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Arthur A. Merrill
Merrill Analysis Inc.
w PATTERN
M PATTERN
Aim:
Are some of the four swing patterns bullish? Are some bearish? How big
was the swing following the pattern?
Robert Levy has attacked this problem for individual stocks'. He measured
the performance in the 4, 13 and 26 weeks following each pattern. The paper
which follows considers the market as a whole, as measured by the Dow Jones
Industrials, ignoring swings of less than 5%. The extent of the swing fol-
lowing each pattern was measured and averaged.
Classification:
Levy suggested identifying the pattern by ranking the five points from high-
est to lowest, then reading the ranks from left to right. In the example
above, the W pattern is number 15342; the M pattern is 41325.
43
Method:
The data source is "Filtered Waves, Basic Theory", which lists all D.J.
Industrial turning points, using a 5% filter, from March 25, 1898. There
are 688 turning points in the span to February 28, 1979, forming 342 com-
plete M and 342 W patterns.
Geometric averages were calculated for the extent (percent rise or percent
decline) of the swing following each pattern classification.
Results:
The average extent of the swing following the various patterns is noted in
the chart which follows. These rankings may be interesting but should
not be considered conclusive, since only the Ml average is far enough from
the overall average to rate a good significance score (for Ml: t = 2.50,
deg. of freedom = 27).
The patterns at the top of bull markets and at the bottom of bear markets
are noted on the following pages.
44
(Geometric ovemqes)
Ml6 w3 WI3
WII
,, M4,YIS
” W2 W4
Y8 @ wr w9
t f
MI4
I2 t-
‘O M3 us YII Yl2
Y2
Ml0
Y7 u9
@ = Ove roll Average
AAY
9i
45
01 u
n m
!!I
5 L
t n
n l
H- L#l?iJ-
L#lTs
t
5
n
03 f
l
N
B
c) n
N WI
~-
* n N
n * *
s N iz m
0 n 5 n
Ye l3l- N m-
n
s
n
N
In N 0
N
m
im- v)
-
H- e
5
n
Y)
I.7
0
E r
N
0
sq m 0 L#lzl- In
N
CD
z
E
I
N 2 to
0-m- UT
4 N
46
Ml n=28 (no.of occurrences: the total for the M
patterns is 3.42)
Aver. rise (swing following pattern): 13.89% This is
the highest of all the M patterns, and is
the only one that has a truly significant
difference for the overall average.
Bear market bottoms: This pattern appeared at the end
of seven of the fifteen bear markets since
1898. The fifth point of the pattern was the
2 I 4 3 5
low point of the bear. Is this a confirma-
tion of the selling climax idea? It certain-
ly indicates an oversold condition.
Bull market tops: This pattern appears at the top of
four bull markets, initiating the new bear
with a sharp downtrend.
\ M2
?
M2 n=16
4
I
Aver.
Bear
Bull
rise:
market
market
9.69%
bottoms:
tops:
This is
none
two
one of the lowest.
IP This is a downward
These reversals
shoulders".
of
Several
zigzag
zigzags
patterns
followed by an upward zigzag.
have been called
exhibit this
"head and
reversal.
M4 n= 16
I
11.12% This is close to the average.
\, I
M4 Aver. rise:
Bear market bottoms: three
Bull market tops: none
3 15 2 4
47
M5 n=13
Aver. rise: 9.94% This is below average.
Bear market bottoms: one
Bull market tops: none
3241 5
325 I4
M7 M7 n=28
Aver. rise: 9.29% One of the lowest.
Bear market bottoms: two
Bull market tops: six This is tied with Ml5 for the
\ ?
4
most tops.
h I This pattern
dymward
begins
zigzag.
with a sharp rise followed by a
4 1 325
M8 M8 n=4
Aver. rise: 10.65% This is average.
? Bear market bottoms: none
I Bull market tops: none
\
t This is a wide swing downward zigzag followed by an
upward zigzag.
r\r-
4 I 5 2 3
48
Y9
M9 n=15
Aver. rise: 9.24% This is one of the lowest.
\t
Bear market bottoms: one
?
4
I
Bull market tops: three
423 I5
MII
Ii
1
Ml1
Aver.
n=20
rise: 9.95% This is low.
\
Bear market bottoms: eight This ties with Ml5 for the
highest frequency.
Bull market tops: one
41”
4 3 5 I 2
Another downward zigzag followed by an upward zigzag.
Ml2 Ml2 n= 15
Aver. rise: 9.80% This is below average.
Bear market bottoms: one
Bull market tops: three
5I 3 2 4
49
Ml3
?
A
I
Ml3
Aver.
Bear
n=12
rise:
market
12.79%
patterns.
bottoms:
This is
one
the second best of the M
\PI Bull
This
market
is
tops:
a triangle
none
51423
Ml4
I Ml4 n=24
Aver. rise: 10.12%
Bear market bottoms: one
Bull market tops: four (including 1929)
sJ\
52314
50
WI
Wl n=28
Aver. decline: 9.53% This isn't far from the overall
,I average.
Bear market bottoms: two
Bull market tops: seven This is tied with Ml6 for top
frequency. This pattern can be found at the
\ 1929 peak. The sharp downtrend initiated the
\2/ t super bear market.
;
I 3 2 5 4
w3 w3 n=17
Aver. decline: 10.65% This is deeper than average.
I Bear market bottoms: two
I Bull market tops: three
I
t
7 This is a downtrend which ends in a steep rise. It
occurred at the March 1, 1978 bottom.
\2/
I4352
I w4 n= 9
Aver. decline: 11.09% This is one of the deepest.
Bear market bottoms: one
Bull market tops: none
I 5 2 4 3
51
w5 n=21
Gr. decline: 10.07% Close to average.
Bear market bottoms: three
Bull market tops: none
I 5 3 4 2
W6 W6 n-16
Gr. decline: 10.17% Close to average.
Bear market bottoms: none
Bull market tops: four
w7 w7 n=17
xr. decline: 11.22% This is one of the deepest.
Bear market bottoms: none
Bull market tops: three (including 1929)
I
I
1 This is another upward zigzag followed by a downward
/ # zigzag.
?
\ik
24153
W8 W8 n=24
Gr. decline: 8.31% This is the best of the W
1
1 averages.
1 7 Bear market bottoms: six
I Bull market tops: one
2 4 3 5 I
52
w9 n=lO
I A i- Aver. decline:
Bear market
11.23%
bottoms:
This
none
is one of the deepest.
WlO n=19
x. decline: 9.94% This is close to average.
Bear market bottoms: one
Bull market tops: two
2534 I
34152
WI2
\9? w12
Aver.
n=16
decline: 9.92% This is average.
:4
Bear market bottoms: two
Bull market tops: one
34251
53
WI3
___~ .-- I w13 n=22
Aver. decline: 10.54% This is deeper than average.
Bear market bottoms: none
I Bull market peaks: four
c
I 3
I This is another upward zigzag followed by a downward
zigzag.
v’l’
3 5 I4 2
w15 n=13
Average decline: 8.47% This is second best.
Bear market bottoms: one
Bull market tops: two
45231
54