V.9:6 (233-234): How Important Is A Turning Point? by Arthur A. Merrill, C.M.T.

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.

—Jonathan Swift

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.