ing point. If the volume signal does not
show up, your selling objective is this Red Parallel, at a limit or on tight progressive stops.
In case there is no such volume signal at the top of the move and the move does not reach
the Blue Trend or make a new high, you are very likely running into a Triangle situation.
In that case, you will have to wait for a breakout one way or another. Meanwhile, maintain
your stop protection underneath.
Selling stock short
• Preparatory selling signals (indicating an opportunity for short sales may be in the
making).
• Penetration of Red Trend to a new low closing (in most cases). The simple breaking
of an ascending Red Trendline where no other pattern or indication is present is
not sufficiently conclusive evidence of Reversal to justify commitments.
• Contact with descending Red Trend if Blue Trend is also descending, provided the
trends do not converge (Parallel or Divergent Trend Channel).
• Contact with horizontal Red Trend if Blue Trend is also horizontal or descending
(Rectangle, Descending Triangle).
• Penetration of ascending Red Trend (with or without volume increase) if Blue
Trend is descending (Symmetrical Triangle).
• Execution of short sales (after preparatory selling signal).
• In case the previous Red Trend has been descending, draw the Red Parallel and
sell at or near this line.
• In case the previous Red Trend has been horizontal or ascending (that is to say,
emerging from Rectangles, Triangles, and various Reversal Patterns), sell on a
rally of 40%–45% of the distance from the last previous Minor Top to the extreme
Bottom of the most recent move.
Covering short sales
Immediately on execution of the short sale, determine the stop level (see Chapter 27, Stop
Orders) and place your protective stop. Penetration of this stop level will automatically
close out your transaction. The stop level may be moved down according to the three-days-
away rule, but it may never be moved up.
If the stock closes above a previous Minor Top (thus setting up an ascending Blue
Trend), buy to cover on tight progressive stops.
If the stock declines on moderate volume and then develops unusually high volume on
any day during the decline before either the Red Trend is broken (with a close below that
trendline), or before the stock has made a new low closing under the last Minor Bottom,
close out the transaction on tight progressive stops.
If the stock develops high volume on the day on which it either breaks and closes below
the Red Trend or makes a new low closing under the previous Minor Bottom, hold it short.
If heavy volume again occurs on the following day or any subsequent day, however, buy
to cover on tight progressive stops.
You will find in many cases the heavy volume signal will develop (sometimes with also
a One-Day Reversal or an Exhaustion Gap) on or near the Blue Parallel; watch especially
for this volume indication as a sign of a good profit-taking point. If the volume signal does
380 Technical Analysis of Stock Trends
not show up, your buying objective is the Blue Parallel, at a limit or on tight progressive
stops. In case there is no such volume signal at the bottom of the move and the move does
not reach the Red Trend or make a new low, you are very likely running into a Triangle
situation. In that case, you will have to wait for a breakout one way or another, meanwhile
maintaining your stop protection overhead.
Additional suggestions
When a level is reached that appears to be either a Minor Bottom on a reaction or a Minor
Top on a rally, and when the stock continues to stall and remain at this point, moving in
a very narrow range for three weeks or more without giving any signal either by way of
price change or volume action as to its next move, it is wise to assume this congestion is
definitely a key area and should be considered a Minor Top or Bottom; protective stops
should be adjusted to it as a Basing Point, instead of the previously established Top or
Bottom, as against the possibility that the move out of this area, when it comes, may be in
the wrong direction.
After a series of moves in a trend, with each move in the Primary Direction marked
by heavier volume than the retreats or Corrective Moves against the trend, you are likely
to have a move in the Primary Direction, which is marked by extraordinary volume (much
larger volume than the normal increase for a Primary Move). On such a move, after taking
your profits on previous commitments, you would ordinarily begin to plan the next
commitment on the Correction. In this particular case, noting the extreme volume, you
would cancel any immediate plans for further commitments in the Primary Direction.
The reason for this is such climactic volume normally indicates the final “blow-off”
of the Intermediate Trend, to be followed either by a Reversal, or at least by a period of
stagnation, or by formation of Consolidation Patterns, or by Intermediate Correction. In
such a case, it is not safe to make any further commitments on this trend pending further
developments and the positive reassertion of the trend.
If you examine daily charts of various stocks, covering long and important trends,
you will find the series of Minor Moves making up the Intermediate Trend is likely to
culminate in a Minor Move marked by tremendous volume. This is truer of Tops than
Bottoms, although at the end of the Panic Phase of a Bear Market, we very often see
climactic volume. The climax indicates, on the other hand, the sale of large amounts of
stock by strong investors to weak traders, near the top; on the other hand, the liquidation
of holdings by weak traders occurs near the bottom, into the hands of strong investors who
will hold them for the next Major Move.
One of the most common errors, and easiest to fall into, is to mistake a Climactic Top
or Bottom for a normal confirmation or preparatory signal for a new commitment in line
with the preceding trend.


to weak traders, near the top; on the other hand, the liquidation
of holdings by weak traders occurs near the bottom, into the hands of strong investors who
will hold them for the next Major Move.
One of the most common errors, and easiest to fall into, is to mistake a Climactic Top
or Bottom for a normal confirmation or preparatory signal for a new commitment in line
with the preceding trend.
It is similar in nature to the error often made by novices in the market of buying on
the Minor Tops (becoming dazzled with the rapid price advance and the great volume of
activity). However, in the case of these final “blow-off” moves, the volume is greater and
the adverse portent far more serious.
General outline of policy for trading in the Major Trend
 A. Always trade in the direction of the Major or Primary Dow Trend (EN: see the editor’s
comments in Chapter 3) as it is indicated at the time.
381Chapter twenty-nine: Trendli nes in action
 B. If the two component Averages of the Dow Theory (Industrials and Rails; EN9:
Transportations) are not in agreement, trade in the direction of the last established
Primary Trend but only in the component that is still following that trend.
 C. Examine charts of group Averages covering groups of businesses in the same or
related lines; trade in the Primary Direction when the trend of the group corresponds.
 D. Trade in any particular stock when its own individual chart indicates a trend in the
same direction as the Primary Trend, and when the technical picture has indicated a
probable move in that direction.
Make all new commitments on the reactions or rallies following the signaling move
in the Primary direction, except in the case of Primary Reversals from Bull Market to Bear
Market, when short sales may be made at the market immediately following the Reversal.
Exception: after an extended move or a series of moves in the Primary Direction, when
signs of exhaustion and Reversal appear in individual charts, commitments in the opposite
direction may be made with objectives limited to a correction of the preceding Intermediate
Move in the Primary Direction.
(EN9: Now the reader’s head is spinning and the color blind are completely confused. As this
book is unfortunately printed in black and white, the reader without colored pencils will be at sea.
This is what I recommend: take out your colored pencils and color the lines yourself. The principles
articulated here by Magee are of great value to a trader and are worth studying.)

383
chapter thirty
Use of Support and Resistance
We know that after many breakouts from well-defined Reversal and Consolidation Patterns,
we get a short countermove back to the edge of the pattern and the checking of this move
at that point is an example of Support or Resistance, as the case may be. Also, we should
be familiar by now with the tendency of stocks to move up or down in a series of zigzag
steps (EN10: i.e., waves and wavelets). If the move is upward, the reaction after each advance
tends to stop at the level of the preceding peak. If the move is downward, the rally after
each decline tends to stop at the level of the preceding bottom. This is again a matter of
Support and Resistance and provides the basis for buying on reactions or selling on rallies.
It has also been pointed out Intermediate Secondary Moves will frequently stop at or close
to the previous Intermediate Top or Bottom.
It is necessary to evaluate the importance of these phenomena of Support and Resistance
and apply them in market practice, for they are among the most important tools we have.
Unfortunately, it is not easy to reduce this particular subject to a neat formula or body of
rules. (EN9: And the effort will be made. See endnote of this chapter for an interesting effort to do
just that.) Here you will depend very largely on experience and observation. You will have
to be alert in spotting the levels at which Resistance or Support is likely to be encountered,
and some judgment is needed in balancing the various factors that will affect the situation.
For example, there is a stock that has broken up out of a well-defined Rectangle of
considerable duration. Should the heavy volume of the breakout move give way to a dull
reaction, you will look for an opportunity to buy this stock at a point a little above the top
level of the Rectangle. It will probably not penetrate very far below that level and, indeed,
will often fail to react all the way to the Support. If the stock should then advance to a new
high, and once more decline on low volume, you may look for another buying point at about
the level of the peak reached on the original breakout. Another advance may be followed
by reaction to the second peak, and this process may be repeated a number of times, each
reaction carrying back to the level of the preceding high.
Now we all know this sort of thing does not continue indefinitely. When the stock first
breaks out, moving from, say, 15 to 19, we may buy rather confidently on the reaction to 17 ,
if that is the Support Level. If we did not buy on this move, we may buy with considerable
assurance on the reaction to Support after the next advance. This advance might have
carried the price to 21 and our buying point would be at the previous peak of 19. As the
stock moves up to 25, 30, 40, it must be clear we are approaching a real Top; although we
cannot say where that Top will be reached, we can be sure it is becoming increasingly
tempting to long-time holders of this stock to sell and take their substantial gains. The
series of steps is bound to come to an end. To be sure, the Major course of the stock and
of the market may continue up for months or years, but after a series of sharp rises, we
may reasonably expect a Reversal and a rather substantial Intermediate Decline before the
upward move is continued.
Therefore, we must regard each successive step of advance with increasing suspicion;
after a s

eBooks\Technical Analysis of Stock Trends 11thed\original\Technical Analysis of Stock Trends.pdf


. The
series of steps is bound to come to an end. To be sure, the Major course of the stock and
of the market may continue up for months or years, but after a series of sharp rises, we
may reasonably expect a Reversal and a rather substantial Intermediate Decline before the
upward move is continued.
Therefore, we must regard each successive step of advance with increasing suspicion;
after a stock has made three such moves in the Primary Direction, it is time to look for an
Intermediate Correction or at least for an important period of Consolidation. Thus, we have
384 Technical Analysis of Stock Trends
the rough shape of a rule. Buy on the reaction to Support after the first breakout; buy on
the reaction to the first Minor Peak after the next move, but do not buy on the reaction to
the second Minor Peak.
Let us say, then, we have been successful in two short-term moves, buying on the
reaction to Support and selling on the climax after a new Top has been made. Nevertheless,
we have decided not to attempt a third such trade. What, then, may we expect next? We
may see a period of Consolidation, we may see the beginning of an Intermediate Decline,
or we may see the stock actually go right on moving up. No matter—we will wait for the
Intermediate Reaction. We will wait until the stock makes a very substantial decline, and
this may take many weeks. Then, if the Major Trend has not reversed itself, we will again
look for a buying opportunity at (or somewhat above) the Intermediate Support, which
will usually be the top level of the advance preceding the one just completed, for this is the
level from which the next Primary Advance is likely to proceed and is a good buying point.
We find the same situation in Bear Markets. A breakout is likely to be followed by one,
two, three, or more steps of decline, with intervening rallies to Minor Resistance. Sooner
or later (and we would count on no more than three such steps in a series), we will get a
turn and an Intermediate Recovery. We will then wait for this rally, which may itself be
made up of several Minor steps, to reach or approach closely the preceding Intermediate
Bottom, at which point we may look for substantial Resistance. Here is the place again to
put out shorts.
Questions will come to your mind. One of them, and one of the most important: how
do we decide when an expected Support or Resistance has failed us, and at what point do
we then abandon our position?
It will be clear this question can be a very painful one. Let us suppose you have seen a
stock rise to 25 and have placed an order to buy it at 23 1/2 on the basis of expected Support
at 23, the level of a previous Minor Peak. The order is executed during a dull reaction. The
next day, the stock slips down to 22 1/2, on perhaps only two or three sales. The next day,
it continues down to 21 1/2, still on low volume. Plus, during the next week, it goes down
steadily, without much volume, nearly every sale being at a lower price, as though no new
bids were being received, and as though no substantial number of bids were standing on
the book at any point. A decline of this sort can eventually assume the magnitude of an
Intermediate Reaction. The move may carry down to 15 before it turns. Obviously, this was
not what you expected, and you should be out of the stock.
The painful part of these drifting moves is you do not want to sell your stock (which
you bought at 23 1/2) on just a slight move down, say to 22 3/ 4, because the probability
is strong it will shoot up at any moment to new high levels. Yet, at some point during a
continued decline, you must decide, “This has gone through the Support; I should sell and
take a small loss now, rather than risk a more serious loss.” The most painful part of all is,
sometimes, the moment you have sold and taken your loss, the stock will come to life and
complete what would have been an extremely profitable move.
You might just as well prepare yourself for this sort of disappointment, for it will
happen to you. To avoid nights of pacing the floor and days of worry, you should decide,
at the time you make the original commitment, just how much leeway you are prepared to give
the stock. Then you will not be tempted to put off a decision from day to day if things are
not going the way you hoped.
In the case of purchases or short sales made against Minor Peaks or Bottoms, as the
case may be, you might set up the following rule. Measuring from the extreme high of the
previous (Supporting) Minor Top, or the extreme low of the previous (resisting) Minor
Bottom, set a stop using the method we have outlined in Chapter 27 . (EN9: See also Chapter 28
385Chapter thirty: Use of Suppo rt and Resistance
and consider the risk limitation procedures in Chapter 42.) This often would be the intraday high
or low, not necessarily the closing price. Penetration to that extent should be presumptive
evidence that your expected Support or Resistance is not going to function.
Where you are buying against Major or Intermediate Support, or selling short against
Major or Intermediate Resistance, you can allow a little more leeway for penetration. In
such cases, examine the Support or Resistance Area, and estimate visually its core or axis;
in other words, try to gauge the “center of gravity” of this area, the point is most nearly the
mean price of sales occurring there, taking into account the volume, because the important
thing is to determine the approximate price level at which a great many shares changed
hands. Having determined this point, set your stop beyond it, according to the methods
specified in Chapter 27 .
Up to this point we have concerned ourselves (reversing the usual order) with how to
get out of situations that have gone bad. We have said nothing about where, precisely, to
get in, nor where, precisely, to take profits.
In the matter of getting in, that is, making the original commitment, you might feel


ed this point, set your stop beyond it, according to the methods
specified in Chapter 27 .
Up to this point we have concerned ourselves (reversing the usual order) with how to
get out of situations that have gone bad. We have said nothing about where, precisely, to
get in, nor where, precisely, to take profits.
In the matter of getting in, that is, making the original commitment, you might feel
there is a conflict between acting on Support or Resistance and acting on either trendline
action or a computed reaction of 40% to 50% after a previous move. At times, these conflicts
might arise and it is not possible to state any exact rule that will reconcile these three
different trading indications. In a great number of cases, however, you will be delighted to
observe a reaction of about 45% will bring your stock to the trendline and will also bring
it near to the Support or Resistance Level. After a move to a new Minor Top, a stock may
be expected to react (1) about 40% to 50% of that move, (2) to the Basic Trendline, and (3) to
the previous supporting Minor Top. Your purchase, then, will be based on a consideration
of all three factors. If you have bought “early,” on the basis of one factor alone, you may
expect the stock to react a bit further without spoiling the triple indications to the extent
of catching your stop. It would be best to make your purchases on the basis of whichever
factor indicates the smallest reaction and to place your stop beyond the greatest reaction
indicated by any of the three. Ordinarily, there will not be too much difference between
these three factors. As usual, the method applies in reverse to short sales.
In cases in which you are buying after an Intermediate Decline or selling after an
Intermediate Rally, you will lean somewhat more heavily on Support and Resistance than
on either a computed percentage for the Secondary Move or a trendline. You will examine
the history of the stock, preferably on weekly or monthly charts first, to see its Major Trend,
to locate important Support or Resistance Areas, and to estimate roughly the extent of
the Corrective Move, the termination of which you are trying to gauge. You will then
check these data in the more detailed picture you can get from your daily charts. As the
Intermediate Corrective Move approaches within 4% or 5% of the Support or Resistance
Level, you may come to a day of extremely heavy volume, and this day may also be a
One-Day Reversal. If so, your commitment should be made at once and protected by a
stop. Otherwise, you may make your commitment whenever the chart begins to hesitate
or flatten out, or, lacking other indications, when it has come to within 3% of the Support
or Resistance.
In this case, your problem in taking profits is a bit more difficult than in the case of
Minor Moves. You are expecting a Reversal of the Intermediate Corrective Move and the
establishment of a new Intermediate Trend in the Primary Direction. You are at a point
at which the course of the market is uncertain. You must realize prices may stay at the
Support (or Resistance) Level, forming a Line or Rectangle, and finally penetrate that level,
establishing Reversal of the Major Trend. However, they may be stopped and turned at the
Support or Resistance Level, only to make a small move away and then return for another,
386 Technical Analysis of Stock Trends
and possibly successful, attempt at penetration. Then again (and this is what you hope), a
continuation of the Major Trend may develop with a sharp move on increased volume in
the favorable direction, to be followed by a Minor Corrective Move and another thrust in
the Primary direction—perhaps a new series of Minor Moves carrying the entire Primary
Trend into new ground.
Taking these cases one by one, if the stock remains at the Support or Resistance Level
for many days or several weeks and then penetrates that level, closing at a price that is
clearly through it, get out at once. If the stock makes a small move in the right direction
and returns to the Support or Resistance, prepare to get out if there is a definite penetration.
If, however, the move is in the right direction, watch for volume indications, and prepare
to set tight stops to take your profits as soon as heavy volume appears (except on a day of
breakout). Once such a signal has appeared, you are then justified in continuing to make
new commitments on the following Minor Correction, and the one following that, for you
are again moving in the Major Trend.
One other situation should be mentioned; up to this point, we have assumed all of your
commitments have been made to take advantage of a move in the direction of the Major
Trend. Let us suppose a move that has carried a stock up to new high levels in a series of
Minor steps proceeds to form and then breaks out of a Reversal Pattern. We must now
look for a Secondary Move of Intermediate extent. We may sell short on the rally to the
Minor Resistance, and, if the move continues down, we may make a second and even (more
cautiously) a third commitment against successive Minor Bottoms. In this case, we will be
looking for the decline to end somewhere in the vicinity of the last previous Intermediate
Top, which is now a Support Level. Similarly, following a recognized Reversal Pattern
and upward breakout on volume during a Bear Market, we may expect an Intermediate
Rally that can be used for trading up to the previous Intermediate Bottom where strong
Resistance is likely to show up. A skillful trader can turn these Secondary Moves into
profits during periods when it is not possible to trade along the indicated Primary Trend;
however, it should be remembered, ordinarily, such moves cannot be expected to go as far
as will those in the Primary Direction.
We might close this chapter by reminding you again that, although Support and
Resistance action in the Minor Trend is shown clearly in daily charts, the Int


econdary Moves into
profits during periods when it is not possible to trade along the indicated Primary Trend;
however, it should be remembered, ordinarily, such moves cannot be expected to go as far
as will those in the Primary Direction.
We might close this chapter by reminding you again that, although Support and
Resistance action in the Minor Trend is shown clearly in daily charts, the Intermediate and
Major Supports and Resistances are most easily recognized on weekly or monthly charts.
(EN9: It seems to this editor that Magee’s discussion here of the use of Support and Resistance
is really most pertinent to position building and pyramiding. Alternatively, the method applies to
an issue that has just caught the analyst’s attention, and he has missed the breakout, which is
usually obvious (at least in hindsight). I feel strongly that the serious trader should not miss the
original breakout. Chasing moving trains is never a healthy activity. Does this appear an impossible
occupation, to watch thousands of stocks? Impossible for your average analyst, but not for your
average computer. For example, the computer may be programmed to alert you when a stock is
gapping on volume or trading at volumes that are suspiciously large. And given the plethora of
services and user groups, the trader stands a good chance of spotting an issue to put on his watch
list before it takes off.
Investors should, in theory, never miss a breakout, because they should be watching a much
more limited group of issues. In my opinion, these are primarily indexes and iShares. An investor’s
portfolio might include a few well-chosen individual issues, but these would be of obvious visibility
to the individual, for example, biotechs for an investor with some knowledge of the area, or Internets
for an engineer, and so on.
The unending effort to remove ambiguity from market interpretation extends to identifying areas
of Support and Resistance. Metastock ( http://www.metastock.com), an excellent software package,
387Chapter thirty: Use of Supp ort and Resistance
has a number of value-added packages. One of the more interesting of these, Powerstrike™ by John
Slauson of Adaptick, Inc. (http://www.adaptick.com) attempts to mathematically define Support and
Resistance zones. Slauson’s package is interesting, and the reasoning and observation behind it are
interesting as well. Market analysis is rooted in one thing: the intelligent observation of the operation
of the market. Dow watched the markets for years and came to the understanding of waves that led
to Dow Theory. Schabacker and Edwards, equipped with these observations and comments, collated
and observed more data and recognized the persistent patterns that occurred over and over in the
markets, and added Magee for his practical engineer’s approach to solving the tactical and strategic
questions. In the 1980s, one of my friends, a Chicago market maker in the options pit, noticed that
there was a 90-second delay on data coming out of the futures pits to the options pit. He set up a
“human ticker” with a direct phone connection to his pit and enjoyed a 90-second advantage over
other market makers until the glitch was noticed and corrected.
Slauson (among others) noticed that important trading and Support and Resistance in optionable
stocks tended to cluster around important option strike price levels. In fact, these levels influence
stock prices and may be said to determine where “important” buying and selling occur. Obviously,
Support and Resistance Levels are set by concentrated face-offs between buyers and sellers. A
battleground metaphor is appropriate: since the time of the Greeks, battles have occurred time and
again in the same physical locations. The reason is obvious. You need physical space to deploy an
army. So commanders will be attracted to the plain or open ground for face-offs and to the high
ground for defensive purposes. Option strike prices have the same attractiveness for traders that a
good battleground has for a military commander. A good place to test the enemy.
Powerstrike™ analyzes the instrument price and volume around the nearby option strike prices
and determines whether Support or Resistance is stronger. All in all, this is a clever application of
number-driven analysis to the Support and Resistance question. The chart analyst may supplement
his analysis with a routine like this.)

389
chapter thirty-one
Not all in one basket
(EN: As diversification for the general investor is nowadays infinitely easier, an important endnote
follows Magee’s text.)
Diversification is important because technical patterns do not always carry out their
original promise. If all your capital is tied up in one stock, or in a few stocks of the same
group or line of business, you may be hurt by a false move affecting only your holdings,
even though the rest of the market may continue to hold firm or even to move farther along
the Primary Trend. By diversifying, you are protected by the law of averages against all of
your holdings going the wrong way, except in the case of some Reversal affecting the entire
market or a large segment of it.
Intelligent diversification calls for study of the costs of buying and selling stocks,
especially in small quantities. You might wish to have a portfolio of stocks representing
the entire Dow–Jones Averages, or a selection that includes at least one stock of every
major group. However, if your capital is limited, this might mean buying only a half-dozen
shares of each stock, and the minimum commission charges would make this an expensive
operation, entirely too costly for short-term trading. The short-term trader must always
think of these costs. They are more important to him than to the long-term investor who
may intend to hold the same stock for many months or years. To you as a trader, a quarter
point or a half point may amount to serious proportions when it is multiplied thr


commission charges would make this an expensive
operation, entirely too costly for short-term trading. The short-term trader must always
think of these costs. They are more important to him than to the long-term investor who
may intend to hold the same stock for many months or years. To you as a trader, a quarter
point or a half point may amount to serious proportions when it is multiplied through a
number of transactions.
Your broker can give you a schedule showing commission and tax costs, and in case
there are any important changes in the rates, which you should study to see what effect
they will have on your costs of trading in stocks at various prices. (EN: You may also evaluate
these charges at http://www.gomez.com and by checking websites of http://www.scottrade.com, http://
www.etrade.com, and http://www.tdameritrade.com. Google is, as ever, an important price-checking
resource, and Barron’s publishes a yearly edition evaluating brokerage houses. In general, this editor
believes the investor who does it the “old-fashioned way,” that is, by phone and human broker, operates
at a disadvantage unless the broker’s value added can be quantified and proven.)
You will find your round-trip costs are a higher percentage of the capital invested in
low-priced stocks than in high-priced stocks. Also, the percentage costs will be higher on
a smaller number of shares than on a round lot and increasing as the number of shares
decreases. Additionally, the percentage costs rise as the total amount of capital used is less.
If your capital is, say $1,000 or $2,000, you might do well to divide it into units of about
$500 each and confine your trading to odd lots of stocks selling at 40 or higher. With larger
capital, you could use larger trading units and extend the range of trading into somewhat
lower priced stock. In any case, it is important to diversify your holdings. By dividing your
capital and using it in such a way as to avoid unnecessary penalties in high costs, you will
have greater protection against freak moves and sudden changes that might affect a single
stock very seriously.
On the other hand, if you have sufficient capital to secure plenty of diversification (8 or
10 stocks should be a maximum for an active trading account), you can increase the size of
the trading units. The whole question here is as to the minimum amounts to be invested in
390 Technical Analysis of Stock Trends
a single commitment and, if these amounts were doubled or tripled, it would not increase
costs, but would, in many cases, reduce them.
EN: diversification and costs
In this original chapter, Magee discussed the necessity for considering costs while striving for
diversification. In present-day markets, diversification may be achieved through the use of Standard
& Poor’s Depository Receipts (SPDRs; SPY) and DIAMONDS™ (DIA) and similar instruments
(ETFs) at comparatively reasonable costs. Index funds and mutual funds also represent diversification
and cost control for the general investor. Mutual funds will not control costs and expenses as
efficiently as the Index Shares and ETFs. This is because mutual funds create costs that the Index
Shares do not: management fees and expenses, slippage, the spread, turnover, and taxes resulting
from realized gains. These costs may be avoided by the careful independent investor.
An internationally prominent trader has told me, on more than one occasion, his considerable
trading fortune amounts to what brokers and specialists would have made off of him if he had been
a member of the general public instead of a member of the Exchanges. The most important weapons
in his quiver were seats in Chicago, New York, and San Francisco.
The message is extremely clear. The general investor must control his costs. The more frequently he
trades, the greater his chances of having his capital ground to hamburger meat by brokers, specialists,
floor traders, market makers, tax authorities, Exchanges, etc., etc., because there is undoubtedly
another party out there taking a chunk as the capital changes hands. The phone company maybe.
Trading costs are the last item brokerage firms want to focus on (see the book Where Are
the Customers’ Yachts?). For years, the Street firms and Exchanges controlled commission costs,
keeping them high, but entering the Internet age a different ethos rules—cutthroat (and cut fees)
competition, reluctantly brought to the old-line exchanges and brokers by upstart competitors, and
not suppressed by the Securities and Exchange Commission (SEC) and the Commodities Futures
Trading Commission.
It would be misleading to attempt to analyze costs in this book because of the mercurial nature
of cost figures as firms compete in the Internet age.
The SEC runs a mutual fund calculator for computing costs of mutual funds. Mutual funds are
among those that manage somehow to not be overly punctilious in estimating (read, disclosing) their
costs to investors. Another good resource for researching mutual funds is http://www.morningstar.
com.
But let me emphasize once again that iShares and ETFs have really made mutual funds obsolete
if the investor uses the simple procedures outlined in this book.
391
chapter thirty-two
Measuring implications in
technical chart patterns
If you show one of your charts to a friend and tell him it looks Bullish, he will reply
immediately, “How far do you think it will go?” This is an automatic response; you can
count on it.
The question is a good one. How far is this expected move likely to go? You do not
know, nor does anyone. Very often you can say, with a fair degree of assurance, “This stock,
which has just made such-and-such an advance, is likely to react to around such-and-such
a price.” That you can estimate fairly closely 7 or 8 times out of 10, by referring to the Basic
Trendline, the parallel projection of the top trendline, or the Support Level.
These rules work out fairly well as applied


nor does anyone. Very often you can say, with a fair degree of assurance, “This stock,
which has just made such-and-such an advance, is likely to react to around such-and-such
a price.” That you can estimate fairly closely 7 or 8 times out of 10, by referring to the Basic
Trendline, the parallel projection of the top trendline, or the Support Level.
These rules work out fairly well as applied to reactions in the Bull Trend, and similarly,
we can estimate rallies in a Bear Trend. Not so with the move in the direction of the trend
itself. A Bullish Move may, and often does, overrun the upper trendline by running up as far
again as the move to the trendline. A Bearish Move may exceed the downtrend, dropping
apparently without limit. (That is one reason we have protective stops—to prevent disaster
in case the trend suddenly reverses itself.) Additionally, it is why we prefer the use of nearby
progressive stops as a method of taking profits, rather than using limit orders placed at a
trendline, Resistance Level, or at some other definite point. Very often, to be sure, a stock
will check its advance at one of these indicated points, but the cases in which a move
carries beyond its objectives are fairly common, and in such cases, no one can make even
a reasonable guess as to what limit the stock will reach on the move.
This follows because the move itself is an unreasonable one. It is an example of public
participation, the surge of uncontrolled speculation (and, very often, it is the final surge of
that particular trend).
In exactly the same way, and often more violently, the uncontrolled falling out of trend
in a downward move is an example of Panic, and being completely beyond reason, it follows
no rule and knows no predetermined limits.
There are, however, certain patterns and certain situations in which we can make some
estimate of the probable extent of a move in the Primary Direction—usually an estimate of
its minimum extent. In these cases, we have a guide to help us in making the decision as to
whether the situation offers enough potential gain to be worth the risks involved. Also, the
indicated measurement gives us at least a hint of about where we might reasonably begin
to look for the volume that will indicate the Top.
For example, a decisive breakout from a Symmetrical Triangle is likely to carry at least
as far as the height of the Triangle measured along its first reaction. This is a conservative
measurement. The move may go much farther. In fact, the trend implications of the Triangle
would suggest a continuation equal to the move preceding the Triangle and leading into it,
for if the trend continues valid, the move should run up to the upper limit of the channel.
In the case of a Reversal, we would also use the height of the first reaction as a minimum
measure. With Right-Angle Triangles, we also can take the long side (formed by the first
reaction) as a rough measure of the minimum expected move.
392 Technical Analysis of Stock Trends
What is more, with Rectangles the minimum we may reasonably expect after a breakout
is a distance equal to the height of the Rectangle. The Head-and-Shoulders Pattern carries
a good measuring stick. The height of the formation from the extreme Top of the head
down to the point directly beneath where the neckline crosses represents the minimum
probable move from the neckline down. Again, this is a matter of Trend Channels, and
most emphatically, this is only a minimum move. Some Head-and-Shoulders Patterns,
representing an implied move of no more than 3 or 4 points, have marked the start of a
decline eventually running to hundreds of points.
The rather unusual breakout that takes the form of an almost vertical “mast” running
up (or down) many points before arriving at a stopping point, where some Consolidation
Pattern is made, carries with it a most explicit measuring rule, and one that works out with
amazing accuracy. The Flag or Pennant Consolidation will occur at the halfway point—“the
Flag flies at half-mast.” The speculation move leading up to the Flag very likely will be
duplicated by another rise, at least equal to the first, in the near future. Following this rise,
there may be another Consolidation and other rises, or there may not. After two surges of
this sort, it is best to stand back and let someone else carry the ball. If you keep enough
charts, and for a long enough time, you will see many perfect examples of this beautiful
formation. You will also see some imperfect examples and some failures. And because the
move is so spectacularly profitable when it works out, you will be tempted to buy on every
Consolidation Pattern formed after a sharp rise. It would be best to wait until the example
is clear—a nearly vertical, almost unbelievable rise, followed by several days of congestion
with practically no volume. If the congestion continues or sags off for more than about three
weeks, sell the stock; it is probably not the real thing.
Needless to say, this same pattern appears in reverse in downtrends and can be traded
on accordingly.
The questions relating to the measuring attributes of gaps have been reviewed in detail
in Chapter 12. The only type of gap that carries substantial implications as to the extent of the
move to follow is the Runaway or Continuation Gap. The appearance of such a gap during a
rapid price move is likely to mark approximately the halfway point; two or more such gaps
can be weighed, in connection with volume and total extent of the move, to estimate the
probable midpoint of the move and thus to predict a probable ultimate objective.
Measuring properties have been ascribed to other patterns and occasionally work out
according to plan. In general, the best measuring devices are your trendlines, Support-and-
Resistance Levels, and the all-important signals of increased volume.
Other tools exist for measuring moves. Arthur Sklarew (see Bibliography) describes


idpoint of the move and thus to predict a probable ultimate objective.
Measuring properties have been ascribed to other patterns and occasionally work out
according to plan. In general, the best measuring devices are your trendlines, Support-and-
Resistance Levels, and the all-important signals of increased volume.
Other tools exist for measuring moves. Arthur Sklarew (see Bibliography) describes
the-rule-of-seven, which I have often found effective. In addition, Wyckoff used PnF charts
to measure moves and I have seen some impressive analyses produced by Professor Hank
Pruden using PnF charts.
(EN9: I have always been extremely chary of measuring moves. If the measurement does not
lead the trader to indulge in expectations that distract him from the crucial nature of the moment
at hand, it might be quite all right. So, as an off-hand casual tool, it might serve some use. Always
better to observe closely what the situation is when the price arrives at the measured point. Decisions
should always be made in the here and now, and not in the “I measured it then.”)
393
chapter thirty-three
Tactical review of chart action
The Dow Theory
(EN: In this chapter, multiple references are made to the tight stop – 1/8 point which decimalizes to
.125. Readers should read this as decimal.13 to.25, depending on the habits of the issue. Issues greater
than a dollar are quoted at two decimal places. Penny stocks can go to 4 decimal places.)
The record shows an investor who had bought a representative group of stocks on every
Major Bull Market signal according to the Dow Theory, as outlined in Chapters 3 through
5, and sold all his stocks on every Major Bear Market signal, since the start of the Dow
Averages, would have come out very well indeed over the years. (EN: see tables in Chapter 4.)
Although this tabulation does not take short sales into account (EN9: now taken into account
in the ninth edition), it would be perfectly consistent to add a representative group of stocks
might be sold short on every Major Bear Market signal and covered at the next Bull Market
signal. Additionally, if the figures for such short sales, based on the level of the Industrial
Average, were included, the total profits on these theoretical transactions, both long and
short, would be enormous. (EN9: Buy and Hold to 2018: $55,411.83. Dow Theory, long only:
$795,592.01. Dow Theory, long and short: $5,757,390.17.) (For illustrations in this chapter, see
Figures 33.1 through 33.16.)
We believe this record carries some weighty implications that have a bearing on the
operations of every trader and investor. We will comment on these shortly, but before doing
so, it should be pointed out that few, if any, investors have actually followed the long-time
Dow signals, buying or selling 100% on every Major signal.
In the first place, to do so would require a long market lifetime and would presuppose
the investor had accepted the Dow Theory in its classic form in toto from the start and he
had never wavered, never altered the definitions nor his method of trading, and never
withdrew any of his capital during the entire period.
In the second place, we would have to assume our ideal investor had an extraordinary
degree of courage to stand firm in periods during which the Major Trend appeared to be
making dangerous threats against his position and an extraordinary degree of patience
to wait out the many months of stagnation when the trend seemed to be getting nowhere
at all.
Finally, we would have to make the assumption the group of stocks actually bought or
sold really represented a fair cross-section of the Averages in that they would make about
the same moves as the Average itself. As a matter of fact, if the group were well diversified,
the chances are good its moves might approximate those of the Averages.
However, it is taking a lot for granted to suppose an investor could meet all of these
conditions over a period of years, which he would have to do to operate strictly as a “Dow
Theory” trader. It is not seriously suggested anyone try to follow any such plan literally.
(EN: Well, in retrospect, why not? Given, in the Internet age, the availability of trading instruments
and markets [DIAMOND™—DIA, Standard & Poor’s Depositary Receipts—SPY] it might not
394 Technical Analysis of Stock Trends
be such a bad idea. The implementation of such a plan in Magee’s time would have been extremely
cumbersome and expensive, but it is eminently practicable in modern markets.)
The important implications of which we spoke are these: if the record of the Averages
shows on these Major Signals it is possible to take substantial theoretical profits over the
long term, and if the Averages are composed of the prices of individual stocks, then the
probabilities favor buying or selling a majority of stocks in line with the Major Trend of the
Averages. The evidence shows Major Trends normally continue for months or years. The
line of “most probable gain,” therefore, is the line of the Major Trend.
On this basis, we would be on safe ground to say when a trend of sufficient importance
gives a Major Signal, the Averages are under way and there will be a greater likelihood of
finding profitable situations among individual stocks moving in that trend than among
those moving in the reverse trend.
1946SOUTHERN PACIFICS X
72
68
64
60
56
52
48
44
Sales
100’s
125
100
75
50
25
XD 1.00
XD 1.00
S S
H
S
SH
NL
APRIL MAYJ UNE JULY AUGUST SEPTEMBER
61 32 02 74 11 18 25 18 15 22 29 61 32 02 73 10 17 24 31 71 42 12 8
Figure 33.1 Head-and-Shoulders Top. The Bull Market that carried Southern Pacific from 8 to 70 in
the years 1941 through 1946 culminated in June 1946 with this formation. Notice the heavy volume
on the left shoulder, lower volume on the head, and small volume on the right shoulder. The breakout
signal, which was decisive on July 15, served notice on holders of long commitments to sell at the
market the next day (at ab


lders Top. The Bull Market that carried Southern Pacific from 8 to 70 in
the years 1941 through 1946 culminated in June 1946 with this formation. Notice the heavy volume
on the left shoulder, lower volume on the head, and small volume on the right shoulder. The breakout
signal, which was decisive on July 15, served notice on holders of long commitments to sell at the
market the next day (at about 63) instead of waiting for the protective stop, which would have been set
at 61, to be caught. Volume eventually developed at the Bottom of the breakout move at about 58 1/2,
which move, incidentally, carried out the minimum measure of the Head-and-Shoulders prediction.
 From this point, however, a weak rally on low volume started and continued up for four weeks.
The weakness of this picture would justify a short sale on a rally of 40% to 50% of the move from the
left shoulder to the bottom or on a return to the neckline, say, at 63. The rally actually extended to
the neckline at 64, broke away on a gap with volume, and continued down in a move that led, in the
next three months, to prices below 40, and later even lower.
 An extraordinary feature of Head-and-Shoulders Tops is the frequency with which a comparatively
small formation, such as the one shown here, will herald a Major Move, changing the course of the
stock for months or even years to come. Not all patterns of this type will lead to such big moves as
this, but no Head-and-Shoulders should be regarded lightly, ever.
395Chapter thirty-three: Tactical re view of chart action
It is suggested you read this preceding paragraph again, carefully. It means we do not
try to sell stocks “at the Top” in a Bull Market. We do not try to “pick up bargains at the
Bottom” in a Bear Market. We do not deliberately buck the kind of trend that history shows
is likely to continue for an undetermined and possibly long time.
What we have said here is stated with a little different emphasis than in previous
editions of this book. You will notice we have not said you will never sell a stock short
during a Major Bull Market or buy a stock in a Bear Market. There will be, and often
are, cases of stocks moving against the Major Trend and, on the basis of their individual
technical behavior, may justify a commitment against the trend of the Averages.
BRANIFF AIRWAYSB NF
1945
JULY AUGUSTS EPTEMBERO CTOBERN OVEMBERD ECEMBER
S
S
S
S
H
H
36
34
32
30
28
26
24
22
20
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Sales
100’s
Figure 33.2 Head-and-Shoulders (or Kilroy) Bottom in Braniff Airways, 1945. Strictly speaking, a
Continuation Head-and-Shoulders after a Secondary Correction in the Bull Market. A Major Bottom,
reversing a long Bear Market, would normally take much longer to form.
 Here we see heavy volume on the left shoulder, somewhat less on the head, and very little on the
right shoulder, with a sharp increase, as required, on the breakout move of September 21. The breakout
was followed by a Throwback to the neckline on diminishing volume, providing a good opportunity
for purchases at 23. The upward move was resumed, and again there was a reaction to the neckline
Support. A second reaction of this sort is not unusual. The closing at 22 3/4 on October 19, below the
previous Minor Bottom, and on increased volume, was mildly disturbing. But in view of the strength
of the pattern and breakout, we would not have sold the stock, and the protective stop at 21 7 /8 was
not even threatened. On October 25, the advance was resumed with a Breakaway Gap and continued
up to 29 1/2, where the move was signed off with a One-Day Reversal and Exhaustion Gap.
 Notice on reaching 29 1/2, “BNF” went into a Consolidation Pattern for more than three weeks,
making an Ascending Triangle, before leaping to 37 1/2. Notice also (we might as well get all we
can out of these examples) the Ascending Triangle takes shape at approximately the halfway point
of the whole advance. We are already familiar with this tendency of stocks in fast moves to form
“halfway” patterns.
396 Technical Analysis of Stock Trends
We feel such trades should be made cautiously and with a full realization the majority
of stocks are moving in a contrary manner. Such trades might be made, for example, in
particular cases as indicated by the charts of the stocks involved, as partial hedges to
reduce overall risk. For example, if a Bull Market had persisted for several years and was
still presumably in effect, but certain stocks had broken badly and showed individual
weakness, a trader might continue to hold three-quarters of his capital in good long
positions but might make a limited number of short sales in the weaker stocks. If, then, the
ASSOCIATED DRY GOODSD G
1946
JANUARYF EBRUARYM ARCH APRILM AY JUNE
72
68
64
60
56
52
48
44
50
40
30
20
10
51 21 92 62 91 62 32 92 33 0613 20 2741 11 82 51 81 52 22 916
Sales
100’s
Figure 33.3 Associated Dry Goods winds up its Bull Market Trend with a Rounding Top. This is a
daily chart for the first six months of 1946.
 The advance in “DG” from 4 to above 72 in just 3 1/2 years, when seen on monthly charts, is a
smooth, accelerating curve that emerged from a long Bottom Formation that had lasted five years
from 1938 through 1942.
 As we enter the final six months leading up to the ultimate peak, note first the action during
January and February. “DG” had just completed a fast run-up in the last quarter of 1945 and was
about due for a Consolidation or a Secondary Correction. On reaching 48, it turned back to 45,
advanced to 50 1/2, to 51, and finally to 52, and then reacted to 44 at the end of February. Had the
move on January 22 gone a little lower and closed below the January 3 low, followed by an even lower
closing on February 26, we would have had to consider this January–February pattern a completed
Broadening Top, a definite Reversal signal. However, the pattern was not perfect, and, therefore, n


advanced to 50 1/2, to 51, and finally to 52, and then reacted to 44 at the end of February. Had the
move on January 22 gone a little lower and closed below the January 3 low, followed by an even lower
closing on February 26, we would have had to consider this January–February pattern a completed
Broadening Top, a definite Reversal signal. However, the pattern was not perfect, and, therefore, not
valid, but the erratic price action shows incipient weakness.
 It is not unusual in these last stages, when public participation is running high, for the climactic
advances to be spectacular and fast; that is what we see here. A five-point Breakaway Gap occurred
on March 25, followed by an advance that petered off at 63 1/2 reacted, and then ran up to more
than 68.
 From here on the move advanced slowly with suggestions of a Convergent Trend and a succession
of “heads” and “shoulders,” and volume dropped off as the Top was reached. The drop on June 4
to below the May 7 Minor Bottom on increased volume would complete the Rounding Top and
call for immediate sale if we were still long; and the penetration of the “neckline” on June 18 was a
conclusive break.
397Chapter thirty-three: Tactical rev iew of chart action
Bull Market continued, he might eventually have to close out the shorts for losses, which
could be regarded as the reasonable cost of “insurance.” On the other hand, if the general
weakness became greater and eventually reversed the Major Trend, then the short sales
would cushion the depreciation of the longs up to the time of the Reversal signal. (EN9: An
extremely wise observation the present editor has developed at greater length in the theory of “natural
hedging.” Given the complexity of modern markets, profits may be made on both sides of the hedge,
and this should be the objective.)
By using an Evaluative Index (see Chapter 38) instead of, or in addition to, the Averages,
it is possible to say, “The market appears to be about 60% Bullish,” or “55% Bullish,” instead
of merely Bullish or Bearish. This takes account of the fact that some markets are more
GREYHOUND CORP G
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBERD ECEMBER
G
34
32
30
28
26
24
22
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Sales
100’s
Figure 33.4 Greyhound: a Rounding Bottom in 1945. A Continuation Pattern after the May run-up
to more than 29 and reaction to Support at 24, the 1944 high.
 In July, volume ran fairly high on downside days, drying up as we entered August. August 10
showed a spurt of volume on the upside, and then more dullness.
 The various small moves through August and September would not give us any basis for trading
operations. The move to a new high in the pattern on August 31 suggested an upturn, and again on
September 19–20, we see another little push up to the 26 level—still not conclusive, however.
 The move that got under way in the week ending October 13 is more definite. This decisive move
with good volume carries right out of the “Bowl” in an almost vertical ascent; not a big move, but a
clear indication of the probable trend. We would look for a point to buy “G” on a correction of 40–50%
of the entire move up from the Bottom, or on a return to near the Support Level around 26. The
purchase would probably be made around 26 1/2. Notice the drying up of volume on this reaction.
 The advance from here to 30, marking an entirely new Bull Market high, came almost immediately.
On November 3, with very heavy volume for a Saturday, “G” closed at 30; since this volume was not
on the day of breakout, we would have closed out the transaction on a tight stop at 29 7 /8 on Monday
(unless we had elected to wait out the next Minor Reaction for a further advance).
 Two weeks later, on the basis of the reaction to good Support, we would have bought “G” again at
about 29 (you cannot figure on getting the extreme low price on any reaction). The following advance
carried up to 34 1/4 in two days. At that point, profits could have been taken or the stock held for the
longer term. “G,” it might be noted, continued up eventually to 54.
398 Technical Analysis of Stock Trends
Bullish or more Bearish than others, and it enables the investor to “roll with the punch”
instead of having to take an all-out position one way or the other. (EN9: I have called this
“Rhythmic Trading.”)
It should be noted, however, while he may take such a partial position against the
(presumed) Major Trend, he will continue to use the bulk of his capital in situations that
accord with the main trend. He will never risk the larger part of his assets in opposition
to the trend, and he will make any countermoves with a clear understanding they are of
the nature of insurance and serve this purpose even though they ultimately may be closed
out as small losses.
ALLIED STORES LS
1946
JULY AUGUSTS EPTEMBERO CTOBERN OVEMBERD ECEMBER
S
S
H
G
S
S
H
SC
SC
52
48
44
40
38
36
34
32
125
100
75
50
25
61 32 02 73 10 17 24 3171 42 12 85 12 19 26 29 16 23 30 71 42 12 8
Sales
100’s
Figure 33.5 Symmetrical Triangle in Allied Stores, a Consolidation in the 1946 decline. Notice heavy
volume as “LS” crashed to the first Reversal point of the pattern on September 10, and the drying up of
volume during the successive swings of the Triangle. In Point-and-Figure charts, this type of pattern is
known as a Pendulum Swing because it does seem to come to rest like a pendulum. Often, volume will
pick up somewhat at each Reversal point, but a valid Triangle must show some overall decrease of volume.
 If, by some unhappy chance, you were then long “LS,” you should have had your protective stop
at 33 1/8, 8% below the Bottom reached at 36. However, the move down out of the Triangle on
Friday and Saturday, October 4 and 5, although on slight volume, was a true breakout (remember
that downside breakouts do not require volume confirmation), and you would have been justified in
selling your long co


by some unhappy chance, you were then long “LS,” you should have had your protective stop
at 33 1/8, 8% below the Bottom reached at 36. However, the move down out of the Triangle on
Friday and Saturday, October 4 and 5, although on slight volume, was a true breakout (remember
that downside breakouts do not require volume confirmation), and you would have been justified in
selling your long commitment at the market on Monday. You would have received about 38 1/2. To
justify a short sale, however, the breakout would have had to close at least 3% outside the Triangle.
The return to the border of the pattern at 40 was interesting, and you will notice volume increased
characteristically as the decline really got under way on October 9 and 10.
 No question about the validity of this breakout. Short sales were in order on a return to the border
of the Triangle, or a 40–50% Correction of the breakout move, say, at 38 1/2 to 39. The rally carried
to the apex of the Triangle and then broke away fast for the decline to 33, where, on October 30, a
Selling Climax and One-Day Reversal occurred—a signal to take profits.
 Notice the small Head-and-Shoulders in August. This was a Continuation Pattern marking the top
of the rally before the September–November crack-up.
399Chapter thirty-three: Tactical re view of chart action
Summarizing all these implications of the Dow Theory: do not make a majority of your
commitments against the Major Trend. During periods of potential Reversal, gradually
reduce your long holdings, and make short sales to a limited amount in weak stocks; but
do not attempt to anticipate either a Major Top or Major Bottom in the Averages by making
an all-out commitment counter to the main trend.
CONTINENTAL MOTORS CMR
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
19
18
17
16
15
14
13
12
11
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 2 961 32 02 73 10 17 24 18 15 22 29
Sales
100’s
Figure 33.6 An Ascending Triangle. “CMR,” after emerging from the doldrums in 1943, forged up
to about 12 early in 1945. The first eight months of the year on a monthly chart showed an Ascending
Triangle with Top at 12 1/4. On daily charts, however, we see the more detailed aspects of this
large pattern. For instance, the final reaction of the whole (monthly) formation in August became
here a Symmetrical Triangle. The breakout from this pattern carried out the minimum measuring
requirements, bringing the price again to the 12 1/4 Top, from which point there was a reaction
that was stopped cold at 11, the apex of the Triangle. A purchase on the reaction after the powerful
breakout from the Triangle, say around 11 1/2, would have been closed out on progressive stops,
starting September 28 when “CMR” reached 14, the sale being consummated October 2 at 14 1/2, a
highly profitable move.
 Profit-taking of this sort would largely explain the stopping of the rise and the formation of a
Consolidation Pattern that turned out to be the Ascending Triangle with Top at 16 1/4, lasting eight
weeks. Notice the November 7 volume when price went through the 16 1/4 level, but failed to close
outside the pattern, and the volume on November 30 when a clean, decisive breakout move closed
at 17 . This move ran to 20, and purchases would have been made at 18 or less on the reaction. The
next wave took “CMR” to its ultimate Bull Market Top at 24 in January. On the ratio scale, the Top of
the Ascending Triangle was exactly halfway between the September Bottom at 11, and the extreme
high of 24. This type of halfway consolidation is typical of Flags and Pennants, and this is a very
similar case.
400 Technical Analysis of Stock Trends
Head-and-Shoulders Top
 A. If you are long a stock, should a breakout down through the neckline occur, with a
closing at least 3% below the neckline, next morning place a stop 1/8 point below the
last close. Continue to place such “tight stops” if not caught the first day, 1/8 point
under each day’s close until one is caught.
 B. Short sales may be made after a breakout, on a recovery of 40% of the distance from
the top of the right shoulder to the bottom of the breakout move, or on a recovery to
a line drawn down across the top of the head and right shoulder, or on a Pullback to
CERTAIN–TEED PRODUCTSC T1 946
APRIL MAYJ UNE JULY AUGUST SEPTEMBER
1
2
3
4
5
B
P
26
24
22
20
19
18
17
125
100
75
50
25
61 32 02 741 11 82 51 81 52 22 961 32 02 7310 17 24 31 71 42 130
Sales
100’s
Figure 33.7 A Broadening Top. This somewhat rare but beautiful and highly dependable formation
developed as CertainTeed made its Bull Market Peak in 1946. A quick glance at the volume scale in
this daily chart shows the high volume on the final stages of the advance, the dullness during the
development of the Top Pattern, and the increased volume after the breakout.
 As we all know by now (or go back to Chapter 10 and review the specifications), a Broadening Top
is a Five-Point Reversal, differing from the Head-and-Shoulders, Triangles, Rectangles, and so on, in
that each Reversal must be at a new high or low for the pattern. It is, if you wish, a sort of reversed
Triangle with its apex to the left, the swings becoming continually wider.
 In the second week of May, “CT” (the symbol has since been changed to “CRT”) made a new Bull
Market high at 25 1/4 (marked “1”). The reaction carried back to Support at the previous Minor Peak
(point “2”) and the following week, “CT” advanced to another new high at 3, closing 1/8 point above
the previous Top.
 Another week had brought “CT” down to point “4” with a closing at 22 1/2, three-quarters of a
point below point “2.” This, in itself, is not sufficient reason for making short commitments. Three
weeks later, “CT” closed at 25 5/8, another new high, at point “5.” Finally, the stock dropped to 21
1/2 on July 23, and at this point (marked “B”), the pattern was completed. Notice the tendency of
volume to rise at each Reversal point of the patt


with a closing at 22 1/2, three-quarters of a
point below point “2.” This, in itself, is not sufficient reason for making short commitments. Three
weeks later, “CT” closed at 25 5/8, another new high, at point “5.” Finally, the stock dropped to 21
1/2 on July 23, and at this point (marked “B”), the pattern was completed. Notice the tendency of
volume to rise at each Reversal point of the pattern.
 Long holdings would be sold at the market the day after the breakout, but short sellers should
wait for a correction of 40–50% of the move from point “5” to point “B.” If shorts were put out at
23, we would not worry if the stock advanced for a time, as it did, without making a new high. The
downside move in “CT” went quickly to 15 1/2, and within 12 months to 11 1/2.
401Chapter thirty-three: Tactical rev iew of chart action
the neckline, whichever point is reached first. If the breakout move continues down
another day, or for several days, the 40% recovery would be based on the entire move
from the top of the right shoulder to the lowest point reached.
Head-and-Shoulders Bottom
(EN: The editor, long distressed by the paradox of the term “Head-and-Shoulders Bottom,” proposes
this formation be renamed in technician’s nomenclature to “the Kilroy Bottom” [see Fig u r e 7.4.])
REMINGTON RAND RR
1944–1945
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
26
24
22
50
40
30
20
10
71 42 12 84 11 18 25 29 16 23 30 61 32 02 73 10 17 24 31 01 72 43 1
Sales
100’s
Figure 33.8 Rectangles in Remington Rand. This is part of a long Bull Market rise that carried “RR”
from under 10 to above 50 in the period from 1942 to 1946. The last three years of this advance were
almost continuous, as seen on monthly charts, without any extensive reactions. When we put the
chart on a daily basis, such as this section covering the end of 1944 and the early months of 1945, right
in the middle of the advance, we see that the rise was not actually continuous but rather was built
up of steps in an ascending “staircase” of Accumulation Patterns. Each sharp advance on increased
volume is followed by a period of dullness and slight recession.
 A picture of this type suggests the methodical campaign of buyers who intended to purchase large
blocks of the stock for large long-term advances without creating a “skyrocket” market by their own
buying operations. Presumably, each advance was checked by the temporary distribution of part of
the stock held by such buyers, and accumulation restarted on reactions.
 In October and November, there is a well-marked Rectangle between 20 3/4 and 22. A purchase
could have been made at or near the bottom limit, say at 21, on the fifth Reversal on November 14.
The move out of pattern in the week of December 2 did not carry 3% out of pattern, but about two
weeks later, a move got under way that qualified as a valid breakout, with volume confirmation as
required on upside moves. Notice the volume increase and One-Day Reversal on December 20 as
this move neared its Top. Purchases would have been made at about 22 1/2 on the basis of a normal
correction, and you would have expected Support at the 22 level. This Support was respected, but
the move did not advance beyond 23 3/4 (made this same Top three times in a period of two weeks)
and returned again to 22 1/4.
 There was no question about the breakout on January 25. Extent and volume were decisive. Notice
the gap and One-Day Reversal on the following day as this Minor Move reached its end.
 In mid-March, as you will see, “RR” plunged down from its high of 27 , but the decline was stopped
in its tracks at the top level of the January Rectangle, a good Support shelf. Never again during the
Bull Market did “RR” even threaten this level because it moved up in April and continued its long
march to the 1946 Top.
402 Technical Analysis of Stock Trends
 A. If you are short a stock, should a breakout on increased volume occur, penetrating
the neckline and closing at least 3% above it, place a stop next morning to cover at 1/8
point higher than the close. If such a stop is not caught, continue each day to place a
stop 1/8 point higher than the previous day’s close until one is caught.
 B. New purchases may be made after a breakout, on a reaction of 40% of the distance
from the bottom of the right shoulder to the top of the breakout move (which reaction
must be on decreasing volume), or on a reaction to a line drawn across the bottom
of the head and the right shoulder, or on a Throwback to the neckline, whichever is
reached first. As in the case of the Top Formation, this 40% reaction is figured on the
entire distance of the breakout move if it should continue up for several days.
PARAMOUNT PICTURES PX
1941–1943
22
20
19
18
17
16
15
14
13
12
50
40
30
20
10
SO ND JF MA MJ JA SO ND JF M
Sales
100’s
Figure 33.9 A Double Bottom in Paramount Pictures. Double Tops and Double Bottoms are not as
common as many traders like to think. They require considerable time to develop and must conform
to specifications as to price range and time, and also (on upside breakouts from Double Bottoms) as
to volume. They are easier to spot on weekly charts than on dailies.
 This is a weekly chart of “PX” from September 1941 through March 1943. A Bottom was made
on climactic volume at 11 3/4 during the “Pearl Harbor Panic” Move. Then came a rise lasting eight
weeks that brought “PX” back to 15 5/8—a rise, incidentally, on feeble volume, strongly suggesting
the possibility of another crack-up to even lower levels. This rise, you will notice, was a considerable
one, amounting to 35% of the price at the December low.
 The downward move, however, which lasted to mid-April, was on low volume and ended precisely
at the December low of 11 3/4. (Note: it is not necessary moves of this sort end at exactly the same
level; the second Bottom could have been a bit higher or lower without spoiling the pattern.)
 The second week in July shows the first sign of


ble
one, amounting to 35% of the price at the December low.
 The downward move, however, which lasted to mid-April, was on low volume and ended precisely
at the December low of 11 3/4. (Note: it is not necessary moves of this sort end at exactly the same
level; the second Bottom could have been a bit higher or lower without spoiling the pattern.)
 The second week in July shows the first sign of a possible Reversal when the price advanced on
increased volume, but it did not close above 15 5/8 and, therefore, was not a breakout. Two weeks
later, on heavy volume, “PX” had moved up to 16 1/2, closing the week at 16. This is a true breakout
and purchases would have been in order on reactions from this point on.
 The move continued up for three years to an ultimate Top at 85.
403Chapter thirty-three: Tactical rev iew of chart action
Complex or multiple Head-and-Shoulders
The same tactical suggestions apply to these as to the simple Head-and-Shoulders.
Definitions and special features of these formations are covered in Chapter 7 .
Rounding Tops and Bottoms
It is difficult to set precise rules for trading on these gradual changes of trend. In the case of
Rounding Tops, if one is long the stock, the general appearance of a Rounding Formation,
ASSOCIATED DRY GOODSD G
1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
28
26
24
22
20
19
18
50
40
30
20
10
XD .25
XD .25
61 32 02 731 01 72 4310 17 24 31 71 42 12 85 12 19 26 29 16 23 30
Sales
100’s
Figure 33.10 A Right-Angled Broadening Formation in Associated Dry Goods. A beautiful example
of a breakout through Multiple Tops, followed by an important move. This is, however, a pattern
that is more fun to observe in retrospect than to follow as an active trader. The stock had moved up
from an important Bottom around 4, established in 1938, 1940, and 1942. At the time of this chart in
1945, “DG” was starting the accelerating climb that eventually ended with the 1946 Rounding Top
at more than 70 (see Figure 33.3).
 If you had been holding the stock, you would have been watching for a substantial corrective move
after the advance from 12 to 20. In late February and the first week of March, “DG” went into a new
Bull Market high-ground, reacted to Support around 19 to 19 1/2, and then advanced again in the
week of March 17 , failing in this move to make a new high. Ten days later, “DG” had reacted to 18
1/2, closing below the previous Minor Bottom. An inexperienced observer, at this point, might have
commented “Double Top” and planned to sell “DG” at once or even to make a short sale. The pattern,
however, was not large enough in duration or extent of price movement to qualify as a Double Top,
nor did it conform to any other recognizable pattern of Reversal. Nor was the volume as high as one
would expect on an important Top.
 The rally in early April carried through to a decisive breakout of more than 3% in the move that
reached 22 7 /8 on April 18. This move was a near penetration of the middle Top and confirmed the
uptrend. If you still held your long stock, you would not rest easier, and in any case, you would
have looked for a chance to buy on a reaction after the breakout. If you had tried to buy at the 21
1/2 Support Level, you would have been left behind, but if you had put your order in a little higher,
say at 22, you would have had a nice profit on the advance to 25 7 /8, where you would have sold on
a tight stop at 25 3/4.
404 Technical Analysis of Stock Trends
extending over a period of several weeks, leveling off from the rise and then turning down,
very likely with a tapering off of volume nearing the top of the rise and a pick-up of volume
as the turn starts down, would suggest getting out of the stock at the market as soon as the
picture looks more or less definite. A short sale of a Rounding Top could be very profitable;
but no exact rule could be stated except, in the absence of fixed Basing Points, one would
want to be very certain the formation was unmistakably a Rounding Top. It would need
to be well formed and following a long rise and extending over a period of some weeks in
its formation. It would also need to be protected with a stop above the Top of the curve, as
explained in the chapter on stops.
AMERICAN CANA C 1946–1947
DECEMBERJ ANUARY FEBRUARY MARCHA PRIL MAY
104
96
88
50
40
30
20
10
71 42 12 84 11 18 25 18 15 22 18 15 22 2951 21 92 63 10 17 24 31
XD .75
XD .75
Sales
100’s
Figure 33.11 A Diamond Pattern in American Can. The daily chart covers the period from December
3, 1946, through May 1947 , inclusive. For background on this situation, keep in mind that “ AC” made
its Bull Market Peak in October 1945 when it reached 112. The tendency of high-grade, high-priced
stocks to top out early at the end of a Bull Market has already been noted. The first decline carried
nearly to 90 and was followed by a rally to 106. The stock then dropped to below 80 and a second
rally brought us to the situation we see here.
 You will notice at once the moves have a gradual “rounding” appearance, due to the fact, at this
price, conservative stocks do not make large percentage moves. If charted on a scale having larger
vertical intervals, the patterns would look very much like those in more speculative stocks.
 The first part of the pattern is similar to a Broadening Top. The first Minor Peak at 96 is followed
by a reaction to 92. The second peak carries even higher, to 98; and the reaction this time goes down
to 91 1/4. A third rally takes “ AC” to 99. So far, we have the five Reversal points of a Broadening Top,
needing only a close below 91 1/4 to confirm the Bearish indications. The next decline fails to break out
of the pattern, however, and for several weeks, we have a narrowing picture like a Symmetrical Triangle.
 Eventually, the stock makes a clean breakout to 89, which is the signal to get out of longs and to
consider short sales on the next rally. As a matter of fact, the three-week rally that started


only a close below 91 1/4 to confirm the Bearish indications. The next decline fails to break out
of the pattern, however, and for several weeks, we have a narrowing picture like a Symmetrical Triangle.
 Eventually, the stock makes a clean breakout to 89, which is the signal to get out of longs and to
consider short sales on the next rally. As a matter of fact, the three-week rally that started never
made an upside penetration of the Resistance Level at 94, the level of the apex of the converging lines
bounding the latter part of the Diamond.
 American Can did not make a spectacular move down from this point, which is not surprising
considering the markdown that had already taken place in “ AC,” the habits and price of the stock,
and the general condition of the market. It did not, however, again rise to the level shown here and,
in fact, retreated to the 80 level.
 To review the nature of the Diamond—it is not a common pattern. It is somewhat like a Complex
Head-and-Shoulders with a bent neckline. It resembles, at the start, a Broadening Top, and its latter
phase narrows like a Symmetrical Triangle.
405Chapter thirty-three: Tactical re view of chart action
You would not be likely to be short a stock on a Rounding Bottom. The long and gradual
rounding appearance with dull volume, followed by a sudden revival on greatly increased
volume, would be signal enough to cover if you should find yourself in this uncomfortable
position. Purchases would be justified in a stock whose chart showed a Rounded Bottom
or Saucer, after the first spasm of activity following a long, dull period of dormancy. You
would buy, according to the rules we have given for purchases on reactions, not on the
breakout, but on the reaction following it, which would almost surely come.
GULF MOBILE & OHIO RR. GFO
1945
JANUARY FEBR UARY MARCHA PRIL MAYJ UNE
30
28
26
24
22
20
19
18
17
16
15
250
200
150
100
50
61 32 02 73 10 17 24 31 01 72 43 17 14 21 28 51 21 92 62 91 62 33 0
Sales
100’s
Figure 33.12 Gulf, Mobile, and Ohio builds a beautiful Wedge, as shown on this daily chart for
the first half of 1945. This was the move that terminated the spectacular rise of “GFO,” its final Bull
Market Top.
 Immediately after the downside breakdown from the Wedge, “GFO” came down to 18 3/4, and
from this Intermediate low, which was reached in August, rallied into a long Rectangle between 23
3/4 and 26 3/4 from which it eventually broke down in a series of crashes that found it, in May 1947 ,
selling for 6 1/8!
 It is rather hard, with a formation of this sort, to say at what precise point the convergence of the
trends is established. The breakout move late in April was normal; the stock was a buy on the next
reaction. The following advance in May, which reached 23 1/2, did not carry out a Parallel Trend
Channel, and we saw a tendency to converge as prices retreated on the reaction. The next three
advances all repeated and confirmed the Wedge picture, and at the top, we see a sort of “bunching
up” as prices make little or no headway. The chances are at 11 an alert trader would have taken profits
on long commitments after the high volume appeared at the top of the Minor Move ending June 4
and 5. In any case, he would have maintained a protective stop at all times to take him out if and
when a downside breakout occurred.
406 Technical Analysis of Stock Trends
Symmetrical Triangles
 A. If you already have a position in the stock. During the formation of a Symmetrical Triangle,
you may be unable to make any change in your holdings. Let us say you have bought
the stock on a reaction after a Bullish Move. The next upsurge fails to make a new high
and gives no sufficient volume signal to cause you to sell out. The next reaction fails
to carry below the previous one. You are “locked” into the Triangle, and you cannot
safely sell, because the Triangle that has formed may eventually break out in the
original direction and show you a good profit (in fact, the odds favor that it will break
MARTIN-PARRY MRT
1945
APRILM AY JUNE JULY AUGUSTS EPTEMBER
24
22
20
19
18
17
16
15
14
13
12
11
125
100
75
50
25
G
XD .15
71 42 12 851 21 92 62 91 62 33 07 14 21 2 841 11 82 51 81 52 22 9
Sales
100’s
Figure 33.13 A Pennant in Martin–Parry. This type of pattern is fairly common in fast-moving
markets. The extraordinary point about Flags and Pennants (and sometimes other Consolidation
Patterns in fast moves) is their tendency to form almost exactly halfway between Bottom and Top.
 Just before this move, “MRT” had built a Rectangle between 10 and 12 lasting seven months, which
followed the 1944 rise from around 4 to 12. The May breakout on heavy volume carried “MRT” right
to the top of the Pennant without any adequate reaction. Note the increase of volume at the top of
that rise. For three weeks prices drifted off with a drying up of volume that is clearly shown in the
chart. The pattern did not correct the entire first phase but found Support at the Minor Peak at 14 1/2.
 Suddenly, on high volume, the move was resumed and this time went right up to 24 3/4. The
chances are traders who were still long their original stock or who had bought in around 15 on the
Pennant would have sold after the high volume of June 6 when “MRT” reached 19 7 /8.
407Chapter thirty-three: Tactical re view of chart action
out in that direction). In case of a breakout move (which must be on increased volume
on the upside), you can close it out for a profit (according to the rules for trading we
have already given) and immediately mark it as a rebuy on the next reaction. If the
breakout is down (whether or not on increased volume), with a closing outside the
Triangle, you should protect yourself with a tight (1/8 point) stop the next day and
continue to set such tight progressive stops under each day’s close until it is sold.
If you are short the stock, the same rules would apply in reverse, except the breakout
in the right direction (down) would


ext reaction. If the
breakout is down (whether or not on increased volume), with a closing outside the
Triangle, you should protect yourself with a tight (1/8 point) stop the next day and
continue to set such tight progressive stops under each day’s close until it is sold.
If you are short the stock, the same rules would apply in reverse, except the breakout
in the right direction (down) would require no volume confirmation while the adverse
breakout (up) would need such increased volume.
LEHIGH VALLEY R . R .L V
1945–1946
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
17
16
15
14
13
12
11
125
100
75
50
25
G
G
G
G
G G
61 32 02 73 10 17 24 18 15 22 29 51 21 92 62 91 62 32 91 62 33 0
Sales
100’s
Figure 33.14 This daily chart of Lehigh Valley R.R. through late 1945 and early 1946 shows a variety
of gaps. At this particular time, “LV” was completing a Secondary Corrective Move before making
one more (and as it turned out, final) effort to exceed the 1945 Top just above 17 . This long-term
situation could be used for a discussion of Double Tops because the Bottom of the intervening move
was violated in the summer of 1946 and the stock continued a downward course to below the 5 level.
 Not all gaps are significant, as displayed in the first gap on October 3, when the stock was moving
in a narrow range on low volume. The gap on Saturday, November 3, however, is important because
the Saturday volume (when doubled) is high. The move failed to qualify by a 3% new high closing as a
true breakout, but the implications of the move were Bullish and might well have justified purchases
on Minor Reactions. The low-volume gaps on these reactions were of no particular interest.
 It is not until the third week of January that we see another gap that looks like a real breakaway.
On January 14, with high volume, “LV” moved up and out in a rush that took it to 15 7 /8 on January
16, closing at 15 1/2. The second appearance of volume here would have suggested application of
progressive stops, and long trades would have been closed out at 15 3/8.
 New purchases could have been made on the reaction at 14 1/2. A second advance accompanied by
a Breakaway Gap developed on January 23. If we consider the second gap (of January 24) a Runaway
or Measuring Gap, we would estimate the probable top of this move at around 17 3/4. When a third
gap appeared on January 28 with a One-Day Reversal and climactic volume, it would be clear this
move was about finished and progressive stops would be used to clear out longs at 16 3/4.
 Note the attempt to rally after the sharp drop and the One-Day Island formed by two gaps as “LV”
fails to hold at the 15 level.
408 Technical Analysis of Stock Trends
 B. If you do not have a position in the stock. Stay away from any stocks making Symmetrical
Triangles until a clear and definite breakout close has been made. After such a
breakout, if on the upside, buy on the next reaction if the Major Trend is up; on the
downside, sell short on the next rally if the Major Trend is down. Rules for making
such commitments have already been given.
Note: Avoid breakouts from Symmetrical Triangles of the type that have continued to
narrow until the breakout point comes far out toward the apex. The most reliable breakouts
occur about two-thirds along the Triangle.
Right-Angle Triangles
The same rules would apply to Right-Angle Triangles as to Symmetrical Triangles (see
Chapter 8, Important reversal patterns: the triangles). Early breakouts are more dependable
here, as in the case of Symmetrical Triangles. Volume confirmation is more important on
upside breakouts from Ascending Triangles and is not strictly required on downside
breakouts from Descending Triangles. Commitments already made are retained until the
breakout and then closed out in the same way as any transaction that shows a gain.
As the Ascending and Descending Triangles carry a directional forecasting implication
that the Symmetrical Triangles do not have, it is possible to make new commitments on
reactions within an Ascending Triangle or rallies within a Descending one. Since the flat
horizontal side of one of these Triangles represents a supply or demand area of unknown
magnitude, and because such a Triangle can be (and sometimes is) turned back before
the horizontal line has been decisively penetrated, it might be better policy to note such
formations in the making and wait until the decisive breakout before making the new
commitment.
Broadening Tops
Presumably, you would not be long a Broadening Top. The early Reversals in the pattern
would have taken you out of the stock, if you follow the tactical rules based on trendlines,
as previously outlined, long before completion of the pattern. Neither would you be
tempted to buy into such a pattern because the trend indications would be clearly against
a move.
On the other hand, a Broadening Top, after its completion, offers excellent opportunities
for a short sale. After downside penetration and a close below the fourth point of Reversal
in the pattern, you are justified in selling short on a rally of about 40% of the distance
covered from the extreme top (fifth point of Reversal) and the lowest point reached on the
breakout move. The stop would be placed at the proper distance above the fifth Reversal,
that is, the extreme top of the pattern.
Rectangles
 A. If you already have a commitment in the stock. The early moves of a Rectangle may provide
no volume signals to permit you to get out. There will be no “breakout” moves during
the formation of a Rectangle that will allow you to take a profit. However, as soon
as the character of the Rectangle is well established (which requires at least four
Reversals to set up a clear Top and Bottom), you may trade on the Tops and Bottoms—
that is, sell at or near the Top, or buy at or near the bottom. For, as in the case of
409Chapter thirty-three: Tactical rev iew of chart action
Symmetrical Triangles,


angle that will allow you to take a profit. However, as soon
as the character of the Rectangle is well established (which requires at least four
Reversals to set up a clear Top and Bottom), you may trade on the Tops and Bottoms—
that is, sell at or near the Top, or buy at or near the bottom. For, as in the case of
409Chapter thirty-three: Tactical rev iew of chart action
Symmetrical Triangles, there is a definite presumption in such formations that they
are more likely to lead to continuous moves than to Reversals, this would mean you
would probably pass up your first opportunity to get out (on the fifth Reversal) and
would indeed probably decide to “ride along” in the expectation of a continuation
of the original move, which will be in the “right” direction for your commitment. In
the case of a breakout in the right direction, you would dispose of your commitment
according to the rules for trading already stated. If in the wrong direction, use the
tight (1/8 point) progressive stops, the same as with the Triangles.
 B. If you are not committed in the stock. Trades can be made within the Rectangle on the
fifth and subsequent Reversals. Due to the slight probability, the move will eventually
continue in the same direction as the preceding move leading up or down to the
Rectangle; thus, it might be best to wait until the sixth Reversal for new commitments,
which would set your interests in the same direction as a continuation. Also, short
sales can be made after any downside breakout close from a Rectangle or purchases
after an upside breakout close with increased volume. Both the short sales and the
long purchases would be made on the Corrective Move following the breakout.
Double Tops and Bottoms
Double and Multiple Tops or Bottoms are not valid unless they conform to the requirements
for such formations. Chapter 9 on these patterns should be read carefully in this context.
 A. If you are long a stock. On penetration and close at a price lower than the extreme
Bottom of the pattern between the Multiple Tops, dispose of the stock on tight (1/8
point) progressive stops.
 B. If you are short a stock. On penetration of the highest point of the Inverted Bowl or rise
between the Bottoms, with a close above that point, close out the short sale on tight stops.
 C. If you are not committed in the stock. Consider a penetration and close beyond the limit
of the correction between the Tops (or Bottoms) as a signal of Reversal and make new
commitments on rallies or reactions.
Right-Angled Broadening Formations
The handling of these on breakouts through the horizontal side would be similar to what
has been said about Multiple Tops and Bottoms, and Right-Angle Triangles.
The Diamond
If you are sure what you have is a valid Diamond Pattern, the rules for trading will be the
same as those we have already covered in connection with breakouts from Symmetrical
Triangles. As in the case of such Triangles, new commitments should wait for a definite
breakout. Commitments already in force would have to remain until such a breakout
had occurred, either declaring a Reversal or indicating a probable continuation of the
original trend.
Wedges
There is no need to set forth detailed rules for policy within a Wedge and during its
formation because the general principles taken up in connection with trendlines and
410 Technical Analysis of Stock Trends
Support and Resistance would take you out of such a situation at the first opportunity after
the convergent nature of the pattern became clear. At the very worst, your stops (which we
hope you maintain faithfully in all situations) will take you out before the consequences
become serious.
Regarding new purchases (from a Falling Wedge breakout) or short sales (from a Rising
Wedge), the same volume characteristics would be expected: notably increased volume on
an upside breakout from a Falling Wedge and less pronounced volume action on the first
stages of breakout from a Rising Wedge. New commitments, in line with the implications
of the breakout, may be placed on rallies or reactions after a clear breakout closing occurs,
carrying beyond the trendlines forming the Wedge.
One-Day Reversals
One-Day Reversals are not technical patterns suitable for trading in the same sense as
the important Reversal and Consolidation pictures we have examined. They are mainly
useful as a gauge in helping to find the precise Top or Bottom of a Minor Move to protect
profits on commitments previously made. The One-Day Reversal, the Exhaustion Gap, and
the day of exceptionally heavy volume following several days of movement in a Minor
Trend are strong indications that the move may have run out. Any of these three signals is
worth watching for; any two of them together carry more weight than one alone; and the
appearance of all three carries very strong implications of a Minor (EN: or even a Major)
Top or Bottom.
Regarding trading on movements signaled by One-Day Reversals, this type of trading
would lie almost in the field of gambling, or at least trading for quick, small profits on short
moves. It would not be the same kind of trading at all that we have been studying in the
greater part of this book. The indications and some suggestions for trading on those one-
day moves are covered in their discussion in Chapter 10.
Flags and Pennants
In many cases, the total decline from a Flag in an uptrend will bring the price back to a
point at which the stock may be bought according to our regular trading tactics, namely,
the decline may carry down to the Basic (Red) Trendline, to the Blue Parallel, or make
a 40% to 50% correction of the rising “mast” preceding the Flag. If the “mast” move is
the first such move out of a level or only moderately rising trend, and if the Major Trend
of the market is Bullish, we would be justified in buying at the first opportunity, which
would be on the Blue Parallel. In such a case we would expect, and ordinarily ge