BACKGROUND ON M AND W PATTERNS By Emmanuel Nyemera
In 1971 Robert Levy presented a pioneering paper in which he categorized stock-price movements as a series of patterns defined by five turning points. With data of daily closing prices of 548 New York Stock Exchange (NYSE) securities, he used a volatility-based filter to define the amplitude of the swings. Specifically, Specifically, he used a filter of 6V, where where V is the volatility of the individual stock as measured by the arithmetic average of the day-to-day percentage price changes over the most recent 131-day period. Levy assigned a five-digit identifier to each pattern pattern by first ranking ranking the five points from the highest to the lowest and then reading reading the ranks ranks from left to right. right. In total, he identified 32 such patterns. He then tested their forecasting value and found none.
In his methodology to test the forecasting value of the patterns, Mr. Levy evaluated only completed patterns which were successfully followed by a chart breakout (i.e. a price movement which penetrated the fourth reversal point of the pattern) prior to the next reversal point. He then measured the performance in the 1, 4, 13 and 26 weeks from the time of the chart breakout and found no si gnificant forecasting value.
In 1982 Arthur Merrill picked up Levy's idea. Using data of the Dow Jones Industrials and a constant filter of 5% to identify the five-point patterns, he evaluated the average extent of the swing just following the completion of the various five-point patterns. He found considerable forecasting power.
Mr. Merrill structured Mr. Levy's 32 five-point patterns into 16 patterns in the shape of an "M" which startwith a upswing and 16 patterns i n the shape of a "W" which start with a downswing. He then ordered ordered them on a scale, scale, from the strongest to the weakest, weakest, and gave gave their relative occurrences and extent of the swing following the completion of each fivepoint pattern.
All M and W patterns are listed below:
16 M Patterns
16 W Patterns
Traditional Technical Patterns
All of the traditional technical patterns such as head-and-shoulders, triangles, uptrends and downtrends can categorized as Ms and Ws as well. For example an M13 is a triangle or wedge and a W16 is a classic up trend.The categorization into classical chart patterns follows:
●
Ascending: M15, M16, W14 and W16
●
Descending: M1, M3, W1 and W2
●
Head and Shoulders: W6, W7, W9, W11, W13 and W15
●
Inverted Head and Shoulders: M2, M4, M6, M8 and M10
●
Triangles: M13 and W4
●
Broadening patterns: M5 and W12
The main challenge for a trader is how to pinpoint the end of the fifth point ending the completion of the particular five-point in order to enter a trade at the beginning of a potential profitable new swing. For that matter, traders use price and time projections methods. The study of the geometry in the five-point patterns is the only method available for that.
References
Robert A. Levy, The Predictive Significance of Five-Point Chart Patterns, Journal of Business, Volume 44, Issue 3 (Jul., 1971), 316-323 Arthur Merrill, Filtered Waves: Basic Theory, The Analysis Press, Chappaqua, New York, June 1977, 183 pages.
Arthur Merrill, Behavior of prices on Wall Street, Second edition, The Analysis Press, Chappaqua, New York, 1984. Arthur Merrill, M and W Patterns, Market Technicians Association (MTA) Journal, Issue 7, February 1980, pp. 43-54. Arthur Merrill, M and W waves- more data, Market Technicians Association (MTA) Journal, November 1984, pp. 23-29.
