Stopping at 3/8ths of a range is a normal support or resistance
retracement and keeps the trend intact. Actually there is a zone between 1/3rd and 3/8th that
will support most retracements and leave the probability of a normal counter trend and thus
keeps the trend intact.
Unfortunately, a market can temporarily bounce off that level and
eventually go through. But the form of the trend getting there is usually sufficient to answer
that question.
There is one last range to deal with and that is the range of the high price. This is only a bear
market phenomenon or only to be used in a bear market. Many bear campaigns will fall to
50% of the high price. And when dealing with individual stocks and commodities that can
move significantly through that level it is best to keep looking at 50% of the next lower high
and if that is significantly broken, then look at the next lower high and 50% of that price. You
would view this along with the range extensions and the range of the highest price.
The run from the 1982 low up to the 1983 high, corrected back to the 1/3rd to 3/8th support level. This retracement is very common in all markets that hold a trend intact. We could call this the
normal counter trend support level for a trend. Dropping down to 50% is more severe and
doesn’t give a high probability of resuming the trend, as does the 1/3rd to 3/8ths level. Of
course, a ¼ retracement is an indication of an even stronger trend but is more likely in bear
trends than bull trends. Unfortunately, markets can bounce off of any of the retracement
values with a counter trend and then resume the trend. So we need more than just price
level.
Matching the move down with an equal move up is not unusual and
is a harmonic relationship. This set up the possibility of the next drive up becoming
an exhaustion drive or the third ascending trendline.
Because the last move down was starting up without hitting the
previous trendline (chart 47), this leg up could be an exhaustion style of trend.
If
this was a blowoff or exhaustion style of trend, this would produce another higher trendlines.
If this was a very strong trend it would also bottom above the previous high. We could also
assume the correction would not be in excess of the 1/3rd to 3/8th retracement level and could
be at 1/4.
Chart 49 shows that retracement to be 1/3rd and the index made a vertical move to a 3/8th
extension. This would make little sense for a high when considering the momentum and
status of the trend. The index moved down one week for the high and started a creeping or
struggling pattern up. This could have produced a high of some significance. There was a lot
of volatility, which is indicative of tops.
But as Chart 50 shows the correction was, again, 1/3 to 3/8 and held the trend intact and
produced another higher trend line and continued the exhaustion. You can see there was still
a leg missing to complete the wave structure and turned out to be a 5 wave subdivided 5th
wave into the August 1987 high. One thing I have noticed over time and use in my analysis is
old 50% marks will come into play if tested. So once a market produces a range of
movement, the 50% mark of that movement needs to be kept on the chart. In this instance,
the low to the 1987 crash was at, among other things, 50% of that range. Once the market
proved it was trending up from the 1986/1987 low, the current trend we are now viewing. We
could assume another exhaustion leg up, as this would be starting from another ascending
trendline. The April/May correction was exactly at 3/8th of the leg up and indicated another
drive probable to complete a 5-wave structure.
Chart 51 is the entire range of the move up we have been studying. You can see the
correction of the 1987 crash was down to 50% of the entire range. You can see as that range
was extended upward and the index hit the price levels of the extension, a correction
followed. This is a monthly chart so each bar is 30 days so the corrections where significant
in time on a daily chart. This is all normal for price vibration.
Chart 52 is a weekly chart of the S&P index. After the 1987 crash, I continued to
look for another sharp trend down to test the 1987 low. So each time there was a false break
pattern, I expected to see a fast trend down. There was no reason to believe that scenario,
other than the emotions of living through the crash and emotionally looking for the same thing
to reoccur. I did know if the index moved past 180 days there would not be a further move
down. I also knew that the eighth year of a decade has a very high probability of being an up
year. But emotionally I still kept looking for another big decline. Then in the beginning of
1989 the index moved above the previous high and within a 4-week decline could not move
back below the previous high. This created a space between the previous creeping trend up
and the low to this correction. Indicating the start of a fast trend up was a strong probability.
This would indicate a minimum move to the next significant resistance. In this instance that
would be the 1987 top. The index moved above that previous top and showed a three-thrust
pattern to end the trend.
But one would have felt very confident of testing the 1987 top (the
first high on the chart) once the “spacing” was confirmed. If you go back and look at chart 51,
the most logical extension would be 1/8 , ¼ or ½. The bull trend was only interrupted by the
90-day (intermediate term counter trend) move down in 1990.
There is another aspect of range analysis we can find very useful. Important highs and lows
can become 50% marks into the future.
The normal extension to end a trend is ¼ of the previous
vibration; in this instance it would have been the 1/3 to 3/8 extension.
The momentum of the move
down carried the price through the ¼ support but it immediately recovered. If we take the
high of the last counter trend and make it a 50% mark (chart 54), the low is confirmed as a
probable complete leg.
While markets are struggling in a sideways pattern an opportunity can present itself once a
third move against support or resistance is complete. Chart 63 is a US stock BMY. After a
third attempt at support or resistance a market can start to trend in either direction. The fourth
attempt at support or resistance caries a probability of breaking through. The only problem
comes in trying to determine which thrust to start the count.
The fourth
attempt at support or resistance caries a probability of breaking through. The only problem
comes in trying to determine which thrust to start the count. The higher low in mid 1994
would not be considered a test because the previous rally didn’t get anywhere near the highs
of the sideways pattern so that is still the same thrust down. But many times that last thrust
down prior to the start of the consolidation can confuse the count if the next low is just
marginal. In this case it is OK and easy to read. A classic volume pattern at the 1994 low.
Non hai nulla di che scusarti 
