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Impulsive and Corrective Moves
When you are analysing the trend of a market, it is important to distinguish between moves in the direction of the trend (Point A to Point B), and retracements against the trend (Point B to Point C). Not only is this vital when you are taking trades, but it can give you an idea of what is happening in the bigger picture as well.
First, what is meant by the terms ‘impulsive’ and ‘corrective’?
‘Impulse’ suggests the existence of force. In the context of a price chart, an impulsive move produces bars that do not overlap the previous bar by a significant amount.
‘Corrective’ suggests correction - a balancing of the previous impulsive move before the next leg of the trend begins. It allows Time to catch up with Price and is characterised by bars that overlap a lot.
By way of example, let’s consider the recent market action in Silver: Chart 1 – Silver Daily Chart
click chart to enlarge
To make it easier to follow, this price chart has nothing marked on it except for a few dates. This is because we are dealing with Form Reading, rather than Time or Price analysis. Time and Price give us the points where markets will reverse, while Form Reading enables us to follow the moves between those points as they unfold.
For the moment we will ignore the period from the 28 June low to the 15 August low. A dramatic change happened around the latter date, when the pattern of each daily bar closely resembling the previous day’s bar was interrupted by a sudden price burst into an upward trend.
The eight bars following the 15 August low showed very little overlap with the previous day’s bar. Price was pushing forward in an impulsive move. This indicated that the trend was in that direction and you would have been looking for an ABC long trade. This duly presented on 30 August, even though there were three corrective bars from B to C of the trade. The Volume for the trade was a bit confusing, with only the day of Point C showing a decline in volume. Form Reading helps to fill in the gaps.
Following the 30 August low, the impulsive move resumed and lasted for about the next nine bars. This reminded me of the old saying that “the market spends 80% of its time working out which way to go and 20% of its time getting there.”
After another sideways period around the 1 October top (to which we will return shortly), prices started to fall. But compare the market action from 1 October to 5 November with the period from 15 August to mid-September. In October, prices worked their way lower with only a few impulsive bars, which indicated that this move was more likely a corrective one - in other words, a move from B to C in the larger scheme of things. This becomes much clearer if you look at the Volume over the whole period from 15 August to 5 November.
Next, consider the advance from 5 - 29 November. Was this impulsive or corrective? Volume picked up but the price only struggled higher, suggesting the market does not appear ready to advance just yet and that more correction may be needed. This is where Time and Price analysis comes in to help you determine how much longer this could last before another move begins. You might, for example, watch 90° from the 1 October top for a potential turn. But always remember that market action must confirm any date.
Also note that sideways periods around bottoms (28 June) and tops (1 October) are accumulation and distribution. W.D. Gann wrote extensively about these in his books, which are well worth studying. Just as you take a deep breath before swimming underwater, the market must prepare itself for any big move, up or down.
Again, these are Form Reading patterns. Time analysis will call the beginning and end of the moves but you must always combine Time and Price with Form Reading to ensure you are constantly in tune with the day-to-day behaviour of the market.
Knowledge is Power!
Tim Walker
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