Q: New Mac - iCloud Music libray and external HDD

Gone into itunes library preferences and pointed the media folder location to the hard drive.

That only applies to downloaded or newly added songs, going forward.  So, if you download any of your songs or add new songs, they get stored at that location.  Existing songs in your MacBook's iTunes library are accessed from their current location (or iCloud in your case).  Existing song files on the external drive are not being used at all, because the MacBook's iTunes library does not know they exist.

The main problem here is that you started with a new iTunes library on the new MacBook, instead of transferring your existing iTunes library data (in your iTunes folder) from your old Mac to the new MacBook.  If you still have access to your old Mac, you should "re-do" it that way.  If your old Mac's iTunes library was set up to access its iTunes Media folder from that external drive, when you transfer that same iTunes library to your new Mac and connect that same external drive (without renaming it), that iTunes library continues to access its iTunes Media folder from that same external drive.  You don't need to change anything, because it's the same iTunes library on new MacBook.

Your iTunes library is in your iTunes folder, normally located at

[startup drive]/Users/[user home folder]/Music/iTunes/

Copy that iTunes folder to an external drive.  The iTunes folder should not be very large, if your complete iTunes Media folder is not in your iTunes folder.  On the new MacBook, it has an existing iTunes folder at the same location.  With iTunes NOT running, move that existing iTunes folder to a different location (like your Desktop); you can delete it later.  Then, copy the iTunes folder from the old Mac, to where the existing iTunes folder was located, which is

[startup drive]/Users/[user home folder]/Music/iTunes/

Make sure your external drive is connected and accessible.  When you run iTunes on the MacBook, it uses the iTunes folder from the old Mac, and everything looks like before.  It uses the iTunes Media folder from external drive.

NOTE:  If you set up File Sharing between the two Macs, you can transfer the iTunes folder from old Mac to new MacBook that way, instead of using an external drive.  If your iTunes Media folder was in the iTunes folder, it would take a LONG time.  But it should be OK in your case, because your iTunes Media folder is on the external drive.

As an FYI - You're doing this procedure, except it's much easier in your case, because your iTunes Media folder is not in your iTunes folder

Manage and back up your iTunes media library - Apple Support

Your iTunes Media folder is already where it needs to be (on the same external drive); you just need to copy the iTunes folder from old Mac to new MacBook.

If i make all the moves of files as indicated. Before i launch itunes again do i need to hold option and then select the legacy itl file?

Are you calling it "legacy" because your old Mac had an older version of iTunes?

If you copy the iTunes folder from old Mac to the same location on new MacBook, iTunes should use it automatically.  You can press the Option key when you launch iTunes, but you would be pointing iTunes to the same .itl file (so it should not make a difference).  IF iTunes on old Mac was an older version, iTunes on new Mac may spend a few minutes updating your iTunes library file, so if it appears to "hang," be patient and let iTunes finish converting the library file (don't force quit iTunes).

it wont overwrite the existing icloud music library.

If there are any differences, I think your iCloud Music Library would be treated as "primary."  In the current "scheme," iCloud Music Library (if you have one) IS your master music library, accessed equally by your associated computers and devices.  The iTunes library on your MacBook happens to have all song files stored locally (and that's a wise approach), but you are actually looking at your iCloud Music Library.

My setup is essentially the same.  My Mac mini has its iTunes folder on internal drive, with iTunes Media folder on an external drive.  All my song files are stored there locally, but that Mac accesses my iCloud Music Library, which is also accessed by my other (older) Mac and iOS device (with no locally stored song files).  I back up my locally stored song files using Time Machine (to another external drive).