THE MEASURING
PRINCIPLE
This week’s topic is “The Measuring Principle”
-- a concept that allows you to set a specific minimum price target
for a movement. Such a target should give you the objectivity to hold
during those periods of minor countertrend movement that occur during
virtually any swing trade.
The measuring principle works with any well-defined
technical analysis pattern such as a head and shoulders, rectangle or
triangle. In the case of the S&P chart above, we have a clear
four-month topping pattern with resistance at 945, support at 868 and a
clear break below support at on a closing basis.
To calculate the minimum target, first establish the height
of the pattern. This calculation is as follows:
Top:
950 (intraday)
Bottom: 868 (support)
Difference: 82 points
Once the height of the pattern has been established,
next subtract that amount from the breakout level if the break has been
below support (or add it if the break has been above resistance). In
this case, the break was below support, so we will subtract.
Breakout level:
868
Less: Height of pattern: 82
Minimum Target:
786
Once this target is established, I try to see if it
makes sense with the rest of the technical picture. Intraweek support is
at 768 and 775. A pullback to 786 implies a testing, but not a breaking,
of the lows. The weekly Bollinger band on the S&P is presently just
above the 800 level and most S&P bottoms overshoot this indicator by
20 or 30 points. In my mind this kind of confirmation gives additional
credence to the target.
The measuring principle may have no fully logical
explanation, yet in my experience it works uncannily well in most cases.
If, however, the market begins to send a different message, do not say,
"I won’t change -- I’ll stick to my measuring principle."
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