Maximum Extension

BarroMetrics Views: The Maximum Extension

MH dropped me a line requesting I explain what I mean by ‘The Maximum Extension”. I am happy to oblige.

In my approach, I look at three filters when assessing breakouts:

  • A time filter (Whole Point Count [WPC])
  • A momentum filter (Line Change Count [LCC])
  • A price filter (Maximum Extension [ME])

(The WPC and LCC are concepts I read about in a course by Trend Dynamics).

The ME seeks to identify the maximum price in a breakout that will still preserve the probability of a change in trend pattern. Or put in another way, as long as we don’t have acceptance beyond the Maximum Extension, the possibility remains that a breakout will turn into a change in trend pattern. One key element for the ME to come into play: there needs to have been a trending market before the breakout occurs.

Let’s look at an example:

In Figure 1:

  • we have the 12-month swing of the cash S&P. 
  • the ME is coming it at 1758. 
  • a monthly bar exhibiting a bullish monthly close above 1758 would suggest the breakout is genuine. 
  • until then, there are a couple of clues that a ‘3-Drives to a High’ CIT is more likely: the volume and ATR are less at  A than at the current breakout B (Figure 2).
  • a bearish-conviction close below  1447 would trigger the Upthrust CIT.

12m-sp.png

FIGURE 1 12M Swing S&P

nvm.png

FIGURE 2  Monthly S&P

Leave a Reply

Your email address will not be published. Required fields are marked *