We are often asked to explain the rationale for why the horizontal Point and Figure (PnF) method works for estimating price objectives. The horizontal PnF method which requires judgment and nuance to employ, is rarely used these days, yet it works surprisingly well. The judgment required is in knowing how much of the horizontal congestion area to count for the purposes of estimating how far a price move could extend. To understand why counting a horizontal congestion area could systematically and consistently measure the potential for a price move, we must review the role of the Composite Operator in the Accumulation and Distribution processes.
An abundance of volatility allows the C.O. to Accumulate the shares of a stock they intend to campaign. A wide trading range with many upward and downward swings provides cover to the C.O. to absorb the many shares needed for a sizable position. Therefore, the key element necessary for the C.O. to Accumulate shares is volatility. If there is less volatility during the trading range, it will take longer. With more volatility it will take less time.