BACKGROUND ON M AND W PATTERNS

By Emmanuel Nyemera

In 1971 Robert Levy presented a pioneering paper in which he categorized stock-price

movements as a series of patterns defined by five turning points. With data of daily closing
prices of 548 New York Stock Exchange (NYSE) securities, he used a volatility-based filter to
define the amplitude of the swings. Specifically, he used a filter of 6V, where V is the
volatility of the individual stock as measured by the arithmetic average of the day-to-day
percentage price changes over the most recent 131-day period.
Levy assigned a five-digit identifier to each pattern by first ranking the five points from the
highest to the lowest and then reading the ranks from left to right. In total, he identified
32 such patterns. He then tested their forecasting value and found none.

In his methodology to test the forecasting value of the patterns, Mr. Levy evaluated only
completed patterns which were successfully followed by a chart breakout (i.e. a price
movement which penetrated the fourth reversal point of the pattern) prior to the next
reversal point. He then measured the performance in the 1, 4, 13 and 26 weeks from the
time of the chart breakout and found no significant forecasting value.

In 1982 Arthur Merrill picked up Levy's idea. Using data of the Dow Jones Industrials and a
constant filter of 5% to identify the five-point patterns, he evaluated the average extent of
the swing just following the completion of the various five-point patterns. He found
considerable forecasting power.

Mr. Merrill structured Mr. Levy's 32 five-point patterns into 16 patterns in the shape of an
"M" which startwith a upswing and 16 patterns in the shape of a "W" which start with a
downswing. He then ordered them on a scale, from the strongest to the weakest, and gave
their relative occurrences and extent of the swing following the completion of each fivepoint pattern.

All M and W patterns are listed below:

16 M Patterns

16 W Patterns

Traditional Technical Patterns

All of the traditional technical patterns such as head-and-shoulders, triangles, uptrends and
downtrends can categorized as Ms and Ws as well. For example an M13 is a triangle or
wedge and a W16 is a classic up trend.The categorization into classical chart patterns
follows:

Ascending: M15, M16, W14 and W16

Descending: M1, M3, W1 and W2

Head and Shoulders: W6, W7, W9, W11, W13 and W15

Inverted Head and Shoulders: M2, M4, M6, M8 and M10

 Triangles: M13 and W4

Broadening patterns: M5 and W12

The main challenge for a trader is how to pinpoint the end of the fifth point ending the
completion of the particular five-point in order to enter a trade at the beginning of a
potential profitable new swing. For that matter, traders use price and time projections
methods. The study of the geometry in the five-point patterns is the only method available
for that.

References

Robert A. Levy, The Predictive Significance of Five-Point Chart Patterns, Journal of Business, Volume 44,
Issue 3 (Jul., 1971), 316-323
Arthur Merrill, Filtered Waves: Basic Theory, The Analysis Press, Chappaqua, New York, June 1977,
183 pages.

Arthur Merrill, Behavior of prices on Wall Street, Second edition, The Analysis Press, Chappaqua, New
York, 1984.
Arthur Merrill, M and W Patterns, Market Technicians Association (MTA) Journal, Issue 7, February
1980, pp. 43-54.
Arthur Merrill, M and W waves- more data, Market Technicians Association (MTA) Journal, November
1984, pp. 23-29.