M 81 W

WAVE

Arthur
Merrill

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

f
MI4
M3
Y2
Ml0
Y7

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.
70 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

n
5
H-

c)
~-

*
n
N
0

iz
l3l-

5
E

H-

L#lTs
N

WI

n
N

N
*
m
5
m-

n
n

0
N
N
m
im- v)

n
N
In

L#l?iJ-

n
*

Ye

n
Y)
r

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

CD
z
N

03
B

m
!!I
L

46

0
N
In

\
?
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

average.
top)

as Ml.

3
I

%
14

\, I
/1J\.
M4

9.69%
This is
bottoms:
two
tops:
none

This is a downward
These reversals
of
Several
shoulders".

M3

M3

Ml

15

11.12%
This is
bottoms:
three
tops:
none

This is another
upward zigzag.

reversal

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

average.

M6

below

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

\
41
4

Bull

downward

zigzag

low.
This

followed

ties

with

Ml5

by an upward

for

zigzag.

#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

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

breakout.

51423

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

w2

w2

Gr.
Bear
Bull

I
,
\
c
?

;/\/
I

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

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

This

is

a triangle

with

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

W6
Gr.
Bear
Bull

w7

1
#
?

/
\ik

with

average.

a sharp

drop

but

ends

with

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

52

followed

is

best

by a sharp

the

recovery.

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.

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
___~

.--

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

I
c
3

I
I

This is
zigzag.

vl
3

I4

upward

deeper

zigzag

followed

than

average.

by a downward

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