The New Science of Technical Analysis

Chapter 2

Retracements

Price advances and declines do not continue uninterrupted. Contratrend rallies and trend reversals occur all the time. Predicting the extent and the duration of these moves is a preoccupation of market analysts. Techniques to project these retracement levels, however, are not only inexact but also often haphazardly applied. Generally, little preparation and forethought are given to the selection of the points critical to the calculation of both support and resistance levels. Through trial and error, I have identified proper price selection techniques, as well as ratios, that can be universally applied to all markets. I have replaced the practice of random selection and guesswork with an objective, mechanical approach that offers a series of explanations and includes examples to justify my techniques.

Selection of Points and Retracement Ratios

In the summer of 1973, one of my senior business associates gave a compelling speech forecasting a steep retracement rally for the stock market to be completed by early fall. When quizzed regarding the upside potential, he flatly stated that he expected an advance approximating three-eighths to five-eighths of the previous decline. When asked to be more precise, he was unable to do so. When asked how he arrived at these figures, he flippantly responded that most rallies in a bear market expire at one of these two levels. He could not supply any additional information other than the fact that he had read of similar ratios ...