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.
FIGURE 1 12M Swing S&P
FIGURE 2 Monthly S&P