Editor's Note: Helene Meisler's column runs exclusively on RealMoney.com; this is a special free look at her column. For a free trial subscription to RealMoney.com, click here. This article was published Feb. 1 on RealMoney.
After recently receiving several emails asking about measured targets, I thought I'd take the time today to explain one of the easiest ways to calculate a target on a chart.
Let's take the example of
Procter & Gamble
. This stock had a big day Thursday and finally broke out, after trying so hard for so long.
First, we know Thursday was a breakout because Procter & Gamble has a base in place. (A base here is a longstanding trading range out of which the stock has recently moved to the upside.) The next step is to look back to find the high of the pattern of the base; in this case, it is $79 from last January. Then, find the low of the pattern, which is from last spring at $56.
Pegging Procter & Gamble
So now we take the top of the pattern ($79) and subtract the bottom of the pattern ($56) to get $23. Then we simply add $23 to the breakout price. Here's where it can get a bit tricky. If you recall in my columns of the past
days, I have drawn in several broken uptrend lines. When a stock is breaking out of a base to the upside, we draw in downtrend lines.
As is the case with uptrend lines, the first broken uptrend line is a heads-up that things may be changing, and the second one is another step in that direction. However, it's the third broken trend line that confirms the move. Of course, the difficulty comes when there really aren't three lines to be drawn. That's the case with Procter & Gamble.
The first downtrend line was broken last summer at $68. That rally stopped at around $77. So we can then draw in the downtrend line connecting the high at $79 with the high at $77, which didn't exactly give us a huge breakout to the upside. Instead, Procter simply traded between $76 and $80.
Let's get back to the measured target. We can (and probably should) use the breakout across the first downtrend line as our breakout price, because there aren't three trend lines, and the second trend line didn't exactly act like a breakout anyway. Add $23 to $68, and we get $91 as a measured target for Procter.
One of the main reasons I picked Procter & Gamble is that back in early November when I was in New York, Jim Cramer and I discussed the merits of Procter's chart. I came up with this target of "$90-something," yet it has taken nearly three months for the stock to make a move. That's a long time to wait for a breakout. However, a general rule of thumb is that if the stock doesn't do anything wrong in the meantime (like break an uptrend line), then patience is a virtue.
Though Procter finally moved out of its trading range and had a big day Thursday, I still expect it will be one of those stocks that will take its time to meander upward, with plenty of backing and filling along the way. That's what it's done so far, and that's what we should continue to expect from it.
On the topic of measured targets, there doesn't have to be a big base or a huge top in place to do the same calculations. And the calculations work the same for the upside as they do for the downside. Take the case of
. This is a head-and-shoulders top consolidation pattern. It's a consolidation because it isn't at the high of the chart, but rather it comes after a rally off the low.
Juniper Approaches Its Target
It's not exactly a textbook head-and-shoulders pattern, but most aren't "textbook" anyway. We can take the high at $27 and subtract the low of the neckline at $19 to get $8. We then subtract $8 from the breakpoint of the neckline, which is right around $20. (All of these prices are "areas" and not exact numbers.) If we take $8 from $20, we get $12 as our target price on Juniper.
As you can see, Juniper is heading toward its target a lot faster than Procter is getting to its target. So when we calculate targets, we'll rarely know how long it will take for the chart to reach its measured target.
(Note: My apologies for not providing charts with the trend lines, but my Internet access is acting up today and won't allow me to download the data I need to create the charts.)
For more explanation of these indicators, check out The Chartist's
Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to