, occurring before prices continue in the original direction.

50%, 75%, and 100% price retracement levels, and their multiples, offer the strongest levels of price support or resistance to further price movements. Reactions at and from the 50% level, which Gann called the "balancing point," should occur most often.

Chart 4 is a diagram of retracements. Prices begin to fall from 12 units. At 2 units, prices reverse direction to the upside. They continue rising until reaching a level of 50% OF THE PREVIOUS MAJOR PRICE TREND, or 7 units.

At 7 units, prices react 50% of the distance from 2 to 7 units, before continuing the upward trend. The upward trend continues to 9-1/2 units, or 75% of the 12-to-2 bear price trend.

At 9-1/2, again, prices react 50% to the downside before continuing the upward trend to the 100% level -12 units - of the previous bear move.

Chart 4

Chart 4

Chart 5 is a price chart of the June 1988 contract for the S&P 500. It is the same contract and time period as that of Charts 1 and 2, but without Gann Pivot Points. Prices can be seen to trend for a period of time, and then react at the Gann levels of 50%, 63%, 75%, and 100%. Reaction points are labelled "A" through "M."

Chart 5 is divided into 4 Price Ranges. These ranges are shown on Charts 6, 7, 8 and 9. As you review these charts, you'll notice that:

1) Prices retrace to Gann retracement levels, and then react.

2) Even ifintraday prices exceed a Gann retracement level, prices generally will close within an acceptable Retracement Zone.

3) In some cases, prices react almost to the exact midpoint of the daily price range.

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