V.6:12 (472-473): Swing Expectations by Arthur A. Merrill

V.6:12 (472-473): Swing Expectations by Arthur A. Merrill
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Swing Expectations by Arthur A. Merrill

Market moves are plagued by the "noise" of short-term vibrations. I've found it useful to clean up the moves by using a simple 5% filter for the market averages and a 10% filter for individual stocks. All swings of less than the specified percentage are ignored as in Figure 1, which charts recent moves of the Dow Jones Industrial Average (DJIA). This chart is quite similar to the point-and-figure method, which also ignores all moves of less than a specified number of points.

To make the filter apply equally to rising and declining moves, 100% is always taken as the low point of a swing. For example, a rise from 100 to 130 is a 30% swing; a decline from 130 to 100 is comparable and is called a 30% swing, although it is only a 23% decline.

I have found that the direction of a swing, after it has; qualified as more than a "blip" on a chart, is a useful market indicator because these swings tend to continue.

We can use the viewpoint and methods of actuarial mathematics and calculate the "life expectancy" of a swing, based on experience. Actuarially, a 23-year-old person can, on the average, expect to see 50 more years. A 37-year-old person is half way through a statistical life expectancy, and can expect to live another 37 years. A person of 70 can expect another 12 years.

If a DJIA swing has carried on past the 5% filter to a swing of 7%, what is its life expectancy? How much further, on the average, can we expect it to continue, before a recognizable (more than 5%) reversal?

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