A reader asked me to create a chart of the “Gann Fan” structure, and I wanted to show that chart as one of my “Chart Art” series of posts.  Let’s take a look at a 10 point Gann Fan originating from the 2007 high and also the 2009 low in the Dow Jones Index.

(Click for full-size image)

The logic behind a Gann Fan grid (trendline) is that it takes a set price amount - in this case 10 points - and does a mathematical function to calculate the trendlines.

Starting with the origin, the software will create a 1 x 1 (one to one or “one by one”) trendline with 10 points for each day moving forward from the origin.

A “2 x 1″ or “Two by One” line would reflect 2 days for every 10 Points in Price.

The formulas you are seeing - 1×3, 1×8, etc all reflect “Time x Price” relationships, with each bar being 10 points and each “time” being 1 day.

Without getting too much deeper into Gann Lines, that’s the general logic - it’s figuring out the relationship between Price and Time on a multiplication function - hence the trendline that originates from a set point.

The first trendline begins with the October 2007 high, and thus slopes down in price, looking for both areas of potential “time and price” relationships and thus support or resistance zones.

The second, more recent trendline begins with the March 2009 lows and is thus up-sloping.

Take a closer look at the chart to see what happened each time price met one of these inflection points, and whether a turning point took place or not.

Of curious and immediate interest to us now, we see price “Riding” the 1×2 (One Day times 20 points) line all the way up - supporting in July and on the recent two price pullbacks.

It may seem far-fetched now - or maybe not, given how quickly the market has risen - but the upper resistance line crosses this rising trendline early in 2010 at the 11,000 level.

It is my assumption that a Gann purist would expect a market turn should price rise to meet this convergence of trendlines.

Just like my prior ‘advanced methods’ chart on the “Confluence at the 10,500 level in the Dow Jones,” let’s see how price reacts to these grids that most traders aren’t keeping their eye on, as to what signals or insights these ‘advanced’ methods (beyond classic indicators) could be revealing.

(I’m not a Gann expert by any means, and I’m using this tool in the standard method.  Feel free to share comments if you use Gann tools in alternate methods).

Corey Rosenbloom, CMT
Afraid to Trade.com

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