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Identification Guidelines

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Table 6.1 shows the identification guidelines for the big M.

Figure 6.2 provides another example of a big M at BD. Price begins the rise at A, the launch price (which is the second bottom of a nicely shaped Adam & Adam double bottom). Along the way, price gaps (an exhaustion gap because price consolidates after the gap) just past midway to the first peak and forms a pennant before resuming the climb to B.

Price meanders up and down as it searches for a bottom at C. The valley between BD looks like a mutant head‐and‐shoulders bottom (the left shoulder is LS, the right shoulder is RS, with head C between them. It's not an ideal head‐and‐shoulders because the two shoulders don't bottom at the same price).

At peak D, price gaps lower (breakaway gap) as if it can wait to reach grandma's house at E. The stock bottoms at E, which is just above the launch price (A). Notice that in this example, the rise from A to B is similar to the drop from D to E. That behavior rarely happens, so consider this a textbook example.

Appearance. Look for two peaks that top out near the same price. The two peaks likely won't share the exact same price, but they should be close. Use your best judgment and be flexible. If the right peak is higher than the left, performance improves but only by a percentage point. Oddly, performance is best if both peaks share the same price.

Table 6.1 Identification Guidelines

Characteristic Discussion
Appearance Two peaks near the same price form a pattern that resembles an M. The price trend approaching the first peak should move upward at a good clip, with few or no pauses along the way. Be flexible, though.
Price trend Price rises into the first top, often a multiple of the big M's height. See text for guidance.
Volume Trends downward from peak to peak.
Breakout direction, confirmation Downward. A breakout occurs when price closes below the valley between the two peaks. It confirms the pattern as a valid big M.
Duration No minimum is set, but the median time between the two peaks is about a month.

Figure 6.2 This big M (BD) struggles to find a bottom between the two peaks (where a head‐and‐shoulders bottom appears).

Between the two peaks, price forms a valley. I didn't set a limit on how far down the valley price slides, but the median height is about 12% in bull markets.

After the second peak, price drops, but often won't fall as steeply as it climbed on the rise to the first peak. In perfect patterns, the slope of the rise to the first peak will mirror the drop after the second peak, as I mentioned. In real life, it takes twice as long to drop from the second peak to the ultimate low as it did to climb from the launch price to the first peak.

Price trend. The price trend leading to the first peak should be unusually tall, often a straight‐line run up at a steep slope. As a good gauge, I looked at the height from the higher of the two peaks (D) to the valley between the two peaks (C). The upward trend leading to the first peak (A to B) should be a multiple of the peak to valley height (at least one times the height, but two times is better, CD).

Volume. Volume trends downward from the first to the second peak most often. Don't discard a big M pattern because it has a rising volume trend. Volume doesn't affect performance. We'll see that later in Table 6.6.

Breakout direction, confirmation. The pattern breaks out downward. A breakout happens when price closes below the low price of the valley between the two peaks. I show the breakout where price closes below line G.

A downward breakout confirms the big M as a valid chart pattern. If price does not break out downward, then you don't have a big M.

Duration. The length of the pattern, from peak to peak, varies from about a week to nearly a year (I often limit pattern width to 6 months, but the longest I cataloged was 254 days. I'm sure I can find wider ones), especially if I use a weekly scale (I prefer daily).

Encyclopedia of Chart Patterns

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