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Projecting Price Targets

05/02/11 03:47:54 PM
by Mike Carr, CMT

Some chart patterns are commonly used to develop price targets. That same principle can help traders even when there isn't a clearly discernible pattern.

Security:   DJIA
Position:   Buy

The recent action in stock markets has been mostly straight up. The daily chart, shown in Figure 1, shows the recent break to new highs. The chart also shows that after the resistance level was cleared, there are no significant price targets visible in the chart.

FIGURE 1: DJIA, DAILY. Charts donít always offer clear patterns.
Graphic provided by: Trade Navigator.
Some patterns, like a head & shoulders, are used to create price targets. The guideline is that the price will fall in an amount equal to the distance between the neckline and the high point of the head. Rectangles also offer a price target based upon the distance between the high and low prices formed by the pattern. In both cases, and with most chart patterns, the objective is based upon symmetry. The idea is that the subsequent price move will be as large as the previous price move.

FIGURE 2: DJIA, DAILY. The Dow Jones Industrial Average (DJIA) fell more than 830 points from its February high to its March low.
Graphic provided by: Trade Navigator.
This idea has been applied to the chart in Figure 2. The Dow Jones Industrial Average (DJIA) feel more than 830 points from its February high to its March low. Once prices broke back above the February high, the idea of symmetry yields a target of 13,223. Of course the precision is deceptive, but a move to 13,200 or so seems probable.

Technical analysis is based on general principles. Too many technicians would prefer to find a precise pattern rather than generalize the concepts of pattern analysis. The simple idea of symmetrical moves is clearly contained in setting price objectives and can often be applied in uncertain conditions where no clear pattern can be seen.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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