f you will give a quick mental review also to the Head-and-Shoulders, the Complex, and the Rounding types offormations, you will see how, if you disregard the volume part of their charts, any one of these patterns mightmerge or grade into a Rectangle. As a matter of fact, however, you will seldom be left in doubt as to properclassification because the circumstances of trading, the type of buying and selling, which produce Rectangles aredifferent, which is usually apparent.
We characterized the Symmetrical Triangle as a “picture of doubt.” The Rectangle might, with even greaterpropriety, be called a picture of conflict. Of course, any fairly compact price formation represents conflict in thesupply-demand sense. A Head-and-Shoulders Top, for example, portrays a conflict between “strong” sellers and“weak” buyers with the outcome already clearly seen before the combat has ended. But a Rectangle defines acontest between two groups of approximately equal strength—between owners of the stock who wish to dispose oftheir shares at a certain price and others who wish to accumulate the stock at a certain lower figure. They bat theball back and forth (up and down, that is) between them until ultimately, and usually quite suddenly, one team isexhausted (or changes its mind) and the other proceeds to knock the ball out of the lot. Nobody (often, not even thecontestants themselves) can tell who is going to win until one line or the other is decisively broken.
We speak of two groups operating in the development of a rectangular trading area because, under present-dayconditions, that is what is usually the fact behind the scenes. This, it should be noted, does not imply“manipulation” in any invidious sense. An investment trust or an estate or, in some cases, an individual heavystockholder has good
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NASH - KELVINATOR
NK
Sales
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Illi
OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH
6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30'
Figure 9.1 Although its Bottom boundary had a slight tendency to “lift,” the formation that put a Top on Nash-Kelvinator in 1946 was an unmistakable four-month distribution Rectangle. Long and rather loose RectangularPatterns of the type shown here may not evince constantly and noticeably diminishing volume, but note,nevertheless, the general, although irregular, downtrend in volume from mid-October to mid-February.
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LIMA LOCOMOTIVE WORKS
LMW
Sales
100's
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OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH
7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 3 10 17 24 3 10 17 24'31
Figure 9.2 Consolidation Rectangles in uptrends have been less common in recent years than during the 1920s andearly 1930s. The large price gap (G) in this example is of the “last in pattern” type, which we shall come to inChapter 12. When a gap within a pattern area is followed by breakout from that pattern, as in this case, the gap isinfrequently closed quickly.
and sufficient reasons for selling at the top price (the “Supply Line” of the Rectangle) with no intent to mislead thepublic. Another investment trust or a group of insiders interested in the company may have equally good and, fromtheir point of view, wise reasons for buying at the bottom price (“Demand Line”). Such are the forces at work inthe market at the start of most Rectangular Chart Patterns, but if the “spread” between top and bottom
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Sales 100's 125 100
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JANUARY
LOEW'S, INC. LW
FEBRUARY MARCH
OCTOBER" NOVEMBER "DECEMBEi
I 7 J i/i J oi"! oe I _ IQ T IO F QZ :
Figure 9.3 A perfect example of Consolidation Rectangle that formed in Loew's near the end of the 1932-1937Bull Market. In this case, a large block of “inside” stock was distributed at 64 to 65 but taken over around 62 byother investors who had the satisfaction of seeing it go on up to 87 the following August. Note the Throwbackfollowing breakout in January.
lines is wide enough (say 8%-10% of the market value of the stock), the situation may quickly attract a followingfrom quick-turn scalpers and the professional element. Thus, a syndicate holding a large block of U.S. Steel maydecide to liquidate at 76, whereas another group decides to invest heavily in “Steel” at 69. The price of X willnaturally fluctuate for a time between those two levels. Traders, seeing this, will try to ride the play, buying at 69and selling at 76 (perhaps also selling short at 76 and covering at 69). Their operations will tend to accentuate orextend the Rectangle, although the number of shares involved in such parasitic trading is seldom great enough toaffect the final outcome. As a matter of fact, this type of trading inside a Rectangle can be quite profitable at times,especially if protected by judicious stops (see Section II).
Pool operations
In times past, before the U.S. Securities and Exchange Commission (SEC) outlawed the practice, Rectangles werefrequently created by the well-organized operations of a single “pool” or syndicate. Such a pool might undertake toaccumulate a large block of
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Figure 9.4 Here is a Rectangle in Socony-Vacuum, a low-priced stock characterized by fluctuations within anarrow range. After reaching a high of 18 in December 1945, it fell back to 15 and then rallied in mid-1946 asshown above. In late August, prices broke down through an Intermediate Trendline (see Chapter 14) and four dayslater fell out of the Rectangle. This formation, in conjunction with the earlier and higher


a Rectangle in Socony-Vacuum, a low-priced stock characterized by fluctuations within anarrow range. After reaching a high of 18 in December 1945, it fell back to 15 and then rallied in mid-1946 asshown above. In late August, prices broke down through an Intermediate Trendline (see Chapter 14) and four dayslater fell out of the Rectangle. This formation, in conjunction with the earlier and higher Top, implied lower levelsfor “SOV” for some time to come. See also comment under Figure 9.5.
1946
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YOUNGSTOWN SHEET & TUBE YB
..
..
APRIL MAY JUNE JULY
6 13 "20 27 4 11 18 25 1 8 15 22 29 6 :13 20 27 T3
AUGUST SEPTEMBER
10 17 24 31 7 14 21 28
Figure 9.5 Another long, loose Rectangle of Major Reversal implications, somewhat similar to that pictured inFigure 9.1. Both an Intermediate and Major Up Trendline (to be discussed later) were decisively punctured by“YB” in August, just before its Rectangle broke down. Under Figure 8.21, we discussed one sort of warning of aPrimary Downturn that may be derived from the comparison of individual stock charts with the Averages. Here isanother hint: the better-grade steels and oils (see “SOV,” Figure 9.4) frequently hold up, or make strongerSecondary Recoveries, after the Averages have turned down at Major Tops. The Street sometimes speaks of“distribution under cover of strength in the steels.”
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JANUARY . FEBRUARY
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Figure 9.6 The Rectangle in early 1945 in “EAL” was actually the final stage of a nearly two-year Consolidationin the rise, which started around 17 in 1942 and ended above 125 in December 1945. G, G mark gaps (see Chapter12), the first a Breakaway and the second a Measuring Gap, which marked the probable objective of the move as55. When prices reached that level, another Consolidation developed, a Symmetrical Triangle. Neither of thesegaps was “closed” during the following two years.
stock in a certain company with a view to marking it up and taking profits when some piece of good news, ofwhich they had inside knowledge, eventually became public. To acquire the desired “line,” they would find itnecessary first to shake out shares held by other traders and uninformed investors. They might start their campaignby suddenly selling short a few hundred shares to quench any current demand and start a reaction. Then, on thatreaction to the previously determined accumulation level, they would start to buy, scattering their orders carefullyand avoiding any publicity. Their buying would, sooner or later, engender a rally, but then they would “plant”rumors around the boardrooms to the effect that such-and-such insiders were selling, or that a projected mergerwas being called off, or a dividend would have to be passed, and, if necessary, they would ostentatiously let out afew of their own recently purchased shares to give color to the rumor. The process might be repeated several timeswith the “pool” gradually securing more and more shares on balance until, finally, its intended line is completed orcould not shake out more of the floating supply. Often, what was going on was fairly evident to the alert chartistback in the 1920s even before the operation was concluded, and perfectly evident, of course, as soon as pricesbroke out topside from their Rectangle.
But such tactics are no longer permitted. “Wash sales” are strictly condemned; the constant policing of allexchange transactions and prompt investigation by the SEC of any suspicious news or activity in a stockeffectually deters the blatant “pool” manipulations of previous years. This probably is the chief reason whyRectangles are nowhere near so common on the charts of the 1950s as they were in the 1920s. (EN: Not uncommonin the 2000s.)
Sales
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AMERICAN ZINC, LEAD & SMELTING ZA
S
H
: S
S
H
H
MARCH
DECEMBER ' JANUARY FEBRUARY
......». L1I11L1. .■■■. ...11 ih.^. „ a.^1 U li
AUGUST SEPTEMBER OCTOBER NOVEMBER
Figure 9.7 An extraordinary, fine, long Rectangle that developed after “ZA” had broken down out of a Head-and-Shoulders Top in February 1946. A perfect opportunity to sell this stock short was given by its Pullback of July 17-18 after prices had broken out of the Rectangle on the 15th. The Multiple Head-and-Shoulders Bottom that itsubsequently made from September to November produced a recovery to 11, but prices later fell to 6 in early 1947.
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Perhaps we can clear up various details of the Rectangle formation most quickly and easily by comparison withthat most nearly related chart pattern, the Symmetrical Triangle, as follows:
• Volume—Follows the same rules as in the Triangles, gradually diminishing as the Rectangle lengthens. Anycontrary development, unless it be a momentary news flurry, is suspect.
• Breakouts—Here also the same rules apply as with Triangles. Review volume requirements, margin ofpenetration, and so on thereunder.
• False moves—Much less frequent from Rectangles than from Symmetrical Triangles. A clearly definedRectangle is, in fact, a

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


in the Triangles, gradually diminishing as the Rectangle lengthens. Anycontrary development, unless it be a momentary news flurry, is suspect.
• Breakouts—Here also the same rules apply as with Triangles. Review volume requirements, margin ofpenetration, and so on thereunder.
• False moves—Much less frequent from Rectangles than from Symmetrical Triangles. A clearly definedRectangle is, in fact, almost as reliable as a Head-and-Shoulders, although not as powerful in its implications.
• Premature breakouts—Slightly more frequent, perhaps, from Rectangles than from Triangles.
(Note: Both false moves and premature breakouts, in the sense in which we employ these terms, areindistinguishable at the time they occur from genuine breakouts. Following both false and premature breaks, pricesreturn inside the pattern. But, in the case of a false move, the trend ultimately proceeds out of pattern in theopposite direction, while in the case of the premature move, the trend finally breaks out again and proceeds in thesame direction.)

Figure 9.8 In this weekly chart showing Sears Roebuck's 1942 Bear Market Bottom, a Consolidation Rectangle(June to November) forms the right shoulder of a large “unbalanced” Double Head-and-Shoulders Pattern.
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BELL AIRCRAFT
BLL
1945
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»rt.
•fern’
FEBRUARY
MARCH
uoULuIllll
APRIL
6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
Figure 9.9 After advancing to 16 in January 1945, “BLL” dropped back to 13 and then constructed a 15-weekRectangle. Note that the down gap (G) on April 30 was caused by a $1.00 dividend going off. The revised bottomline of the pattern, drawn $1.00 lower, was not violated.
Figure 9.10 A brief and very “high” Rectangle formed in September 1937 in the rapid Bear Market Decline of“KN,” followed by a Descending and then a Symmetrical Triangle Consolidation.
• Pullbacks—Return of prices to the boundary of the pattern, subsequent to its initial penetration (breakout), takesplace more frequently with Rectangles than with Symmetrical Triangles. Our estimate would be that a Pullback orThrowback (the first is the common term for a rally after a downside breakout, and the second for a reactionfollowing an upside breakout) occurs within three days to three weeks in about 40% of all cases.
• Directional tendency—The Rectangle is more often a Consolidation Formation than a Reversal Formation, theratio being about the same as with Symmetrical Triangles. As Reversal Patterns, Rectangles appear morefrequently at Bottoms (either Major or Intermediate) than at Tops. Long, thin, dull Rectangles are not uncommonat Primary Bottoms, sometimes grading into the type of Flat-Bottomed Saucer or Dormancy described in Chapter7.
• Measuring implications—A safe minimum measuring formula for the Rectangle is given by its width. Pricesshould go at least as far in points beyond the pattern as the difference in points between the top and bottom lines ofthe pattern itself, though they may go much farther. Generally speaking, the brief, wide-swinging forms, whichappear nearly square in shape on the chart and in which turnover is active, are more dynamic than the longer andnarrower manifestations. Moves out of the latter almost always hesitate or react at the “minimum” point beforecarrying on.
Figure 9.11 This formation, constructed by United Aircraft in 1942, was not completed and could not be called aDouble Bottom until prices rose above 31 in February 1943. (See following pages.)
Figure 9.12 INCO quickly recovered from the Reagan Crash of 1987 and by year's end, it was nearly back to its1987 high; the latter was decisively broken in April 1988. The powerful rally continued to carry “N” higher. Butthe August reaction, followed by a poor rally in September, created a large Head-and-Shoulders Top. The earlySeptember decline broke the neckline to confirm the Reversal and the subsequent Throwback, to NecklineResistance, was an excellent selling point.
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REPUBLIC STEEL
RS
G
AUGUST
J’
J
•G—
t1
3 H
III
billIII
lill IIhl
JANUARY FEBRUAR^““MARCH APRIL--MAY ” JUNE ’’ JULY
: 1 8 15 22 29 5 12 19 26 2 9 16 23' 2 9 16 23 30 6 13 20 27 4 11 18 25 P"8 15 22 29 6T13 20
Figure 9.13 Owing to the long-time-between-Tops requirement for true Double Top Reversals, these formationscan seldom be seen to advantage on a daily chart, but here is a good 1946 example in Republic Steel. Note the fivemonths and 20% decline between Tops. This chart contains many interesting lesser technical formations also. The“Broadening” Swings (see Chapter 10) in June and July, as the second Top was made, and the rounding rally inAugust were extremely Bearish in their implications.
Relation of rectangle to Dow Line
The resemblance of this individual stock chart formation, which we have discussed under the name of Rectangle,to the Average formation known to Dow theorists as a “Line” has doubtless occurred to you. Obviously, theirrationale and forecasting implications are much the same, but true Rectangles with sharply delimited Top (Supply)and Bottom (Demand) boundaries are truly characteristic only of trading in individual issues. Line formations inthe Averages are seldom rigorously defined, with successive Minor Heights forming quite precisely at a certainhorizontal tangent and successive Bottoms at a similarly precise horizontal level. If you will examine the separatecharts of the issues composing an Average at a time when the Average is “making a Line,” you will surely findsome of them showing an irregular uptrend, others showing an irregular downtrend, still others may be formingTriangles, and a few may be constructing Rectangles, or what not, but it is the algebraic sum of all these more orless divergent pictures that makes up the Average “Line.”
To be sure, there is some tendency on the part of active traders to sell (or buy) stocks when a certain Averagereaches a certain figure, regardless of the statu


, others showing an irregular downtrend, still others may be formingTriangles, and a few may be constructing Rectangles, or what not, but it is the algebraic sum of all these more orless divergent pictures that makes up the Average “Line.”
To be sure, there is some tendency on the part of active traders to sell (or buy) stocks when a certain Averagereaches a certain figure, regardless of the status of individual issues involved. An investment counsel willoccasionally advise his clients, for example, to “sell all speculative holdings when the Dow Industrials reach 500”(EN: or 5,000 or 15,000). But trading commitments based solely on general Average levels are so seldom followedconsistently that they have little effect. (EN10: In the modern era, with the availability of index exchange-tradedfunds, this is no longer true.)
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Figure 9.14 Shares of “AMR,” then selling for around 90, were split 5-for-1 in April 1946, resulting in a quickrally to a new high. But the overall aspect of a Double Top with the high made the previous December wasnevertheless apparent and confirmed when prices broke down through the “valley” level on August 28. Popularbuying brought in by “splits” is usually short-lived and only temporarily distorts the broad picture.
Rectangles from Right-Angle Triangles
In the preceding chapter, we referred to a type of partial “failure” in the development of a Right-Angle Trianglethat necessitates reclassifying the Triangle as a Rectangle. Now that we have examined the latter pattern in detail,we need say little more about this phenomenon, except to note the odds still appear to be somewhat in favor ofultimate breakout in the direction originally implied by the incipient Triangle. The fact there is this slightpresumption, however, certainly does not warrant disregard of an opposite breakout from the rectangularreconstruction.
Double and Triple Tops and Bottoms
To some of the old hands in the Street, our relegation of that good old byword, the Double Top, to a Minor Positionin our array of Reversal Formations may seem almost sacrilegious. It is referred to by name perhaps more oftenthan any other chart pattern by traders who possess a smattering of technical “lingo” but little organizedknowledge of technical facts. True Double Tops and Double Bottoms are exceedingly rare; Triple Forms are evenrarer. Additionally, the true patterns (as distinguished from chart pictures that might mistakenly
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CONTAINER CORPORATION
CNR
111
S’ O ' N ‘ D~*~J 1 F 1 M A 1 M 1 J 1 J A S 1 O~N 1 D~~J F ’ M
Figure 9.15 The Major Reversal Formation in “CNR” at the start of a Primary Advance that reached 54. Note howan attempt at an Ascending Triangle turned into a Double Bottom.
be called such but are really assignable to some one of our other Reversal Formations) can seldom be positivelydetected until prices have gone quite a long way away from them, and can never be foretold or identified as soonas they occur from chart data alone.
But we are getting ahead of our story; we should first define what we are talking about. A Double Top is formedwhen a stock advances to a certain level with, usually, high volume at and approaching the Top figure, then retreatswith diminishing activity, then comes up again to the same (or practically the same) top price as before with somepickup in turnover, but not as much as on the first peak, and then finally turns down a second time for a Major orConsequential Intermediate Decline. A Double Bottom is the same picture upside down; the Triple types makethree Tops (or Bottoms) instead of two.
It is not difficult to skim through a book of several hundred monthly charts and pick out two or three examples ofMajor Double Tops and, perhaps, one or two Double Bottoms. One will find cases in which stocks made twosuccessive Bull Market Peaks several years apart at almost identical levels. Such phenomena stand out, in distantretrospect, like the proverbial sore thumb, which undoubtedly accounts for the undue awe with which the amateurchartist regards them. He neglects, for the moment, to consider the fact a thousand other issues might have donethe same thing but did not—that some of these even acted, for a time, as though they were going to Double Top,but then went on through and higher.
Is there any practical utility for the trader or investor in the Double Top concept? Yes, there is, but it will be easierfor us to formulate it if we first consider what is not a Double Top. Refer back for a moment to the AscendingTriangles and the Rectangles previously studied;
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TRINITY INDUSTRIES INC.
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MAY
U
2330 6 13’2027 4 *11’18’25* 1 * 8’15*22*29’ 6'1____
X D.125 X D.125
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SB
3
DAY
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REVERSAL.
10 iiill
EpTEMBER OCTOBER
LY AUGUST SE - - - - ----
3’20*27 3 *10’17*24’31’ 7 *14’21 '28' 5 ’12*19
Figure 9.16 Although Trinity Industries did not have the well-formed pattern exhibited by our otherrecommendations, we found the high-volume plunge, with the low of the day the third test of the year's low, a verybeguiling technical situation. Basically, it was a Triple Bottom with a One-Day Reversal to get the uptrend started.
when these start to evolve, the majority of the time their first step is the construction of two Tops at an identicallevel with an intervening recession, and with less volume on the second Top than on the first. In the ordinarycourse of events, a third Top will develop there, and ultimately, prices will break through and move on up to stillhigher levels. Thus, we see we must have some rule or criterion to distinguish a true Double Top Reversal Patternfrom the Double Tops that do not imply Reversal when they appear as a part of a Consolidation Area in an uptrend.
Distinguishing characteristics
No absolute and unqualified rule can be laid down to fit all cases involving stocks of different values and marke


rough and move on up to stillhigher levels. Thus, we see we must have some rule or criterion to distinguish a true Double Top Reversal Patternfrom the Double Tops that do not imply Reversal when they appear as a part of a Consolidation Area in an uptrend.
Distinguishing characteristics
No absolute and unqualified rule can be laid down to fit all cases involving stocks of different values and markethabits, but one relative distinction quickly suggests itself when we study these different kinds of chart formations:if two Tops appear at the same level but quite close together in time and with only a Minor Reaction between them,chances are they are part of a Consolidation Area; or, if a Reversal of Trend is to ensue, there will first be morepattern development—more “work” done—around those top ranges. If, on the other hand, there is a long, dull,deep, and more or less rounding reaction after the initial peak has appeared, and then an evident lack of vitalitywhen prices come up again to the previous high, we can at least be suspicious of a Double Top.
How deep is deep, and how long is long? Fair questions, to which, unfortunately, it is impossible to give simple,definite answers, but we can attempt approximations. Thus, if the two Tops are more than a month apart, they arenot likely to belong to the same Consolidation or Congestion Formation. If, in addition, the reaction between thefirst and second high reduces prices by 20% of their top value, the odds swing toward a Double Top
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Figure 9.17 Publicker made its Bull Market high only a few weeks after it was listed on the “big board.” Then itstarted to build a Descending Triangle but pulled up out of it. The final outcome was a Triple Top, completed inAugust (see Figures 8.17 and 9.15).
interpretation. But both of these criteria are arbitrary, and not without exception. There are cases in which the twopeaks have occurred only two or three weeks apart, and others in which the “valley” between them descended onlyabout 15%. Most true Double Tops, however, develop two or three months or more apart. Generally speaking, thetime element is more critical than the depth of the reaction. The greater the time between the two highs, the less theneed of any extensive decline of prices in the interim.
Given the conditions we have specified, namely, two Tops at approximately the same level but more than a monthapart on the chart, with somewhat less activity on the second advance than on the first, and a rather dull orirregular and rounding type of recession between them, we can then be suspicious that a Double Top Reversal hasactually evolved. Should a small Head-and-Shoulders or Descending Triangle start to develop at the second Top, asis frequently the case, we can be on guard, to the extent of protecting long commitments at once with a close stopor by switching to something else with a more promising chart picture.
Yet, even all these signs together are not final and conclusive. The situation can still be saved, and often is. Let ustake a look at what is, presumably, going on behind the scenes to create our chart picture up to this point. The firstTop on relatively high volume was a normal incident and tells us little except that here, for the moment, demandmet with sufficient supply to stop the advance and produce a reaction. That supply may have represented onlytraders' profit-taking, in which event the trend is likely to push on up after a brief setback. But, when the reaction
drifts off lower and lower until it has given up 15% and more of the stock's peak market value, and flattens outwithout any prompt and
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Figure 9.18 In the ordinary course of events, at the time this Bottom Pattern developed in “NG,” consisting, as itdid, of fluctuations for 10 long months within a range of only 1 full point, most traders would pay no attention toit. Certainly, it suggested very little opportunity for short-term profits. On an arithmetically scaled chart, thepattern could hardly be seen. Logarithmic price scaling, however, as we have remarked in an earlier chapter, hasthe great advantage of bringing to light the percentage importance of significant market action at very low pricelevels.
vigorous rebound, it becomes evident that either the demand was pretty well played out on the last advance or theselling represented something more than short-term profit cashing. The questions then are these: did the first highgive evidence of important distribution, and is there much more to meet at the same price range?
Nevertheless, as our chart picture shows, demand did finally come in and absorb enough of the floating supply toturn the trend around. When prices pushed up and began to run into selling again near the level of the first Top,that was to be expected on “psychological” grounds; many quick-turn operators naturally would take profits at theold high (perhaps with the intention of jumping right back in at a still higher price if the old high should beexceeded). Hence, a Minor Hesitation there was quite in order. But selling in sufficient quantity to produce anotherextensive reaction would be quite another matter. We have, by now, established a zone of Supply or Resistance atthe peak levels and a zone of Support or Demand at the Bottom of the valley between. The final and decisivequestion now is this: will the “valley” Support reappear and stop the second decline?
The conclusive definition of a Double Top is given by a negative answer to that last question. If prices, on theirrecession from the second peak, drop through the Bottom level of the valley, a Reversal of Trend from up to downis signaled, which is usually a signal of major importance. Fully confirmed Double Tops seldom appear at turns inthe Intermediate Trend; they are characteristically a Primary Reversal phenomenon. Hence, when you ar


p is given by a negative answer to that last question. If prices, on theirrecession from the second peak, drop through the Bottom level of the valley, a Reversal of Trend from up to downis signaled, which is usually a signal of major importance. Fully confirmed Double Tops seldom appear at turns inthe Intermediate Trend; they are characteristically a Primary Reversal phenomenon. Hence, when you are sure youhave one, do not scorn it. Even though prices may have already receded 20%, the chances are they have very muchfarther to go before they reach bottom.
As to measuring implications, the Double Top affords no formula comparable with what we have attributed toHead-and-Shoulders and Triangle Formations, but it is safe to assume the decline will continue at least as farbelow the valley level as the distance from peak to valley. It may not be so in one interrupted slide; on the contrary,considerable time may be required to carry out the full descent in a series of waves. Pullbacks to the “valley” pricerange, following the first breakthrough, are not uncommon. (Take into account the general rule that a ReversalFormation can be expected to produce no more than a retracement of the trend that preceded it.)
One more point: we have said the Tops need not form at precisely the same level. Use here the 3% rule we havepreviously laid down as a measuring stick for breakouts. A first Top at 50, for example, and a second at 51 1/2would come within this limit. Curiously enough, the second peak often does exceed the first by a fraction. Theimportant points are (1) that buying cannot push prices up into the clear by a decisive margin, and (2) the Supportbelow is subsequently broken.
Double Bottoms
In identifying a Double Bottom, we can apply all of the precepts we have formulated for the Double Top Pattern,but upside down. The differences between the two pictures are just what you might expect them to be, having inmind the characteristic differences between Head-and-Shoulders Tops and Bottoms, for example. Thus, the secondBottom is usually conspicuously dull (little trading volume) and is apt to be quite rounded, whereas the second Topin a Double Top is moderately active and nearly as sharp and “spiky” in contour as the first. The rally up from thesecond Bottom shows an increase in turnover, and volume should pick up to a marked degree as the valley level, ormore properly, in this case, the height between the two Bottoms, is surpassed. Double Bottoms appear just about asfrequently as do Double Tops at Primary Trend Reversals, and Double Bottoms also occur sometimes at the end ofIntermediate Corrections in a Major Uptrend.
If you are familiar with some of the jargon of the Street, it has probably occurred to you that the second low of aDouble Bottom is an example of the market action so often referred to as a “test.” In a sense, that is just what it is—a test or corroboration of the Support (i.e., demand) that stemmed the first decline at the same level. The successof that test is not proved, however—and this is a point to remember—until prices have demonstrated their abilityto rise on increasing volume above the preceding high (the height of the rally between the two Bottoms). Until
such time, there is always the possibility a second test (third bottom) may be necessary, or even a third, and thatone of these will fail with prices then breaking on down into further decline. This thought leads us to our next typeof Reversal Formation.
Triple Tops and Bottoms
Logically, if there are Double Tops, then we might expect that there will also be Triple Tops, which will develop insomewhat similar fashion. The fact is that Reversal Formations, which can only be classed as Triple Tops, dooccur, but they are few and far between. Many patterns evolve at an important turn from up to down in the trendthat contains three Top points, but most fall more readily into the category of Rectangles. For that matter, anyHead-and-Shoulders Formation, particularly if it be rather “flat” with the head not extending much above the levelof the two shoulders, might be called a sort of Triple Top.
The true Triple Top (as distinct, that is, from other types of three-peak formations) carries a recognizable familyresemblance to the Double Top. Its Tops are widely spaced and with quite depth and usually rounding reactionsbetween them. Volume is characteristically less on the second advance than on the first, and still less on the third,which often peters out with no appreciable pickup in activity. The three highs need not be spaced quite so far apartas the two that constitute a Double Top, and they need not be equally spaced. Thus, the second Top may occur onlyabout three weeks after the first and the third six weeks or more after the second. Also, the intervening valleysneed not bottom out at exactly the same level; the first may be shallower than the second and vice versa. Also, thethree highs may not come at precisely the same price; our 3% tolerance rule is again useful here. Yet, despite allthese permissible variations, there should be, and generally is, something suspiciously familiar about the overallpicture, something that immediately suggests the possibility of a Triple Top to the experienced chartist.
The conclusive test, however, is a decline from the third Top that breaks prices down through the level of the valleyfloor (the lower one, if the two valleys form at different levels). Not until that has occurred can a Triple Top beregarded as confirmed and actually in effect; so long as demand persists at the valley price range, the trend can beturned up again. Only in those cases in which activity is conspicuously lacking on the third peak and then begins toshow Bearish characteristics by accelerating on the ensuing decline is one justified in “jumping the gun.”
Note this formation qualifies as a Triple Bottom in every detail—spacing between Bottoms, extent in percent ofintervening rallies, volume. Of course, its completion in Octob


n beturned up again. Only in those cases in which activity is conspicuously lacking on the third peak and then begins toshow Bearish characteristics by accelerating on the ensuing decline is one justified in “jumping the gun.”
Note this formation qualifies as a Triple Bottom in every detail—spacing between Bottoms, extent in percent ofintervening rallies, volume. Of course, its completion in October 1942 did not necessarily forecast that “NG”would climb to 33, as it ultimately did. But the fact that many other stocks were making sound Major BottomFormations at higher price levels at the same time certainly warranted the conclusion that “NG” was on its way up,and that it was a bargain at 5.
Triple Bottoms are simply Triple Tops turned upside down, with the same qualifications noted when discussingDouble Bottoms. The third low should always be attended by small volume, and the rise therefrom must show adecided increase in turnover and carry prices decisively above the Tops of the rallies that formed between theBottoms. One is never justified in “jumping the gun” on a presumed Triple Bottom Formation unless nearly everyother chart in the book is in an unmistakably Bullish position. The risk of premature buying is expressed in asaying one sometimes hears in the boardrooms to the effect of “a Triple Bottom is always broken.” This is not atrue saying. Once a Triple Bottom has been established and confirmed by the necessary up-side breakout, itseldomly fails—it almost always produces an advance of distinctly worthwhile proportions. But an uncompleted“possible” Triple Bottom chart picture must be regarded as treacherous. Stick to the breakout rule and you will besafe.
Triple Tops are sometimes referred to as “W” Patterns because of their occasional resemblance to that capital letteron the chart. There is a sort of hybrid between the Double and Triple Top, in which the middle one of the threeTops does not attain the height of the first and third, and thus, even more strikingly resembles a “W.” For the samereason, Double Tops are sometimes called “M” Formations.
Because the elements in Double and Triple patterns are normally spaced well apart in time, they are often easier todetect and appreciate on a weekly chart than on a daily. Monthly graphs disclose numbers of widely spread Doubleand Triple Bottoms but, on the other hand, are too coarse to reveal many good Double and Triple Top Patterns.
In our foregoing discussion of the Triple Top, we referred to a sort of intuition that comes with experience andenables a technical analyst to recognize the potentialities for Reversal of a certain chart development, sometimeslong before it has reached a conclusive stage. This is a not uncommon talent, but it is one that is seldom attainedexcept through searching study and long experience (in which the latter usually involves a few expensivemistakes). The reader of this book need not despair of acquiring “chart sense” and without undue cost—if he willconcentrate on his study, watch, check, and double-check every new development on his charts, and “keep score”on himself.
It has been said that chart interpretation is not a science but an art. It is not an exact science, to be sure, because ithas no rules to which there are not exceptions. Its finer points defy expression in rule or precept. It requiresjudgment in appraisal of many factors, some of which may seem, at times, to conflict radically with others. But tocall it an art, which implies the need for genius, or at least for a high degree of native talent, is certainly improper.Say, rather, that it demands skill, but a skill that can be acquired by anyone of ordinary intelligence.
chapter ten
Other Reversal phenomena
We have considered so far eight classes of chart patterns that appear at more or less important Reversals ofdirection in the trend of prices. They are as follows:
1. The Head-and-Shoulders
2. Multiple or Complex Head-and-Shoulders
3. Rounding Turns
4. Symmetrical Triangles
5. Right-Angle Triangles
6. Rectangles
7. Double and Triple Tops and Bottoms
8. One-Day Reversal
Of these, numbers 1, 2, 3, and 7 develop most often at Major Turns, whereas numbers 4, 5, and 6 occurmore frequently at Intermediate Stages. Numbers 1, 2, 3, and 5 give indication before they are completedas to which way the price trend is likely to proceed from them. Numbers 4 and 6 give no such indicationand, as we have seen, are rather more apt to signal Consolidation or Continuation than Reversal. But all ofthem can, and on occasion do, appear at both Major Tops or Bottoms. EN: Number 8 appears typicallyafter uncontrollable moves, up and down.
We have yet to take up a few other technical patterns that, because of their limited significance, rarity, ordoubtful utility to long-term traders, have been relegated to the end of our Reversal studies (see Figures10.1 through 10.28).
The Broadening Formations
In concluding our discussion of Triangles in Chapter 8, we mentioned certain types of price congestion ortrading areas that have sometimes been called “Inverted Triangles” because, starting with very narrowfluctuations, they widen out between diverging rather than converging boundary lines. Herein, we havechosen to classify them instead as Broadening Patterns since, except for that inverted resemblance insuperficial appearance, they are quite different in nature and trend implications.
If the Symmetrical Triangle presents a picture of “doubt” awaiting clarification and the Rectangle apicture of controlled “conflict,” the Broadening Formation may be said to suggest a market lackingintelligent sponsorship that is out of control—a situation, usually, in which the “public” is excitedlycommitted and is being whipped around by wild rumors. Note though we say it only suggests such amarket; there are times when it is obvious those are precisely the conditions that create a BroadeningPattern in prices, yet other times when the reasons for it are obscure or undiscoverable. Nevertheless, the


ent sponsorship that is out of control—a situation, usually, in which the “public” is excitedlycommitted and is being whipped around by wild rumors. Note though we say it only suggests such amarket; there are times when it is obvious those are precisely the conditions that create a BroadeningPattern in prices, yet other times when the reasons for it are obscure or undiscoverable. Nevertheless, thevery fact that chart pictures of this type make their appearance, as a rule, only at the end or in the finalphases of a long Bull Market lends credence to our characterization of them.
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Figure 10.1 The Symmetrical type of Broadening Formation, which develops most frequently in the laterand more “excited” stages of a Primary Bull Market, is perfectly exemplified in this Crane Companychart. Note that the Broadening Pattern here started to form in December 1945 after a 10% reaction; if ithad formed on Top of a rally, it would have been suspected as a possible Broadening Top. Nevertheless, itcarried the usual Bearish implications. "CR" topped out at 49% in June.
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Hence, after studying the charts for some 20 years and watching what market action has followed theappearance of Broadening Price Patterns, we have come to the conclusion they are definitely Bearish inpurport—that, while further advance in price is not ruled out, the situation is, nevertheless, approaching adangerous stage. New commitments (purchases) should not be made in a stock that produces a chart of
this type, and any previous commitments should be switched at once or cashed in at the first goodopportunity.
The Broadening Formation may evolve in any one of three forms, comparable, respectively, to invertedSymmetrical, Ascending, or Descending Triangles. The "Symmetrical" type, for example, consists of aseries of price fluctuations across a horizontal axis, with each Minor Top higher and each Minor Bottomlower than its predecessor. The pattern may thus be roughly marked off by two diverging lines, the uppersloping up (from left to right) and the lower sloping down. But these Broadening Patterns arecharacteristically loose and irregular, whereas Symmetrical Triangles are normally regular and compact.The converging boundary lines of a Symmetrical Triangle are clearly defined as a rule, and the Tops andBottoms within the formation tend to fall with fair precision on those boundary lines. In a BroadeningFormation, the rallies and declines usually do not all stop at clearly marked boundary lines.
Volume during Broadening Formations
Another distinction between Triangle and Broadening Formation is in the volume chart. The constructionof a true Triangle is attended, as we have seen, by diminishing activity, starting with high volume on thefirst Minor Reversal that initiates the pattern, but growing less and less as prices fluctuate in ever-smallerwaves out toward the apex. Then activity picks up again after prices have broken out of the Triangle,immediately and sharply if the breakout is through the topside. With the Broadening Formation, on theother hand, trading activity usually remains high and irregular throughout its construction. If it developsafter
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76 Sales 100's
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AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
Figure 10.2 Although this particular Major Reversal Formation appeared on the charts more than 35 yearsago, it is so perfectly developed and on such a large scale that it may well stand as our elementary modelfor an Orthodox Broadening Top. This pattern in Air Reduction is discussed in detail on previous pages.Note also the Symmetrical Triangle Consolidation of July-August, and the examples of Runaway,Breakout, and Exhaustion Gaps (RG, BG, and EG), which will be taken up in Chapter 12.
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an advance, as is almost always the case, the first Minor Reversal that starts the pattern will occur on alarge turnover, but so will the second rally in the pattern, and the third, and high
both price and volume—is, thus, one of wild and apparently “unintelligent” swings.
As can easily be seen, under such circumstances, a true breakout from the area may be difficult, if notimpossible, to detect at the time it eventuates. The volume part of the chart
1946
AMERICAN ROLLING MILLS
28
Sales
100's
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APRIL
MAY
JUNE
JULY
AUGUST
13 20 27 3 10 17 24 31 7 14 21 28
Figure 10.3 A small, but perfect, 1946 Broadening Top that formed at the end of a three-month chartpattern, which also had overall Broadening (and, hence, Bearish) aspects. The five critical points ofReversal are numbered on the chart. The “breakout” was registered on August 27. The Pullback Rally thatfollowed immediately was strong, but it still held within normal bounds. Another interesting BroadeningTop of 1946 appears in Figure 33.7.
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4
CONSOLIDATED EDISON ED
1935
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1938
Figure 10.4 When they appear as plain and as compact as this example, Broadening Tops on weeklycharts carry very powerful Reversal indications. The Top of the fifth turn in this formation was capped onthe daily chart by a Head and Shoulders, which was pictured in Figure 6.7. The dashed lines on the abovechart are trendlines—to be discussed in Chapter 14.
kN
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18 Sales 100's
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Figure 10.5 Broadening tendencies that appear on monthly charts, or very wide spread (with Tops five orsix months apart) like the above on weekly charts, should not be regarded as significant technical
formations. Reversal points in a true Broadening Top should not be more than two months apart, as inFigure 10.4.
ASSOCIATED DRY GOODS DG
1945
JA N UARY FEBRUARY MARCH..............APRIL.............MAY.........* JUNE..........
■ 6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 1926 2~9 16 23 30
Figure 10.6 Three successive reactions in "DG" in February-March 1945 made successively lowerBottoms, but the intervening rallies came up to the same high (about 21%), thus forming a RightAngledBroadening Formation with a horizontal Top (Supply) Line. Penetration of this technically important topline on April 16 was a Bullish signal. The flat-topped type of pattern does not necessarily portray aBearish situation.
88
1946
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72
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64
60
PARAMOUNT PICTURES
PX
56 Sales 100's 125 100
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50
25
I...........................mill iiiiini
JANUARY~FEBRUAR
5 12 19 26 2 9 16 23
MARCH
2 9 16'23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
Figure 10.7 The 1946 Top in Paramount Pictures, from which it fell to 46 a year later, was a RightAngledBroadening Formation with a horizontal bottom line that was “cracked” the first week of June, but notdecisively broken until June 20. (This stock was later split 2-for-1.)
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Figure 10.8 Another example of the Flat-Topped type of Broadening Price Pattern that appeared near theend of 1945. “LS” went on up to 63 in 1946. Prices broke out of this formation with a Breakout Gap (G)and another Breakout Gap appeared on December 3. G-G marks an “Island.” See Chapter 12 for Gaps.
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Sales 100's 250
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U. S. STEEL X
1946
AUGUST
4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24' 31 7 14 21 28
Figure 10.9 The 1946 Bull Market Top in U.S. Steel was a three-month Diamond that might also beconstrued as a Head-and-Shoulders.
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AMERICAN BOSCH CORP.
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Figure 10.10 A Diamond (November) that broke out topside and thus functioned as Consolidation ratherthan Reversal.
obviously furnishes no clue, while the very looseness and lack of definition of the price pattern preventthe drawing of any line that surely says, “this far and no farther.” (We are referring now to the“Symmetrical” type only of Broadening Formation.) Once prices have run well away, either up or down,from the pattern area, it becomes plain that a breakout has occurred, but by that time, it may be too late torisk a trade on the situation; the move may already have gone too far. What can we do about BroadeningFormations then? Well,
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Figure 10.11 Diamond Reversal Formations are often easier to detect on weekly than on daily charts.Trace out the price swings and volume in this May-June 1946 Diamond in Shell. Note also the remarkableDescending Triangle that developed from September 1946 to February 1947, and the March Pullback toits apex, another ideal


tions then? Well,
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Figure 10.11 Diamond Reversal Formations are often easier to detect on weekly than on daily charts.Trace out the price swings and volume in this May-June 1946 Diamond in Shell. Note also the remarkableDescending Triangle that developed from September 1946 to February 1947, and the March Pullback toits apex, another ideal place to sell short.
we have already noted 9 times out of 10 they carry Bearish implications. They appear most often at ornear an important topping out of the trend. Hence, it is reasonably safe to assume that prices, when theyfinally break away from the formation, will go down, or if they do go up, will very soon turn around and
come back down again. Therein lies one answer to the problem of what to do about a BroadeningFormation.
In addition, the price action within the formation, in many cases, furnishes an advance indication ofbreakout direction. If the trend is going to break down from the Broadening Area, the last rally within thearea may fail to rise as high as its predecessor, thus breaking the sequence of ever higher Tops within thepattern. Alternatively, if the trend is going to emerge on the topside, the last reaction within the patternmay fail to depress prices as low as the preceding reaction. These “failures” within the pattern occur, aswe have stated, in a majority of all Broadening Formations. Note that one cannot be sure of such asignificant development (what we have referred to above as a failure, for lack of a better descriptivename) until prices go on and out the other side of the formation or, more precisely, have exceeded the lastpreceding move in that direction by a decisive margin (our 3% rule again).
A typical example
No doubt the foregoing paragraph sounds rather complicated. It will be easier to visualize thedevelopment of a “failure” signal if we cite an example using actual price figures. Easier yet, perhaps, ifthe reader will sketch out our example on a scrap of chart paper. Suppose stock XYZ, after advancingsome 30 points on gradually increasing turnover, runs into heavy selling at 62 and reacts to 58. But thereis still plenty of interest in the issue; it stops
Created with TradeStation 2000i by Omega Research© 1999
Figure 10.12 Technicians in the future will look back with amazement at the Top, which put theexclamation point on the Bull 1990s. The most amazing thing being that what was going on at the timewas recognizable and subject to analysis with a ruler (see Resources). The analysis furthermore indicatedthe party was over (or at least the fat lady was in the process of singing). As Edwards noted, theBroadening Top, which had (and has) implications of its own, morphed into a Diamond, which threw off afalse signal, breaking out on the upside, which developed into another triangular-like pattern (could belooked at as ragged triangular or ascending—only bottom line shown here), which after a head fake brokedown, made a modified V-Bottom and returned to the top of what could be looked at as a monsterrectangle. The top horizontal line, drawn in August 2000, stops the 2001 rally cold and from there it is aslippery slide to the tragedy of September 11, 2001. It was obvious that the investor had no business being
long and that trading strategy was in order. Was there any prescience in recognizing the mulish sidewaystrend of the market? None whatsoever. Is all this hindsight? The reader may see for himself by examiningthe record of how this market was analyzed at the time at the edwards-magee.com newsletter archives.
at 58 and then swings up to a new peak at 63. It “churns” there for a day or two and drops back again, thistime to 56% before it is halted by another burst of buying. Its third rally takes it up to 62, where ithesitates and falls back to 59, but it is then picked up again and carried on to 65. (By this time, aBroadening Formation has become evident on the chart.) At 65, there is a great show of trading, followedby another reaction that drops quotations quickly back to 60. Support appears there momentarily andprices fluctuate for three or four days between 60 and 62 and then fall away again, finally to close at 56,with volume running high all through this phase. A fourth rally starts, but now the traders who bought inat 60 on the preceding downswing are frightened and looking for a chance to “get out even,” and theadvance is stifled at that level. Quotations start to slip and soon are down to 55, below the previous patternBottom. When this occurs, the “failure” of the preceding rally is confirmed—its failure, that is, to riseabove 65 and, thus, carry on the Broadening Movement. The decline below 56, by virtue of that failure,may be regarded as a breakout.
If you followed the foregoing example closely, you will have noted there can be (and very often are)Minor Fluctuations inside the pattern that do not affect its outcome. Thus, the rise from 56% to 65 reallyconsisted of three moves, first from 56% to 62, then from 62 back to 59, and, finally, from 59 up to 65.The reaction from 62 had no significance so long
Figure 10.13 Hudson is another stock that ended its Bull Market in 1946 with a Major Diamond, whichalso could be taken as a Complex Head and Shoulders. This formation was plain on the weekly chart but
hard to see on the daily. Note how the Diamond gave a sell signal about 2 points higher than the Head-and-Shoulders. The 14%-17% area at the end of the year, when construed as a weak Rectangle, was barelyfulfilled in February 1947.
as it stopped above 56% and was succeeded by a new rise carrying beyond the previous pattern high,which, in this case, had been 63.
The example just detailed is one of the more common types in which the failure occurs on a rally and thebreakout eventuates on the downside. But it could have been converted into the opposite form if the lastdecline had stopped at 60, and then, instead of fluctuating for a few days between 60 and 62


ucceeded by a new rise carrying beyond the previous pattern high,which, in this case, had been 63.
The example just detailed is one of the more common types in which the failure occurs on a rally and thebreakout eventuates on the downside. But it could have been converted into the opposite form if the lastdecline had stopped at 60, and then, instead of fluctuating for a few days between 60 and 62 and breakingdown again, had pushed right back up and past 65. That action would have given us a failure on a declineand an upside breakout. (The odds would be, however, that the final Top was not far away.)
The Orthodox Broadening Top
There is one particular manifestation—a special case, as the mathematicians might say—of theBroadening Price Formation whose general nature we have discussed in the preceding paragraphs. Thisparticular form appeared at the 1929 Tops of many of the active and popular stocks of that day, but it hasdone so with less frequency at Bull Market highs since 1929, and rarely has done so at high-volume Topspreceding extensive Intermediate Declines, as in 1933 and 1934. It is known to market technicians underthe specific name of Broadening Top, and although it conforms to our general descriptions for allSymmetrical
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Figure 10.14 As U.S. Steel approached the Top of its Secondary Recovery in August 1937, its pricefluctuations tended to grow narrower, between upward sloping but converging boundaries, while volumediminished. This pattern—a Wedge—carried a definitely Bearish message. The entire swing from July tothe end of August was essentially a Rounding Top. The three Gs mark Breakaway Gaps (see Chapter 12),the last (September 7) made as prices broke down through a Support Level (see Chapter 13).
Broadening Price Patterns, it has been so precisely defined, and so often cited in technical writings, thatwe may well take some time to examine it.
The Orthodox Broadening Top has three peaks at successively higher levels with two Bottoms betweenthem, with the second Bottom lower than the first. The assumption has been it is completed and in effectas an important Reversal indication just as soon as the reaction from its third peak carries below the levelof its second Bottom.
Perhaps we can best see what this formation is like if we examine one of the classic patterns thatdeveloped in 1929. Our chart (Figure 10.2) shows the daily market action (price and volume) of AirReduction from July 1 to December 31 of that year. We have numbered from 1 to 5 the significant turningpoints within the Broadening Top that ended that stock's Bull Market in October. A Broadening PricePattern was not detectable until prices had started to move up from the second Minor Low (point 4); bythen 3 had formed above 1 and 4 below 2. New highs at 5 (a and b), followed by the definite downsidebreakout at B (nearly 6% under 4), completed the pattern and, according to the rules, signaled a MajorTrend Reversal. In this case, there can be no doubt as to the importance of the Reversal indication
because, as our chart shows, the price of Air Reduction dropped from above 220 on October 18 to below80 on November 14, just four weeks later, and the final Bottom was not seen until nearly three years laterin 1932.
There are some fine points of this classic example that should be noted. First, a new high, that is, a thirdand higher Top, was made at 5a and the subsequent reaction was halted at 195, well above 4, andsucceeded by renewed advance. This looked like one of the advance notices (“failures”) to which we havereferred on a preceding page, portending an upside breakout. But the example before us will serve toemphasize the warning
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Figure 10.15 An “ideal” Falling Wedge that developed in Loew's in 1936. Note the volume trend therein,which is irregular but generally diminishing. July produced a small Flag (see Chapter 11), and at the endof the year, “LW” went into a Rectangle out of which prices “skyrocketed” to 75.
that we attached thereto—that such an indication is not to be trusted until prices have decisively exceededthe previous Top. At 5b Air Reduction was traded briefly at 223, 2 points, but less than 3% higher than 5a,and the day closed with quotations below 5a. The break on October 24 (to B) took prices more than 3%under the level of 4. Now occurred a development typical of Broadening Tops—a Pullback Rally (to B)retracing about half of the ground lost between the last pattern Top (5b) and the end of the initial breakoutmove (B). Such a recovery (and failure) will be attempted, according to our experience, in at least four outof five Broadening Top Patterns, and it may not fail until it has regained two-thirds of the precedingdecline, although it usually peters out around or even below the halfway mark.
As stated, this is a classic example; there were many others at that time. The very fact that so manyevolved at the 1929 peak, which was followed by history's most disastrous losses, probably accounts forthe extremely Bearish implications market technicians have ascribed to the Broadening Top Formation.We regard it now with somewhat less awe; its measuring implications are probably no greater than thoseof a large, high-volume Head-and-Shoulders, but it is a pattern characteristic of the last stages of aPrimary Uptrend.
The insistence that the third Top (our number 5), when followed by a decline below the second Bottom(our number 4), completes the Reversal Pattern may be regarded, in the light of experience, as setting toostrict a limitation because Broadening Formations do, on occasion, go on to make a fourth and higher T


d-and-Shoulders, but it is a pattern characteristic of the last stages of aPrimary Uptrend.
The insistence that the third Top (our number 5), when followed by a decline below the second Bottom(our number 4), completes the Reversal Pattern may be regarded, in the light of experience, as setting toostrict a limitation because Broadening Formations do, on occasion, go on to make a fourth and higher Top.Yet this rule may be, and usually is, justified by the fact the overall indications are undeniably Bearishand, hence, one should not wait too long to get out. On the other hand, the requirement for a third Topdoes seem to be justified on the score that Major Reversals are seldom completed until at least three
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Figure 10.16 Wedges seldom appear at Major Trend Reversals, but Schenley's Bull high in 1946 wasmade at the end of an eight-month Rising Wedge, plainly seen on its weekly chart. The dashed line at 60marks a Support Level (see Chapter 13) that served to stem the subsequent decline for nine weeks.
attempts have been made to push prices on in the direction of the previous trend. This is the reason whypioneer technical students lumped together many formations under the classification “Five-PointReversals.” The Broadening Top is a Five-Point Reversal (our numbers 1-5) and so it is a Head-and-
Shoulders. A Broadening Top might, in fact, be called a Head-and-Shoulders with a high right shoulderand a down-sloping neckline.
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Figure 10.17 There are many interesting and technically significant features in this 12-month daily chartrecord of “TWA.” Note the extraordinary One-Day Reversal, December 3, which marked its Major Top.Although the next four weeks produced a sort of poorly formed Descending Triangle, the Reversal Daywas the only clear-cut and unmistakable signal to sell. When you study Pennants, turn back to this chartfor its November Pennant. Its long Intermediate Down Trendline was tentatively broken in August 1946,without confirming volume (see Chapter 14). Note that at no time during the decline did a “Buy” Patternappear.
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Figure 10.18 The strong One-Day Reversal that marked Greyhound's 1946 Bull Market high; note theclimax volume. A less conspicuous Reversal Day appeared on August 26. It is suggested the reader goback over all charts in the preceding chapters; he will find many Reversal Days of greater or lesserconsequence. Many gaps (G) were of measuring type (see Chapter 12).
Figure 10.19 Apple, 1987 Reagan Crash. Does this plunge appear to be out of the blue? Not really.Numerous signs are given: break of major trendline; short-term momentum down before the crash in anenvironment of extreme top psychology; then the crash itself, the Panic Selling exhibiting the typicalpattern of short covering; and then further decline.
Why no Broadening Bottoms?
All of the other types of Reversal Formations we have studied thus far can occur as either Tops orBottoms; they can develop at the end of a decline to turn the trend up or at the end of an advance to turnthe trend down. But this does not seem to be true of the Broadening Formation. It has been assumed in thepast that Broadening Bottoms must exist, but the writer has never found a good one in his examination ofthe charts of thousands of individual stocks over many years, and only one or two patterns that bore a
resemblance to it in the charts of the Averages. Apparently, the circumstances that create BroadeningFormations do not exist after a prolonged decline in prices. This would seem to bear out our earliercharacterization of this sort of pattern as suggesting active, excited trading with much public (and, hence,not too well-informed or managed) participation. Such conditions are naturally associated with the finalphases of a Bull Market.
Right-Angled Broadening Formations
Price patterns of the “Inverted Triangle” shape, having a horizontal Top or Bottom boundary, occur aboutas often as the symmetrical type, which is to say, not nearly as often as true Triangles, Rectangles, and soon. In the mid-twentieth century, there were very few of them (EN9: Still scarce in the 2000s). Althoughthe true Right-Angle Triangle with a horizontal top line and up-slanting bottom line is called an AscendingTriangle, just as its counterpart with
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Figure 10.20 The Panic Selling of October 19, 1937, produced a conspicuous Climax Reversal Day innearly all leading stocks, as well as in the Averages. This New York Central chart shows, beside theSelling Climax (SC), its Head-and-Shoulders Recovery Top of July-August and a Consolidation Rectanglethat ended as a Triangle in early October. “CN” made a final Bear Market low the following March at10%. On a logarithmic price scale, its down trendline from August was not broken until June 1938.
a horizontal bottom boundary and a down-slanting top boundary is called a Descending Triangle, wecannot apply these terms to the Inverted or Broadening Forms. Generally speaking, Right-AngledBroadening Formations carry Bearish implications, regardless of which side is horizontal, in nearly thesame degree as the symmetrical manifestations.
Obviously, however, they differ essentially from Symmetrical formations in one respect: a horizontal sideindicates either accumulation or distribution at a fixed price, depending on which side is horizontal.Logically, it follows any decisive break through that horizontal side has immediate forceful significance.Thus, if a Broadening Price Pattern with a flat top boundary develops after a good advance, and if pricesfinally burst up thr


ially from Symmetrical formations in one respect: a horizontal sideindicates either accumulation or distribution at a fixed price, depending on which side is horizontal.Logically, it follows any decisive break through that horizontal side has immediate forceful significance.Thus, if a Broadening Price Pattern with a flat top boundary develops after a good advance, and if pricesfinally burst up through that top line on high volume and close above it to a conclusive extent (roughly3%), then it is safe to assume the preceding uptrend will be resumed and carried on for a worthwhilemove. This does happen, although it is rare. The odds favor the opposite, that is, the eventual victory ofthe forces of distribution that created the horizontal Top and a breakaway into an extensive decline.
Moreover, if an advance is to ensue from a Flat-Topped Broadening Formation, chances are the thirdreaction in the formation will be attended by much diminished trading activity
Figure 10.21 Dow Industrials, 1987 Reagan Crash. Rumors proliferated—ironically, one that Reagan hadAlzheimer's. Proximate cause: professional panic exacerbated by an ill-considered portfolio insurancescheme propagated by academics. Note the authoritative (lower) trendline here (75 days) is broken bymore than 2% (Magee's suggestion) in early September. The broken upper trendline (25 days) would havepulled the ripcord for the more agile trader. Savvy investors were hedging and liquidating throughSeptember, and fund managers panicked in October. According to the Brady Report, Hull Trading Co.bought the bottom on October 20, thus saving American capitalism.
instead of the continued high or irregular volume characteristic of Bearish Broadening Movements; eitherit or the fourth reaction will be halted and reversed above the low point of the preceding reaction. Thisturns the formation into a Consolidation Head-and-Shoulders, a Continuation-of-Trend Pattern, which weshall take up in Chapter 11. The message here for the trader owning a stock whose chart begins to developa Broadening Formation of this type is to watch the third reaction. If it carries below the second andvolume does not fall off to a marked degree, sell out on the next rally. (You can always repurchase thesame stock, if you wish, without much “loss of position” should prices finally and, improbably, recoverand push up through the Top.)
Right-Angled Broadening Formations with horizontal lower boundaries (flat Bottoms) almost alwaysbreak down. Once prices have fallen below the lower boundary line, there is frequently a Pullback Rallyto that line, either in a few days or in two or three weeks, similar to the Pullbacks that so often follow thebreakdown from a Head-and-Shoulders Top.
(Note that the third or fourth rally in a pattern that starts out as a Flat-Bottomed Broadening Formationmay fail to carry prices as high as its predecessor, in which case a Head-and-Shoulders deal will instill. Inother words, every Head-and-Shoulders begins as a Broadening Formation and the statement of thatrelation takes us logically to our next type of Reversal picture.)
The Diamond
The Diamond Reversal Formation might be described either as a more or less Complex Head-and-Shoulders with a V-shaped neckline or as a Broadening Formation which, after two or three “swings,”suddenly reverts into a regular Triangle that is nearly always of the Symmetrical form. So far as theaccompanying volume pattern is concerned, the latter is
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Figure 10.22 The Selling Climax discussed on the preceding pages is typically a one-day phenomenon,and on only one occasion (April 1939) in history has a general market One-Day Reversal signaled thefinal low of a Primary Bear Trend (although many individual stocks evinced a Selling Climax on theircharts in March 1938).
possibly the better description; its name obviously derives from its pictorial resemblance to theconventional diamond shape.
Although it is fairly conspicuous and easily detected when it appears on the charts, the Diamond is not acommon pattern. Since its development requires fairly active markets, it rarely occurs at BottomReversals. Its “natural habitat” is Major Tops and the High-Volume Tops that precede extensiveIntermediate Reactions. Many Multiple Head-and-Shoulders Formations are borderline Diamond cases;that is, they permit the drawing of slightly bent necklines. The reader is cautioned, however, against tryingtoo hard to make Diamonds out of price patterns of the Head-and-Shoulders type. There is a temptation todo so because a V-shaped neckline may promise to give an earlier (and, hence, more profitable) breakoutsignal than the straight neckline of the Head-and-Shoulders. It is much safer to stick to the latter, however,unless the second half of the formation consists of a series of cleancut, converging Minor Fluctuations,which plainly demands definition by converging boundary lines, and unless activity shows some tendencyto diminish during this period as it would in a Triangle.
The Diamond requires little further comment. Our illustrations will suffice to acquaint you with its typicaldetails. It carries a minimum measuring implication that, having studied
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Figure 10.23 A church spire top in Qualcomm. The December gap might be mistaken for a buy signal, asmight be the runaway days, but they are actually hand-engraved invitations to leave the party with nearprogressive stops a hair off the day's low. Also valid is t


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Figure 10.23 A church spire top in Qualcomm. The December gap might be mistaken for a buy signal, asmight be the runaway days, but they are actually hand-engraved invitations to leave the party with nearprogressive stops a hair off the day's low. Also valid is the exit on the Key Reversal on day two after thegap. How does the trader know this is a blow-off and not a signal to pyramid? By the age, length, state,and slope of the market. When trendlines go vertical, blow-off management must be used. The return tothe base of the first runaway day is notification that it is a Bull trap—the first Bull trap. The second Bulltrap is the breakout of the triangle in March. A wonderful chart filled with fin de siecle and fin demillennium lessons.
the Head-and-Shoulders and Triangle formulas, you can probably deduce for yourself. Prices should moveat least as far from the breakout point as the greatest width in points of the pattern from its Top (head) toBottom (V in neckline). This, it must be emphasized, is a minimum rule and subject only to the usualqualification that a Reversal Formation must have something to reverse. Generally, the new trend carriesprices eventually well beyond the minimum measurement.
Wedge Formations
All of the chart formations we have discussed up to this point can and do develop at changes in the MajorTrend of prices; a few of them seldomly occur at any other change than a Major Reversal. We have toconsider three patterns that are ordinarily Minor, or, at most, only Intermediate in their trend implications.They are useful, nevertheless, in trading operations. One of them, the Wedge, we have already alluded to(in Chapter 8) as having some resemblance to the Triangles.
The Wedge is a chart formation in which the price fluctuations are confined within converging straight (orpractically straight) lines but differs from a Triangle in that both boundary lines either slope up or slopedown. In a Symmetrical Triangle, the Top border slants down, whereas the Bottom border slants up. InRight-Angle Triangles, one boundary slopes either up or down, but the other is horizontal. In a RisingWedge, both boundary lines slant up from left to right, but because the two lines converge, the lower mustproject at a steeper angle than the upper. In a Falling Wedge, the opposite is true.
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Figure 10.24 Microsoft. A Key Reversal Day in March. Department of Justice breakaway gaps: runawaygaps, exhaustion gaps. Selling Climax. As usual, further lows are achieved. A cornucopia of chartists'
delights.

Figure 10.25 eBay. As eBay broke its trendline and drifted sideways, it became a good subject for KeyReversal Day trading. Note several instances.
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Figure 10.26 If you cannot deliver groceries electronically what good is the internet? Meg Whitman (acompetent, well, more than competent, CEO) and eBay found a use for it: the biggest flea market everinvented (and growing every day). Every military commander knows the axiom, Exploit Success! andeBay exploits and exploits and exploits. Is there a fundamental lesson here for the technician? Absolutely.Although the technician should be able to take a nameless chart and trade it competently (CEO of his ownship) no real information or data should be ignored. In this case, the real information—that eBay was an800-pound gorilla (or flea)—fit the chart perfectly. So eBay separated itself from a bunch of nags to runlong and hard. Handicappers know to always keep an eye on winning jockeys: Whitman. Ellison atOracle. Moore at Intel. Gates at Microsoft. Jobs at Apple (and Pixar and NEXT and so on ... and so on ..In2005, what is to be done with eBay? Draw a trendline, raise your stops, and sell it if it reverses.
Superficially, one might think because an Ascending Triangle with one horizontal and one up-line is aBullish picture, the Rising Wedge, with both of its pattern lines up, should be even more Bullish. But suchis not the case. Remember, the flat top of an Ascending Triangle signifies a supply of shares beingdistributed at a fixed price; when that supply has been absorbed (and the rising lower boundary lineindicates it will be absorbed), the pressure is off and prices will leap forward. In a Rising Wedge, on theother hand, there is no evident barrier of supply to be vaulted, but rather, a gradual petering out ofinvestment interest. Prices advance, but each new up-wave is feebler than the last. Finally, demand failsentirely and the trend reverses. Thus, a Rising Wedge typifies a situation that is growing progressivelyweaker in the technical sense.
It might be said any advance in prices, no matter what shape it may take on the chart, weakens thetechnical status of the market. Prospective buyers are—or, at least, should be—more reluctant to pay highprices than low, and owners are more willing to sell at high prices than at low; in other words, any sort ofrise tends to increase supply and diminish demand. (Although theoretically true, the preceding statementmust be qualified by the fact that rising prices actually attract rather than discourage public buying.) Thedifference between a Rising Wedge and what might be called a normal Uptrend Channel (of which we
LU (Lucent Tech Inc) 08/26/2006 3:34 PM EDT
Figure 10.27 Lucent. Late twentieth- and early twenty-first-century schizophrenia. Runaway Days,Breakaway Gaps. Maalox is to be prescribed for the investor. Ecstasy for the trader. Reversal Days andshort-term tactics win the day when the subject is insane. An excellent example of fitting the trader to thestock. Wh


ed a normal Uptrend Channel (of which we
LU (Lucent Tech Inc) 08/26/2006 3:34 PM EDT
Figure 10.27 Lucent. Late twentieth- and early twenty-first-century schizophrenia. Runaway Days,Breakaway Gaps. Maalox is to be prescribed for the investor. Ecstasy for the trader. Reversal Days andshort-term tactics win the day when the subject is insane. An excellent example of fitting the trader to thestock. Why would a rational investor own such a stock?
shall have more to say later) is the Wedge sets a sort of limit on the advance. Its converging boundarylines focus on a point near where the advance will halt and reaction will set in.
We can state most of the essential facts about the Up-Pointed Wedge Formation in a few short sentences.It can develop either as a sort of Topping-Out Pattern on a previously existing uptrend or start to formright at the Bottom of a preceding downtrend. It (the Wedge) normally takes more than three weeks tocomplete; a shorter pattern of this shape is nearly always better classified as a Pennant, which we willdiscuss in the next chapter. Prices almost always fluctuate within the Wedge's confines for at least two-thirds of the distance from the base (beginning of convergence) to the apex; in many cases, they rise clearto the apex, and in some, they actually go a short distance beyond, pushing on out at the Top in a last-gasprally before collapsing. Once prices break out of the Wedge downside, they usually waste little time beforedeclining in earnest. The ensuing drop ordinarily retraces all of the ground gained within the Wedge itself,and sometimes more. Trading volume in a Wedge tends to follow the regular Triangle Pattern, diminishinggradually as prices move up toward the apex of the Wedge.
The Falling Wedge
Except for the fact it is pointed down, the Falling Wedge appears in all respects like the rising form justdescribed, except the price trend that follows its completion differs in character. When prices break out ofa Rising Wedge, they usually fall away rapidly, but when they
Figure 10.28 In the caption to Figure 10.27, the editor asked, apparently rhetorically, why a rationalinvestor would own Lucent. The picture here shows what happens when apparently rational investors donot set a stop to protect themselves from irrational volatility. The market knows things investors do notknow, but it will reveal these things to the most basic of investors if he reads the chart. This chart is addedfor the ninth edition to pick up the picture where the eighth left off.
move out of a Falling Wedge, they are more apt to drift sideways or in a dull “Saucering-around”movement before they begin to rise. The Rising Wedge may, therefore, call for quick action to secureprofits, whereas with a Falling Wedge, the trader ordinarily can take his time about making hiscommitment for the ensuing rise.
Both types of wedges should be well defined on the chart. Unless a trend pattern is quite compact withfrequent fluctuations, nicely bounded by lines that clearly converge to a point, and their up (or down) slantis marked, the Wedge construction must be considered doubtful. You will find borderline cases in whichone of the pattern lines so nearly approaches the horizontal in direction that it resembles a Right-AngleTriangle, and the latter would carry quite different implications for future trend development. It is difficultto lay down any hard and fast rules for distinguishing the two. If one boundary line is nearly horizontal, orif the daily closing prices tend to fall at about the same level, then the formation is more safely construedas a Triangle. The reader need not let this problem worry him unduly, as he will rarely be left in doubt forlong after he has acquired a little experience with charts. One soon gets to recognize the characteristic“symptoms” of the different formations and make correct diagnoses almost instinctively.
Wedges on weekly and monthly charts
Most true Wedges are too short-lived (seldom longer than three months) to take on a recognizabledefinition on a monthly chart, but they may be spotted occasionally on the weeklies. Longcontinued, gradual downtrends, when plotted on arithmetic scale, sometimes assume the Wedgeform. Thus, an entire Major Bear Decline on any arithmetic monthly chart may appear like a giantFalling Wedge. This is due to the fact that the up and down fluctuations that compose the MajorSwing, while maintaining about the same extent in percentage, tend to shorten in terms of points(dollars) as prices move from higher to lower levels. Such Major chart patterns are not the trueWedges we have discussed herein. When plotted on semilogarithmic scale, these same moveswould normally show a Parallel or even slightly widening, instead of Converging, Channel.
Rising Wedges common in Bear Market Rallies
As a final note, we might add that the Rising Wedge is a quite characteristic pattern for Bear MarketRallies. It is so typical, in fact, that frequent appearance of Wedges at a time when, after anextensive decline, there is some question as to whether a new Bull Trend is in the making may betaken as evidence that the Primary Trend is still down. When a Major Bear Swing ends in a Head-and-Shoulders Bottom, the last Rising Wedge will often appear as prices rally from the left shoulderto the neckline and just before they break down to the head (final low). A Rising Wedge on anarithmetically scaled weekly chart is almost invariably a Bear Market phenomenon, expressing thediminishing vigor that is the normal property of any reaction against a prevailing Primary Trend.
The One-Day Reversal
We referred in Chapter 6 to a price pattern known as the One-Day Reversal. This particulartechnical Reversal indication, when taken alone, can be accorded only temporary or strong MinorTrend significance. True, it may appear at the very peak of a long advance, forming perhaps on thehigh day of the head in a Head-and-Shoulders Pattern, which will be followed by a long decline,but it can hard


versal
We referred in Chapter 6 to a price pattern known as the One-Day Reversal. This particulartechnical Reversal indication, when taken alone, can be accorded only temporary or strong MinorTrend significance. True, it may appear at the very peak of a long advance, forming perhaps on thehigh day of the head in a Head-and-Shoulders Pattern, which will be followed by a long decline,but it can hardly be credited with forecasting that entire decline; all it really signaled was the turn inthe “head” itself. A One-Day Reversal may just as well occur, for example, at the beginning (thefirst peak) of a Symmetrical Triangle which only Consolidates instead of Reversing the previousuptrend. Even so, as you can see, it warns us of at least temporary exhaustion of Bullish forces.
On the downside, a One-Day Reversal often appears in magnified and conspicuous form at the endof a Panic Sell-Off, in which case it usually is referred to as a Climax Day or Selling Climax. Thismanifestation of it has special significance, which we shall take up later. First, however, just what isa One-Day Reversal?
To begin, it is a day of unusually high volume, exceeding, as a rule, by a notable margin any tradingturnover registered in any one-market session for the past several months. It comes after a fairlylong and steady advance (or a similar decline), on which activity has been increasing gradually.Prices push right ahead from the opening gong as if nothing could stop them. Frequently, even theopening sales are so far beyond the previous day's closing level as to leave a large gap on the chart.(We shall discuss gaps later.) The tape runs late and before the advance (or decline) halts, priceshave been carried as far in an hour or two as three or four days would ordinarily take them. But thehalt does come finally, maybe at the end of the first hour or perhaps not until late in the day. Then
quotations “churn,” registering only fractional changes to and fro, with the tape still “fast” andoften running late by spurts. Suddenly, the trend reverses and prices move just as rapidly in theopposite direction. The session ends with a final burst of activity that puts the price at the closeright back where it started the day. There has been an enormous amount of activity, and quotationsmay have traversed intraday a range of 2% or 3%, but the net change from the previous day at theend of trading is very small.
One-Day Reversals at Tops appear quite often in the charts of individual stocks that are thin(relatively small floating supply of shares), have had an active advance, and have attracted a largepublic following. They rarely develop in the Averages. Selling Climaxes (One-Day Reversals atBottoms), on the other hand, are found conspicuously in the Averages at the end of many abnormalor Panic Declines.
One-Day Reversals, as already stated, do not carry Major Trend implications. The nimble in-and-out trader can capitalize on them—maybe pick up several points if he has funds available andjumps in at the right moment. But, as a rule, the new trend (i.e., the trend at the close of the day)does not carry very far right away; prices usually “work” around in the nearby ranges for some timeand build some sort of area pattern before they move away in a swing of Intermediate proportions.The One-Day Reversal, as a phenomenon that occurs frequently within or at the start of morepregnant technical formations, gives an important clue to probable trend developments. In anyevent, it is an urgent warning to watch closely the chart in which it has appeared to see what patternof price action may follow and be prepared for the worthwhile move when it comes.
The type of false move or shakeout described in Chapter 8 as occurring at the apex end of aSymmetrical Triangle often takes the form of a One-Day Reversal.
The Selling Climax
In the “bad old days” when stocks could be bought by putting up as little as 10% of their cost incash and there were no restrictions on short selling, professional operators could (and tradition saysthey often did) organize Bear Raids to shake out weakly margined holdings. By selling short inquantity at a favorable moment when the “public” had gotten itself pretty well extended on the longside, they could break prices down. Brokers then would send out calls for more margin from their“long” accounts, many of whom could not or would not put it up, with the result of their stocksdumped on the market, which in turn produced further declines. The professionals could then stepin, cover their shorts with a profit, and secure a line of long stock for the next advance. Bear Raidsof this sort were effectively checked by the imposition of the Securities and Exchange Commission(SEC) regulations, but margin calls and forced selling will always exist as a market factor so longas stocks can be bought on margin and whenever prices drop extensively following a spree ofpublic buying.
Most true Selling Climaxes, if not all, have been produced by distress selling such as referred to inthe preceding paragraph. They have come at the end of rapid and comprehensive declines thatexhausted the margin reserves of many speculators and necessitated the dumping of their shares atwhatever the market would bring. This process is progressive—feeding upon itself, so to speak—with each wave of forced sales jeopardizing another lot of margined accounts, until, at last, millionsof shares are tossed overboard, willy-nilly, in a final cleanup. Such is a Selling Climax in which thetotal turnover may exceed any single day's volume during the previous upswing. It is a harvest time
for traders who, having avoided the Bullish infection at the top of the market, have funds in reserveto pick up stocks available at panic prices.
Obviously, a cleanout day or Selling Climax radically reverses the technical condition of themarket, for in its process, shares have passed from weak hands into strong hands at very muchlower prices. The ominous weight of potential selling that