I have been a student of the market umteen years. And although I first cut my financial teeth on purely Fundamental Analysis, many years of experience and financial battle scares have taught me the invaluable service of Technical Analysis. Whereas most Fundamental Analysis is indeed meaningful, its tenets provide no basis for estimating the extent of a future price trend. Here lies the benefit or advantage TA has over FA.
As all market students know there are countless TA methods: many take into account chart analysis of formations, patterns or price trends. Others use 'oscillator' indicators of sundry variety in an attempt to ascertain when a move is about to begin or is close to termination. Still other TA methods have to do with pure numbers.
Over the years I have collected a small library of these TA methods. I have discovered not a one of them is useful in ALL markets. And where they demonstrate profitable reliability in a specific commodity for a number of years, SUDDENLY, they become useless. I believe the reason for this is logical. A particularly successful analytical method becomes known to too many people. Consequently, when nearly everyone is using the same method to determine future movements, it becomes useless because ALL are playing the commodity the same way.
In rummaging through my extensive library this afternoon, I ran across an old book. Unfortunately, the published date was not given. Nevertheless, I do remember where and when I obtained the book, which helps date it. My best estimate is that it was published between 1977 and 1980. The book's title is "TECHNIQUES OF A PROFESSIONAL COMMODITY CHART ANANYST" by Arthur Sklarew.
As I leafed through the old tome, a Chapter leaped out at me! It is called "Predicting How Far A Move Will Go." As the aurora of Gold's Move late last month still circles the windmills of my mind, I was riveted to pages 78-82. They described a purely numerical TA method of estimating how far a particular commodity might run, once a significant reversal had taken place. This numerical method is called "The Rule of Seven." With the five page description of the "The Rule of Seven," there were three chart examples showing how accurately the estimated price targets were subsequently reached WITHIN JUST FEW MONTHS. They were the commodity Futures of Copper, Plywood and Pork Bellies. Following is a verbatim description of this method.
The Rule of Seven
"There appears to be no rhyme nor reason to The Rule of Seven, but is often surprisingly accurate in its predictions. It is based on the assumption that the initial leg of a new price trend reflects the potential power of the changing forces of supply and demand sufficiently to serve as a guide to the probable extent of the price move. Put another way, using the Rule of Seven, a measurement of the initial leg of the trend is all the information needed to project one or more objectives in the direction of the new trend.
Numerous tests that I have made over the years have revealed that the formula for measuring upside objectives by the Rule of Seven is slightly different for downside objectives.
In an uptrend the basic formula is: Measure the size of the initial up-leg by subtracting the low price from the high; multiply that figure by seven; then divide the product by four to get the distance from the low to the first (price) objective. For the next two price targets, divide the product by three for the second objective, and finally by two for the third objective. Note that for each of the three objectives the respective distance figure is added to the low."
Needless to say the September 1999 gold bull immediately leaped to mind. Using the old numerical Rule of Seven method to (theoretically) forecast the how far this gold bull will run, I calculated the three price targets based on the following data:
Initial up-leg: 339 - 257 = 82
Low = 257
Price target # 1 = $401
Price target # 2 = $448
Price target # 3 = $544
"Another characteristic of the Rule of Seven is that in dynamic markets, a FOUTH objective must be considered. The FOURTH price target is seven times the initial up-leg projected upward from the low of that leg." In this case the Price target # 4 = $831… my my my, it may well threaten gold's record high of $850 made in January 1980.
Eyeballing a long-term chart of gold suggests the Rule of Seven indeed made valid forecasts for the price targets of the 1982 and 1985/86 gold bull runs. Since then there has not been a valid indicator, probably because it could not take into account the artificial price pressures of the Gold Cabal.
Please be cautioned, THIS IS NOT A RECOMMENDATION TO BUY OR SELL ANY FORM OF GOLD. I am merely sharing my research reading with you. But by all means go to a library to read this book, which provides many other little known TA methods. Who knows, old TA methods may be like old neckties, if one waits long enough the style comes back.
1 November 1999