sm by which all of the opinions of all interested
persons are reduced by a competitive democratic auction to a single figure,
representing the price of the security at any particular moment. The various
formations and patterns we have studied are not meaningless or arbitrary.
They signify changes in real values, the expectations, hopes, fears,
developments in the industry, and all other factors that are known to
anyone. It is not necessary to know, in each case, what particular hopes,
fears, or developments are represented by a certain pattern. It is important
to recognize the pattern and understand what results may be expected to
emerge from it.
The short-term profits are, you might say, payment for service in the
“smoothing out” of inequalities of trends, and for providing liquidity in the
market. As compared with the long-term investor, you will be quicker to
make commitments and quicker to take either profits or (if necessary)
losses. You will not concern yourself with maintaining “position” in a
market on any particular stocks (although, as you will see, we will try to
maintain a certain “total Composite Leverage” [or risk and profit exposure]
according to the state of the market, which accomplishes the same result).
You will have smaller gains on each transaction than the long-term investor,
but you will have the advantage of being able to frequently step aside and
review the entire situation before making a new commitment.
Most particularly, you will be protected against Panic Markets. There are
times (and 1929 was by no means the only time) (EN: 1987 and 1989 also
come to mind. EN9: Add 20012002, if you please: May 2, 2001, Dow
11,350; September 17, 2001, 8,062; March 18, 2002, 10,673; and July 22,
2002, 7,532), when the long-term investor stands to see a large part of his
slowly accumulated gains wiped out in a few days. The short-term trader, in
such catastrophes, will be taken out by his stop-loss orders, or his market
orders, with only moderate losses, and will still have his capital largely
intact to use in the new trend as it develops. (EN: The best technical
analysts' opinion in “modern times” is that even long-term investors should
not grin and bear a Bear Market. This is a necessity only for bank trust
departments and believers in Burton Malkiel.)
Finally, before we get on with the subject of tactics, the operations we are
speaking of are those of the small and midsize trader. The methods
suggested here, either for getting into a market or getting out of it, will
apply to the purchase or sale of odd lots, 100 shares, 200 shares, and
sometimes up to lots of thousands of shares or more of a stock, depending
on the activity and the market for the particular issue. The same methods
would not work for the trader who was dealing in 10,000-share blocks
(except in the largest issues) because, in such cases, his own purchases or
sales would seriously affect the price of the stock. Such large-scale
operations are in a special field governed by the same basic trends and
strategy, but that requires a different type of market tactics (see Figure
18.3). (EN: Or, put another way, as Magee said to me one time, a mouse
can go where an elephant cannot.)
Strategy and tactics for the long-term investor— What's a
speculator? What's an investor?
In the years since Magee wrote the original Chapter 18, some different
connotations have attached themselves to the terms “speculator” and
“investor.” A great cultural shift has also occurred. The days when the New
Haven (New York, New Haven, and Hartford Railroad) was a beacon of
respectability (and lent luster to its investor) and paid “good dividends” are
gone forever; as is the New Haven. In fact, after the turn of the century,
corporations saw a change in investor sentiment about dividends. Investors
wanted capital appreciation
Figure 18.3 If an investor only learned one thing from this book, it would
be that one thing might be the salvation of his portfolio or his retirement
plan (if all his assets in the investment plan were shares of Enron). Instead,
the employees of Enron made a major mistake in not having a diversified
retirement portfolio—they had all their eggs in one basket, their income and
savings came from one source. But diversification is not even the crucial
lesson here; the lesson is get out of the stock when it reverses. The corollary
of that lesson is never buy a stock in a downtrend. However, the more
important lesson is never buy a stock when it is in a swan dive. So obvious
you say, but not so obvious at the time for portfolio managers for the
University of Miami who continued to accumulate Enron stock even as it
neared earth at 100 miles an hour. Of course, they had a sophisticated (?)
company; the Motley Fools had a death grip on the stock all the way to the
bottom.
and cared less for dividends. In fact, it has lately been considered the mark
of a “growth stock” not to pay dividends. Evidently, the days of the New
Haven are gone forever, when an “investor” was one who bought, held, and
collected dividends, and “speculators” were slightly suspect men like
Magee who played the medium-term trends and bought “unchic,
speculative” stocks. It all has a sepia tone to it. Yesterday's Magee
speculator might be called a medium-term investor today.
Although the term “speculator” could still be applied to anyone who
“trades” the market, today that old-time speculator and his kind would more
likely be called traders than speculators. Commodity traders who have no
business interest in the contracts they exchange are always referred to as
speculators, as opposed to commercials, who are hedgers and users of the
commodities they trade. Now “day traders” might be considered the
equivalent of the old-time speculators—except that day trading veers
dangerously close to gambling. And only the passive, in the opinion of this
editor, never trade at all and sit on their holdings during Bear Markets.
On the spectrum of investors, from investor to gam


ors, as opposed to commercials, who are hedgers and users of the
commodities they trade. Now “day traders” might be considered the
equivalent of the old-time speculators—except that day trading veers
dangerously close to gambling. And only the passive, in the opinion of this
editor, never trade at all and sit on their holdings during Bear Markets.
On the spectrum of investors, from investor to gambler, the old “New
Haven Investor” who “wants his dividends” is pretty rare these days, and,
again, may be one of those trust departments that does not want to get sued
and so stays out of stocks that go up. After all, prudent men do not “trade in
volatile stocks” but “invest in safe issues, like bonds,” which only lose
about 1.5%-2.0% of their purchasing value per year but preserve the
illusion of having “preserved principal.”
One definition of the long-term investor
Let us take as a long-term investor now one who expects to at least track
market returns, for it has been demonstrated over a relatively long period of
time that this can be done by passive indexing. At the turn of the century, as
this is written, it would seem neither longterm, medium-term, nor short-
term investors think about the risks involved in matching the market
because, entering the third millennium, it has been so many years since we
have had a really vicious Bear Market. Dow 36,000? This is a passing
phase. As each Bull Market reaches higher and higher, the odds are lower
and lower that it will continue— historic Bull Markets of the 1990s
notwithstanding.
What then are the strategy and tactics for the long-term investor to achieve
a goal of matching the market? (EN9: Is it necessary to remind the reader of
Chapter 4 and the Dow Theory?)
Let us remark immediately that the tactics Magee described for the
speculator—or trader if you will—are not at all in conflict with the short-
term tactics used occasionally by the long-term investor. As buying or
selling time approaches the stops of the long-term investor, that investor
becomes a trader who can and should adopt the trader's tactics. Sooner or
later, the focus even narrows to real time at the moment of trade execution.
Interestingly, the charting techniques we have described here work on tick-
by-tick data in real time also. Hence, if the trader wants to enter into the
real-time environment, he can attempt to time his trade right down to the
real-time chart formations. Only the really active and skilled long-term
investor will be concerned with squeezing the last half point or points out of
his position. This illustration of the time focus is addressed to any investor
or trader or speculator to demonstrate the fractal nature of both price data
and the applicability of Magee-type technical analysis to it.
The strategy of the long-term investor
The strategy of the long-term investor is to catch the long trends—to
participate in trades that lasts months and years. However, this strategy does
not intend to be sucked into long Bear Markets. Rather, portfolios are
liquidated or hedged when Bear Market signals are received. As has been
previously seen in examples of the performance of (more or less)
mechanical Dow Theory (see Chapter 4), this kind of performance can be
quite satisfactory—better indeed than buy-and-hold strategies that have
come much into vogue because of the Clinton-Gore Bull Markets of the
1990s.
If the goal is to beat not only the markets but also the mutual funds (only
20% of which outperform the market over the long term anyway—and
sometimes none of them make money), then passive indexing is the most
likely strategy. This may be done in a number of ways—index funds,
buying the basket, buying the futures, and so on. Nevertheless, the most
attractive method might be the use of the Standard & Poor's Depositary
Receipts (SPDRs; SPY) and DIAMONDS™ (DIA) and the like. The tactics
may be calibrated to the risk tolerance and character of the investor. He
might hedge or sell on Dow Theory signals, or on breaks of the 200-day
moving average, or on breaks of the long-term or intermediate trendlines
with a filter (Magee recommended 2%, and this might be calibrated to the
character of the markets and increased to 3% or a factor relevant to actual
market volatility). Basing Points (see Chapter 28) is also a powerful
method. Instruments we have previously discussed— SPDRs,
DIAMONDS, index futures, and options—can be used to execute these
tactics.
Suffice it to say that every strategy must provide for the plan gone wrong,
in other words, the dreaded Bear Market. Bear Markets would not be so
fearsome if the average investor did not insist on seeing only the long side
of the market. Long-term strategies go out the window quickly when blood
runs on the floor of the New York Stock Exchange. The well-prepared
technical investor has a plan that provides for the liquidation of positions
gone bad and presumably the discipline to execute it.
This involves the regular recomputation of stops as markets go in the
planned direction, and ruthless liquidation of losers that do not perform.
One may think of a portfolio as a fruit tree. Weak branches must be pruned
to improve the yield. Stop computation is treated in a number of places in
this book (see Chapters 27 and 28). For the investor trading long term, this
may be, as an example only and not as a recommendation, the breaking of
the 200-day moving average or the breaking of a long-term trendline. The
200-day moving average is widely believed to be the long-term trend
indicator, for which believing will sometimes make it come true. (EN9: Let
me emphasize here that “200” is a parameter and an example. Personal
research may fit a better parameter to the actual market.)
In reality, more than just the 200-day moving average or a manually drawn
trendline should be looked at. The chart patterns comprising the portfolio
should be considered also, as well as charts of major indexes and averages.
Also, consider the condition of the averages and

eBooks\Technical Analysis of Stock Trends, Eleventh Edition-CRC Press (2018).pdf


e emphasize here that “200” is a parameter and an example. Personal
research may fit a better parameter to the actual market.)
In reality, more than just the 200-day moving average or a manually drawn
trendline should be looked at. The chart patterns comprising the portfolio
should be considered also, as well as charts of major indexes and averages.
Also, consider the condition of the averages and their components—their
technical state—whether they are topping, consolidating, or trending as
indicated by their charts.
Moreover, it would be impossible not to mention Magee's Basing Points
Procedure (see Chapter 28). Possibly the most powerful trailing stop
method in existence.
Rhythmic investing
In addition, if Chapter 31 on “Not All in One Basket” is weighed seriously,
one might be rolling a portfolio from long to short gradually in natural
rhythm with the markets and in harmony with the Magee Evaluative Index
described there. That is the preferred strategy of the authors and editor of
this book.
These things all depend on the goals, temperament, and character of the
investor. If he is going to spend full time on the markets, he is probably not
a long-term investor. Such men eat well and sleep soundly at night. The
trader is lean and hungry—not necessarily for money, but for activity. It
behooves one to know his type as a trader or investor. Knowing one's type
or character is best established before finding it out in the markets, as the
markets can be an expensive place to search for self-knowledge.
There is no inherent conflict in holding long-term positions and also
attempting to profit from intermediate trends, depending on the amount of
capital in hand and how much time, energy, and capital the investor wants
to put into trading. A long-term strategy can be implemented with a
modicum of time and energy, as follows: pay attention to the major indexes
and averages and buy on breakouts, at the bottoms of consolidations and on
pullbacks; sell or hedge on the breaking of trendlines, calculated on Basing
Points (see Chapter 28) and the penetration of support zones.
The long-term investor will accept greater swings against his position than
the intermediate-term trader or speculator. As an example with the method
of using Basing Points in Chapter 28, the speculator is using a three-days-
away rule, whereas a long-term investor might be using a three-week
Basing Point or some such analogy. Plus, if interested, when he suspects or
analyzes a long Bull Market is approaching a climax, he might adopt the
three-days rule also, or even begin following his stock with a daily stop just
under the market. Beware though, as professionals look for stops just under
the close of the previous day in situations such as these.
It would be wise not to confuse long-term investing with “buy and hold,” or
as it was expressed in one investment fad in the 1970s, “one-decision
investing.” As an example of this misguided thinking, in 1972, the “best and
brightest” investment analysts (fundamental) on the Street picked a
portfolio of stocks for the generation, or 20 years. The companies would be
difficult to argue with as the creme de la creme of American business. After
all, who could kvetch at Avon, Eastman Kodak, IBM, Polaroid (unless he
happened to look at Figure 37.27), Sears Roebuck, and Xerox? Even today,
if you did not have a close eye on the market, you would immediately
respond, “blue chips.” Consider the following table showing the stocks and
the results achieved over the long term.
Price Price Percent
Stock 4/14/7212/31/92Change
Avon Products61.00 27.69 (54.6)%
Eastman Kodak42.47 32.26 (24.0)%
IBM 39.50 25.19 (36.2)%
Polaroid 65.75 31.13 (52.7)%
Sears Roebuck21.67 17.13 (21.0)%
Xerox 47.37 26.42 (44.2)%
In 2017, the vagaries of unsupervised portfolios is again seen: Avon 2.50;
Kodak 7.75; IBM 141; Polaroid unlisted; Sears 7.21; Xerox 32.64. Beware
of pundits and mindless investing.
Charts (Figures 18.4 and 18.5) showing activity for IBM and Xerox appear
on the following pages.
Figure 18.4 The questionable—even bizarre—results of “one-decision
investing” (i.e., buy and hold) are amply illustrated by this chart. First of
all, the “best and brightest” recommended IBM at a decade high to see it
decline by more than 50%. It subsequently recovered to double from their
original recommendation. Ah, sweet justification! Only, unfortunately, at
the end of 20 years to see it rest approximately 40% beneath the
recommendation. The analytical lines give some hint of how a technician
might have traded the issue. I like to say that there are bulls, bears, and
ostriches, and anyone who followed this one-decision investment proves
my case.
Figure 18.5 Like IBM in the previous figure, Xerox was recommended at a
place at which it should have been sold instead of bought. The comments
there might apply to the chart here. The foolishness of “buy and hold” or
“one-decision investing” is amply illustrated by observing the long-term
swings of the stock and thus of the investor's equity. Technical analysis is
intended to be an antidote to such foolishness.
Summary
The long-term investor attempts to catch major market moves—those
lasting hundreds, if not thousands, of Dow points and stay in trades for
many months if not years.
Within this time frame, he expects to take secondary trends against his
position. Depending on his temperament and inclination, he may attempt to
hedge his portfolio upon recognizing secondary market moves against his
primary direction.
His preference for stocks and portfolio will be for market leaders, for
baskets that reproduce the major indexes (or Index Shares) as the ballast for
his portfolio, and he may choose some speculative stocks to add spice to his
portfolio.
In spite of his penchant for long-lasting trades he will not tolerate weak,
losing, or underperforming stocks. They are the shortest of his trades. He
will cut losses and let profits run, the truest of the market maxims and the
least understood b


reproduce the major indexes (or Index Shares) as the ballast for
his portfolio, and he may choose some speculative stocks to add spice to his
portfolio.
In spite of his penchant for long-lasting trades he will not tolerate weak,
losing, or underperforming stocks. They are the shortest of his trades. He
will cut losses and let profits run, the truest of the market maxims and the
least understood by unsuccessful investors. The other maxim least
understood by investors is “buy strength, sell weakness.”
Truly sophisticated investors attempt to participate in Bear Market trends
also. This is the greatest difference between professional and general
investors—professionals have no bias against the short side.
For the convenience of day traders, the URL of Gamblers Anonymous is
noted: http:// www.gamblersanonymous.org.
chapter nineteen
The all-important details
In this chapter and the one following, we take up a number of elementary
suggestions intended largely for the benefit of those who have never kept
charts before. Much of this will seem obvious and repetitive to the
advanced student, although even he may find some thoughts that will
simplify his work. The beginner should read these chapters carefully and
use them for later reference.
The details of how and when you keep the charts will not guarantee you
profits, but if you fail to work out these details in such a way as to make
your work easy, as part of a regular systematic routine, you cannot expect to
keep up your charts properly or make any profits.
Charting and analyzing your charts is not a difficult process, nor will it take
too much of your time if you have determined a reasonable number of
charts and have arranged for doing the work regularly, meaning every day
without fail.
You will need a source of data—the day's market prices and volume. If you
live in a big city, your evening paper will carry the complete list, and you
can plan to set aside a certain period before dinner, or after dinner, or during
the evening. If you cannot allot such a period and keep it sacred against all
other social or business obligations, then plan to do the charting in the
morning. The key is to set a definite time and let nothing interfere, ever, or
you are lost. (EN: This process is radically simplified by automated
computer downloading procedures and access to data sources and internet
sites, but the principle is the same.)
You should have a suitable place to work and keep your charts. If it is at
home, in the dining room or living room, other members of the family
should understand that what you are doing is important. You should be able
to shut the door and work without interruption. The light should be bright
and as free from shadows as possible. (It makes a big difference, especially
if you are keeping a large number of charts.) The ordinary desk lamp throws
a reflected glare directly across the paper and into the eyes. It can be a
strain if you are doing much of this close work. Better to have an overhead
light, placed just a few inches in front of your head and a convenient
distance above; and if this light can be a fluorescent fixture using two 40-
watt lamps, you will get almost perfect shadowless lighting. These
suggestions apply in case you are not working by daylight.
Additionally, have plenty of room. A big desk top or a dining room table
with a large clear space for chart books, extra sheets, pencils, scratch paper,
ruler, calculator, computer equipment, and anything else you need. If your
working surface is fairly low, say 28 or 29 inches from the floor, it will be
less tiring than the usual 30-inch desk height.
Whether you are working in ink or in pencil, pick out the writing tool that is
easiest for you to use. If you are using pencils, try several different makes
and degrees of hardness. Find one that is hard enough not to smudge too
easily, and yet is not so hard you have to bear down to make a clean black
mark. The wrong kind of pencil can tire you and irritate you more than you
realize. Also, have plenty of pencils, a dozen at least, well-sharpened, so as
soon as one becomes a trifle dull and you are not getting a clean, fine line,
you can simply lay it aside and continue at once with another freshly-
sharpened pencil.
Keep your charts in loose leaf books with big enough rings to make turning
the pages easy. Do not overcrowd the books; get new books if a volume is
too crowded. Finished charts may be kept in file folders. The only ones that
need to be in the books are the current sheets and the sheets for the
immediately preceding period. If possible, use a seven-ring binder. Pages
are easily torn loose from two- and three-ring binders, but seven rings will
hold the pages safely and you will seldom have one tear out.
The charts you keep will become increasingly valuable to you as the chart
history builds up. The old chart sheets will be very helpful to you for
reference. Provide a file or space where they can be indexed and kept in
chronological order, and also have file folders for brokers' slips, dividend
notices, corporate reports, clippings and articles, notes on your own
methods, and analyses and special studies of the work you are doing.
In this connection you will, of course, keep a simple but complete record of
each purchase, sale, dividend, and so on, on stocks you have bought or sold.
This record will make your work much easier when the time comes to
figure out income taxes. It will also give you all the statistical information
you need to judge the results of your trading operations.
(EN: At the beginning of my investment career, and often in the middle of it,
I thought the above was cracker-barrel wisdom. The longer I last the more I
think that homespun wisdom might be the best kind to have in investing—
somewhat like Mark Twain, who was astounded at how much his father
increased in wisdom the older Twain himself got.
We may restate the modest homilies above: Be serious. Be methodical. Be
disciplined. Be businesslike.


er, and often in the middle of it,
I thought the above was cracker-barrel wisdom. The longer I last the more I
think that homespun wisdom might be the best kind to have in investing—
somewhat like Mark Twain, who was astounded at how much his father
increased in wisdom the older Twain himself got.
We may restate the modest homilies above: Be serious. Be methodical. Be
disciplined. Be businesslike. Anyone who succeeds in investing without
these qualities is the recipient of blind luck and will be fortunate not to fall
into a hole before his career is over.
These thoughts occur when one is wondering how Magee would have
viewed the advent of the microcomputer and its impact on technical
analysis and investing. Might he have said, “What hath this tool wrought?!
Wonders and abominations!!”
Given the possibilities for complicating analysis and operations when
confronted with all the bells and whistles of the average computer software
package, the investor must maintain perspective. What, then, are the all-
important details in practicing technical analysis with the aid of a
computer?)
The simplest and most direct way to use
a computer for charting analysis
In reality, the computer can be used as a simple tool to do a simple job.
There is nothing inherently complicated about keeping a chart on a
computer. All computer software packages enable bar charting and many, if
not most, enable many other kinds of charting, from candlesticks to
oscillator charting. The process, in almost all commercially available
packages, is so simple that explaining it here would be superfluous (see
Appendix B, Resources, for demonstrations), except to generally say it
consists of retrieving data, updating the program's price database, and
clicking an icon to run a chart. The software packages themselves explain
their features better than can be done here. What is important here is to
give perspective. Even simpler when the whole process takes place on the
internet, as at http://www.stockcharts.com or http://www.bigcharts.com, or
http://www. tradestation.com.
In this respect, charting can be done with quite expensive programs and
also on publicly available free programs or freeware. Charting can also be
done with interactive charting programs on many internet sites. The basic
bar chart can be enhanced with an unending number of technical studies—
moving averages, oscillators, and so on. Therein lies the danger. Chart
analysis in itself is a qualitative process. Decorating graphic charts with
number-driven information and studies can lead the general investor astray
—and into confusion and indecision.
Thus, the first preference of this analyst is to keep the process as simple as
possible. Get the data, draw a chart, analyze the patterns, consider the
volume, and draw the appropriate analytical lines—this can usually be
done by the program on the screen. Often a better graphic picture may be
obtained by printing the chart and hand-drawing the analytical lines. This
brings to the fore one of the main problems of almost all the software
packages—screen graphics are poor and, at least to old chartists,
disorienting. They are especially befuddling to analysts who are
accustomed to working on TEKNIPLAT™ chart paper. With passing
editions of Resources, this problem will be dealt with. (EN9: In the
intervening years since the eighth edition, two things have occurred: the
editor adjusted to modern technology and the technology achieved a level
of excellence acceptable to a carping analyst. Internet technical analysis
sites such as http://www.stockcharts.com and http://www.thinkorswim.com
improved to be surprisingly valuable resources at unbelievably low prices—
even free.)
The question of graphic representation of the facts is worth noting as a
persistent one. To a certain extent, the individual analyst will solve this
conundrum by adapting his eye and mind to a graphic environment, using
one graphic method consistently and seeing how it relates to the facts in the
market. John Magee-oriented solutions to this problem will be available on
the website http:// www.edwards-magee.com.
In Appendix B, Resources, the reader may see some examples of simple and
inexpensive software packages and internet sites that are quite adequate to
the required tasks of charting technical analysis, as well as more complex
number-driven analysis.
Summary
The computer is an invaluable tool for analysis. Use of it will enable the
following:
• Data may be acquired automatically via internet or dial-up sites at
little or no cost. Some of these even offer real-time data, which is a
way for the unsophisticated trader to go broke in real time, but which
the general investor may desire on the day of executing a trade. Many
of these sites offer every kind of analysis from respectable technical
analysis (usually too complicated) to extraterrestrial channeling.
• A computer package and internet portfolio sites will give the analyst
virtually effortless portfolio accounting and mark-to-market prices—a
valuable device to have to keep the investor from mixing his cash and
accrual accounting, as Magee says.
• The computer will enable processing of a hitherto unimaginable
degree. An unlimited number of stocks may be analyzed. Choosing
those to trade with a computer will be dealt with in Chapters 20 and
21.
• Appendix B, Resources, contains information on software packages
that the reader may try and purchase at quite reasonable prices. In all
likelihood, the least expensive of these will be adequate to the needs of
most general investors. In addition, I present a brief discussion of
internet sites and resources.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter twenty
The kind of stocks we want: the speculator's
viewpoint
The specifications of the kind of stock we want to chart are fairly simple
and few. We want a stock that will enable us to make a profit through
trading operations, meaning a stock whose price will move over a wide
enough


ussion of
internet sites and resources.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter twenty
The kind of stocks we want: the speculator's
viewpoint
The specifications of the kind of stock we want to chart are fairly simple
and few. We want a stock that will enable us to make a profit through
trading operations, meaning a stock whose price will move over a wide
enough range to make trading worthwhile. There are those who are
concerned mainly with safety of principal and the assurance of income from
a stock. For them, there are (EN9: or were) stocks that afford a considerable
degree of stability. You may (and probably will) want to keep a substantial
part of your total capital in stocks of this type. They move in a narrow price
range; are extremely resistant to downside breaks in the market; are also
(and necessarily) unresponsive to fast upside moves in the market as a
whole, and are highly desirable for the conservative investor. They are not,
however, the most suitable issues for trading operations, because their
swings are small, and commissions would tend to diminish the narrow
trading profits that could be taken. Also, they do not make the sharp, clear
chart patterns of the more speculative issues, but move in rounding,
sluggish undulations. (EN9: These remarks reflect a bygone time. The
described stocks by and large went the way of the Dodo. When T can
disappear from the market as a factor, there is no place to hide, except in
bonds, which, when stagnant, only lose real value at the rate of inflation
and loss of purchasing power of the dollar. Even bonds should be subject to
frequent reevaluation using the tools described in this book.) (For
illustrations in this chapter, see Figures 20.1 through 20.4.)
To amplify this comment and explain a bit about what underlies what we
are doing, let us assume a certain company has two issues of stock, a
preferred and a common. We will assume the concern has a certain steady
minimum profit it has earned for years, sufficient to pay the preferred
dividend, the continuance of these dividends seems practically assured. The
dividends on the preferred are fixed at, let us say, 6%. Now the common
stock gets all that is left. In one year, there may be $0.50 a share for the
common stockholders. The next year, there may be $2.00 a share or four
times as much. In a case like this, if there are no other factors, you would
expect the preferred stock to sell at a fairly steady price without much
change, whereas the common stock is subject to a “leverage” and might
shoot up to four times its former value. The more speculative issues
represent either a business that is, by its nature, uncertain as to net profit
from year to year, where the volume of business or the profit margin
fluctuates widely, or one in which the majority of the “sure” net profit has
been sheared off for the benefit of senior obligations. There are also other
factors that affect the speculative swing of a stock, and, as a result, one
issue may be very sensitive and another extremely conservative, and
between them there would be all shades and degrees of sensitivity or risk. It
is enough here to note briefly the nature of the business itself does not
always account for the habits of the stock because the other factors may be
very important. Most stocks have a fairly well-defined “swing” power,
which can usually be determined by past performance of
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been met, compared (at right) with the Goodyear $5.00 Preferred, which
carries a high degree of assurance that the $5.00 dividend will be met, but
no promise of further participation in profits. Monthly range of each stock
for the same 54-month period is shown on a ratio scale. As the Common
makes an advance of more than 300%, the Preferred advances about 25%,
leveling off at a point that represents the maximum price investors are
willing to pay for the sure $5.00 dividend.
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Figure 20.2 S&P. Here the benefits of relaxed long-term investing may be
seen, buttressed, of course, by the longest and handsomest Bull Market in
American history in the Clinton-Gore years. At the end of this record, the
effects of public enthusiasm (or as Chairman Greenspan of the Fed said,
“irrational exuberance” vide tulipomania) can be seen in the wide
undisciplined swings (best seen in Figure 20.3). The dotted line represents
150-day (approximately) Moving Average. Just using the Moving Average
as a signal (or the Basing Points Procedure) would have beaten the market
and 99% (the 99%) of other investors.
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Figure 20.3 SPY. For illustration, here is a chart of the AMEX Index Share,
the SPY, or ETF based on the S&P 500. After the crash of 1998 (the Asian
Economic Flu crash), the fan lines tell a story, as does the last phase of the
chart where the market whips in what appears a Broadening Top. (EN9:
Note this Broadening Top was identified in 1999-2000 before the crash as
documented in the http://www. edwards-magee.com archives. See Figure
20.4.)
Figure 20.4 The S&P 500 in all its glory and tragedy. An


e S&P 500. After the crash of 1998 (the Asian
Economic Flu crash), the fan lines tell a story, as does the last phase of the
chart where the market whips in what appears a Broadening Top. (EN9:
Note this Broadening Top was identified in 1999-2000 before the crash as
documented in the http://www. edwards-magee.com archives. See Figure
20.4.)
Figure 20.4 The S&P 500 in all its glory and tragedy. An especially good
portrait by Holbein, the younger. The Broadening Top pointed out in Figure
20.3 in 2000 foretold the decline of the S&P to below 790—not quite 50%
but close enough to catch the eye. Particularly fine lessons here, besides the
Broadening Top lesson. All of them screaming for action. The broken
trendline at A, the broken trendline at B, the broken “neckline” or
horizontal line at C. Notice the close correspondence of the break at B and
C. The next lesson is not to buy downtrends until a clear bottom is made in
a major bear market. Clearly no bottom is made until the Kilroy Bottom at
1-2-3. Even then, the least risky trade for the long-term investor is when the
Kilroy Fenceline (Neckline) is broken at D. All of this was knowable at the
time.
how a stock will behave in the future as to the extent of its swing. (EN9: Or
we might say, short-term volatility and long-term range.)
Incidentally, for short-term trading (EN9: amusing in the modern context;
by short-term trading Magee means trading of trends of shorter length than
Dow Waves), we are thinking about the habits of the stock that are only
partly determined by the business it represents. Purchase of stock in one
company that has a somewhat uncertain or fluctuating profit record may be
more conservative than purchase of a highly leveraged stock of another
company whose basic business is steadier and more conservative. We will
take up the matter of determining these risk constants a little later.
One should also understand the short sale of a stock does not imply any
feeling that the country is going to the dogs or even that the concern
represented is going to the dogs. Such a sale merely indicates your belief
the stock may be temporarily overpriced; that earnings or dividends may
have been abnormal in recent years and are likely to be reduced; or that for
one reason or another, the stock of the company may be worth a bit less
than it has been worth.
For technical trading, we want a fairly speculative stock, one that will make
sizable swings up in a Bullish Trend and down in a Bearish Trend. The very
factors that tend to make a stock safe and desirable to the investor may
make it entirely unsuitable for trading. Also, with certain reservations that
will be taken up later on, the more speculative the stock the better it is for
our purposes.
(EN: Entering the third millennium (since we Anglo-Saxons started
counting—the fourth or fifth by other measures), the distinctions between
“speculative” stocks and every other kind of stock has grown increasingly
blurry. Rather than apply a perhaps pejorative (in the minds of some
readers) term like “speculative” to otherwise-innocent stocks, we would do
better to describe stocks as wide ranging or narrow ranging, as volatile or
nonvolatile. Stocks may then be evaluated one against another by their
betas and historical volatilities, statistical data easy to obtain. “Betas” and
“volatilities” are dealt with in Chapters 24 and 42.)
In line with this more current thinking, there is another question for readers
of this book—the choice of trading (or investment) instruments for the long-
term investor.
The kind of stocks we want: the long-term investor's viewpoint
Changing opinions about conservative investing
Virtually no one invests like the conservative investor described above in
Chapter 20— except perhaps trust departments of antediluvian banks. There
may be some investors still out there who are so risk averse they still follow
the method described. Bank trust departments may be still doing it; they
used to do it so the trust beneficiaries could not sue them. This is the reason
trust departments exist, to give legal cover (the so-called prudent man rule)
to trustees in case of suit by beneficiaries. Most enlightened trust
departments and trustees now probably follow indexing or other more
productive strategies to cater to new understandings of the prudent man
rule.
“Indexing” refers to the practice of constructing a portfolio to replicate or
closely reproduce the behavior of a widely followed index such as the
Standard & Poor's (S&P) 500 or the Dow-Jones Industrials. These
portfolios never track the Indexes exactly because the advisors and funds
who manage them take management fees and expenses. These fees are
generally less than fees and expenses on actively managed funds, but in fact
are not necessary for the private investor to pay because even the tyro
investor can now use “Index Shares” (e.g., DIAMONDS™ [DIA], S&P
Depositary Receipts [SPDR; SPY, QQQ,] and so on) or other proxy
instruments to do what the funds and professionals do. Essentially what
indexing does is track the Averages, a strategy that was impossible or
difficult (expensive) when Magee examined it, as in Chapter 15. (EN9: In
the opinion of this editor, hiring a management company to run an indexing
strategy is a waste of capital. Much better for the investor to invest directly
in ETFs and to exit the market when uptrends end and reverse. This is a
much better strategy than “passive indexing,” which cleverly manages to
capture both losses and profits in the Averages.)
The kinds of stocks long-term investors want:
the long-term investor's viewpoint
Perhaps one of the most important actualizations of recent editions is to
bring current this book's treatment of the Averages, noting that it is now
possible to trade the Averages in stock-like instruments. This fact deserves
to be marked as a vitally important development in modern markets. This
chapter will confine itself to describing facilities for trading and investing in
the Ave


's viewpoint
Perhaps one of the most important actualizations of recent editions is to
bring current this book's treatment of the Averages, noting that it is now
possible to trade the Averages in stock-like instruments. This fact deserves
to be marked as a vitally important development in modern markets. This
chapter will confine itself to describing facilities for trading and investing in
the Averages and Indexes.
In 1993, the American Stock Exchange (AMEX) introduced trading in
SPDRs™, an Exchange-traded unit investment trust based on the S&P 500
Composite Stock Price Index. The AMEX calls these securities Index
Shares™, a name they also use for other similar instruments. As noted
above, large investors and funds have long traded “baskets” of stocks
representing the S&P 500, obviously an activity requiring large capital. In
fact, a certain class of investment managers and funds have practiced
“passive investing” meaning indexing, primarily for large clients. The
purchase and liquidation of these and other “baskets” is one form of
“program trading.”
Recognizing the utility of this investment practice, the AMEX created the
SPDR as a proxy instrument to allow the smaller investor to practice the
same strategy. The effectiveness of this product introduction may be
measured by public participation in the trading of the SPDR (SPY). By
2000, almost $15 billion was invested in SPDRs with more than
100,000,000 shares outstanding. These units allow the investor to buy or
sell the entire portfolio or basket of the S&P 500 stocks just as he would an
individual stock, but the capital required to do so is radically reduced.
In 1998, the AMEX introduced DIA, Index Shares on the Dow-Jones
Industrial Average™ (DJIA), which is analogous in every way to the
SPDRs. Thus, an investor may “buy the DJIA.” So in current financial
markets, it is possible to “buy the market,” unlike those conditions under
which Edwards and Magee operated.
Construction of the Index Shares and similar instruments
The AMEX unit investment trusts are constructed to replicate the
composition of their base instrument. The SPDR, for example, is an
instrument that represents one-tenth of the full value of a basket of the S&P
stocks and trades on the AMEX, just like a stock (SPY). Other
characteristics of stocks are also reproduced such as long life (the SPDR
Trust lasts into the twenty-second century) and quarterly dividends (cash
paid on the SPDRs reproducing dividends accumulated on the stocks of the
S&P 500). Even dividend reinvestment is possible, and the units may be
traded on the AMEX during regular trading hours. Under normal
conditions, there should be little variance in the price of the SPY relative to
the S&P 500. (In 2008, the AMEX merged with the New York Stock
Exchange. Trading and instruments remain as described.)
These elements, as discussed for SPDRs, are common to all the Index
Shares— DIAMONDS, World Equity Benchmarks (WEBs), and others.
There are, of course, some expenses and costs to using the Index Shares—a
small price to pay for the use of the instrument and generally less than the
costs of a fund. Index Shares are also much more flexible for the
independent investor. Among other advantages, the private investor can
control the tax consequences of his investment, which is not possible in
funds.
Other Exchanges have created similar security instruments or derivatives or
futures to replicate or track the well-known averages and indexes. Among
these are tracking shares or index shares or futures (let us call them
“instruments”) on other indexes (Russell, Nikkei, and so on) or options on
the futures or indexes until there is a bewildering array of instruments
available for trading, investing, and hedging. Among the more important
exchanges and instruments traded are the Chicago Board of Trade (futures
and options on futures on the Dow); the Chicago Mercantile Exchange
(futures on the S&P, Nikkei 225, Mini S&P 500, S&P Midcap 400, Russell
2000, and NASDAQ 100); and the Chicago Board Options Exchange (S&P
100 and 500 options). This, by no means, is an exhaustive list. All the
futures and options that matter will be found listed in the Wall Street
Journal under Futures Prices or Futures Options Prices.
This book does not deal in comprehensive detail with futures and options,
but it is worth mentioning these exchanges and their futures and options
products because of the facility they offer the investor and trader for
hedging portfolios in Index Shares and Average trading, not to mention
opportunities for speculating.
Briefly, hedging is the practice of being neutral in the market. That is, one
might be long the DIAMONDS and buy a put option on the DJIA at the
Chicago Board of Trade, meaning that advances in the DJIA would result in
profits in the DIAMONDS, and a loss of premium in the put. Conversely, a
decline in the Dow would result in profits in the put and losses in the
DIAMONDS. As this area is not the province of this book, this is a highly
simplified description of a hedge. Nevertheless, the reader should see and
understand that hedging can be an important strategy. Hedging can take the
place of liquidation of a portfolio when the analyst recognizes a change of
trend or unstable conditions but does not wish to incur taxes or wishes to
defer them.
An outline of instruments available for trading and investing
It would be herculean to attempt to list the entire panoply of averages,
indexes, futures, and options available for trading—herculean due to the
fact new trading instruments are constantly in creation and due to the fact,
now operating at internet speed, we may expect the rate of change to
accelerate. In addition to those listed above, there are WEBS (meaning that
exposure to world markets may be arranged).
In all, approximately 30 or more Index Share units or instruments were
available for trading on the AMEX at the turn of the century, in addition to
DIAMONDS and SPDRs. Similar instruments exist on the Phila


act,
now operating at internet speed, we may expect the rate of change to
accelerate. In addition to those listed above, there are WEBS (meaning that
exposure to world markets may be arranged).
In all, approximately 30 or more Index Share units or instruments were
available for trading on the AMEX at the turn of the century, in addition to
DIAMONDS and SPDRs. Similar instruments exist on the Philadelphia and
in Chicago, and others are being created daily. To reduce the confusion, the
general investor will probably find the major indices of the most
importance. The more instruments one deals with the more complicated the
strategy and tactics become. Therefore, the Dow, the S&P 500, and the
NASDAQ composite (DIA, SPY, QQQ) are probably sufficient for the
purposes of the gentleman (or lady) investor. The Mid-Caps, the Nikkei,
and others begin to come into play when the trader begins to try to catch
sector rotation, fads, short-term cycles, and so on.
The importance of these instruments: diversification, dampened
risks, tax, and technical regularity
It would be difficult to underestimate the importance of these new trading
instruments. First of all, they afford the private investor what was
previously reserved for the large capital trader—the ultimate in market
diversification. The S&P 500 represents stocks comprising 69% of the value
of stocks on the New York Stock Exchange. Buying it is buying the
American economy. The 30 Dow Industrial stocks represent the most
important symbol in the American economy—and perhaps in the world.
Investors are well advised to pay attention to both Averages if they would
fare well in the markets (Note the plural: markets). These two Averages
now have the influence or clout that once the Dow alone had to express the
state of the markets and stocks in general.
Buying the SPY or DIA then represents the immediate acquisition of a
diversified portfolio. And buying the NASDAQ or QQQ gives one
immediate exposure to the more speculative and volatile sector of the
American economy. Given the long-term bullish bias of the averages and
the American economy, it is difficult to argue with this as both strategy and
tactics for the long-term investor. This does not mean positions should be
taken blindly without thought or not monitored. On the contrary, recall if
you will the record of the Dow Theory; even for the long-term investor,
bear markets should not be allowed to destroy liquidity and equity value.
These questions are discussed at greater length in Chapter 18.
Although we believe these instruments are good vehicles, it is wise to
remember Magee's frequent admonition (less important now than when
spoken) that it is a market of stocks, not a stock market. Meaning when the
tide is flowing down with the Dow and S&P, prudence and care must be
used in taking long positions in stocks that are in doubt as to direction.
Additionally, it is worth noting investments in these instruments will be less
profitable than an astutely chosen individual stock. For example,
Qualcomm appreciated approximately 240% (temporarily) in 1999-2000
compared with about 24% in the S&P over the same period. Those who
bought Qualcomm at its top and sold it at the bottom of its reaction lost
about 75% or about $148 a share. Traders in Qualcomm tended to obsess
and pay hyper attention to the stock, whereas investors in the SPY reviewed
it once a week or less or told their computers or their brokers to give them a
call if it broke the trendline or entered stops. Then they slept at night and
had eupeptic digestion.
Other advantages accrue to the trading of the SPDRs. Ownership of a fund
can result in tax liabilities as managers adjust portfolios to reflect changing
membership in the fund or withdrawals in capital by irate stockholders.
Since Index Shares last into the twenty-second century, the long-term
investor has no need to realize gains and pay taxes. Bear markets may be
dealt with by hedging with other instruments—futures, options, or proxy
baskets of stock, or individual stocks, and accepting the tax consequences
of these trades.
John Magee aptly observed before the direct trading of the Averages was
possible that the Dow-Jones Industrials were very regular and dependable
from the technical point of view. This observation is annotated at some
length in comments on Dow Theory in Chapter 36. Therefore, the investor
in the Index Shares may have a smoother time technically than a trader of
an individual stock.
Summary
The long-term investor and mid-term speculator attempt to capture long
secular (as well as cyclical) trends in the markets. They shun frequent
trading and capital-eroding transactions. They recognize that risk fluctuates
with time and trend, and they know that frequent turnover benefits mainly
the broker.
The strategy of the long-term investor may be to match the market by using
funds or SPDRs or baskets, but he does not like to participate in Bear
trends. He hedges or liquidates his positions on major trend shifts. In fact,
he may even short the indexes if his analysis indicates major bear markets.
If he desires to outperform the market (which will happen automatically if
he follows the methods of this work), he finds some individual speculative
stocks to trade in addition to his foundation portfolio. Depending on his risk
tolerance, he may always be somewhat hedged. When long the indexes, he
finds some stocks in downtrends to short. When he is short the indexes, he
finds some strong stocks to hold long. There is no excuse for a moderately
skilled and reasonably capitalized investor to lose money over the long term
in the market.
As a reminder, Chapters 5 and 28 describe powerful methods for the long-
term investor using Magee's Basing Points Procedure.
chapter twenty-one
Selection of stocks to chart
The trader who operates on the “fundamental” basis, making his
commitments on his analysis of earnings, dividends, corporate
management, prospects for the industry, and so on, will usually


ney over the long term
in the market.
As a reminder, Chapters 5 and 28 describe powerful methods for the long-
term investor using Magee's Basing Points Procedure.
chapter twenty-one
Selection of stocks to chart
The trader who operates on the “fundamental” basis, making his
commitments on his analysis of earnings, dividends, corporate
management, prospects for the industry, and so on, will usually (of
necessity) confine himself to a few stocks or a single group of stocks in the
same field.
To the contrary, the technical trader, using daily charts, should have a large
portfolio of issues. Since he is primarily interested in the technical chart
patterns, he will not try to make an exhaustive study of the background of
each company. In fact, the characteristics of the stocks themselves, as they
act in the market, are more important to him than what these companies
make or what they are earning. This is because, although the stocks
represent ownership in the company, the capital structure, “leverage,” and
floating supply of the stock may (and very often does) mean fluctuations in
the stock price that are not directly in proportion to changes in the affairs of
the business.
You will also find many cases in which the stock of a well-regarded, well-
managed, long-established concern, whose latest earnings report shows
increased profits, and with a long record of dividends paid, would not be a
good buy at the market price. It may be overpriced and due for a serious
depreciation. You will find other cases in which a stock, which apparently
represents no great promise of either earnings or dividends, suddenly starts
a series of spectacular moves upward, and is indicated clearly as a buy. Of
course, the answer, in each case, is the records available apply to the past,
not the future; and very often, chart action will indicate the inside
knowledge of those who are in possession of facts the public has not yet
received.
To change our example to something more easily visualized, let's assume
there are two houses for sale. One is a fine, well-built, modern home in an
attractive part of town at, say, $200,000—and the other property, a
somewhat shabby six-family tenement in a less attractive section, at the
same price of $200,000. There is no question which is the “better” house,
but in a case like this, the market for well-built single homes at this price
may be poor, whereas the demand for apartments may be good. The six-
family house may be the better investment.
Then again, we have the question of what is conservative and what is highly
speculative. It is not always enough to judge from the type of business of
the company itself. You may have a highly conservative concern, carrying
on a stable volume of business, with a long record of successful operation.
Yet, if there are bonds, debentures, preferred stocks, and other senior
obligations, the common stock may be subject to wide fluctuations. Also, if
the issue is small, or if a large part of it is closely held, you will have a
“leverage” effect that results in wide swings in the stock.
Therefore, in choosing your stock to chart, you will want to consider the
kind of stock and its character and habits in the market, rather than the
business of the concern it represents. We will come back to this point and
show you how you can shape up a list that will give you the kind of stocks
you want for trading.
Meanwhile, the question “How many charts?” has been left hanging. One
answer to this is that the more stocks you chart, the more good
opportunities you will have. Many stocks, even of active issues, will go
through long periods when, indeed, there is nothing much to tell. In a period
of stability, the chart simply indicates it is a period of stability, and the only
possible trading activity would be purchases and sales at the Bottoms and
Tops of its undulations. The charts are more informative when a change in
the situation occurs; they will signal a change of trend as soon as (and
usually before) the news of the changed conditions has come out. If you
have enough charts, you will always have some stocks making decisive and
clear-cut moves either up or down, at any time.
You should, therefore, keep as many charts as you can. Do not bite off more
than you can chew, however. A man with only 15 minutes to half an hour a
day for this work might have to confine himself to 20 or 30 charts. It would
be much better if he could have 100. If he is in a position to give a major
part of his time to the work, he could very well run as many as 300 charts. A
most important word of caution is indicated here: Do not start anything you
cannot finish. It is better to have too few at the beginning than too many.
Then, if you find you can add others, you will be in a better position, from
your experience, to pick out the ones you want to include. However, if you
start with too many charts or begin to run behind with your analyses, you
will not be getting the best use from your portfolio and it would be better to
cut down at once. (EN: Magee's admonitions are still in effect for the
manual chartist. The modern computer-equipped investor has a different
problem. He can chart every issue in the market every day. The question
becomes how many can he effectively study and analyze? There is even a
computer answer to this question. Namely, the cyber trader can program
the computer to report stocks on an exception basis. For example,
“Computer, show me all the stocks which are above their 50-day moving
average and which have unusual volume.”)
From what we have already been over, you know it is possible to chart
anything that is sold in identical units in a free competitive market. This
includes all kinds of commodities, bonds, debentures, when-issued
contracts, and so on, as well as stocks. You may have some special interest
that will call for charting something outside the field of stocks—well and
good.
In general, however, you will want to chart active, listed stocks of well-
esta


is possible to chart
anything that is sold in identical units in a free competitive market. This
includes all kinds of commodities, bonds, debentures, when-issued
contracts, and so on, as well as stocks. You may have some special interest
that will call for charting something outside the field of stocks—well and
good.
In general, however, you will want to chart active, listed stocks of well-
established corporations. There is no reason an unlisted stock cannot be
charted, but ordinarily, the only figures you can obtain on it are the bid and
offer prices. On these stocks, you do not have a published statement of the
volume of sales each day or any record of prices at which sales actually
took place, and those are essential to the charting of daily technical action.
Therefore, you will usually be charting stocks listed on some exchange.
This is also an advantage because concerns listed on the larger exchanges
are required to meet certain conditions, publish certain information, and
comply with definite rules and practices.
In this book, most of the examples have been taken from stocks listed on
the New York Stock Exchange (NYSE). There are thousands of issues
traded on the NYSE, and these stocks represent every type of security, from
the most conservative to the most speculative, from the cheapest to the most
expensive, and they include every principal type of industry and business.
There is no reason, however, that stocks should not be chosen from the
American Stock Exchange, the NASDAQ, or from any other exchange in
this country, or for that matter, in some other country. (EN: So far as the
chart action is concerned, the patterns and their meanings will be the
same).
(EN9: In general the stocks to watch, or chart, will tend to leap out of the
haystack of stocks. For stock pickers Investor's Business Daily is in the
constant process of sifting the markets for nuggets with its CANSLIM
system. (Not a recommendation to use that system, only a recommendation
to examine every tool that might be of use.) Stocks that appear suddenly on
the most active lists of http://www.stockcharts.com might bear examination
by the chart analyst. These include optionable stocks that suddenly show a
radical change in implied volatility,; stocks that pop up with suspicious
Chapter twenty-one: Selection of stocks to chart 317
volume spikes compared with average volume, and those with internet and
software packages one might construct a filter to be informed by the
computer of stocks breaking their 14-, 44-, 150-, and 200-day moving
averages: 14 because some professionals think the public thinks in this time
frame; 44 because some think funds think in 44-day time frames. The others
because everyone thinks they are important.
In reality, if the investor aim is to beat the market, he may choose just to
confine his activities to the ETFs that represent the indices—DIAMONDS™
(DIA), Standard & Poor's Depository Receipts (SPY), and QQQ. ETFs are
inherently less risky than any individual stock.)
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter twenty-two
Selection of stocks to chart: continued
In choosing your stocks, you will probably look for the greatest diversity in
the kind of industry. As you are not specializing in the detailed study of a
single group, you will try to get stocks from as many different groups as
possible. You will want to include mines and oils, rails and chemicals,
liquors and amusements, airlines, utilities, techs, internets, biotechs, ad
infinitum. The reason for this is simply that, very often, many stocks in a
particular industrial group will show the same or similar patterns, as the
entire industry is affected by certain Major conditions. You will often find,
for instance, when Allis-Chalmers (EN: or Dell) makes a Triangle or other
Area Pattern, followed by a sharp upward move, Deere (EN: or Compaq),
Minneapolis-Moline, Harvester, and Case will make similar Triangles, or
possibly Rectangles or some other Consolidation Pattern, followed by a
similar upward move. When Schenley is moving in a long downtrend, you
will very likely find that Distillers—Seagram's, National Distillers,
Publicker, and American Distilling—are also moving in a long downtrend.
(EN: Metaphorical names, like the names of Greek gods or Ulysses and
Leopold Bloom. The present-day reader may read Intel, Fairchild, and
National Semiconductor or 3COM. The idea is the same.) (For an
illustration in this chapter, see Figure 22.1.)
Therefore, unless you plan to keep enough charts to include several stocks
of each important group, it is best to pick your stocks to make up as widely
diversified a list as possible. In this way, during times when certain groups
are moving indecisively, or are inactive, you will have some representation
in other groups that may be active. (Do not infer from this that all stocks of
a group move together at all times. Individual concerns will frequently
move according to special influences that bear on a single company. Where
the Major influence is some industry-wide condition, the group will move
more or less as a unit.)
We, therefore, choose stocks representing a wide variety of groups or basic
industries. Nevertheless, suppose we are limited as to the number of charts
and we must choose one stock from a group; which stock to choose? For
instance, we must choose one stock from the transportation group (EN: or
Biotech, or internets.) As a matter of fact, you would probably want more
than one because this particular group is so important and so large, but for
the moment, let us choose just one. (EN9: Or, even better, why not one of
the indexes—for example, an ETF—for the desired group. An example of
betting on all the horses rather than trying to pick the winner, and there is
no conflict between making both bets.)
Should it be a high-priced stock or a low-priced stock? Let us examine that
point first. If you examine the past records of stocks, you will generally find
the lower p


ust one. (EN9: Or, even better, why not one of
the indexes—for example, an ETF—for the desired group. An example of
betting on all the horses rather than trying to pick the winner, and there is
no conflict between making both bets.)
Should it be a high-priced stock or a low-priced stock? Let us examine that
point first. If you examine the past records of stocks, you will generally find
the lower priced issues make much larger percentage moves than the higher
priced stocks. It is not unusual for a stock selling around 5 to make a rise of
100%, moving up to 10 sometimes within a few weeks. On the other hand,
you do not find 100% moves in days or weeks among the stocks selling at
100 or 200. The same industry-wide move that carries your $5.00 stock
from 5 to 10 might carry your $100 stock from 100 to 140. Obviously, if
you had put $1,000 into outright purchase of the stock at 5, the move would
have increased the value of your stock 100% or $1,000. In the other case, if
you had put the same amount into a stock at 100,
136
128
120
112
104
96
88
80
Figure 22.1 Low-priced stocks move faster than high-priced stocks. Here
are weekly charts of two rail stocks, charted on ratio scale over the same
six-month period. Baltimore and Ohio during this time advanced from 12
3/8 to 28 7/8, a gain of 16 1/2 points, while Union Pacific moved up from
109 to 137, a gain of 28 points. The advance in “UP,” however, compared
with its price, is much less than the advance in “BO.” A thousand dollars
used for outright purchase of “UP” would show you a capital increase of
25%. On the other hand, if you had put a thousand dollars into outright
purchase of “BO,” your increase would have been 133%, or more than five
times as much.
Bear in mind low-priced stocks not only go up much faster, but also come
down much faster than high-priced stocks. When you own a low-priced
stock, you cannot safely “put it away in the box and forget it.” For security
and stability, you would do better to buy a few shares of a high-priced, gilt-
edge security. For trading purposes, you will want to strike a compromise
between the rather sluggish “blue chips” and the extremely erratic “cats and
dogs” in the lowest price bracket.
the move to 140 (although many more points) would have increased your
capital to only $1,400. The gain in the lower priced stock would be about
two and one-half times as great.
The authors have worked out and tabulated the percentage moves of large
groups of stocks over long periods of time (see Appendix A, ninth edition)
and have set up a table that shows the relative average sensitivity of stocks
at different price levels. This table pertains only to the price level of stocks;
thus, the same stock that today sells at 5 and makes wide percentage swings
will not swing so widely when it has moved up to a price level of 20-30.
(EN10: These concepts replaced by beta and volatility.)
Several questions may come to your mind at this point. Do not the costs of
trading low-priced stocks relative to high-priced issues have to be taken into
account? (EN: Yes, they do. Given the extreme changeability in these costs
in the internet economy, calculation of those costs here would be
tantamount to wasting trees. This cost question may be researched quickly
and easily given the availability of search engines such as Google and
access to the internet.)
In selecting the price level of the stocks you prefer to trade in, you cannot
set too arbitrary a limit because there are other factors to consider and you
may have to make some compromises on one score to get what you want in
some other direction. Stocks from 20 to 30 are in a good trading price
range. Very often, you will find stocks in the 10-20 range that are so
interesting you will want to chart and trade in them. You will find good
situations in stocks selling at 30-40. Furthermore, you will understand, of
course, the stocks that are now selling at 10 may be selling next year at 40,
or vice versa. Considering you cannot be changing your portfolio of charts
all the time, you must not be too “choosy” in picking the price range of
your stocks. You would not ordinarily pick out a stock that was selling far
above the price range of most stocks of its group, say at 150, when several
others in the same industry were selling at 15, 28, or 37. For the high-priced
stock, as we have said, is likely to be sluggish as a trading medium. On the
other hand, you would not take the very lowest priced issues of the group,
selling at, say, 4 or 2 when others were in the 10-30 bracket. You would not
only be faced with erratic and tricky chart action, and much higher
percentage costs for commissions, but also you might not be able to operate
on margin at all. There are, from time to time, limitations on the amount of
margin on stocks at all levels. In the lower priced issues, these limits are
often more stringent. Plus, in the lowest priced stocks, you are sometimes
not permitted to trade on margin. (EN: As these requirements are subject to
the vagaries of the Federal Reserve Board, the investor must inform himself
at his personal broker or ECN. For quite some years, the general margin
requirement has been 50%. The Fed came in for some sharp criticism for
not dampening speculation in the fin de siecle bubble by raising margin
rates to 100%, and its lack of action exacerbated the blow off of 2000. A
change in margin rates should get the immediate attention of the technical
analyst. Something will be up.)
Ordinarily, you will get the greatest effective leverage at some point in the
20s, considering all these factors, and your trading can run down through
the teens and up through the 40s. Above 40 and below 10, you will have to
have strong reasons for trading, which might be, of course, ample capital. It
would therefore be best for the moderately financed investor to choose a
majority of his stocks from the middle price range (10-40), plus only those
special situations you are particularly interested in wa


ors, and your trading can run down through
the teens and up through the 40s. Above 40 and below 10, you will have to
have strong reasons for trading, which might be, of course, ample capital. It
would therefore be best for the moderately financed investor to choose a
majority of his stocks from the middle price range (10-40), plus only those
special situations you are particularly interested in watching among the very
low and very high brackets.
If, however, you will go back to the long-time past record of any group of
stocks, you will find that even among stocks moving at nearly the same
price levels today, there are widely different behavior patterns. You will find
some stocks respond to a severe market setback by reacting, let us say, 20%
—that is, if they were selling at 30, they would move down to around 24.
Others will respond to the same setback in the general market by a reaction
of 50%—that is, if they were selling at 30, they would end up at around 15.
Additionally, if you examine the records, the same stocks that make these
relatively different reactions in one setback will make about the same
moves, relative to each other, in other setbacks. Furthermore, the same ones
that make only moderate corrections on declines will make only moderate
advances on rises. The ones that go down sharply on setbacks will also
skyrocket in a Bullish Market. This has nothing to do with the phenomenon
we discussed earlier, by which we saw that cheap stocks move faster than
expensive stocks. This is due to the habits of particular stocks, and these
habits seem to be quite stable over periods of many years.
We will find, for instance, volatile and speculative issues that make larger
percentage swings than most other stocks at their price level. On the other
hand, we will find a stock, selling for much less, that has smaller percentage
swings than most stocks at its price level. This fact may be obscured, as the
comparatively low-priced stock may actually make larger swings than the
higher priced. It is only when we have taken the price level into account
that we can see the individual habit of the stock. Knowing this, we can
project that habit to other price levels.
We are not too interested, as we have said before, in stocks that do not
ordinarily make substantial moves. We are very much interested in those
that make the wider moves. We can compute the basic swing power of a
stock, which we call the Sensitivity Index, and will outline the method for
doing this in Appendix A, ninth edition. (EN: The procedure Magee speaks
of here, of computing a “Sensitivity Index,” may be regarded as the
historical predecessor of what are now called “betas.” The beta of a stock
compares its relative volatility with that of the market as a whole, so if the
beta of the market is 1.00 and the beta of the stock in question is 1.50, a
move of 1.00 in the market will probably be matched by a move of 1.50 in
the higher beta stock. The formula for beta will be found in Appendix B,
Resources, and calculated betas at finance.yahoo.com.)
Therefore, you will have eliminated from your list stocks at the wrong price
level and stocks without enough swing power (for you want to chart only
those stocks in which you can trade profitably). Of the ones left, you will
eliminate others and find that some stocks, which make wide price moves
and apparently offer large opportunities for profit, may be very “thin.” The
charts will be spotty, filled with gaps, days of “no sale,” and moves of
several points on only a few hundred shares of business. These stocks are
thin because of a small issue, because of ownership of a large block of
shares by some corporation or by insiders, or for other reasons. They are
difficult to trade in because they are hard to buy and hard to sell; you stand
to lose heavily on the “spread” between bid and offer. It might be hard to
liquidate even 500 shares without driving the price down badly, to your
loss, and sometimes you will see changes of 1 or 2 full points between sales
of single hundreds. These you will want to eliminate, and if you do not
know the habits before you choose your portfolio, you will probably find it
worthwhile to drop any stocks that prove too thin, substituting new and
more dependable choices.
After you have culled the list from all these angles you will find you have
left a choice of a number of stocks, all of them selling in a price range that
is attractive, all of them sufficiently active and responsive to market trends,
and all of them available in sufficient supply to provide a good trading
medium. The final choice of any one (or several) of these stocks is then a
matter of personal preference.
After you pick out your stocks from one group, study the other groups—the
motors group, the amusements, the computers (EN: the internets) and so
forth, until you have finally made up your selection of stocks to follow. Try
to get as complete and balanced a representation of groups as the number of
your charts will allow. (EN: In this context, the process described here is
made infinitely simpler by available software and by the proliferation of
group indexes, ETFs, and indicators. In fact, if the investor desires, rather
than trading an individual stock in an industry group, he may often choose
to trade the average or index itself and cushion his risks. This will almost
never be as profitable as a well-chosen individual issue but will always be
better than a badly chosen individual issue. And ETFs never go broke (so
far).)
In this connection, if you are not planning to represent all groups, there are
some groups more likely to provide good trading stocks than others. Foods
and tobaccos, for example, are generally less responsive to market swings
than the rails, liquors, and airlines, which are very responsive. Do not worry
too much, however, about exactly which stocks to choose for even if you
took the first 50 or 100 stocks in the listed issues, you would have among
them at least 25 good tradi


ome groups more likely to provide good trading stocks than others. Foods
and tobaccos, for example, are generally less responsive to market swings
than the rails, liquors, and airlines, which are very responsive. Do not worry
too much, however, about exactly which stocks to choose for even if you
took the first 50 or 100 stocks in the listed issues, you would have among
them at least 25 good trading stocks. You can start with almost any list, and,
as time goes on, you will drop some and add others, improving your
portfolio and tailoring it to your own needs.
(EN: As additional commentary here it is worth noting that “techs,”
“biotechs” (or whatever the mania of the moment is—probably space hotels
and intergalactic travel in this millennium) will present areas of risk and
reward sufficient to excite the seventeenth-century tulip trader. The centered
investor and trader will consider vogues and manias as he chooses his
active portfolio and choose to participate (or not) depending on his appetite
for risk and excitement. Or, as the popular maxim has it, one man's
champagne is another man's poison. This question is pursued in greater
detail in Chapter 23.)
By way of further simplification, the investor may choose to follow only one
or two issues— Standard & Poor's Depositary Receipts (SPY) or
DIAMONDS™ (DIA). If it were not only bought, but also sold or hedged,
the market would be outperformed. This would be a simple investor's life
indeed.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter twenty-three
Choosing and managing high-risk stocks: tulip
stocks, Internet sector, and speculative frenzies
Nothing could more vividly illustrate the timeless nature of chart patterns
and situations than the internet stocks that bloomed at the turn of the
century. These stocks repeated that eternal pattern—the Tulipomania, the
Gold Rush, the can't-fail-opportunity-to-get-rich-quick. (For illustrations in
this chapter, see Figures 23.1 through 23.17.)
It is almost impossible to resist comparing the speculative frenzy that took
place in the internet and technology issues to the famous seventeenth-
century mania that Holland experienced in the famous Tulipomania. In
MacKay's undying classic account (Extraordinary Popular Delusions and
the Madness of Crowds), the trading of tulip bulbs replaced sober
commerce and business as the occupation of the country, and enormous
fortunes were made trading the tubers. Blocks of real estate, breweries,
assets of real and large value were traded for one tulip bulb. MacKay
produced my favorite paragraph in the literature of finance: “A golden bait
hung temptingly out before the people, and one after the other, they rushed
to tulip-marts, like flies around a honey pot. Every one imagined that the
passion for tulips would last forever, and that the wealthy from every part of
the world would send to Holland, and pay whatever prices were asked for
them.”
That mania ended in ruin. A better long-term prospect may be in store for
the internet, as there is a basis of technology and economic substance to the
sector. You could not, after all, use your tulip to check the market for prices.
In fact, there were those, admittedly a small number, who struck it rich in
the California Gold Rush of 1849. It is an ill wind, etc.
As an exercise in rueful perspective, the seventh edition of this book
remarked, in the words of Richard McDermott,
Companies like Lotus or Microsoft went public and grew into business
giants in a short period of time... A significant theme stock for the 1990s has
been Internet stocks. Names like America Online, CompuServe, and
Netscape have provided important products and services that allow
individuals to “surf the net” for information around the world.
Young students of the market will search in vain for Lotus, CompuServe,
and Netscape in the lists of stock symbols. The giant Lotus was swallowed
by IBM, in part because Microsoft, a ruthless competitor, disemboweled it.
CompuServe and Netscape disappeared into the belly of a larger fish, AOL,
with some of the same factors involved. Later Microsoft got its
comeuppance—halving in value as the U.S. Justice Department brought
successful antitrust action against it.
There are those who fault the great Wall Street investment banks for having
brought half-baked potatoes (or unblooming tulips) to market. The Street
firms, cashing in on the mania, were willing to sell the public every
immature profitless idea and company named

Figure 23.1 Multitudinous lessons in Microsoft. However, short-lived joy.
The top rounds over, price makes another attempt, and then the momentum
is clearly, if puzzlingly, down. The cancellation of the runaway day in
January definitely marked this move as a bull trap, and the short-term
trendline from October would also have taken the trader out of the trap. Use
of the Basing Points technique (see Chapter 28) would also have allowed
escape from the trap. Failed signals, as this one, often are excellent signals
for a trade in the other direction.
“dot.com Inc.” that venture capitalists floated on a sea of seed money.
Mining engineers will recognize the phenomenon of “salting the mine.” It
was the finest moment for the great old firms of the Street since the
investment trusts of the 1920s. The reader is most recommended to look
into The Great Crash, 1929 by John Kenneth Galbraith to compare the
Street firms' behavior from one mania to the next. It will be found most
edifying. At the pinnacle of great manias, no one can be trusted.
Managing tulipomanias and Internet frenzies and.. .Bitcoin
In a time of excess, the centered investor maintains his composure and
focus. Probably easier said than done. Nonetheless, many investors and
traders profited from the internet boom or were not severely damaged.
Many managers and traders watched with envy from the sidelines, and with
schadenfreude when the bubble burst.
For technical analysts speculating and trading according to the principle


coin
In a time of excess, the centered investor maintains his composure and
focus. Probably easier said than done. Nonetheless, many investors and
traders profited from the internet boom or were not severely damaged.
Many managers and traders watched with envy from the sidelines, and with
schadenfreude when the bubble burst.
For technical analysts speculating and trading according to the principles of
this book, important opportunities arise in speculative frenzies and buying
panics—namely, important profits may be made by remaining calm and
methodical while the uninformed and naive cause speculative blow-offs,
which have some things in common with the ends of great bull trends in
substantive issues.
The question becomes that of realizing some of the profits to be made in
these exciting times. Of course, the first thing to do is not get excited. These
manias come and go— sometimes they are called biotechs, sometimes
computers, sometimes internets, and probably, at some point, human
genome miracle drugs or Martian real estate. It should be emphasized these
profits are made on both sides, long and short. The crowd will only
Figure 23.2 MSFT monthly. It is easy to lose perspective when looking at a
daily chart of a bull trap in which one has lost a leg. A monthly long-term
look at Microsoft can help restore perspective. Unfortunately, the Dow-
Jones Company was looking at this chart, not the nearby, when they added
Microsoft to the Dow 30 in 2000. Expert timing? At the time, the John
Magee Newsletter observed it was a negative indicator of a major top in the
Industrials.
think of the riches to be made long. Professionals and skilled technicians,
professional or not, will take the profits on the short side.
Here is the most important concept in trading these runaway issues: all of
the techniques and methods described in this book remain valid for dealing
with these kinds of stocks. In addition, here are some other points that
should be taken into consideration. The best way to control risk in the
Bitcoin market is by trading a position so small (like a roulette bet) that a
100% loss will cause no distress or discomfort. The sector in question, tech-
tech, web-tech, biotech, internet, space travel, whatever, will be a market
unto itself, and special technical factors will apply to it. The phases of
market lives, accumulation, attraction, markup, mania, and blow-off will
occur in compressed time spans—much shorter than the cyclical life of an
issue with fundamental data to attach it to reality (see Figure 23.4 of Palm
Computing).
By the time the IPO occurs, the insiders are already prepared to begin the
distribution phase. For example, when Palm Computing was spun off from
3Com in 2000, only 3% of the shares were sold—creating an artificial
scarcity and propelling it to absurd heights—Palm attained an instant
market value greater than that of 3Com, which owned most of its stock.
(EN9: We have, since The Fall, learned of “laddering.” To let their inside
clients in on the IPO, some of the underwriters required the clients to buy
more of the stock in the open market after the IPO at higher prices. A clever
way to throw gasoline on a raging bonfire. Whether Palm was laddered or
not is not known.)
Figure 23.3 The editor learns a lesson. Never leave a chart unanalyzed,
even if the implications are obvious. Also, never be afraid to belabor the
obvious. Obviously, this figure should have had a longterm trendline drawn
on it. No monumental bull market should be ignored. Why give the market
its money back? It should have been obvious from this figure that the
Microsoft party was over and not just the fat lady but the entire chorus was
beating on anvils. Plus, the protective line must be drawn. Here the broken
line at A is the most important and saves a bit of capital rather than waiting
for the plaintive signal at C. Given the robust Bull Market in Microsoft, the
long-term investor might have been justified in waiting until the C trendline
was broken. A matter of investing style and philosophy. There appears to be
some long-term support at 18. The five-year sideways market appears to be
resolving itself into a macro triangle that might break out one way or the
other in 2005. This is a case in which an investor might make a fundamental
analysis to guide his position (always confirming with the chart analysis).
Microsoft is beset with howling wolves on all sides. Linux, Unix, sales of
only one copy of Windows in China, hackers playing hob with security
holes in its software. Can it rise again? Only the chart knows for sure, and it
is silent at this recording. In 2011, MSFT was in an 11-year sidewave.
These issues must be traded with the utmost care and attention. For
example, it is the height of foolishness to enter a market order to buy on the
issue of the IPO. An issue going public at 12 might trade on the opening at
50 in these frenzies—a sign to the savvy technician the sheep are headed for
the shearing shed.
Certain factors must be kept in mind. Some IPOs collapse shortly after
going public. Others rocket off before distribution is complete. So stops
must be carefully computed. Once it is clear the rocket is taking off, as
indicated by price and volume, some discreet pyramiding might be possible
for the experienced and skilled speculator.
Detailed techniques for management of the runaway issues
The technique described in Chapter 28 for tight progressive stops is
certainly one way of dealing with these stocks. There, the method for
finding Basing Points and raising stops based on the three-days-away rule is
detailed. Also, especially in the case of these rocket stocks, the practice of
raising stops based on new percentage highs should be
170 -
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PALM
Created with MetaStock www.equis.com
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15000 :
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X10
40 •
30 •
April
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June
July
August
J. 4 11
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Figure 23.4 PALM. Fool's gold. Fool's gold with naivete writ


etailed. Also, especially in the case of these rocket stocks, the practice of
raising stops based on new percentage highs should be
170 -
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PALM
Created with MetaStock www.equis.com
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J. 4 11
September
Figure 23.4 PALM. Fool's gold. Fool's gold with naivete writ large on it.
Here is a spike reversal day on the initial day of trading. The accumulation,
markup, and most of the distribution occurred behind closed doors before
this trick was perpetrated. After the matanza, the continuation takes on
Figure 23.5 Dealers palmed all the missing capital in PALM? Somebody
made the money disappear up a shirtsleeve. What makes you think the deck
was stacked? Or that the initial public offering (IPO) was laddered? Maybe
it was just fools chasing tulips. Those investors (gamblers) playing the shell
game with PALM found themselves playing with six shells instead of three
as like an insidious amoeba PALM divided into two tulips, PLMO and
PSRC. Keep your eye on the magician closely. For the analyst, all the
smoke and mirrors could not hide the fact gravity took PALM in all its
manifestations down. The downtrend lines are broken in 2003 and 2004 and
a respectable Kilroy Bottom is made. Nevertheless, the implications of the
bottom may have already been carried out. A continuing story for
speculators or astute (very astute) investors who know something
fundamental and have very long-term vision.
Figure 23.6 PSRC in its amoeba-like glory. The failure of what might have
been a rounding bottom, especially with the breakdown gap in October and
the failure to rally back to the neckline left no doubt as to the fate of PALM
by any other symbol. Broken trendlines are also indicative. Remember that
any large pattern can be broken down into smaller patterns susceptible to
short trendline analysis, as in this case. Sooner or later a palm-size
computer, PDA, widget device is going to be the wave of the future. (EN10:
A visionary prediction of the iPhone.) The canny investor will not mistake
the company for the stock and will also not venture capital until there is a
better chart story.
implemented. Since these are “game” situations, and irrational, one may
employ tactics he might not ordinarily use with his serious capital—some
light pyramiding and some scaling out of the position based on continuous
new highs. Additionally, in the blow-off phase when close monitoring is
necessary, one might want to exit on a long reversal day, or on a key
reversal pattern, and then go to the beach; or, if from Texas, one might want
to short the issue.
Essentially, I view these stocks as interesting aberrations in the early part of
their lives. So I would not look for long-term investment-type trades. Take
the money and run. In all likelihood, these stocks will explode like
fireworks and then expire. There will be the companies like Microsoft and
—it remains to be seen—Yahoo!. After the fireworks show, the patient
technician may return to the scene of the crime to see whether there are any
burning embers. Once they have blown off, crashed, and made reasonable
bottoms, then one begins to look for investment possibilities, which there
definitely will be. There is too much potential in the technology of the
internet—and biotech and the human genome—for some phoenix not to rise
from the ashes.
In the beginning it behooves the trader to regard them as speculative
instruments of exceptional risk and opportunity.
Several caveats are in order:
• The prudent speculator does not commit too much of his capital to such
enterprises. Probably no more than 5%-10%.
3com Corporation-(Nasdaq NM) 3.71 0.10 2.77%
Apr Jul Oct 97 Apr Jul Oct 98 Apr Jul Oct99 Apr Jul Oct 00 AprJul Oct 01
Apr Jul Oct
24
22
20
18
16
14
12
10
2
540
480
420
360
300
240
180
120
60
0
Figure 23.7 COMS. Underwriters cleverly doled out only 3% of 3Com-
owned Palm stock onto the market at the IPO. Palm wound up “worth”
more than 3Com for a short time. Here the lesson of tulipomania is vivid.
The contrast in before and after volume. The necessity of analysis to deal
with tulips in bloom. The fatal lesson of heeding (or not heeding) gaps
across horizontal trendlines. Impossible to manage for the buy-and-hold
investor.
• When selling them short, one should not be early. A definite top should be
seen because there might be a second stage of the rocket.
• Emotional involvement with tulips and internet stocks—or stocks of any
kind actually—can lead to a broken heart. In the charts, note the success in
a number of cases of trading the key reversal day.
(EN9: Reviewing charts from the apocalypse is a sobering experience. So
many rash and mad adventures. So much capital sucked into the black hole
of underwriters and 21-year-old huckster CEO wallets. Better than the
South Seas Bubble. And, as definite proof that man is directly descended
from geese and sees no farther ahead than the next feeding bowl, the ghost
of the mania oozes from the closet in 2005, reborn as Google mania. Man
(or goose if you will) never learns. That is why he is so much fun to watch.)
Google—what a creature is man! What a game is the market! Google, a
wonderful company, and a great concept goes public in 2004 after world-
class hype (world class? intergalactic class!). Floated as a red herring at
135, it eventually goes IPO at 85 in an innovative public offering. Then the
fun starts. Future readers of this book may observe the markup made as of
the date of this writing (November 2004) and judge whether the method
worked. A company on roller blades, impossible to dislike as a company.
Remember, unless you are Warren Buffet, you are buying the stock, not the
company.
45
39
36
33
30
27
24
21
18
15
12
Figure 23.8 ORCL. True to the character of stocks during the Tulipomania,
Oracle was difficult to handle without careful analysis. Stock splits
preceded a number of the sell-offs (note gaps p