M 81 W

WAVE

Arthur Merrill

w

PATTERNS

A. Merrill Analysis Inc.

PATTERN M PATTERN

Aim: Consider the zigzag movements of stock prices, ignoring Pick any five consecutive turning points. If the first is upward, the pattern forms an -M. If the first swing pattern is a -W. Are some of the four swing patterns was the swing following the pattern?

bullish?

Are

minor fluctuations. of the four swings is downward, the

some bearish?

How big

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 following each pattern was measured and averaged. Classification: Levy suggested identifying the pattern est to lowest, then reading the ranks above, the W pattern is number 15342; we have patterns.

separated

'"Predictive Journal

of

the

32 possible

Significance Business,

of U. of

by ranking the five points from left to right. In the the M pattern is 41325.

patterns

into

16 M patterns

Five Point Chart Patterns", Chicago July 1971.

43

from highexample

and 16 W

Robert

A. Levy,

Method: The data source is "Filtered Industrial turning points, are 688 turning points in plete M and 342 W patterns.

Waves, Basic Theory", using a 5% filter, from the span to February 28,

A computer program was designed to identify the the extent of the swing following each pattern. programmable calculator, and had 476 instructions. plied to the 688 turning points. Geometric decline)

averages were calculated of the swing following

In addition,the patterns and at the bottom of all

were bear

for each

identified markets

the pattern at since

which March 1979,

lists all D.J. 25, 1898. There forming 342 com-

patterns and to measure It was designed for T159 This program was ap-

extent (percent classification. the top 1989.

of

all

rise

or percent

bull

markets

Results: The the not the deg.

average extent of the swing following the various patterns is noted in chart which follows. These rankings may be interesting but should since only the Ml average is far enough from be considered conclusive, overall average to rate a good significance score (for Ml: t = 2.50, of freedom = 27).

The patterns at the top of are noted on the following

bull markets pages.

44

and at the

bottom

of

bear

markets

ovemqes)

(Geometric

Ml6 ,,

w3 WII

WI3

W2 wr

W4 w9

M4,YIS ” Y8

@

t

f MI4 M3 Y2 Ml0 Y7

‘O

us

u9

YII

I2 t-

Yl2 @

=

Ove roll

Average AAY

9i

I n the pages which follow, n = the number of times the pattern waa found in the 342 M or 342 W patterns since March 25, 1898. 7’0 rise: this is the percent rise average (geometric) in the swing immediately following an M pattern, or the percent decline in the swing following a W pattern. It is compared with the overall average of all swings, using a 5% filter.

45

01

u

n 5 H-

t

c) ~-

N

* n N 0

s

iz l3l-

5 E

H-

l

L#lTs N

f

n

WI

n N

N * m 5 m-

n n

0 N N m im- v)

n N In

s

L#l?iJ-

n

l

n *

Ye

e

n Y) r

I.7 0 0 2 to sq m 4 N N 0-m- UT L#lzl-

I

CD z N

n

03 B

n

5

t

m !!I L

E

46

0 N In

2

I

4

3

5

\ ? 4 I IP M2

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 low point of the bear. Is this a confirmation of the selling climax idea? It certainly indicates an oversold condition. Bull market tops: This pattern appears at the top of initiating the new bear four bull markets, with a sharp downtrend.

M2 Aver. Bear Bull

n=16 rise: market market

one of

the

lowest.

zigzag followed by an upward zigzag. zigzags have been called "head and patterns exhibit this reversal.

This is the second most popular patterns. Aver. rise: 9.08% This is below the overall Bear market bottoms: four Bull market tops: three (including the 1929

\\

n= 43

This

is

a downtrend,

M4 Aver. Bear Bull

n= 16 rise: market market

but

not

as steep

of

the

M

average. top)

as Ml.

3 I

% 14

I

2

5

\, I /1J\. M4

3

9.69% This is bottoms: two tops: none

This is a downward These reversals of Several shoulders".

M3

M3

3

Ml

15

11.12% This is bottoms: three tops: none

This is another upward zigzag.

2

reversal

4

47

from

close

to

the

a downward

average.

zigzag

to

an

M5 n=13 Aver. rise: Bear market Bull market

9.94% This is bottoms: one tops: none

This is a "broadening larger from left to 3241

formation". right.

The swings

n=6 This one of the rarest Aver. rise: 11.86% This is the Bear market bottoms: one Bull market tops: none

get

325

of the patterns. third best.

M6

This is decline.

a downward

zigzag

followed

by a sharp

rise

and

I4

M7

\ h 1

? 4 I

M7 n=28 Aver. rise: Bear market Bull market

9.29% One of the lowest. bottoms: two tops: six This is tied with most tops.

This pattern begins dymward zigzag.

? I \ t

M8 Aver. Bear Bull

n=4 rise: market market

a sharp

10.65% This is bottoms: none tops: none

This is a wide upward zigzag.

swing

r\rI

with

rise

Ml5

followed

for

the

by a

325

M8

4

average.

5

M6

4

below

5

2

3

48

downward

average.

zigzag

followed

by an

Y9

\t 4

? 4 I

423

M9 n=15 Aver. rise: Bear market Bull market This is breaking

9.24% bottoms: tops:

This is one three

one of

an upward trend followed through the preceeding

the

lowest.

by a steep low point.

downswing,

I5

MI0 i I \8

Ml0 n=18 Aver. rise: Bear market Bull market

9.55% This is bottoms: one tops: one

one of

the

lowest.

This is another downward zigzag followed by an upward zigzag. It occurred recently; March 1, 1978 was the third point of this pattern.

VP 425

I3

Ii

MII

1

\ 41” 4

3

5

I

Bull

3

downward

zigzag

low. This

followed

ties

with

Ml5

by an upward

for

zigzag.

2

#Ip 2

9.95% This is bottoms: eight highest frequency. market tops: one

Another

Ml2

\&Ic\ 5I

Ml1 n=20 Aver. rise: Bear market

Ml2 n= 15 Aver. rise: Bear market Bull market A sharp

rise

9.80% This is below bottoms: one tops: three which

4

49

changed

into

average.

a downward

zigzag.

the

Ml3 ? A I \PI

Ml3 n=12 Aver. rise: Bear Bull

12.79% This is patterns. market bottoms: one market tops: none

This

is

a triangle

with

the

upward

second

best

of

the

M

breakout.

51423

I

Ml4

II?

\1 sJ\

Ml4 n=24 Aver. rise: Bear market Bull market

10.12% bottoms: one four (including tops:

1929)

This pattern begins with a promising concludes with a bad break.

uptrend,

but

52314

Ml5 n=44 Aver. rise: Bear market

Ml5

Bull

This is the most frequent of the M patterns. 11.15% This is close to average. This is tied with M 11 for bottoms: eight maximum frequency. This is tied with Ml6 for top market tops: six frequency.

This pattern occurred recently. the fifth point of this pattern. 5

24

February 28, It's a fine

I3

Ml6

Ml6 n=40 Aver. rise: Bear market Bull market This

is

This is the third 11.50% This is bottoms: four tops: one

a sharp

uptrend.

50

most frequent. the fourth best.

Compare

it

to

M15.

1979 was uptrend.

WI

Wl n=28 Aver. decline: 9.53% This isn't far from the overall 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 super bear market.

,I

\ t ;

\2/ I

3

2

5

4

w2

w2

Gr. Bear Bull

I , \ c ?

;/\/ I

4

2

5

This

n=43 This is the second decline: 11.06% One of market bottoms: three market tops: six is

a downtrend,

but

not

most frequent the deepest.

as steep

pattern.

as Wl.

3 /

w3 I I

I t 7

w3 n=17 Aver. decline: 10.65% This Bear market bottoms: two Bull market tops: three

This is occurred

is

deeper

than

a downtrend which ends in a steep at the March 1, 1978 bottom.

average.

rise.

\2/ I4352

I

w4 n= 9 Aver. decline: 11.09% This Bear market bottoms: one Bull market tops: none

This

I

5

2

4

is

a triangle

with

3

51

is

downward

one

of

the

breakout.

deepest.

It

w5 Gr. Bear Bull

n=21 decline: 10.07% Close market bottoms: three market tops: none

This pattern an uptrend. I

5

3

4

W6 Gr. Bear Bull

w7

1 # ?

/ \ik

with

average.

a sharp

drop

but

ends

with

2

W6

I I

begins

to

n-16 decline: 10.17% Close market bottoms: none market tops: four is

w7 xr. Bear Bull

n=17 decline: 11.22% This is one of the market bottoms: none three (including 1929) market tops: another

zigzag

average.

This

This is zigzag.

an upward

to

upward

followed

zigzag

by a downward

zigzag.

deepest.

followed

by a downward

the

of

24153

W8 1 1 7

1 I

Bear Bull

n=24 8.31% This decline: averages. market bottoms: six market tops: one

This

is

W8 Gr.

a downtrend

)A/2

4

3

5

I

52

followed

is

best

by a sharp

the

W

recovery.

I

A

w9 n=lO Aver. decline: 11.23% This Bear market bottoms: none Bull market tops: three

i-

Wide

WlO x. Bear Bull

fluctuations

were

downswing

one of

followed

n=19 decline: 9.94% This market bottoms: one market tops: two

A sharp

is

followed

is

the

by a very

close

to

by a strong

deepest.

weak rally.

average.

upward

zigzag.

I

2534

Wll Aver. Bear Bull

n=3 This is the rarest of the decline: 10.77% This is below number is low. market bottoms: none market tops: none.

W patterns. average, but

34152

WI2

:4

\9?

w12 n=16 Aver. decline: 9.92% This Bear market bottoms: two Bull market tops: one

There is increasing

a broadening in magnitude

34251

53

is

average.

formation, from left

with the to right.

swings

the

WI3 ___~

.--

I

w13 n=22 Aver. decline: 10.54% This Bear market bottoms: none Bull market peaks: four

I c 3

I I

This is zigzag.

v’l’ 3

5

I4

upward

deeper

zigzag

followed

than

average.

by a downward

2

WI4

w14 n=36 This is the third Aver. decline: 9.67% This is Bear market bottoms: two Bull market tops: five

I t ? I I

another

is

1 i

This is a fine uptrend. March 1, 1978 had this

highest better

in frequency. than average.

It occurred pattern.

recently:

d 35241

w15 n=13 Average decline: 8.47% This Bear market bottoms: one Bull market tops: two A strong

upward

zigzag

is

is

second

followed

best.

by a minor

zigzag.

WIG

W16 n=48 This is the most frequent W pattern. Aver. decline: 8.97% This is the third best. Bear market bottoms: seven Bull market tops: seven (including 1929) This

uptrend

is

steeper

45231

54

than

W14.

downward