n
of account equity to risk to be expected growth optimal. The Kelly
Criterion never yields a peak whose value is the expected growth
optimal fraction of an account to risk, but rather always yields the
expected growth optimal leverage factor. The two can be translated
between one another, but the real benefit of the Optimal f formula is
it gives us the height to this curve, expressed as an expected multiple
made (or lost) on our initial equity (which is not provided by the
Kelly Criterion), from which we can derive a field of study.
For example, there is a point left of the peak where the curve goes
from concave up to concave down. Given the vertical axis is the
expected growth multiple and the horizontal axis is the risk, we can
state this point of inflection represents that point where marginal
increase in growth is occurring faster than marginal increases in
risk, and this flips at the point of inflection.
Consider the height of the curve at both f
 = .l and f = .4 as
equivalent yet the latter is risking four times as much! Clearly, there
is never any reason to be beyond the peak of the curve to the right.
We have spoken that you are on this curve, somewhere, whenever
you have a position in the markets, whether you acknowledge this or
not. Note the point in Figure 2 where f
 = .5, where the multiple = 1.0.
To risk any more than this is to see a multiple less than 1.0, and
therefore the more one continues to trade at this level, multiplying
his initial equity by a number less than 1, the more one insures he
will go broke.
Most importantly, this is a situation created without borrowing
anything at all—it occurs in a cash account! This is a situation created
wherein one would have on one unit risked for every 2 units in equity,
a situation that clearly requires no borrowing whatsoever, and yet,
to continue at that level of “leverage” under these (very favorable)
conditions, one will go broke with certainty as he continues to trade.
When more than one trade or play occurs simultaneously in various
markets or approaches, the curve displayed in Figure 2 (which is a
curve in 2D space since we are looking at one component), manifests
in N
 + 1 dimensional space for N components traded simultaneously.
If we consider a case of trading two of these issues simultaneously,
of wagering on two 2:1 coin toss games simultaneously, we find
ourselves in an N
 + 1 dimensional manifold (in this case, 2 + 1 = 3
dimensional manifold) space as depicted in Diagram B.6.
This N + 1 dimensional space is referred to as “Leverage Space,”
and portfolios derived therefrom as “Leverage Space Portfolios”
(“LSP” portfolios). LSP-style portfolio construction grants us insights
unavailable by more conventional portfolio constructs. For example,
in Figure 3, we find the peak of the curve at the f coordinates for both
536 Appendix B
games at.23, .23. Yet, notice what happens if we are off on only one
axis; we can be at, say .23, .6, and we find our multiple, the height of
the graph at these coordinates, to be less than 1. Thus, even though
we are off on only one component in the portfolio (and still not
borrowing money to assume any positions) we insure we will go
broke as we continue to trade. The notion of diversification as one of
meliorating risk is clearly challenged in an LSP-style portfolio, and
this is not at all evident by more traditional perspectives on portfolio
construction.
Not only are we ineluctably in leverage space when we put on one
or more positions in the markets, but we are also very likely moving
through leverage space with changes in our equity and the markets,
paying the price and reaping the consequences for the various points
we traverse through the surface of leverage space.
Thus, various paths can be constructed algorithmically through
leverage space to achieve different criteria than the conventional
criterion of maximizing expected return to expected variance, or
even that of maximizing expected growth (which would be to reside
at the peak in the surface). With a path through leverage space in an
LSP-style portfolio, a path through the surface of expected growth as
a multiple of our starting stake, we are now able to seek solutions to
any investment criteria.
f C o in 2
f C o in 1 .90.80.70.60.50.40.30.20.10.00
0
1
2
3
4
5
6
7
8
9
10
Diagram B.6 Expected Multiple of Starting Stake after Twenty Tosses in Two Simultaneously Played
2:1 Coin Toss Games.
537
Appendix C: Technical Analysis:
beyond Edwards & Magee
• Section 1: A brief general survey of number driven tools
• Section 2: The creative technician—the work of Richard Arms
• Section 3: The Point and Figure method by an eminent analyst, Mike Moody
• Section 4: One of the most famous of technical routines—Bollinger Bands
Section 1: A brief general survey of number driven tools
Here is something to contemplate: A listing of technical analysis tools.
Technical Overlays
 1. Bollinger Bands: A chart overlay
showing the upper and lower limits of
“normal” price movements based on
the Standard Deviation of prices
 2. Chandelier Exit: An indicator used to
set trailing stop-losses for both long
and short position
 3. Ichimoku Cloud: A comprehensive
indicator defining support and
resistance, identifies trend direction,
gauges momentum and provides
trading signals
 4. Kaufman’s Adaptive Moving
Average (KAMA): A unique moving
average that accounts for volatility and
automatically adjusts to price behavior
 5. Keltner Channels: A chart overlay
showing upper and lower limits for
price movements based on the Average
True Range of prices
 6. Moving Averages: Chart overlays
showing the “average” value over
time. Both Simple Moving Averages
(SMAs) and Exponential Moving
Averages (EMAs) are explained
 7. Moving Average Envelopes: A chart
overlay consisting of a channel formed
from simple moving averages
 8. Parabolic SAR: A chart overlay
showing reversal points below prices
in a


ents based on the Average
True Range of prices
 6. Moving Averages: Chart overlays
showing the “average” value over
time. Both Simple Moving Averages
(SMAs) and Exponential Moving
Averages (EMAs) are explained
 7. Moving Average Envelopes: A chart
overlay consisting of a channel formed
from simple moving averages
 8. Parabolic SAR: A chart overlay
showing reversal points below prices
in an uptrend and above prices in a
downtrend
 9. Pivot Points: A chart overlay showing
reversal points below prices in
an uptrend and above prices in a
downtrend
 10. Price Channels: A chart overlay
showing a channel made from the
highest high and lowest low for a
given period of time
 11. Volume by Price: A chart overlay
with a horizontal histogram showing
538 Appendix C
the amount of activity at various price
levels
 12. Volume-Weighted Average Price
(VWAP): An intraday indicator based
on total dollar value of all trades for
the current day divided by the total
trading volume for the current day
 13. ZigZag: A chart overlay showing
filtered price movements greater than
a given percentage
Technical Indicators
 1. Accumulation/Distribution Line:
Combines price and volume to show
how money may be flowing into or out
of a stock
 2. Aroon: Uses Aroon Up and Aroon
Down to determine whether a stock is
trending or not
 3. Aroon Oscillator: Measures the difference
between Aroon Up and Aroon Down
 4. Average Directional Index (ADX):
Shows whether a stock is trending or
oscillating
 5. Average True Range (ATR): Measures
a stock’s volatility
 6. Bandwidth: Shows the percentage
difference between the upper and
lower Bollinger Band
 7. %B Indicator: Shows the relationship
between price and standard deviation
Bollinger Bands
 8. Chaikin Money Flow (CMF):
Combines price and volume to
show how money may be flowing
into or out of a stock Alternative to
Accumulation/Distribution Line
 9. Chaikin Oscillator: Combines price
and volume to show how money may
be flowing into or out of a stock. Based
on Accumulation/Distribution Line
 10. Chande Trend Meter (CTM): Scores
the strength of a stock’s trend, based
on several technical indicators over six
different timeframes
 11. Commodity Channel Index (CCI):
Shows a stock’s variation from its
“typical” price
 12. Coppock Curve: An oscillator using
rate-of-change and a weighted moving
average to measure momentum
 13. Correlation Coefficient: Shows the
degree of correlation between two
securities over a given timeframe
 14. DecisionPoint Price Momentum
Oscillator (PMO): An advanced
momentum indicator tracking a
stock’s rate of change
 15. Detrended Price Oscillator (DPO):
A price oscillator using a displaced
moving average to identify cycles
 16. Ease of Movement (EMV): An
indicator comparing volume and price
to identify significant moves
 17. Force Index: A simple price-and-
volume oscillator
 18. Mass Index: An indicator identifying
reversals when the price range widens
 19. MACD (Moving Average
Convergence/Divergence Oscillator):
A momentum oscillator based on the
difference between two EMAs
 20. MACD Histogram: A momentum
oscillator showing the difference
between MACD and its signal line
 21. Money Flow Index (MFI): A volume-
weighted version of RSI showing shifts
is buying and selling pressure
 22. Negative Volume Index (NVI): A
cumulative volume-based indicator
used to identify trend reversals
 23. On Balance Volume (OBV): Combines
price and volume in a very simple way
to show how money may be flowing
into or out of a stock
 24. Percentage Price Oscillator (PPO):
A percentage-based version of the
MACD indicator
 25. Percentage Volume Oscillator (PVO):
The PPO indicator applied to volume
instead of price
 26. Price Relative/Relative Strength:
Technical indicator comparing the
performance of two stocks to each
other by dividing their price data
 27. Pring’s Know Sure Thing (KST): A
momentum oscillator from Martin
539Appendix C
Pring based on the smoothed rate-of-
change for four different timeframes
 28. Pring’s Special K: A momentum
indicator from Martin Pring
combining short-term, intermediate
and long-term velocity
 29. Rate of Change (ROC) and
Momentum: Shows the speed at
which a stock’s price is changing
 30. Relative Strength Index (RSI): Shows
how strongly a stock is moving in its
current direction
 31. RRG Relative Strength: Uses RS-Ratio
to measure relative performance
and RS-Momentum to measure the
momentum of relative performance
 32. StockCharts Technical Rank (SCTR):
Our relative ranking system based on
a stock’s technical strength
 33. Slope: Measures the rise-over-run for
a linear regression
 34. Standard Deviation (Volatility):
A statistical measure of a stock’s
volatility
 35. Stochastic Oscillator (Fast, Slow,
and Full): Shows how a stock’s price
is doing relative to past movements.
Fast, Slow and Full Stochastics are
explained
 36. StochRSI: Combines Stochastics with
the RSI indicator to help you see RSI
changes more clearly
 37. TRIX: A triple-smoothed moving
average of price movements
 38. True Strength Index: An indicator
measuring trend direction and
identifying overbought/oversold levels
 39. Ulcer Index: An indicator designed to
measure market risk or volatility
 40. Ultimate Oscillator: Combines
long-term, mid-term and short-term
moving averages into one number
 41. Vortex Indicator: An indicator
designed to identify the start of a new
trend and define the current trend
 42. Williams %R: Uses Stochastics to
determine overbought and oversold
levels
Outline
This is a list of tools and indicators available at stockcharts.com. Most if not all of these
tools are also available either through software packages (Tradestation, AIQ, Metastock)
or online (thinkorswim and others). I display the list so newcomers to technical
analysis get an idea of the plethora of tools available. Also, I display the list so that
students see the philosopher’s stone n

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


ine
This is a list of tools and indicators available at stockcharts.com. Most if not all of these
tools are also available either through software packages (Tradestation, AIQ, Metastock)
or online (thinkorswim and others). I display the list so newcomers to technical
analysis get an idea of the plethora of tools available. Also, I display the list so that
students see the philosopher’s stone nature of building systems to beat the market. To
briefly review, the philosopher’s stone is a stone which allows the owner to convert lead
to gold. In the Middle Ages, it was the subject of much dedicated research. At present,
to my knowledge, only George Soros has a philosopher’s stone, but it is entirely possible
for the dedicated student to find in the list a tool or method which will allow him to
reap rich rewards.
Displaying the list also prompts me to repeat what we have frequently told our graduate
students over the years: You can drive a nail with a screwdriver; so if it works for you it
doesn’t matter what it looks like. To this end I will comment on some, but not all, of the
tools listed here—in some cases revealing tools and systems which, in research, have been
fiendishly effective.
Moving averages
Technical Analysis of Stock Trends is often the first book investors read when they become
interested in the technical approach to the market. This is as it should be and also new
analysts need to be informed of the amazingly varied field of technical analysis. Chart
540 Appendix C
analysis is the cornerstone of technical analysis and a required field of knowledge. If the
analyst is more statistically oriented or is looking for an algorithmic method he must search
through the numerous alternatives in the technical toolbox.
This appendix is intended not to teach the reader the details of operating a moving
average or stochastics routine, but to place the various technical tools and systems (or
methods) in context and in perspective. The first of these tools is the moving average.
We personally can testify to the power of these systems, having reaped outsize profits
using moving average systems. Note these profits were gained in roaring bull markets. In
sideways markets trading a moving average can be the equivalent of producing sausage
with a meat grinder. Thus, having confidence in the state of the market is an absolute
necessity. The effect of a moving average is to smooth raw price behavior and clarify the
trend of the market. The bells and whistles you can hang on a moving average are like a
Christmas tree. You can use the moving average as input to a signal -–buying when the
price penetrates above the MA line. Using the MA line as a stop, selling when prices fall
below the MA line. Or you can construct a filter—buying or selling when prices pierce the
line by x%. The possible variations are infinite.
As is probably obvious, MA systems are in the main trend following systems. As are
virtually all Edwards & Magee methods and systems. The reason for attempting to employ
trending systems is, without exception, long-term trend following results in larger profits
than any other trading method.
In general, the market makes something of a shibboleth of two moving averages—the
50-day and the 200-day. The 50-day is thought by the media and public to be a warning
crack in the market and the 200-day penetration is thought to be a bear market phenomenon.
In our trading, we watch the 50 and the 200--day but we don’t use them as signals. We are
usually more concerned with patterns and the character of the market rather than using
these moving averages as signals. Rather, we use them as alerts as to what the public is
thinking and depend on Basing Point analysis for stops.
Magee’s consideration of moving averages is contained in Chapter 36. It is amusing
to quote a remark of his upon discovering moving averages: “ …one could derive a sort
of Automated Trendline that would definitely interpret the change of trend… It seemed
almost too good to be true. As a matter of fact, it was too good to be true.”
Personally, we have experienced excellent profitability with moving average systems.
While we originally thought this was a sign of genius, with time we realized that the
market was the genius and my company was trading in a roaring bull market—and indeed
we were—the monstrous commodity bull markets of the ‘70s—the Russian wheat market,
the Hunt silver market…. Almost anything, including bonobo monkeys throwing darts,
works in a tidal market.
Nevertheless, a long moving average can keep the investor fully invested for months—
if not years. In the case of the great Bull Market of 2009–2017 , it took years, as evident by the
chart with a 200-period simple moving average. (Figure C.1)
A number of different types of moving averages are used by technicians: simple,
exponential, triangular, variable, and weighted. The distinguishing difference amongst
these methods is the simple method weights all prices equally. Weighted and exponential
routines place a higher value on the most recent data, enabling more sensitive and rapid
reaction. Triangular averages put more weight in the middle of the time period and variable
averages adjust the weighting according to the volatility of prices.
Does this smack of the philosopher’s stone? One thing it should tell the newcomer—and
grizzled veteran—is the search for a market beating method is incessant and indefatigable—
it never ceases.
541Appendix C
Contemplating an exponential versus a simple moving average the difference is
probably not worth the trouble. Trading decisions might be moderately accelerated on
trading length systems ( −5–15 days for very short term; 15–23 days for short term; and
24–50 days for intermediate term; and 100 days and up for long term. With recent thinking
we might add super long term—that is 200 days or even longer weekly based systems.)
The conventional way to use a moving average system is t


ly not worth the trouble. Trading decisions might be moderately accelerated on
trading length systems ( −5–15 days for very short term; 15–23 days for short term; and
24–50 days for intermediate term; and 100 days and up for long term. With recent thinking
we might add super long term—that is 200 days or even longer weekly based systems.)
The conventional way to use a moving average system is to go long when price breaks
above the moving average and sell when price falls below the moving average. Probably the
most usual modification to these systems is to put a filter on them, for example requiring
the penetration of the moving average line by 1 (or x) % to assure validity. (Cf. Chapter
36, the Pentad system) We think, based on experience, this may be the most effective way
to employ this tool. Sometimes two moving averages are used. Signals are created by the
interplay of the moving average lines, one moving above or below the other. This is a
characteristic of MACD, which will be discussed later.
Figure C.1 A 200 period moving average on a weekly chart. The investor would never (virtually
never) have felt the least anxiety for his position. His confidence in the trend would have been
buttressed by the MA line.
542 Appendix C
Stochastics
The first thing to do when studying stochastics is stop trying to figure what “stochastics”
means. Of course, it has a dictionary meaning to be discussed later. Right now, the reader
should put aside the question of actual meaning and consider what it means in the discipline
of technical analysis.
Markets have two basic theoretical (and actual) states: trending or mean reverting. If
the market is non-trending, swinging back and forth, up and down, traders need tools
to deal with it. If they want to trade under these conditions they turn to oscillators. The
purpose of the oscillator is to aid in identifying wave bottoms and wave tops. The stochastic
algorithm is one of the more popular of these oscillators.
Stochastics establishes a “window” on the market for the analysis of prices. The default
value for this window is 14 bars, but different practitioners customize the value for their
own use. The price highs and lows within this window are integral to the analysis. The
routine establishes a line (called %K) as the essential benchmark or guide of the analysis.
A second line is calculated (%D) using a simple moving average of %K. This moving
average is quite short (3 periods default value) and thus creates a line of great sensitivity.
Conventionally these lines are displayed on a scale from 1 to 100. Signals are generated by
values of 20 and 80. The routine buys when the low value is 20 and sells upon a high value
of 80. In short, selling strength and buying weakness. 20 and 80 refer to where the closing
price is relative to the window trading range, thus placing price position at 20% or 80% of
the range. Other means of generating signals are available, to wit the interaction of the two
lines, as for example, the %K line falling below or rising above the %D line. (Figure C.2)
As with most tools, the technician can modify the routine to suit his whim.
MACD (Moving Average Convergence/Divergence)
MACD is a trend following momentum indicator that shows the relationship between
two moving averages of price. It is calculated as the difference between a 26 and a 12-day
exponential moving average. Gerald Appel, who is reported to be the creator of the routine,
placed a 9-day exponential moving average on top of the MACD as a means of identifying
trading signals. Generally, a sell signal occurs when MACD falls below the signal line and
a buy signal when it rises above the signal line. Trading also occurs as MACD goes above
and below zero. (Figure C.3)
As one can well imagine with 55 indicators (and counting), there is a tool for every
occasion. One must always remember the rule of tools: To a man with a hammer everything
looks like a nail. Rather than attempting to explicate every tool, I will restrict myself to
the obvious, after reminding the reader that careless and uneducated use of any tool can
seriously endanger his capital.
Some other chosen indicators to consider: ADX, a tool which shows whether an issue is
trending or oscillating. This tool is easily replaced with a ruler and the naked eye. This is the
case with many of the indicators; they have been developed by their inventors to attempt to
remove ambiguity from the market—a desire the experienced chart analyst doesn’t possess.
The chart analyst looks at a chart and most of time it is obvious. If not, it becomes obvious
the moment a ruler is laid on it. Another tool which does more or less the same is the Aroon
which uses Aroon Up and Aroon Down to determine whether an issue is trending or not.
Once again, a question which is painfully obvious at first glance to the chart analyst. We
should make clear that some intelligent analyst has used each of these tools to wring a profit
from the market. Accumulation /Distribution Line showing how money flows in and out
543Appendix C
of an issue may be useful to some practitioners, as may Volume by price which shows the
amount of activity at various price levels. Pivot points— a relatively simple mechanism
evidently popular with many traders can at least give the trader unambiguous trading points.
Which brings us to a central technical and philosophical point: Almost any system
is better than no method (or system) at all. The problem for the inexperienced trader—
or investor—is what system. This book answers that question for most investors and is a
good method while the investor refines his own methods. We continue to say the trader
who invents a system without thorough knowledge of this book is putting life limb and
capital at risk. This statement may be a little less true now than in years past—simply
because so much of this book’s material has leaked via osmosis into general investor
knowledge—usually


ion for most investors and is a
good method while the investor refines his own methods. We continue to say the trader
who invents a system without thorough knowledge of this book is putting life limb and
capital at risk. This statement may be a little less true now than in years past—simply
because so much of this book’s material has leaked via osmosis into general investor
knowledge—usually unconsciously, but often through outright imitation or worse. Not a
practice which outrages us, though, sometimes amuses us—but no tears. Also, as we have
been in education for many years, we observe the spread of knowledge as something the
enlightened and educated do as a responsibility to the community and humanity.
Point and Figure analysis
Bar chart analysis has so dominated investor usage for so long (partly because of this book)
that even many experienced analysts have ignored an interesting and valuable method
which we will explore briefly here. That method is Point and Figure analysis.
Figure C.2 Stochastic routine on a gold chart. Obviously interpreting the indicator requires some
experience and discrimination, but this is true of all number driven indicators.
544 Appendix C
Figure C.3 MACD on a gold chart. MACD is a popular tool and deemed effective by many traders. Readers can see why from the chart.
545Appendix C
Said by some to be an invention of Charles Dow, and by others to be created by the
Russians, PnF charting has shown itself to be surprisingly effective in our experience.
When we examine some of its characteristics we get an idea why. Bar charts represent price
action (open high low close) with a vertical bar with cross hatches for open and close. The
x axis represents time, the y, price. PnF ignores time for the most part, though there is a
nod to it as we will see.
Several basic decisions are made in the construction of the chart. Since the chart is
made up of boxes, the size of the box must be determined. The analyst chooses a box
style appropriate to the duration of the chart. Obviously, if one is dealing with years
of data in the INDU the box must be large—50, 100 points. At shorter durations wave
analysis would suggest a good size; and at any rate online routines present reasonably
sized charts. In general, one might say larger boxes furnish perspective and smaller boxes
furnish detail.
The other choice the analyst must make is reversal size. The traditional choice here is
a three box reversal. Thus, if the box size is 4 and we are in an x column, 12 points down
must occur to change to a column of 0s and three 0s would be drawn in the next column.
And although time is usually ignored, a box is marked with a month indicator as a column
rolls over to a new month.
All these options are subject to change and adjustment by the individual technician.
What is more, there are other varieties of PnF charts—one box reversal, for example, but the
basic idea is the same. Using a variety of methods, one may make forecasts from the chart.
Let me emphasize: Treat this method and any other algorithmic method with caution until
you have thoroughly examined it (Figure C.4).
Next for comparison, a bar (Candlestick) chart shows the traditional picture of this
period (Figure C.5).
As the reader can see, PnF charting is a fascinating and valuable method. Many
investors rely on this method alone for their analyses.
As with all of the tools surveyed here no attempt is made to give a definitive exploration
of the tool or to describe the mechanics of its creation. Those details about PnF charts are
ably discharged by the books Point & Figure Charting by Thomas Dorsey and The Definitive
Guide to Point and Figure by Jeremy du Plessis. Later in this appendix Mike Moody will
discuss the method in a much more sophisticated way.
Section 2: The creative technician—the work of Richard Arms
The Arms Index (TRIN) by Richard Arms
In 1967 , when I was still an unknown in Technical Analysis and was working as a
stockbroker for a major NYSE firm, we moved into new modernized offices. Among the
improvements were new quote machines, which actually had a tiny screen to display the
information. Moreover, the data included some fascinating numbers. It was possible to
see the number of stocks that were up and the number of stocks that were down at any
time, and even a total of the volume traded on the up stocks and a total of the volume
traded on the down stocks. Looking at this, I began to wonder if it could serve as an
indicator, telling us if the ratio of up to downs was the same as the ratio of up volume
to down volume. If not, deviations from normality might show when the buyers or the
sellers were more in control. In seconds, the Arms Index, or TRIN, came into being in
my mind and then in my research. An article in Barron’s was all that was needed and it
took on a life of its own.
546 Appendix C
Figure C.4 Here from the edwards-magee.com website is a PnF chart from November 2015 which looks for a target of 2549—this when the S&P
was around 2000.
547Appendix C
Figure C.5 Here also from the edwards-magee.com website is a chart from November 2015 for comparison with the above PnF chart.
548 Appendix C
The calculation
With so many sources, such as newspapers, television stations and every quotation
service, providing the calculated index most users will never need to make the calculation
themselves. However, in order to appreciate the significance of the index one should be
familiar with its derivation. The Formula is:

()
() .. ..
ADVANCES/DECLINES
ADVV OL /DECLV OL ArmsIndex=
At any time, we can retrieve the numbers showing how many stocks are up for the day,
how many stocks are down for the day, the volume on the advancing stocks and the volume
on the declining stocks. Plugging them into the above formula we end up with a single
number, the Arms Index for that instant. The above example* (footnote) has produced a
somewhat bearish index. An index of 1.00 is a


dex=
At any time, we can retrieve the numbers showing how many stocks are up for the day,
how many stocks are down for the day, the volume on the advancing stocks and the volume
on the declining stocks. Plugging them into the above formula we end up with a single
number, the Arms Index for that instant. The above example* (footnote) has produced a
somewhat bearish index. An index of 1.00 is a standoff, indicating both the advancing
stocks and the declining stock received their fair share of the volume. A value over 1.00 is
Bearish, indicating the declining stocks are receiving more than their share of the volume.
An index lower than 1.00 is Bullish since the up stocks are receiving more than their fair
share of the volume. Normally, the index will fluctuate closely around 1.00. We have seen
days end with an index as low as .19 and other days with an index over 10.00, but these were
rare occurrences, where the traders were reacting to extremes in euphoria or fear. Normally,
the index will be somewhere between .65 and 1.75.
EXAMPLE THE ARMS INDEX: ADVANCES 1024 DECLINES 2030 ADVANCING
VOLUME 299,790,000 DECLINING VOLUME 786,830,000 1024/2030 =.504 1024/2030 =.504
299790/786830 =.381 .504/.381 = 1.32 .504/.381 = 1.32 (ADVANCES / DECLINES) (ADV . VOL.
/ DECL. VOL.) (ADV . VOL. / DECL. VOL.) = THE ARMS INDEX (TRIN) EXAMPLE
The reasoning
At any time, the Arms Index is telling us whether the up stocks are getting their share of
the volume or not. If the index is over 1.00 the down stocks are overpowering the up stocks.
(Remember, under 1.00 for the raw number is good, and over 1.00 is bad. It is counter-intuitive,
but it is the way the index was first calculated, and it’s late to try to change it now. If that really
bothers you, invert the calculation and it will be more intuitive, but you will be out of step with
everyone else using the index. You will see the index is dealing with comparing two ratios,
so it is commonplace to have a market that appears to be Bullish because of there being more
stocks up than down, but is actually under pressure, in that those up stocks are not getting
their share of the volume, and the index is Bearish. Similarly, we can have more stocks down
than up, but have a Bullish index, because the up stocks are getting more than their fair share
of the volume. The Arms Index is measuring the internal dynamics of the market—dynamics
that may not be otherwise readily apparent. A Bullish Arms Index in a slumping market may
be telling us there is accumulation going on, under the guise of a down market.
Using the index
The index was originally developed as an intraday timing tool, and it still is valuable in that
role. There are two things to look at: the actual reading and the way it is changing during the
day. The actual level is tending to reflect the current condition; sometimes a Bullish reading
in a declining market or a Bearish reading in a rising market makes the move suspect. More
often, the value will be in line with the current market activity, but watch for the big extremes.
549Appendix C
Not always, of course, but often, the index will go too far in one direction, and suggest the
move is overdone. It is reflecting those times when reason is being abandoned and a blind
panic or a feeding frenzy is dominating the trading. A very high or a very low index can be a
sign it is time to be a contrarian. The other intraday use is watching for change, rather than just
the actual value of the index. Often the index will change direction before a reversal becomes
apparent in the averages. A Bearish index in a Bearish market that suddenly starts to move
toward lower (less Bearish) levels may be a warning the market is about to turn up. The same is
true bullish numbers that start to get higher; suggesting a downturn may be developing. Most
often, though, the index is now used on a longer-term basis. The most common use is a simple
10-day moving average of the closing daily numbers. This tends to be a good indicator for
market moves lasting a few weeks. For short-term trading, I like the 5-day moving average. In
order to get a feel for longer-term trends, I use a 21-day and a 55-day. The big market moves can
be recognized by using very big moving averages, such as the 233-day. On each of the following
charts, we are looking at simple moving averages of the Arms Index on an inverted scale. The
red line is the index and the black line is the market. Since the scale has been inverted for the
index, the lows on the indicator line tend to coincide with low points in the market. Similarly,
peaks in the index coincide with the market tops. I have chosen different time intervals on each
of the charts below since the longer-term moving averages are used for longer-term predictions.
I have not given any hard-and–fast numerical levels as buy and sell signals because we need to
look at the index in the context of the current market. Buy signals in a Bear Market are at more
oversold levels than they are in a Bull Market. Extreme peaks and troughs, compared to what
has been seen recently, tell when it is time to become a buyer or a seller. These are only a few
applications and examples. Not shown are Arms Indices, now available, for NASDAQ and also
for a number of foreign markets, in which the index is equally effective. Immense amounts of
work, using many different methods, has been done over the years since the index was first
made public. Anyone wishing to know more is referred to the various books by Richard W.
Arms, Jr. Figure C.6 illustrates the index and shows Equivolume chart for context.
Figure C.6 Notice how on the Equivolume chart the breakaway is accentuated by the wide bars. The
technician is constantly in need of accents and alerts like this (cf. also Figure C.7).
550 Appendix C
Equivolume charting
Introduction
In 1971, with the Arms Index a part of Wall Street methodology, I had become more
fascinated by the role of


strates the index and shows Equivolume chart for context.
Figure C.6 Notice how on the Equivolume chart the breakaway is accentuated by the wide bars. The
technician is constantly in need of accents and alerts like this (cf. also Figure C.7).
550 Appendix C
Equivolume charting
Introduction
In 1971, with the Arms Index a part of Wall Street methodology, I had become more
fascinated by the role of Volume in the marketplace. I had been spending great deal of
time studying an early edition of the book you now hold but had also been learning the
ideas of Richard Wyckoff; both placed a great deal of emphasis upon the importance of
Volume in evaluating stock movements. As I was driving home from work one afternoon,
I was thinking about stock charts and volume and suddenly realized there might be a better
way of depicting trading action. What if we could substitute volume for time on our charts?
We could depict each day as a rectangle rather than the traditional line on a bar chart.
The width of the box would represent the volume for that day. Unbeknownst to me, I was
reinventing a method suggested decades earlier, but not widely popularized. I decided to
call my new approach Equivolume (cf. Figures C.7 and C.11).
Figure C.7 Once again the wide volume indicating bars alert the technician to an important surge
in the market.
551Appendix C
The technique
In the days before the proliferation of computers, implementing the concept of Equivolume
was far from easy. In order to lift the volume from the bottom of the chart and insert it in
the posting, a scale for each stock had to be devised based upon its normal trading. That
scale could change if the stocks went into a phase of much heavier or lighter trading. I will
not go into the calculations I used at the beginning, but it seemed to work. I hired a lady to
draw dozens of charts for me and proceeded to learn to read what they said; this led to my
first book. Later, each new advancement justified another book. Once people a lot smarter
than me figured out how to let a computer do the work, it became a lot easier. Now, one
can get Equivolume charts on most major charting services, so there is really no need to
wonder about the scaling. Suffice it to say, the rectangles on any chart are proportional to
one another in reflecting the volume.
The result
An Equivolume chart does not in any way change the high and low on each entry, but when
combined with the volume it becomes a box, the shape and size of which reflects supply
and demand for that trading period. All the techniques popularized by the masters who
first published this book are valid when used with Equivolume charts.
However, for example, trendlines tend to be broken earlier if volume becomes
heavier, and breakouts are more noticeable if volume increases, thereby legitimizing them,
as are levels of support and resistance. Equivolume uses all the same data, but just gives us
a different picture, which includes all the data in a single entry. Below are two charts: a bar
chart and an Equivolume chart of the same stock over the same time period. This is three
months of trading in General Electric (Figure C.8).
The chart below is posted on a weekly basis (Figure C.9).
Conclusion
Equivolume represented a far better way of looking at market action because each entry
told a more comprehensive story. The shape of the box indicated how easy or hard it was
for prices to move while the size of each box showed the interest intensity. It was a method
that could be used for any investment product, as long as both price movement and volume
numbers were available. It has become a complete methodology and is readily available on
a plethora of data services.
Arms CandleVolume charting
After the introduction and wide adoption of Equivolume, the next logical step was to combine
the Equivolume concept with the Japanese method known as Candlesticks. Yet, I was slow
to do this because one or more of the major charting services had already included a partial
joining of the two techniques, calling it CandleVolume, but doing it in such a way some of
the visual advantages of Equivolume were lost in the process. Yet, if I did the combination of
the methods in my way, completely merging the two techniques, I found it could be another
great advance in the way we looked at charts. Clumsily double printing of charts, I was able
to work on it and found the results to be very helpful, and since the name CandleVolume
was already taken, I started calling it Arms CandleVolume. Then, after my first speech on
the approach, to the International Federation of Technical Analysts in San Francisco a few
years ago, the problem was solved. Within minutes of completing the speech the President
of Stockcharts.com, who had been in the audience, showed me he had quickly adapted their
software for the new technique and, with my approval, would immediately include it in their
service, which they did. The illustrations in this article are from that source.
552 Appendix C
Figure C.8 This is three months of trading in General Electric illustrating two different but
complimentary pictures of the market. By dragging the volume off the bottom margin and including
it in the price we have made it apparent all days are not equal in importance. Moreover, the concept
of eliminating time as a market measurement led, in later studies and books, to the development
of Volume Cyclicality, Ease of Movement and of Volume Adjusted moving averages. It had become
apparent the market is a volume function. If nothing trades, nothing happens; The more trading,
the more importance.
553Appendix C
The advantages
Although the open and the close appear on some versions of bar charts, the Equivolume
methodology had ignored them. The Candlestick charts did contain the opens and closes;
in fact, they emphasized them. It led to different and fascinating visual patterns using
the ancient methods from their origin given ima


, nothing happens; The more trading,
the more importance.
553Appendix C
The advantages
Although the open and the close appear on some versions of bar charts, the Equivolume
methodology had ignored them. The Candlestick charts did contain the opens and closes;
in fact, they emphasized them. It led to different and fascinating visual patterns using
the ancient methods from their origin given imaginative and memorable names. I have,
in order to distinguish the new methods and to emphasize adding volume changes the
meanings very often, tended to use my own nomenclature. The Japanese methods are
wonderful, but the volume adds a new dimension. As one starts to use this technique it
becomes ever more apparent the open and close levels, added to high and low and volume,
are providing a powerful additional tool.
The technique
All we have done is to place the Candlestick inside the Equivolume box. However, there
is a vertical line through the box, the wick, and there are two horizontal lines across the
box, the open and the close. Above and below these lines are the legs. If the open is lower
than the close the body of the posting with be black and if it is higher the body will be
red. If color is not available, the body can be filled or unfilled. Below we see a comparison
of the three techniques: Bar chart, Equivolume chart, and Arms CandleVolume chart.
They  are all daily postings of Newmont Mining over the same three-month period
(Figure C.10).
To delve into the interpretation is beyond the scope of this article, but it is clear, I think
that each day, each posting, tells us a concise story of supply and demand; of conflicting
pressure of buyers and sellers. Box sizes tell us of overall enthusiasm while box shapes tell
us how easy or hard it is for price movement to occur. Moreover, the difference between
the open and the close tell us whether prices are stalled or moving. Box shape, size, volume
and Candle body size all present a picture of ease or difficulty of movement.
Figure C.9 Vividly illustrating the usefulness of the Equivolume chart like signposts on a battlefield:
Lots of fighting here.
554 Appendix C
Figure C.10 Notice the increasing analysis of information that occurs from one method to the next
moving from conventional bar chart through Equivolume to Candlevolume.
555Appendix C
Figure C.11 Notice the increase in information as we move to the newer technique. Candlevolume
combines virtues of Equivolume and Candlestick charts.
556 Appendix C
Point & Figure technical analysis by Mike Moody
Like most technical analysts, my exposure to charts came initially from bar charts. I started
as a naïve stockbroker, hoping to understand markets to help my clients make money. I
soon learned the “account executive” position was—from the faulty point of view of the
brokerage firm—primarily a sales job. I quickly learned to use bar charts as a form of self-
defense from the firm’s research department. The charts could be used to examine the
position of any security the firm’s research department was recommending, in the often
vain hope the recommendation and the chart were in synch.
I found the bar charts most commonly in use had a limited perspective, usually only
about a year of price data. Soon I was taking an additional charting service that used
weekly bar charts—including a relative strength line as well.
My quest for perspective ended when I was introduced to the Point and Figure chart.
I think it is an extraordinarily flexible and useful complement to bar charts because of the
perspective it can supply. Analysts like Richard Wyckoff used both bar charts and Point
and Figure charts in tandem because of their different features and strengths.
Point and Figure charts are now fairly rare, which is unfortunate. Novices often do
not understand what they are looking at or how a Point and Figure chart is constructed.
I’ve included a simple example chart below (Figure C.12).
This chart is an example of a traditionally scaled 3-box reversal Point and Figure chart.
The chart style was popularized by Abe Cohen of Chartcraft. The price scale is on the left.
(You can see that price boxes below $20 are smaller than price boxes from $21 to $100. This is
a clever, pre-computer attempt to adjust to a more logarithmic scale.) Columns of Xs denote
rising prices and columns of Os indicate falling prices. The small numbers embedded in
the chart indicate the month a security first printed that price. (1-9 for January through
September, and A-C for October through December—another elegant early solution to fit
a time identifier in a single-width box.)
The perspective is obvious, as this chart covers well over a decade. However, for a
technical analyst used to bar charts, two things stick out. First, there is no time scale; years
where a lot happened are wide because many reversals occurred. Years where the stock
was quiet are represented by far fewer columns. Second, it is not immediately obvious how
a 3-box reversal chart is constructed; it’s simple but requires a short explanation.
A 3-box reversal chart is designed to filter out any price movements less than 3 boxes,
whatever that may be on the chart. With a 3-box reversal chart, there will never be a column
that consists of less than 3 boxes. The general rule will hold—the minimum column depth
will be a function of the reversal value used.
Let’s pick up the chart in 2012, as it first reversed upward to $34 in September. There is
a simple flow chart logic to plotting a Point and Figure chart.
 1. If you are rising in a column of Xs, first look to see if a new price high was made. If
yes, put a new X in the column.
 2. If no new high was made, check to see if a 3-box reversal down occurred. If yes, put
in a new column of 3 Os.
 3. If no new price high was made or no reversal down was made, do nothing.
It’s the “do nothing” that is different because time can pass with no adjustment made
to the chart. The chart


column of Xs, first look to see if a new price high was made. If
yes, put a new X in the column.
 2. If no new high was made, check to see if a 3-box reversal down occurred. If yes, put
in a new column of 3 Os.
 3. If no new price high was made or no reversal down was made, do nothing.
It’s the “do nothing” that is different because time can pass with no adjustment made
to the chart. The chart is a record of pure price movement.
By November 2012, General Mills had printed $35—without ever reversing down 3
boxes or more. In January 2013, the price hit $36. February 2013 was a good month—the
557Appendix C
Figure C.12 Years of data for GIS.
558 Appendix C
price hit $37 and continued to $40. $41 was reached in March, and $42 and $43 in April.
May 2013 saw the first 3-box reversal, from a peak price of $44 to the minimum reversal
level of $41.
Key to the value of Point and Figure charts is their flexibility. Many early practitioners
of Point and Figure used single-box reversal charts calculated with intraday data. This style
of chart looks more similar to a bar chart, but actually captures volatility particularly well
because of the use of intraday data. With a bar chart, each day might be a single bar, but
during a particularly volatile period for the market or for an individual stock, a single-box
reversal chart can put in many, many columns.
Like a bar chart, price targets with a Point and Figure chart are usually estimated from
the width of the base—and during a particularly volatile period like 1987 or 2008 many,
many reversals can occur in a single day! Alan Shaw, formerly the chief market technician
at Smith Barney, believed that intraday, single-box reversal point & figure charts were the
premier way to estimate price moves from a base. As a guide to this type of chart, Alan
always recommended Alexander Wheelan’s Study Helps in Point and Figure Technique.
On more than one occasion, this knowledge allowed Alan to estimate large price moves
when the base on a bar chart was narrow.
The computer age has improved Point and Figure charting immeasurably. The computer
has no trouble creating true logarithmic charts. Here is the same chart of General Mills, this
time using a 2% box and a 3-box reversal. Also shown is the traditional 45-degree trendline,
drawn from prominent highs or lows. (Figure C.13)
Percentage charts are, I think, significantly clearer. There is no reason not to use
them now since they can be so easily generated. (All of the charts here are courtesy of
StockCharts.com.)
Detail can be added by shrinking the box size; greater perspective can be achieved
with a larger box size.
It seems simple but changing the box size or reversal value allows the Point and Figure
chart to be adapted to any time frame, from scalping to swing trading to infinity.
The chart below, using a 1% box size with a 3-box reversal shows a clear breakout from
a downtrend that is not visible at the same price on a chart with a larger scale. (Figure C.14)
Moving averages can also be helpful on Point and Figure charts to help determine
trend. The difference with a Point and Figure chart is that the moving average is a moving
average of the center point of a certain number of columns.
The chart below simply replaces the 45-degree trendline with a 10-column moving
average. (Figure C.15)
Trend is critically important, but as my career developed into money management, it
became important also to measure the power and durability of the trend. The Chartcraft
service had, for years, calculated a relative strength ratio (stock price divided by index price),
adjusted the decimal points to make it chartable, and then plotted it on a traditional 3-box
reversal chart. At Dorsey Wright, we changed these relative strength charts to percentage
charts and gained vast additional perspective.
The chart below, of Danaher Corp., is a relative strength chart using a 6% scale with a
3-box reversal value. The price of Danaher is divided by the price of an S&P 500 ETF and
plotted on a log scale. Suddenly, it becomes apparent—in broad terms—Danaher has been
outperforming the market for more than 15 years. (Figure C.16)
The final strength of Point and Figure charts is their objectivity. A skilled practitioner
with a bar chart can be very effective, but one analyst might discern a continuation pattern
where another sees a different pattern in a larger or smaller time frame. Two analysts
559Appendix C
Figure C.13 An alternative view of General Mills.
560 Appendix C
looking at the same Point and Figure chart, on the other hand, will always be in agreement
about whether the chart is on a buy signal or a sell signal.
The criterion is incredibly simple and unambiguous. If the price exceeds the immediately
previous column of Xs, it is on a buy signal. If the price declines below the immediately
previous column of Os, it is on a sell signal. On the Danaher relative strength chart, for
example, there is a buy signal at 10.88 in October 2000. (It exceeded the previous rising
column, which topped out at 10.27 .) There is no subsequent sell signal, as no column of Os
ever falls below the previous column of Os. A security, by definition, is always on either a
buy or sell signal.
The objective nature of Point and Figure can be useful in other realms as well. Market
indicators or diffusion indexes can be plotted on a Point and Figure chart and objectively
graded as a buy or sell, for example.
Perspective, flexibility, and objectivity, then, are the cardinal virtues of the Point and
Figure charting method. They give a perspective, unlike a bar chart, abstracting pure
price and giving deep insight into volatility. They have almost unlimited flexibility to be
Figure C.14 Clarifying the issue with percentage boxes.
561Appendix C
adapted to different scales, time frames, and purposes. Finally, their objectivity can become
a powerful tool in the hands of any analyst.
For further investigation, some of


They give a perspective, unlike a bar chart, abstracting pure
price and giving deep insight into volatility. They have almost unlimited flexibility to be
Figure C.14 Clarifying the issue with percentage boxes.
561Appendix C
adapted to different scales, time frames, and purposes. Finally, their objectivity can become
a powerful tool in the hands of any analyst.
For further investigation, some of the best-known resources are:
Alexander Wheelan, Study Helps in Point & Figure Technique
A.W. Cohen, How to Use the Three-Point Reversal Method of Point & Figure Stock Market
Trading: A Technical Approach to Stock Market Trading
Thomas J. Dorsey, Point and Figure Charting: The Essential Application for Forecasting and
Tracking Market Prices
Jeremy du Plessis, twenty-first Century Point and Figure: New and Advanced Techniques for
Using Point and Figure Charts
Bollinger Bands
The creation of John Bollinger, Bollinger Bands is an inventive solution to the question of
measuring and displaying price volatility. Technicians had previously developed channels
Figure C.15 Overlaying the PnF with a moving average.
562 Appendix C
and envelopes which have proved productive for some. Bollinger made the concept
dynamic, developing a channel whose lines (or bands) are variable depending on volatility.
Bollinger Bands are printed as three lines. The middle line (or band) is a conventional
moving average. The upper band is equivalent to the middle band but shifted two standard
deviations up. The lower band is similar but shifted two standard deviations down. As
volatility varies the bands narrow and widen and technicians look to the position of price
Figure C.16 Relative strength perspective.
563Appendix C
relative to the lines to orient their trading. Thus, the bands are useful in lending perspective
as prices oscillate. The routine is quite popular and this mention is meant only as an
introduction and should inspire the interested student to take up Bollinger’s publications
to explore this interesting and valuable tool. Bollinger on Bollinger Bands may be found at
Amazon. (Figure C.17)
Figure C.17 The dynamic nature of the bands dramatizes the nature of volatility and can be a
great aid in trading—usually over the short term. Bollinger recommends 20 periods for the moving
average.

565
List of Illustrations and Text Diagrams
Regarding the illustrations in this book, except for those which are marked as adapted
from other sources, the charts listed as Figures below have been reproduced from the
authors’ own “working” charts. As such, they were made up originally for private use
only and without a thought to their eventual reproduction, much less their publication.
They are not and do not pretend to be works of art, but it is hoped that they will, despite
their “homemade” appearance, serve the purpose of illustrating the various formations,
patterns, market phenomena, and trading principles discussed in the text. That they do not
show the clean line and expert lettering of a professional draftsman’s work is regretted. The
reader will, we trust, make allowances.
As for their selection, it should be stated most emphatically that it was not necessary
to search through thousands of charts in order to find good examples of all these various
technical formations. Many dozens, even hundreds, were available for practically every
type of pattern. Anyone who has learned to recognize them can find for himself plenty
of good technical pictures in a quick examination of even as small a portfolio as 50 or 100
charts. In other words, the illustrations in this book are in no sense unique. In selecting
them, we have tried only to show as much variety as possible and samples from previous
as well as more recent market history.
Perhaps it is not necessary, but it is at least in accord with custom, to add that the
information as to specific market prices, volume of transactions, etc., used in preparing our
illustrations (or cited in the text of this book) has been derived from sources believed to be
reliable, but is not guaranteed.
566 List of Illustrations and Text Diagrams
Part One
Figure Page
1.1 UNITED STATES STEEL. Monthly price ranges from January 1929 to December
1946.
5
6.1 HUMANA, INC. Daily, 1988. Head-and-Shoulders Top. 46
6.2 CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC. The Head- and-Shoulders Top
Formation which ended its Bull Market in February 1946.
46
6.3 WESTINGHOUSE ELECTRIC. The Head-and-Shoulders Top of January through
February 1946.
47
6.4 TELEDYNE, INC. 1984. Large Head-and-Shoulders Top. 48
6.5 IC INDUSTRIES. 1986. Head-and-Shoulders Top. 49
6.6 DUPONT. Its Major Top in 1936, with an unusual Pullback. 50
6.7 CONSOLIDATED EDISON COMPANY of New York. The Head-and-Shoulders
Reversal of 1937.
50
6.8 REPUBLIC AVIATION. Its 1946 Bull Market Top. The Head-and-Shoulders
measuring formula.
51
6.9 WALT DISNEY PRODUCTIONS. 1986. Head-and-Shoulders Top. 51
6.10 NEW YORK CENTRAL. Head-and-Shoulders Top in June through July 1945,
followed by a Multiple Head-and-Shoulders Bottom.
52
6.11 UNION CARBIDE & CARBON. The Head-and-Shoulders within a Head-and-
Shoulders Top Formation which capped its 1929 Bull Market.
53
7.1 LOCKHEED AIRCRAFT. A Head-and-Shoulders Bottom Reversal in December
1943.
58
7.2 DOME MINES. Weekly chart showing the Major Head-and-Shoulders Bottom of
1942.
59
7.3 FEDERAL NATIONAL MORTGAGE ASSOCIATION. 1984. Head-and-Shoulders
Bottom.
60
7.4 ILLUSTRATION OF KILROY BOTTOM 60
7.5 DOW INDUSTRIALS. 2003 Kilroy (H&S) Bottom. 61
7.6 MCA, INC. 1986. Complex Head-and-Shoulders Top. 62
7.7 BUDD MANUFACTURING (now The Budd Company). Multiple Head-and-
Shoulders Top of 1946.
62
7.8 AMERICAN LOCOMOTIVE. Extended top of Multiple type, 1946. 63
7.9 DIGITAL EQUIPMENT CORPORATION. 1985. From a Head- and-Shoulders
Top to Complex Head-and-Shoulders Bottom.
63
7.10 ARCHER DANIELS MIDLAND COMPANY. 1984. Complex Head-and-
Shoulders Bottom.
64
7.11 GENERAL BRONZE. Multiple type Bottom forme


7.7 BUDD MANUFACTURING (now The Budd Company). Multiple Head-and-
Shoulders Top of 1946.
62
7.8 AMERICAN LOCOMOTIVE. Extended top of Multiple type, 1946. 63
7.9 DIGITAL EQUIPMENT CORPORATION. 1985. From a Head- and-Shoulders
Top to Complex Head-and-Shoulders Bottom.
63
7.10 ARCHER DANIELS MIDLAND COMPANY. 1984. Complex Head-and-
Shoulders Bottom.
64
7.11 GENERAL BRONZE. Multiple type Bottom formed July–September 1945. 64
7.12 AMDAHL CORPORATION. 1984. Complex Head-and-Shoulders Bottom. 65
7.13 PUBLIC SERVICE CORP . OF NJ. Weekly chart showing Multiple Bottom pattern
of 1941 to 1942.
66
7.14 NATIONAL SUPPLY. The “two-headed” Top Formation of 1946. 67
7.15 PHILLIPS PETROLEUM. The 1946 Top — a Multiple Pattern merging into a
Rounding Turn.
67
7.16 AMERICAN & FOREIGN POWER 2nd PFD. A. A Rounding Bottom formed in
1945.
68
567List of Illustrations and Text Diagrams
Figure Page
7.17 AMERICAN SAFETY RAZOR. Monthly chart. Two Major Bottoms — a Head-
and-Shoulders in 1932 and “Bowl” in 1942.
69
7.18 THE BUDD COMPANY. Monthly chart showing Major Rounding Bottom of
1942.
70
7.19 CERTAINTEED PRODUCTS. Monthly chart. Major Rounding Bottom of 1942. 70
7.20 J.I. CASE. The Rounding Bottom of 1932 showing a temporary rally out of
pattern.
71
7.21 GAMEWELL COMPANY. A “dormant” type of Rounding Bottom in 1944. 72
7.22 INLAND STEEL. Semi-dormant Rounding Bottom of 1935. 72
7.23 APPLIED MAGNETIC CORPORATION. 1988. Saucer-like Pattern. 73
7.24 CRAY RESEARCH. 1987. Gap and Rounding Top. 74
7.25 NORTHERN INDIANA PUBLIC SERVICE. A magnificent Scalloping tendency. 75
8.1 HUDSON BAY MINING AND SMELTING. Major Bottom of 1941 to 1942, a
perfect Symmetrical Triangle. Weekly chart.
78
8.2 SEARS, ROEBUCK. Symmetrical Triangle Top of 1946, and subsequent step-
down pattern of same form.
78
8.3 JOHNS–MANVILLE. Triangular Bottom development of 1941 to 1942. Weekly
chart.
79
8.4 DELAWARE & HUDSON. Weekly chart. Wide-swinging Symmetrical Triangle
Bottom of 1941 to 1942 with Throwback to apex Support.
80
8.5 CUBAN–AMERICAN SUGAR. A Rounding Bottom in 1945 which merged into a
Symmetrical Triangle.
81
8.6 NATIONAL GYPSUM. A false move out of the extreme apex of a Symmetrical
Triangle.
81
8.7 NORTH AMERICAN COMPANY. Symmetrical Triangle topping a recovery
from a Panic Low in 1937.
82
8.8 VERTIENTES — CAMAGUEY SUGAR of Cuba. Triangular- like development at
1946 Top.
83
8.9 EASTERN AIRLINES. A Symmetrical Triangle in 1947 that did not carry
through.
83
8.10 NATIONAL GYPSUM. A typical Symmetrical Triangle leading to continuation
of the preceding trend in 1944 to 1945. Weekly chart.
84
8.11 U.S. INDUSTRIAL CHEMICALS. Triangular Pattern completing an extended
reaccumulation period.
84
8.12 AMERICAN BANKNOTE. The Major Bottom Reversal of 1941 to 1942. 85
8.13 CELANESE CORPORATION. Ascending Triangle of consolidation type in 1946. 85
8.14 BRIGGS MANUFACTURING. Weekly chart of 1941 to 1943 showing Triangular
Bottom of ascending type.
86
8.15 SEARS, ROEBUCK. The Symmetrical Descending Triangle Top of 1936 and
subsequent Intermediate Recovery Bottom of ascending form.
86
8.16 SOUTHERN RAILWAY PREFERRED. A perfect Ascending Triangle in 1936. 87
8.17 ARMOUR & COMPANY. Long Ascending Triangle in 1946 to 1947 in which
distribution eventually overcame upward trend.
88
8.18 SOCONY–VACUUM OIL. Ascending Triangle forming head of Head-and-
Shoulders Bottom in 1942. Weekly chart.
89
8.19 BATH IRON WORKS. Descending Triangle Top of 1946, showing adjustment of
pattern lines for Ex-Dividend Gap.
90
568 List of Illustrations and Text Diagrams
Figure Page
8.20 REVERE COPPER & BRASS. Large Descending Triangle Top of 1946. 91
8.21 WESTINGHOUSE ELECTRIC. The Descending Triangle which topped out
“WX” ahead of the general market.
92
8.22 HUDSON MOTOR CAR. Series of Triangles in the 1929–32 Bear Market. Weekly
chart.
93
8.23 AMERICAN ROLLING MILL. The “hybrid” pattern of ascending type which
formed in 1941 to 1943. Weekly chart.
94
8.24 GOODRICH (B.F) COMPANY. The remarkably small but perfect Ascending
Triangle which reversed its Major Trend in 1942. Weekly chart.
95
8.25 EBAY. 2004 Descending Triangle Surprise. 96
9.1 NASH–KELVINATOR. Rectangular distribution area of 1945 to 1946. 104
9.2 LIMA LOCOMOTIVE WORKS. Rectangular pattern of “conflict” in 1944 to 1945. 104
9.3 LOEW’S, INC. Perfect Rectangle of the “pool operation” type, 1936. 105
9.4 SOCONY–VACUUM OIL. Rectangle Top Formation of 1946. 106
9.5 YOUNGSTOWN SHEET & TUBE. Major Top of Rectangle formed in 1946. 106
9.6 EASTERN AIRLINES. Long Consolidation ending in Rectangle in early 1945. 107
9.7 AMERICAN ZINC, LEAD & SMELTING. The Consolidation Rectangle which
followed a Head-and-Shoulders Top in 1946.
108
9.8 SEARS, ROEBUCK. A “hybrid” Major Bottom Formation in 1941 to 1942. 109
9.9 BELL AIRCRAFT. Ex-dividend drop causing apparent false move out of
Rectangle in 1945.
109
9.10 KENNECOTT COPPER. Series of Consolidation Formations in 1937 Bear Trend. 110
9.11 UNITED AIRCRAFT. The Double Bottom of 1942. Weekly chart. 111
9.12 INCO COMPANY, LTD. Subsequent to the October crash, developed a large
Head-and-Shoulders Top.
111
9.13 REPUBLIC STEEL. Major Double Top of 1946 with subsidiary patterns. 112
9.14 AMERICAN AIRLINES. Weekly Chart. Bull Market Top of 1945 to 1946, a form
of Double Top.
113
9.15 CONTAINER CORPORATION. The Major Double Bottom of 1941 to 1943.
Weekly chart.
114
9.16 TRINITY INDUSTRIES. 1985. Triple Bottom. 115
9.17 PUBLICKER INDUSTRIES. Triple Top of 1946. 116
9.18 NATIONAL GYPSUM. Triple Bottom of 1941 to 1942. Weekly chart. 117
10.1 CRANE COMPANY. Broadening Formation of 1945 to 1946, a warning of final
top.
122
10.2 AIR REDUCTION. The classic Broadening Top of 1929. 123
10.3 AMERICAN ROLLING MILLS. Small Broadening Top of 1946 at the end of a
generally broadening (and Bearish) Formation.
124
10.4 CONSOLIDATED EDISON. Major Broadening Top on weekly chart of 1935 to
1938.
124
10.5 INTERNATIONAL PAPER. Showing a form of “broadening” which is of
doubtful tech


of 1945 to 1946, a warning of final
top.
122
10.2 AIR REDUCTION. The classic Broadening Top of 1929. 123
10.3 AMERICAN ROLLING MILLS. Small Broadening Top of 1946 at the end of a
generally broadening (and Bearish) Formation.
124
10.4 CONSOLIDATED EDISON. Major Broadening Top on weekly chart of 1935 to
1938.
124
10.5 INTERNATIONAL PAPER. Showing a form of “broadening” which is of
doubtful technical significance. Weekly chart, 1945 to 1947.
125
10.6 ASSOCIATED DRYGOODS. Right-Angled Broadening Formation with
horizontal Top, 1945.
125
10.7 PARAMOUNT PICTURES. The 1946 top, a Right-Angled Broadening Pattern
with horizontal bottom line.
126
569List of Illustrations and Text Diagrams
Figure Page
10.8 ALLIED STORES. Flat-topped Broadening Pattern of 1945, and Breakout Gaps. 126
10.9 U.S. STEEL. The three-month Diamond which formed the 1946 Bull Market Top. 127
10.10 AMERICAN BOSCH CORPORATION. A Diamond Pattern in 1945 which
functioned as a Consolidation.
127
10.11 SHELL UNION OIL. 1946 Major Diamond Top and Descending Triangle. 128
10.12 DOW INDUSTRIALS. 1999–2000 Diamond. 129
10.13 HUDSON MOTORS. The 1946 Major Top, a Diamond or Complex
Head-and-Shoulders.
130
10.14 U.S. STEEL. The Wedge as part of a Rounding Top on the August 1937 recovery. 131
10.15 LOEW’S, INC. Falling Wedge of classic form in 1936; Flag and Rectangle. 132
10.16 SCHENLEY DISTILLERS. A large Wedge which signaled a Primary Top in 1946.
Weekly chart.
133
10.17 TRANSCONTINENTAL & WESTERN AIRLINES. Major One-Day Reversal and
long downtrend. 1945 to 1946.
134
10.18 GREYHOUND CORPORATION. A conspicuous One-Day Reversal at the 1946
Bull high.
134
10.19 APPLE. Panic selling and climax in Apple, 1987 Crash. 135
10.20 NEW YORK CENTRAL. A typical Panic Selling Climax in 1937. 136
10.21 DOW INDUSTRIALS. 1987 Reagan Crash. 137
10.22 NATIONAL CASH REGISTER. An example of “One-Week Reversal” in 1941.
Weekly chart.
138
10.23 QUALCOMM. A church spire top in Qualcomm. 139
10.24 MICROSOFT. A key reversal day in March. 140
10.25 EBAY. As Ebay broke its trendline and drifted sideways it became a good subject
for reversal day trading.
140
10.26 EBAY. 2004-5 Astonishing Ebay breaks away on wings of great business. 141
10.27 LUCENT. Late 20th, early 21st century schizophrenia. 142
10.28 LUCENT. Fortune telling (or loss of fortune telling) by the chart. 143
11.1 MARTIN–PARRY. Ideal Flag in rapid advance of 1945. 152
11.2 NATIONAL GYPSUM. An up Flag and another false move from apex of
Triangle. 1945.
153
11.3 NASH–KELVINATOR. Flag of “Half-Mast” type preceding 1937 Bull Market
Top.
154
11.4 VANADIUM CORPORATION. Rapid sequence of small Consolidation
Formations in 1936 to 1937.
155
11.5 BRIGGS. Bull and Bear Flags and Symmetrical Triangle Top in 1936. Support–
Resistance phenomena.
156
11.6 ANACONDA COPPER. Wedge or Pennant, Flag and Runaway Caps in 1936–37. 157
11.7 PACIFIC TIN. Flag, following and succeeded by Triangles, in 1944. 158
11.8 MULLINS MANUFACTURING. B. An overlong Flag which worked
nevertheless. 1936.
159
11.9 WYANDOTTE WORSTED. Application of measuring formula to Flag. 1946. 160
11.10 AMERICAN WOOLEN. Perfect “Half-Mast” Pattern in 1946, with gaps and
Ascending Triangle.
161
11.11 MO. 2005 gaps and flags galore. 162
570 List of Illustrations and Text Diagrams
Figure Page
11.12 AMERICAN LOCOMOTIVE. A Flag in 1935 which appeared to fail but finally
came through.
163
11.13 ANACONDA COPPER. Head-and-Shoulders Consolidations in 1936, and
measuring Flag.
164
11.14 AMERICAN & FOREIGN POWER 2D PFD. A. Head-and- Shoulders
Consolidation Pattern of 1945.
164
11.15 MIAMI COPPER. A genuine Scallop uptrend in 1945. 165
11.16 COMMONWEALTH EDISON. Scalloping trend of an investment stock, 1945. 165
11.17 INTERNATIONAL TELEPHONE & TELEGRAPH. Saucerlike Consolidation in
1944.
166
11.18 FLINTKOTE. Consolidation Formation — a Symmetrical Triangle — providing
signal of Primary Reversal.
167
12.1 AMERICAN WATER WORKS & ELECTRIC. Common or Pattern Gaps in a
Rectangle; Runaway Gap and Flag. 1945.
172
12.2 BETHLEHEM STEEL. Three types of Breakaway Gap. 1937. 173
12.3 ZENITH RADIO. Strong Breakaway Gap on weekly chart of 1942 Major Bottom. 174
12.4 ZENITH RADIO. Monthly chart of 1936 to 1946 for comparison with Figure 124. 175
12.5 BLAW–KNOX. Gaps following long Rectangle in early 1946, and Major Double
Top.
176
12.6 BALTIMORE & OHIO. The measuring formula applied to a Runaway Gap in
early 1937.
177
12.7 SOUTHERN PACIFIC. A large Measuring Gap in the Panic Decline of late 1937. 178
12.8 WILLYS–OVERLAND. Various types of gaps in 1944, and Head-and-Shoulders
Reversal.
179
12.9 A.O. SMITH CORPORATION. A technically significant (Runaway) Gap in 1946
decline. Weekly chart.
180
12.10 BALTIMORE & OHIO PFD. Small Island in right shoulder of Major Head-and-
Shoulders Top. 1946.
180
12.11 LION OIL COMPANY. An Island “shakeout” in a thin stock. 1947. 181
12.12 BETHLEHEM STEEL. Unusual Island Reversal at the 1937 Bull Top. 182
12.13 PENNSYLVANIA RAILROAD. Changes in technical lines required by
ex-dividend decline.
183
12.14 183
13.1 JONES & LAUGHLIN. Normal trend action illustrating Support and Resistance.
Weekly chart, 1944 to 1947.
191
13.2 BENDIX AVIATION. Support–Resistance Levels in an Intermediate Uptrend.
1944 to 1945.
194
13.3 NATIONAL DISTILLERS. 1926 to 1947 monthly chart showing Major Support–
Resistance Levels.
195
13.4 KRESGE (S.S.) COMPANY. 1936 to 1946 monthly chart showing important
Support–Resistance Levels.
196
13.5 JEWEL TEA. Major Support–Resistance Levels on 1936 to 1946 monthly chart. 198
13.6 REMINGTON RAND. Descending Triangle Top and significant failure of
Support. Weekly chart, 1945 to 1947.
199
13.7 YORK CORPORATION. Measuring Gap and long Rectangle. 1945 to 1946. 200
13.8 YORK CORPORATION. Sequel to Figure 141. Rectangle Support, false move
from apex of Triangle, and Double Top. 1946.
201
571List of Illustrations and Text Diagrams
Figure Page
13.9 GOODYEAR TIRE. Four Pullbacks to neckline of Head-and- Shoulders


e Top and significant failure of
Support. Weekly chart, 1945 to 1947.
199
13.7 YORK CORPORATION. Measuring Gap and long Rectangle. 1945 to 1946. 200
13.8 YORK CORPORATION. Sequel to Figure 141. Rectangle Support, false move
from apex of Triangle, and Double Top. 1946.
201
571List of Illustrations and Text Diagrams
Figure Page
13.9 GOODYEAR TIRE. Four Pullbacks to neckline of Head-and- Shoulders Top.
Weekly chart, 1945 to 1947.
203
13.10 INTERNATIONAL TELEPHONE & TELEGRAPH. Support “field” of
Symmetrical Triangle. 1945.
204
13.11 INTERLAKE IRON. “End run” following a late breakout from Symmetrical
Triangle. 1944.
204
13.12 SOUTHERN RAILWAY. Typical Pullbacks to Head-and- Shoulders Neckline,
and increase of volume as Support is violated. 1946.
205
14.1 ATLANTIC REFINING. Basic Intermediate Trendlines on weekly chart, 1944 to
1947.
208
14.2 ATCHISON, TOPEKA & SANTA FE. Acceleration of Intermediate Uptrend in
1936. Support Levels.
209
14.3 CRANE COMPANY. Short-term trendlines in 1945, and examples of channel
“failure” and Pullback.
210
14.4 COMMERCIAL SOLVENTS. Intermediate Downtrend and Uptrend in 1946. 211
14.5 PHILLIPS PETROLEUM. An exception to the normal consequences of valid
trendline penetration. Weekly chart, 1935 to 1938.
212
14.6 PARAMOUNT PICTURES. Double trendlines in accelerated Intermediate
Advance. 1945 to 1946.
213
14.7 BETHLEHEM STEEL. Trend Channels and Rectangle. 1945. 213
14.8 PAN AMERICAN AIRWAYS. Descending Triangle Top and long, Double
Downtrend Channel. 1945 to 1946.
214
14.9 SOUTHERN PACIFIC. Intermediate Basic and Return Lines and Flags within
Trend Channel. 1945.
214
14.10 HUDSON MOTORS. Measuring implications of “failure” in Trend Channel.
1945.
215
14.11 CONSOLIDATED VULTEE. Part of a two-year Uptrend Channel. 1945. 215
14.12 NASH–KELVINATOR. Downtrend Channel in 1946. 216
14.13 R.H. MACY. Complex Top in 1946 and penetration of Intermediate Up Trendline.
Tentative Fan Lines.
217
14.14 ARKANSAS BEST. 1987. Fan and Head-and-Shoulders Bottom. 218
14.15 BARBER ASPHALT. Application of three-fan principle to Bull Market Reaction.
1946.
219
14.16 DELAWARE & HUDSON. Application of three-fan principle to Bull Market
Reaction. 1944.
219
14.17 BACYRUS ERIE. 1984. Excellent Fan Pattern. 220
15.1 GENERAL MOTORS. Straight-line Bull Trend. Monthly chart, 1938 to 1946. 230
15.2 HUDSON MOTORS. Up-curving Bull Trend. Monthly chart, 1938 to 1946. 230
15.3 CURTIS PUBLISHING $7 PFD. Typical decurving Bull Trend of preferred stocks.
Monthly chart, 1938 to 1946.
231
15.4 CURTIS PUBLISHING COMMON. Accelerating Bull Trend of low-priced,
speculative common stocks. Monthly chart, 1938 to 1946.
231
15.5 COMMONWEALTH EDISON. Straight-line Bull Trend of investment type
utility. Monthly chart, 1938 to 1946.
232
15.6 INTERNATIONAL HYDRO–ELECTRIC. Up-curving Bull Trend of a high
leverage junior utility stock. Monthly chart, 1938 to 1946.
232
572 List of Illustrations and Text Diagrams
Figure Page
15.7 HOUSTON OIL. Accelerating trend of a speculative oil stock. Monthly chart,
1938 to 1946.
233
15.8 STANDARD OIL OF OHIO. Straight-line Bull Trend of an investment oil.
Monthly chart, 1938 to 1946.
233
15.9 REPUBLIC STEEL. Typical Bull Trend of steel stocks. Monthly chart, 1938 to
1946.
234
15.10 AMERICAN CAR & FOUNDRY. Up-curving Bull Trend of heavy industry
issues. Monthly chart, 1938 to 1946.
234
15.11 CELOTEX. Accelerating uptrend of a low-priced building supply stock. Monthly
chart, 1938 to 1946.
235
15.12 CLAUDE NEON (Curb Exchange). Strongly up-curved Bull Trend of a low-
priced, highly speculative issue. Monthly chart, 1938 to 1946.
235
15.13 LIGGETT & MYERS TOBACCO B. Straight-line trend characteristic of tobacco
stocks. Monthly chart, 1938 to 1946.
236
15.14 CORN PRODUCTS REFINING COMPANY. Typical Major Uptrend of food
group. Monthly chart, 1938 to 1946.
236
15.15 WESTINGHOUSE ELECTRIC. Major Trendlines. Weekly chart, 1935 to 1938. 237
15.16 THE DOW–JONES INDUSTRIAL AVERAGE. Monthly chart, 1924 through 1937,
showing the unique straight downtrend developed by the 1929 to 1932 Bear
Market.
238
15.17 THE S&P 500. Horrors of the 1987 Crash. 239
15.18 THE S&P 500. The 1987 Crash viewed from afar. 239
15.19 THE DOW. Three Bull Market tops. 240
15.20 THE DOW 1999–2000 The top of the bubble. 241
16.1 OATS. Tracing “normal” patterns during the 1940s (5th ed.). 246
16.2 COTTON FUTURES. Familiar technical action in a futures chart (5th ed.). 247
16.3 GOLD 2005. A great rounding bottom? Foretelling? 248
16.4 GOLD October 2011. Results of massive rounding bottom. 249
16.5 SILVER 2005. Another great rounding bottom? 250
16.6 SILVER MAY 05. Lessons in agility, gaps and run days. 251
16.7 SILVER October 2011. The bull market foreseen in 2005. 252
16.8 TBONDS 2005. Applications of charting knowledge. 253
16.9 Commodity Research Bureau April 2005. Gaps and triangles in futures charts. 254
16.10 Commodity Research Bureau 2005. Long term view of bull market. 255
16.11 BONDS. Twenty year Spectacular display of patterns and signals. 255
16.12 COFFEE September 94. Gaps and flag. Absolute clarity. 256
16.13 SILVER May 11. A beautiful top. 257
17.1 SPIEGEL, INC. The Major Top of 1946 and the first part of a Bear Trend. 1946 to
1947.
262
17.2 SPIEGEL, INC. Sequel to Figure 198. Continuation of Bear Trend. 1946 to 1947. 263
17.3 CBOT DOW INDEX FUTURES AND DIAMONDS. Hedging DIAMONDS with
index futures illustrated.
278
17.4 CBOT DOW INDEX FUTURES AND OPTIONS ON FUTURES. Using options
and futures to control portfolio risk.
282
573List of Illustrations and Text Diagrams
Part Two
Figure Page
18.1 CUDAHY PACKING. Head-and-Shoulders Reversal at the Major Top in 1928. 294
18.2 HUDSON MOTORS. Daily chart from January through June 1930, showing large
Descending Triangle, also Symmetrical Triangle Consolidation during decline.
295
18.3 ENRON 2005. The most fundamental lesson. 298
18.4 IBM. Perhaps those “best and brightest” fundamental analysts were not as
feckless as one might think from look


CUDAHY PACKING. Head-and-Shoulders Reversal at the Major Top in 1928. 294
18.2 HUDSON MOTORS. Daily chart from January through June 1930, showing large
Descending Triangle, also Symmetrical Triangle Consolidation during decline.
295
18.3 ENRON 2005. The most fundamental lesson. 298
18.4 IBM. Perhaps those “best and brightest” fundamental analysts were not as
feckless as one might think from looking at their 20-year record.
301
18.5 XEROX. More benefits of fundamental analysis. 302
20.1 GOODYEAR TIRE COMMON. Monthly, 1943 to 1947, showing rapid advance of
a somewhat speculative common stock during a Bull Market.
308
20.1 GOODYEAR TIRE $5 PFD. Monthly, 1943 to 1947, showing stability of a
conservative preferred stock of the same company in the same period.
308
20.2 S&P . Here the benefits of relaxed long-term investing may be seen. 308
20.3 SPDR. For illustration, here is a chart of the Amex Index Share, the SPYDR, or
share based on the S&P 500.
309
20.4 S&P 500 2004-5. The Broadening Top comes home to roost. 309
22.1 BALTIMORE & OHIO. Weekly, first 6 months of 1945, showing tendency of a
low-priced stock to make wide swings in a general market move.
320
22.1 UNION PACIFIC. Weekly, first 6 months of 1945, showing tendency of a
high-priced stock of the same group to make small swings.
320
23.1 MICROSOFT. A multitude of lessons in Microsoft. 326
23.2 MICROSOFT. A Monthly perspective. 327
23.3 MICROSOFT. 2005. The long view after the fall. 328
23.4 PALM. Fool’s gold. Fool’s gold with naivete writ large on it. 329
23.5 PALM masquerading as PLMO. A Continuation of the shell game. 329
23.6 PALM masquerading as PSRC. Which shell is it under? 330
23.7 3COM. Underwriters cleverly only threw 3% of 3Com-owned Palm stock onto
the market at the IPO.
331
23.8 ORACLE. Your modern misshapen rectangles in Oracle again, marked by
runaway days and gaps.
332
23.9 INKTOMI. Scaling the Internet. 333
23.10 EMULEX. Lessons in high-speed speculation. 334
23.11 AMAZON. Weekly. Internet dreams of glory. Documenting the great Internet
bubble. Blow-off and hangover.
335
23.12 AMAZON. Daily. Details of the blow-off with some techniques to profit and not
suffer.
335
23.13 AMAZON. 2005. Rolls on. Biggest river in world. Not of profits. 336
23.14 CISCO. Exercises in adroit speculation. 337
23.15 CISCO. Zooming in on Cisco. 338
23.16 GOOGLE. 2005. More fun than a googly on a sticky wicket. 339
23.17 GOOGLE 2011. A herd of cash cows. 340
24.1 CORN PRODUCTS REFINING COMPANY. Weekly, 1945 to 1946. Habits of a
stock of low sensitivity.
342
24.1 SCHENLEY DISTILLERS. Weekly, 1945 to 1946. Habits of a stock of high
sensitivity.
342
574 List of Illustrations and Text Diagrams
Figure Page
24.2 CUBAN-AMERICAN SUGAR. Weekly, 1945 to 1946. Habits of low-priced stock
of fairly low sensitivity.
343
24.2 ELECTRIC BOAT. Weekly, 1945 to 1946. Habits of low-priced stock of somewhat
higher sensitivity.
343
28.1 AMERICAN CABLE & RADIO. Daily, last half of 1945 and beginning of 1946.
Placement and change of stop-order levels.
362
28.2 BASING POINTS. The most important chart in the book? 366
28.3 BASING POINTS. Candlestick version. 369
28.4 APPLE. Illustration of Basing Points in 1987 Reagan Crash. 370
33.1 SOUTHERN PACIFIC. Daily, 6 months in 1946. Head-and- Shoulders Top, rally,
and subsequent decline.
394
33.2 BRANIFF AIRWAYS. Daily, last half of 1945. Head-and- Shoulders Bottom,
reactions, Ascending Triangle Consolidation and advancing trend.
395
33.3 ASSOCIATED DRY GOODS. Daily, first half of 1946. Rounding Top; also
Broadening Consolidation.
396
33.4 GREYHOUND. Daily, last half of 1945. Rounding Bottom and advance with
reactions to Support Levels.
397
33.5 ALLIED STORES. Daily, last half of 1946. Symmetrical Triangle Consolidation in
decline; also small Head-and-Shoulders Continuation Pattern.
398
33.6 CONTINENTAL MOTORS. Daily, last half of 1945. Ascending Triangle showing
Pullback to Support Level; also Symmetrical Triangle with reaction to apex.
399
33.7 CERTAINTEED PRODUCTS. Daily, 6 months in 1946. Broadening Top, showing
rally following the breakout, and subsequent decline.
400
33.8 REMINGTON RAND. Daily, end of 1944, beginning of 1945. Series of Rectangles
during Bull Market Advance, and return moves to Support Levels.
401
33.9 PARAMOUNT PICTURES. Weekly, 1941 to 1943. Double Bottom, breakout, and
reaction to Support before main advance.
402
33.10 ASSOCIATED DRY GOODS. Daily, first half of 1945. Right- Angled Broadening
Formation and ensuing advance.
403
33.11 AMERICAN CAN. Daily, end of 1946, beginning of 1947. Diamond Formation at
top of Secondary rally.
404
33.12 GULF, MOBILE & OHIO. Daily, first 6 months of 1945. Intermediate Bottom and
Wedge.
405
33.13 MARTIN–PARRY. Daily, 6 months in 1945. Pennant, showing formation of
Consolidation Pattern at halfway point in advance.
406
33.14 LEHIGH VALLEY RAILROAD. Daily, end of 1945, beginning of 1946. Gaps of
various types.
407
33.15 NORTHERN PACIFIC. Daily, 6 months in 1944. Support and Resistance
phenomena; also showing Symmetrical Triangle and reaction to apex, and small
Rectangle.
412
33.16 AMERICAN STEEL FOUNDRIES. Daily, 6 months in 1947. Parallel Trend
Channels in Primary and Secondary directions.
413
36.1 DOW INDUSTRIALS. 150-day moving average. Editor’s choice. 424
36.2 Freeburg’s PENTAD system. 425
37.1 U.S. SMELTING, REFINING & MINING. Weekly, 1951 to 1953, showing
Ascending Triangle and Head-and-Shoulders Top.
428
575List of Illustrations and Text Diagrams
Figure Page
37.2 INSPIRATION CONSOLIDATED COPPER. Downtrend and break through
Major Support.
429
37.3 GRANITE CITY STEEL. Rectangle and Support–Resistance phenomena in 1956
uptrend.
430
37.4 MASONITE. 1956 downtrend showing Support–Resistance phenomena. 431
37.5 DELAWARE, LACKAWANNA & WESTERN. Rectangle and uptrend. 1954 to
1955.
432
37.6 AMERICAN LOCOMOTIVE. Rectangle with false move, and subsequent upside
breakout and advance.
433
37.7 FANSTEEL METALLURGICAL. Weekly, 1955 to 1956. Sh


429
37.3 GRANITE CITY STEEL. Rectangle and Support–Resistance phenomena in 1956
uptrend.
430
37.4 MASONITE. 1956 downtrend showing Support–Resistance phenomena. 431
37.5 DELAWARE, LACKAWANNA & WESTERN. Rectangle and uptrend. 1954 to
1955.
432
37.6 AMERICAN LOCOMOTIVE. Rectangle with false move, and subsequent upside
breakout and advance.
433
37.7 FANSTEEL METALLURGICAL. Weekly, 1955 to 1956. Showing Ascending
Triangle, reactions to Support, and eventual uptrend.
434
37.8 TEXTRON. 1956 to 1957. Descending Triangle, with sharp decline after the
breakout.
435
37.9(a) LIBBY, McNEILL & LIBBY. Monthly, 1927 to 1930. Showing continuance of
Bullish Trend into 1930.
436
37.9(b) CHRYSLER. Monthly, 1927 to 1930. Showing Major Top in 1928 and the collapse
during the early months of 1929.
436
37.9(c) EAGLE–PICHER LEAD. Monthly, 1927 to 1930. Generally Bearish Major Trend. 436
37.10(a) WEST INDIES SUGAR. Monthly, 1953 to 1956. Showing continuance of Bullish
Trend through 1956.
437
37.10(b) WESTINGHOUSE ELECTRIC. Monthly, 1953 to 1956. Showing Major Top in
1955 and the collapse during the early months of 1956.
437
37.10(c) S.S. KRESGE. Monthly, 1953 to 1956. Generally Bearish Major Trend. 437
37.11 NORTHROP AIRCRAFT. 1954 to 1955. Descending Triangle at an important top. 438
37.12 NORTHROP AIRCRAFT. 1956 to 1957. Ascending Triangle and upside breakout. 439
37.13 CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC. The magnificent uptrend of
1954 to 1955 with numerous Support–Resistance and Area Pattern features.
440
37.14 WESTINGHOUSE ELECTRIC & MANUFACTURING COMPANY. Downside
trend in the early stages of the 1955 to 1956 collapse.
442
37.15 OTIS ELEVATOR. 1954 to 1955. Showing a full year of a typical daily chart on
TEKNIPLAT charting paper. Shows a long Triangle Consolidation, eventually
followed by a continuation of the Major Advance.
443
37.16 The DOW–JONES INDUSTRIAL AVERAGE. Daily chart showing the
Broadening Top established in May to August 1957.
444
37.17 The DOW–JONES INDUSTRIAL AVERAGE. Daily chart showing the
Broadening Top established in 1999–2000.
445
37.18 INDUSTRIAL RAYON CORPORATION. Showing Bearish action of a stock
through the entire year 1957. Daily chart.
446
37.19 LORILLARD. Showing Bullish action of a stock through the entire year, 1957.
Daily chart.
447
37.20 AVNET ELECTRONICS CORPORATION. May through October 1961, showing
Bearish Trend during a time when the market Averages were strong. Daily
chart.
448
37.21 BURNDY CORPORATION. April to September 1961. Classic Head-and-
Shoulders Top and rallies to neckline. Daily chart.
449
37.22 BRUNSWICK CORPORATION. Showing the end of the great Bull Market Move
in this stock, and the decline which followed. 1960 to 1962. Weekly chart.
450
576 List of Illustrations and Text Diagrams
Figure Page
37.23 POLAROID. First 6 months of 1962. Long Rectangle followed by a precipitous
drop after penetration of Support. Daily chart.
451
37.24 COPPER RANGE. First 6 months of 1962. Head-and-Shoulders Top with
down-sloping neckline. Daily chart.
452
37.25 U.S. SMELTING, REFINING & MINING. April through September, 1962.
Head-and-Shoulders Bottom, breakout, reaction, and advance. Daily chart.
453
37.26 The DOW–JONES INDUSTRIAL AVERAGE. Weekly, July 1961 through June
1962. The massive Head-and-Shoulders Pattern preceding the 1962 break.
454
37.27 ABC VENDING CORPORATION. Daily, April to September 1963. Head-and-
Shoulders Top and Major Downtrend.
455
37.28 CERRO CORPORATION. Daily, January to June 1963. Symmetrical Triangle and
uptrend, showing reaction to “cradle point.”
456
37.29 CRUCIBLE STEEL. Daily, March to August 1963. Ascending Triangle, showing
Breakaway Gap.
457
37.30 SUPERIOR OIL. June to November 1962. Showing an important Double Bottom,
which became the base for a Major Advance.
458
37.31 GENERAL STEEL INDUSTRIES. Daily, November 1962 to April 1963. Example
of a Major Uptrend with normal reactions.
459
37.32 UNITED ARTISTS. Daily, February to August 1963. A Major Downtrend,
demonstrating Resistance Levels during the decline.
460
37.33 UTAH–IDAHO SUGAR COMPANY. January to June 1963. Breakout and rapid
advance appearing suddenly in a normally dull stock.
461
37.34 CONTROL DATA CORPORATION. Daily, February to August 1965. Example of
a Wedge with downside breakout and Major Collapse.
462
37.35 U.S. SMELTING, REFINING & MINING. Daily, July to December 1965. Breakout
from dormancy, Major Advance, showing Symmetrical Triangle Consolidation.
463
37.36 LIVINGSTON OIL COMPANY. Weekly, January 1965 into January 1966.
Downside Major Trend, Symmetrical Triangle Bottom, Major Reversal to
uptrend.
464
37.37 PACKARD–BELL ELECTRONICS. Daily, August 1965 to January 1966. Flag
showing “Half-Mast” situation, and a large Ascending Triangle with powerful
breakout move on the upside.
465
37.38 PARKE, DAVIS & COMPANY. Daily, July 1969 to June 1970. This could be
regarded as a very flat Head-and-Shoulders Top, or as a long Rounding Top.
466
37.39 ASTRODATA, INC. Daily, October 1969 through February 1970. A complete
collapse; then reopens 20 points lower.
467
37.40 ORACLE. Lest one think that the air pocket gap does not still exist, here is an
example from the turn of the century (third millennium).
468
37.41 PUBLIC SERVICE ELECTRIC & GAS. Monthly, 1969 through 1970. A typical
electric and gas utility stock.
469
37.42 MEMOREX CORPORATION. Daily, September 1969 through May 1970. Last
“Bull” fling for Memorex before gapping down with volume in February 1970.
470
37.43 FLYING TIGER CORPORATION. Monthly, October, 1969 through 1971. From
the 1967 high of 48½, “FLY” started a downtrend that lasted 2 years and took
the stock down to 11¼.
471
37.44 ACTION INDUSTRIES. Daily, November 1971 to April 1972. A large Ascending
Triangle formed after an advance of 90%, and followed by a breakout and a
further advance practically duplicating the first one in percentage gain.
472
577List of Illustrations and Text Diagrams
Figure Page
37.45 DELL COMPUTER. From


8½, “FLY” started a downtrend that lasted 2 years and took
the stock down to 11¼.
471
37.44 ACTION INDUSTRIES. Daily, November 1971 to April 1972. A large Ascending
Triangle formed after an advance of 90%, and followed by a breakout and a
further advance practically duplicating the first one in percentage gain.
472
577List of Illustrations and Text Diagrams
Figure Page
37.45 DELL COMPUTER. From nothing (a college dorm) to something. 473
37.46 DELL. Air pockets return. 474
37.47 INTEL. The heart of the Microsoft computer. Compare MSFT. 474
37.48 NOKIA. The story of the communications revolution. 475
37.49 AMD. Intel’s counterpart. 475
37.50 YAHOO. Internet rocket fuel. 476
37.51 YAHOO 2005. After the tulipomania. 477
37.52 APPLE COMPUTER. The revenge of Steve Jobs. 478
37.53 APPLE 2005. The press’ whipping stock strikes back. 479
37.54 NDX. A ten year trade using Basing Points. 480
A.1 Important swings of the DOW–JONES INDUSTRIAL AND RAIL AVERAGES,
1941 through 1946.
508
A.2 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, February 1 to August 31, 1941.
509
A.3 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, March 2 to October 31, 1942.
510
A.4 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, November 2, 1942, to June 30, 1943.
511
A.5 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, July 1, 1943, to January 31, 1944.
512
A.6 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, May 1 to November 30, 1945.
514
A.7 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, May 1, 1945, to November 30, 1945.
516
A.8 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, December 1, 1945, to May 31, 1946.
518
A.9 The DOW–JONES INDUSTRIAL AND RAIL AVERAGES. Daily closing prices
and total market volume, May 4 to October 19, 1946.
520
578 List of Illustrations and Text Diagrams
Text Diagrams
The charts listed as Figures all represent actual market history. In contradistinction, the
diagrams listed below do not depict real trading history, but have been specially drawn as
simplified, hypothetical market situations to facilitate the explanation of certain trading
principles. EN: Certain of these rather than drawings are exhibits of other interest.
Diagram Page
3.1 Hypothetical daily chart illustrating the failure of one average to confirm the other
in making a Dow Theory signal.
16
6.1 How a Head-and-Shoulders Top reversal pattern forms. The essential elements. 45
29.1 Trendline in rising market and parallel to it. (Referred to as Red Trendline and Red
Parallel.)
374
29.2 Return line in rising market and parallel to it. (Referred to as Blue Trendline and
Blue Parallel.)
374
29.3 Trendline in declining market and parallel to it. (Referred to as Blue Trendline and
Blue Parallel.)
374
29.4 Return line in declining market and parallel to it. (Referred to as Red Trendline and
Red Parallel.)
375
29.5 Example of trend action, showing decline, reversal, consolidation, advance, top,
and downside breakout.
375
29.6 Diagrams of the principal preliminary buying signals as shown by trend action. 376
29.6 Diagrams of the principal preliminary signals for short sales as shown by trend
action.
377
38.1 The Evaluative Index. Weekly, 1961, January through December 1961. 483
38.2 Evaluative Index from Magee Market Letters. 485
B.1 Formula for Calculating Volatility. 528
B.2 Risk Analysis. 529
B.3 Profit Analysis. 530
Tables
1 The Dow Theory’s 60 Year Record. 43
1.1 The Dow Theory’s Record to 2005 Longs Only. 45
1.2 The Dow Theory’s Record to 2005 Longs and Shorts. 48
579
Alphabetic Index of Stock Charts
Figure Stock Name Summary Description of Chart Page
23.7 3COM. Underwriters cleverly only threw 3% of
3Com-owned Palm stock onto the market at
the IPO.
331
12.9 A.O. SMITH
CORPORATION.
A technically significant (Runaway) Gap in
1946 decline. Weekly chart.
180
37.27 ABC VENDING
CORPORATION.
Daily, April to September 1963. Head-and-
Shoulders Top and Major Downtrend.
455
37.44 ACTION INDUSTRIES. Daily, November 1971 to April 1972. A large
Ascending Triangle formed after an advance
of 90%, and followed by a breakout and a
further advance practically duplicating the
first one in percentage gain.
472
10.2 AIR REDUCTION. The classic Broadening Top of 1929. 123
10.8 ALLIED STORES. Flat-topped Broadening Pattern of 1945, and
Breakout Gaps.
126
33.5 ALLIED STORES. Daily, last half of 1946. Symmetrical Triangle
Consolidation in decline; also small Head-
and-Shoulders Continuation Pattern.
398
11.11 ALTRIA GROUP (MO). 2005 gaps and flags galore. Chartist’s joy. 162
23.11 AMAZON. Weekly. Internet dreams of glory.
Documenting the great Internet bubble.
Blow-off and hangover.
335
23.12 AMAZON. Daily. Details of the blow-off with some
techniques to profit and not suffer.
335
23.13 AMAZON. 2005. Rolls on. Biggest river in world. Not of
profits.
336
37.49 AMD. Intel’s counterpart. 475
7.12 AMDAHL
CORPORATION.
Complex Head-and-Shoulders Bottom, 1984. 65
11.14 AMERICAN &
FOREIGN POWER 2D
PFD.
A Head-and-Shoulders Consolidation Pattern
of 1945.
164
7.16 AMERICAN &
FOREIGN POWER 2ND
PFD.
A Rounding Bottom formed in 1945. 68
9.14 AMERICAN AIRLINES. Weekly Chart. Bull Market Top of 1945 to 1946,
a form of Double Top.
113
580 Alphabetic Index of Stock Charts
Figure Stock Name Summary Description of Chart Page
8.12 AMERICAN BANK
NOTE.
The Major Bottom Reversal of 1941 to 1942. 85
10.10 AMERICAN BOSCH
CORPORATION.
A Diamond Pattern in 1945 which functioned
as a Consolidation.
127
28.1 AMERICAN CABLE &
RADIO.
Placement and change of stop-order levels. 362
33.11 AMERICAN CAN. Daily, end of 1946, beginning of 1947.
Diamond Formation at top of Secondary rally.
404
15.10 AMERICAN CAR &
FOUNDRY.
Up-curving Bull Trend of heavy industry
i