The method of arriving at a price objective is based on the height of the pattern. Take the vertical distance from the head (point C) to the neckline. Then project that distance from the point where the neckline is broken. Assume, for example, that the top of the head is at 100 and the neckline is at 80. The vertical distance, therefore, would be the difference, which is 20. That 20 points would be mea­sured downward from the level at which the neckline is broken. If the neckline in Figure 5.1a is at 82 when broken, a downside objec­tive would be projected to the 62 level (82 - 20 = 62).
Another technique that accomplishes about the same task, but is a bit easier, is to simply measure the length of the first wave of the decline (points C to D) and then double it. In either case, the greater the height or volatility of the pattern, the greater the objective. Chapter 4 stated that the measurement taken from a trendline penetration was similar to that used in the head and shoulders pattern. You should be able to see that now. Prices trav­el roughly the same distance below the broken neckline as they do above it. You'll see throughout our entire study of price pat­terns that most price targets on bar charts are based on the height or
volatility of the various patterns. The theme of measuring the height of the pattern and then projecting that distance from a breakout point will be constantly repeated.
It's important to remember that the objective arrived at is only a minimum target. Prices will often move well beyond the objec­tive. Having a minimum target to work with, however, is very helpful in determining beforehand whether there is enough potential in a market move to warrant taking a position. If the market exceeds the price objective, that's just icing on the cake. The maximum objective is the size of the prior move. If the previ­ous bull market went from 30 to 100, then the maximum down­side objective from a topping pattern would be a complete retracement of the entire upmove all the way down to 30. Reversal patterns can only be expected to reverse or retrace what has gone before them.
Adjusting Price Objectives
A number of other factors should be considered while trying to arrive at a price objective. The measuring techniques from price patterns, such as the one just mentioned for the head and shoul­ders top, are only the first step. There are other technical factors to take into consideration. For example, where are the prominent support levels left by the reaction lows during the previous bull move? Bear markets often pause at these levels. What about per­centage retracements? The maximum objective would be a 100% retracement of the previous bull market. But where are the 50% and 66% retracement levels? Those levels often provide signifi­cant support under the market. What about any prominent gaps underneath? They often function as support areas. Are there any long term trendlines visible below the market?
The technician must consider other technical data in try­ing to pinpoint price targets taken from price patterns. If a down­side price measurement, for example, projects a target to 30, and there is a prominent support level at 32, then the chartist would be wise to adjust the downside measurement to 32 instead of 30. As a general rule, when a slight discrepancy exists between a pro­jected price target and a clearcut support or resistance level, it's
usually safe to adjust the price target to that support or resistance level. It is often necessary to adjust the measured targets from price patterns to take into account additional technical informa­tion. The analyst has many different tools at his or her disposal. The most skillful technical analysts are those who learn to blend all of those tools together properly.