THE MEASURED MOVE

THE MEASURED MOVE

All price trends must come to a halt. Sometimes they switch into new directions without warning, as in V turns, but far more often they run into gradually increasing resistance. The pressure of buying comes to equal that of selling; as long as this rough balance continues, a stock moves horizontally across the chart. Market writers like to call this period of hesitation a “critical juncture,” meaning the cats on the fence and they don’t know which way it’s going to jump.

As the opposing pressures are building up or wearing down, their interplay in the market at this “critical juncture” may form one of the reversal patterns, meaning that a major switch in trend lies ahead. At other times, however, a stock is just pausing to digest a certain amount of support or resistance it has met, and once that’s gone, it will resume its original trend. Such a pause, or hesitation, produces a Continuation Pattern essentially, a more or less sideways trading range that interrupts, but does not end, a trend. Its chief value to chartists is in indicating future support areas and in forecasting the extent of subsequent price swings, as discussed in Chapters 2, 3 and 4.

That is nothing to sneeze at, but in a certain type of situation, we can do more—namely, to predict, from a price movement that has run into a hesitation area, the probable extent of the subsequent price movement, or where the stock next will meet a “critical juncture.” We hereby dub this situation, which until now has been un-named, the Measured More. Such a move is, basically, a fairly large price swing that has been interrupted roughly at the midway mark, by either a fairly sharp “correction” (a rally or reaction, as the case may be), or by a horizontal congestion range. The interruption cuts the trend swing into two fairly equal legs, which tend to be parallel. In other words, the stock on each cover about the same price distance in about the same time (though sometimes the time is reduced on the second leg, which thereby becomes steeper than the first). Here’s how it looks on the chart:

Note that the illustration is heavily shaded. This was done to avoid being distracted by the small counter movements contained within the broader waves. The same effect is achieved when one looks across a brokerage office at one of those big, framed wall charts of the market averages, covering many years. One then sees the major bull and bear markets, as mountain ranges and valleys, rather than the lesser moves. It is precisely such a broad picture on a smaller scale, of course, that one needs to analyse a Measured Move.

The components of a Measured Move, in detail, are:

·       A-B:  The first leg. This may be either a long, gradual rise, or a fast, sharp run-up. The price will hold to a trend channel in a general way, but don’t insist that a well-defined trend line be drawn along the lows of the move, for these trends often curve. Remember, look at the chart pattern broadly.

·       B-C: The corrective phase. This may be a sharp, quick reaction or a prolonged phase of consolidation. It is much like a railroad switch that shunts a train to a parallel set of tracks. The corrective action will mark the midpoint of the total rise.

·       C-D: The second leg. This move will very nearly equal that of the first leg. Note, however, that one should measure the indicated distance of the second leg beginning from the low point of the corrective phase (B-C). There is an important volume indication in this sector. Somewhere between the halfway mark and the two-thirds mark, on the second leg, volume tends to increase notably. Beyond the two- thirds mark, volume tends to drop off.

The Measured Move is just as valid in a decline as in a rise. The description above applies equally, in reverse.

Here is an example of a declining Measured Move:

Now that we can recognize the pattern, it may be worthwhile to re-emphasize a point made earlier: there is no way of predicting a Measured Move before it begins. To try do so would be like trying to predict what kind of reversal pattern a stock will make at the end of a movement that is still in full progress. In either case, it is only after the pattern has been developing for some time that some determination of the possibilities can justifiably be made.

On the other hand, Measured Moves are easily readable in their late stages, and are extremely reliable indicators of the approach of a "critical juncture.” They lend themselves remarkably well to the timing of market operations.

Why the Measured Move works as it does is not known, but we can speculate about it. It might be compared to a fast ball hurled over the plate, which a batter barely tips just enough to give it a hop, but not enough to cut its momentum in the original direction. Slightly deflected, the ball flies on into the catcher’s mitt or, if he misses it, the ball sails on until it has lost the momentum the pitcher originally put into it. The corrective phase in a Measured Move may be attributed to profit-taking, short selling, or any or all of the other motivations that may check a trend. Why the second leg is about equal to the first may take higher statistical mathematics or psychology to explain. Perhaps it’s related to the fact that stocks tend to retrace half of the distance gained in any swing (the 50% rule). But regardless of the reason, there is a close correlation between the first and second legs of a Measured Move, which can be exploited by the chartist.

Let us now go over some actual case histories. If these analyses demonstrate that the reader can master the Measured Move, then by all means he should add it to his collection of valued tools.

This Measured Move almost hit its objective on the nose. The move A to B (219— 165 = 54) is expected to equal C to D. Adding 54 to C (201) projects the move to 255. The move reached 256  (D) or  points higher than expected. On the way down, D to E (256—208 = 48) should equal F to G. Subtracting 48 from F (232) gives a projected objective of 184. Actually, prices declined to G (172) and later spilled all the way to 149. Interestingly, the rebound from the low carried back to about the initially projected objective. Incidentally, Points B D F form a Head & Shoulders top.