Coronavirus and the US Stock Market – Using WD Gann’s Rule of Three

WD Gann Rule of Three - Stock Market Investing
Coronavirus and the US Stock Market - Using WD Gann's Rule of Three

Well, we’ve got a problem.

Actually, it could be a very serious problem.

You may remember on Monday I told you about China’s coronavirus.

At the time, numbers showed 62 people infected and two dead.

Well, my fears have come to life…

Health authorities and border officials are on high alert. They’re trying to protect our country from a possible pandemic.

They’ve called it the ‘perfect storm’, as thousands of Chinese begin to move across the globe.

Remember, this weekend is not just Australia Day, we’ve also got the Chinese New Year celebrations.

Over 300 cases found

Tallies of the virus have continued to rise. Right now, there’s confirmation of 100 cases and at least three deaths.

However, rumours of the numbers of deaths are floating above the 300 cases mark. I guess we can say we don’t really know for sure…

Just last week a man in Brisbane was said to be suffering from respiratory problems. He flew in from Wuhan. That’s the city in China where it is suspected the virus originated.

We’re literally days away from a potential outbreak.

Houston we’ve got a problem

More on that shortly!

First, let’s close up on this coronavirus, because it’s connected to the stock market…

Overnight the US stock market declined. It was down around 0.5%, which isn’t too dramatic.

According to The Australian, the decline was due to the first reported case of the virus hitting the US.

And the Center for Disease Control and Prevention confirmed this overnight…

Apparently, a male US resident landed in Washington.

So, you’re probably wondering: What does all of this mean for your investments?

Right up I’ll say there is no hard and fast answer.

But what I will do is let you in on a little secret.

You can call it the Rule of Three.

This is a real strategy; it was written about by WD Gann. You can find it in his book Wall Street Stock Selector.

Gann was a stock market trader and educator. He’s reported to have made $50 million in his career. He died back in the 1950s.

Use this secret three-day rule

Anyway, here’s the rule: When you know it, you can use it immediately.

Ready? Good.

Here’s what Gann said…

A stock which shows strong up trend will never close 3 consecutive days with losses. When it does…then it indicates that the trend has reversed, at least temporarily…

Gann also said to apply this rule on both the weekly and monthly charts.

That means you’d be looking for three bars, either daily, weekly or monthly.

Of course, you would change the rule to suit your trading strategy. Are you a short-, medium- or long-term trader, that is.

Oh, and if you were wondering…Gann charged $1,000 for this rule. That was back in the 1930s.

I guess you could say there was some value in this rule. Now all you need to do is watch it play out.

Which I’ll be doing, too.

Here’s the chart of the Dow Jones. Look below.

Dow Jones - WD Gann Rule of Three Stock Market Investing

Source: TradingView

[Click to open in a new window]

The chart above is of the Dow Jones, you may also know it as the DJI.

It’s a daily chart and starts on 3 December 2019.

Visualise the three-day rule. Can you see how since 3 December the market has not fallen more than three days in a row?

That indicates that the trend is still favouring the up move, at least for now.

Anyway, I’ve got one more point to make. I’ve modified this rule just a tad.

You see, according to Gann, you want to watch for three consecutive days of falling prices.

I think that’s a bit tight. So here’s my variation. If you can confirm three days of falling prices, and on the fourth day the price moves below the third days low…then the trend has reversed, temporarily.

As I said, it’s just a variation I use. It helps to confirm the trend has reversed and not  assume that it has.

If this coronavirus is going to be a big deal. It will show up on the chart. All you need to do is just watch it.

What you do after then is your choice. This is just one rule that you can use.

A sound trading plan will have a group of rules that when triggered will be actioned on.

You shouldn’t use this rule in isolation.

I hope you found this useful.

Until next time,

Jonathan Evans Signature

Jonathan Evans,
Analyst, Profit Watch

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