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HOW CHARTS CAN HELP YOU
IN
THE STOCK MARKET
William
L. Jiler
E
TRENDLINE,
a division of
STANDARD & POORS CORPORATION
©7962 by William L. J Her
All right reserved, including the right to reproduce this book, or
any portions thereof, in any form.
Library of Congress Catalog Card Number: 62-1^222
March, 1 962
First Printing
October, 1963
Second Printing
April, 1965
Third Printing
Fourth Printing
March, 1966
Manufactured in the United States of America
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To
predict the course of the stock market. Wall Street ers
have tried everything from the height of
quency of simspots. The most practical
tides to the fre-
tools are charts that
shoiu the price changes of individual stocks as ivell as the
action of the market as a tvhole. Chartists are powers in the
Street;
on ivhat their charts show, institutions, mutual
funds and thousands of individual investors buy and
—Time magazine.
sell.
ACKNOWLEDGEMENTS
This book ivas years in the
making and is the fruit of the labor of many people. Chart
ideas and formations had to be carefully researched. Among
the hundreds of patterns studied, only a small percentage
were finally adopted for use in the book. Reams of written
material on charting techniques ivhich ivere submitted to
the author were parboiled, condensed
attefnpt to simplify
The author
is
and
clarify a
who
and leached
in
an
difficult subject.
especially indebted to Charles Hatten, a
professional investment advisor
years,
most
and
chartist for over 2
spent tireless hours on research and writing.
originated the chapter on
"The Measured Move" and
5
He
ivrote
parts of several other chapters. Considerable editorial assist-
ance was provided by John Hess, the well
known
financial
writer.
The author
also gratefully
acknowledges research and
editorial help frorn such able market experts
as
Stephen
Greenberg, Vice-President of Waist on & Co., Inc.; Richard
D. Donchian, Director of Commodity Research for Hay den,
Stone ^ Co., Inc.; Fred Barton, of the Commodity Department of Thomson & McKinnon; Edward Underwood, FJitor of the Mitchum, Jones & Templeton Technical Stock
Market Letter; Harry Jiler, President of Commodity Research Bureau, Inc.; Joseph R. Karp, Investment Advisor;
late Lester Wyetzner of Meller & Company.
The help and encouragement of Joseph Granville, author
of two popular books on technical stock market analysis and
Kenneth Ward, Senior Vice-President of Hayden, Stone &
and the
Co., Inc., were deeply appreciated.
The author
also wishes to
thank Joseph Kesselman
who
contributed greatly to the production of this book, and the
chart staff of Trendline
who prepared
the art
work for
publication.
WILLIAM
L.
JILER
1.
2.
3.
4.
A TOOL FOR INVESTORS
TRENDS
SUPPORT AND RESISTANCE
HEAD AND SHOULDERS
19
27
41
55
97
109
10.
DOUBLE TOPS AND BOTTOMS
LINE AND SAUCER FORMATIONS
V FORMATIONS
THE MEASURED MOVE
THE COIL (OR TRIANGLE)
CONTINUATION PATTERNS
12
5
11.
REVERSAL DAYS, GAPS, ISLANDS
13
5
149
15.
THE TRAP
THE MARKET AVERAGES
MORE INDICATORS
THE "200 DAY MOVING AVERAGE"
16.
PROFITS
187
17.
PITFALLS—AND PROFITS
195
5.
6.
7.
8.
9.
12.
13.
14.
73
85
117
157
165
179
The
illustrations in this
gories:
(a)
book are divided into two catedrawn to show the
simple figures, arbitrarily
general appearance of the different formations discussed
in the text,
and (b) charts for
whose
formed patterns that
selected listed stocks
actual fluctuations in the market
could be clearly identified.
The
charts of listed stocks (without the author's added
'^pattern identifiyng" outlines) appeared originally in the
stock market chart publications of Trendline.
PLATES
6
—Uptrend Line and Channel
—Downtrend Line and
Channel
KORVETTE — Upcurving Trendline
FLINTKOTE — Downcurving Trendline
AMERICAN TOBACCO — Support
ALUMINIUM LTD. —
7
UNIVERSAL OIL PRODUCTS
1
KERR-MCGEE
2
GEORGIA PACIFIC
3
4
5
10
1
50
51
Valid
BRUNSWICK — (Weekly Range Chart) —
13
52
53
—Head & Shoulders Top
TECHNICOLOR — Head & Shoulders Top
CROWELL COLLIER—Complex Head &
HELi-coiL
Shoulders
12
39
40
Levels
Support and Resistance
9
38
Resistance Levels
Support Levels and Support Zones
8
37
Top
67
68
69
BAR CHRIS CONSTRUCTION CO.
Complex Head & Shoulders Top
OCCIDENTAL PETE Complex Head
Shoulders Bottom
—
70
&
71
8
1
14
1
VARIAN ASSOCIATES
—Head & Shoulders
72
Failure Patterns
1 5
16
17
1
19
20
2
22
23
24
2
5
26
17
28
29
3
31
32
3 3
34
3 5
36
37
3 8
39
AMERICAN MACHINE
& FOUNDRY
Double Bottom with Platform
LEESONA Double Top
STANDARD KOLLSMAN Doublc Top
GENERAL TIRE Doublc Bottom Variation
LIONEL Triple Top
DU PONT (Weekly Range Chart)
Double Bottom
CERTAIN-TEED Line Bottom or "Long Base"
viEWLEX Line Bottom
DAYSTROM Saucer Bottom
KAYSER-ROTH Saucer Bottom
DYNAMICS CORP. Long Saucer Bottom
—
—
—
—
—
—
—
—
—
—
—Saucer Top
AMERADA — True V Formation
OWENS-CORNING — Inverted Extended V
IBM — Extended V Bottom (Left-Handed)
MACK TRUCKS — Inverted Extended V
(Left-Handed)
WESTiNGHOUSE ELEC. — (Weekly)
Inverted True V
TEXAS INSTRUMENTS —Measured Move
MAGNAvox—Measured Move
RCA — Measured Move
PERKiN ELMER —
LITTON — Large
STUDEBAKER-PACKARD — Triangle Top
GENERAL TIME — Key Reversal Day
and Diamond
BURROUGHS —Wedge,
siEGLER
Triangles
Triangles
Flag,
78
79
80
8
82
83
90
91
92
93
94
95
104
105
106
107
108
114
115
116
121
122
123
131
132
40
41
42
43
44
45
46
47
48
49
50
5 1
5
2
5
3
—
—
NAFi—Gaps,
HERTZ Diamond
GENERAL INSTRUMENT Boxes and
AVNET Island Reversal
—
133
a
Box Top
Reversals, Islands
—
UNIVERSAL MATCH Two-Day Reversal Top
SMITH-CORONA Key Reversal Day Top
ZENITH Two-Day Reversal Bottom
TRANSiTRON The Bull Trap
MINERALS & CHEMICALS The Bull Trap
GENERAL TELEPHONE The Bull Trap
TXL OIL CORP. The Bear Trap
ANALYZING THE DAILY CHART OF THE
DOW-JONES AVERAGE
DOW- JONES AVERAGE (Monthly Ranges
1949-1961)
dow- jones average vs. standard
—
—
—
—
&
—
—
poor's 500
134
143
144
145
146
147
152
153
154
155
161
162
163
54
dow- jones average
5 5
the advance-decline line
174
175
5 8
Barron's confidence index
SHORT interest ratio and the
D-j industrials
trendline's monthly odd lot index
and the dow-jones average
trendline's weekly odd lot index
177
59
60
RONSON
&
5
6
57
poor's
5
vs.
standard
00
and the dow-jones average
61
— 200-Day Moving Average and
Move Up Together
COLLINS RADIO — 200-Day Moving Averages
164
176
178
Price
183
and Prices Move Lower Together
184
62
FIRST
CHARTER FINANCIAL
Return Moves
63
FORD MOTOR CO.
to
200-Day Moving Average
— 200-Day Moving
Average Signaling Major Bottom
18
5
186
E
Risk
inherent in living, and risk-capital
is
of the "free enterprise" system.
by assuming
and
risks,
at the
Man
is
the lifeblood
evolved and progressed
same time, using
all
of his
experience, ingenuity and thinking processes to minimize
such
risks.
nomic
life
—
—
The stock market
of a free democracy
a vital
is
organ in the eco-
a staging area for receiv-
ing and marshalling risk-capital in the
march toward
a
greater and more prosperous economy.
Just as the progress of man was smoothed by the
minimization of
risk,
the
economic well-being of the
individual investor and of the economic
depends upon the reduction of
this
concept in
his
risk.
life
How
process itself
can one
utilize
investment program? Stock exchanges
and leading brokerage houses advertise "Investigate Before
Invest." This is a good start, but it is important also to
You
"Investigate After
You
Invest."
Far too few investors bother with even cursory investigations.
And many who
pride themselves on the thorough-
ness of their research ignore
what
is
probably the most im-
portant part of any investment analysis
psychology of buyers and
ments. Briefly, are prices heading up,
The
—
the changing
sellers as reflected in price
down
move-
or sideways?
neglect of this essential ingredient stems
from
a
lack of knowledge and a paucity of published material on
the research of price movements. This book,
a
simple chart of price history,
fill
the void. It
is
not designed
"playing the market," but
as
is
a
as a
which utilizes
humble attempt to help
system or a gimmick for
an introduction to the
of price analysis with some practical hints on
knowledge can be used to minimize
prove investment
results.
risks
how
field
this
and help to im-
HOW CHARTS CAN HELP YOU
IN
THE STOCK MARKET
A TOOL FOR INVESTORS
What makes
one stock
sell
at $
5
a share
and another
at
$100?
And what makes
at
one time
— and
the market pay
$100
Well, there are
a
worth, the outlook for
the
economy
market
.
.
.
$ 5
a share for
stock
at another?
company's earnings, dividends, net
its
future business, the outlook for
whole, the general behavior of the stock
as a
countless factors.
could learn them all, and balance
them properly, he should be able to predict the price of a
stock
or so it would seem. Yet, assuming he had a pretty
If a diligent investor
—
accurate idea of
Machines would
how
rise
the earnings of International Business
over the
anticipate that I.B.M.
annual profit
icould
in the late
last
sell
decade, hoiv co7ild he
as loiv as
Nineteen Forties and
12 times
at
its
60 times
earnings in the late Fifties?
Obviously, "investors' confidence" went up sharply
in the Fifties.
—
that
is,
the
And
sum
obviously, the psychology of the market
of the attitudes of
A
all
potential buyers
Tool for Investors
19
and
sellers
—
is
determining
a crucial factor
use being "right" about a stock, if the
no
prices. It's
market
is
"wrong."
How
often does the market go down following an announcement of good news, and up when the outlook seems
dark! Put another way, "a stock is worth only what in-
pay for
vestors are willing to
it."
Thus, to predict the action of
a stock, it
would be
all
the hard, economic facts, plus an accurate
insight into the
minds of the public. That recalls the sad
I'd fix me some ham and eggs,
ideal to
old
if
I
jest,
have
"If
had some ham,
I
had some eggs." The fact
may
thing that
is,
nobody can know every-
affect the price of a stock
vaunted "insider."
To
be sure,
it's
—not even
the
an enormous advantage
knowledge about earnings, dividends, stock
mergers, oil discoveries or new products. But to
by such knowledge, the insider and his sisters and
to have advance
splits,
profit
and
his cousins
increases the
to
sell,
must
aunts
— must buy
for the stock, just as
when he
he increases the supply. In either case,
register itself in the marketplace,
vestor
may
Now
all
his
demand
—
stock. In so doing, he
ready
his action
where the
alert in-
observe the signal.
while, as
the factors that
we have
may
just noted,
affect the interplay of
the price.
No
company,
//
nobody can
determine the price of
in the last analysis all these factors
meet
in the
learn
a stock,
market and
supply and demand, which does
matter what the news
may
set
be concerning a
affecf the price of its stock only tuhen it
favor of either supply or demand. If, at a
luill
tips the scale in
given point, the
demand
for a stock
(orders to buy)
up. If supply exceeds demand, the price
is
must go
must go down.
greater than the supply (orders to sell), the price
20
is
Charts provide
and demand
—
record of this interplay of supply
a
a history at-a-glance
or group of stocks, showing
at
is
of the trading in a stock,
how many
shares
were traded,
what price and when.
The purpose of "chart reading" or "chart analysis"
to determine the probable strength of demand versus
pressure of supply at various price levels, and thus to pre-
which a stock
dict the probable direction in
and where
The
it
will
by the history of
clues are provided
movements,
price
will
move,
probably stop.
a stock's
recorded on a chart. In the market,
as
history does repeat itself
—
often.
On
the charts, price fluc-
tuations tend, with remarkable consistency, to fall into a
number of
patterns, each of
between buying and
which
signifies a relationship
selling pressures.
"formations," indicate that demand
ply, others suggest that supply
still
for
is
Some
is
patterns, or
greater than sup-
greater than
demand, and
others imply that they are likely to remain in balance
some time.
Before going any further,
about
this:
there
let
us be clear
and emphatic
no infallible system for
is
dicting STOCK PRICES.
system would eventually
own
Rather than being
infallible,
or misunderstood
—
so
out throughout
this
much
all
pre-
inventor of the
If there were, the
the stock in the market.
charts are often misleading
so,
that
book and we
we
also
try to point this
have included
a
chapter on the pitfalls of chart reading at the end of this
book.
Fortunately,
time to
it's
make money
sary to be right
not necessary to be right
in the stock
market.
more often than you
A
It's
are
all
of the
only neces-
wrong. This
Tool for Investors
21
principle
is
known
well
who
to gamblers,
never loses." Actually, the house often
loses
say "the house
—
at least
enough to keep the customers coming back
— but
often
that
mathematical edge assures that the house will win in the
long run.
How
can one find such an edge
in the stock
market? Certainly, sound, thorough information
abo'it a
company, its industry and the economy are valuable. But
a knowledge of the stock's chart action, and a familiarity
with chart patterns, will help the investor decide when to
buy and when
Now,
to
sell.
a look at
chart readers
may
how
the chart
made. (Experienced
is
skip the rest of this chapter, but we'd
be delighted to have them stay along.) The charts used in
this
book
— and most widely used
in price forecasting
—
are
called Vertical Line Charts, the kind that newspapers use
There are many other kinds
to depict the stock averages.
bols, plotted
Some
—-composed of
or other
sym-
on logarithmic, square root or arithmetic
scale.
and variations
lines, bars, steps
analysts use oscillators,
moving
averages, ratios or
"points and figures." Each of these has
function, but
all
interpretation
is
By
merits and
its
generally highly complicated.
may easily be
minimum of time.
Chart
contrast, the Vertical Line
kept and understood by anybody, in
It
its
take a lot of time to keep up, and their
a
presents at a glance the most pertinent information
the highest, lowest and closing prices and the
number
shares traded in a given period. It
most time-
tested
method, having grown
is
also the
of
in use since the turn of the
century. Vertical Line Charts showing the course of leading stocks and market averages for
many
years are avail-
able to the investor through various chart publications.
22
They
provide ready-made, up-to-date charts of leading stocks,
and he can
easily build
the stocks he
is
The chart
and maintain
own
his
charts for
interested in.
is
built to
show either daily, weekly, monthly
The same patterns can be
or even yearly price fluctuations.
recognized in any of these, and they
equal effect in forecasting
signal a turn
book
in this
—but
may
be used with
the daily chart will often
more quickly, and so most of the illustrations
Weekly and monthly ones are
are daily charts.
handy, however, for studying long-range trends, and examples appear at the end of the chapters that follow.
In any case, the price information
is
entered on graph
paper of the ordinary kind, with even horizontal and ver-
The up-and-down
tical rules.
scale,
printed on the
sides,
measures prices; the scale along the top or bottom indicates the time
as
it
may
the case
happened
be.
—
From
the day, week,
lished in the newspapers, or reported
chart-maker enters
month
or year,
the stock market table, as pub-
a dot to
mark
on the
ticker,
the highest price at
the stock was traded that day, and another dot to
A
the low.
vertical line
drawn between
the price range for the day.
mark
A
these dots
the
which
mark
shows
short, thin crossline will
the price of the last transaction of the day. For ex-
ample, a stock that was traded Oct.
from $45
appear
FIGURE
as follows:
1
1 5
at prices
ranging
to $47 a share, with the last trade at $46, will
(PRICE
SCALEI
1
Weekly, monthly or yearly charts
drawn
in the
same way, with each
are,
of course,
corresponding to the
line
price action for such a period.
Space
is
provided
at the
bottom of the chart
to
add
an important piece of information: the number of shares
(or
as
volume) traded during each period. This is recorded
bar extending up from zero to the correct
a vertical
figure, in
accordance with
along the
a scale
paper market tables, the volume
shares, or
"round
—indeed
the
on
FIGURE
Date
a table
2
necessity
—
of
charts
be seen by considering the daily market action
of General Motors stock from Sept.
first
(In news-
side.
given in hundreds of
lots," unless otherwise indicated.)
The convenience
may now
is
1 5
to Oct. 15, 1961,
of figures
GENERAL MOTORS
Low
Close
471^
48
No. of shares
Traded
37,100
Oct.
1
The first vertical line shows that, on Sept. 1 5 prices
G.M. ranged from a high of 48 to a low of 47 V4,
,
paid for
closing at 48
(horizontal dash)
;
the line at the
bottom
shows that 37,100 shares of G.M. were traded that day.
The same procedure was followed
Oct.
! 5.
(It will Le
for each day through
noted that space for week-ends
is
elim-
inated to provide continuity.)
These data
may
be condensed, for the purpose of ex-
amining long-term trends, into
follows:
FIGURE 4
-
a
weekly range chart,
as
TRENDS
A
mere glance
have
at a
few stock charts
A
tion for a considerable time.
show that
will reveal that prices
tendency to move in
a prevailing
examination will
tendency, or trend, frequently assumes a
this
definite pattern, zig-zagging along an
line.
a particular direc-
closer
imaginary straight
In fact, this ability of prices to cling extremely close
to a straight line
teristics
is
one of the most extraordinary charac-
of chart movements.
Now,
there
is
nothing mystical or hocus-pocus about
chart reading. Stocks trace various patterns for reasons
soundly based
in
human psychology
that determines stock movements.
to
move along
a straight line, for
explain. In physical terms,
it
— and
it's
psychology
The tendency of
example,
often
is
is
stocks
not hard to
likened to the law
of inertia; that an object in motion will continue in
tion in the same direction, until
In
human
more for
a
it
mo-
meets an opposing force.
terms, an investor will tend to resist paying
stock than the price other people have recently
been paying for
it
—
unless
it
continues
moving up, which
Trends
17
him some confidence
will give
or hope that
going up. Conversely, an investor will
for
less
theirs
—
will keep
it
resist selling a
stock
than the price other people have been getting for
unless the price keeps declining,
and he
fears
it
will continue to decline.
Let us see
how market
development, forms
typical,
case.
a
psychology, reacting to a news
trend in an imaginary, but highly
Suppose the
XYZ
Corporation
completion of the development of
promises
to increase sales
selling at
$20
and friends
atives
and earnings.
a share. Insiders
—
is
nearing
new product
a
—
Its
that
stock has been
executives, employees, rel-
are the first to learn about
it.
They
removed from the ranks of those who
are immediately
might be willing
to
sell
their stock at $20,
$21 or even
$22. Their shares are off the market, and to that extent,
the supply of stock at those prices has been reduced, creat-
ing a tendency for the stock to
rise.
More important, some
of them will begin to buy more stock, increasing the de-
mand. By
this time,
word of
the
new product may have
reached brokers, investment counselors and perhaps other
people in the industry concerned.
The
steadily, to $23, $24, $25, attracting
tention,
more and more
at-
and traders and the general public begin to scram-
ble aboard.
is
price has been rising
Everybody
loves to give or get a stock tip
(
this
one of those rare ones that are sound) and more and
more buyers are attracted.
Then comes the public announcement of
the
new
product. Brokerage firms, in pamphlets sent to their clients,
discuss
itself
what
effect
advertises
new demand. But
28
it
will
have on XYZ's earnings.
and publicizes the item. All
there comes a point
when
XYZ
this creates
the market
price has fully "discounted" the development
stock has risen
enough
—
that
is,
the
to take into account the increase
in earnings likely to occur. This point
the time the public announcement
is
is
often reached by
made.
Many
traders
when
on the news"
price
rise.
the news occurs after a sharp
A downtrend may develop if it appears that the rise
went too far. Perhaps the early estimates of sales and earnto cash in their profits, especially
"sell
ings were too optimistic. Perhaps other companies quickly
introduce competitive products.
departments
buyers
who
may
still
who bought
out at a
loss,
decline.
As
have profits
Or
profits
the price of
may
near the top of the
cash
rise
in.
from other
XYZ
XYZ
back,
falls
Then, latecomers
may,
to avoid even bigger losses.
in disgust, sell
And
so the de-
cline continues.
So,
for such well-founded reasons, stock prices do
move in a given direction for a considerable time
down or "sideways." Thus, an obvious first lesson
drawn from chart reading is that, when a stock is
tend to
—
up,
to be
a given trend line, // is more likely
moving along that line than not to. Not cerlikely. But the ability to spot a trend gives the
found to be following
to continue
tain, just
investor an edge in determining his market tactics.
HOW
TO SPOT A TREND
In the course of a stock's normal
the chart, as
few
as three points,
or bottom of a wave,
line;
more
may
wavy movement
across
each marking the top
suggest the presence of a trend-
are usually needed to confirm
it.
In Figure
5,
note that in the uptrend, the third point, C, becomes fixed
at a higher level
than the
first
point, A.
With only
three
Trends
29
points observed so far, the trendline
cases actually cross Point B. In the
some
C
is
may
may
FIGURE
and
in
C
occur when Point
is
even with Point A.
5
UPTREND
DOWNTREND
LINE
SIDEWAYS TRENDLINE
LINE
Please note that the uptrend line
necting the lower points of
trend line must be
This
is
drawn by connecting
—and
from the lower
the higher points.
shown
what point
it
When
a
a stock
and downtrends
it is
points, as
safer to
draw
lines actually
at
is
where
it is
likely to halt
desired
on
its
one does for
a
parallel, straight horizontal
sideways trendline along the
a
hypothetical uptrend.
Figure 6 (page 31) shows
would look on
work
to be highly unreliable
sideways trend forms, both upper and
lower points often conform to
but
does the opposite,
use in precise forecasting,
little
to determine at
next swing.
—
ones. This technique appears to
times, but experience has
lines,
drawn by conA down-
limits
quite naturally
drawing uptrends from the upper
and of
is
stock movement.
a
an important distinction. The inexperienced chart
reader invariably
how
trendlines
a daily basis vertical line chart.
and channels
How
trend-
develop are shown in the charts at the end
of this chapter,
30
C
downtrend, Point
lower than Point A. "Sideways," or horizontal trend-
lines
low
be difficult to
move away from Point
recognize until prices
all
taken from actual market action. The
1
The broken
lines,
which
parallel to the trendlines, help to outline
chan-
heavy, solid lines are the trendlines.
were drawn
channels are grooves or ducts through which
nels. Briefly,
prices
move
as
they zigzag along
a trendline.
Once
a trend-
line has been clearly established, a channel can usually be
determined. Needless to say, channels seldom occur
defined as in the selected charts
shown
as
neatly
in Figure 6,
but
found, they are useful in suggesting at what price
when
buy or
FIGURE 6
to
-V
sell, if
the decision to
ft
buy or
sell
W'lA
rt
Downtrend Cha
has been made.
ii
Sideways Channel
Uptrend Channel
CHANNELS
It
is
perhaps obvious that the longer
moving along
a given trend, or
groove, the stronger that trend
reason, trendlines
within
is
a
a
stock has been
given channel or
likely to be.
on longer range charts such
as
For
this
weekly or
monthly high-low-and-close charts are usually more reliable than trendlines that form on daily high-low-and-close
charts. Trendlines that form in just a few weeks cannot
be expected to hold in the majority of instances. But, even
when
stocks break
away from an
signal a true shift in direction, they
return to
this
it.
established
have
a
line,
and
tendency to
This magnetic attraction of the old trend,
"pull-back effect"
common to trendlines, will be obmany of the formations cov-
served on the completion of
Trends
3
ered in later chapters.
An
awareness of this
help the timing of purchases and
movement can
sales.
FIGURE 7
^
,1
,'
„
iU--'^ Tend".
Ill.l
•'''•
I
'
PULL BACK EFFECT
VOLUME
As we have noted, when
formation
A-B-C
trendline. This
the analyst sees a three-point
Figure
not yet
is
lines that
5,
he will draw a tentative
a signal for action;
As time goes
for confirmation.
with tentative
as in
on, his chart
he must look
may
be strewn
have been discarded. But he will
also find trends that follow
through.
One of his most imnumber of shares
portant guides will be the volume, or
traded each day.
The volume
is
of buying and selling pressure
move. Obviously,
5
if a
a
—
stock that
measure of the intensity
the conviction behind a
is
seldom traded jumps
points on a single trade of 100 shares, the price increase
only means that one individual, for reasons best
himself,
wanted 100
immediately except
shares,
known
to
and there were none to be had
at a level
5
points "above the mar-
ket," where some other individual had told his broker he
would be willing to sell.
By the same token, the greater the volume, the greater
the significance of a price movement, in general. During
a normal uptrend, volume increases when prices are rising
from the trendline, and volume subsides when prices are
32
falling
back to the trendline. Conversely,
volume
the
when they
is
usually greater
when
in a
downtrend,
prices are falling
than
are rallying.
SHARP TURN AHEAD
Changes
in this
in trend before
volume pattern often warn of
it
a reversal
actually happens. For example,
if
an
uptrend has been proceeding normally, with higher volume on rallies and lower volume on reactions, and suddenly volume subsides on the rallies and increases on the
reactions,
To
line
in
is
a
a
be a signal of a pending price reversal.
A single,
caution signal.
simple break of a trendline
of the trend. But
may not indicate the end
warning. And long experience in
most
it's
may
it
the chartist, each break of an established trend-
cases
developed
this rule
of thumb:
A
chart analysis has
trend reversal
is
quite
whenever a stock price has broken
well established trendline by as much as 3 per-
likely to be in process
through
cent,
its
on increased volume.
VARIATIONS
An
interesting variation
from the
straight-line trend
the curved trendline. In some cases, the
advance or
a decline
momentum
is
of an
suddenly picks up steam so rapidly
that an established straight trendline curves in the direction of the
move.
(The
activity in
XYZ
Corporation,
described earlier in this chapter, might well produce an accelerating curve.)
Figure
curving trendlines. If
price m-ove,
it
this
8
shows upcurving and down-
curving occurs after an extended
frequently results in a climactic action
that brings the major m^ovement to
its
final
peak (or
Trends
33
bottom
in
a
Climactic action
sell-ofif).
with frenzied buying or
tionally
wide and volume
trendline can be
be just
very
is
is
synonymous
moves
a
Warning:
pinpoint the end of a climactic
tically rising stage
are excep-
"French Curve""' and can
the straight-line variety.
the reaction phase has begun.
FIGURE
Price
abnormally high. This type of
drawn with
as valid as
difficult to
selling.
can carry
The "blow-off"
move
It
is
until
or the ver-
a considerable distance.
8
UP-CURVING TRENDLINE
Study
will reveal
many
formations of trendlines.
OOWNCURVING TRENDLINE
other variations and complex
Two
interesting variations are
the "internal trendline" and the "fan."
Figure 9 shows
how
from A to B is
C, forming beneath the
FIGURE 9
section
a
an internal trendline forms. The
normal uptrend
trendline,
makes
it
line,
while
an internal
B
INTERNAL TRENDLINE
—Draftsman's
•French Curve
34
instrument for tracing various curved
to
line.
lines.
A
fan (as shown in Figure 10) develops
(A
established trendline
move
tinue to
and
(A
When
C)
to
(A
a third trendline
direction.
when
a well
broken, but prices con-
is
same direction and soon develop
in the
second trendline
B)
to
;
this
to
second
line
D) forms
a third line breaks, a
—
is
a
broken again,
still
in the
major turn
same
in trend
usually folloivs. Sometimes, to be sure, this procedure repeats itself a fourth or even a fifth time
overwhelming that
a
fourth break in
—but
the odds are
a trendline will result
in a turnaround.
FIGURE
1
THE "FAN'
MARKET TACTICS
Like a
investor
traffic
when
light,
the chart advises the knowledgeable
to go ahead, slow
an established upward trendline
is
bright green.
New
down
is
stock purchases can be
previous investments should be held.
line flashes the
is
amber caution
on increased volume.
or stop.
New
As long
as
intact, the traffic signal
Any
made and
break in
trend-
a
light, especially if the
break
purchases should be deferred,
and existing stockholdings should be re-examined. The
longer the trendline has held, the more significant will be
the eventual breaking of this line as a "bear" signal. Finally,
evidence that a downtrend
light, indicating that it's
is
time to
developing flashes the red
sell
and cash
in
on
profits,
or take other defensive measures to avoid losses. (Brokers
Trends
3 5
are familiar
with such defensive steps
as
seUing short "against
the box," and buying "puts and calls,"
which need not be
discussed here.
Assuming that one has decided
he
may
gain an advantage of as
buy or
to
much
sell
a stock,
as several dollars a
by being familiar with the trend channel through
which the stock has been fluctuating. He would buy at
the bottom of the channel, and sell at the top. And of
share
course, the break of a trendline or the return
trendline
may
move
to a
represent highly favorable buying or selling
opportunities.
To "buy
price
moves
vestors.
To
is
bottom and
sell
at the
The
by
a
is
all
formula that
of prices. But the trendline
is
in-
unwise, and
investor should use imagination at
and avoid being bound by hard and
fascinated
top" of major
of course the unattainable dream of
try for the last eighth of a point
unnecessary.
times,
at the
all
fast rules, or
offers too precise a forecast
the
first
and most significant
picture to be looked for in any systematic approach to
chart reading.
36
!
1
1
!
'
1
:
1
:
KERR-H
\;
1
!
,
1
'
^j
.
1
1
1
1
1
1
SUPPORT AND RESISTANCE
Have you
ever bought a stock, watched
and yearned to
it
decHne
out for what you paid for
sell
in price,
Have
it?
you ever sold a stock, watched it go up after you had sold
it, and wished you had an opportunity to buy it again at
the original price? Well, you are not alone. These are common human reactions, and they show up on the stock charts
by creating support and
A support
level
is
resistance.
that price at which one
a considerable increase in the
ing.
A
resistance level
is
demand
that price at
may
expect
for a stock, or buy-
which one may ex-
pect a considerable increase in the supply, or selling. Such
levels are
where
as a
not hard to find: for example, any price
a great deal
of stock has changed hands
level
may be pegged
support or resistance level (the terms are interchange-
able, as will be seen).
area produces
what
Heavy turnover
in a given price
analysts call a congestion range
on the
chart, as in Figure 11.
Support and Resistance
41
FIGURE 11
Hi\||i'Sni'^n''''ii,r=
"i
HOW
Let's assume that
tors
bought stock
share,
A
and then saw
it
RESISTANCE FORMS
you and hundreds of other invesrange between $20 and $22 a
at a
shp
down
to $16.
The
first
reaction
of the typical buyer will be to hold on, in hope that the
stock will rebound, climb above $22, and show a profit that
will vindicate the buyer's
A
remains depressed,
many
judgment. However,
if
stock
buyers will begin to think
it
would be great just to break even. So if the stock finally
heads back upward, the disposition to sell will grow stronger
as it gets closer and closer to the breakeven point. Naturally, the
more trading
(or congestion) that occurred in
the $20- $22 price range, the greater the supply of stock for
Hence, the greater the resistance
sale.
at that point to a
further advance.
Now,
stock
A
suppose that, after
between $20 and $22,
all
it
those investors bought
went up
instead of
down.
The analyst will peg that zone as a support area. That is,
he would expect that, if stock A, having risen to $2 5 a
share, or more, should slide back, it would meet new buying demand as it returned to the $20- $2 2 range. There
are a number of reasonable explanations. For one thing,
those who sold out when the stock was at $20-$22 have
42
been kicking themselves
many may
be eager to
which they
sold
all
the time
buy back
it
was moving up, and
the stock at the price at
and thus get "back on board" without
may then say that they were right
it,
embarrassment. They
all
along about the great prospects of stock A. Another
—
among those who bought in the $20- $22 range, or
who thought of buying at the time but saw the stock
may plan to buy any time it gets
"get away" from them
third
type of major buying may dethat
price.
A
back to
short on the rise, and purfrom
traders
who
sold
velop
in
their
profits when it falls back.
stock
to
cash
chase
group
—
The
usually
analyst
draws support and resistance
points or zones in horizontal lines on his chart. For example,
referring to Figure
12, if a stock trades for
between $20 and $24, the support
at
$20
Once
(line
A) and
level
some time
becomes outlined
the resistance level at $24 (line B).
prices break above the resistance level of $24, the
entire
former range (between
A
and B) becomes
a
sup-
port area, or zone.
FIGURE 12
i,/v
FiffiS/
HOW
As
SUPPORT FORMS
the market develops, a support level
a resistance level,
that stock
B
and vice
may become
versa. (See Figure 13.)
has seesawed between
5
and
5 5
Suppose
for several
Support mid Resistance
43
months. During
as the
if prices
5 5
correctly label 50
the resistance level.
close"'
above
becomes
who bought
investors
Now,
new
a
this
5 5,
sup-
the stock at
have found that their judgment was sound, be-
now
cause they
may
we would
as
level automatically
The many
level.
at last
ing to
5 5
one day break through and
former resistance
port
this period,
support level and
have
buy more
a
paper profit, and some
at that level.
may
The many who
be will-
sold at
5 5
be eager to "get on board again" at that price, for the
reason given above.
FIGURE
1
'f^N'I
Desislance Level
I'
I,
|l
'I
.1
I
,
>
Congestion or
OLD RESISTANCE BECOMES NEW SUPPORT
If the
had
fallen
breakout had been dotin
to a resistance level. All buyers at 50
have
losses
—
that
is,
if
below 50, then 50 would switch from
and
many might want
a
stock
B
support
and over would then
to "break even"
if
prices
get back to 50 or over.
An
may
individual stock (or an average, for that matter)
well meet support or resistance at certain other price
'It might be noted here that analysts regard the closing price as more significant
than the "inter-day" high and low, largely on the ground that the average investor
looks for, and reacts to, the closing price In his morning newspaper. Stock manipulators have been known to exploit this fact by rigging the last deal of the day, at a
price quite different from the bulk of the day's trading.
44
levels established in the
cally or quite recently.
always make
say, "I
20 and
minds of
How
investors, either histori-
often does one hear someone
money buying such-and-such
"'''
selling at 40.
A
stock at
study of the cyclical stocks
downs of
(those whose fluctuations follow the ups and
the business cycle most closely, such as steels and other
basic industrials) reveals that
many
of
them have
favorite
historic turning points.
Even on the short range, the highs and lows of a
may have a psychological effect on investors, and thus become minor levels of support and resistance. To illustrate, suppose you held some stock that
stock's fluctuations
market, and had just about decided to
was
rising in the
sell,
when suddenly
it began to drop from new highs.
you had missed a golden opportunity
the top"? And if, while you were brooding about
Wouldn't you
to "sell at
it,
your stock
feel
rallied to the previous high,
wouldn't you
be inclined to get out there? If enough buyers feel that
way,
this
high point can form a potent resistance
even though the
first
time around,
it
level,
was reached on very
light trading.
THE 50% RULE
When
a stock, or the
up
down,
or
market
as a
whole, has
or "technical reaction."
That
a third to two-thirds of the
the quick-trader
sells
to
is,
way.
If stocks
have jumped,
cash in on profits;
in.
if
they've
Then, the stock
is another common support or resistance level
investors set their goals in multiples of ten, or even five.
"The round number
many
rebound"
stocks tend to snap back,
dropped, the "bargain hunters" rush
cause
swung violently
professionals look for a "technical
—simply
Support and Resistance
be-
45
may resume
the original trend. In longer-range swings,
tendency for support or resistance to develop
there
is
when
the stock retraces half of the ground won, or
a
in the last
move. For example,
lost,
stock has advanced from
if a
20 to 60 without serious interruption and then goes into
a
downtrend,
port at a level
there's a
good chance that
midway
in the previous advance. Therefore,
it
will find sup-
half of the 40-point gain, or 20 points, can be subtracted
from the high
FIGURE 14
to find a potential support level at 40.
"'ii
r
}20
Lv
iiur
I
Ill
40
Potential Support Le
>-
40
Points or
50%
of
Point
Ad.once
Poi
^L'u-!'"'
THE
50%
RULE
UNUSUAL VOLUME
We
have noted that
shows that
a
"congestion range" on the chart
a lot of shares
have changed hands
price for a relatively extended time, and
a
probable support or resistance
at a given
makes
this price
level. Logically, it
should
not matter too much, however, whether the trading took
weeks, or occurred more or
as
long
as
trading activity
ume during
a price
less in a
is
heavy.
relatively short time,
A
brief flareup of vol-
movement, even though
it
does not
appear on the chart to have interrupted the price trend,
often discloses a potent support or resistance area which
later proves effective in
For example,
ume and
hit, say,
checking
a stock
$14
may
a share,
a decline or a rally.
be rising on average vol-
whereupon trading suddenly
expands sharply. Without any extraordinary acceleration,
46
the price continues to
but
rise,
at
about 16, the volume
subsides to "normal," or the rate prevailing before the
flareup.
The
price
may now
continue upward,
fall
back or
any case, the chartist will mark
High Volume Zone, and will look
for support or resistance in this area. The principle works
just as well on a decline, of course. (For examples of High
Volume Zones, see the charts at the end of this chapter.)
move "sideways," but
this
14-to-16 area
When
in
as a
volume of trading expands sharply
the
as
a
stock reaches an unexpected support or resistance level, the
level tends to be increased. Paradoxically,
poteucy of that
a
sharp drop in volume sometimes appears to have the same
significance!
Why
many
this
should happen
is
problematical;
from
what they regard as a significant turning
point to see which way it will jump. The drop in volume
therefore would be a tip-off to a shift in market psychology
perhaps
of those interested in
a
stock withdraw
the market at
associated with a specific price level. In any case, while
volume goes up more often than doivn at support and resistance levels, it goes down often enough to warrant the
consideration of the analyst.
Another note on volume: when
of a congestion zone in which
will, as always,
the breakout
It
is
is
it
a
stock breaks out
has been trading, the analyst
watch the volume
to help determine
whether
"valid," rather than just a flash in the pan.
helpful to
know
that a valid breakout on the
(penetrating a resistance level) usually
an increase in volume.
On
is
rise
accompanied by
the other hand, a valid
"down-
side" breakout (penetrating a support level), usually oc-
curs on light volume at
an increase in volume
first,
which must be confirmed by
as the price
continues to decline.
Support and Resistance
47
SUPPORT AND RESISTANCE IN ACTION
Like trendlines, support and resistance can be found at
most any time and on any chart. In
basic
components that make up
all
al-
fact, they are the
the
more
sophisticated
patterns that chartists look for in trying to predict price
movements. As noted
in
motion (a trend)
in the
preceding chapter, an object
will continue in
motion
until
it
meets
an opposing force (support or resistance). The chart reader
continually works with both these tools, and he finds that
they help each other. Trendlines help confirm support and
resistance levels, while support
and resistance
levels help
confirm and anticipate new trendlines.
On
daily charts,
of a support zone
"•"
it is
prudent to consider the bottom
more
as
valid than the top.
Very
fre-
quently, a rising stock will react back into a support zone
and then resume
port level
may
its
advance. (See Figure 15.)
A new
sup-
then form ivithin the previous support zone,
and become the next valid support. Illustrations of support
and resistance analysis appear
at the
end of the chapter.
FIGURE 15
,|ll,
\S,
.iM
'iiiil-isJiil
New
'
."'
1,.l
'
First
Valid Support Level
Support Zoi
I
Volid Support Level
VALID SUPPORT LEVELS
'•Weekly and monthly charts also reveal support and resistance levels, and are
convenient for spotting long-established, or "historic" levels of individual stocks,
as mentioned earlier. The potency of resistance and support levels has a tendency
to fade with time, but the chartist will find many surprising examples which
have proved to be significant even after several years have elapsed.
48
resistance can tell the in-
The study of support and
vestor whether his ship
levels
is
on course. As long
hold firm, he can feel that his stock
may buy
and he
more. If
his
as
support
doing well,
is
stock breaks through a sup-
may
port level, he has cause for concern, and
consider
sell-
ing out.
Some traders use their
up practical trading
studies of support
and resistance
They buy when stocks
have fallen to support levels, or when stocks have risen and
broken through resistance levels. They sell when stocks hit
to set
resistance levels or fall
systems.
through support
Another technique may be
out of a trading range of
5
previous resistance point of
may
short-swing trader
on
a
downswing,
may be
traders
level of the
The
it
levels.
as follows: If a
5 5
becomes
a
support zone. The
not wish to hold on to the stock
penetrates the
level.
5 5
content to hold the stock
support zone (50)
is
as
long
a
find a level
he
may
as
the lower
sophisticated investor uses the support-and-resist-
he should instruct his broker to
on
if,
Longer-range
not broken.
ance concept to help him decide in advance
profits
stock breaks
0-55 and climbs, say, to 58, the
market
where
close
out
rise.
a rally
a
sell,
at
what
price
in order to cash in his
In a major downtrend, he uses
is
likely to develop, at
short position
(buy stock cheaply
place shares he sold short at a higher price)
,
it
to
which point
or he
to re-
may
plan
new investment buying.
Now, having sharpened our basic tools of trendlines and
support-and-resistance, we are ready to proceed to the most
fascinating aspect of chart reading
—
the remarkable for-
mations that signal major turning points in the market.
Support and Resistance
49
1
.^^j_.
_
L,
\J
HEAD AND SHOULDERS
Of
the chart patterns that signal a reversal of trend, the
all
"Head and Shoulders"
is
stands out sharply, and
by
it's
far the best
known.
It
often
almost always possible to find
one of them in the process of unfolding on some chart in
one's collection. Experienced chartists are fond of it as
among
newcomers
the most reliable of indicators, while
chart analysis seize upon
it as
to
an early opportunity to put
their theories to a practical test in the market.
As in abstract art, one should not expect the picture
Head and Shoulders closely to resemble the real thing.
Over-simplified, a Head and Shoulders (right-side up, as in
of a
Figure 16) simply portrays three successive
tions,
with the second one reaching
either of the others.
The
the peak of the second
may have come
a
rallies
and reac-
higher point than
failure of the third rally to equal
is
a
warning that
to an end. Conversely, a
Shoulders, found upside
down
suggests that an upturn
lies
a
major uptrend
bottom Head and
following a declining trend,
ahead. Let's examine the three
Head and
Shoulders
5 5
Head and Shoulders top
phases of the
FIGURE 16
in detail:
H.ad
ii>"'i
/,ll
'',./,'
;
A
,iri.J
'11.1'
HEAD AND SHOULDERS TOP
Lefl shoulder
1.
some duration reaches
by
Volume
a reaction.
rially
on the
rally,
Overall volume
is
—This
a
forms when an upturn of
climax in
a rally,
important.
is
It
which
is
followed
should expand mate-
and contract noticeably on the reaction.
heavy during the formation of the
left
shoulder.
The Head
2.
than the
just
about
is
rally carries the stock higher
followed by a reaction that erases
the gain, leaving the price in the vicinity of
all
the previous low.
overall
—A second
one, but
first
volume
Volume
usually
is
is
high on the rally phase, but
not quite so high
as
during the
left shoulder.
3.
Right Shoulder
Head
height of the
formation of
—A
before another reaction sets
a right shoulder
weakness. Yet
it is
third rally fails to reach the
is
a
in this area that
J6
if
particular attention
volume during the building of the right shoulvolume contracts noticeably on this rally, one may
directed to
der. If
The
most chart misreadings
are apt to occur. These can be avoided
is
in.
decided manifestation of
strong evidence that the price structure has been
weakened. If, however, the volume increases, beware of a
take
it as
no matter how
false signal,
ideally the picture
may have
been unfolding.
and Shoulders should be regarded as complete until the price breaks doivn below a line drawn tangent
with the lows of the left and right shoulders. This is called
the Neckline. (Some advanced students believe it makes
No Head
some difference of degree whether the Neckline slants up
or down, or is horizontal, but this is debatable, and in any
case need not concern us here.)
Once
than not
This
is
such
a
Head and Shoulders
the
a rally will
called the
move
return
Return Move. Whether
move
The same
a
considered,
a
stock will
make
is
is
is
turning strongly upward,
quite likely.
soft, there
may
On
the other hand,
be no return move.
applies to trends of the industry that includes
this stock: if it's
look for
whole
as a
in the stock
the general tone
if
completed, more often
often depends on conditions in the general
market. If the market
a
is
carry the price back to the Neckline.
an
and the
oil,
oils are rallying,
we may
return move, etc. Since outside factors must be
it's
not feasible to
set
down
a
hard and
fast rule.
THE HEAD AND SHOULDERS BOTTOM
As
Head and Shoulders
indicated, the inverse
(or
Head and
Shoulders bottom), looks exactly the same on the chart
a
Head-and-Shoulders top, except that
and marks the end of
a
it's
as
upside down,
downtrend rather than the end of
an advance. But the volume develops somewhat differently,
and since volume plays
any pattern
is
valid,
a
it is
major
role in
determining whether
worthwhile to review the compo-
Head and Shoidders
57
nents of an inverse
Head and
Shoulders:
FIGURE 17
|i
Breakout
Neck
lino
f \
'
'^
.1"'
.""-1..,.""
l|,|
JJL
JM'
>.
I'
I'V
HEAD AND SHOULDERS BOTTOM
The Left Shoulder
1.
—A downtrend, under way
lowed by
a rally.
and contracts noticeably on the
The Head
2.
—A
it
Volume
rally.
left shoulder;
then
a
back to the vicinity of the previous
increases
on the second
the rally that preceded
volume of the
on the second
of the head
is
it,
but
decline, as
second rally
rally's high.
compared with
usually does not equal the
it
Volume should
first decline.
rally
fol-
second decline carries the stock
below the low point of the
carries
for
a cHmax in a sharp sHde, which
Volume expands materially on the decline,
some time, reaches
is
increase again
and overall volume during the formation
slightly greater than
during the building of
the left shoulder.
3
—A
The Right Shotdder
third decline fails to reach
the low of the second, and another rally develops.
Volume
should taper off decidedly on this decline, and pick up
sharply on the rally, remaining high right through the
breaking of the neckline. This
test
58
of any
is
an extremely important
Head and Shoulders bottom.
If the
volume
is
not there, one would be especially wary of the possibility
of a false move, no matter
may have unfolded.
If the
how
ideally the chart picture
volume
is
through
there, the break
the neckline completes and confirms the pattern.
Again, no hard and
fast rule
can be
ing the probability of a return move.
market or of the
eral
some bearing on the
a
move
return
is
specific
a
HOW
IT
group of stocks
more
likely to follow a
statistical
regardthe gen-
may
have
proof of
bottom pattern
this
is
at hand.
HAPPENS
Like any other chart pattern, the
scribes
down
situation. It has been suggested that
top one, but no
than
set
The trend of
Head and Shoulders
what occurs when buyers meet
sellers
de-
under certain
circumstances. Let us try to depict, in the form of a diagram,
just
how
different groups of investors react psychologically
— and with
—
their money
during the different phases of a
Head and Shoulders, which we might call a drama in three
acts. Our cast of characters is as follows:
GROUP A Persons who bought stock before or during
an uptrend, and are
now
ready to
sell
and
take their profits.
GROUP B
Persons
now
prices
GROUP c
who
missed the uptrend, but are
ready to buy the stock at "bargain"
during
a technical reaction.
Persons who, like
Group
B, have missed the
uptrend and want to buy on the reaction,
but wait too long and "reach" for the market on
GROUP D
its
Persons
the
first
rally to
who have
new
highs.
missed the uptrend and
reaction, but seize
on the second
Head and
Shoulders
59
reaction as a "last chance" to get that bar-
gain price.
GROUP E
Same
characters as in
Group C, except
that
now would-be sellers. Having seen
new purchases turn into paper losses,
have now decided, "If the price gets
they are
their
they
back up to where
just a small
I
can break even, or take
loss, I'll sell."
Remnants of Group A,
GROUP F
plus a smattering of
trades in each of the other groups,
who now
show losses on their purchases.
how the drama develops, in diagram form:
all
Here is
FIGURE 18
Group
/
l'"'l,
Groups
1
'>t
Group D
I"'
Group
Head and Shoulders Top-Drc
MORE
PICASSO
THAN RENOIR
Let US emphasize here what
—
that the term
and highly imaginary
As with
many
all
we
suggested at the beginning
"Head and Shoulders"
title
is
a
pretty abstract
for a pattern of market behavior.
other patterns of behavior involving people and
other unpredictable elements, chart configurations
do not follow
a point, or a
a rigid
formula. Sometimes the
Head
is
not
curve, but a flat-top, representing a "sideways
congestion range." Sometimes the shoulders are deformed:
one does not appear to balance the other.
Complex Head and Shoulders
60
And
sometimes.
take form, which
is
to say
—
that a small pattern
two
that there are
contained within
is
left shoulders,
a larger one, or
two heads and two
right
shoulders. This need not frighten a public that pays fortunes
for paintings
by
(For the chart variety,
Picasso.
see
Figure
19.)
In spite of such variations, the alert chart reader should
be able to detect in
is
we
as
many
actual market charts behavior that
basically similar to that of the classic
described earlier. If this similarity
Head and Shoulders
is
there,
it
will serve
an indicator of a probable reversal in trend.
FIGURE 19
Two Heods
'
'
^
^"°^'''
.f
ll.'^ 'ill'-
n
-
J'l,
II'
'
::.ni
'i
T
>
,
-
,
h
---
.
'
.\h
/ ,i
I
T-o'ioht
>r'^'i\
'I
'i
COMPLEX HEAD AND SHOULDERS FORMATIONS
OBJECTIVES
Having found a reversal pattern such as a Head and Shoulders, which indicates that a stock that has been rising is
now
likely to fall, or vice versa,
question:
How far
We know
buy stock
ivill it
enough now
for the
where do we get
rise,
off?
or
To
we meet another important
go?
to get aboard the train
sell
(i.e.
short for the decline), but
"project the
move"
or
"compute
number
the objectives" calls for a diligent assessment of a
of factors. We'll discuss these factors here in closer detail
than
we have
worth
it.
We
seen in previous studies of the subject.
It's
can't hit the objective of a price swing right
on the nose every time, but we can with practice achieve
Head and
Shoulders
61
a
high batting average.
FIGURE 20
II
(20+ 10-301
20 --v_
''W'"^"i,,;;/"'J\;i'''^^"'f
Left Shou^^der
UU
common
rule of
_
RIghl £houlder
|
MINIMUM OBJECTIVE
Now,
a
Shoulders formations
pleted, the stock in
is
its
that,
thumb apphed
reversal
far again as the distance
but
it
swing
does not go far enough.
able objective
tors,
such
Head and
will
move
at least as
from the top of the head
neckline. (See Figure 20.) This rule
lysts,
to
once the pattern has been com-
is
well
Our
known
to the
to ana-
selection of a prob-
must take into account other technical
fac-
the order of importance:
as, in
1.
What
2.
How
3.
Where
is
the general
market doing?
does the current price stand in relation to
the historic price scale of our stock?
are
major
levels
of support or resistance to
be met?
FIGURE 21
lOOp
(Yearly
Slock
Range
Chart)
(Daily
Range
Chart)
XYZ
y
/
i
- V3
A
85
„.'''
,
Poinis
'ii'
V
lll'l,
Objective
6S
(80-15)
'58
62
'59
'60
'61
FINDING OBJECTIVES
For
a practice
run,
let's
XYZ
assume that Stock
has
Head and Shoulders top. (Figure
21.) Should we sell? And if so, when do we buy back? If the
setback is going to be minor and we like our stock for the
long haul, it's hardly worth selling. If the move is inter-
completed
a well defined
mediate, we'd consider selling, but
to,
might decide not
still
because of the capital-gains tax we'd have to pay on our
profits.
On
the other hand,
if a
major slump
impending,
is
we want out. Well, let's see. Like an airline pilot who runs
down a checklist to determine whether it's safe to take off,
let's run down our checklist (Questions (1.), (2.) and (3.)
above) to
1.
see
whether
it's
The market
as
prudent to hold or
whole
a
offers
sell:
no decisive
clue.
Stocks have been moving irregularly "sideways"
with considerable selectivity by the public, and
our
2.
own
XYZ
industry group has been mixed.
an all-time high of 9 5
hit
Head, formed
a
at the
top of the
Right Shoulder, broke through
move
the neckline at 80 and then effected a return
to 80,
hit
where
it
now
it
had
risen SSO'^c in three years.
ously then, the stock
3.
Three years ago
an all-time low of 10. That means that,
the top,
is
stands.
is
historically high,
ample room to decline
—
A long range chart reveals
or
is
it
at
Obvi-
and there
there?
that the last major area
of "congestion" or "consolidation" with considerable trading occurred at
important support
again,
there
is
There
is
no other
higher price. Thus,
another potential support
which we discussed
we noted
50.
visible at a
area
in a previous chapter,
when
that stocks often tend to retrace
50%
Head and
Shoulders
63
of a major move, and then meet support or
computed. Over
ance. This
is
three years,
XYZ rose
Half of
8
you get
5
5
is
21/2.
easily
from 10
to 9
Since that
points.
relatively close to
is
we had
indicated,
is
5
from 95, and
421/2. Subtract that
where strong support
or 8
5,
resist-
period of
a
5
0,
better
rely on the latter figure.
But we have not yet considered our rule of thumb for
the swing following a Head and Shoulders formation. In
this case, the distance from Head (95) to the Neckline (80)
is 15 points, so that we may expect XYZ to drop to 65.
And
On
there's a
good chance that
the basis of these findings,
date to be sold for
a
minimum
will
it
XYZ
is
go to
5
21/^
or 50.
an excellent candi-
decline of
points.
1 5
THE HEAD AND SHOULDERS FAILURE PATTERN
So
far,
we have
discussed patterns that have been completed.
The stocks have broken through the Necklines, and we know
which way they are probably going. But sometimes a Head
and Shoulders formation, or one of
its
variations, will de-
velop in a perfectly normal fashion, but will
fail
to pene-
moves
know, then, that
trate the neckline. (See Figure 22.) Instead, the stock
We
"sideways," fluctuating indecisively.
a reversal pattern has not developed.
the price activity within this area
ficant trend
move
This activity
or
mud. By
much
like that of a car
64
know
that
When
the
on the gas and away he
at least, so
stuck in snow
of gears, the motorist causes
the vehicle to rock back and forth.
just right, he steps
—
also
be preparing a signi-
in either direction.
is
a judicious shifting
or in reverse
But we
may
he hopes. In
a
momentum
goes,
is
forward
Head and Shoulders
—
up-and-down movement within
Failure Pattern, the
ways range estabUshes
moment
—
a
a
momentum, and
a side-
at just the right
penetration of the top or bottom Hne of the
trading range
—
prices gain traction,
and
a
new
trend
is
estabhshed. This type of formation can support a major
move.
Figure 22
'in'
'i.
J!iiL_!]
,ii'
,("'.
Z'jJ.SlSJ.
HEAD AND SHOULDERS
BOTTOM FAILURE
HEAD AND SHOULDERS
TOP FAILURE
TACTICS
It's
time
now
to put our theory to
work. For review, we
present at the end of the chapter actual case histories of
six stocks.
These charts were selected to
tives.
No
well, if not better,
principles
and
and problems
case histories,
would have been the same.
his
is
comiuitment,
as a
general rule, ivhen
through the Neckline.
However, an
there
theory, and a study of these
demonstrate an obvious conclusion: The inves-
make
a stock breaks
as early as
in
but given basically similar patterns, the
results
Our Head-and-Shoulders
tor should
illustrate inter-
computing objecdoubt other stock charts would have served as
esting chart formations
alert
and experienced investor
may
act
during the formation of the Right Shoulder,
strong reason to believe that the formation
completed. Such reason will exist
ivill
;'/
be
if
Head and Shoulders
65
1
The
relationship of the current price to the historic
price scale
is
favorable to a reversal of the previous
extended trend.
2.
The previous trend
has run into strong support
or resistance.
3.
Volume
indications have been measuring
standards for a
4.
The
up
to
Head and Shoulders formation.
general market
neutral or headed in the
is
direction opposite the one that our stock had been
following before the
Head and Shoulders began
to form.
In such a case, the investor
to the top or
bottom of
a
may
ing his shots very neatly, indeed.
66
take action very close
major swing, which would be
call-
PLATE 10
TECHNICOLOR — Head & Shoulders Top
In price and volume behavior, this April-May top was almost an ideal Head &
Shoulders formation, yet the closeness of the shoulders to the head (lto2 points) could
argue strongly for those who see Triple Tops. As can be seen from the chart, prices
formed a well-defined upcurving trendline and channel, reaching a climax with
vertically rising prices on high volume. High volume also marked the left shoulder.
Activity was progressively lower for the head and right shoulder. The breaking of the
neckline was on high volume, and the return on lower volume. Although not shown,
October for a test of the top pattern (now a resistance area) and
were thrown back from about the 36 level, eventually declining to around 21.
prices rallied in
68
_
DOUBLE TOPS AND BOTTOMS
Among the most
—
and yet among
Double Tops and Bottoms.
Experienced analysts have long recognized them as common
patterns of market behavior at a turning point, or reversal,
familiar of chart patterns
the most deceptive
and therefore
as
—
are the
highly valuable. Beginners love them, be-
cause they tend to see Double
Tops and Bottoms everywhere.
The Double Top (Figure 23)
and
is
often called an
pivot A,
of
M
back part way to B,
fall
A at point C,
set by B. Similarly,
Bottom is often called a
Figure 23
ii'
I'll/
rise
rally to
sharply to a
about the
level
and then decline past the previous reaction
low
'
M
resembles the letter
formation. Prices
./
i|,
M FORMATION
f\
i'-
ii
Ill
DOUBLE TOP OR
might be expected, the Double
W formation.
Vi,
'iN
•
as
|
^i'/
;
r
'i,i
^^'Jiii-''
\'
DOUBLE BOTTOM OR
,'
^
W
FORMATION
Double Tops and Bottoms
73
Because the normal
movement
chart takes the form of a zigzag
may
tend to read a Double
of stocks on a daily
the beginning analyst
line,
Top or Bottom
into every
move-
ment. In actual practice, very few formations that start
out looking like Double Tops or Bottoms end up as true
patterns. Furthermore, the true ones are not easily diagnosed
until the reversals in trend have
prices already
as
become pronounced and
have moved substantially.
One of the main reasons for the trouble here is that,
we pointed out in a previous chapter, a stock normally
meets resistance at a previous high, and support at a previous
low. This often causes
it
may
it
to hesitate, or pull
back
a bit.
be only a brief pause before the stock absorbs
supply or demand waiting at
this point,
penetrates the level and resumes
ner,
any hesitation may look
of a
W. More
often than not,
within any one of
Let's
a host
examine
The
a
its
it is
and then
advance.
To
top of an
like the
But,
all
the
easily
the begin-
M or bottom
only routine price action
of other chart configurations.
true
Double Top
in terms of
market
where
enough supply of stock was put on the market to
satisfy all demands and cause a moderate reaction. This
reaction may reflect selling based on a combination of
psychology.
first
peak represents the price
level
a big
motives, such as a fairly widespread decision to cash in on
profits,
and
a
well-informed view that, for various reasons,
the stock has gone about as high as
it's
likely to
go for the
time being.
After the reaction, "weak" holders of the stock
feel
they missed an opportunity to
sell
out at the top.
"bargain hunters" and other optimists move
in,
price back to
who
74
its
previous peak, these
sellers
may
When
running the
missed the
first
who
peak rush to unload. In addition, some of those
more stock
sold the first time have
to offer at the
The supply
therefore again increases
stock down.
Now,
reaction low,
if
been
satisfied,
heavier than the demand.
is still
enough
price.
to drive the
drop down through the previous
demand
clear that the
it is
in the top area has
prices
same
for stock at prices
and that the supply of stock
With an advance thus
downward.
ruled
out, the path of least resistance leads
VOLUME
The normal volume pattern of
increase in trading
and
here's a big
however
and Bottoms reveals
behavior. Trading
Double Top
a
is
a
marked
around each of the peaks. However
—
a
study of valid Double Tops
a
considerable variation in volume
may
be light on one peak, and heavy on
the other. In fact, some very potent tops and bottoms have
formed on unusually
volume throughout. The best
Heavy volume around one or both
light
rule appears to be this:
peaks, or any unusual change in volume, such as a notable
drop
in activity, tends to
confirm the development of a
Double Top or Bottom.
VARIATIONS
Many Double Tops
that
form on
slightly higher than the other,
pattern (Figure 24). Sometimes,
a
daily charts
show one peak
mark
a true reversal
but
Double Top or Bottom may
a
still
stock that's completing
hesitate,
and build
platform, or congestion range, before the main
a small
move
gets
underway. This more often occurs in a Double Bottom. The
platform takes shape in the area just beyond the middle leg
of the
W,
or just at the breakout area.
Double Tops and Bottoms
75
FIGURE 24
DOUBLE BOTTOM
WITH PLATFORM
The
Triple
Top
or
DOUBLE TOP
WITH PLATFORM
bottom
is
a
well-known, and
valid,
variation (Fig. 25) on daily hi-low charts, although some-
what
rare
on weekly or monthly range charts. In this case,
from the second peak of what is shaping
the stock declines
up
as a
Double Top, but runs into support buying around
the level of the previous low. Instead of breaking through
and completing the Double Top, it
peak. Then it reacts again. By now,
rallies to
it
form a third
up much of
has used
demand existing at the two previous lows, and it pushes
down through. Volume may be high on the first peak, and
the
is
apt to be relatively low on the second and third peaks
picking up, however,
move
has been
when
the direction of the
set.
FIGURE 25
/AAA
\ /\
new major
thing, the trader should not expect a small pattern
is,
one that has taken form in
a
short time
—
—
that
to support a
big move. And, as we indicated at the outset, the Double
Top or Bottom is a tough one to anticipate, even for the most
experienced chartists.
A
favorable answer to the following
questions will minimize the risk:
1.
Did
first
2.
3.
the price decline about
5%
or
more from the
peak?
Was
there unusual volume around the first peak?
Does the chart history of the stock designate this
area as a likely major turning point, where, for
example, long-range support or resistance
is
to be
expected, or have major trendlines been broken?
4.
Is
the general market in a downtrend, or at least
neutral?
Double Tops and Bottoms
77
!
;
1
1
I
I
1
1
„.
^^_i_.
„J.
LJ_._L,..^^_
LINE
AND SAUCER FORMATIONS
form the chart
Lines and Saucers
dream
reader's
patterns.
They're easy to recognize, they're reHable, they usually portend an extensive price
move and
—
best of
all
— they
give
the chartist plenty of time to assume a market position close
to the
bottom or top of the ensuing swing. They have only
one major drawback: they're rare
among
popular, actively
traded stocks.
When
it is
as a
a
Line Foriuatiou evolves into
commonly
movement
long sideways
range, followed
a
major bottom,
called a long base. This appears
by
a
on the chart
of prices within a narrow
sudden eruption into new high ground,
well above the preceding price range. Sometimes, although
rarely, a line
it
formation will form
will look like
a
major fop,
in
which
one of our Western mesas, or
case
plateaus.
FIGURE 26
»;;'k°'^r'
-
'iimiiiiririnr,iiii|"iiiiirn"ii'p
LINE
BOTTOM OR LONG BASE
.AiUL"!'ljL"j'-'i'l'L'L"JL"J,.__
-
-
-
-
LINE
B,e=ko..—
TOP
Line anil Saucer Formations
8 5
The
Saucer, or "rounding turn,"
the Line Formation, but has
may form much more
forming
a
its
characteristics
(See Figure 27.)
quickly.
and
Prices
curve upward (in the case of
a saucer gradually
bottom formation) or downward
The
closely related to
is
own
(in the case of a top).
curve, of course, tips off the probable direction of the
major move to come. There's another picturesque feature.
A great majority of Saucers
(not quite
develop a Handle
all)
or Platform, consisting of either a horizontal or slanted line,
before the
main move
gets
underway. Perhaps the formation
should be called a Saucepan, instead.
FIGURE 27
.,l,lll'
Ill>ll,
II,
I
I
IT
11
ll
Platform
SAUCER BOTTOM
SAUCER TOP
HOW
°'"°\l'
HAPPENS
As with all valid chart patterns, these stem from typical
market psychology in certain situations. For example, the
Line Bottom, or "long base," occurs
and demand
is little
in
its
outlook, for better or worse, and no news to
it.
current price
sellers.
A
Stockholders
level,
buy, especially
86
the supply of
trading in the stock, because there has been no change
attention to
any
when
for a stock are in a very stable balance. There
if
and potential buyers
they must
draw
see little reason to sell at the
see little reason to
bid the price
breakout from
up
this long base
to
smoke out
on increased
volume probably means that something
product, a
jump in sales or
profits, a
or fact has produced an unusual
Incidentally, such
is
merger
brewing
—and
demand
—
a
new
rumor
this
for the stock.
breakouts are rarely accompanied by
company announcements
—
those
come
Frequently,
later.
"insiders" have been quietly adding to their holdings during
the "long base" period.
is
At any
buying, and sooner or
more and more
people,
rate,
someone
later, the facts
in the
know
become known
and the price begins to take
to
off.
VOLUME
A
is
tidy characteristic of the Line and Saucer formations
that the volume portion of the chart tends to follow the
Throughout
price.
a Line,
always exceptionally low
or base formation, volume
—
until
high ground. Even then, trading
at the outset,
but
it
the breakout into
may
is
new
be relatively light
soon expands dramatically.
In a typical Saucer, on the other hand, trading slowly
dimishes to a low at the turn of the formation, then gradually picks
up
curve to complete the pattern or
as prices
move
to the
saucer
itself. It
Platform
stage.
may become
Volume thus
has
formed
a
quite active at the start of the
Platform, and again at the end,
as the
stock breaks out of
the Platform area.
At
the outset,
were
we noted
that the Line and Saucer formations
easily recognizable,
and we have discussed
how
One
to rec-
ognize them.
Now,
never take
pattern of any kind for granted until
a
a
mild word of caution.
should
it
is
nearly completed. This applies even to so simple a formation as the Line, or long base.
A
stock
may
appear to be
Line and Saucer Formations
87
developing one, but evolve into an entirely different for-
mation
in short order.
There
is
that deserves
an interesting variation of the base formation
On
comment.
out move, there will be
a
in the opposite direction,
—
that
is,
a false
swing
which may "shake out" timid or
(See Figure 28.)
ill-informed stockholders.
shakeout prices drop to
occasion, just before the break-
"shakeout,"
During
this
new low. Then they rally through
new high ground, on high volume.
a
the base range and into
Despite the weakness displayed by the brief dip, this variation can result in as great a rally as the
more orthodox
base formation.
FIGURE 28
.11'
|1|
I|'""l''l,
Illl'l
"lull
J|l'
False Breok
LONG BASE WITH "SHAKE-OUT" MOVE
MARKET TACTICS
Our "dream formations"
among popular
unfortunately, do not often occur
or active issues.
The Line
or Saucer
is
more
apt to take shape on the charts of stocks in which trading
is
light
and on which
general public.
On
following such
a
to a
little
information
is
available to the
the other hand, the profit potential in
pattern
minimum. Hence,
it
is
great,
and the
risk
can be held
behooves the investor-analyst to
maintain an adequate collection of charts, and keep an eye
peeled for Lines and Saucers.
The
base
is
as
best time to
soon
breakouts from
88
buy
a
stock that has formed a long
as possible after
all
the breakout. True, as in
formations, there
is
often a kickback.
move
or return
advance really gets
to the base, before the
into high gear. (See Figure 29.)
type of formation
is
But the advance from
one
so steep that
who
this
may
hesitates
miss the bus.
FIGURE 29
.1
Uptrend
X
I
Jill''
'
P'
Tr_^''Liii.iii'
r(i|iiip'''iii'^'hi'^'ui'i'ii'ii,i'M'«",i"«i''
'~,i
LONG BASE AND VOLUME DEVELOPMENT
One
forming
has
a
more time
to take a position
times to buy: (1) During the upcurve,
prices are gradually rising;
when
off
a
purchase
may
be
on reduced volume
precise
when
a
stock
is
Saucer bottom. In fact, there are four favorable
(2)
made
— but
At
if
it's
when volume and
the end of the curve,
the stock begins to level
hard to anticipate the
end of the curve; (3) During the formation of the
platform, preferably at the low point of the Platform's
trading range; (4)
On
the actual breakout
from the
Plat-
form.
FIGURE 30
,li|l'i'L''i'!«Ll'_
'^''^li'iiii'iniiiiiM'!!'^'-'^'
w////////////Mmmm:
SAUCER BOTTOM
Line and Saucer Formations
89
ZD
.
Z£
T
X
"
-+~
-A
-'
Mill
V FORMATIONS
In the stock market, as elsewhere, where there
there
risk.
is
tial profit,
profit,
is
And, generally speaking, the greater the poten-
the greater the risk. So
it is
with
a certain
group
of chart reversal patterns which are so powerful that they
spark the most dynamic of
tunately, are
among
all
price swings
—
but, unfor-
the hardest to anticipate or analyze.
In fact, even after they are completed, the most experienced
chartist can't be certain that trends will follow
a
V
normal way. These
through in
known
elusive chart patterns are
as
Formations.
In other reversal patterns, buyers and
dominance over
a
more or
less
group and then the other alternating
may
play of forces
reversal
— and
The
name
progressive shift
which
is
a
for
in the lead.
This inter-
be said to prepare the market for a
to alert the chartist.
mation. As the
sellers vie
extended period, with one
implies, there
from
a
Not
is
so
with
a
V
For-
no such preparation.
downtrend
to an uptrend,
function of other reversal patterns,
V
is
absent.
Formations
97
Instead, the
matic and
V-turn
strikes
final. It's as
with Httle warning;
it's
dra-
though, by some prearranged signal,
the stock that sellers have to offer has been suddenly
all
taken up, and buyers remain the dominant force for some
time to come.
Hence,
but
V
Forrriations signal sharp reversals in trend,
same time are among the most
at the
difficult to analyze.
Nevertheless, there are a few positive clues that can be of
assistance in catching a
good number of these moves.
And
because the price swings that follow are often substantial,
it
At the end of this chapter,
number of actual market situ-
pays to master these patterns.
we
will carefully
examine
a
ations in an effort to lessen the mystery.
But
True
V
us define our
first, let
kinds: the
V
patterns.
There are two
and the Ex fended V.
THE TRUE V FORMATION
The
typical true
V
(Figure 31)
is
V-shaped indeed, and
has three components:
A.
Downtrend: More often than not, the decline
that marks the left arm of a V is fairly sharp and
extensive, but
—
B.
it
may
just so the trend
Pii'of:
A
be quite slow and irregular
is
down.
single day's action frequently
low point of the
decline.
At
marks the
times, the turn
is
more gradual, but rarely does the price pause in
this region for more than a few days. In most
instances, volume picks up noticeably near the
lows. Sometimes, the heaviest volume will be
registered on the very day of the turning point,
marking this as a climax day.
C.
98
Uptrend: The
first signal
of a turn
is
given
when
stock
the
price
penetrates
downtrend
a
which has been drawn along the
the preceding decline. After the turn,
tends to pick
gresses.
The
up gradually
early part of this phase
spot, because until the
we
move
volume
move
the
as
line,
rally peaks of
pro-
the trouble
is
has gone far enough,
can't be sure that the formation
is
a valid
V-turn. However, the uptrend phase of the true
V will tend
leg.
to duplicate the preceding
45 degree angle, the uptrend, C,
up
sure
downtrend
downtrend, A, measures down
If the
is
likely to
as a
mea-
45 degree angle.
as a
FIGURE 31
'I'
«l'''
I,
J^
INVERTED TRUE V (TOP)
TRUE V BOTTOM
INVERTED TRUE V
The Inverted True
V
marks
cates, the opposite of the
V
\
a
top and
bottom. In
is,
as its
a great
name
indi-
majority of
volume picks up sharply around the pivot, and this
V on the volume scale, as well as
the price. Sometimes, however, volume on the turn is relatively normal or even unusually light.
cases,
forms an upside-down
THE EXTENDED V FORMATION
No
less
32
lends itself
)
potent than the True V, the Extended
more
V
(Figure
readily to accurate forecasting because
of one significant difference. This comes after the pivot,
V
Formations
99
when
up through the downtrend
True V, the upward
the stock has penetrated
hne, as described just above. In the
move
begins
more or
immediately. In the Extended V,
less
range develops. Eventually,
a fairly sizable lateral trading
the stock breaks out above the tops of this trading range,
thus completing the formation. In detail, the four
nents of an Extended
A.
V
Downtrend: As
in the
True V,
or irregular. In a good
from
all
—
compo-
are:
many
downtrend
the
is
this
cases
may
be steep
—though
far
interrupted by a
"sideways" or "consolidation" phase
a short dis-
tance before the final low.
jB.
Again
Pivot:
as in the
comes
in a single day,
days.
Volume behavior
True V, the turn often
but sometimes takes several
is
similar:
usually
up
sharply.
C.
Markup:
Initial
through either
The stock
( 1 )
a
price
downtrend
line
pushes up
drawn along
the rally peaks of the preceding decline or (2)
marking the top of the "sideways" or "conformed just before the
a line
solidation" phase that
Volume
pivot.
D.
Platform: This
tended
more
V
apart
picks
is
up during
this penetration.
the portion that sets the Ex-
from the True V, and makes it
The Platform may be
identifiable, as well.
quite horizontal, but usually slants moderately
down. As the platform is developing, volume
tends to slacken. Then, when the stock begins its
final
swing toward the breakout, volume tends
to pick up.
The breakout
itself
companied by heavy volume.
100
normally
is
ac-
'"''"
\/: "
'.
INVERTED EXTENDED V (TOP)
EXTENDED V (BOTTOM)
An
V may
Extended
confirmed,
when
be regarded as completed, or
the price breaks through the highs of the
Platform on increased volume.
If the
Platform happens to
downward, one may watch for the stock to push
through the downtrend line drawn along the rally peaks
slant
within the Platform. If
volume, the pattern
may
trader
is
this
penetration occurs on increased
likely
and a
bottom of
to follow through,
at this point decide to
buy near
the
an extended swing.
LEFTHANDED
Sometimes an Extended V develops in which the price and
volume follow exactly the pattern described above, except
that the Platform is on the left instead of the right. Some
people are born with the appendix on the left and the heart
pointed right;
V
it
The Lefthanded
doesn't seem to matter.
spells a price reversal just the
same.
FIGURE 33
I,
.1'
lll
LEFT-HANDED
EXTENDED V
^.J'\s
.1'
.ill'
'l\
ll'
^
||/
\/
LEFT-HANDED
INVERTED EXTENDED V
V
'|
Formations
101
MARKET TACTICS
It's a
good thing
accordingly.
It's
and act
to learn the probabiHties, or odds,
bad thing to take
a
a little
information
on market behavior or mathematics and turn it into a rigid
as long as the money
"system," which one follows blindly
flexible
and imaginative
to
be
necessary
holds out. It is always
market
situations.
actual
to
knows
in applying what one
—
Nowhere
is
more true than
this
we
Formations, which
in the case of the
V
among the
not mean to imply
described at the outset as
hardest to anticipate or analyze.
they were impossible, for
if
We
did
they were,
it
would be
a
waste
of time to discuss them. But the trader confronting a possible V turn should be alert for false signals, aware of the
conscious of the risk as well as the potential profit,
pitfalls,
and ready to beat
The need
way
V
a retreat in a
hurry.
for a flexible approach
is
suggested by the
Formations tend to occur. Every actively traded
stock has a mixed following: in-and-out traders, informed
investors and the general public. In nearly
the interplay of
V
all
three groups
may
all
chart patterns,
be seen
—but not
in
turns. These are generally the product of a dramatic
switch in market psychology, resulting from some surprise
development, unforseen even by the informed investors.
(These are rarely so well-informed that they buy stock at
the very bottom of a downtrend; they are
on the decline.)
unexpected news item,
"accumulate"
An
a political
or even a broadcaster's tip can cause a
flow into brokerage
trend.
Such
One
102
more
likely to
it
offices
a reversal,
by
orders to
and suddenly reverse
definition,
exception occurs
development,
wave of
when
is
a stock
impossible to foresee.
there
is
a large
block of
stock to be sold. Here, the supply
is
steadily, creating constant pressure
Once
a
the supply
is
let
out cautiously but
on the price structure.
gone, the price tends to snap back like
rubber band.
In any case, the chartist-investor
V
to be
must watch
for the
completed and study the past of the stock and the
nature of the immediate situation to determine the probable
extent of the subsequent swing, and then act
It
is
safer for beginners
ators as well) to
make
tions before putting
is
a
number
number of
The hope is
lems.
flexibility,
of "dry runs" in
any money down. In
no substitute for practice.
offer a
—with
care.
(and perhaps experienced oper-
On
V
situa-
analysis, there
the following pages,
we
case histories, posing a variety of prob-
that they will emphasize the need for
and add to the experience necessary to cope with
the tricky, but rewarding,
V
turn.
V
Formations
103
PLATE 27
A^^ER.\DA
— True V Formation
The true V outlined above sparked an advance of 50 points in eleven weeks. What
was more remarkable was the fact that the market averages were in the doldrums and
market breadth studies showed that most stocks were in downtrends. Anyone following price movements in September, 1961, might have been lucky enough to catch
this turn close to the bottom. The clues were the breaking of a downcurving trendline
on high volume with a small breakaway gap (see Chapter 11). Because V formations
are not easy to identify* one probably would have to wait until the price topped 80,
when the tremendous increase in volume left little doubt that a true V formation had
been completed.
104
•
.1
'
i
-..„
PLATE 30
The
MACK TRUCKS — Inverted Extended V
left-handed type of extended
V
top
(Left
Handed)
above and
in the preceding
than the right-handed
type. This is especially so in the Mack Truck chart above. The platform on the left
side takes a triangular shape, and the analyst must await the breaking of the lowest
point of the triangle before assuming that a V top has been completed. In most
chapter, the extended inverted
V)
is
more
(or, as labeled
difficult to anticipate
cases the platform, whether on the left or right side, is fairly well outlined, so that
prices break through the bottom of the range (on V tops), the analyst can
complete his analysis of the V reversal pattern. On this chart, the major downtrend
line held intact despite some rather wide swings on the way down.
when
V
Formations
107
THE MEASURED MOVE
All price trends must
into
new
come
to a halt.
Sometimes they switch
directions without warning, as in
V
turns, but
more often they run into gradually increasing resistance.
The pressure of buying comes to equal that of selling; as
long as this rough balance continues, a stock moves horizontally across the chart. Market writers like to call this
period of hesitation a "critical juncture," meaning the cat's
on the fence and they don't know which way it's going to
far
jump.
As the opposing pressures are building up or wearing
down, their interplay in the market at this "critical juncture" may form one of the reversal patterns, meaning that
a
major switch
a stock
is
just
or resistance
its
in
trend
lies
ahead.
pausing to digest
it
a
At other times, however,
amount of support
certain
has met, and once that's gone,
original trend.
Such
Continuation Pattern
—
a
it
will
resume
pause, or hesitation, produces a
essentially, a
more or
less
sideways
trading range that interrupts, but does not end, a trend.
Its
chief value to chartists
is
in indicating future support
The Measured Move
109
and
areas
in
forecasting the extent of subsequent price
swings, as discussed in Chapters
That
is
nothing to sneeze
and
2, 3
but
at,
—
we can do more namely,
movement that has run into a
situation,
price
4.
in a certain
type of
to predict,
from
a
hesitation area, the
probable extent of the subsequent price movement, or
where the stock next
hereby dub
ivill
this situation,
meet a "critical ]unct7ire."
which
named, the Measured Move. Such
fairly large price
at the
either a fairly sharp "correction"
(a rally or reaction, as the case
into
two
a
swing that has been interrupted roughly
midway mark, by
congestion range.
We
now has been unmove is, basically, a
until
The
may
be)
,
or
by
a horizontal
interruption cuts the trend swing
fairly equal legs,
which tend
to be parallel. In
other words, the stock on each covers about the same price
distance in about the same time
time
is
reduced on the second
steeper than the first). Here's
(though sometimes the
leg,
which thereby becomes
how
it
looks on the chart:
FIGURE 34
MEASURED MOVE UP
Note
that the illustration
is
heavily shaded. This was
done to avoid being distracted by the small countermove-
ments contained within the broader waves. The same
is
achieved
when
effect
one looks across a brokerage office at one
of those big, framed wall charts of the market averages,
110
covering
many
years.
One then
the major bull and
sees
bear markets, as mountain ranges and valleys, rather than
the lesser moves.
It
is
on
precisely such a broad picture
a
smaller scale, of course, that one needs to analyze a Meas-
ured Move.
The components of a Measured Move, in detail, are:
A-B:
The first leg. This may be either a long, gradual rise, or a fast, sharp run-up. The price will
hold to
don't
a
trend channel in a general way, but
insist that a
drawn along
well-defined trend line be
the lows of the move, for these
trends often curve.
Remember, look
at
the
chart pattern broadly.
B-C:
The
corrective phase. This
quick reaction or
solidation.
It
is
a
may
be a sharp,
prolonged phase of con-
much
like a railroad
switch
that shunts a train to a parallel set of tracks.
The
C-D:
corrective action will
of the total
rise.
The second
leg.
equal that of the
This
mark
move
first leg.
the midpoint
will very nearly
Note, however, that
one should measure the indicated distance of
the second leg beginning
of the corrective phase
from the low point
(B-C). There
important volume indication
in
this
is
an
sector.
Somewhere between the halfway mark and the
two-thirds mark, on the second leg, volume
tends to increase notably. Beyond the twothirds mark, volume tends to drop off.
The Measured Move is just as valid in a decline as in
The description above applies equally, in reverse.
a rise.
The Measured Move
111
Here
is
an example of
FIGURE
a declining
Measured Move:
3 5
MEASURED MOVE
Now
that
we can
DOWN
recognize the pattern,
it
may
be
made earlier: there
Move
before it begins.
Measured
worth while to re-emphasize a point
is
no way of predicting
To
try do so
a
would be
of reversal pattern a stock will
ment
that
is still
what kind
the end of a move-
like trying to predict
make
at
in full progress. In either case,
after the pattern has been developing for
some determination of the
possibilities
it is
only
some time that
can justifiably be
made.
On
the other hand, Measured
Moves
are easily read-
able in their late stages, and are extremely reliable indicators of the
approach of
a "critical
juncture."
They
lend
themselves remarkably well to the timing of market operations.
Why the Measured Move works as it does
but we can speculate about
fast ball
—
just
enough to give
ball sails
a
not known,
a batter
a
barely tips
hop, but not enough to cut
its
in the original direction. Slightly deflected, the
on into the catcher's mitt
on until
originally put into
112
it
is
might be compared to
It
hurled over the plate, which
momentum
ball flies
it.
it
it.
has lost the
The
—
or, if
he misses
momentum
it,
the
the pitcher
corrective phase in a Measured
Move may
any or
Why
all
be attributed to profit-taking, short selling, or
of the other motivations that
the second leg
is
may
about equal to the
check
first
a trend.
may
take
higher statistical mathematics or psychology to explain.
Perhaps
it's
related to the fact that stocks tend to retrace
half of the distance gained in any swing (the
But regardless of the reason, there
between the
first and second
which can be exploited by the
Let us
now
5
0%
rule).
a
close correlation
legs of a
Measured Move,
/5
chartist.
go over some actual case
histories. If these
analyses demonstrate that the reader can master the Meas-
ured Move, then by
all
means he should add
it
to his col-
lection of valued tools.
The Measured Move
113
^
PLATE 34
RCA — Measured Move
This Measured Move, which marked a decline of 32 points for RCA in I960, followed
an interesting reversal formation. It might be called a Double Top with variations on
the second top; however, the author would judge that the variations were sufficiently
developed to cause the entire formation rightfully to be called a Triple Top. The
decline of 19% points from A to B was without a correction; there was a slight pause
during the declme from C to D. By subtracting AB or 19Kt from C, 65%, the decline
can be projected down to 46. The bottom of the move, D proved to be AOVi, just V2
point short of the Measured
116
Move
objective.
THE COIL (OR TRIANGLE)
When
a
ranges,
it is
toy.
And
move
stock fluctuates in
in effect
just as a
winding up
wound
smaller
like a spring in a
price
mechanical
spring holds enough tension to
the toy, a coiling action in a stock can propel prices.
In the toy, the tension
sellers.
A
is
mechanical. In the market, the
on the increasing uncertainties of buyers
tension builds
and
progressively
typical coil (or triangle) looks like this:
FIGURE 36
THE COIL
Invariably, a coil follows an advancing or declining
phase of market action. In the example shown, prices are
depicted as advancing to Point A, where evidently buying
has dried up, and perhaps profit-taking develops. Here, a
measure of uncertainty has been introduced in the minds
of the "bulls."
The
reaction to
B
halts the profit-taking
The Coil
(or Triangle)
117
and attracts new buying. The ensuing
those
who
C
to
D
to
E
increases anxiety
among
C
rally to
fear that prices are too high.
The
upsets
from
decline
the bulls, and the rally
has the same effect on the "bears." Meanwhile,
volume
has steadily decreased through the coil as buyers and sellers
become more uncertain about the future direction
of prices. At the apex of the coil. Point F, buying and sellalike
ing pressure for the
this point, it
moment
takes very
little
At
reach complete balance.
new buying
or selling to tip
the balance and create a fairly sharp rally or decline. This
accounts for the great difficulty of making
price forecast
from
a
WHICH WAY NOW?
More often than not
— perhaps 60% of
ance between supply and demand
represents nothing
definitive
a coil.
more than
trend of prices. Therefore,
a
is
the time
—
this bal-
only temporary, and
pause in the long-range
coils are
often regarded
as in-
dications of a continuation of the prevailing trend.
the other
40%
formations, or
But
of the time, coils become parts of other
mark bonafide
reversals.
Even
in
such
cases,
the coil represents a balance between supply and demand,
which has made the market sensitive to any new bullish or
bearish influence. In some cases, the breakout itself, even
though
it
was caused by small buying or
sufficient to
swing
a
market sentiment that
selling,
is
may
be
evenly divided
or uncertain.
While the word Coil suggests the spr'Dig action of this
more useful for further analysis.
pattern. Triangle becomes
Now,
the Triangle assumes one of four basic shapes on a
stock chart: the Symmetrical (or Isosceles) Triangle, the
118
Ascending Triangle, the Descending Triangle, and the Inverted Triangle, or Funnel.
They appear as follows:
drawn connecting
the
Symmetrical Triangle: Lines
rally peaks and the reactionary lows tend to con-
verge on the apex, or dead center, of the pattern.
When
the price breaks outside one of these lines
—preferably on
is
regarded
as
increased volume, the formation
completed.
Ascending Triangle: Here the top
zontal, while the
it.
The
bottom
demand becomes more
more willing
goes on.
up
hori-
meet
picture suggests a "line of supply" avail-
able at the price represented
while
is
to
line, ideally,
line slants
to
by the top
meet the supply price
When demand
finally
—
—
aggressive
is,
time
as
overcomes the sup-
ply at that level, the price breaks above
pleting the formation.
line,
that
Volume remains
com-
it,
relatively
low during the formation, and should pick up on
the breakout.
Descending Triangle: The opposite of the Ascending
Triangle,
lower line
foreshadows
it
is
a line
supply, or offers to
a
renewed
decline.
of support, or demand.
sell,
become more aggressive
with the passing of time. As
sellers
lower their
ideas as to the value of the stock, the price
down
until support gives
through the lower
line,
works
way, the price breaks
and the formation
completed. Again, volume tends to decline
formation
develops,
The
The
as
is
the
and to pick up on the
breakout.
Inverted Triangle: While this figure, which
The
may
Coil (or Triangle)
also
119
be called a Funnel, looks like a normal Triangle
turned backwards,
situation
—
a
it
represents quite a different
very nervous and uncertain market.
In this case, volume
grow
the price swings
rises as
wider.
FIGURE 37
Il'.Im'"^"!!!!
,l'l
I
ii
ir
Symmetrical
Triangle
I'Av
Vv
Ascending
1
|'
'M
Descending
'l
Inverted
Triangle
Triangle
TRIANGLES
MARKET TACTICS
The
with
analysis of Triangles should, of course, be tied in
other chart information such
resistance,
as
trendlines, support
and
and other formations. The following guidelines
are offered as a checklist in following Triangle develop-
ments:
1.
Odds
are favorable that
any Triangle
will even-
tually result in a continuation of the trend that
preceded
2.
it.
The odds favoring
a
continuation decrease ac-
cording to which of the four basic Triangles develops, in the following order: Ascending,
Sym-
metrical, Descending, Inverted.
3.
Purchases should be
levels
within
made
at the lowest possible
a Triangle, or after the
subsequent
trend has been well defined, because Triangles are
especially treacherous.
-^
false
all
120
moves, and are
chart formations.
They
among
^\
are subject to
many
the least reliable of
—
-^
1
1
CONTINUATION PATTERNS
Even the strongest trends do not roll on without interruption. They run into profit-taking, support or resistance
or other interference. Momentarily, the force behind
levels,
up a flurry
demand begins
the trend weakens, or the opposing side puts
resistance.
draw
a
The
new
interplay of supply and
pattern on the chart. If
tant shift in the balance of power,
Pattern. If
inal
it
it
we
signifies
price trend will resume,
we
call
it
Reversal
which the
a
to
an impor-
call it a
represents only a pause, after
of
orig-
Continuation
Pattern.
Technically, the Triangle
because
it
most often
previous trend.
betrays
its class
is
is
often placed in this
Too many
times, however, the Triangle
and produces
a Reversal.
pattern rated a separate examination.
whole group of
Boxes,
Flags,
class,
followed by a continuation of the
much more
Pennants,
reliable
Hence,
Now
let's
this tricky
examine
a
Continuation Patterns:
Wedges and Diamonds. Their
graphic names describe them quite accurately.
Continuation Patterns
12
5
FIGURE
3 8
THE BOX
Price fluctuations, over a period of weeks or months, out-
These patterns are quite com-
line a square or rectangle.
mon; they
usually represent a situation where a stock
caught between equally strong supply and resistance
and
ers
vacillates
nor
from
between them for
a
Box (unlike
points the
way
a time,
with neither buy-
A
assume the ascendancy.
sellers able to
the Triangle)
is
is
levels,
breakout
usually valid and
for the ensuing price move.
FIGURE 39
"
,1
hi
tr.I'l
-ii'
DOWN
UP FLAG
The
much
a
FLAG
I
must be pictured as flying without
it would assume the shape of
chartist's Flag
of a breeze (otherwise
Box).
Ideally,
ward about 45
den, sharp
it
forms
degrees.
a
parallelogram slanting
The
flagpole
is
down-
created by a sud-
on good volume. The folds of the Flag
you will are created by the subsequent fluc-
rise
fluttering, if
—
tuation of the stock as
it slips
back. Loosely formed Flags,
or broad Flag patterns, are not to be trusted, especially
they
126
tilt
if
upward, instead of sagging. But the tightly built
formed
Flag,
relatively quickly,
is
among
the most trust-
—
worthy of chart formations even if it tilts upward. Its
reliability may be based on the fact that a simple, common
pattern of market psychology can account for the Flag.
A
sharp run-up on good volume creates a flagpole.
good number of potential
also creates a
on
like to cash in
their profits,
and the
It
who would
in prices may
sellers,
rise
much of the immediate demand. Hence,
drift down on decreased volume. Each suc-
have exhausted
prices tend to
cessive
low
fails to
top the previous rally high, because
is
lower than the preceding one, and each rally
demand
tem-
is
when
porarily weakened. This sagging tendency will halt
new
the
sellers
have been
satisfied.
Now,
prices
their original course and, reassured, the buyers
resume
come out
of hiding.
FIGURE 40
l'iL:i"r.,T'J.
1,1'jj--,il
li!
V
'lai
DOWN PENNANT
UP PENNANT
flies from a pole, created
on good volume. However, the Pennant
Like the Flag, the Pennant
by
a
sharp
has a
stiff
Flag,
it
rise
breeze behind
it.
Instead of sagging, like the
generally develops along a horizontal line,
and
takes a triangular shape. This implies a greater balance
between supply and demand during
idation than in the case of the Flag.
this period
Volume
about the same. Pennants are somewhat more
Flags,
and the tighter the Pennant, the more
of consol-
patterns are
reliable
than
reliable it
Cotifhiiiafiot! Paf terns
is
127
as
an indicator of
a
renewed, vigorous price trend.
FIGURE 41
-'-«*"'[
FALLING
"
WEDGE
RISING
WEDGE
Wedges are a mixture of other patterns already disThey may resemble Flags, except that the lines
cussed.
formed by the tops and bottoms of price fluctuations tend
to converge, rather than remain parallel. If a
following
as a
a
movement
sharp price
it may look like
may embody some
"pole,"
again,
it
angle, but the Triangle
Wedge
this
tion
is
a
Wedge forms
that can be designated
downslanting Pennant, Then
of the characteristics of a Tria horizontal figure,
either
—
uptrend and are usually bullish and, strange
rising
in
while the
—
up or down. This slant and only
slant
distinguishes the Wedge from other ContinuaPatterns. Falling Wedges tend to focus within a major
slants,
Wedges tend
to occur in downtrends.
as it seems,
Volume,
as
most of the others, tends to dry up during the forma-
tion of a
Wedge, and
to pick
up on
FIGURE 42
ii'^ii'-'
THE
128
DIAMOND
the breakout.
The Diamond
in price. It
is
is
most often found after
a big
swing
an exciting time, with the pubHc alternately
enthusiastic about the stock and worried about
naturally causes prices to fluctuate. If there were
citement, prices would hold in a
channel, reflecting
a
more or
it.
This
less
ex-
horizontal
less
momentary balance of supply and
demand. Instead, prices seesaw with greater and greater
swings, on high volume. Then the excitement begins to
fade, the price swings contract and volume declines noticeably. The highs and lows of this period now form a Dia-
mond. When prices later break through its high or low,
volume may be expected to pick up sharply.
Diamonds are trickier than the other Continuation
Patterns we have just discussed
in fact, some of them
—
develop into Reversal Patterns. Further, they sometimes
are confused with other types of patterns. The price movement may look like a Head and Shoulders, or an Extended
V. The distinguishing marks of the Diamond are its upper
and lower points, and its volume behavior. One pattern
of development after Diamonds form is worth noting.
Often, prices will break
mond
down through an
apparent Dia-
top and later turn to rally to sharply higher ground.
Tricky or not, Diamonds often
developments;
as
every
woman
are followed
by exciting
knows, they are worth
collecting.
MARKET TACTICS
Breakouts from tight Boxes, tight Flags and tight Pennants are exceptionally reliable signs of future trends.
They not only
indicate the direction prices will
move, but
they also usually precede fast and wide movements. For
Continuation Patterns
129
this reason,
Not
some traders act only on such
quite so rehable, but
still
among
signals.
the
more
reliable
of chart indicators, are loosely built Boxes, Flags and Pennants, and
all
Wedges and Diamonds. They can help
confirm other signs of
a
to
major trend development, and
they of course are useful in locating levels of support and
resistance
and good buying or
selling points.
CAUTION
It
is
may
always possible that an apparent Continuation Pattern
slip
suddenly and without notice into
Formation. The chart follower must accept
a
part of the odds, and remain alert and ready at
to turn
130
with the trend.
Reversal
this
risk
all
as
times
—
REVERSAL DAYS, GAPS, ISLANDS
Over the
have built up
years, chartists
a
graphic language
Among
to describe interesting patterns.
the terms that
should be familiar to the diligent investor are four that
designate sudden, striking developments. These are
Key
Reversal Days, High Activity Days, Gaps and Islands.
Their reliability
as
trend forecasters
is
limited, but they
do turn up rather frequently on one stock chart or anand at times one of these events will mark a major
other,
shift in trend, at short notice.
any of these phenomena
Hence, the appearance of
calls for close
examination of the
situation.
REVERSAL DAYS
A
Stock has been rising for some time.
day,
it
pushes to a
ne^o'
denly runs into heavy
and
closes
words, at a
and
below the
loss
On
this particular
high for the movement, then sudselling.
The
close of the
price drops sharply,
day before
—
in other
new top
Top Reversal Day.
for the day. This combination of a
a loss for the
day
is
called a
Reversal Days, Gaps, Islands
13
5
Conversely, a Bottom Reversal
downtrend, when the price
Day
occurs during a
hits a neiv loiv for the
move,
then ralhes to close with a gain for the day.
FIGURE 43
Key Reversal D(
I,
'Top)
N
HIn
1 1 1 1 1
K«y Reversal
^°'''"'*
Imilllll
i.iiiiiiilMI II
Ill
KEY REVERSAL DAYS
mark no more than
Generally, such Reversal Days
a brief
interruption in the prevailing trend, or possibly a
may
slowdown
in the
Much
often, a major shift in direction ensues. In such
less
a case, the
date
to recognize
tecting
it
would be
is
advance or decline,
called a
—once
the
Key
new
Reversal Day.
trend
within a few days
a clue.
as the case
is
is
easy enough
It's
well established.
harder.
be.
De-
Unusual volume
Others should be sought
—
for example,
the chartist should try to determine whether the Reversal
Day came at an important
It may be that, after
rection,
loss
may
on the
sell
a cor-
and have
sign of weakness. This
comes
new high and then reacts to show a
same day. The Reversal Day signal itself
during the
cause enough stockholders to
The Key
a
in
sell
the following
chain reaction.
Reversal
major decline
The last
hung on
136
a bit nervous,
the stock hits a
days to set off
a
first
level.
long advance without
a
some traders have become
decided to
when
support or resistance
may
Day
that occurs at the
bottom of
be a bit easier to identify and explain.
of the "bulls" have
now
lost
hope, after having
for so long, and they decide to
dump
their stock
and take their
losses,
calling customers for
worse to come. As they
in fear of
unload, and the price hits a
new
may
low, brokers
more margin,
resulting in
begin
fur-
still
ther selling. Prices drop sharply in frenzied trading. Then,
summer storm, the selling suddenly subsides. Short
sellers buy a little stock to close out their positions and collect their profits. They and other buyers meet few offeras in a
and prices
ings,
Traders
close.
rise easily,
closing above the preceding day's
note the selling
and decide to buy for
climax and the day's gain,
at least a
Return Move.
FIGURE 44
^t^*H
\
/"'V,
W
....i..iiUllllilli
REVERSALS
variation of the above formations
Reversal. Let's suppose that a stock has
vance.
On
the
first
day
(BoHom:
llll..ll.llllll.llllllll
II
TWO DAY
A
m
in question,
it
is
may open
and
toward the end, closing
sell off
which
also
is
a
Ttvo-Day
major ad-
moves on
highs and closes at about the high of the day.
day, prices
the
made
On
to
about unchanged, but drift
at the
new
the second
down
low of the day,
about the low of the preceding day. Presum-
ably, after the bullish
performance of the
first
day, traders
expected the stock to maintain the advance. But their confidence
is
shaken when, instead of making a
stock drops to yesterday's low. Such
a
major
a
new high, the
may lead to
shock
reversal, if other conditions are ripe.
Here
again,
high volume would be a helpful clue. And, as with the
one-day
reversals, the
two-day variation may occur
at the
Reversal Days, Gaps, Islands
137
bottom of
a decline, as well as at the
top of a
rise.
GAPS
Every now and then,
a
stock will open one morning at a
day before, and
price higher than the highest price of the
keep
rising.
Or
it
will
open lower than the lowest price of
the day before, and keep falling. Either event will leave a
conspicuous
Gap on
the chart
—conspicuous because
normal course of trading, the range of
prices paid
in the
on any
given day will overlap the ranges of the day before and
the day after.
first
A Gap can
be informative to the analyst, but
he must determine what kind of
Gap
it is,
FIGURE 45
it.
''Gap\K*Hl
Gap
l^rHUrn^
Common Gop
^^
and examine
made
the chart characteristics of the stock that
-•
Breokowoy
Gaps
The Common Gap: Active stocks relatively produce
few Gaps, though those are the most significant ones. Gaps
are much more often found on the charts of stocks traded
very lightly, in which a single relatively small order to buy
or
sell
may
cause a wide swing in price.
It
would seem ob-
vious that such Gaps are virtually meaningless. Nevertheless,
oldtime chartists insisted on building
a
theory on
this
slender foundation. Usually, the price of a stock that has
138
produced
a
Common Gap
in a short time. This
is
timers held that every
a lifetime.
will fluctuate
back past that area
called "filling the
Gap must
be
filled
Gap." The old-
—even
if it
took
Traders would be well advised not to commit
funds on that assumption alone. As always, they
their
should give careful attention to the past pattern of prices
and volume before judging the significance of the Gap.
T/je
Breakaway Gap
a horse of a different color. It
is
generally occurs after an important chart pattern has been
completed, and
price move.
it
often marks the beginning of a major
An upward Breakaway Gap
companied by
a big rise in
volume, and
is
is
usually ac-
show
likely to
a greater than normal range between the day's high and
low prices in other words, a longer vertical line on the
—
A
chart.
doivnivard Breakaway
Gap may
be accompanied
by heavy volume, but volume is not quite so important
here. Up or down, the breakaway represents some overnight development that has caused a concentration of orders to buy (or sell) at the market price. The development
often
is
an unexpected news event
action, a merger,
ficient
Government
a
stock
split,
war
scare
dividend
—
importance to shift market psychology for
siderable time, resulting in a
Gaps
—
action, a
are
of sufa
con-
major price movement. Such
sometimes "filled" by an early reaction in
prices,
movement
in the
but more often the stock accelerates
its
direction of the breakout. In the days following the initial
Breakaway Gap, it is not uncommon for a stock to produce one or more additional Gaps, as excitement about the
situation spreads.
The Knnaivay (or Measuring) Gap: Sophisticated
buy on reactions, and often wait for one
traders prefer to
Reversal Days, Gaps, Islands
139
major advance has got underway. Sometimes, how-
after a
ever, the stock, instead of reacting, accelerates its advance.
Then
may jump
the waiting traders
At
missing the bus altogether.
have sold short
may
see a big rise
to reduce their losses.
in the general public.
And
the
aboard, in fear of
who
the same time, those
ahead and hasten to buy,
move may
stir
excitement
A new wave of buying develops
from
named Runaway
these sources, creating a series of aptly
Gaps. These are also called Measuring Gaps, because they
often occur at about the midpoint of
a
and hence can be used to measure the
move. For example,
$22
if a
major price swing,
likely extent of the
stock formed a base in the $20 to
Runaway Gap
then climbed to $40, where a
area,
formed, there
is
go on to the
a fair likelihood that it will
area of $5 8 to $60.
Exhaustion Gaps: As
long advance
a
and more stockholders grow nervous
They
as
rightly feel that this can't go on forever
hate to
sell
on,
rolls
out and miss a good part of the
—but
rise.
sell
short,
but
as
the rise gains
A
of buying causes the price to form a gap or
series
Now
may
this
rise
may
"fill
may bog down
ing, after
or yield to
140
final
spasm
of gaps.
carry the stock into the area where a good
in
the gap" within a
clearly an Exhaustion
is
and
over-
holders had long ago decided to take their profits.
The
tion
is
momentum
they rush to cover, feeding the buying boom.
many
they'd
Now
then, venturesome traders will decide the stock
priced and will
more
well as pleased.
heavy trading, and the stock
week or
so. It
Gap, marking the
would then be
of buywhich the "tired" advance will pause to rest,
a downturn. A careful study of the whole situa-
necessary to
make an
final flush
early distinction
—
a vital
one
— between
the
Runaway and
kinds, of course, occur in decHnes
The
lowed by
When
Island Reversal:
a
as well as rises.)
Breakaway Gap, as
on the chart
is
fol-
the stock trend turns sharply
an Island. For example, stock
It
Gap
an Exhaustion
into reverse, the picture
run-up.
(Both
the Exhaustion Gap.
XYZ has been having a strong
reaches a climax one day
—opening
graphically called
is
—
Wednesday,
a
let's
new high in heavy volume and rising
further, but demand begins to peter out, and fairly heavy
profit-taking develops. The stock nevertheless closes with
say
enough gain
at a
to leave a
gap on the chart. Overnight, how-
ever, the selling orders build
to
up
so heavily as to cause
open below Wednesday's lowest
On
price,
and to keep
XYZ
falling.
the chart, the line representing Wednesday's trading
range stands alone, cut off on both
One-Day
Island Reversal.
Other
This
sides.
islands take
is
two
called a
more
or
days to form. In either case, they signify at least a tem-
may
porary halt in the prevailing trend, and
when accompanied by unusual volume
—
reversal in trend. (See the case study of
—
especially
indicate a major
Avnet
at the
end
of the chapter.)
HIGH ACTIVITY DAYS
Any day when volume
is
make
exceptionally high or prices
an exceptional swing (often these go together) should be
tagged by the chartist
as a
High Activity Day.
It
is
ap-
parent that some significant change in ownership occurred
on that day, and
will
at that price.
Subsequent price movements
determine whether the buyers made
or a poor one. In any case, closer study
information.
It
may
be, for
a wise decision
may
example, that
yield useful
a big
block of
Reversal Days, Gaps, Islands
141
stock that has been available for sale at that price
other words, "overhanging the market"
—
—
in
has been cleared
away, leaving the stock free to advance against
little selling
pressure.
MARKET TACTICS
—
phenomena discussed in this chapter Oneand Two-Day Reversals, Gaps, Islands and High Activity
All the unusual
Days
—should be regarded by
tion flags.
He must
the investor-analyst as cau-
of course consider each case within the
framework of the
over-all chart picture,
trendlines, support
and resistance
versal patterns.
The
which includes
levels and, possibly, re-
special circumstances of each situa-
tion will determine whether one should
not possible to outline
a
buy or
other hand, one should not ignore a warning.
case histories that follow
warnings can
142
be.
sell.
It's
hard-and-fast rule, but on the
show
just
how
Some of
the
significant such
~
„
THE TRAP
And now,
the fox might say to his cubs,
as
it
is
talk about an unpleasant subject. Actually, the
not so
much
found
as
chart pattern
a
part of any
ceding chapters, or
The
analysts,
it
as a
number of
may
It
tively
flair
for graphic terms, tag
Traps" or "Bear Traps," depend-
narrow range near recent
new
range, leaving the "bulls"
on
a Bull
a rela-
highs. Prices break out of
high ground and then suddenly decline
through the lows (support
the stock
is
be
patterns described in pre-
ing on which kind of trader they catch. Basically,
Trap occurs after a stock has traded for a while in
the range into
may
stand alone.
with their
these situations as "Bull
predicament.
time to
Trap
its last rise
levels) of the previous trading
(or rather those
who bought
or in the trading area), stranded
The more significant Traps feature a splurge
more volume in the Trap, the more bulls
have been caught. The Bear Trap is much less common.
It occurs when a stock drops to a new low area on active
trading from a congestion or trading range and then rallies
with
losses.
of volume; the
The Trap
149
back over the trading
lowed by
2 5%) and often
FIGURE 46
^»4
area. In
a
ill
is
fol-
'||--.Trop
w
III
ii'
I
Trap
cases, a
major move (25 to 50%).
\n
?l
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most
an intermediate swing in price (10 to
at least
I.
Valid Support Level
.
Valid Resistance Level
li
,1,1"
-----.hrii
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l.m
I
Hull
lllllllli
I
The stock
swimmer who,
such a situation
in
after standing
finally dips his toe into the
or low area
— but
finds
iiiilllliJIlll!
I
THE "BEAR" TRAP
THE "BULL" TRAP
by
may
be likened to a
a pool
water
—
that
for
is,
some time,
the
new high
too cold and pulls out. In terms
it
we may assume that a stock's penenew high ground has encouraged old buyers
but it also has brought into play
excited new ones
of market psychology,
tration into
and has
—
a large, heretofore invisible
new high
demand and the
supply of stock available for
The supply proves
too great for
sale at the
price.
the
price declines. Confidence in the stock
is
The new buyers
Some of them accept
disturbed, at least for the time being.
find themselves trapped with losses.
the realities of the situation and
sell
out, thus adding to
the pressure on the price.
The two keys
to identifying such a situation are unvolume and the backslide from a new high that
breaks through a previous trendline or support level. Now,
usual
it is
not a Trap formation at
uptrend
hits a
new high
on lower volume. In
150
all,
when
a stock in a
in active trading
fact, that's perfectly
major
and then reacts
normal behavior,
and may be interpreted
as bullish
—
so long as the reaction
does not "violate" the indicated support level or trendline.
(It
w^ell to
is
keep in mind
ing, there are as
many
at all times that in actual trad-
shares sold as bought. If a stock can't
make much headway on high volume,
obviously, heavy
selling pressure exists at this price level.)
MARKET TACTICS
The Trap
well named.
is
It
perienced chartist, because
a
new high
or low
cases, that's just
—
what
may
a
breakout to a
—
hitting
a stock's
looks like a go-ahead signal. In most
it is.
As we have noted,
in a given direction will tend to
and
catch even the most ex-
beginning
its
new high
a stock
moving
continue in that direction,
or low
(especially after a
congestion of price movements) offers strong confirmation
that the trend will continue. Nevertheless, a sudden reversal,
or Trap,
may
soon
as
always possible
is
—
any chart formation
just as
be reversed. Hence, the readiness to abandon a position
appears to have proven
as it
wrong
is
one of the
most important attributes of the successful investor.
When
and
is
is
a
Trap develops
after a long price
accompanied by high volume,
indicated.
their profits,
On
a
movement,
major trend reversal
hitting a Bull Trap, holders should cash in
and traders
may
ation, the short-term trader
sell
who
short. In
any Trap
situ-
has been caught should
take his medicine as quickly as possible and stay out of the
situation until
it
has been clarified.
The long-range
investor
should take a hard look at his position. If other factors
such
as
long-range chart considerations, the
look, his tax situation
he
may
and the business cycle
stay in and "sweat
it
company out-
—
are favorable,
out."
The Trap
151
-n
^
i
ILi
.
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I
:
IJ
^^.,.^..^^.,
_-.,
-U-±-
i
1"
"
•
—
THE MARKET AVERAGES
Up to now,
stocks.
we've been discussing the behavior of individual
But what about "the market" that everybody
talks
about?
To be sure, nobody literally "plays the market" any
more than anybody bets on all the horses in a race; the
investor must put his money on individual stocks, not averages. Nevertheless, the public
to
how
the over-all
"market"
the popular stock averages.
pays a great deal of attention
behaving,
is
When
as
measured by
the "market"
is
—even
going up,
own
And he is not far wrong. As the old Wall
it, "When they raid the house, they take
the typical shareholder feels encouraged
if his
stock has declined.
Street saying has
all
the
when
girls
— and
the market
will carry
with
including
many
it,
the
is
piano player."
in a strong
sooner or
that,
on
later, a large
their
In other
words,
downtrend or uptrend,
it
majority of stocks,
own merits, would be behavcommon sense; obviously,
ing quite differently. This makes
the general attitude of the public toward investment and
the business outlook, for example, will affect
all
individual
The Market Averages
157
stocks.
Chart analysts have often seen highly bullish pat-
terns of individual stocks disintegrate in a declining market.
a turn of the market. A good
buck the market trend, but the odds are,
of course, against any individual stock doing so. Hence, no
matter what stock an analyst is following, he must at all
times be alert for any adverse development in the market
as a whole. Put another way, the market in general is an
This usually happens around
many
stocks will
integral part of the chart analysis of each stock. Primarily,
what the
know
analyst wants to
is
whether the market
is
going through an intermediate "bull" phase or "bear" phase
or neutral phase.
That
he
is,
is
not
as
concerned with the
daily fluctuation of the market, or the historical, years-long
trend, as he
with the intermediate swings that
is
average prices 10 to 2
5%, and
behavior of the stocks he
The
is,
is
may move
thus materially affect the
working with.
technical approach to market forecasting
—
that
the use of the past and present behavior of the market
to predict
its
the century.
their
future course
Its pioneers,
work on
—
dates back before the turn of
Dow, Hamilton and Rhea,
based
averages or indexes of the prices of selected
stocks.
The
from
Dow-Jones averages stems
The most popular one is, of course, the
great popularity of the
their writings.
Dow-] ones
Industrials, an average of thirty leading stocks,
called industrials primarily to distinguish
rails
and
utilities
(although A. T.
C5> T.,
them from the
rather oddly,
is
Although any average based on a
limited selection of stocks will be rather sensitive to a wide
m,ove in even one issue, the Dow-Jones Industrials has proven
listed as
an
indtistrial).
to be a thoroughly reliable indicator of the general
158
vwve-
The Netv York Times average of
vient of the market.
tiventy-five indnst rials
is
also a fairly
good yardstick.
The chief reason for using a limited selection to judge
the movement of the viarket as a whole is, of course, convenience. The averages originally were tcorked out laboriOJisly on pencil and paper. Now, the computer has made
possible a much more comprehensive m,easure. Standard
^
Poor's uses the 500 leading
York Stock Exchange,
ket values.
It
common
representing
New
stocks on the
ii^ell
90%
of marby the num^the figures up and
over
multiplies the price of each stock
ber of shares outstanding, then adds
all
reduces them, to an index number.
And
it
does so every
hour! Even such an index, of course, does not tell everything about the market. It does not, for exam-pie, tell tvhat
the most actively traded stocks were doing
matter, xvhat your stock was doing.
The
—
nor, for that
analyst should
not rely on one source of information about the market
and ignore the others. One of them Tnay have something
significant to tell him.
An
all
index takes
a
is made by adding up
by the number of stocks. An
the sum of prices and compares it with that of
average, roughly speaking,
the prices and dividing
"normal" or base period, usually given
as
100.
If,
for
example, the Federal Reserve Board's index of production
in a given
month
is
114,
it
14%
means production was
higher than the average of the base period, which was the
year 19 57.
are
It
should be noted further that, since some stocks
more important than
others,
and most of them
or issue stock dividends at one time or another,
it is
split
neces-
sary to iveight the averages or indexes to avoid distortion.
Occasionally, stocks used in the selected averages
must be
The Market Averages
1 5
9
replaced because of mergers or other changes in the picture.
The basic technique for forecasting the market is a strict
chart analysis of one or more of these averages or indexes.
we have
All the chart reading techniques
chapters apply just as
much
do to individual stocks. There
in that several
may
whole
as a
Dow
Theory, for example,
is
A
validity of a trend reversal. This dates
basic tenet
that the Rails
confirm the Industrials (or vice versa)
when
they
are available, so that one
be used to check, or confirm, another.
of the
as
an additional advantage,
is
market averages
discussed in earlier
market
to the
must
to establish the
back from the days
railroad stocks represented the largest share of
stocks traded; nevertheless, orthodox
Dow
theorists
all
still
on such confirmation.
insist
Because of the great sensitivity of the
Industrials to
market developments,
as a lead indicator,
in the
it
may
still
Dow- Jones
be regarded
but confirmation should be looked for
more comprehensive Standard
the possibility of a false signal.
& Poor's
And
500, to reduce
often, the Standard
& Poor's index has given the first indication of a new trend's
developing, possibly because the
Dow- Jones
average has
been distorted by unusual weakness or strength in one or
two heavily weighted
stocks. Nevertheless, if
Poor's index points toward a
should be sought in the
new
trend
first,
Standard
&
confirmation
Dow- Jones. Examples
of
how
this
confirming technique has actually worked appear in the
analyses
160
on the following pages.
PLATE
5 1
Analyzing the Daily Chart of the Dow-Jones Average
As explained in Chapter 1, chart analysis techniques apply equally to daily, weekly
and monthly range charts and this goes for the various stock averages. The chart
above depicts the daily high, low and closing values of the popular Dow-Jones 30
Industrials from August, 1960, to June, 1961. Even though this mdex is a composite
of thirty different stocks, the over-all
movement conformed to such ordinary formation development as a Double Bottom, a well-defined uptrend channel and all
support and resistance concepts. Close analysis of the uptrend development will
reveal that the trendline was slightly penetrated at the end of May, although prices
continued to make new highs. This later proved to be a valid caution signal, since
the advance eventually bogged down in that approximate area.
The Market Averages
161
PLATE
53
Dow-Jones Average
VS.
Standard
& Poor's
500
At the end of July, 1959, the Dow-Jones Average of 30 Industrials and the Standard
Poor's Average of 500 Composite Stocks both reached all-time highs. The chart
pattern that developed around these historic levels on both averages (A and AA)
appeared to be small downsloping Head & Shoulders Tops. The declines from these
tops, however, came on very light volume, which detracted from their significance
as a possible reversal formation. Then the S & P 500 violated the previous support
&
(BB), but the D-J Industrials held. This lack of confirmation again suggested
D-J average advanced to a new all-time
high (C), but the S & P 500 did not make it (CC). Thus, it refused to confirm the
level
that trends were indecisive. Subsequently, the
bullish implication of the D-J high. By February (D and DD) both Indexes dropped
through major support levels and confirmed a weak price structure. Later in I960,
the D-J Industrials went below 565, S & P 500 declined almost to the 52 level.
The Market Averages
163
PLATE 54
Dow-Jones Average
vs.
Standard
& Poor's
500
A second chart comparing the movements of the Dow -Jones Average of 30 Industrials
and the Standard & Poor Composite Average of 500 stocks is also shown to illustrate
the importance of confirmation in chart analysis of the averages. In the chart on the
previous page, it was seen how a lack of confirmation pointed to indecisiveness.
In the chart above, covering the period June, I960 to April, 1961, it can be seen that
these two averages can move in almost identical fashion. In September, October
and November, both averages formed identical almost precise Double Bottom
formations (with platform), thus presaging a major move upwards. The advance that
followed also proceeded in a duplicate fashion. The only technical difference was the
way in which the trendlines formed. The D-J Average adhered closely to a straight
line right from the second bottom until April. The S & P 500's trendline was not
as well defined.
164
MORE INDICATORS
In the past forty years or
so, a
great
many
techniques have
been used in efforts to forecast market trends. Garfield
Drew,
in his book, "Neii^
Methods for
Market," describes and analyzes
Profii in the Stock
many
indicators and mechanical systems. It
that each of these methods enjoyed
is
of these technical
interesting to note
some success
at
one time
or another, but no system proved accurate most of the time.
Joseph Granville, in his book, "A Strategy of Daily Stock
Market Timing for
1960),
also
examines
Maximum
many
Profit"
(Prentice-Hall,
of these indicators and systems,
analyzes their successes and failures, and presents
a
sound
approach to the technical study of the market for timing
purchases and
sales.
Some of
these
methods
are well tried,
others entirely new, but Mr. Granville's approach
and
original.
Hall for
(The author
much
is
is
fresh
indebted to him and to Prentice-
of the material in this and the following
chapter.)
The Granville book covers fifty-five basic day-to-day
number of indicators of intermediate trends,
indicators and a
More
Indicators
165
all
Among
of which have withstood the test of time.
most
significant are the
Interest Ratio
the
Advance-Decline Line, the Short
and Barron's Confidence Index.
ADVANCE-DECLINE LINE
A
significant fact about the action of the
not closely reflected in the price averages
stocks that go
up
in a given day, as
is
market that
the
is
number of
compared with the num-
ber that go down. It fairly often happens that while the
market average
than
rise
is
advancing, more individual stocks decline
(or vice versa)
—
either because a
few leading
stocks are strong, or because the gains are averaging larger
than the
losses.
So analysts have worked up a number of
indicators of breadth, referring to the
number
of different
stocks that are traded on a given day, and the proportion
that rise or
fall.
These on occasion give an
earlier indication
of the underlying strength of the market more quickly
than the price averages, in which the action of a handful
of stocks
may
camouflage the
real
condition of market
psychology.
One
of these indicators
Granville develops this line
is
the Advance-Decline Line.
by adding up the advances and
on successive days, and then subtracting the smaller
figure from the larger, to get what he calls the "cumulative
declines
differential." It's simpler
than
it
from the following hypothetical
sounds, as will be seen
table
three days of activity (to be continued
The
showing the first
from day to day).
course,
on advances and declines can be obtained, of
from virtually any newspaper that carries stock-
market
reports.
figures
You can
pick any starting date, and keep
going, because the real significance of this indicator
166
is
in
the changing trend, or pattern, rather than the specific
numbers charted.
TABLE OF ADVANCES AND DECLINES
Advances
Declines
Cumulative Cumulative Cumulative
Declines
Differential
Advances
Monday
600
400
600
Tuesday
J25
460
1,125
400
860
470
510
1,595
1,370
Wednesday
The
figures
are plotted
on
+200
+265
+225
under the column Cumulative Differential
produce the Advance-Decline Line.
a chart to
Granville gives the following principles for interpret-
ing the Advance-Decline Line:
1.
When
Dow- Jones
the
while the
A-D
Line
is
Industrial
average
market
rising, the
falls
will turn
up.
2.
When
falls,
3.
the
Dow- Jones
rises
the market will turn
The strength
while the
A-D
Line
down.
of such a market rally or reaction
will be signalled
differs in course
by how much the price average
from the A-D Line, and for how
long.
4.
The A-D Line, taken alone, does not indicate
precisely when such a rally or reaction will occur,
but only that
5.
When
the
it
will occur reasonably soon.
Dow- Jones
vious top and the
was when
made
average approaches a pre-
A-D
Line
is
below where
it
market situation
is bearish. If the A-D Line is above where it was
when it made that top, a breakthrough to new
highs
6.
When
is
it
that top, the
imminent.
the
Dow- Jones
vious low and the
average approaches a pre-
A-D
Line
is
well above where
More
Indicators
167
it
was when
is
bullish
But
if
made
it
—
the
it
made
that
A-D
is,
that low, the market situation
the previous low should hold.
Line
is
below where
it
was when
that low, then a downside penetration
is
imminent.
The Advance-Decline Line can
to develop his
own
con-
also be used in
junction with other market indicators.
The
reader
is
urged
possible uses.
Barron's confidence index
An
interesting effort to measure confidence
Weekly
Barron's
in 1932,
and has attracted
was begun by
a considerable
following in recent years, thanks largely to Granville's
The
writings.
idea
is
to get a figure that can be charted,
which would show how willing
chance. Barron's does
it
investors are to take a
by comparing the
return, on high-grade bonds at current
yield, or rate of
market
prices
with
the yield on low-grade bonds. Naturally, yields are higher
on the
riskier bonds.
fident about the
But when investors grow more con-
economy, they move from high-grade
to
lower-grade bonds, and the difference in yields narrows.
What
theory
is
investors
that
—
are mostly
sions
has this to do with the stock market? Well, the
bond buyers
managers of
and sophisticated
money." (Actually, they
are substantial
the so-called "smart
trusts
and large funds. ) Their deci-
about the economy today are likely to be taken up
by the general, stock-market public two to four months
from now. As a matter of fact, the Confidence Index has
been tending to lead the stock averages by about that length
closer to two months than to four of late. Hence,
of time
—
if
the Confidence Index tops out and begins to slide, one
168
may
look for a similar development in the stock market in
60 to 120 days. Same thing on an upturn, of course.
Caution: The chart interpretation of this index
bit special.
a
point
is
What
probably not very significant.
Such
a bull
a
is
a
breakthrough of no more than one-tenth of
a rally or decline that
tern.
of
is
A
is
significant
completes an important chart pat-
development
may
signal the beginning, or end,
market.
This index has shown
by 60
the stock market
a
tendency since 1932 to lead
to 120 days in 8
5
per cent of the
recorded past performance. This means that in
1 5
per cent
of the previous turns the index has either lagged or had
a
longer lead time, most of those cases showing a longer
lead time of
5
more months. The great years of turn
or
to
the downside have fallen into the Confidence Index's 1 5
per cent time category. In years such as 1929 (adjusted
back), 1937 and 1946 the Confidence Index had
a lead
While the Index was trendtime of five months
rising swiftly and this
was
ing lower the stock market
created a technical tension which ultimately led into an
extended decline some months later.
or longer.
SHORT INTEREST TRENDS AND THE SHORT INTEREST RATIO
If we have an index of confidence, why not an index of
pessimism? Well, we have one, indeed. It naturally is based
on quite a different breed of operator from the solid, bondbuying citizen whose pulse is taken by Barron's Confidence
Index. This different breed
Selling short
is
a
is
the short
seller.
technique most generally used by
professional traders and risk-minded investors in an effort
to profit
by an expected
decline in the price of a stock.
More
Indicators
169
(Sometimes, simply to insure an investor against a decline,
or for tax avoidance purposes, but that's another story.)
Anyhow, market
analysts agree
on
a pretty
paradox:
have plenty of bears around!
bullish to
There are two reasons for
this.
One
is
the theory firmly
held by some Wall Street cynics that the public
wrong
—
that
going down,
is,
it
is
always
any time everybody says the market
will
go up, and vice
to the general public,
it
is
The cynics may
economy has seeped
versa.
suggest that, by the time a turn in the
down
it is
has been anticipated in the
way ahead on the next bend.
may, there's a much more obvious reason,
market, which already
is
Be that as it
which rests on the nature of short selling. A short borrows
stock through his broker to sell at the market price. Even-
must buy the same number of
tually, he
what he
now
shares to replace
has sold. Because he has acted like a bear, he
behave
as a bull.
(Every past short
sale
is
a
must
future
purchase.) Therefore, the short interest or short position
(both are terms for the number of shares sold short but
not yet replaced) forms a cushion to stock
decline, shorts will
go up, shorts
Thus, a
in
to cash in
on
rush to buy to cut their
rise in
the short interest
is
prices. If
any stock he
is
following.
The
tabulate the short interest on the
1 5
they
their profits. If they
losses.
bullish,
and
a decline
Every investor should watch the short
bearish.
is
may
buy
interest
leading stock exchanges
th of each month. Lead-
ing newspapers and financial publications carry these figures
a
few days
tial
later
—
at least for those stocks in
which substan-
changes have occurred, or large short positions are out-
standing.
The
170
significance of the short position depends
on the
volume of trading. Naturally, a short position of 5,000
would not be terribly important in a stock that
traded 10,000 shares a day, but would be a considerable sup-
shares
port to a stock that was trading only 500. Just
market
may
as a
whole
very active, even
is
so, if
the
a large short position
not mean much, since the eventual buying that
may
represents
even
a
be quickly
may
modest short position
The Short
But
satisfied.
set off a sustained rally.
Interest Ratio, therefore,
the ratio of
is
volume
the short interest (or position) to the average daily
for a given
month. For example,
if
the short interest totals
4,000,000 shares and the volume of trading
3,500,000 shares
averaging
is
Short Interest Ratio
a day, the
it
market
in a slow
is
about
1.14.
As
rises
a general rule,
above
position
below
1.5, the
whenever the Short Interest Ratio
market
and the outlook
.5,
is
readings of
.5
likely to be in an "oversold"
bullish.
When
the Ratio falls
the market's position has been greatly weakened
indicated.
The "in-between"
should be regarded
as slightly bullish,
and an important downturn
while
is
1.0 to 1.5
to 1.0
may
is
be considered
as
a caution zone.
trendline's odd-lot index
Another indicator that has been drawing a growing following is also based, in a sense, on the theory that the majority
is always wrong. It may be suggested that, by the time a
new
trend or development has seeped
fellow," the "smart
is
money"
down
to the "little
has already acted on
looking forward to the next development
"taste
makers"
set a
new
fashion,
time the general public has picked
—
and then drop
it
up.
it,
and
just as the
it
by the
(Remember when
More
Indicators
171
automobiles ballooned out, and
The
"taste
and
a social analyst
tailfins
were
makers" already were driving
at their gaudiest?
little
foreign cars,
could have predicted that compact cars
for the masses were just around the corner.)
As
it
happens, the market offers a keen measurement
of the attitude of the "little fellow." This
trading in odd
lots,
there
is
lots
—
or lots of
a seller for
chased from, or sold
to,
less
than 100
is
the
volume of
round
shares. In
every buyer. But odd
lots are
pur-
jobber firms that keep a supply in
inventory, and serve other brokers by buying or selling odd
lots at a fraction
of
a
point above or below the market price.
how many shares have been bought and
how many have been sold short). Thus,
Daily, they report
sold
(including
we know whether
the "little fellow"
is
selling
more stock
than he's buying, or vice versa, and to what extent.
Garfield
Drew
has been credited with refining a tech-
nique for forecasting the market by use of the figures on
odd-lot trading, on the assumption that the odd-lot trader
is
always wrong. The Trendline Corp., leading publisher
of stock market charts, found on careful research that there
was much validity
in this approach. It developed Trendline's
Odd-Lot Index to show the odd-lot trend at a glance. This
was computed as follows:
1.
The weekly ratio of odd-lot purchases to odd-lot
sales
was studied for the twenty-four years 1937
through 1960.
It
was confirmed that odd-lotters
normally buy more shares than they
sell
(partly,
perhaps, because they sometimes accumulate stock
round lots, and partly simply bemarket
has been expanding, and rising
cause the
until they get
over the long haul).
172
2.
This normal ratio
—
the normal Iniyhig
3.
On
each week's ratio
a chart,
normal buying
to the
4.
11 to 10
—was
established as
line.
is
plotted in relation
line.
The index is seasonally adjusted during the period
between November 1 and January 20 of each year.
It
was found that odd-lot buying,
selling,
drops off sharply from
in relation to
November
1
to
—
December 20 and it picks up sharply from
December 20 to January 20.
Obviously, when the index is above the normal buying
line, odd-lotters are buying more than they usually do, and
when it is below the line, they are buying less than they usually do.
Research over
many
years has produced the follow-
ing principles for interpreting the index:
1.
Odd-lot buying
mal during
a rise in the
2.
invariably
is
a bull
less
than nor-
market
as a valid
major move.
Toward the end of an advance, odd-lotters begin
to buy more than normally. They continue to do
so while the
market
is
making
buying becomes frenzied
3.
much
move. This can help to confirm
They
also
its
top.
close to the
Often
their
very top.
buy more than normally during the
beginning stage of
a decline in the
market. This
tapers off as the decline continues.
4.
Around
a valid
bottom, odd-lot buying
is
usually
well below normal.
No one index, method or system has ever forecast the
market with complete accuracy. However, intelligent judgment of the methods outlined
can
raise one's
in this chapter,
taken together,
batting average enormously.
More
Indicators
173
PLATE
J 5
The Advance-Decline Line
Analysis of any one indicator must always be considered in conjunction with as
many
other indicators as possible. In addition, the rules suggested in the text for
dogma. Examination
of the chart of the Advance-Decline Line for 1961 and through January 1962, discloses that a vigorous upttend at the beginning of 1961 set the pace for a rising DowJones Index. The A-D Line topped out in June, 1961, and although the D-J Index
continued to make new highs, the down-turn in the A-D Line served as a warning
to the technician that the averages were not likely to get far. A slowing down of the
advance and the decline in January 1962 validated this reasoning. During the greater
part of 1961, the A-D Line appeared to be far more indicative of the trend of the
broad market than the Dow-Jones Average, or for that matter, other leading stock
interpreting the various indicators are merely guidelines and not
averages as well.
174
PLATE 56
Most of
Barrens' Confidence Index
the adherents of the use of the Confidence Index wait for minor
the Index as indications of forthcoming minor
moves
in the stoclc
moves
in
market averages.
The
writer prefers a different kind of utilization of the Index, i.e., to consider the
Index itself as a subject for chart analysis. Outlines of major formations which seem
to be significant in forecasting trends of the Confidence Index and the averages are
marked on the charts above. The V Bottom in 1949 heralded the long "bull" market
and no major top formation could be seen until 1956 and 1957, when important support zones were violated. The index traced a downcurving trendline, climaxed by an
Extended V Bottom in January 1958. A Line Top in 1959 set a decline in motion
which was reversed by a Double Bottom in I960. The trend was higher until June
when an uptrend line was broken; however, the support line along the Jan. -Mar. low
was not decisively broken so that a major "bear" signal was deferred.
More
Indicators
175
700
BOO
500
400
300
200
2.5
10
1.5
THE
DAY MOVING AVERAGE"
"200
Stock market technicians have experimented over the years
with any number of methods for detecting or measuring
trends.
Many
use
some kind of moving average,
in
an effort
to iron out the daily fluctuations. For example, an econo-
mist working with the monthly figures on
contracts
may want
new
smooth out the trend
to
line in order
to reduce the distortion that a single big contract
duce into
a
month's volume.
—
month moving average
that
He may
is,
may intro-
then use
to get a
building
a three-
working figure
for March, he will average the actual figures for February,
March and April. His working figure for April will be the
March-April-May average, and so on. He can plot such
a series
on
a chart,
and obtain quite
a reliable
trend
Similar techniques have their place in market analysis.
Advance-Decline Line, described
is
one kind of moving average.
is
that
line.
The
in the preceding chapter,
One advantage of such an average as a measure of trends
it is
produced by
a
simple arithmetical computation
and does not depend on personal judgment.
Tfie
"200 Day Moving Average"
179
The moving average that covers about 200 days has
among analysts as a measurement of longrange trends. The most laborious way to set one up is to
add up the closing prices of a stock (or market average)
won
great favor
on 200 consecutive days, then divide by 200 to get the
moving average for the 200th day. On the 201st day, Day
No. 1 is dropped and the price for Day No. 201 is added.
And
so on.
Most
analysts, including Granville, find
factory and
less
it
just as satis-
week
tedious to use one price a
for thirty
The Trendline Corporation computes its "200-day
moving averages" by adding the closing prices of thirty
weeks.
consecutive Thursdays, and dividing by thirty. Each week,
the
is
new
figure
is
added, and the one for thirty weeks earlier
dropped. Such an average
is
customarily plotted on reg-
ular stock price charts, for comparison with daily price
developments.
Granville
lists
eight basic rules for interpreting such
charts:
1
If the
200 -day average
following
a decline,
line flattens
out or advances
and the price of the stock
penetrates that average line on the upside, this
constitutes a major
2.
buying
line while the average line
is
3.
a
buying
If the stock price
declines
toward
below the average
still
is
rising, this also
it,
up
line
and
to go through
and
above the 200-day
but
fails
again, this
is
If the stock price falls too fast
declining
180
is
signal.
instead turns
4.
signal.
If the price of the stock falls
average
line,
a
a
buying
signal.
and far below
short-term
a
rebound
toward the
line
may
Hne
If the average
5.
be expected.
out or declines follow-
flattens
and the stock price penetrates that line
on the downside, this constitutes a major selling
ing a
rise,
signal.
If the price of the stock rises
6.
line
is
while the average line
rises
toward
turns
down
it,
is
but
below the average
again, this
is
average
line,
a
line
and
go through and instead
fails to
a selling signal.
If the stock price rises too
8.
falling, this also
a selling signal.
If the stock price
7.
above the average
is still
fast
above
short-term reaction
may
a rising
be ex-
pected.
It
should be emphasized that these guidelines should
not be used
as
as a
"system" for playing the market, but merely
another technical tool
—
a
techniques of chart analysis.
be given
first
handy addition
The
to the basic
daily price action should
consideration, especially in timing market
turns.
The 200-day moving average
cator,
and trend
is
not a sensitive indi-
reversals often are clearly outlined in the
price action well before the
moving average
itself turns.
Keeping abreast of the various indicators
is
a
com-
paratively simple matter inasmuch as they are published
in chart
form on
a
continuous
basis.
The weekly
"DAILY BASIS STOCK CHARTS,"
line
Corp., 82 Beaver Street,
publication,
published by Trend-
New York
5,
N.
Y., provides
up-to-date charts each week on the Advance-Decline Line,
Trendline's
Odd-Lot Index, Barron's Weekly Confidence
Index and the Short Interest Ratio. This interesting publication also charts the daily fluctuations of the
Dow- Jones
The "200 Day Moving Average"
181
Industrials
and Standard
&
Poor's 500-Stock Average and
shows the 200-day moving average Une for these
latter
two
indices. In addition, the hundreds of charts for individual
stocks that are published weekly, include a 200-day
average line on each chart.
182
moving
1
1
1
II
M
'
1
1
1
1
,
1
:
1
1
1
1
.
.._
,Jf_LI_LllL
„.._!_
+.
.^.,_.
,_
.^-ui^'
PROFITS
The
ket
to
able student of the charts will be right about the
more often than he
make
a profit,
mar-
wrong. That should be enough
is
but even an exceptional ability to predict
stock prices by no means automatically assures success in
the marketplace. Forecasting
As an oldtime Wall
is
one thing, trading another.
Streeter said, "Forecasting sows the
seed; trading reaps the harvest."
a
stock
is
determine
when
going up, but
it
how much money
to get out.
A
A sound
forecast
tells
you
takes proper trading tactics to
to risk, at
what moment, and
good forecaster can go broke,
if
he
is
who were poor forecasters have become rich. There are in fact many brilliant
analysts in Wall Street who have never made money in the
a
poor trader, while some good traders
market.
A
friend of
mine
good heads, but holes
says of such people,
in their shoes."
"They have
Chart reading must
be married to a sound trading or investment program to
mend
those shoes.
Wall
Street writers love to discuss
in military terms.
A
best-seller
is
market operations
called
"The
Battle for
?rojits
187
Investment Survival" (by Gerald Loeb).
market
called a "battlefield,"
One
hears the
with "buying and
selling
forays" and "bull and bear raids." In line with this war
we might say that chart techniques and other means
of analyzing company prospects are all fine weapons, but
talk,
good
tactics are
needed to win
program can't be taught
suit
in a
battles.
book;
A proper investment
must be
it
tailored to
each individual's personality and pocketbook. We'll try
here to offer a
To
plan
is
few
guidelines.
begin with, one must have a plan of action.
Your plan might be
better than none.
Any
devised out
of the answers to the following questions:
2.
How much
How much
3.
What
1.
4.
5.
1.
are
do you have to invest?
you prepared
are
to lose?
your investment objectives?
How do you get in?
How do you get out?
Hotv much do you have
to invest?
tive investor should not
touch the funds needed
for the basics of
life,
such
as
The
prospec-
housing, insurance,
a cash reserve adequate for regular and emergency
expenses, and a
minimum
set aside for retirement.
One of Bernard Baruch's cardinal rules was, "never
commit all of your funds to the market." Furthermore,
a
it's
good idea not to commit
all
your available investment funds. For example,
you have $20,000
188
needs,
it
10%
to
may
left, after
be wise to
90%
in the
of
if
deducting those basic
commit anywhere from
market
at various times,
depending on opportunities and your analysis of
market conditions. Before committing the greater
share of your funds,
you should have
good back-
a
log of profits and be extremely optimistic about
the general
market outlook. That extra cash
posi-
you
tion will provide maneuverability and help
maintain an objective viewpoint, which
to
2.
market
is
vital
analysis.
Hoiv much
are
you prepared
phisticated investor, "lose"
to lose?
is
To
the unso-
word. The
a dirty
experienced investor knows that any situation can
turn sour. Just
a
as
Napoleon always allowed for
margin of error on the
allow for market adversity.
must determine
willing to run,
if
A
good business
how much
and how much loss he
in
advance
to take, before retreating.
be there;
you must
battlefield,
you want to
you must know when
The market
live to fight
—but only
is
man
he
is
willing
will always
another day,
to say "enough."
favor the sound analyst
risk
The odds
he does not
if
go broke on one or two investments that will
show
a loss.
One
comes to mind
successful trading
uses a
10%
program that
rule. If a stock
pur-
wrong way, the trader gets out
hits 10%. He either gives his broker
chase goes the
when
the loss
a stop-loss order (a standing order to sell his stock
at the
market
if it falls
to a certain point) or he
gives himself a mental stop order
way, requires great
—which, by
self-discipline.
allow themselves a range of possible
2
5%, which may
be
reasonable,
the
Other traders
loss
up
taking
Profits
to
into
189
account one's resources, tax situation, profit backlog and other considerations.
What are your investment objectives? Once you
know how much you are going to commit and
how much loss you are willing to risk, you should
have a good idea of what your objectives are. You
may set yourself a goal of a 2 5 % profit on an
investment, 50% or even 100%
keeping in
—
mind
that, generally speaking, the greater the risk
the greater the potential profit, and vice versa.
You may
prefer simply to ride with the trend,
pyramiding
—
that
is,
buying more stock
as
the
a method must be protected
by an automatic way of getting out of the market,
price
moves up. Such
such
as stop-loss
orders that are kept a certain
distance below the price as
it rises.
either of these approaches,
You may
reject
and rely simply on
when to get out. Whatmethod you use, you should have an objective
in mind before you invest, and stick to it.
How do yon get in? Your attention may be drawn
to a particular stock in any number of perfectly
valid ways. It may be that you like a company's
product or admire its management or you may
have received a tip. There is nothing wrong with
looking into a tip from a reliable source, but it's
a grievous error to buy a stock merely because
chart analysis to determine
ever
—
you've had
a tip. (Also, as the
Livermore put
it,
'Tf you
famous trader
buy on Smith's
Jesse
tip,
on Smith's tip.") You should find
out everything you can about the stock. Read the
you must
190
sell
company's reports and Prospectuses, the data
Moody's or Standard
&
Poor's,
in
and any studies
put out by brokerage houses or investment advisory firms.
You may
information.
can of
Do
as
you
as
flow (profits plus
profits, cash
sales,
its
even write the company for
complete an analysis
depreciation) and other fundamental information.
Then study
the chart. If the construction
is
basic-
and your other analyses agree, the
ally bullish,
odds will greatly favor an investment. Again, the
chart should be consulted to find the best time to
—
buy
breakout point,
at a
normal reaction on
must take your
light
position.
support
You
how much money you
will
and whether you
do
will
a
volume. At
it
you
should determine
commit on
all
or a
level,
this point,
at
stock
this
once or piece-
meal, buying on reactions, or on the "scale-up"
—
that
is,
market
you do
buying additional shares
rises.
that,
as
and
Never buy
you will only compound your
if
the
on the scale-down. If
losses.
Mathematically, that shifts the odds against you,
unless
you have an awful
lot of faith,
an awful
lot
of nerve and an awful lot of money.
5.
Hoiv do you get out? This is undoubtedly the
hardest part of any investment program. The
common laments of Wall Street operators, professional
and amateur
sold while
on
a little
Here
I
alike, are, "I
should have
was ahead!" and "I should have hung
longer!"
again,
you must have an
a plan of action. If
objective,
and
your investment system tends
Profits
191
toward the mechanical, you may decide that (A)
you are willing to assume a 10% loss in any investment; (B) you figure to be right only once out
of three times; hence (C) you must clear well
more than 30% when you are right to make a
net profit.
or
100%
Some
traders set a fixed goal of
or whatever.
One
50%
recent best-seller on
the market claimed that enormous profits were
made by a system of
The author would keep
under congestion
areas,
trailing stop-loss orders.
raising his stop-loss price
which he
called "boxes of
He would get out automatically
on abnormal reactions. Of course, this assured that
price action."
he would always be sold out somewhere below
the top, but as Bernard Baruch says in his auto-
biography, "Only
bottoms."
A
liars
sell
at
tops and
buy
at
pure chartist, on the other hand,
uses chart techniques to determine
out of the market.
He
sells
when
when
to get
his analysis indi-
advance is slowing down, or that a
imminent or already getting under
cates that an
reversal
way.
is
To
wait for confirmation of
excellent method, but
pline,
and some people
enough
To
your
to
employ
repeat: af7y plan
investment plan
own
it
is
is
this
will
better than no plan. Also, an
192
You must know
weaknesses and strengths, and adopt
came
an
never be objective
a highly personal thing.
writer recently
is
approach.
not only meets your needs, but also
The
a reversal
requires great self-disci-
is
a
plan that
one you can
live with.
across a strikingly similar thought
in the
writings of
two famous stock market
stock market was to
there
is
any key
"know
thyself."
to the process of
The
One
know
myself,
I
other said, "If
growing up,
systematic effort of critical self-appraisal.
to
operators.
most important thing one could learn about the
said the
it
And
lay in the
as I
came
acquired a better understanding of other
people."
Aside from your
condition, the
own
foibles,
of course, your financial
amount of time you can devote
and your experience are important
to the
market
in devising an investment
program.
Vrofits
193
— AND
PITFALLS
Chart reading
is
an
awaits the investor
its
not
art,
who
PROFITS
and many
a science,
forgets this. Let us review
a pitfall
some of
Hmitations:
Bombshells:
Dynamic unexpected
"peace scares," or surprise
ing market sentiment in general; they
disasters affecting a single
vividly remembers the
company
market values were wiped out
alter trends.
new
may
be
scares,
affect-
be bonanzas or
or industry.
Wall
Street
after President Eisen-
first session
hower's heart attack in 1956,
trust actions,
events can reverse
may
war
action by the government
chart trends without warning. These
when
billions
in hours.
of dollars in
Proxy
fights, anti-
products, mergers often dramatically
Chart analysis
not hocus-pocus, and
it is
is
based on market psychology,
nonsense to believe,
as
some "pure"
theorists appear to do, that all events are written in the
charts before they occur.
The
chart, in short,
is
not an Ouija
board.
Indecisions, indecisions: Stocks have been said to spend
two-thirds of the time making up their minds what they
Piifalls— and Profifs
195
do in the remaining third of the time. The experienced
will
chartist will heartily concur. Frequently, he
is
does the chart say?" Often, the answer
is:
(However, while most stocks
are giving
no
asked,
"What
"Nothing."
whatever
signal
most of the time, some stocks are always on the move, or
The
getting ready to move.)
analyst with access to
many
charts will find plenty of promising trends or formations.
No two
are alike: It
market that every
a little different
is
part of the attraction of the
situation, like every person,
from
all
others. Since
is
at least
no two patterns form
in exactly the same manner, their interpretation depends
on the experience, judgment and imagination of the chartist.
Granville compares chart reading to piano playing. Anybody can learn to follow the notes on the score, more or
but what comes out
less,
little
is
old lady said to the boy
something
who
else again.
how
asked her
As the
to get to
Carnegie Hall: "Practice! Practice!"
Wha' Hop pen? Sometimes, what seems
to be a con-
firmed, clearly established formation or trend will suddenly
fall
apart without any apparent reason.
may
good old hindsight
it
Even
a
post-mortem
not show why. Admittedly, this doesn't happen often;
will usually find
what went wrong. But
happens.
Quirks:
Many
stocks have personalities of their
and tend to repeat certain patterns
cally to follow, in
which
—
own,
or to behave too errati-
case the analyst will say, "This
One stock may regularly form
may prefer rounding turns
may turn on a dime. There is
stock just doesn't chart well."
double tops or bottoms: another
to saucer bottoms; a third
nothing particularly spooky about
will attract a special kind of
196
this.
A
stock very likely,
market following, which
will
behave in
a certain
by
all its
a cycle
way. Also,
own, or
it
a
may
company may be
in earnings. This individual personality of stocks
here as a pitfall,
who
is
call a
but
it is
affected
be .subject to erratic swings
is
listed
an opportunity. The investor
also
familiar with the longterm behavior of a stock can
turn with increased confidence.
Tidal Waves:
As we have
said before, the
most clearly
defined patterns of individual stocks will disintegrate with-
out warning in a general turn of the market. Hence, the
sound analyst closely follows general market conditions,
both technical and economic.
CONCLUSION
If we have emphasized the limitations of chart analysis, it
is partly because we recall the disrepute into which the
charts
—and everything
after the
about the stock market
else
fell
1929 crash. In some brokerage houses, analysts
had to hide their charts for fear of ridicule or banishment!
That has, of course, long since changed. Nowadays, charts
are studied by the investment advisers of banks, mutual
funds, insurance companies, pension funds, and brokerage
And not only by these professionals, but by an ever
growing section of the investing public. The writer has seen
houses.
hundreds of
letters to the publishers
'^Daily Basis Stock Charts, in
of the weekly service
which subscribers
tell
of mar-
ket successes that they attribute to their use of the charts.
The
service itself does not plug
recommendations;
it
just
any
stocks, nor
make any
gave the facts (in the form of
charts), and these investors felt these facts had given
them
an added edge in the market.
Charts can't guarantee
a
winner every time, but here
Pitfalls—and Profits
\97
are
some of the things they can do:
They can help determine when to buy and when to
by indicating probable levels of support and resistance,
and by signalling trend reversals,
They can call attention by unusual volume or price
behavior
to something happening in an individual company that can be most rewarding.
sell,
.
—
.
They
sideways
ing up.
.
the trend
.
is
—
up,
down
slowing
down
or
or speed-
a life history of a stock at a glance,
demonstrate whether one
is
and whether the price
They
.
.
They provide
tion,
.
help determine the current trend
— and whether
.
.
—
buying on
is
a rally or
on
and
a reac-
historically high or low.
.
.
.
means for confirming (or rejecting) a
decision to buy that is based on economic data or other
factors, including stock tips and hunches.
offer a
.
In short,
how
could
we
'A stock market chart publication of Trendline
198
.
.
get along without
them?
INDEX
All page tiumbcrs in italics refer to
Brunswick, 53
terms used in illustrations.
Bull Traps, 149, 150, 151, 152, 152,
Advance-Decline Line, 166-168, 174,
Aluminium
Ltd.,
i53,153,i54
Burroughs, 132
174, 179,181
Certain-Teed, 90
5
Channels
Amerada, 104
American Machine
& Foundry, 78
& Telegraph,
American Telephone
downtrend, 31,31,
15 8
American Tobacco, 50
Ascending Triangle,
sideways,
}
3 S,
38
1
uptrend, 3i, 37, 37, i6i, 161
119,
120,
120,
Coil, 2/7,
117-118
Colhns Radio, 184
/2i, 121
Averages, market, 157-164
Common Gap,
Avnet, 143
Confidence Index, Barron's 166, 168-
Bar Chris Construction Co., 70
Barron's Confidence Index, 166,
169, J7J, 175, 181
168-
Congestion range, 41, 42, 42, 46, 75
Continuation patterns, 109, 125-130
169, i75,175, 181
Baruch, Bernard, quoted, 188, 192
"Battle for Investment Survival,
1)8, 138-139
Boxes, 125, 126, 126, 129, 130, 134,
The"
(Loeb), 187-188
Bear Traps, 149, 150, 155, 155, 162,
162
134
Diamonds, 125, 128, 129, 130, 1}2,
132,233,133
Flags, 125, 126, 126-127, 129, 130,
Bottom Reversal Day, J36, 136
13i, 131, 232, 132
126, 126, 129, 130, 154,
Pennants, 125, 127, 127-128, 129,
Breakaway Gap, US, 139, 141, 144,
Wedges, 125, 128, 128, 130, U2,
Boxes,
125,
134
144
130,232,131
132
199
Runaway (Measuring),
"Critical juncture," 109, 110
Crowcll-Collier,
Cyclical stocks, 45
General Instrument, 134
Daily Basis Stock Charts, 181, 197
General Motors, 24-26
General Telephone, 154
Daystrom, 92
Descending Triangle,
120,
\2Q,
119,
Diamonds, 125, 12S, 129, 130, 132,
Double Bottom, 73, 74, 75, 77, «3
,
83,
3 8
Head and
Shoulders,
Double Top, 7}, 7i, 74, 75,
76,
.
77,
79,79,80,80
variations,
Dow-Jones
top,
160
56, 56, 57, 60, 62, 62, 67,
5 5,
67, 68, 68, 69, 69, 70, 70, 163,
Industrials, 158, 160, 161,
161, 162, 162, 163, 163, 164, 164
177,177, 178, 17S, 181-182
Downcurving
trendlincs,
3 3,
Downtrend line, 3 0, 3 0, 3 ]
Drew, Garfield, 165, 172
34,
34,
61,61
Hertz, 13
3
High Activity Days, 13
High Volume Zones, 47
3 «
,
163
varieties,
Heli-Coil, 67
40
5,
141-142
Indexes, 159-160
Indicators, market, 157-178
duPont, 83
Dynamics Corp., 94
Eisenhower, Dwight
Internal Trendline, 34, 34
D., 19
Business
International
5
140-141,
Exhaustion Gap, 138,
144,
V
formation,
98,
99- 101,
3 5, 3 5,
V
formation, 101,
101,205,105, 207,107
121, 122, 122
144,144
Inverted True
45-46
First Charter Financial,
1
126-127,
126,
V
formation, 99, 99,
108
8 5
129,
130,
i3i, 131, 232, 132
Investment program, 188-192
Island Reversal,
141,
143,
143,
144,
144
Flintkote, 40
Ford Motor Co., 186
Islands, 13
"French Curve," 34
Kayser-Roth, 93
Gaps, ;3i, 131, 135, i3«, 138,142
Breakaway, 13
Common,
19,
Inverted Triangle, 119-220, 120, 222,
101, i06, 106
125,
Machines,
106
Inverted Extended
144
8,
139, 141, 144, 144
i3X, 138-139
Exhaustion, 138, 140-141, 144, 144
200
72
56,57,58,58,64,65,65
return move, 56, 57, 5S, 59
7S-76
Dow Theory,
rule,
5-72
failure patterns, 64-65, 65, 72,
neckline,
with platform, 75, 76, 76
'Fan,"34,
5
bottom, 55, 57, 5X, 58,71,71
i6/,161
Flags,
Georgia Pacific,
Granville, Joseph, 165-168, 180, 196
132, i33, 133
50%
General Time, 131
General Tire, 81
12}, 12}
Extended
139-
138,
140, 144, 144
(>^
5,
141, 142
Kerr-McGee, 37
Key Reversal Days,
136,246,146
Korvette, 39
131, 131, 135, 136,
Perkin, Elmer, 121
Lecsona, 7^
V
Lcfthandcd
formation,
10\ ,
101,
/06, 106, lt}7, 107
Line bottom, icc Long base
195-198
pitfalls and,
"Pull-back effect,"
RCA,
144
Line top,
195-198
187-193
Profits,
Line formations, S5, 85, 87, 88, \44,
3
1,J2
116
Resistance, 41-53
85
Resistance area, 46
Lionel, 82
Resistance levels, 41, 43, 43, 44, 44,
Litton, 122
Livermorc,
Jesse, cjuoted,
46,47,48,49, 5i,51
190
Return Move,
Loeb, Gerald, 188
Long
Pitfalls,
S5, 85, 86-87, 88,
base,
90,
)(9,
56, 57, 5X, 59
Reversal Days, 13 5-138
90,9/,91,i3/, 131
Bottom,
with "shake-out" move, SS, 88
Key, lil, 131, 135, 1)6, 136, 146,
M formation,
sfi'
Double Top
Major
Top, 135, i36
Reversal patterns, 109, 12
1 1
top, 8
136
146
Mack Trucks, 107
Magnavox,
i 3 6,
5,
129
Ronson, 183
5
"Rounding turn,"
Market averages, 157-164
Measured Move,
109-113,
\l-\,
114,
sec
Saucer forma-
tions
//5, 115, ii6, 116, l(>2
Runaway Gap, lU, 139-140,
down, 1\2, 112
Saucer bottom,
up,
n 0,
Minerals
1 5
Saucer formations, X6, 86, 87, 88
3
Saucertop, X6, 95,95
average, 179
200 Day, 179-182, iX3, 183,
"Shackout,"SX, 88
i
H,
184, /)f5, 185, iJ(6, 186
Short
Interest
Ratio,
NAFI, 144
Sideways trendline,
Siegler, 95
New
Smith Corona, 146
Methods for Profit in the Stock
Market (Drew), 165
Times average of twenty-
five industrials,
1
59
Occidental Petroleum, 7
Odd-Lot Index,
Trendline's, 171-173,
177,177, 17i, 178, 181
One-Day
Island Reversal, 141, 142
166,
169-171,
/76, 176, 181
Neckline, 56, 57, 5S, 58, 64, 65, 65
New York
144, 144
86, X9, 89, 92, 92,
9}, Si, 94, 3^
1 1
& Chemicals,
Moody's, 191
Moving
)(6,
Standard
&
3 0, 3 0, 3
i
Poor's, 159, 160, 16}, 163,
164, 164, 182, 191
Standard KoUsman, 80
Strategy of Daily Stock Market Timing
for
Maximum
Profit
(Granville),
165-167
Studebaker-Packard, 123
Owens-Corning, 105
Support, 41-53
Pennants, 125, 127, 127-128, 129, 130,
Support area (zone), 42, 43, 43, 46,
Hi,
131
4«,48,49, 50, 50, 52, 52
201
Support
levels, 41, 43, 43,
44, 44, 47,
Triple Bottom, 76, 76
48,49
Triple Top, 76, 76, 82, 82, 162, 162
potential, 46,46, 48
True
valid, 4X, 48, 52, 52
Two-Day
Symmetrical Triangle, 118, 119, 120,
120, 121, 121, 122,122, /23, 123
137,
142,
179-182,
186
Reversal Day, 13
TXL Oil Corp.,
136
5,
155
Universal Match, 145
Transitron, 152
Universal Oil Products, 52
Traps, 149-151
Upcurving
155,762,162
Bear, 149, 150, 155,
Bull, 149, 150, 151, i52, 153, 153,
154
Uptrend
V
trendlines, 33, 34, 39, 39
line,
.
30, iO, 31, 37, 37
formations, 97-108
Extended, 98, 99-101, 101, 106
Trcndlines
Inverted True, 99, 99, 108, 108
downcurving, 33, 34, 40, 40
downtrend, 30, 30,
3 i, 3 8,
Inverted Extended,
38
3
5-36
Varian Associates, 72
"pull-back effect," 31,32
30,
Vertical Line Charts, 22-26
3 /
channels on, 31,31
support and resistance levels and, 48
upcurving, 33, 34, 39, 39
uptrend, 30, 30,
variations,
Trendline's
3
3-3
J ;,
daily,
23,23,24-25,26
monthly, 24
37, 37
trendlines on, 29, 30, 30, 31,
5
3 1
weekly, 24, 26, 26
Odd-Lot Index, 171-173,
177, 177, 178, 178, 181
yearly, 24
Vicwlex, 91
Trends
Volume
spotting, 29-32
straight-line,
105,
True, 98,99, 99, 104, 104
tactics and,
3 0,
105,
Lefthanded, 101, 101
internal, 34, 34
sideways,
101,
107,107
"fan," 34, 35,35
market
137,
183, 183, 184, 184, 1X5, 185, 186,
Texas Instruments, 114
54,
Reversals,
200-Day Moving Average,
Technicolor, 68
/
formation, 98, 99, 99, 104, 104
144, 144,145,145, 147, 147
"Technical rebound," 45
Top
V
Double Tops and Bottoms and, 75
27
volume and, 32-3
Line and Saucer formations and, 87
on Vertical Line Charts, 24, 25, 26
3
Triangles, 117-120, 121, 121, 122, 122,
223,123, 125,131, 131
support
and
resistance
levels
and,
46-47
trends and, 32-33
Ascending, 119, 120, 120,121
Descending, 119, 120, 123
W formation,
Inverted, 1X9-120,121,122
Wedges, 125, 128, 128, 130, 132, 132
Symmetrical,
118,
119,
121, i22, 122, 123, 123
202
120,
121,
see
Double Bottom
Westinghouse Electric, 108
Zenith, 147