Fibonacci and Gann Applications in Financial Markets

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Data Problems 211 suffered from having too few holders and eventually the total issued stock in the trust was bought out by one of the larger holders, British Coal Pension Fund. This caused the shares to be delisted and, by that purchase, move out of the FTSE-100 Index itself. As mentioned in previous chapters, some instruments go through such great changes that the whole previous history has to be rebased in order to show a ‘real’ price history. This may come about from a change in the synthetic coupon in a Bond future, stock split or rights issue in equity markets, change in size of deliverable in the case of commodity markets and so on. While most of these rebasing exercises are carried out by a relevant exchange or data provider, on some occasions the analyst has to carry out these rebasing exercises. Although there are some philosophical considerations for the technical analyst, these rebasing exercises are fairly mundane procedures. However, it has to be remembered that for Gann analysis where there are key historical highs and lows, especially where the lifetime high and low are used in calculations, alteration of these prices will alter the ‘official’ origin and extreme of any Gann calculation. This is especially critical where Gann fanlines and Gann eight’s charts are involved. Even after a rebasing exercise, or indeed when analysts are using a synthetic price history, important Gann levels have to be maintained. ‘Traded’ prices are much more important than those created by a rebasing exercise. When the notional coupon on the Long Gilt future contract at LIFFE was changed in the late 1990s the exchange provided historical prices in a rebased format, but it was interesting to see that on subsequent price bull moves approaching the historical high in the un-rebased time series, the ‘new’ contract behaved as if this was relevant. Indeed, it was when the market ‘remembered’ that the contract struggled to reach this historical zone before the new coupon was issued and treated these levels with caution. It was noted that key resistance levels on the rebased series gave very little in the way of resistance as the rally developed, so the market was indeed ‘remembering’ previous price action and behaviour. This was a salutary lesson to technical analysts. Personally I prefer to keep the extremes of the lifetime high and low on the new chart by having a horizontal line rather than a bar, for, despite the change in the price history, I have been made aware that the historical high or low or both remains as ‘critical’ market knowledge, and so becomes part of the folklore of that particular market. It is not uncommon to have a non-technical analyst ask when a particular instrument was at such-and-such level in the past. In reply a technical analyst has to give the non-rebased level as this was a real traded level and not synthetic. Market conditions may change during an analyst’s working lifetime, but current pricing and position relative to key levels remains the same. This can be invaluable additional evidence for future price or yield moves.
212 Fibonacci and Gann Applications in Financial Markets THE BASIS IN FUTURES ANALYSIS Although there is a direct connection between the basis and futures price, the basis does influence the price to some extent, especially when approaching the maturity of the futures contract. Remembering the formula (Cash price) � basis � (futures price) � (conversion factor) basis theory states that at the maturity date the basis (or error) has to be exactly zero for the CTD. The CTD is the physical commodity that will be delivered to holders of the futures contract if they have not chosen a cash delivery or reversed their holdings or rolled forward to the next contract delivery month. During the life of the future, the basis may fluctuate violently. Some analysts prefer to look at the price action of the CTD throughout the life of the futures. However, in cases where it is difficult to forecast the CTD accurately, that is where more than one instrument could be delivered on the futures Maturity Date, the behaviour of the basis is critical. Not all markets have the clearly identified CTD, as was the case in the MATIF NNN throughout the 1990s, where although there were three or more instruments within the basket of deliverables, only one had a clear advantage as the basis of the CDT was less than 10 while the others were greater than 30 for the life of the instrument, year after year. This made the NNN an interesting if simpler instrument to analyse. During that period, the UK Long Gilt futures with all its peculiarities may have had underlying Gilts, which had a small basis but may not have been deliverable due to XD issues. Charting of the basis was simple for most of the life of the futures, but when approaching maturity all potential deliverables had to have their associated basis charted as it was often difficult to forecast which instrument was going to be delivered. The difficulty arises when in the last few days of life, traders see that there is a strong argument for one particular basket member to be delivered. Anticipating a strong demand for this on the day of maturity, a trader may buy this instrument in the hope of the price rising significantly, as it is needed to fulfil delivery obligations on maturity day. This demand for the physical asset will have an effect on the price of it (it will go up) and thus the basis relative to the futures contract will change. Indeed, in cases where there are several candidates for potential delivery, buying one could have the effect of making it no longer likely to be delivered. This is a difficult situation to be in for, if purchased but not required for delivery, the price may not go up as demand is very low relative to the actual asset that is being delivered. Data issues are part and parcel of the daily grind for the technical analyst. Intraday technical analysts are particularly open to being hit with incorrect prices, spikes or indeed dull hours. Data providers have improved their methods for catching such
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FIBONACCI AND GANN APPLICATIONS IN
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Contents Preface ix 1 Introduction
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For Angus and Jenny for all the ski
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Preface Technical analysis is not a
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1 Introduction to and History of th
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Introduction to and History of the
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10 Fibonacci and Gann Applications
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3 Other Applications of the Fibonac
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Other Applications of the Fibonacci
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4 Charting and Difficulties: A Hist
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Charting and Difficulties: A Histor
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5 Common Errors in Application of F
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Common Errors in Application of Fib
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7 Application and Common Errors in
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Application and Common Errors in Fi
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Page 204 and 205: 11 Conclusion The application of Fi
Page 206 and 207: Conclusion 195 and I believe this i
Page 208 and 209: Conclusion 197 watching it develop
Page 210 and 211: Conclusion 199 created by futures e
Page 212: Conclusion 201 Gann analysis, where
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Page 226 and 227: Appendix 2 Glossary of Common Terms
Page 228 and 229: Glossary of Common Terms 217 Month
Page 230: Glossary of Common Terms 219 Englan
Page 235 and 236: 224 Index commodity markets, 12, 17
Page 237 and 238: 226 Index Gann theory (cont.) probl
Page 239 and 240: 228 Index pi, discovery, 1-2 pit tr
Page 241: 230 Index ‘V’ bottoms/tops, 15-
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Fibonacci and Gann Applications in Financial Markets

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