Stocks & Commodities V.

5:4 (132-135): Calculating retracements by Hal Swanson

Calculating retracements
by Hal Swanson

he following forecasting method is an approach to charting price retracement in stocks, commodities,

indices or any free market. It is a study of momentum, an evolution somewhere between Gann and Elliott Wave, that allows traders to project an ideal price correction in both price and time. In my approach, a price move of any proportion will attempt to retrace itself by 50% to 61.8% of the initial price move. This retracement first occurs at twice the original momentum, or even greater, and then completes the price correction with the same momentum as the initial price move. There are six important points, or areas, in this correction pattern where the price retracement could be halted or a secondary reaction could occur. (See the related article on this topic.) A trader who applies the ideal correction technique, spelled out in the following calculations, will quickly develop a new market perspective--a perspective of market direction or phase, proportion, momentum and timing. When a trader uses this form of wave analysis in combination with cycle analysis, as I do, the probability of success is magnified. The validity of this technique is enhanced by the fact that it can be used for intraday trading or longer-term projections. (In my own trading, I use it with 15-minute bar charts yet it recently proved itself accurate over a 15-year span of weekly data.) Also, it can be applied to rising markets as well as declining ones with no noticeable difference in results. Figure 1, showing the Commodity Research Bureau (CRB) Futures Price Index, is an excellent example of a projected price correction. By measuring from the low on Oct. 4, 1971 at 96.40 to the high on Nov. 20, 1980 at 337.60, we can make the following calculations to determine the ideal correction pattern: Step 1. 50% retracement in both price and time A) Find the number of points difference from low to high: 337.60 (high) - 96.40 (low) = 241.20 points B) Calculate 50% of the point difference from low to high: 241.20 (points difference) 0.50 = 120.60 points C) Subtract the 50% difference from the high: 337.60 (high) - 120.60 (difference) = 217.00 points (a 50% price retracement) D) Count the number of calendar days from low to high: Oct. 4, 1971 to Nov. 20, 1980 = 3,335 calendar days E) Calculate 50% of the time difference from low to high: 3,335 calendar days 0.50 = 1,667.5 calendar days F) Add the 50% time difference to the date of the high: Nov. 20, 1980 + 1,667.5 calendar days = June 14.5, 1985 (date of 50% retracement). Therefore, a price of 217.00 on June 14.5, 1985 (point D) represents a 50% retracement in the CRB index in both price and time. The "momentum" (or rate of movement) from the high price to the 50%

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Stocks & Commodities V. 5:4 (132-135): Calculating retracements by Hal Swanson

retracement price is the same as the momentum from low to high in the initial move. Step 2. 61.8% retracement in both price and time A) Find the number of points difference from low to high: 337.60 (high) - 96.40 (low) = 241.20 points B) Calculate 61.8% difference from low to high: 241.20 (points difference) 0.618 = 149.06 points C) Subtract the 61.8% difference from the high: 337.60 (high) - 149.06 (difference) = 188.54 points (a 61.8% price retracement) D) Count the number of calendar days from low to high: Oct. 4, 1971 to Nov. 20, 1980 = 3,335 calendar days E) Calculate 61.8% of the time difference from low to high: 3,335 calendar days 0.618 = 2,061 calendar days F) Add the 61.8% time difference to the date of the high: Nov. 20, 1980 + 2,061 calendar days = July 13, 1986 (date of 61.8% retracement) We now know that a price of 188.54 on July 13, 1986 (Point E) represents a 61.8% retracement in both price and time. The momentum from the high to the 61.8% retracement is the same as the momentum from low to high of the initial move. Step 3. 50% retracement with twice the momentum A) Find the number of points difference from the low to high: 337.60 (high) - 96.40 (low) = 241.20 points B) Calculate 50% of the point difference from low to high: 241.20 (points difference) x 0.50 = 120.60 points C) Subtract the 50% difference from the high: 337.60 (high) - 120.60 (difference) = 217.00 points (a 50% price retracement) D) Count the number of calendar days from low to high: Oct. 4, 1971 to Nov. 20, 1980 = 3,335 calendar days E) Calculate 25% of the time difference from low to high: 3,335 calendar days x 0.25 = 833.75 calendar days F) Add the 25% time difference to the date of the high: Nov. 20, 1980 + 833.75 calendar days = March 3.8, 1983 With these calculations, we find that a price of 217.00 on March 3.8, 1983 (point C) represents a 50% price retracement in 25% of the time. The momentum, therefore, from the November high to this retracement point is twice the momentum of the initial move from low to high. Momentum lines are drawn from the November high to the twice-momentum point C, and from the November high to the 50% original momentum point D. A "correction window" is constructed using the 50% and 61.8% retracement points (D and E). The correction window allows us to forecast price-time

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Stocks & Commodities V. 5:4 (132-135): Calculating retracements by Hal Swanson

movement. Studying both the correction window and momentum lines in Figure 1, a trader quickly gains a new perspective. Initially, the CRB Futures Price Index fell from the November high with at least twice the momentum of the initial move from low to high--a typically negative development. As the downward momentum began to slow and the index crossed the first momentum line H-C, a secondary rally started. It carried the index through the second momentum line H-D, into the level of resistance at point A. (See related article for more on point A .) After a period of consolidation, the index resumed its decline into the ideal correction window. Our projected low in the index was point E, 188.54 on July 139 1986 (a Sunday). The actual low was 196.16 on July 14, 1986. Assuming this is a major low in the index, the next rise can be projected using our ideal correction technique. A 50% retracement with twice the momentum would put the index at 266.88 on Dec. 11.5, 1987. The correction window would begin at 266.88 on May 10, 1989 and extend to 283.57 on Jan.9.3, 1990. If the CRB Futures Price Index deviates significantly from the projected momentum lines, it would be the first indication of a major pattern change. On March 31, 1987, the index would have to be at 213.99 or above to still be on track. The correction technique described has projected an ideal counter-trending pattern and objective, and should be kept in that context. Once a price correction has run its course and the next trending move is beginning, another technique should be used because trending and correction price patterns are different. The technique I use is similar in principal to classical correction techniques but projects an ideal trendline, price path to an objective and support/resistance lines. Hal Swanson (14003 Chevy Chase, Houston, TX 77077, (713) 558-1457) began his career in the futures industry in 1967. Since 1972, as an account executive, he has assisted his clients in developing their investment and hedging programs.

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Stocks & Commodities V. 5:4 (132-135): Calculating retracements by Hal Swanson

FIGURE 1:

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Stocks & Commodities V. 5:4 (132-135): Calculating retracements by Hal Swanson

FIGURE 2:

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