I am using the Dow utility average as a proxy for what I see happening in the market now.
Price has climbed from the March lows in a nice straight-line run. Then the average went horizontal during mid March to the start of May. After that, price resumed the upward move, peaking 5 days ago. Since then, the utility average has dropped.
The green line shows the bottom of a support zone setup by that horizontal move I already described. I see the average dropping to this line and then rebounding. Since I am just guessing, the average could turn before it reaches the line.
If it does turn, then I expect the average to move up following the blue line. The apex of the symmetrical triangle will pose a challenge should the average rise that far.
I expect the other market averages to follow a similar course. The horizontal support zone is not as pronounced in the industrials, transports and other indexes, but it is there nonetheless.
Let's take a closer look at why I expect a rebound.
From my study of triangles, I know that the apex -- where the two lines join in the future -- marks a reversal point 60% of the time or a minor high or low 75% of the time. If you accurately draw the red lines, and I have not in this picture, the apex of the triangle is directly above point A. Although that does not help us determine a future path, it is worth checking.
I show a picture of what happens after a measured move up chart pattern. The measured move is the A B C progression of price, just as the utility average shows in real life. Price rises in the first leg, A, goes horizontal in the corrective phase, B, and then moves higher in the second leg, C.
What happens after that? My book, Encyclopedia of Chart Patterns, second edition discusses the answer on page 518, along with Table 33.4.
The red line in the chart shows the typical course that price takes as it weaves up and down in a bull market. Refer to the book for the statistics in a bear market.
I studied over 800 measured moves to figure out the answer, and the adjacent chart shows the statistics. Here are the bull market numbers and what they mean.
- Price remains above the corrective phase 19% of the time;
- Price stops somewhere within the corrective phase 35% of the time;
- Price stops below the corrective phase but remains above the bottom of the measured move up 31% of the time;
- And price drops below the measured move up 15% of the time.
If you add the percentages, you will find that price will remain at or above the corrective phase 54% of the time and above the bottom of the pattern 85% of the time. Having those kinds of statistics at your fingertips is why so many traders consider my books invaluable resources, but I will let you decide.
-- Thomas Bulkowski