How Important Is A Turning Point?
by Arthur A. Merrill, C.M.T.
So, naturalists observe a flea
Hath smaller fleas that on him prey
And these have smaller still to bite 'em;
And so proceed ad infinitum.
So goes the market. Waves within waves within waves. Sometimes it's difficult to see the forest; we
see only the trees. The Dow theory is concerned with penetration of turning point levels. When does a
turning point become important enough to set an important level?
The Elliott wave theory is concerned with waves of various magnitudes. When does a turning point
become important enough to qualify for the next class of waves?
These questions can be addressed with the help of magnitude filters, a technique of filtering out market
swings smaller than a specified magnitude.
Point and figure charts do this. On a one-point chart, all swings of less than one point are ignored, or
filtered out. On a three-point chart, all swings of less than three points are filtered out or ignored. The
turning point on a three-point chart is more important than the turning point on a one-point chart.
In stock prices, however, points such as on a point and figure chart are a very poor measure. One point on
a $10 stock means a lot more than one point on a $100 stock. If we are going to measure importance, we
have to work with percentage changes, not point changes. Percentage is a much more reliable yardstick.