After you'd drawn the ellipses with the wooden compass, did you hear Holmes say "Our killer lives in this area" and then some further dialogue? If not, then you'll need to redraw it until he comments. It might just need tweaking. The location pins need to be just inside the yellow line.
After that's done, and you click on the metal compass to continue, your cursor won't appear as a metal compass -- you'll only know you've picked it up when you left-click-drag on the map and the red circle appears.