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Minyan Mailbag: Getting Technical with the Banks


Measuring the measured move.

Dear Prof. Sadana,

You mentioned a "measured move" in BKX back at the beginning of January. Can you explain what that means?

Minyan James

Dear Minyan James,

Thanks for your question. A measured move basically assumes that prices will move in equal increments, and helps gauge where the price level might be once the pattern is consummated. It's a useful process to assess potential target price levels - if the technical pattern unfolds as expected.

An example to clarify this point; Here's where I talked about the measured move on BKX. To tell you the truth, I was a little amazed at the possible downside implications. I might choose not to act on them -- or to rely on strict money-management rules if I do -- but I certainly try not to argue with the charts.

Note the distance between the apex to the bottom (approximately 50-40 = 10); upon completion of the pattern, subtract that from the breakdown price (approximately 40-10 = 30), which incidentally coincided with November lows.

So, my view was this: If the descending triangle pattern unfolds, there's a possibility the price will go to $30 - an uncomfortable thought when the media is proclaiming a "bottom" has already been hit. That was the reason for my continued note of caution on the banks on January 7, when I discussed the bearish formations in BKX and mused,

that there were "signs of extreme weakness in the charts….Of course, till $40.5 is taken out, we are still ok. But the question that comes to my mind when I look at the above charts is, until when?"

And of course, what happened was a picture-perfect, textbook unfolding of a measured move; BKX is currently trading at $27.50, having overshot the original price target, as it often does.

Some important caveats here:

First, please note "upon completion of the pattern" is of the utmost importance. At times, traders see charts resembling some technical pattern, and boldly state the pattern is unfolding; a trader needs to make sure the corroborating volume patterns are also satisfied before a trade is initiated.

Sometimes, they see one "shoulder and one head," and proclaim the projections for a head-and-shoulders pattern even though a) the pattern is incomplete and b) the volume pattern doesn't confirm the formation of the head-and-shoulder pattern.

While that pattern might eventually unfold as expected, my preference is to wait for action till the market consummates a pattern in an attempt to minimize risk.

Secondly, if the implications seem too unbelievable, as in the case of BKX, one can always reduce their long exposure in the market. In a different market, a more aggressive stance would be welcome, but in this market, it is not prudent to take on unnecessary risk.

It is always good to validate your thesis by independent assessment of stocks in a similar sector; in this case, I looked at extremely weak technical action in Citigroup (C), JPMorgan (JPM), Bank of America (BAC), among others, as corroborating evidence.

Finally, measured moves are calculated differently for different patterns and for breakouts as well as breakdowns.
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