The Measured Move

THE MEASURED MOVE

The measured move, or the swing measurement as it is sometimes called, describes the phenomenon where a major market advance or decline is divided into two equal and parallel moves, as shown in Figure 6.10a. For this approach to work, the market moves

Figure 6.10a Example of a measured move (or the swing mea­surement) in an uptrend. This theory holds that the second leg in the advance (CD) duplicates the size and slope of the first upleg (AB). The corrective wave (BC) often retraces a third to a half of AB before the uptrend is resumed.

Figure 6.10b A measured move takes the prior upleg (AB) and adds that value to the bottom of the correction at C. On this chart, the prior uptrend (AB) was 20 points. Adding that to the lowpoints at C (62) yielded a price target to 82 (D).

should be fairly orderly and well defined. The measured move is really just a variation of some of the techniques we've already touched on. We've seen that some of the consolidation patterns, such as flags and pennants, usually occur at about the halfway point of a market move. We've also mentioned the tendency of markets to retrace about a third to a half of a prior trend before resuming that trend.

In the measured move, when the chartist sees a well-defined situation, such as in Figure 6.10a, with a rally from point A to point B followed by a countertrend swing from point B to point C (which retraces a third to a half of wave AB), it is assumed that the next leg in the uptrend (CD) will come close to duplicating the first leg (AB). The height of wave (AB), therefore, is simply measured upward from the bottom of the correction at point C.

THE CONTINUATION HEAD AND SHOULDERS PATTERN

In the previous chapter, we treated the head and shoulders pat­tern at some length and described it as the best known and most trustworthy of all reversal patterns. The head and shoulders pat­tern can sometimes appear as a continuation instead of a reversal pattern.

In the continuation head and shoulders variety, prices trace out a pattern that looks very similar to a sideways rectangu­lar pattern except that the middle trough in an uptrend (see Figure 6.11a) tends to be lower than either of the two shoulders. In a downtrend (see Figure 6.11b), the middle peak in the consol­idation exceeds the other two peaks. The result in both cases is a head and shoulders pattern turned upside down. Because it is turned upside down, there is no chance of confusing it with the reversal pattern.

Figure 6.11a Example of a bullish continuation head and shoulders pattern.

Figure 6.11b Example of a bearish continuation head and shoulders pattern.

Figure 6.11c General Motors formed a continuation head and shoulders patterns during the first half of 1997. The pattern is very clear but shows up in an unusual place. The pattern was completed and the uptrend resumed with the close above the neckline at 60.

CONFIRMATION AND DIVERGENCE

The principle of confirmation is one of the common themes run­ning throughout the entire subject of market analysis, and is used in conjunction with its counterpart—divergence. We'll introduce both concepts here and explain their meaning, but we'll return to them again and again throughout the book because their impact is so important. We're discussing confirmation here in the context of chart patterns, but it applies to virtually every aspect of technical analysis. Confirmation refers to the comparison of all technical sig­nals and indicators to ensure that most of those indicators are pointing in the same direction and are confirming one another.

Divergence is the opposite of confirmation and refers to a situation where different technical indicators fail to confirm one another. While it is being used here in a negative sense, diver­gence is a valuable concept in market analysis, and one of the best early warning signals of impending trend reversals. We'll discuss the principle of divergence at greater length in Chapter 10, "Oscillators and Contrary Opinion."

CONCLUSION

This concludes our treatment of price patterns. We stated earlier that the three pieces of raw data used by the technical analyst were price, volume, and open interest. Most of what we've said so far has focused on price. Let's take a closer look now at volume and open interest and how they are incorporated into the analytical process.