outer line. The recoveries from such Bottoms are usually just as
sharp, and prices, therefore, rally back above the upper, inner line quickly.
Warning of an impending break in the trend is given when prices come
down to the outer line steadily, rather than by the quick “shake” type of
reaction, and then have difficulty rallying back through the inner line.
Watch such developments closely. A break down may not follow; the
situation may still be “saved,” but the chances are that the trend is near its
end.
Trend Channels
At the start of this trend study, we applied the term Basic Trendline to the
line that slopes up across the Wave Bottoms in an advance and to the line
that slopes down across the Wave Tops in a decline. Furthermore, we noted
the opposite Reversal Points, that is, the wave crests in an advance and the
wave troughs in a decline, were, as a rule, less clearly delimited. That is one
of the reasons why all of our discussion up to this point has been devoted to
Basic Trendlines. Another reason is that the technician's most urgent task is
to determine when a trend has run out, and for that purpose, the Basic Line
is all important.
In a fair share of normal trends, however, the Minor Waves are sufficiently
regular to be defined at their other extremes by another line. That is, the
Tops of the rallies composing an Intermediate Advance sometimes develop
along a line that is approximately parallel to the Basic Trendline projected
along their Bottoms. This parallel might be called the Return Line because
it marks the zone where reactions (return moves against the prevailing
trend) originate. The area between Basic Trendline and Return Line is the
Trend Channel.
Nicely defined Trend Channels appear most often in actively traded stocks
of large outstanding issue—least often in the less popular and the relatively
thin equities that receive only sporadic attention from investors. The value
of the Trend Channel concept for the technical trader would hardly seem to
require extended comment here; its tactical utilization is discussed in the
second half of this book.
Its greatest utility, however, is not what usually appeals to the beginner
when he first makes its acquaintance, namely, the determination of good
profit-taking levels. Experienced technicians find it more helpful in a
negative sense. Thus, once a Trend Channel appears to have become well
established, any failure of a rally to reach the Return Line (top parallel of
the channel in an Intermediate Advance) is taken as a sign of deterioration
in the trend. Furthermore, the margin by which a rally fails to reach the
Return Line (before turning down) frequently equals the margin by which
the Basic Trendline is penetrated by the ensuing decline before a halt or
Throwback in the latter occurs.
By the same token, given an established Trend Channel, when a reaction
from the Return Line fails to carry prices all the way back to the Basic
Trendline but bottoms out somewhere above it, the advance from that
Bottom will usually push up out of the channel on the top side (through the
Return Line) by a margin approximately equal to the margin by which the
reaction failed to reach the bottom of the channel (Basic Trendline).
Experimental Lines
Your experienced technician, in fact, is constantly drawing trendlines of all
sorts—Minor, Intermediate, and Major—on his charts. He will first very
lightly pencil them in wherever he can find an excuse to draw one. Many
will quickly prove to be of no significance; those he may erase. Others will
“stand out,” showing evidence of technical authority, which he will make
heavier or color, as suggested later on. He will be constantly on the watch
for Double Trendlines and will draw tentative Return Lines to mark off
possible channels at every opportunity. As soon as he has what appears to
be a Basic Up Trendline, for example projected from two Bottoms, he will
go back to the Top of the rally between those two Bottoms and draw from
that parallel to the Bottom Trendline. If the next rally comes up to that
parallel, stops there and turns down, he has a probable Return Line and
channel established.
This practice of drawing in and experimenting with every trendline, which
the price action permits or suggests, is earnestly recommended to the reader
of this book, particularly if the technical approach is new to him. It is the
quickest way—in fact, the only way— of acquiring the experience we have
stressed as essential to recognition, judgment, and utilization of trendline
implications in trading.
Perhaps we should add here one “don't” for the beginner. You will have
noted we have not mentioned a line projected from a Bottom to a Top, or
vice versa. Trendlines are always drawn across two or more Bottoms, or
two or more Tops. They should never be drawn to cross through the price
track. (Prices may cross their extensions later, but this should not have
happened at the time the lines are first drawn.) If you did not know better,
you might, for example, put in a line from the Top of the left shoulder to the
Top of the right shoulder of a Head-and-Shoulders Formation, thus cutting
through the head, but such a line would have no technical validity.
Consequences of Trendline penetration: Throwbacks
At the beginning of this chapter, we mentioned the probable consequences
of a breakdown through an Intermediate Up Trendline. To repeat, if an
Intermediate Up Trendline has been constructed, has qualified as
technically significant by the tests previously discussed, and has then been
decisively broken, the inference is the uptrend is finished. And the
consequences to be expected are either a full Intermediate Recession or a
period of Consolidation (usually becoming a recognizable Area Formation).
Technical indications of other sorts may be seen on the chart, which will
suggest which of these two consequences is the more likely. In either event,
the Intermediate Trend trader will certainly look twice before attempting to
find furthe


hed. And the
consequences to be expected are either a full Intermediate Recession or a
period of Consolidation (usually becoming a recognizable Area Formation).
Technical indications of other sorts may be seen on the chart, which will
suggest which of these two consequences is the more likely. In either event,
the Intermediate Trend trader will certainly look twice before attempting to
find further profit in that particular situation at that time.
A more immediate but less important probable consequence of trendline
penetration has also been mentioned—the “Pullback.” Pullbacks that follow
breakouts from Reversal and Consolidation Formations have been
described in our earlier studies of those price patterns. It is easy to
understand why a rally that develops after prices break out through the
lower boundary of a Rectangle, for example, will be stopped when it gets
back to that boundary by the Resistance (supply) now residing there.
Support-Resistance Theory enables us to rationalize most of the Throwback
moves that occur after prices have broken out of other types of Reversal or
Consolidation Areas. The Pullbacks that follow trendline penetrations
cannot be thus rationalized; yet they occur much more frequently, and they
appear to be stopped much more exactly at the old trendline level than is the
case with Area Formations. Why should prices, after they have thrust down
through a rising trendline, perhaps for several points, turn back up and
ascend to or very near the old trendline, stop there, and then go off in
renewed decline? The Top of that Pullback Rally may be 2 or 3 points
above the original penetration level, because the trendline is sloping up all
the time; nevertheless, there it stops, falters, and gives up. No one knows
why supply should overcome demand or why Resistance should be so
plainly evident at that particular point whose level is determined by two
variants—the slope of the line and the time it is reached.
You cannot reasonably expect a Pullback Rally to climb all the way back to
a trendline that is ascending at a very steep angle, which may mean the
attainment of a new high price for the entire Intermediate Uptrend; yet even
that happens in more than just a few cases. What can be counted on in the
great majority of typical Up Trendlines (those that slant up at a normal or
fairly flat angle) is that after the line has been broken, a Pullback Rally will
develop, either in a few days or in the usual Minor Wave tempo and will
carry prices back up to the projected trendline.
Throwbacks do not occur, it should be noted, when prices erupt through a
Return Line, that is, break out of the top side of an Uptrend Channel. Or,
more correctly stated, the Return Line does not function as a Support
against a Throwback after prices have gone through it. An unusually strong
upswing in a Rising Trend Channel may carry beyond the top of the
Channel as defined by its Return Line, but the next reaction may go right
back down through it without evidencing any hesitation at its level.
The Throwback is one of the mysteries in trendline price action to which we
alluded at the outset. The technical analyst who studies trends and
trendlines over any considerable period will discover many other even more
mysterious phenomena that cannot find space in this treatise, as no way has
yet been found to put them to practical use in trading and investing. They
are extraordinarily interesting in retrospect, but they are not subject to
forecast.
Intermediate Downtrends
In all of the foregoing discussion of trends and trendlines, we have
concentrated on uptrends; we have, in fact, had in mind specifically
Intermediate Advances in the direction of the Primary Trend, that is, within
a Major Bull Market. Those particular trends are most apt to develop
“normally” and are most amenable to trendline definition. Intermediate
Down Moves in a Major Bear Market may well be taken up next. Before
discussing the respects in which they differ from Primary Advances, recall
that the Basic Trendline on a down-move is the line projected across the
Tops of the rallies within it. The Trend Channel will be to the left of that
trendline and below it on the chart. The Return Line (if any) will define the
Bottom of the channel.
Intermediate (Bear Market) Downtrends are far less regular and uniform in
their development than Bull Market Advances. Their angles of decline are
characteristically steeper, and this is particularly true, of course, of the
Panic Moves typical of the second phase of a Bear Market, as in our
discussion of Major Trends in Chapter 3. Moreover, prices have a tendency
to drop away from any trendline drawn across the first two Rally Tops; in
other words, to curve down or accelerate as the move proceeds. This shows
plainly on an arithmetically scaled chart and even more conspicuously on a
semilogarithmic sheet.
The practical results of this down-curving tendency are not so important,
insofar as it delays the penetration of the original trendline and, hence, the
giving of a signal of trend change. The fact is prices tend to thrash around
for some time, making a base at the Bottom of one of these precipitous
declines. In so doing, they work out sideways on the chart and the trend
frequently does not turn up visibly until after the trendline has finally been
reached and broken through on the upside after all. Thus, there is
justification for drawing down trendlines and keeping them in view even
though they may seem, for some time, simply to travel off into space with
no apparent relevance to the actual trend of prices.
It naturally follows from the above that Return Lines on most Bear Market
Declines have little practical utility; they are, more often than not, very
quickly broken downside. Good channels are hard to find.
However, and this is of considerable practical importance, the very last
Intermediate Downswing in a Major Bear Market is the last Primary Move
that leads to the final, longterm Bottom, which is us

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


aturally follows from the above that Return Lines on most Bear Market
Declines have little practical utility; they are, more often than not, very
quickly broken downside. Good channels are hard to find.
However, and this is of considerable practical importance, the very last
Intermediate Downswing in a Major Bear Market is the last Primary Move
that leads to the final, longterm Bottom, which is usually cleaner, more
regular, and less precipitous—in other words, it is a more nearly normal
trend of the sort we expect to find in most Intermediate Advances in a Bull
Market (except that it slants down instead of up). This interesting habit is,
as we said, of practical importance. Knowing it, we have an additional and
very useful clue to the end of a Bear Market.
When, after a Major Bear Trend has proceeded for some time and distance,
and has experienced at least one Panic Sell-Off, it then goes off in another
but less active and more orderly decline, and this decline develops and
follows a good trendline. Watch it closely though. If this Intermediate holds
to its steady and not-too-steep downward course—if its trendline is
contacted several times by Minor Rallies or it produces a fairly consistent
channel and prices do not “fall out of bed” down through its parallel Return
Line, then the eventual upside penetration of this trendline may well signal
a Major Turn, that is, the inception of a new Bull Market.
Corrective trends: the Fan Principle
In this study of Intermediate Trendlines, we have left to be taken up last the
subject of Secondary or Corrective Trends. These are the Intermediate
Declines that interrupt the Primary Advances in a Bull Market, and the
Intermediate Recoveries that alternate with Primary Declines in Bear
Markets.
Intermediate Reactions against the Major Direction of the market take a
variety of forms. Sometimes, as we have seen in our earlier study of chart
patterns, they run out into Consolidation Formations—Triangles,
Rectangles, and so on—in which the net price reaction is of minor
consequence, but time is consumed in backing and filling before the
Primary Trend can be resumed. In such cases, there is no basis for drawing
an Intermediate Trendline, nor is one needed for any practical purpose.
At the other extreme, so to speak, we find Corrective Swings that develop
as a more or less orderly straight-line return of moderate slope to the nearest
good Intermediate Support or Resistance Level, retracing perhaps a third to
a half of the preceding Primary Swing. These reactions produce good
trendlines, as a rule, and the eventual penetration of their trendlines is a
good technical signal of Reversal. Intermediate Corrections clearly of this
type are relatively rare.
A third form taken by Intermediate Corrections is nearly as common as the
first named above (Consolidation Pattern) and much more common on the
charts than the second. In a Bull Market, it starts with a sharp reaction that
proceeds for several days—perhaps for as much as two weeks—producing
a steep Minor Trendline. This line is broken upside by a quick Minor Rally,
after which prices slide off again in a duller and less precipitate trend. A
second Minor Trendline may now be drawn from the original high point
across the Top of the upthrust that broke the first trend. This second
trendline is broken by another partial recovery thrust, and a third and still
duller and flatter sell-off ensues. A third trendline can now be drawn from
the original high across the Top of the second upthrust. The whole move, by
this time, has taken roughly and irregularly a “Saucering-out” form. The
three trendlines drawn from the original Reversal points from which the
Corrective Decline started, each at a flatter angle than its predecessor, are
known as Fan Lines. The rule is when the third Fan Line is broken upside,
the low of the Intermediate Correction has been seen.
There are exceptions to this rule—as there are to every so-called rule of
technical chart analysis. Rarely, a correction of this type will go on to make
another dip to a new low for the whole corrective move before prices really
start to round up again. But the Three-Fan Principle works in the great
majority of cases. Moreover, it offers the trader an opportunity to take a
position at a point at which he can logically employ a very near stop order
and, thus, limit his loss to a controlled amount if the rule does not work out.
It is interesting to note that prices consistently throw back in these
movements to the preceding Fan Line after each upthrust. The new Primary
Swing, once the low has been passed, usually starts slowly and carries out
for a time the Saucer picture.
The Three-Fan Rule works just as well in calling the turn on Intermediate
Recoveries in a Bear Market, the majority of which take the rounding form
that is adapted to its use. Note, however, that the Fan Principle is normally
applied only to corrective moves, that is, to determine the end of
Intermediate Reactions in a Bull Market and the end of Intermediate
Recoveries in a Bear Market.
Major Trendlines will be outlined in the following chapter, but before we
leave this study of Intermediate Trends, it will be well to state again that the
practical application of trendlines in actual trading requires experience and
the good judgment to be attained only therefrom. Some technical analysts
depend largely on trendline studies, few attempt to use trendlines almost
exclusively, but the majority have found they are best employed as an
adjunct to other technical data.
Technical analysis of a stock chart is something like putting together a
jigsaw puzzle. There are many items to be considered, among them volume,
pattern, and the measurements derived therefrom, Support and Resistance
Levels, trendlines, and general market prospects—and all fit into place to
get the complete picture.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter fifteen
Major Trendlines
In the preceding chapter on In


ike putting together a
jigsaw puzzle. There are many items to be considered, among them volume,
pattern, and the measurements derived therefrom, Support and Resistance
Levels, trendlines, and general market prospects—and all fit into place to
get the complete picture.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter fifteen
Major Trendlines
In the preceding chapter on Intermediate Trendlines, mention was made of
the distinctive effects produced by arithmetic and semilogarithmic plotting,
but it was noted that these differences were unimportant in connection with
Minor Trends or Intermediate Trends of average duration. When we come
to Major Trends, however, we find the difference does become important.
Major Trendlines are illustrated by Figures 15.1 through 15.20.
If you will examine a large collection of arithmetically scaled monthly
charts covering 10 years or more of market history, you will quickly see
that Bull Trends, in the great majority of actively traded, more or less
speculative common stocks, tend to accelerate. They start slowly and push
up at a steeper and steeper angle as they approach a Major Top. This up-
curving path takes them farther and farther away from any straight trendline
drawn from two Bottom points in the first, slow-moving stage of advance.
As a consequence, they top out and have gone down a long way in a
recession that may be of Major consequence before their straight trendline
is again touched.
Many of the stocks that show such typical accelerating curves in their
advance (Major) Trends on arithmetic paper produce straight trends on a
logarithmic scale. As a consequence, their logarithmic Major Trendlines are
broken more quickly, and usually at a higher price level, when at last their
trends do top out and turn down. In the case of such stocks, then, the
logarithmic scale gives a better trend signal.
But there are other stocks—mostly of the more substantial investment or
semiinvestment type—that tend to advance in straight arithmetic trends.
Consolidated Edison, General Motors, and Libbey-Owens-Ford Glass are
examples. (The trends of these on a logarithmic scale show a decelerating
curve.) Still a third class, made up largely of highgrade preferred stocks,
produces a rounding over or decelerating Bull Trendline even on the
arithmetic scale. And, finally, there are a number of issues whose normal
Bull Market Trendlines fall somewhere between our first two types—that is,
they curve up away from a straight path on the arithmetic scale, but curve
over to the right (breaking through a straight line) on the logarithmic scale.
(EN: Fortunately, in this age of computers and easily processed data, there
is analytical software that allows the analyst to instantaneously switch
between the scales. Desktop packages are available[(see Appendix B,
Resources] and a number of internet sites have these capabilities.)
All of which, the reader, at this point, no doubt finds most discouraging.
Some stocks do this and some stocks do that, but what help is there for us in
such a mix-up? The answer lies in studying the history of each issue in
which you may be interested. Most stocks do not change their habits and
their technical characteristics much from one Bull and Bear cycle to the
next. An issue, like General Motors, that produces a straight-line Bull Trend
on an arithmetic chart in one Primary Upswing is likely to repeat that
performance in the next. EN10: GM after the fall will, we suspect, retain its
previous habits, but that remains to be seen.
As a matter of interest, stocks do sometimes change over a long period of
years. Companies that were regarded as extremely speculative when their
shares were first listed
60
40
20 Sales 100's 4000 2000
Figure 15.1 The straight-line Bull Market Trend of General Motors on an
arithmetic monthly chart: 1941 low, 28 5/8; 1946 high, 80 3/8.
Figure 15.2 The up-curving trend of a speculative motors stock, Hudson
Motors. Compare this with “GM”: 1941 low, 2 5/8; 1946 high, 34.
Figure 15.3 Typical decurving Major Bull Trend of a high-grade preferred
stock. This is Curtis Publishing $7.00 Preferred: 1942 low, 12; 1945 high,
154.
30
20
10
Sales
100's
1200
1000
Figure 15.4 The accelerating uptrend of the common stock of the same
publishing company: 1942 low, 3/8; 1946 high, 26.
Figure 15.5 A conservative investment-type utility stock makes a straight-
line Major Bull Trend. This is Commonwealth Edison: 1942 low, 17 3/8;
1946 high, 36 1/8. Leverage is an important factor in trends.
15
10
5
Figure 15.6 The up-curving trend of a low-priced “junior” utility,
International Hydro-Electric: 1942 low, 1/4; 1946 high, 15 1/2.
Sales 100's 400 200
Figure 15.7 A speculative oil stock, Houston Oil: 1942 low, 2 1/4; 1946
high, 30. Compare this picture with “SOH” in Figure 5.8.
Figure 15.8 Straight-line uptrends in an investment oil, Standard Oil of
Ohio: 1942 low, 10 1/8; 1946 high, 30. Note: trendline unbroken until 1948.

Figure 15.9 Steel stocks have the speculative or accelerating type of
Primary Uptrend, Republic Steel: 1942 low, 13 3/8; 1946 high, 40 7/8.
Figure 15.10 The normal Major Bull Trend of heavy industrial issues is up-
curving, American Car & Foundry: 1942 low, 20; 1946 high, 72 3/8.
40
80
60
Figure 15.11 A low-priced building stock, Celotex Corporation: 1942 low,
6 1/8; 1946 high, 38 1/8.
Figure 15.12 A highly speculative, low-priced issue, traded on the Curb
Exchange, Claude Neon Lights: 1942 low, 1/8; 1946 high, 9.
Figure 15.13 The tobacco stocks follow the investment type of trend. This
is Liggett & Myers: 1942 low, 50 1/2; 1946 high, 103 1/2. Note the Double
Trendline.
70
60
50
40
Sales
100's
400
200
Figure 15.14 High-grade food issues (Corn Products Refining) resemble
the tobaccos: 1940 low, 40 1/4; 1946 high, 75 3/4.
192
176
160
152
144
136
128
120
112
104
96
88
80
76
72
68
64
60
56
52
48
44
Sales
100's
1935
1936
1937
1938
Figure 15.15 In the process of “pulling back” to a very steep Up Trendline,
prices may e


/2; 1946 high, 103 1/2. Note the Double
Trendline.
70
60
50
40
Sales
100's
400
200
Figure 15.14 High-grade food issues (Corn Products Refining) resemble
the tobaccos: 1940 low, 40 1/4; 1946 high, 75 3/4.
192
176
160
152
144
136
128
120
112
104
96
88
80
76
72
68
64
60
56
52
48
44
Sales
100's
1935
1936
1937
1938
Figure 15.15 In the process of “pulling back” to a very steep Up Trendline,
prices may easily go to a new high. Note the Pullback of August 1936 in
this weekly chart of Westinghouse Electric. The second, less steep line
turned out to be the true Major Bull Trend. Note that the February-April
price pattern in 1936 could not be considered a true Double Top Reversal of
Primary import because the recession between the two highs was only about
10% of the Top's value (around 122). Figure 8.21 shows on a daily chart the
final Top Reversal Formation that “WX” made in 1937.
may attain an increasingly important and stable position in the general
economy, with the result that, eventually, their stock acquires a solid
investment rating. Their Bull Market Trends will then gradually change
from an up-curve to a straight line and, finally, to a decelerating curve.
Other old, established corporations may lose position and rating, as well as
shift from the investment type of trendline to the speculative. But, it is true
in general, that Major Patterns do repeat.
If you are keeping your own set of manual monthly charts, you can choose
whichever scale you please. But most technical chart followers prefer to
buy their long-range pictures readymade, thereby getting a much more
extensive history of many more issues than they could hope to chart
themselves. Since the only comprehensive portfolios of monthly charts that
are available at reasonable cost are arithmetically scaled, you will possibly
have to make these serve all purposes. (EN: No longer necessary because of
the availability of good software and internet chart sites. See Appendix B,
Resources.) You will find with a little experimentation that an architect's
French curve can be used to plot good Major Uptrend Lines on many of the
issues whose normal Bull Trends accelerate away from a straight line.
400
360
320
280
240
200
160
120

DOW - JONES INDUSTRIAL AVERAGE ranmnnninnmnsjwssss
::::::::::::::
Figure 15.16 The 1929-1932 Primary Bear Market was the only one in all
stock market records that produced a Straight-Line Major Downtrend. Trace
also the Support and Resistance Levels throughout this 14-year history of
the Dow Industrials. Each rally in the great Bear Move stopped at or near a
previous Bottom level. Each decline stopped near the level of a Congestion
in the 1924-1929 Bull Market. See also the level of 1937 Top. (Source:
Chart courtesy of Market Research, Inc., at http:// wwwbarchart.com.)
Figure 15.17 S&P Reagan Crash. As can be clearly seen, this crash sent
numerous signals, starting with the breaking of a Major Trendline by more
than 2% in late August. Once this occurs extreme caution and watchfulness
must be exercised. The darker and darker complexion of things is brought
out by the “smart selling,” which shows many “downthrust days" toward
the end (October 10-20). The April trendline breaks (by more than 2%)
would have ejected the trend trader also to be put back long in June.
Observance of the 2%-3% trendline-break rule or use of Basing Points and
progressive stops (see Chapters 27 and 28) would have avoided much
needless grief.
Figure 15.18 S&P Long-Term Perspective. Viewed from afar it seems an
exercise in futility to attempt to “time the market.” One must keep in
perspective the crashes in market prices are timed to coincide with personal
and business needs for short-term liquidity, or cash. One must also
remember the market behavior from 1965-1982, as well as the table of Dow
Theory Performance from Chapter 4 (Table 4.2).

Figure 15.19 Three Bull Market Tops, 1929, 1987, 1998. Notice here that
in each case the crash occurred after the nearest important trendline had
been decisively broken—usually trendlines of approximately three months
by 2% or more, and sometimes accompanied by reversal formations. All
historic tops will show evidence of attempts to resume the trend after a
break of this kind. Belief dies hard. Nonetheless, hedging or exiting on
these trend breaks proves to be the best strategy over and over again.
Figure 15.20 The Bull 1990s top in the S&P gave much clearer readings
than the Dow top, with the broken trendlines being paramount. But while
the Dow flirted with the emotions of Bulls who wanted to believe in the
Dow 36,000, the S&P broke its trendlines and went south for the winter, a
potentially very long winter. This might have started off as a rounding top
and then became a complex-complex top, and you can even see traces of a
Head-and-Shoulders top in it. It is the editor's opinion we may never see
such unruly tops again in this generation. The pent-up greed, lust, and
naivete as even the bootblacks (they still have those don't they?) rushed to
get the latest tulip bulbs. Tulips are like century plants; they only bloom
once each hundred years. A little old lady with a ruler could have saved her
portfolio here. All it takes is not believing the hype (Dow 36,000 indeed!)
and making an unemotional analysis and honoring the stops.
The tests for the technical significance of a Major Trendline are
substantially the same as those specified for Intermediate Lines in the
preceding chapter. A little more leeway must be allowed on penetrations—
again, a matter of judgment—but you are dealing with coarse data and long
swings here, and what you want from your monthly charts, primarily, is
perspective on the broad picture.
One more point regarding the construction of Major Bull Trendlines: the
best lines—the most useful—are drawn, as a rule, not from the absolute low
of the preceding Bear Market but starting from the next Intermediate
Bottom. The accumulation area at the beginning of a Bull Market is usually
long and drawn


e, and what you want from your monthly charts, primarily, is
perspective on the broad picture.
One more point regarding the construction of Major Bull Trendlines: the
best lines—the most useful—are drawn, as a rule, not from the absolute low
of the preceding Bear Market but starting from the next Intermediate
Bottom. The accumulation area at the beginning of a Bull Market is usually
long and drawn out in time and relatively flat. The first trendline that can be
drawn from the extreme low point may, therefore, be too nearly horizontal
to express the genuine Bull Trend that starts with the markup phase. The
several charts showing Major Trendlines that illustrate this chapter will
demonstrate this point (EN: Especially Figure 15.14). It applies as well to
many Intermediate Moves that start from Area Formations. Take the Head-
and-Shoulders Pattern, for example: the true Intermediate Trendline usually
starts from the right shoulder rather than from the head.
Major Downtrends
From the technical analyst's point of view, it is regrettable that few Bear Markets haveproduced Major Trendlines of any practical significance on the charts of individualstocks. A notable exception was the long Bear Market of 1929-1932, which producedmagnificently straight trendlines on the arithmetic plotting of a host of issues (as wellas in the Averages, to which we shall refer later). But it is almost impossible to findother instances in which a Bear Trendline having any forecasting value can be drawnon either arithmetic or semilogarithmic scale.
The normal Major Bear Market Trend is not only steeper than the normal Bull Trend(because Bear Markets last, on the average, only about half as long as Bull Markets),but it is also accelerating or down-curving in its course. This feature is accentuatedand, hence, particularly difficult to project effectively on the semilogarithmic scale.
The technician cannot expect to obtain much in the net of it, help from his MajorTrendlines in determining the change from a Primary Downswing to a PrimaryUpswing. This should not be taken, however, as advice to not draw trendlines on aMajor Down Move, or to disregard entirely any trendlines that may develop withsome appearance of authority. If you do not expect too much of them, they may,nevertheless, afford some useful clue as to the way in which conditions are tending tochange.
The student of stock market action who is not altogether concerned with dollars andcents results from his researches will find Bear Market Trendlines a fascinating fieldof inquiry. They do some strange things even though they fail in the practical functionof calling the actual Major Turn and go shooting off into space, they sometimesproduce curious reactions (or, at least, appear to produce what would be otherwiseinexplicable market action) when the real price trend catches up with them months oryears later. But such effects, interesting as they may be, are, in our present state ofknowledge, uncertain and unpredictable. (EN: This fact may persist into the mists ofthe future and be thought of like Fermat's Last Theorem. Our present state ofknowledge in the twenty-first century is no further advanced than it was in Magee'stime.)
We must dismiss this rather unfruitful topic with the reminder that one clue to the endof a Primary Bear Market is afforded by the Intermediate Trendline of its final phase,which we cited in the preceding chapter.
Major Trend Channels
Another difficulty is met when trying to draw Return Lines and construct channels forMajor Trends on an arithmetic chart. Owing to the marked tendency for prices tofluctuate in ever-wider swings (both Intermediate and Minor) as they work upward ina Primary Bull Market, their channel grows progressively broader. The Return Linedoes not run parallel to the Basic Trendline (assuming there is a good Basic Trendlineto begin with) but diverges from it. Occasionally, a stock produces a clear-cut MajorChannel Pattern, but the majority do not.
A large Rectangle base was made on this weekly chart in April, May, and June 1937,but observe the poor volume that accompanied the breakout and rise from thatformation—an extremely Bearish indication for the Major Trend. The “measurement”of the Rectangle was carried out by August, but that was all.
As is usually the case, it was impossible to draw a Major Down Trendline that hadany forecasting value on this chart. The beautiful straight trendlines that appeared inthe 1929-1932 Primary Bear Market led many chart students to expect similardevelopments in every Bear Market, but the fact is that 1929-1932 was unique in thatrespect.
Semilogarithmic scaling will correct, in many cases, for the Widening Channel effectin Bull Trends, but then we run into the opposite tendency in Primary Bear Markets,and for that, neither type of scaling will compensate.
Trendlines in the Averages
Practically everything stated in the preceding chapter regarding IntermediateTrendline development in individual stocks applies, as well, to the various Averages.The broad Averages or Indexes, in fact, produce more regular trends and, inconsequence, more exactly applicable trendlines. This may be partly due to the factmost Averages are composed of active, well-publicized, and widely owned issueswhose market action individually is “normal” in the technical sense. Another reason isthe process of averaging smooths out the vagaries of component stocks, and the resultmore truly reflects the deep and relatively steady economic trends and tides.
In any event, it is a fact that such averages as the Dow-Jones Rails, Industrials, and65-Stock Composite, The New York Times 50, and Standard & Poor's Average of 90stocks (the last two named being probably the most scientifically composed to typifythe entire broad market) do propagate excellent trendlines on their charts. (EN: As thereader will note, most of these indices are obsolete. In the modern age, the S&P 500probably best fulfills this function.)
The very accuracy of thei


and65-Stock Composite, The New York Times 50, and Standard & Poor's Average of 90stocks (the last two named being probably the most scientifically composed to typifythe entire broad market) do propagate excellent trendlines on their charts. (EN: As thereader will note, most of these indices are obsolete. In the modern age, the S&P 500probably best fulfills this function.)
The very accuracy of their trends, particularly their Intermediate Moves, permits us toconstrue their trendlines more tightly. Less leeway need be allowed for doubtfulpenetrations. Thus, although we ask for a 3% penetration in the case of an individualstock of medium range, 2% is ample in the Averages to give a dependable breaksignal.
Experienced traders know it pays to heed the Broad Market Trend. It is still easier toswim with the tide than against it.
EN: Trendlines in the Averages and Trading in the Averages
Numerous averages and indexes have come online since the fifth edition, includingthe S&P 100, S&P 500, Russell 2000, and so on. It would be an exercise in dailyjournalism to attempt to list all the indexes now available, as new ones spring up likeweeds after the spring rain. This is because the invention of a widely adopted indexcan be very lucrative for its creator S&P and Dow-Jones collect licensing fees fromthe “use” of their indexes by the exchanges. The constant addition of new tradinginstruments requires that current lists be kept in Resources, and the reader may alsoconsult the Wall Street Journal, Barron's, and the Investor's Business Daily whereprices of indexes and averages are reported. Online brokerages and financial newssites also offer up-to-the-minute lists and quotes on virtually all trading instruments.A list and links to these sites may also be found in Appendix B, Resources, and athttp://www.edwards-magee.com.
As of the turn of the century, the most important of these indexes joining the Dow areprobably the S&P 500, the S&P 100, and the NASDAQ. In fact, these are probablysufficient for economic analysis and forecasting purposes, and certainly good tradingvehicles by means of surrogate instruments, options, and futures. Some would includethe Russell 2000 in this list. These indexes and averages have been created to fillneeds not addressed adequately by the Dow-Jones Averages.
With this proliferation of measures of the market and various parts of it, a differentquestion arises questioning the value of the Dow alone in indicating the BroadMarket Trend. Limited research has been done on this question; however, my opinionis the Broad Market Trend must now be determined by examining the DowIndustrials, the S&P 500, and the NASDAQ Composite.
Trading the Averages in the 21st century
As pointed out in other new chapters and notes in the eighth edition, the ability totrade the Averages instead of individual stocks is a powerful choice offered bymodern markets. The index ETFs offer ideal vehicles for investing: The DIA, SPY,
QQQ and IWM give the modern investor unparalleled flexibility and convenience.Magee was of the opinion that the Averages offered technical smoothness oftenlacking in individual issues. This would seem to be true intuitively. After all, just as amoving average smooths data, the average of a basket of stocks should dampen pricevolatility. Of course, as Mandelbrot pointed out, in a 10-sigma market stormeverything sinks.
Illustrated in this chapter are several detailed cases following Magee's suggestion ofAverage trading. I attempt to demonstrate here two perspectives: one, the horror ofthe immediate, what the crash and panic look like as they occur; and two, what thecrash and panic look like in retrospect. We all live in the present, except for the greatbillionaires who can afford to doze through horrific Bear Markets. Bill Gates' networth varied by $16 billion or $17 billion in early 2000. This would put the ordinaryinvestor out of business.
So the ordinary investor, you and I, have to respect the great yawning Bear Market.We must step to the sidelines and let the bear eat the foolish virgins, to borrow aBiblical metaphor.
You will remember Magee opined that a trendline break of 2% was sufficient to causeliquidation of longs when analyzing the Averages. In the accompanying figures, thishypothesis is examined.
EN9: In respect to the breaking of trendlines (by 2% or 3%), I should note thebreaking of a trendline is as much a warning as a signal to act. The break, instead ofa change of trend to the reverse, may indicate a change of trend to the sideways—intoa reversal or continuation pattern.
chapter sixteen
Technical analysis of commodity charts (EN9: Following the practice of allowing thereader to discriminate between the work of Edwards and Magee and that of the editor,a section on commodity trading, Chapter 16, has been added to the ninth edition. Seesame.)
A little thought suggests the variously interesting and significant patterns we haveexamined in the foregoing chapters on stock charts should logically appear as well inthe charts of any other equities and commodities that are freely, constantly, andactively bought and sold on organized public exchanges. In general, this is true. Theprice trends of anything for which market value is determined solely (or for allpractical purposes within very wide limits) by the free interplay of supply anddemand will, when graphically projected, show the same pictorial phenomena of riseand fall, accumulation and distribution, congestion, consolidation, and reversal that
we have seen in stock market trends. Speculative aims and speculators' psychologyare the same whether the goods dealt in are corporate shares or contracts for the futuredelivery of cotton bales. (For illustrations in this chapter, see Figures 16.1 through16.13.)
It should be possible in theory, therefore, to apply our principles of technical analysisto any of the active commodity futures (wheat, corn, oats, cotton, cocoa, hides, eggs,etc.) for which accurate daily price and volume da


same whether the goods dealt in are corporate shares or contracts for the futuredelivery of cotton bales. (For illustrations in this chapter, see Figures 16.1 through16.13.)
It should be possible in theory, therefore, to apply our principles of technical analysisto any of the active commodity futures (wheat, corn, oats, cotton, cocoa, hides, eggs,etc.) for which accurate daily price and volume data are published. It should be, thatis, if proper allowance is made for the intrinsic differences between commodityfutures contracts and stocks and bonds.
In previous editions of this book (EN9: up to the eighth), traders who cast longingeyes on the big, quick profits apparently available in wheat, for example, werewarned that commodity charts were “of very little help,” as of 1947.
It was pointed out that successful technical analysis of commodity futures charts hadbeen possible up to about 1941 or 1942, but the domination of these marketsthereafter by government regulations, loans, and purchases completely subject to thechanging (and often conflicting) policies and acts of the several governmentalagencies concerned with grains and other commodities had seriously distorted thenormal evaluative machinery of the market. At that time, radical reversals of trendcould and did happen overnight without any warning so far as the action of the marketcould show. The ordinary and orderly fluctuations in supply-demand balance, whichcreate significant definite patterns for the technician to read, did not exist. Yet, whilefortunes were made (and lost) in wheat, corn, and cotton futures during the World WarII period, it is safe to say they were not made from the charts.
During the past five or six years, however, the application of technical methods tocommodity trading has been reexamined. Under 1956 conditions, it appears thatcharts can be a most valuable tool for the commodity trader. The effects of presentgovernment regulation have apparently resulted in “more orderly” markets withoutdestroying their evaluative function. Allowing for the various essential differencesbetween commodities and stocks, the basic technical methods can be applied.
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Figure 16.1 Oats, for obvious reasons, traced more “normal” patterns than Wheatduring the 1940s. This chart contains an H & S bottom, a Symmetrical Triangle thatmerged into the Ascending form, a gap through a former top level, and an interestingtrendline. The Island shake-out through the trendline was an extremely deceptivedevelopment.
It may be in order here to discuss briefly some of the intrinsic differences betweencommodity futures and stocks referred to above and to some of the special traits ofcommodity charts. First, the most important difference is the contracts for futuredelivery, which are the stock-in-trade of the commodity exchange, have a limited life.For example, the October cotton contract for any given year has a trading life of about18 months. It comes “on the board” as a “new issue,” is traded with volumeincreasing more or less steadily during that period, and then vanishes. Theoretically, itis a distinct and separate commodity from all other cotton deliveries. Practically, itseldom gets far out of line with such other deliveries as are being bought and soldduring the same period, or with the “cash” price of the physical cotton in warehouses.Nevertheless, it has this special quality of a limited independent life, as a consequenceof which long-term Support and Resistance Levels have no meaning whatever.(EN10: This absolute may not be absolute. Evaluate the longterm charts for yourissue to see whether influence is evident.)
Second, a very large share of the transactions in commodity futures—as much as 80%certainly in normal times—represents commercial hedging rather than speculation.(EN10: Less true in the twenty-first century.) It is, in fact, entered in to obviate riskand to avoid speculation. Hence, even near-term Support and Resistance Levels haverelatively less potency than with stocks. Also, because hedging is to a considerabledegree subject to seasonal factors, there are definite seasonal influences on the
commodity price trends that the commodity speculator must keep in mind, even ifonly to weigh the meaning of their apparent absence at any given period.
A third difference is in the matter of volume. The interpretation of volume withrespect to trading in stocks is relatively simple, but it is greatly complicated incommodities by the fact that there is, in theory, no limit to the number of contracts fora certain future delivery that may be sold in advance of the delivery date. In the caseof any given stock, the number
Figure 16.2 In contrast with the grains, the technical action of the Cotton futuresmarkets has been fairly consistent with normal supply-demand functioning ever since
prices rose well above government support levels. In this daily chart of the 1947October delivery (New York Cotton Exchange), the reader will find a variety offamiliar technical formations, including critical trendlines, a Head-and-Shoulders topthat was never completed (no breakout), and Support-Resistance phenomena muchthe same as appear in stock charts. Double trendlines are not at all unusual in Cottoncharts.
of shares outstanding is always known. As this is written (1956), there are in thehands of stockholders 13,700,203 common shares of Consolidated Edison, and thatquantity has not varied for many years nor is it likely to change for several years tocome. Every transaction
In the case of commodity future contracts—say, September wheat—trading beginslong before anyone knows how many bushels of wheat will exist to be delivered thatcoming September, and the open interest at some time during the life of the contractmay exceed the potential supply many times over, and all quite legitimately. (EN9: Asalways, volume data is a supplem


several years tocome. Every transaction
In the case of commodity future contracts—say, September wheat—trading beginslong before anyone knows how many bushels of wheat will exist to be delivered thatcoming September, and the open interest at some time during the life of the contractmay exceed the potential supply many times over, and all quite legitimately. (EN9: Asalways, volume data is a supplementary indicator to price. No one makes a profit onit.)
One more important difference may be mentioned. Certain kinds of news—aboutweather, drought, floods, and so on that affect the growing crop, if we are dealingwith an agricultural commodity—can change the trend of the futures marketimmediately

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Figure 16.3 A Rounding Bottom in Gold 1997-2004. “These patterns, when theyoccur after an extensive decline, are of outstanding importance, for they nearlyalways denote a change in Primary Trend and an extensive advance yet to come. Thatadvance, however, seldom carries in a ‘skyrocket' effect, which completes the entireMajor Move in a few weeks. On the contrary, the uptrend that follows the completionof the pattern itself is apt to be slow and subject to frequent interruptions, tiring outthe impatient trader, but yielding eventually a substantial profit.” So said RobertEdwards in remarking on Rounding Bottoms in stock charts. As may be seen here,this Rounding Bottom consists of a downtrend, a false signal off the Double Bottom(upon which a pretty penny might have been made by the agile trader), and ahandsome uptrend—and it all looks like a huge Rounding Bottom.
and drastically and are not foreseeable given the present stage of our weatherknowledge. Analogous developments in the stock market are extremely rare. (EN:Except for acts of God and Alan Greenspan [and Ben Bernanke]).
It is not the purpose of this book to explain the operation of commodity futuresmarkets, nor to offer instruction to those who wish to trade therein. This brief chapteris included only as a starter for readers who may want to pursue the study further.They should be advised that successful speculation in commodities requires far morespecialized knowledge and demands more constant daily and hourly attention. Theordinary individual can hope to attain a fair degree of success in investing insecurities by devoting only his spare moments to his charts, but he might better shuncommodity speculation entirely unless he is prepared to make a career of it.
(EN: The editor has been, during his checkered career, a registered commoditytrading advisor. At the beginning of that career, I discussed these subjects with Mageeand received essentially the above comments, which are here reproduced from thefifth edition. Subsequently, I observed among my associates and partners, and on myown, that futures are eminently tradable with the adaptation of techniques andmethods described in this book. It is also true, as Magee says, that futures trading isso different in tempo, leverage, and character that the novice risks life, limb, andcapital in entering the area unescorted. Resource references are essential reading, butthe beginner is urged to educate himself before beginning trading with extensive studyand paper trading.)
Figure 16.4 Gold, October 2011. The momentous earth-shaking power of a massiverounding bottom is vividly dramatized by the gold chart since 2005, as well as thepower of chart analysis to anticipate it. Regrettably, the editor did not compute theprice target implications of the pattern in the ninth edition in 2005. That computationwas made at the http://www.edwards-magee.com website at the time. There it wascomputed as follows (and the reader can do it for himself): depth of pattern, 248.20plus neckline 507.40, target 755.60. In fact, the possibility was entertained that theentire formation from 1980 to 2008 might be a Rounding Bottom. In which case, thedepth was 700.70, added to the neckline of 959 and resulted, actually achieve, in atarget of 1,660. Remember Edwards said these were probable minimummeasurements.
Technical analysis of commodity charts, part 2: a 21st-century perspective
In the search for the Philosopher's Stone, more sweat and money have been put intothe area of commodities and futures than were ever expended in the securities arena.There is a simple reason for this—great fortunes are made and lost with much greaterrapidity in the futures area than in securities. Of all the great dramatic moments instock market history, few are so memorable as the great Hunt silver market, or Sorosfacing off against the Bank of England, or of gold soaring to $1,000 an ounce(deferred contracts). And the saga continues in 2005: $50 oil? $60? $70? $100? Andthe effects, economic and psychological! In dimly lit garrets and brightly lit computerrooms thousands of researchers concoct systems to trade these markets—corn,soybeans, silver, copper ...
Rocket scientists
At times, individual traders and groups of traders have plundered (harvested?) thesemarkets for fairy tale profits. I know whereof I speak, having been a principal inCalifornia's first licensed commodity trading advisor that was founded by the NASArocket scientist R. T. Wieckowicz. During the 1970s, as the stock markets groundfutilely around the 1,000 level on the Dow, the futures markets returned yearly gainsin the 100% range. Consistently. For years. Those were the years of the Californiasystems traders and the beginning of computerized trading. From the primeval slimeof NASA, rocket scientists emerged to create a renaissance in market technology. Atthe time it seemed clear that science and genius had at last conquered the markets andthat clients would come buzzing from the world over like bees to a honey
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Figure 16.5 A Rounding Bottom


ce in market technology. Atthe time it seemed clear that science and genius had at last conquered the markets andthat clients would come buzzing from the world over like bees to a honey
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Figure 16.5 A Rounding Bottom in Silver, 1998-2005. The apparent RoundingBottom in silver, combined with the same pattern in gold, would seem to cast a pallover the economic situation for some time to come in 2005. This coincides with theapparent long-term patterns setting up in the securities markets. If the best that can behoped for in securities is a 1965-1982 kind of widely whipping market, commoditiesmay react as they did in the 1970s—with tidal wave markets. These markets can betraded by the well-capitalized chart analyst who is well seasoned. Tyros will losemoney learning the game whatever markets they trade. Their chances will beimmeasurably improved by applying the techniques taught in this book. In addition tothe technical pattern pictured here, there is every reason to suspect that a largefundamental shortage of silver bullion exists and will worsen. Ted Butler, athttp://www.doomgloom.com, is a long-term silver analyst (and associate of the editor)who anticipates a new silver blow-off is coming. One wonders what Nelson andBunker Hunt are doing at present. A very cautious investor (like Warren Buffet who isreported to have invested $1 billion in silver bullion) may defeat futures silvervolatility by buying the bullion.
pot and that the rivers of profits would last forever. They did last for some time, andthen the markets changed. Mechanical systems that cut through the markets like areaper in a wheat field in Bull Markets grind up capital like sausage in sidewaysmarkets. Science and genius were revealed as the happy combination of man,moment, system, and market.
Turtles?
During the 1980s from the sea came crawling the Turtles. Progeny of the proteantrading wizard, Richard Dennis, the Turtles again harvested outsize profits from themarkets, reportedly running in the 80% yearly range. The so-called Turtles got theirname from a comment that Dennis is reported to have made that traders were madenot born, and he was going to raise traders like turtles. Additional reading about theTurtles is available in Jack Schwager's fascinating books, including Market Wizardsand others. Schwager's books are required reading for aspiring futures traders.Additionally, the trading manual of the Turtles will be found online athttp://www.originalturtles.org. This workbook, written by
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Figure 16.6 Silver, May 2005. Although the long-term silver outlook may be Bullish,the short term will be very volatile, especially for the thinly capitalized trader. Thenshort-term tactics must be adopted. The Island Top here at 1 is a gentle invitation tothe trader to take his profits and be gone. Even to short, with a stop just above thehigh. The run day after 1 adds a note of urgency to the invitation. The gap ispunishment for the hard of hearing and a bonus for the quick-witted (everybody whosurvives in futures is either quick witted or extremely well financed). The stop movesdown to the top of the gap day, then to the top of the next gap day, and for the veryapt profits are taken on the next run day down, on the principle of sell weakness, buyweakness. The tight trendline at 2 crossed by the heavy run day is a buy signal with
the stop moving to the bottom of the gap at 3, where it is taken out a few days later bythe long-range day down. The run day at 4 is a short signal with the stop being at theday's high. Is it necessary to say short-term futures trading can be quite rapid? Thereis always bullion or associated stock plays.
Curtis Faith, an original Turtle, contains virtually all of the elements necessary in atrader's systems and procedures manual. The manual was prepared according to thetraining Dennis gave his Turtles. Serious traders do not operate without some suchdocument. Certainly all of the serious traders I have known (a considerable number)have had fully developed manuals like the Turtle workbook. I cite the Turtleworkbook rather than others in my possession because it is publicly available athttp://www.originalturtles.org (as well as in the 9th edition of this book) and becauseit is beautifully articulated.
In the late 1990s, the Turtles were made into turtle soup in the futures markets as themajority of systems traders wound up as hamburger meat. Is there a moral? Yes. Themarkets giveth and the markets taketh away. Science and genius are again revealed tobe the happy combination of man, method, moment, and market.
The Turtle system is basically an adaptation of Richard Donchian's channel breakoutsystem. In the Donchian system, the trader goes long when the 20-day high is brokenand sells and goes short when the 20-day low is broken. In the 1970s, Dunn andHargitt evaluated a number of mechanical trading systems and found that Donchian'ssystem was superior to the others evaluated at that time. Will Donchian's system stillwork? Yes,

Figure 16.7 Silver, October 2011. Here is what happened in silver after the ninthedition was published. Could there be any greater vindication of the value of chartslooking at the issue six years later? Just as in the case of gold, the analysis allowedthe analyst to anticipate a monster Bull Market. On http://www.edwards-magee.com,the authors wrote letters all during this time pointing out the silver Bull. Measuringthe entire formation, the depth is 33.96, added to the neckline of 37.5 equals 71.46.This seems quite fanciful to us, but that is t


value of chartslooking at the issue six years later? Just as in the case of gold, the analysis allowedthe analyst to anticipate a monster Bull Market. On http://www.edwards-magee.com,the authors wrote letters all during this time pointing out the silver Bull. Measuringthe entire formation, the depth is 33.96, added to the neckline of 37.5 equals 71.46.This seems quite fanciful to us, but that is the measurement.
in broadly trending markets. Will the Turtle system still work? Yes, in broadlytrending markets. Plus, like virtually all mechanical systems, they do not knowwhether they are in a broadly trending market or not. They are blind—all they see areones and zeros. The addition to these systems of prudently applied chart analysis willimmeasurably improve their performance and risk characteristics.
The application of Edwards and Magee's methods to 21st-century futuresmarkets
During my career as a commodity trading advisor, I have known a number ofsuccessful traders and advisors who used what I would describe as Magee-type chartanalysis to make their trades. Often, other elements were input into their decision-making process, but manual charting was a key factor in their operations. Some ofthese traders used simple trendline analysis with price or volume filters and someused a combination of trendlines and support and resistance. All were trend followers.
Having looked at the futures markets with some attention over the past several years,it seems to me there is no reason why chart analysis should not work as well now infutures as it has always worked in stocks. Essentially, the questions raised bysecurities trading are the same as those presented by futures trading in the analysis ofa chart. Is there a trend? Where are support and resistance? Is there a breakout? Arethere waves and wavelets? How do you enter and how do you exit?
The great bug-a-boo of securities traders coming to the futures trading is the speed ofthe game. Like college football players stepping up to the NFL, there is a brutallearning curve and rookies are the most likely to get killed. I am not going to makeany effort here to present a primer for new futures traders, but rather, I will look atsome futures charts at the end of this chapter to show the journeyman that chartanalysis can be used
Figure 16.8 Treasury Bonds. The double-pump triple-nod head fake is a specialty offutures markets. The fear and greed factor are multiplied by 10, like the leverage. Buthere in September 2004 Bonds, we can see how simple chart analysis can serve thetrader. The downtrend from March (1) is completely manageable with a simpletrendline and trend analysis. The end of the downtrend in May is marked by twostrong run days. At any rate, the stop would have been at May 1, using a Basing Pointkind of analysis. If we were going to trade it long, this would have been traded for ascalp (because we do not know whether or not there is a bottom). The break of thetrendline at 2 is an engraved invitation to get long and the trendline at 3 keeps us longuntil broken by the signal day at the end of July. This would put us short again,whereas a two-day trade as the signal day on the trendline at 4 puts us long again.Obviously, we are using very tight, short trendlines and long-range days (or run days)as signals. The use of the run day as a signal, combined with other indicators, iscommon in my experience among traders.
as a decision-making method in these dramatic markets. Again, chart analysis has theweakness (or strength) of being a qualitative process. It will not make decisions forthe average trader, as a mechanical system will.
On the other hand, a breakout is a breakout. A gap is a gap, leaving aside the questionof limit move gaps for the moment. A trend is a trend. And here is the great advantage
that a firm grasp of charting methods can give the practitioner. It can give him theperspective to recognize the essential nature of the market at hand and choose to waitor to enter. Mechanical methods not having the qualitative discrimination of anexperienced chartist will blindly take every trade until they are out of money. Theexperienced chart analyst can sit back and say, this market has not yet made a bottomand the time to begin trading it long has not yet come. Or, he can recognize theessential differences between a trading and a trending market and adjust his tacticsaccordingly. As Magee noted in Chapter 16:
Under what might be called normal market conditions, those chart patterns whichreflect trend changes in most simple and logical fashion work just as well withcommodities as with stocks. Among these we would list Head-and-Shouldersformations, Rounding Tops

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Figure 16.9 Commodity Research Bureau Index, April 2005 Futures. Just asTriangles often work in securities, they often work in futures. Breakaway gap, secondbreakaway gap, runaway gap, second runaway gap—this is the formation before thesecond runaway gap is somewhat quizzical—it might be considered a flag, but it hasthe same effect, and depending on the trader's operating methods, the stop would bejust under the gap/run day anyway. It will not take much study for the reader to seethe principles of chart analysis used in this entire book are validated here. The maindifference is in the setting of stops, and in fact, the same stop methods may be used ifthe trader is sufficiently well financed.
and Bottoms, and basic trendlines. Trendlines, in fact, are somewhat better definedand more useful in commodities than in stocks. Other types of chart formations whichare associated with stocks with short-term trading or with group distribution andaccumulation, such as the Triangles, Rectangles, Flags, etc., appear less frequently incommodities and are far less reliable as to either direction or extent of the ensuingmove. Support and Resistance Levels, as we have already noted, are less


useful in commodities than in stocks. Other types of chart formations whichare associated with stocks with short-term trading or with group distribution andaccumulation, such as the Triangles, Rectangles, Flags, etc., appear less frequently incommodities and are far less reliable as to either direction or extent of the ensuingmove. Support and Resistance Levels, as we have already noted, are less potent in
commodities than in stocks; sometimes they seem to work to perfection, but just asoften they don't. For similar reasons, gaps have relatively less technical significance.
These words remain true today, as do virtually all the principles enunciated in thisbook by Edwards and Magee and myself. In fact, if most futures charts were given toan
Figure 16.10 Commodity Research Bureau (CRB), long-term view. It does not takemuch analysis of this 10-year CRB chart to see a huge Double Bottom and to considerits implications. If China and India are going to compete with us for natural resources,we could see an entirely new economic paradigm, if the reader will excuse the term.Clearly, there is a Bull market in commodities. In Chapter 42, Pragmatic PortfolioManagement, it is suggested that capital should flow to markets that are moving,rather than remaining committed to markets that are mired in mulish trends.Furthermore, it is suggested in that chapter that a good natural hedge is to go long onthe uptrend of an index and short the components of it that are in downtrends. TheCRB is somewhat thin but might lend itself to this strategy.
Figure 16.11 The 20-year bonds as expressed in the TLT; ETF Bonds displayclassical signals of absolute clarity.
Figure 16.12 September, 1994. Coffee was so easy in retrospect that it should beengraved on a brass plate. The long is taken on the breakout of the horizontaltrendline. The position is never in any danger, as there is no down-wave ofsignificance until May when stops are advanced to stay 5% under lows (Basing
Points). The May down-wave allows a Basing Point stop to be established. Thebreakaway gap is a windfall profit. The flag tells us that more is coming—as it doeswith another gap and run days—until the spike reversal, which is a clear signal to beout on the close. A gap up on the open, an exploration up, and a close down—anabsolutely clear message of reversal from the market.
256 Technical Analysis of Stock Trends
Figure 16.13 The May 11 top in silver. In the first quarter of 2011, silver took off in aroaring uptrend. Any surprise here, after looking at the Bounding Bottom? As seen inthe chart, it came near to going parabolic. The top notice came on April 25—interestingly on a reversal bar. Reading the Candlestick, the market gapped wide onthe opening and took a long excursion down to close the opening gap. Then bargainhunters thought they were getting a good price on silver and drove the price back up,so it did not close on the lows. The next day, it gapped down on the open andbasically wandered down all day long—the party was over. The signs were subtle.
Chapter sixteen: Technical analysis of commodity charts 257
analyst, without issue identification and dates would not be identifiable as commoditycharts. When limit moves appear, the difference slaps one in the face. On this point Imight differ from Magee slightly as regards to gaps. Obviously, limit move gaps havebreathtaking significance. All in all, it seems to me gaps often say the same thing tofutures analysts as they do to stock analysts.
Another mathematical reason might be adduced for the practicality of using simplechart analysis to trade futures. That is the tautological nature of the method. A trend isa trend, and a trendline is a trendline. If you enter a suspected trend (setting a
protective stop at a technically analyzed place) and follow the trend using BasingPoints or observing the trendline and exiting on a break and reversal there will be nodifference from doing the same with a stock. Well, some difference. Due to theleverage, you will be required to be hyperaware of risk. In futures, the penalty forholding a position through “a normal reaction” can be extremely harsh. That is whystops are so important.
The TLT chart from late 2008 is a spectacular display of patterns and signals. Thispattern has appeared many times before and will appear again in the future.
Prices break out of a sideways pattern on a strong gap. The gap is across the trendline,which is what makes the signal significant. Every gap is not a signal. In this case, thegap is extra significant because there is a power bar on the gap day—it should bebought. This is called a breakaway gap. Prices continue to progress, and a few dayslater another gap occurs. This is a runaway gap and is another signal.
Shortly thereafter, prices drift sideways for a few days. This is a flag. Flags are vividmessages to traders. Robert Edwards described how they are used. He said, “The flagflies at half-mast,” meaning after a rocket-like advance and this formation, pricesshould advance on at least as far as they had come.
Power bars (signals) exit from the flag, and then another gap occurs. This is theexhaustion gap. This is a message to exit longs and to short the issue. The messagecould not have been clearer.
The skilled trader, first of all, catches the original signal—the power bar exiting fromthe sideways pattern. He then pyramids on the subsequent signals. Exiting from theflag, a good trader should have a boatload of this issue, and at the top, selling after theexhaustion gap, he should have made at least a small killing.
Stops
Some traders set their stops using money management rules rather than technicallyidentified points. I believe it is always better to find the technical point using a BasingPoint, or support and resistance. To me it makes better sense to adjust position size tocontrol risk as I describe in Chapter 26. The use of money management stops hasbeen very successful for many traders. If some logical and disciplined method o


heir stops using money management rules rather than technicallyidentified points. I believe it is always better to find the technical point using a BasingPoint, or support and resistance. To me it makes better sense to adjust position size tocontrol risk as I describe in Chapter 26. The use of money management stops hasbeen very successful for many traders. If some logical and disciplined method ofsetting and observing stops is not installed, the trader is assured of failure.
A money management stop is, simply enough, a stop calculated by deciding to risk2% (or 3% or 4% or x%) of capital on a trade. For example, William O'Neil says thatwhen a stock trader enters a position, he should set a stop 8% under his entry price.
This is a little crude, and not strictly speaking, a money management stop, but it isbetter than no risk calculation at all. In a stricter sense, if we said we wanted to limitthe risk of the trade to 3% of capital, we would use the 8% rule to set the stop and theScott Procedure in Chapter 26 to determine the number of shares or contracts. TheTurtle system contains similar procedures. Numerous studies have proven the size ofthe risk per trade—1%, 2%, 3%—is directly correlated to equity volatility.
The 25th looked like a reversal day. The gap down on the 26th could have beenconsidered the closing of an exhaustion gap—not apparent here because the tails(shadows) of the candlesticks obscure the complete price behavior.
(EN10: In the 10th edition, a new section on stops in Chapter 27 examines a numberof stop methods.)
A variety of methods
As noted above, a competent chart analyst may, in my opinion (and in Magee'sopinion), perform profitably in the futures markets. There are other questions, ofcourse, namely of character, temperament, intelligence, judgment, and so on. Let usleave those questions to Dr. Elder and confine ourselves to the method question. Chartanalysts proved their abilities in the futures markets long before computers existed. Infact, long before in the case of Japanese rice traders, enlightening their efforts withcandlesticks in the eighteenth century.
In the 1970s, I saw point and figure chartists enjoy great success at Dean Witter andMerrill Lynch and other major firms in futures. I have seen least squares curve fitters,moving average calculators, and abstruse statistical analysts all enjoy profitableoutings in commodities. Not to speak of the Turtles who, using naturalistic high-lowsystems, harvested good profits in the markets. As the saying goes, gateless is the gateand many are the ways to the great Dow. Although I have enjoyed great successmyself using mechanical number-driven systems over the years, I have become moreand more attracted to “natural” systems. Chart analysis is essentially natural, as is theTurtle system. The Dow Theory is a natural system in which no mathematicalalgorithm comes between the analyst and the data. The essential, more, quintessential,weakness of all number-driven systems is their blindness. They do not have the abilityto discriminate between the forest and the trees. The experienced human chartist cansee (and hear) the changing rhythms of the market and respond to them, responding tofactors too subtle (and even subconscious) to program. Nevertheless, even naturalsystems, like the Turtle systems, can fall into this trap. When the markets learn a lotof capital is waiting just above the 20-day high, they will set a trap for it. For“markets” you may read “they.” If you apply the knowledge of this book to suchsituations, you may avoid the trap.
Everything you need to know as a chart analyst trading futures
“Jack be nimble, Jack be quick, Jack jump over the Candlestick.” Yes, it is true, as theleverage is 10 times greater and the speed is 10 times faster. I have illustrated inFigure 16.9 the combination of a very tight trendline with a run day, which it seems tome is a good current (twenty-first century) combination. Otherwise, the same qualitiesthat make a good securities trader make a good futures trader once the great leap toleveraged quick-fire markets is made. If you have been successful trading stocks, youwill probably be successful trading futures, and you probably should practice onstocks while studying futures. A sobering fact I often recount to my graduate studentsis that Richard Wyckoff worked in the securities business for eight years beforemaking his first investment; he studied the markets an additional six years beforetrading.
The Magee methodology will serve as a valuable cornerstone of your futuresoperations and you must never cease studying. Mechanical systems have theirattractions, especially when seasoned with experienced chart analysis. No methodwill survive unless practiced with diligence, persistence, judgment, and patience.Time and again you will hear famous traders say discipline is the secret of theirsuccess. What they mean by discipline is their ability to measure and contain the risk,set a stop based on technical or money management procedures, and then honor thestop. The most important lesson the futures trader has to learn from Edwards andMagee is the ability to see the character of the market, trading or trending, and then toadjust his tactics accordingly.
In the next great Bull Market in commodities, which is inevitable, these methods andsystems derived from them will once again reap windfall profits.
I have attempted in the ninth edition of this classic book to show the book'susefulness to the intelligent futures trader. Simple classical chart analysis alone can besuccessful in the futures markets in the hands of an experienced competent analyst.Natural mechanical systems such as the Turtle system have been effective and will beagain, perhaps with some tweaking (such as imposing a chart analysis superstructure).Wave analysis methods such as the Basing Points Procedure of Chapter 28 can beused. Even number-driven systems, such as moving averages, can be successful,especially if combined with chart


hands of an experienced competent analyst.Natural mechanical systems such as the Turtle system have been effective and will beagain, perhaps with some tweaking (such as imposing a chart analysis superstructure).Wave analysis methods such as the Basing Points Procedure of Chapter 28 can beused. Even number-driven systems, such as moving averages, can be successful,especially if combined with chart analysis.
chapter seventeen
A summary and concluding comments
We began our study of technical stock chart analysis in Chapter 1 with a
discussion of the philosophy underlying the technical approach to the
problems of trading and investing. We could ask the reader to turn back
now and review those few pages to recapture a perspective on the subject
that must have been dimmed by the many pages of more or less arduous
reading that have intervened. (For illustrations in this chapter, see Figures
17.1 through 17.4.)
It is easy, in a detailed study of the many and fascinating phenomena that
stock charts exhibit, to lose sight of the fact they are only the rather
imperfect instruments by which we hope to gauge the relative strength of
supply and demand, which, in turn, exclusively determines what way, how
fast, and how far a stock will go.
Remember, in this work, it does not matter what creates the supply and the
demand. The fact of their existence and the balance between them are all
that count. No man, no organization (and we mean this verbatim et
literatim) can hope to know and accurately appraise the infinity of factual
data, mass moods, individual necessities, hopes, fears, estimates, and
guesses that, with the subtle alterations ever proceeding in the general
economic framework, combine to generate supply and demand.
Nevertheless, the summation of all these factors is reflected virtually
instantaneously in the market.
The technical analyst's task is to interpret the action of the market itself—to
read the flux in supply and demand mirrored therein. For this task, charts
are the most satisfactory tools thus far devised. Lest you become enrapt,
however, with the mechanics of the chart— the minutiae of daily
fluctuations—ask yourself constantly, “What does this action really mean in
terms of supply and demand?”
Judgment, perspective, and a constant reversion to first principles is
required. A chart, as we have said and should never forget, is not a perfect
tool nor a robot; it does not give all the answers quickly, easily, or
positively, in terms anyone can read and translate at once into certain profit.
We have examined and tested exhaustively many technical theories,
systems, indexes, and devices that have not been discussed in this book
(chiefly because they tend to shortcircuit judgment) to see the impossible by
a purely mechanical approach to what is far from a purely mechanical
problem. The methods of chart analysis that have been presented are those
that have proved most useful because they are relatively simple and easily
rationalized since they stick closely to first principles. Additionally, they are
of a nature that does not lead us to expect too much of them and they
supplement each other and work well together.
Let us review these methods briefly. They fall roughly into four categories:
1. The Area Patterns or formations of price fluctuation that, with their
concomitant volume, indicate an important change in the supply-demand
balance. They can signify Consolidation, a recuperation or gathering of
strength for renewed drive in the same direction as the trend that preceded
them. Or they can indicate Reversal, the playing out of the force formerly
prevailing, and the victory of the opposing force, resulting in a new drive in
the reverse direction. In either case, they may be described as periods
during which energy is brewed or pressure is built up to propel prices in
Figure 17.1 Spiegel's Bear Market started in April 1946 from a
Symmetrical Triangle that changed into a Descending Triangle. Note the
Pullback in June and two Flags. This history is carried on in Figure 17.2,
which overlaps Figure 17.1; this chart shows the move that ensued from the
wide Descending Triangle of early 1947, culminating in a Reversal Day on
May 19. Note various Minor and Intermediate Resistance Levels.
Technical Analysis of Stock Trends
Figure 17.2 Overlapping Figure 17.1, this chart shows the move that
ensued from the wide Descending Triangle of early 1947, culminating in a
Reversal Day on May 19. Note various Minor and Intermediate Resistance
Levels.
Chapter seventeen: A summan/ and concluding comments
a move (up or down) that can be turned to profit. Some of them provide an
indication as to how far their pressure will push prices. These chart
formations, together with volume, furnish the technician with most of his
“get-in” and many of his “get-out” signals.
Volume, which has not been discussed in this book as a feature apart from
price action, and which cannot, in fact, be utilized as a technical guide by
itself, deserves some further comment. Remember it is relative that it tends
naturally to run higher near the top of a Bull Market than near the bottom of
a Bear Market. Volume “follows the trend,” meaning it increases on rallies
and decreases on reactions in an overall uptrend, and vice versa. But use
this rule judiciously; do not place too much dependence on the showing of a
few days and bear in mind that even in a Bear Market (except during Panic
Moves), there is always a slight tendency for activity to pick up on rises.
(“Prices can fall of their own weight, but it takes buying to put them up” as
Edwards said.)
A notable increase in activity, as compared with previous days or weeks,
may signify either the beginning (breakout) or the end (climax) of a move,
temporary or final. (More rarely, it may signify a “shakeout.”) Its meaning,
in any given case, can be determined by its relation to the price pattern.
2. Trend and trendline studies supplement Area Patterns as a means of
determining the general dire


)
A notable increase in activity, as compared with previous days or weeks,
may signify either the beginning (breakout) or the end (climax) of a move,
temporary or final. (More rarely, it may signify a “shakeout.”) Its meaning,
in any given case, can be determined by its relation to the price pattern.
2. Trend and trendline studies supplement Area Patterns as a means of
determining the general direction in which prices are moving and of
detecting changes in direction. Although lacking the nice definition of Area
Formations, they may frequently be used for “get-in” and “get-out”
purposes in short-term trading, as well as provide a defense against
premature relinquishment of profitable long-term positions.
3. Support and Resistance Levels are created by the previous trading and
investment commitments of others. They may indicate where it should pay
to take a position, but their more important technical function is to show
where a move is likely to slow down or end, and at what level it should
encounter a sudden and important increase in supply or demand.
Before entering a trade, look both to the pattern of origin for an indication
of the power behind the move and to the history of Support-Resistance for
an indication as to whether it can proceed without difficulty for a profitable
distance. SupportResistance studies are especially useful in providing
“cash-in” or “switch” signals.
4. Broad market background, including the Dow Theory, should not be
scorned. This time-tested device designates the (presumed) prevailing
Major Trend of the market. Its signals are “late,” but with all its faults (like
the greatly augmented following it has acquired in recent years resulting in
a considerable artificial stimulation of activity at certain periods), it is still
an invaluable adjunct to the technical trader's toolkit.
The general characteristics of the various stages in the stock market's great
Primary Bull and Bear cycles, which were discussed in our Dow Theory
chapters, should never be lost to view. This brings us back to the idea of
perspective, which we emphasized as essential to successful technical
analysis at the beginning of our summary. The stock that does not, to some
degree, follow the Major Trend of the market as a whole is an extraordinary
exception. More money has been lost by buying perfectly good stocks in the
later and most exciting phases of a Bull Market, and then selling them,
perhaps from necessity, in the discouraging conditions prevailing in a Bear
Market, than from all other causes combined.
Hence, keep your perspective on the broad market picture. The basic
economic tide is one of the most important elements in the supply-demand
equation for each individual stock. It may pay to buck “the public,” but it
does not ever pay to buck the real underlying trend.
Major Bull and Bear Markets have recurred in fairly regular patterns
throughout all recorded economic history, and there is no reason to suppose
they will not continue to recur for as long as our present system exists. It is
well to keep in mind that caution is in order whenever stock prices are at
historically high levels and that purchases will usually work out well
eventually when they are at historically low levels.
If you make known your interest in your charts, you will be told the chart
analyst (like the Dow theorist) is always late—buying after prices have
already started up (maybe not until long after the “smart money” has
completed its accumulation) and sells after the trend has unmistakably
turned down. Partly true, as you have no doubt already discovered for
yourself. The secret of success lies not in buying at the very lowest possible
price and selling at the absolute top, but rather in the avoidance of large
losses. (Small losses you will have to take, and as quickly as possible as
warranted by the situation.)
One of the most successful “operators” Wall Street has ever seen, Bernard
Baruch, a multimillionaire and a nationally respected citizen today, is
reputed to have said never in his entire career had he succeeded in buying
within 5 points of the bottom or selling within 5 points of the top! (EN: For
perspective, the 5 points mentioned constituted roughly 10% of the market
at that time.)
Before we leave this treatise on theory and proceed to the more practical
matters of application and market tactics that are the province of Section II
of this book, the reader will, we hope, forgive one more admonition. There
is nothing in the science of technical analysis that requires one always to
have a position in the market. There is nothing that dictates something must
happen every day. There are periods—sometimes long months—when the
conservative trader's best policy is to stay out entirely. What is more there is
nothing in technical analysis to compel the market to go ahead and
complete (in a few days) a move the charts have foretold; it will take its
own good time. Patience is as much a virtue in stock trading as in any other
human activity.
Technical analysis and technology in the 21st century: the
computer and the internet: tools of the investment/information
revolution
The purpose of this section is to put computer and information technology
into proper context and perspective for chart-oriented technical analysts.
In John Magee's time, in his office in Springfield, Massachusetts, there was
a chart room—a room filled with all-age chartists from teenagers to senior
citizens. These people spent all their time keeping charts and assisting
Magee in interpretation. These were wonderful and intelligent people who
developed marvelous insights into the stocks they charted as well as created
the manual charts that adorn this book.
Today, that room and all those technicians have been replaced by a beige
(sometimes lime) box that sits crowded on our desktops and that is often
worshipped as a fount of insight and wisdom: “Computer, analyze my
stocks.”
Unfortunately, the computer does not have the discrimination and pattern


arvelous insights into the stocks they charted as well as created
the manual charts that adorn this book.
Today, that room and all those technicians have been replaced by a beige
(sometimes lime) box that sits crowded on our desktops and that is often
worshipped as a fount of insight and wisdom: “Computer, analyze my
stocks.”
Unfortunately, the computer does not have the discrimination and pattern
recognition ability of the people in that chart room. Undeterred by this
weakness in computer technology, traders and investors have poured
incalculable money and effort into computer-aided research, attempting to
discover the keys to market success. More money has been spent in this
effort than was ever put into the search for the philosopher's stone. Much of
it was wasted, but it has not all been spent in vain. In some areas, it has
been quite productive. But no fail-safe algorithm, in spite of all this effort,
has been found for investment success, and certainly not for stock trading.
The research has demonstrated that even the algorithm of “buy low, sell
high” has fatal flaws in it.
To fully understand the importance of the computer, the reader should
appreciate some basic differences in participants' approach to the markets,
or, we might say, schools of analysts and investors. We will not bother with
fundamental analysts here, as they are of a different religious persuasion.
Chart analysts, or Magee-type technical analysts, pretty much confine their
analysis of the market to the interpretation of bar charts. (This does not
mean their minds must be closed to other inputs. On the contrary—anything
that works.) Another chart analyst school uses point and figure charts, and
another candlestick charts. Another breed of technical analysts takes basic
market data, price and volume, and uses them as the input to statistical
routines that calculate everything from moving averages to mystically
designated indicators like %R or Bollinger Bands (see Glossary); they are
known as statistical or number-driven technical analysts. All these analysts
attempt to invest or trade stocks and other financial instruments (not
including options) using some form of what is called technical analysis—
that is, they all take hard data that people cannot lie about, misrepresent,
and manipulate, (unlike the data inputted to fundamental analysis like
earnings, cash flow, sales, etc.) as input to their analysis.
Using number-driven or statistical technical analysis, these latter schools
attempt, just as chart analysts do, to predict market trends and trading
opportunities. This can be more than a little difficult because the stock and
bond markets are behavioral markets driven by human emotion, perhaps the
most important of many variables influencing price. Plus, human emotion
and behavior dictates manic and depressive elements, which have not yet
been quantified. Yet, some chart analysts believe they can recognize it when
they see it on the charts.
In another area, the computer has yielded much more dramatic and
profitable results, but that is in a model-driven market, namely the options
markets. Quantitative analysts, those who investigate and trade the options
markets, are a breed apart from technical analysts. In an interesting irony,
emotion-driven markets, the stock markets, are used as the basis for
derivatives, or options, whose price is determined largely by the operation
of algorithms called “models;” for example, the Black Scholes model.
Quantitative analysts believe, as does this editor, the options markets can be
successfully gamed through quantitative analysis. Results of skilled
practitioners indicate this belief is accurate.
Alas, life is not so simple for the simple stock trader. Stock prices having
nothing to do with mathematics, except for being expressed as natural
numbers, are not susceptible to easy prediction as to their future direction.
Not even with Magee chart analysis or any other form of analysis—
technical, fundamental, or psychic. (From a theoretical point of view, each
trade made on the basis of a chart analysis should be looked at as an
experiment made to confirm a probability. The experiment is ended quickly
if the trend does not develop.) The fact chart analysis is not mechanizable is
important. It is one reason chart analysis continues to be effective in the
hands of a skilled practitioner. Not being susceptible to mechanization,
counterstrategies cannot be brought against it, except in situations whose
meaning is obvious to everyone, for instance, a large important Support or
Resistance Level or a glaringly obvious chart formation. These days
everyone looks at charts to trade even if they do not believe in their use. In
these obvious cases, some market participants will attempt to push prices
through these levels to profit from volatility and confusion. Indeed, human
nature has not changed much since Jay Gould and Big Jim Fisk.
When these manipulations of price occur, they create false signals—Bull
and Bear traps. Interestingly, the failure of these signals may constitute a
reliable signal in itself—but in the direction opposite to the original signal.
The importance of computer technology
Of what use and importance then is this marvelous tool—the most
interesting tool man (homo) has acquired since papyrus? (Numerous
computer software packages available are capable of executing the
functions described in the following discussion.) If the computer cannot
definitively identify profitable opportunities, what good is it?
Probably the most important function the computer has for the Magee
analyst is the automation of rote detail work. Data can be gathered by
downloading from database servers. Charts can be called up in an instant.
Portfolio accounting, maintenance, and tax preparation can be disposed of
with one hand while drinking coffee with the other. All in all, this might
make it sound as though the computer is a great tool, but with a pretty dull
edge. Not strictly true. There is at l