As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
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Encyclopedia of Chart Patterns Second Edition
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I wrote this article for Active Trader magazine in August 2005 as part five of a series. They accepted it for publication, but never printed it nor paid for the work to write it (no kill fee).
Insert your favorite expletive. 
So, I am posting the full article here.
This month's chart pattern review covers islands and measured moves with five different variations. The above figure shows them.
Island tops and bottoms are price patterns setoff by gaps that align in price. A long island is a new term for a floating price structure setoff by unaligned gaps.
Measured moves up and down are useful tools to determine how far price will trend. They are stair step patterns in which price often returns to the corrective phase once the pattern completes.
The next figure shows an island top reversal. An island top reversal is a price structure setoff by two price gaps that share the same price level. One gap can be wider than the other, but at least some of the prices must overlap. Often, the view from the first gap to the second is unobstructed by price movement, meaning that the rise after the first gap is strong enough to take price much higher and keep it above the gap support zone.
Island top reversals form as a consolidation range at the end of a price uptrend. The second gap marks the downward price run and it often occurs on heavy volume. There is no set width to an island top reversal. It can be one day wide to several months long. Some analysts say that islands are short, a week or two long and have a relatively flat price structure. Testing revealed that the median width is 18 days.
The next figure shows an island bottom reversal. It looks the same as a island top reversal only flipped upside down. The two gaps share a common price, so they align, but the gaps can be any size. Price trends down leading to the chart pattern and trends upward after the second gap. The second gap usually occurs on high volume.
Both tops and bottoms are notable for their poor overall performance, ranking dead last out of 23 chart pattern types in a bear market and 21 pattern types in a bull market. Thirty
percent of tops and bottoms change trend (meaning price moves at least 20 percent in the new direction) within a week of the breakout (the second gap). Such a quick reversal leaves
little time for price to make its move. For more information about the tests used, consult
Encyclopedia of Chart Patterns, Second Edition.
The measure rule applies to both island tops and bottoms. Compute the height of the island from the highest peak to lowest valley and add it to the highest peak (upward breakouts) or subtract it from the lowest valley (downward breakouts) to get a price target. This works between 69 percent and 62 percent of the time for up and down breakouts, respectively. Thus, be conservative in your estimates and look for nearby support or resistance zones where price may reverse.
Price after the second gap tends to reverse, so watch for price to retrace and fill the second gap. That happens between 65 percent and 70 percent of the time. These throwbacks and pullbacks, as they are called, often see price continue in the original breakout direction after the retrace completes.
The next figure is the type of island that most novice chartists find. It's not an island reversal because the two gaps don't share a common price, and price continues following the trend after the second gap instead of reversing.
Look for two unaligned gaps, meaning that they don't share the same price. Search for gaps that are unusually wide, at least $1 each for the best postbreakout performance. The island should be shorter than four months long (the median is 41 days long). Most long islands have volume that spikes at each gap, so the resulting volume trend is U shaped.
A key trading tactic with long islands is that when multiple islands appear in a price trend, the islands tend to get shorter. That can alert you to a coming trend change. Avoid trading unusually short islands unless it's a countertrend trade.
To determine how far price is likely to move after the second gap, compute the island height from highest peak to lowest valley in the island, and divide by two. Add (upward breakouts) or subtract (downward breakouts) the result from the closing price the day before the second gap to get a price target. This method works between 82 percent and 78 percent of the time for upward and downward breakouts, respectively.
Measured moves are stair step price patterns. The beauty of this pattern is it telegraphs how far price will move.
The next figure shows a measured move down. The first leg is the decline from A to B. The corrective phase follows with the retrace from B to C and the second leg completes the pattern in the drop from C to D.
Ideal measured move downs will have the second leg the same distance as the first, will take the same amount of time, and will follow the same slope. Few measured move downs perform that well.
Tests have shown that the first leg declines 27 percent in 61 days, on average. The corrective phase retraces 48 percent in 30 days of the first leg decline, and the last leg drops price another 25 percent in 62 days.
Look for a measured move down to begin from a new high, meaning that price is trending upward leading to the pattern. Price declines in the first leg in a straight-line drop. Avoid patterns with curving legs.
Tests show that the corrective phase retraces between 38 percent and 62 percent of the first leg decline most often. Avoid measured move downs with large retraces (over 75 percent). The slope of the first leg often carries onto the second leg even though it's offset by the corrective phase. The slopes won't match perfectly, but it's usually close. Often, both legs fit inside their own price channels.
The measure rule predicts a price target. Find the height of the first leg from highest peak to lowest valley before the corrective phase (AB) and divide by two. Subtract the result from the highest peak in the corrective phase (C) to get a price target (D). This works 83 percent of the time in a bull market and 93 percent of the time in a bear market.
After a measured move down completes, price often rebounds to the corrective phase. The retrace stops just 16 percent of the time below the corrective phase; 35 percent of the time it will stop within the corrective phase, and 31 percent of the time price will stop above the corrective phase but below the measured move down's high. That leaves 18 percent of the time price continues rising above the top of the measured move down.
The next figure shows a measured move up chart pattern. It's the same as a measured move down except the price trend is upward.
Look for a measured move up to start after a downward price trend, commonly occurring near the yearly low. The first leg (AB) sees price rise 46 percent in 87 days, on average. The corrective phase retraces 47 percent of the first leg rise in 32 days followed by the resumption of the rise in the second leg with gains of 32 percent in 60 days. Those numbers are averages so your results will vary. Avoid patterns with curving legs (a straight-line rise is best) and those that correct too far (over 75 percent).
Trading tactics are the same as measured move downs applied to the upward direction. Calculate the height of the first leg from lowest valley to highest peak (AB) and divide by two. Add the difference to the lowest valley (C) in the corrective phase to get a price target (D). This works 85 percent of the time in a bull market.
Once the measured move up completes, price often returns to the corrective phase and sometimes moves lower. Look for price to stop above the corrective phase just 19 percent of the time. Thirty-five percent of the time price stops within the price boundaries of the corrective phase, and 31 percent of the time price drops below the corrective phase but remains above the measured move up low. The final 15 percent of the time, price drops below the measured move up low.
Islands and measured moves have their application in today's trading environment. Their height, projected in the direction of the breakout gives a clue to future performance. In the case of the measured move, once the pattern completes, price often returns to the corrective phase. That's useful trading information. If you own a stock and it completes an measured move up and then price drops, 85 percent of the time it will rebound before reaching the bottom of the corrective phase. That could help you remain in the trade for additional profits.
-- Thomas Bulkowski
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