Measured Move Down Complete Guide

What is Measured Move Down?

The Measured Move Down is a three-part bearish continuation pattern that illustrates a disciplined market decline. It consists of a primary impulse leg (Leg 1), a corrective consolidation or retracement (Leg 2), and a secondary impulse leg (Leg 3). Thomas Bulkowski, in his 'Encyclopedia of Chart Patterns,' identifies this as a highly reliable formation where the second decline often mimics the first in both price magnitude and, occasionally, duration. The pattern begins with a sharp sell-off as supply overwhelms demand. This is followed by a 'dead cat bounce' or a corrective phase where prices drift upward or sideways on diminishing volume. This retracement typically recovers 38% to 62% of the first leg's losses but fails to break above the initial starting point. The signal is confirmed when price breaks below the low of the first leg, initiating the third phase. Volume characteristics are crucial: volume should be heavy during the two downward legs and noticeably lighter during the corrective phase. According to Bulkowski’s research, the pattern meets its price target—calculated by subtracting the length of the first leg from the high of the correction—approximately 60% to 70% of the time in bearish markets. It is often viewed as the bearish equivalent of the 'AB=CD' harmonic pattern, providing traders with a clear mathematical framework for profit-taking and risk management in trending environments.

Identification Rules

1. The first leg must be a clear, identifiable downtrend with a significant price drop.
2. The corrective phase (Leg 2) should retrace between 33% and 66% of the first leg's move.
3. Volume should decrease during the corrective phase and increase as the second decline begins.
4. The second decline (Leg 3) is confirmed when the price breaks below the low established by Leg 1.

References

• Thomas N. Bulkowski (2005). Encyclopedia of Chart Patterns.
• Steve Nison (2001). Japanese Candlestick Charting Techniques.

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