Dow 2000 Measured Move Lightning Bolt Down

Nov 20, 2007: 12:34 AM CST

Previously, I discussed the Descending Triangle breakout in the Dow Jones Index during the year 2000. Following that breakout, the Dow Jones experienced two downthrusts in price that are more commonly known as “Measured Moves” which have occurred twice this year (July to August and then August to October, 2007). Knowing what a measured move is, and how to trade it, can add significant profits to your trading arsenal.

Based on the idea that “Momentum Precedes Price,” the measured move is actually a three-part pattern that is clear to perceive and relatively easy to trade.

The first condition is a large volatility move to the downside (or upside, but we’ll stay with the downside example for the time being). This move cannot (or can rarely) be predicted – it just happens and forms the initial condition.

Following a large move down, an attempt is made by buyers to retrace the move and short-sellers cover temporarily in a pattern than forms a classic “Bear Flag” formation.

The perfect “measured move” down (you can also call this the “lightening bolt” pattern) retraces back to a key moving average, such as the 20 period MA which adds further confirmation of a proper trade entry.

When the ‘pullback’ or retracement forms, you can enter a trade as close as possible to that overhead resistance zone and place a tight stop above the moving average and play for a “Measured Move” of the initial downthrust. You can actually project a visual price target on the chart to play for as part of your ‘risk/reward’ ratio.

The third part of the pattern is the actual capitulation in price which takes the stock or index down to the proper projection point which completes the ‘measured move.’

Let’s look:

dow2000p2.jpg

The dark blue line represents the measured move, and again only the final blue line can be predicted from the pattern.

The teal lines represent the bear flag which often forms coincidentially with this measured move (or lightning bolt) pattern.

To trade this pattern, you really only need to use price and perhaps a key moving average. Other oscillators will degrade your ability to perceive this and many other price patterns.

As a bonus, here are the two most recent “measured move” lightning bolt patterns in the Dow Jones this year:

dow2007.jpg

Notice how the measured move patterns take on somewhat of a “Natural Note” or “Natural Symbol” notation in musical scores.

Once the measured move is complete, price loses immediate predictability, but odds then favor a reversal in price against the measured move.

Of course, it’s always nice to have a move terminate at a key support zone, such as the 200 period moving average, but that’s not always the case.

Study to see if you can find examples of measured moves in your favorite stock or index that have occurred in the past.

2 Comments

2 Responses to “Dow 2000 Measured Move Lightning Bolt Down”

  1. richard taylor Says:

    would adm be a good stock to do options? thanks. R.T.

  2. Corey Rosenbloom Says:

    Richard,

    It depends on what you mean. Virtually any stock can do well with options, provided there is enough liquidity and the bid/ask spread is not too wide. ADM likely would be no exception.

    You can use options as mini-surrogates for stocks if you buy the call to go long and the put to go short. One option equals 100 shares.

    I feel that profitable options trading is much more difficult than pure stock trading, and I would prefer ‘spread’ strategies with options over pure buys of calls and puts.

    If I can of more help, please let me know.