ty was over (or at least the fat lady was in the process of singing). As Edwards noted,
the Broadening Top, which had (and has) implications of its own, morphed into a Diamond, which threw
off a false signal, breaking out on the upside, which developed into another triangular-like pattern
(could be looked at as ragged triangular or ascending—only bottom line shown here), which after a
head fake broke down, made a modified V-Bottom and returned to the top of what could be looked
at as a monster rectangle. The top horizontal line, drawn in August 2000, stops the 2001 rally cold
and from there it is a slippery 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 sideways trend of the market? None whatsoever. Is all this hindsight? The
reader may see for himself by examining the record of how this market was analyzed at the time at
the edwards-magee.com newsletter archives.
130 Technical Analysis of Stock Trends
as it stopped above 56½ 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 the breakout eventuates on the downside. But it could have been converted
into the opposite form if the last decline had stopped at 60, and then, instead of fluctuating
for a few days between 60 and 62 and breaking down again, had pushed right back up and
past 65. That action would have given us a failure on a decline and 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
the Broadening Price Formation whose general nature we have discussed in the preceding
paragraphs. This particular form appeared at the 1929 Tops of many of the active and
popular stocks of that day, but it has done so with less frequency at Bull Market highs
since 1929, and rarely has done so at high-volume Tops preceding extensive Intermediate
Declines, as in 1933 and 1934. It is known to market technicians under the specific name of
Broadening Top, and although it conforms to our general descriptions for all Symmetrical
HUDSON MOTORS HT
1945–1947
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Figure 10.13 Hudson is another stock that ended its Bull Market in 1946 with a Major Diamond,
which also 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 14½–17½ area at the end of the year, when construed as a weak
Rectangle, was barely fulfilled in February 1947 .
131Chapter ten: Other Rever sal phenomena
Broadening Price Patterns, it has been so precisely defined, and so often cited in technical
writings, that we may well take some time to examine it.
The Orthodox Broadening Top has three peaks at successively higher levels with two
Bottoms between them, with the second Bottom lower than the first. The assumption has
been it is completed and in effect as an important Reversal indication just as soon as the
reaction from its third peak carries below the level of its second Bottom.
Perhaps we can best see what this formation is like if we examine one of the classic
patterns that developed in 1929. Our chart (Figure 10.2) shows the daily market action (price
and volume) of Air Reduction from July 1 to December 31 of that year. We have numbered
from 1 to 5 the significant turning points within the Broadening Top that ended that stock’s
Bull Market in October. A Broadening Price Pattern was not detectable until prices had
started to move up from the second Minor Low (point 4); by then 3 had formed above 1 and
4 below 2. New highs at 5 (a and b), followed by the definite downside breakout at B (nearly
6% under 4), completed the pattern and, according to the rules, signaled a Major Trend
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 below 80 on November 14, just four weeks later, and the final Bottom was not seen
until nearly three years later in 1932.
There are some fine points of this classic example that should be noted. First, a new
high, that is, a third and higher Top, was made at 5 a and the subsequent reaction was
halted at 195, well above 4, and succeeded by renewed advance. This looked like one of the
advance notices (“failures”) to which we have referred on a preceding page, portending
an upside breakout. But the example before us will serve to emphasize the warning
U. S. STEEL X 1937
APRILM AY JUNE JULY AUGUST SEPTEMBER
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G G
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31 01 72 41 81 52 22 951 21 92 631 01 72 43 17 14 21 28 41 11 82 5
Figure 10.14 As U.S. Steel approached the Top of its Secondary Recovery in August 1937 , its price
fluctuations tended to grow narrower, between upward sloping but converging boundaries, while
volume diminished. This pattern—a Wedge—carried a definitely Bearish message. The entire swing
from July to the 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).
132 Technical Analysis of Stock Trends
that we attached thereto—that such an indication is not to be trusted until prices have
decisively exceeded the previous Top. At 5 b Air Reduction was traded briefly at 223, 2
points, but less than 3% higher than 5 a, and the day closed with quotations below 5a. The
break on October 24 (to B) took prices more than 3% under the le


t Level
(see Chapter 13).
132 Technical Analysis of Stock Trends
that we attached thereto—that such an indication is not to be trusted until prices have
decisively exceeded the previous Top. At 5 b Air Reduction was traded briefly at 223, 2
points, but less than 3% higher than 5 a, 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 breakout
move (B). Such a recovery (and failure) will be attempted, according to our experience, in
at least four out of five Broadening Top Patterns, and it may not fail until it has regained
two-thirds of the preceding decline, 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 many evolved at the 1929 peak, which was followed by history’s most disastrous
losses, probably accounts for the 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 those of a large, high-volume Head-
and-Shoulders, but it is a pattern characteristic of the last stages of a Primary 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 too strict 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 Bearish and, hence, one should
not wait too long to get out. On the other hand, the requirement for a third Top does seem
to be justified on the score that Major Reversals are seldom completed until at least three
LOEW’S, INC. LW
JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DE CEMBER
1936
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4 11 18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26
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 end of the year, “LW” went into a Rectangle out of which prices “skyrocketed” to 75.
133Chapter ten: Other Rever sal phenomena
attempts have been made to push prices on in the direction of the previous trend. This
is the reason why pioneer technical students lumped together many formations under
the classification “Five-Point Reversals.” 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 shoulder and a down-sloping neckline.
SCHENLEY DISTILLERSS H
1945–1947
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Figure 10.16 Wedges seldom appear at Major Trend Reversals, but Schenley’s Bull high in 1946 was
made at the end of an eight-month Rising Wedge, plainly seen on its weekly chart. The dashed line at
60 marks a Support Level (see Chapter 13) that served to stem the subsequent decline for nine weeks.
134 Technical Analysis of Stock Trends
TRANSCONTINENTAL & WESTERN AIRLINES TWA
1945–1946
RD
OCTOBERN OVEMBER DECEMBER JANU ARYF EBRUARYM ARCH APRILM AY JUNE JULY AUGUST SEPTEMBER
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Figure 10.17 There are many interesting and technically significant features in this 12-month daily
chart record 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 Day was the only clear-cut and unmistakable signal to sell. When you study Pennants, turn
back to this chart for 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” Pattern appear.
GREYHOUND CORP.G
1946RD
G
G
I. U. T.
APRILM AY JUNE JULY AUGUST SEPTEMBER
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61 32 02 74 11 18 25 18 15 22 29 61 32 02 73 10 17 24 31 71 42 12 8
Figure 10.18 The strong One-Day Reversal that marked Greyhound’s 1946 Bull Market high; note the
climax volume. A less conspicuous Reversal Day appeared on August 26. It is suggested the reader
go back over all charts in the preceding chapters; he will find many Reversal Days of greater or lesser
consequence. Many gaps (G) were of measuring type (see Chapter 12).
135Chapter ten: Other Reve rsal phenomena
Why no Broadening Bottoms?
All of the other types of Reversal Formations we have studied thus far can occur as either
Tops or Bottoms; they can develop at the end of a decline to turn the trend up or at the end
of an advance to turn the trend down. But this does not seem to be true of the Broadening
Formation. It has been assumed in the past that Broadening Bottoms must exist, but
the writer has never found a good one in his examination of the 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 Broadening
Formations do not exist after a prolonged decline in prices. This would seem to bear out
our earlier characterization of this sort of pattern as suggesting active, excited trading with
much public (and, hence, not too well-informed or man

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


er 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 Broadening
Formations do not exist after a prolonged decline in prices. This would seem to bear out
our earlier characterization 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 final phases of a Bull Market.
Right-Angled Broadening Formations
Price patterns of the “Inverted Triangle” shape, having a horizontal Top or Bottom boundary,
occur about as often as the symmetrical type, which is to say, not nearly as often as true
Triangles, Rectangles, and so on. In the mid-twentieth century, there were very few of them
(EN9: Still scarce in the 2000s). Although the true Right-Angle Triangle with a horizontal top
line and up-slanting bottom line is called an Ascending Triangle, just as its counterpart with
APPLE COMPUTER INC-(Nasdaq NM) 62.72 –0.03 –0.05 %
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AugS ep OctN ov DecA ug SepO ct NovD ecFebM ar AprM ay JunJ ul87
1998-2004 Prophet Financial Systems, Inc. Terms of use apply.
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 an environment of extreme top psychology; then the crash itself, the Panic Selling exhibiting the
typical pattern of short covering; and then further decline.
136 Technical Analysis of Stock Trends
a horizontal bottom boundary and a down-slanting top boundary is called a Descending
Triangle, we cannot apply these terms to the Inverted or Broadening Forms. Generally
speaking, Right-Angled Broadening Formations carry Bearish implications, regardless of
which side is horizontal, in nearly the same degree as the symmetrical manifestations.
Obviously, however, they differ essentially from Symmetrical formations in one respect:
a horizontal side indicates 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 prices finally burst up through that top
line on high volume and close above it to a conclusive extent (roughly 3%), then it is safe
to assume the preceding uptrend will be resumed and carried on for a worthwhile move.
This does happen, although it is rare. The odds favor the opposite, that is, the eventual
victory of the 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 third reaction in the formation will be attended by much diminished trading activity
NEW YORK CENTRALC N
1937
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
40
35
30
25
20
Sales
100’s
400300
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SC
NL
SS
H
HS S
31 01 72 43 17 14 21 2841 11 82 52 91 62 33 06 13 20 27 41 11 82 5
Figure 10.20 The Panic Selling of October 19, 1937 , produced a conspicuous Climax Reversal Day
in nearly all leading stocks, as well as in the Averages. This New York Central chart shows, beside
the Selling Climax (SC), its Head-and-Shoulders Recovery Top of July–August and a Consolidation
Rectangle that ended as a Triangle in early October. “CN” made a final Bear Market low the following
March at 10½. On a logarithmic price scale, its down trendline from August was not broken until
June 1938.
137Chapter ten: Other Rever sal phenomena
instead of the continued high or irregular volume characteristic of Bearish Broadening
Movements; either it or the fourth reaction will be halted and reversed above the low point
of the preceding reaction. This turns the formation into a Consolidation Head-and-Shoulders,
a Continuation-of-Trend Pattern, which we shall take up in Chapter 11. The message here
for the trader owning a stock whose chart begins to develop a Broadening Formation of
this type is to watch the third reaction. If it carries below the second and volume does not
fall off to a marked degree, sell out on the next rally. (You can always repurchase the same
stock, if you wish, without much “loss of position” should prices finally and, improbably,
recover and push up through the Top.)
Right-Angled Broadening Formations with horizontal lower boundaries (flat Bottoms)
almost always break down. Once prices have fallen below the lower boundary line, there is
frequently a Pullback Rally to that line, either in a few days or in two or three weeks, similar
to the Pullbacks that so often follow the breakdown from a Head-and-Shoulders Top.
(Note that the third or fourth rally in a pattern that starts out as a Flat-Bottomed
Broadening Formation may fail to carry prices as high as its predecessor, in which case a
Head-and-Shoulders deal will instill. In other words, every Head-and-Shoulders begins as
a Broadening Formation and the statement of that relation 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 the accompanying volume pattern is concerned, the latter is
$INDUA LAST-Daily 12/24/1987 C = 1998 .67 –9000 .74 –81 .82% O = 10039 .58 H = 10204 .03 L = 10029 .96 V = 1181488000
Created with TradeStation www.TradeStation .com
Volume 108803664.00
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r is
$INDUA LAST-Daily 12/24/1987 C = 1998 .67 –9000 .74 –81 .82% O = 10039 .58 H = 10204 .03 L = 10029 .96 V = 1181488000
Created with TradeStation www.TradeStation .com
Volume 108803664.00
2700.00
2600.00
2500.00
2400.00
2300.00
2200.00
2100.00
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3/1987 4/1987 5/1987 6/1987 7/1987 8/1987 9/1987 10/1987 11/1987 12/1987
Figure 10.21 Dow Industrials, 1987 Reagan Crash. Rumors proliferated—ironically, one that Reagan
had Alzheimer’s. Proximate cause: professional panic exacerbated by an ill-considered portfolio
insurance scheme propagated by academics. Note the authoritative (lower) trendline here (75 days)
is broken by more than 2% (Magee’s suggestion) in early September. The broken upper trendline (25
days) would have pulled the ripcord for the more agile trader. Savvy investors were hedging and
liquidating through September, and fund managers panicked in October. According to the Brady
Report, Hull Trading Co. bought the bottom on October 20, thus saving American capitalism.
138 Technical Analysis of Stock Trends
possibly the better description; its name obviously derives from its pictorial resemblance
to the conventional diamond shape.
Although it is fairly conspicuous and easily detected when it appears on the charts, the
Diamond is not a common pattern. Since its development requires fairly active markets, it
rarely occurs at Bottom Reversals. Its “natural habitat” is Major Tops and the High-Volume
Tops that precede extensive Intermediate 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 trying too hard to make Diamonds out
of price patterns of the Head-and-Shoulders type. There is a temptation to do so because
a V-shaped neckline may promise to give an earlier (and, hence, more profitable) breakout
signal 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 clean-
cut, converging Minor Fluctuations, which plainly demands definition by converging
boundary lines, and unless activity shows some tendency to 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 typical details. It carries a minimum measuring implication that, having studied
NATIONAL CASH REGISTER NC
1941–1943
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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
the final low of a Primary Bear Trend (although many individual stocks evinced a Selling Climax
on their charts in March 1938).
139Chapter ten: Other Rever sal phenomena
the Head-and-Shoulders and Triangle formulas, you can probably deduce for yourself.
Prices should move at least as far from the breakout point as the greatest width in points of
the pattern from its Top (head) to Bottom (V in neckline). This, it must be emphasized, is a
minimum rule and subject only to the usual qualification that a Reversal Formation must
have something to reverse. Generally, the new trend carries prices 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 Major Trend of prices; a few of them seldomly occur at any other change
than a Major Reversal. We have to consider 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 (or practically straight) lines but differs from a Triangle in that both
boundary lines either slope up or slope down. In a Symmetrical Triangle, the Top border
slants down, whereas the Bottom border slants up. In Right-Angle Triangles, one boundary
slopes either up or down, but the other is horizontal. In a Rising Wedge, both boundary
lines slant up from left to right, but because the two lines converge, the lower must project
at a steeper angle than the upper. In a Falling Wedge, the opposite is true.
QUALCOMM (58.7500, 62.0625, 58.0000, 59.8750, →1.5625)
Created with Meta Stock www.equis.com
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Figure 10.23 A church spire top in Qualcomm. The December gap might be mistaken for a buy
signal, as might be the runaway days, but they are actually hand-engraved invitations to leave the
party with near progressive stops a hair off the day’s low. Also valid is the exit on the Key Reversal
on day two after the gap. 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 to the base of the first runaway day is notification that it is a Bull trap—the
first Bull trap. The second Bull trap is the breakout of the triangle in March. A wonderful chart filled
with fin de siècle and fin de millennium lessons.
140 Technical Analysis of Stock Trends
MSFT(D) - Daily NASDAQ L = 27.56 +0.35 +1 .29% B = 27.55 A = 27.56 O = 27.67 Hi = 27.73 Lo = 27.44 C = 27.56 V = 57145012
Bull Trap
Runaway Days
Ru


unaway day is notification that it is a Bull trap—the
first Bull trap. The second Bull trap is the breakout of the triangle in March. A wonderful chart filled
with fin de siècle and fin de millennium lessons.
140 Technical Analysis of Stock Trends
MSFT(D) - Daily NASDAQ L = 27.56 +0.35 +1 .29% B = 27.55 A = 27.56 O = 27.67 Hi = 27.73 Lo = 27.44 C = 27.56 V = 57145012
Bull Trap
Runaway Days
Runaway Gap
Exhaustion Gap
Department of Justice Gap
48.00
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Created with TradeStation
Figure 10.24 Microsoft. A Key Reversal Day in March. Department of Justice breakaway gaps:
runaway gaps, exhaustion gaps. Selling Climax. As usual, further lows are achieved. A cornucopia
of chartists’ delights.
EBAY INC-(Nasdaq NM) 39.00 –0.29 –0.74%
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1998–2004 Prophet Financial Systems, Inc. | Terms of use apply.
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Figure 10.25 eBay. As eBay broke its trendline and drifted sideways, it became a good subject for
Key Reversal Day trading. Note several instances.
141Chapter ten: Other Reve rsal phenomena
Superficially, one might think because an Ascending Triangle with one horizontal and
one up-line is a Bullish picture, the Rising Wedge, with both of its pattern lines up, should
be even more Bullish. But such is not the case. Remember, the flat top of an Ascending
Triangle signifies a supply of shares being distributed at a fixed price; when that supply
has been absorbed (and the rising lower boundary line indicates it will be absorbed), the
pressure is off and prices will leap forward. In a Rising Wedge, on the other hand, there is
no evident barrier of supply to be vaulted, but rather, a gradual petering out of investment
interest. Prices advance, but each new up-wave is feebler than the last. Finally, demand fails
entirely and the trend reverses. Thus, a Rising Wedge typifies a situation that is growing
progressively weaker in the technical sense.
It might be said any advance in prices, no matter what shape it may take on the chart,
weakens the technical status of the market. Prospective buyers are—or, at least, should
be—more reluctant to pay high prices than low, and owners are more willing to sell at high
prices than at low; in other words, any sort of rise tends to increase supply and diminish
demand. (Although theoretically true, the preceding statement must be qualified by the
fact that rising prices actually attract rather than discourage public buying.) The difference
between a Rising Wedge and what might be called a normal Uptrend Channel (of which we
EBAY(D) -Weekly NASDAQ L = 35 .14 –0 .24 –0 .68% B = 35 .14 A = 35 .15 O = 35 .15 Hi = 35 .58 Lo = 34 .93 C = 35 .14 V = 11216380
35 .83
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Figure 10.26 If you cannot deliver groceries electronically what good is the internet? Meg Whitman
(a competent, well, more than competent, CEO) and eBay found a use for it: the biggest flea market
ever invented (and growing every day). Every military commander knows the axiom, Exploit
Success! and eBay 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 own ship) no real information or data should be ignored. In this case,
the real information—that eBay was an 800-pound gorilla (or flea)—fit the chart perfectly. So eBay
separated itself from a bunch of nags to run long and hard. Handicappers know to always keep
an eye on winning jockeys: Whitman. Ellison at Oracle. Moore at Intel. Gates at Microsoft. Jobs at
Apple (and Pixar and NEXT and so on … and so on …). In 2005 , what is to be done with eBay? Draw
a trendline, raise your stops, and sell it if it reverses.
142 Technical Analysis of Stock Trends
shall have more to say later) is the Wedge sets a sort of limit on the advance. Its converging
boundary lines 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 form right at the Bottom of a preceding downtrend. It (the Wedge) normally
takes more than three weeks to complete; a shorter pattern of this shape is nearly always
better classified as a Pennant, which we will discuss 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 clear to the apex, and in some,
they actually go a short distance beyond, pushing on out at the Top in a last-gasp rally before
collapsing. Once prices break out of the Wedge downside, they usually waste little time before
declining 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, diminishing gradually 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 just described, except the price trend that follows its completion differs in character.
When prices break out of a Rising Wedge, they usually fall away rapidly, but when they
LU (Lucent Tech Inc)
08/26/2006 3:34 PM EDT
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Figure 10.27 Lucent. Late twentieth- and early twenty-first-century schizophrenia. Runaway Days,
Breakaway Gaps. Maalox is to b


lly fall away rapidly, but when they
LU (Lucent Tech Inc)
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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
and short-term tactics win the day when the subject is insane. An excellent example of fitting the
trader to the stock. Why would a rational investor own such a stock?
143Chapter ten: Other Reve rsal phenomena
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 secure profits, whereas with a Falling Wedge, the trader ordinarily can take
his time about making his commitment for the ensuing rise.
Both types of wedges should be well defined on the chart. Unless a trend pattern is
quite compact with frequent fluctuations, nicely bounded by lines that clearly converge
to a point, and their up (or down) slant is marked, the Wedge construction must be
considered doubtful. You will find borderline cases in which one of the pattern lines so
nearly approaches the horizontal in direction that it resembles a Right-Angle Triangle,
and the latter would carry quite different implications for future trend development. It is
difficult to lay down any hard and fast rules for distinguishing the two. If one boundary
line is nearly horizontal, or if the daily closing prices tend to fall at about the same level, then
the formation is more safely construed as a Triangle. The reader need not let this problem
worry him unduly, as he will rarely be left in doubt for long 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 recognizable definition on a monthly chart, but they may be spotted occasionally on
the weeklies. Long continued, gradual downtrends, when plotted on arithmetic scale,
sometimes assume the Wedge form. Thus, an entire Major Bear Decline on any arithmetic
LU(D) -Weekly NYSE L = 2 .84 –0 .02 –0 .70% B = 0 .00 A = 0 .00 O = 2 .85 Hi = 2 .90 Lo = 2 .81 C = 2 .84 V = 31864800
8th Edition
Fig. 104 .4
3.97
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Created with TradeStation
Figure 10.28 In the caption to Figure 10.27, the editor asked, apparently rhetorically, why a rational
investor would own Lucent. The picture here shows what happens when apparently rational investors
do not set a stop to protect themselves from irrational volatility. The market knows things investors
do not know, but it will reveal these things to the most basic of investors if he reads the chart. This
chart is added for the ninth edition to pick up the picture where the eighth left off.
144 Technical Analysis of Stock Trends
monthly chart may appear like a giant Falling Wedge. This is due to the fact that the up and
down fluctuations that compose the Major Swing, 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 true Wedges we have discussed herein. When
plotted on semilogarithmic scale, these same moves would 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 Market Rallies. It is so typical, in fact, that frequent appearance of Wedges at a time
when, after an extensive decline, there is some question as to whether a new Bull Trend
is in the making may be taken 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 shoulder to the neckline and just before they break down
to the head (final low). A Rising Wedge on an arithmetically scaled weekly chart is almost
invariably a Bear Market phenomenon, expressing the diminishing 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 particular
technical Reversal indication, when taken alone, can be accorded only temporary or strong
Minor Trend significance. True, it may appear at the very peak of a long advance, forming
perhaps on the high 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 in the “head” itself. A One-Day Reversal may just as well
occur, for example, at the beginning (the first peak) of a Symmetrical Triangle which only
Consolidates instead of Reversing the previous uptrend. 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 end of a Panic Sell-Off, in which case it usually is referred to as a Climax Day
or Selling Climax. This manifestation of it has special significance, which we shall take up
later. First, however, just what is a One-Day Reversal?
To begin, it is a day of unusually high volume, exceeding, as a rule, by a notable margin
any trading turnover registered in any one-market session for the past several months. It
comes after a fairly long and steady advance (or a simil


Climax Day
or Selling Climax. This manifestation of it has special significance, which we shall take up
later. First, however, just what is a One-Day Reversal?
To begin, it is a day of unusually high volume, exceeding, as a rule, by a notable margin
any trading turnover registered in any one-market session for the past several months. It
comes after a fairly long 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 the opening 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, prices have been carried as far in an hour or
two as three or four days would ordinarily take them. But the halt 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” and often running
late by spurts. Suddenly, the trend reverses and prices move just as rapidly in the opposite
direction. The session ends with a final burst of activity that puts the price at the close
right back where it started the day. There has been an enormous amount of activity, and
quotations may have traversed intraday a range of 2% or 3%, but the net change from the
previous day at the end of trading is very small.
145Chapter ten: Other Rever sal phenomena
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 large public following. They rarely develop in the Averages. Selling Climaxes
(One-Day Reversals at Bottoms), on the other hand, are found conspicuously in the Averages
at the end of many abnormal or 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 and jumps 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 time and 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 more pregnant technical formations, gives
an important clue to probable trend developments. In any event, it is an urgent warning
to watch closely the chart in which it has appeared to see what pattern of 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 a Symmetrical 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 in cash and there were no restrictions on short selling, professional operators could (and
tradition says they often did) organize Bear Raids to shake out weakly margined holdings.
By selling short in quantity at a favorable moment when the “public” had gotten itself pretty
well extended on the long side, 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 stocks dumped on the market, which in turn produced further
declines. The professionals could then step in, cover their shorts with a profit, and secure a
line of long stock for the next advance. Bear Raids of 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 long as stocks can be bought
on margin and whenever prices drop extensively following a spree of public buying.
Most true Selling Climaxes, if not all, have been produced by distress selling such
as referred to in the preceding paragraph. They have come at the end of rapid and
comprehensive declines that exhausted the margin reserves of many speculators and
necessitated the dumping of their shares at whatever 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, millions of shares are tossed overboard,
willy-nilly, in a final cleanup. Such is a Selling Climax in which the total 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 reserve
to pick up stocks available at panic prices.
Obviously, a cleanout day or Selling Climax radically reverses the technical condition of the
market, for in its process, shares have passed from weak hands into strong hands at very much
lower prices. The ominous weight of potential selling that has been overhanging the market
has been removed. Usually, the Panic has carried quotations (although only temporarily, as a
rule) well below even conservative values based on current business conditions.
A Selling Climax need not be completed, and the Reversal of Trend actually becomes
evident, within a single day. We have classified it as a variety of One-Day Reversal, but some
146 Technical Analysis of Stock Trends
of them have actually spread out over two days, with the decline exhausted and coming
to a halt late on the first day, too near the end of the session to permit much recovery. The
next day sees an extensive rally right from the opening gong, as it is immediately apparent
then, if not late on the preceding day, that there are no more distress offerings.
The all-time per


Analysis of Stock Trends
of them have actually spread out over two days, with the decline exhausted and coming
to a halt late on the first day, too near the end of the session to permit much recovery. The
next day sees an extensive rally right from the opening gong, as it is immediately apparent
then, if not late on the preceding day, that there are no more distress offerings.
The all-time percentage record for Selling Climaxes is held by October 29, 1929. Prices
in terms of the Dow–Jones Industrial Average opened that day practically at their high,
252.38, which was more than 8 points below the previous day’s closing level. Panic selling
flooded the Exchange from the start; before it was over, the Industrial Average had lost 40.05
points. From that low, 212.33, it rallied in the final two hours to 230.07 for a gain of nearly
18 points and went on up another 28 points the following day. This 1929 climax set the all-
time record also for daily turnover: 16,410,000 shares were traded in those five hours, more
than twice as many as in any one day during the entire preceding Bull Market. But the low
level of October 29 was broken a week later, and the bottom of that particular early phase
of the 1929–1932 Bear Market was not reached until November 13. EN: See comments on the
following page on the Reagan Crash of 1987.
The Panic of 1937 ended with a classic Selling Climax on October 19, another “Black
Tuesday” in stock market annals. The Dow Industrials had closed at 125.73 the night before;
prices had already fallen without a rally of consequence from a high of 190 in mid-August,
and margin accounts were nearly all in a precarious situation. The telephones had worked
overtime the preceding day by brokers demanding additional margin, most of which was
not forthcoming. When the Exchange opened on the 19th, quotations hit the toboggan
under a flood of offerings. By 11:30 a.m., with the Industrial Average around 115, the selling
was over and offerings disappeared. An hour later, prices were jumping a point between
sales and the day closed at 126.85, recovering its entire loss. Volume on that climax was
7 ,290,000 shares, double that of any day at the top of the preceding Bull Market. An intraday
high of 141.22 was reached 10 days later, but the Panic Low was subsequently broken on
November 20, 1937 , and that Bear Market finally ended at 98.95 (Dow–Jones Industrials’
closing level) on March 31, 1938.
EN: No wonder investors have instinctual angst on October 19. In 1987, the Bear returned to
create another great Panic—on the very same date. From a high of 2746.65 on August 25 the Dow
bungeed to a low of 1,616.21 on October 20. The actual full-blown panic took place from October
14 (high 2,485.15) to October 20 (low 1,616.21) with October 19 and 20 traversing a range of
547.95 points or 25% of the market at that point. Top to bottom, 1130 points were lost, comprising
a retracement of 41%. The more things change the more they stay the same, as André Malraux is
said to have remarked. Actually, he said it in French, which is more elegant, and expresses the same
idea: Plus ça change, c’est plus la meme chose. Readers should not assume that similar crashes
will not occur in the future.
The foregoing were general market climaxes, a phenomenon that produces (or rather is
produced by) simultaneous selling in practically every actively traded individual issue.
A Climax Bottom, as a matter of fact, appears in an individual stock chart, as a rule, only
as a concomitant of a general market cleanout, although there are cases in which some
particular and completely unexpected piece of bad news affects one certain company and
causes panicky liquidation of its shares alone, terminating with a One-Day Reversal. The
Top Reversal Day, on the other hand, is normally a manifestation of an individual stock
rather than of the general market average.
The two outstanding examples of Selling Climaxes (cited above) and numbers of
others that have appeared at the conclusion of various Panic Sell-offs offered extraordinary
opportunities for a quick turn to the trader who was smart (or lucky) enough to get in at the
bottom. He could cash in a few days later with exceptional profits. Professional operators
147Chapter ten: Other Rever sal phenomena
capitalize on such opportunities. The problem is to recognize the climactic nature of the
selling in time to seize the chance—and that is not as easy as it may have sounded in our
discussion. Just to emphasize the possibilities of error, there was a 30-point drop, followed
by a 30-point recovery, on a turnover of nearly 13 million shares, on October 24, 1929, but
the trader who did not grab his profits within 48 hours never had another chance to get out
even (in terms of the Averages, that is).
But it is not impossible to recognize a Selling Climax, if you have friends in the Street
to keep you informed on the condition of margin accounts and the amount of necessitous
selling to be expected. EN: This information is now not difficult to come by. It is easily obtainable
in the general financial press. The climax comes after a decline approaching Panic proportions.
The day usually opens with a substantial Downside Gap (opening prices considerably below
the previous night’s closing); offerings appear too great to be absorbed; prices collapse;
volume is extreme; the market is exceptionally “broad” with nearly every listed stock
crowding into the record. Then, some time after 11:00 a.m., perhaps not until afternoon,
the selling appears to dry up; a few issues continue to decline while others begin to climb.
Suddenly prices are jumping, which is the time to act. Buy a stock that has been thoroughly
depressed but normally has a good following at all times (e.g., U.S. Steel). Do not hang on
too long; take a reasonable profit as soon as it is available and sell, in any event, whenever
the recovery shows signs of bogging down.
Remember


up; a few issues continue to decline while others begin to climb.
Suddenly prices are jumping, which is the time to act. Buy a stock that has been thoroughly
depressed but normally has a good following at all times (e.g., U.S. Steel). Do not hang on
too long; take a reasonable profit as soon as it is available and sell, in any event, whenever
the recovery shows signs of bogging down.
Remember, a One-Day Reversal is not a dependable Major Trend indicator. Selling
Climaxes do not normally occur at the final Bottoms of Bear Markets—weak holdings
usually have been shaken out long before that stage is reached. Only one Primary
Downtrend in all the record has, in fact, ended with the first Panic Phase, that being the
five-month Bear Market of 1938–1939 that was followed by an equally short Bull Market.
Occasionally, a weekly chart will produce a formation that might be called a “One-
Week Reversal,” in some such conspicuous fashion as is shown above in “NC.” In this
instance, the subsequent rise proves that a Major change in its technical balance occurred
in December 1941. Curiously enough, no other obvious Reversal Pattern appeared on
the weekly chart at this turn in the Primary Trend of “NC.” (Its daily chart showed an
Ascending Triangle.) But this example of a One-Week Reversal is not shown to give the
idea that such phenomena carry important technical indications. On the contrary, most
“Reversal weeks” are followed by very disappointing moves.
One remaining Reversal Formation, the Island Pattern, involves the whole subject of
Gaps, which will be taken up in detail in Chapter 12; thus, we will defer our discussion of
the Island Reversal until then.
Short-term phenomena of potential importance
Very short-term phenomena—of a one-day or a few days’ duration—can sometimes be
indicative of not only short-term direction, but also give hints as to long-term price behavior.
Gaps (see Chapter 12) and One-Day Reversals (this Chapter) belong to this group. Other
short-term patterns of interest include Spikes, Key Reversal Days (sometimes merely called
Reversal Days), and Runaway Days (sometimes called Wide-Ranging Days).
Spikes
On the day it occurs, a Spike is not immediately identifiable for by definition it protrudes
Head-and-Shoulders above days before and after if it is at or near a Top and plunges
much below the surrounding days if it occurs at a Bottom. So after a day that exhibits an
148 Technical Analysis of Stock Trends
unusually wide range, the subsequent days must be observed to discriminate the day from
a Runaway Day. Both are the marks of a far-ranging battle between Bulls and Bears, with
the close giving a clue as to whom the eventual winner will be.
The importance of the spike is highlighted by the following:
 1. The strength and length of the action that preceded it.
 2. The close of the day, whether up on a Bottom or down on a Top.
 3. Its prominence when compared with the days before and after it.
An extremely wide-range day at the end of a long Bull move that closes down after
making unusual new highs might even be construed as a one-day signal. Whether one
trades on it or not would depend on his particular style and taste and the nature of his
trading—long range, scalping, and so on. In fact, the Spike might also be a One-Day
Reversal—that pattern in which an opening gap often is followed by avid buying that
collapses and closes below the opening or at the low of the day. Such action might be
compared with an army pursuing a seemingly defeated enemy only to discover the retreat
was a ruse, then turning and fleeing the other way in a rout.
Turn this description on its head and you have a Spike Bottom. It is not infrequent that
a Spike will be followed by significant price movement in the opposite direction. Figure
10.23 illustrates a modern Spike. Figures 1.1 and 7 .16 show some spikes on Edwards’ and
Magee’s charts.
Runaway Days
A Runaway Day is a day that stands out on the chart as having an unusually long range,
often opening at the low and closing at the high, or vice versa for Bear runaways. Here
the enemy has retreated precipitously, or treacherously, to draw the Bulls into a trap. The
holders and sellers cannot or will not satisfy the eager demand of the buyers and so the
price transverses perhaps two to three times the daily range. Although the agile speculator
may jump on this charging train and realize a nice scalp, it is the following days that
reveal the true significance. Nice consolidation and continued volume will confirm the
day as significant while a tapering of volume and rounding or volatile pullback will call
into question its validity. Although these days may be taken as hair-trigger buy signals (or
sell signals, depending) the return of prices to the low of the Runaway Day will probably
indicate the day was a false signal and a trade in the opposite direction is shaping up.
See Figure 7 .20 for runaways complete with gaps.
One such example is shown in Figure 10.24 in which a bull trap precipitated by a
Runaway Day with a subsequent collapse foretold the 50% decline in Microsoft stock in 2000.
Key Reversal Days
The Key Reversal Day pattern occurs when one sees a new high in an up-move and then
a close below the close of the previous day. As a short-term trading signal it has much to
recommend it, but like every other technical pattern, judgment and timing are required to
profit from it. In a Bull Market, there will be some if not many such interim highs marked
by Key Reversal Days. On the Key Reversal Day at a major or important Top, the trader
shorts the stock on the close with a stop at the high of the reversal day, or slightly above.
He may then exit on the profit side on the occurrence of a Key Reversal Day in the opposite
direction, or on a profit target, or a chart pattern. If adventurous, he may use the trade as
149Chapter ten: Other Reve rsal phenomena
the first of accumulating a position for an ant


important Top, the trader
shorts the stock on the close with a stop at the high of the reversal day, or slightly above.
He may then exit on the profit side on the occurrence of a Key Reversal Day in the opposite
direction, or on a profit target, or a chart pattern. If adventurous, he may use the trade as
149Chapter ten: Other Reve rsal phenomena
the first of accumulating a position for an anticipated Bear Market, adding other positions
as more significant patterns occur and as support levels are broken.
This pattern also is useful in trading range markets, as shown in some internet stocks
from 2000, where trading with Key Reversal Days would have allowed the trader to escape
unscathed in the minicrash of the NASDAQ in early 2000 (see Figures 10.25 and 10.27 for
eBay and Lucent.)
Of all the Very Short-Term Patterns, Gaps, One-Day Reversals, Key Reversal Days,
Spikes, and Runaway Days, it should be noted that the return of prices to the origination
of the formation marks the formation as a false signal and a reason to reverse the trade
direction and look for significant profits.
Clearly, these are the tactics of scalpers and speculators, but it profits the long-term
investor to know and understand them.

151
chapter eleven
Consolidation Formations
An army, which has pushed forward too rapidly, penetrated far into enemy territory,
suffered casualties, and outrun its supplies, must halt eventually, perhaps retreat a bit to
a more easily defended position and dig in, bring up replacements, and establish a strong
base from which later to launch a new attack. In the military parlance with which we have
all become more or less familiar these past few years, that process is known as consolidating
one’s gains. Although it will not do to overwork the analogy, there is much in the action
of the stock market that may be compared to a military campaign. When a stock pushes
ahead (up or down) too fast, it reaches a point at which the forces that produced its move
are exhausted. Then it either reverses its trend (in a Major or Intermediate sense), reacts to
a good Support Level, or Consolidates its position, in some sort of “sideways” chart pattern
composed of Minor Fluctuations, until it has caught up with itself, so to speak, and is ready
to go on again. (For illustrations in this chapter, see Figures 11.1 through 11.18.)
We already have had occasion to refer to Consolidation Formations in our study of
Symmetrical Triangles and Rectangles; exactly how those two chart formations might
either reverse the previous trend or Consolidate it in preparation for its continuation
were shown. We noted about three out of four Symmetrical Triangles will turn out to be
Consolidations rather than Reversals—and Rectangles in about the same proportion. Even
a Flat-Topped Broadening Pattern constructed at the Top of an Intermediate Advance may,
despite its normally Bearish implications, be converted into a Consolidation or Continuation
Formation if its Flat Top is decisively penetrated on the upside.
A Dow Theory Line in the chart of one of the Averages may be a Consolidation or
Reversal Formation, but is rather more likely to be the former than the latter. A Dow Line
is, of course, a sort of loose Rectangle. The fact is almost any sort of sideways price pattern,
such as is often termed a “Congestion” or trading area, provided trading volume tends
to diminish during its construction (and provided it does not show definite broadening
tendencies), usually functions as a Consolidation. But most areas of Trend Consolidation
are fairly well defined, taking on a recognizable pattern.
Flags and Pennants
We do not need to spend more time here on the Triangles and Rectangles; they have been
examined in both their Reversal and Consolidation manifestations in previous chapters.
Our first two formations, which are characteristic of Consolidation only, are the Flags and
Pennants, which are curiously related in certain aspects to Triangles, Rectangles, and
Wedges.
A Flag looks like a flag on the chart. That is, it does if it appears in an uptrend; the
picture is naturally turned upside down in a downtrend. It might be described as a small,
compact parallelogram of price fluctuations, or a tilted Rectangle that slopes back moderately
against the prevailing trend. Let us consider the Uptrend Flag first. It usually forms after
a rapid and fairly extensive advance that produces a nearly vertical, or at least quite steep
price track on the charts. On such moves, volume normally shows a progressive increase
until it reaches a high rate. This volume (since every transaction signifies a sale as well as
152 Technical Analysis of Stock Trends
a purchase) is a warning that many holders of the stock are taking profits. Eventually the
pressure of profit-taking halts the markup. Prices “churn” without further gain and then
react 2 or 3 points on reduced turnover. A new rally occurs but fails to equal the previous
high or attain the previous top volume. Another reaction carries quotations slightly below
the preceding Bottom with further diminution of activity and then follows a series of
similar Minor Fluctuations, each of whose Tops and Bottoms are successively a trifle lower
than its predecessor, and with volume shrinking markedly and constantly as the pattern
develops. On the chart, the initial, steep up-move followed by the compact, sideways, and
slightly down-sloping price Congestion Area, which can be roughly bounded, top and
bottom, by parallel lines, takes on the appearance of a mast (or halyard) with a flag flying
from its peak, hence, the name of the formation.
Sometimes each rally and setback within the Flag takes three or four days, rarely more.
In other cases, prices will skip back and forth between the upper and lower Flag boundaries
in a single day or two, in which event the pattern on the chart consists of an almost solid
block of price range lines. The wider the pattern


yard) with a flag flying
from its peak, hence, the name of the formation.
Sometimes each rally and setback within the Flag takes three or four days, rarely more.
In other cases, prices will skip back and forth between the upper and lower Flag boundaries
in a single day or two, in which event the pattern on the chart consists of an almost solid
block of price range lines. The wider the pattern (from top to bottom) the longer time,
MARTIN – PARRYM RT
1945
APRILM AY JUNE JULY AUGUST SEPTEMBER
G
X D 150
24
22
20
19
18
17
16
15
14
13
12
11
Sales
100’s
125
100
75
50
25
7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29
Figure 11.1 This is a typical and practically perfect Flag, constructed May 12 to June 2, 1945, in
Martin–Parry. Daily turnover diminished to a low rate as prices settled down for exactly three weeks
after their swift advance from 11 to 16 1/2 but held up away from the lower boundary line during
the third week, and then burst out topside with high volume in another straight-line push from 15
to 21. Study this chart again when you come to the Flag-measuring formula later in this chapter. The
dashes at 12 indicate the upper range of an old Resistance Level (see Chapter 13).
153Chapter eleven: Consolid ation Formations
naturally, it should take for each swing within it to be completed. This process of Minor
Fluctuations may continue for only five days to a week if the Flag is narrow, or it can go
on for as long as three weeks. Daily turnover by that time usually will have shrunk to a
relatively low ebb. Then, suddenly, prices will erupt with a new burst of activity from the
end of the Flag and push straight up again in another advance that practically duplicates
the original “mast” atop which the Flag was constructed.
We have spoken of the Flag pattern as being moderately down-slanting, but the very
short and “solid” ones will frequently develop horizontally and look like small squares. (On
rare occasions, a pattern of the Flag type in an uptrend will even slope up a trifle.)
Flags form on steep down moves in much the same manner and with precisely the
same implications as they do in uptrends. Down Flags, of course, tend to slope up—that is,
they simply invert the picture presented by an Up Flag. Trading volume diminishes during
their formation and increases again as prices break down away from them.
The Pennant: a pointed Flag
The only important difference between a Pennant and a Flag is the former is bounded by
converging boundary lines rather than parallel lines. The normal Pennant, in other words,
is a small, compact, sloping Triangle. It slants down when it appears in an uptrend, and it
NATIONAL GYPSUM NG
1945
JUNE JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER
24
22
20
19
18
17
16
15
14
Sales
100’s
12510075
50
25
16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1 8
Figure 11.2 Another typical Flag of three weeks’ duration, August 30 to September 18. This National
Gypsum chart overlaps that in Figure 8.6, showing the false move at the apex of the May–June
Symmetrical Triangle. A buy signal was given when prices pushed up through the old apex level on
August 23 with increased volume. Most interesting is the second Symmetrical Triangle that formed
in October–November, an almost exact replica of the first, but with a downside false move at its apex.
The sharp increase in volume on November 27 left no doubt as to its being a Consolidation rather
than Reversal Pattern. “NG” went on up to 33.
154 Technical Analysis of Stock Trends
slants up in a downtrend. It forms, as a rule, after a rapid advance (or decline), and trading
volume shrinks notably during its construction. In fact, activity tends to diminish even
more rapidly in a Pennant than in a Flag (which we naturally would expect on account of
the progressively shorter fluctuations that compose it), and it may drop almost to nothing
before the Pennant is completed and prices break away from it in a new and rapid move.
The Pennant might also be described as a short, compact Wedge, characterized by
marked diminution of activity. When, as is usual, it slants back against the preceding trend,
its forecasting implications are similar to those of the Wedge, in that prices break out of
it in a direction opposite to its slant. But there are rarer Minor variations of the Pennant,
comparable with those sometimes found in the Flag, in which the price area is very short
and “solid” and practically horizontal (like a Symmetrical Triangle), or in which the slope
is actually slightly in the same direction as the preceding trend instead of against it. When
prices move out of the last-named type, they ordinarily do so, not in a sudden straight-line
breakaway, but rather in an accelerating curve with volume increasing gradually instead
of abruptly at the break; the whole pattern resembles a curved horn that runs to a long,
slender point. Do not let these variations worry you; there is nothing deceptive about their
appearance; their kinship to the more common, normal form is quite apparent.
The measuring formula
The same approximate measuring formula applies to the Pennant as to the Flag. They are
both “Half-Mast” Patterns that ordinarily form after a fairly steady and rapid (steep) price
movement. In applying the measuring rule, go back to the beginning of that immediately
preceding move, to the point at which it broke away from a previous Consolidation or
NASH – KELVINATOR NK 1937
JANUARYF EBRUARYM ARCH APRILM AY JUNE
24
22
20
19
18
17
16
15
Sales
100’s
250
200
150
100
50
2 9 16 23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26
Figure 11.3 Flags of the “Half-Mast” type appear most often in the later and most active stages of a
Primary Advance. The above example (January) was the last Consolidation Formation before “NK’s”
1937 Bull Market Top. Note the Rectangle Reversal Pattern in March and the series of step-down
patterns that followed.
155Chapter eleven


23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26
Figure 11.3 Flags of the “Half-Mast” type appear most often in the later and most active stages of a
Primary Advance. The above example (January) was the last Consolidation Formation before “NK’s”
1937 Bull Market Top. Note the Rectangle Reversal Pattern in March and the series of step-down
patterns that followed.
155Chapter eleven: Consolid ation Formations
Reversal Formation (or through a significant trendline or Resistance Level, with which
later chapters are concerned), a point recognizable as a rule by a quick spurt in activity,
and measure from there to the Minor Reversal level at which the Flag or Pennant started
to form. Then measure the same distance from the point at which prices break out of the
Flag or Pennant, and in the same direction. The level thus arrived at is the minimum
expectation of this type of Consolidation Pattern. As a matter of fact, advances from Flags
VANADIUM CORP.V A
1936–1937
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
44
40
38
36
34
32
30
28
26
24
22
20
19
18
17
16
Sales
100’s
125
100
75
50
25
3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 6 13 20 27
Figure 11.4 Sometimes a stock will make a long series of small Consolidation Patterns in its uptrend,
one following right on the heels of another as successive groups of traders buy in while others take
their profits on previous purchases. In this sequence of step-ups in Vanadium, the Flag Pattern
formed in January 1937 ran a few days over, but the volume breakout of February 4 left no doubt
the trend was still up. A final Top was made at 39 1/2 in March. Note the strong buy signal given
on December 14. Refer to this record again in connection with Support and Resistance studies in
Chapter 13.
156 Technical Analysis of Stock Trends
or Pennants in an uptrend generally go farther (in terms of points or dollars) than the
preceding move, whereas declines may not carry quite so far. Hence, the formula is best
applied on a semilogarithmic chart by measuring actual chart distance rather than by
counting points. You can check this by referring to the examples illustrating this study.
Reliability of Flags and Pennants
These pretty little patterns of Consolidation are justly regarded as among the most
dependable of chart formations, both as to directional and measuring indications. They
do fail occasionally, but almost never without giving warning before the pattern itself is
completed. All that is necessary to guard against such failures is to strictly apply the tests
as to the authenticity of the pattern incorporated in their description. These are as follows:
 1. The Consolidation (Flag or Pennant) should occur after a “straight-line” move.
 2. Activity should diminish appreciably and constantly during the pattern’s construction
and continue to decline until prices break away from it.
 3. Prices should break away (in the expected direction) in not more than four weeks.
A pattern of this type that extends beyond three weeks should be watched with
suspicion.
The matter of practical trading on these particular formations will be taken up in
Section II of this book, which is devoted to tactics. Our second test deserves some further
BRIGGS BG
1936
JANUARYF EBRUARY MARCHA PRIL MAYJ UNE
68
64
60
56
52
48
44
40
Sales
100’s
250
200
150
100
50
4 11 18 25 1 8 15 22 29 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27
Figure 11.5 A Bull Flag in February and a Bear Flag in April 1936, in Briggs. The Top between was
a Symmetrical Triangle. April 30 was a Reversal Day. Prices recovered to 64 1/2 in November 1936,
making there a long-term Major Double Top with this March high. The Support–Resistance Zone at
51–53, indicated by dashed line, was still effective in 1946 (see Chapter 13).
157Chapter eleven: Consoli dation Formations
comment here though. If a pattern begins to develop on the chart—which, so far as the price
picture alone is concerned, qualifies as a Flag or Pennant, but during which trading volume
remains high or obviously irregular instead of diminishing—then the outcome is more
apt to be a quick reaction against, rather than continuation of, the previous trend. In other
words, such high or irregular activity formations are characteristically Minor Reversal
Areas rather than true Consolidations. Watch the volume half of your chart at all times.
Where they may be expected
Flag and Pennant Consolidations are characteristic of fast moves. Therefore, they show up
most frequently in the later, dynamic phase of Bull Markets, after the first accumulation and
the more orderly early markup stages have passed. Hence, the appearance of these patterns
may be taken as a warning that an advance is approaching its final weeks. The rapid phase
of a Major Bear Trend, on the other hand, is its second stage, often characterized by almost
“vertical” Panic Declines. The Flags and Pennants that develop therein are usually short—
completed in a matter of three or four days rather than weeks. In the late months of a Bear
Market, formations that evolve on the charts in the Flag or Pennant similitude often will
run too long (four weeks or more), begin to show an increase in volume on the rallies, and
be succeeded by only dull and limited reactions.
ANACONDA COPPERA
1936–1937
OCTOBER NOVEMBER DECEMBER JANUARY FEBR UARY MARCH
72
68
64
60
56
52
48
44
40
38
36
Sales
100’s
500
400
300
200
100
G G
G
3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 6 13 20 27
Figure 11.6 The down-sloping, Converging Price Formation of November 4 through December 9
might be called either a short Wedge or a Pennant. Note the small Flag in October; also Runaway
Gaps November 4 and February 19, and the Breakout Gap December 10.
158 Technical Analysis of Stock Trends
In general, it may be said these particular chart patterns are most common (and most
dependable) in uptrends. The appearance, after a Major Decline, of price


ion of November 4 through December 9
might be called either a short Wedge or a Pennant. Note the small Flag in October; also Runaway
Gaps November 4 and February 19, and the Breakout Gap December 10.
158 Technical Analysis of Stock Trends
In general, it may be said these particular chart patterns are most common (and most
dependable) in uptrends. The appearance, after a Major Decline, of price pictures that, at the
start, assume the downtrend Flag or Pennant form must be regarded with caution. Unless
such developments hold strictly to the limitations we have stated above under the heading
of “reliability,” do not trade on them.
Flag pictures on weekly and monthly charts
One of our requisites for a dependable Flag (or Pennant) was it should not take more
than four weeks to complete its pattern and break out in a new move. It stands to reason,
therefore, that a true Flag cannot show up at all on a monthly chart and barely appears
on a weekly chart. You will find price areas on long-range charts, patterns that have taken
8 or 10 weeks to as many months, sometimes a year or two, in their construction, which
assume the shape of a Flag, but do not expect them to function as Flags. Examined in
detail on a daily chart, these same long areas almost always will be found to contain price
formations having entirely different significance. Frequently, what is really a Major Reversal
Area following a long, rapid advance will look something like a Flag when it is condensed
on a monthly chart. So, do not trust such pictures on long-range charts; do not take it for
granted that they represent Consolidation for a new rise; find out what the detailed daily
plotting for the same period says.
The July–August Flag ran for five weeks—too long to be trusted without additional
technical evidence (see point 3 under “Reliability of Flags and Pennants”). The danger in
PACIFIC TINP TC
1944
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
7
6
5
412
Sales
100’s
125
100
75
50
25
8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 30
Figure 11.7 An example (in June 1944) of the brief and compact type of price “Congestion” that can
be classed as a Flag. The advance here started at 5 from a 13-month Symmetrical Triangle of which
only the last two months appear above. The measuring implication of this tiny Flag was not fulfilled
until after prices had undergone a sort of Triangular Consolidation in July.
159Chapter eleven: Consoli dation Formations
such prolonged formations is either when the breakout finally appears it will fail to follow
through, or prices will keep drifting right on down. For the moment—on August 25—it
looked as though this Flag had “gone stale,” but when prices rose above the previous high
on August 27 , with a smart pickup in volume, purchases were obviously safe.
Rectangular Consolidations: an early phase phenomenon
In contrast with Flags and Pennants, which are typically last-stage Bull Market Concomitants,
Consolidations of the Rectangle class are found more often in the earlier phases of Bull
Trend evolution. In Major Bear Moves, Rectangles may develop in the first stage just before
a Panic Decline, or in the last stage preceding a strictly limited final sell-off. The latter
manifestation presumably betokens premature accumulation by interests who feel that
prices have already gone low enough to suit their purposes. (They come out all right, if
they are able to hold on through the remainder of the Bear Swing and long enough for the
next Bull Market to put prices back up again to profitable levels.)
MULLINS MANUFACTURING BM NS 1936
APRILM AY JUNE JULY AUGUST SEPTEMBER
G
28
26
24
22
20
19
18
17
16
15
14
13
12
Sales
100’s
50
40
30
20
10
4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 5 12 19 26
Figure 11.8 Another example of the series of Flag-type Consolidations that may form in a rapid,
third-phase Bull Market Advance. Mullins went from 15 to above 39 in six months in 1936, dropped
back to 31, and then rose again in March 1, 1937 , to its previous high, making a Major Double Top.
(Note that “MNS” was split 2-for-1 in 1937 .)
160 Technical Analysis of Stock Trends
Head-and-Shoulders Consolidations
All our references to the Head-and-Shoulders Formations up to this point (see Chapters
6 and 7) have considered that pattern as typifying a Reversal of Trend, and, in its normal
and common manifestation, that is most definitely the Head-and-Shoulders function. But,
occasionally, prices will go through a series of fluctuations that construct a sort of inverted
Head-and-Shoulders picture, which in turn leads to continuation of the previous trend.
There is no danger of confusing such Continuation or Consolidation Formations with
regular Head-and-Shoulders Reversals because, as stated, they are inverted or abnormal with
respect to the direction of the price trend before their appearance. In other words, one of the
patterns that develops in a rising market will take the form of a Head-and-Shoulders Bottom.
Those that appear in decline assume the appearance of a Head-and-Shoulders Top. By the
time these price formations are completed (left shoulder, head, and right shoulder evident),
there is no question as to their implications. But at the head stage, before the right shoulder
is constructed, there may be—usually is—considerable doubt as to what really is going on.
WYANDOTTE WORSTEDW YO
1945–1946
M
M
G
JANUARYF EBRUARYM ARCH APRILM AY JUNE
48
44
40
38
36
34
32
30
28
26
24
22
Sales
100’s
125
100
75
50
25
22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15
Figure 11.9 The vertical lines marked “M” show how the measuring formula is applied to a Flag
Pattern. Note the first measurement is taken from the level at which the mast leaves the previous
“Congestion” up to the peak of the Flag. This same distance is then measured up from the Flag
breakout. In “WYO,” the formula worked out exactly. Trading commitments should normally have
been


8 25 1 8 15
Figure 11.9 The vertical lines marked “M” show how the measuring formula is applied to a Flag
Pattern. Note the first measurement is taken from the level at which the mast leaves the previous
“Congestion” up to the peak of the Flag. This same distance is then measured up from the Flag
breakout. In “WYO,” the formula worked out exactly. Trading commitments should normally have
been cashed in above 36 on this move. They might then have been reinstated when it became apparent
by April 2 that a Rounding Bottom was completed (note volume) for a new advance.
161Chapter eleven: Consolid ation Formations
The volume pattern in Consolidations of this type does not follow the rule for Reversal
Head and Shoulders. In a downtrend, for example, the Consolidation Formation resembled
in its price contour a Head-and-Shoulders Top, but the attendant volume will diminish
instead of increase on the left shoulder and head as well as on the right shoulder. The same
holds true for the “Bottom” Patterns that develop as Consolidation in an advance market;
however, Breakouts resemble, in all respects, those arising from Reversal Formations.
Head-and-Shoulders Consolidations of the Complex or Multiple type seldom appear
on the charts. Theoretically, they might and should be as easy for the chart technician to
handle as the simple forms.
The formula for determining the probable minimum price move (beyond the neckline)
from a Head-and-Shoulders Reversal Formation was discussed in Chapter 6. To anyone
familiar with the verities of stock market trends and the endless variety of pictures that
the charts can present, it is amazing how accurately that formula works out and how often
the first consequential move away from a Head-and-Shoulders Top or Bottom will carry
through to the point (or a little beyond) implied by the measurement of the formation. But,
the same formula applied to Consolidation Patterns of the Head-and-Shoulders form does
not work out as well. Such patterns are usually quite “flat,” and the ensuing move generally
AMERICAN WOOLEN WY
1946
G
G
JANUARYF EBRUARYM ARCH APRILM AY JUNE
68
64
60
56
52
48
44
40
38
36
34
32
30Sales
100’s
125
100
75
50
25
5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
Figure 11.10 A 1946 chart that delighted technicians contains a perfect “Half-Mast” Pattern in
January, with measuring gaps (G, G) above and below it; a downside Flag in early February (check
measurement); a fine Ascending Triangle at the bottom of this reaction with a Throwback in April,
giving an ideal “buy spot.”
162 Technical Analysis of Stock Trends
extends well beyond the measurement implied thereby, although, in some cases, it may
not go quite as far. Consequently, the Head-and-Shoulders formula cannot be applied to
Consolidation Areas with the assurance that it sets up a definite and dependable objective;
one has to look, in these cases, to a variety of other chart indications to appraise the probable
proportions of the move to follow.
Scallops: repeated Saucers
Our next chart picture differs from the Consolidation Formations previously discussed, in
that it does not constitute a more or less definite area of Congestion or fluctuation to which
one or more critical boundary lines can be affixed. We could, perhaps, take it up as well in a
subsequent chapter under the general heading of normal trend action. Yet it is a pattern so
characteristic of certain types of stocks and certain types of markets, and so nearly related
to the principle of Consolidation for further advance, that it may be better treated here.
When a stock for which there is a large number of shares outstanding, and for which
there is, at all times, a fairly active and “close” market emerges from a long-time Bottom
(as exemplified by the past history of Radio Corporation and Socony-Vacuum), which will
often make a long Major Advance in a series of “Saucers.” These successive patterns, each
of which resembles, in both price and volume action, the Reversal Formation described in
Chapter 7 as a Rounding Bottom, are slightly uptilted, that is, the rising end always carries
the price a little higher than the preceding Top at the beginning of the Saucer. The net gain
accomplished by each Saucering movement will vary from stock to stock, but there seems
MO(D) - Daily NYSE L = 65.41 +0.42 +0.65% B = 0.00 A = 0.00 O = 65.65 Hi = 65.65 Lo = 65.05 C = 65.41 V = 4968500
52 .51
69.00
66.00
65 .41
60.00
56.00
52.00
48.00
45.00
42.00
39.00
S O N D 04 F M A M J J A S O N D 05 F M A M
Created with TradeStation
Figure 11.11 MO. Talk about your technician’s delights. Altria Group throws off some pretty good
delights here: a breakaway gap and run days to the downside, a down flagpole with flag, and pattern
gaps. But they are good pattern gaps and really interesting. Then a triangle complete with a breakaway
and an up flagpole with flag. The non-technician probably is suffering from nausea at this point. It
is a roller coaster that bodes ill for everyone. Additionally note a completely tradable situation for
the alert short-term technician.
163Chapter eleven: Consoli dation Formations
to be a strong tendency for it to amount to about 10%–15% of the price of the issue. The total
reaction from the left-hand lip of each Saucer to its Bottom level is usually a little greater,
from 20% to 30%, and the length (duration) of the Saucers is normally five to seven weeks,
rarely less than three. Thus, the overall advance is slow but steady, in much the same sense
as the progress of the man who eventually got out of the deep well by climbing three steps
for each two that he slipped back.
The charts of stocks that take this sort of course show a picture of strikingly similar
and symmetrical Rising Scallops, one succeeding another with little or no pause between.
Trading activity runs up to a peak at the latter stage of each Scallop, as the previous high is
approached and exceeded


who eventually got out of the deep well by climbing three steps
for each two that he slipped back.
The charts of stocks that take this sort of course show a picture of strikingly similar
and symmetrical Rising Scallops, one succeeding another with little or no pause between.
Trading activity runs up to a peak at the latter stage of each Scallop, as the previous high is
approached and exceeded, then diminishes into dullness as prices curve down and flatten
out at the Bottom of the next Saucer, picking up again as prices curve up into their next rise.
The trading opportunities afforded by stocks of the Saucering habit hardly require
extended comment (although we shall set down some detailed specifications in Section II
of this book). The Bottom level of each Scallop is usually easy to detect by watching price
trend and volume, and so is the topping out at the end. Yet it is curiously a fact that most
“tape watchers” handle such stocks in the wrong way, becoming interested in them and
buying when they show activity (“make a new high on volume”) and neglecting them
entirely when they are in the dull, rounding-out stage of their trends.
AMERICAN LOCOMOTIVE LA
1935
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBERD ECEMBER
28
26
24
22
20
19
18
17
16
15
14
Sales
100’s
50
40
30
20
10
6 13 2 27 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28
Figure 11.12 A Flag (end of November) that seemed for several weeks to have failed completely.
Prices, however, rose quickly to 36 1/4 from their December 23 low, thus finally carrying through
according to formula. Note the Flat-Topped Broadening Formation that started the move.
164 Technical Analysis of Stock Trends
AMERICAN & FOREIGN POWER 2d Pfd AF P 2d Pr
1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
28
26
24
22
Sales
100’s
125
100
75
50
25
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 11.14 A 1945 Head-and-Shoulders Consolidation in which both of the shoulders and the head
took a “Saucer” form. Compare price and volume trends. Prices advanced to 31 1/2 in July, came back
again to 25 1/2 in August, and then shot up to 40 in November.
ANACONDA COPPERA
1936
S S
H
JULY AUGUSTS EPTEMBER OCTOBERN OVEMBERD ECEMBER
52
48
44
40
38
36
34
32
Sales
100’s
500
400
300
200
100
4 11 18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26
Figure 11.13 Typical of the form that Head-and-Shoulders Consolidation Patterns may take, both as
to price pattern and volume, was this development in Anaconda. Measuring formula for the small
Flag in October should be applied from the point of breakout through the Head-and-Shoulders
neckline.
165Chapter eleven: Consoli dation Formations
MIAMI COPPERM I
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER
14
13
12
11
10
9
8
Sales
100’s
125
100
75
50
25
XD .25 ¢
23 30 7 14 21 28 4 11 18 25 1 8 15 22 9 6 13 20 27 3 10 17 24 1 8 15
Figure 11.15 Part of a genuine “Scallop” uptrend, typical except for the short duration and relatively
small decline in the October Saucer. The next Scallop, which started in December, dropped prices
back to 12 1/2 in January, and then carried them to 18 1/2 in February. A four-month Saucer, from
February 1945 to June, preceded this chart. Note the position traders found themselves in if they
bought at 9 on the “new high volume” in June.
COMMONWEALTH EDISONC WE
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
36
34
32
30
28
Sales
100’s
125
100
75
50
25
7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29
Figure 11.16 Although the Scalloping habit characteristically appears in low-priced issues, it is
sometimes found in widely held, semi-investment stocks of medium price, such as “CWE.”
166 Technical Analysis of Stock Trends
Many boardroom tape watchers scorn charts with unfortunate consequences to their
capital in the long run. Genuinely expert tape readers—those who are able to show fairly
consistent profits in their trades—are really extremely rare. (EN: For “tape readers” substitute
“day traders,” 99% of whom are unsuccessful.) When you do meet such an individual, you will
find that he either, in effect, “carries charts in his head” or else takes a careful look at the
record before he buys on a ticker showing activity.
As a stock with the Scalloping habit finally works up in price to 15 or so, its pattern
tends to become less regular; it begins to depart from the smooth, narrow Saucer-like curve
of the lower levels. Above 20, it is apt to break away entirely from the Scallop sequence and
produce, from there on, more rapid straight-line advances, interspersed with sharp reactions
and standard types of Consolidation Formations, which are characteristic at all times of
medium- and high-priced issues. (There are exceptions: some high-priced preferred stocks
for which there is always a market, but whose trends depend almost entirely on the gradual
changes in prevailing interest rates and supply of funds for investment, have a persistent
Scallop habit in their Primary Upswings.)
We have named rather specific price levels (15 and 20) in the preceding paragraph, but
price is not the sole factor determining the departure of a stock from a Scallop Trend. The
only safe assumption is that, once such a habit is detectable, it will be continued until the
chart shows a definite divergence from it, and such divergence usually takes first the form
INTERNATIONAL TEL. & TEL. IT 1944
JANUARY FEBR UARY MARCHA PRIL MAY JUNE
19
18
17
16
15
14
13
12
11
Sales
100’s
250
200
150
100
50
8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1
Figure 11.17 This chart shows the last five months of a broad, 13-month Saucer-like Consolidation
in “IT,” which followed its rapid run up from 3 to 16 in late 1943 and early 1944. “IT” is an erratic
actor, and its volume is apt to be particularly deceptive in day-to-day movements. Major Price
Patterns in it, however, are dependable. This final phase of its long Consolidation (distribution


1
Figure 11.17 This chart shows the last five months of a broad, 13-month Saucer-like Consolidation
in “IT,” which followed its rapid run up from 3 to 16 in late 1943 and early 1944. “IT” is an erratic
actor, and its volume is apt to be particularly deceptive in day-to-day movements. Major Price
Patterns in it, however, are dependable. This final phase of its long Consolidation (distribution
and re-accumulation) first took the form of a Rectangle (with a premature breakout) and then an
Ascending Triangle. Its 1945–1946 Bull Market Top was a massive Head-and-Shoulders.
167Chapter eleven: Consolid ation Formations
of a greater-than-wanted advance arising at the end of one of the Saucers. Consequently, if
you have previously taken a position in it at a favorable point (near the Bottom of a Scallop),
you will unlikely be hurt when the stock finally alters its action.
Very low-priced issues may persist in a Scalloping Trend right up to their Major Bull
Tops, and even attempt another Saucer Movement following what turns out to have been
the final high, which attempt then fails to carry out the previous successively higher and
higher pattern. Such failures are not difficult to detect; the change from the previous pattern
appears before any appreciable damage is done to a properly assumed commitment.
FLINTKOTEF O
1941–1943
19
18
17
16
15
14
13
12
11
10
9
Sales
100’s
50
40
30
20
10
ND JF SO ND JF MMMAJ JAO S
Figure 11.18 There are times when a Consolidation Pattern gives the only good technical signal
that a Reversal in an issue’s Primary Trend has actually taken place. Although cases of a Major
Turn, particularly a Bottom, without some sort of recognizable Reversal Formation on the chart
are quite rare, they do occur. This weekly chart of Flintkote illustrates such a phenomenon. A
Bear Market low, from which it rose to 47 in 1946, was made at 8 5/8 in December 1941. Without
developing any important technical foundation on either a daily or weekly chart, its first upswing
took it to 11 7 /8 the following April. From that point, it went into a six-month Symmetrical Triangle
and then broke out topside at the three-quarters stage on increased volume. This action, plus the
fact it immediately thereafter burst up through an old and highly significant Resistance Level at
12, was sufficient to mark it as being in at least a strong Intermediate if not a full Primary Uptrend.
The combination of technical developments illustrated in this chart—a large Consolidation Pattern
forming just under a Major Resistance and then a breakout upside from both—is something to
watch for when it appears a Reversal from a Bear to Bull Trend is due. Resistance Levels will be
discussed in Chapter 13.
168 Technical Analysis of Stock Trends
Modern versus old-style markets
We have mentioned in our discussion of Reversal Formations that some of them have
appeared less frequently in the charts of the 1960s than they did in prior years, and others
more frequently. The same is true of Consolidation Formations. Patterns of the compact,
strictly defined sort such as Rectangles and Right-Angle Triangles are less common now.
Symmetrical Triangles are apt to be somewhat looser than they were in the 1920s and
1930s—not as clean-cut and conspicuous on the charts. Typical profit-taking patterns such
as Flags and Pennants seem to be as common as ever, whereas “normal” trend pictures,
including those formations associated with normal trend development (such as Head-and-
Shoulders, Rounding Turns, and so on), are more common.
The reasons for these changes are fairly apparent; Securities and Exchange Commission
(SEC) regulations, higher margin requirements, greater public sophistication, and a
more conservative—we might better say more pessimistic—approach to the problems of
investment and stock trading generally have all played a part in this evolution. SEC and
Stock Exchange vigilance have done away with the flagrant pool manipulations designed
to take advantage of the “lambs” of former years. Nowadays, there is even very little of the
more “legitimate” sort of syndicate operation planned to facilitate large-scale accumulation
or distribution.
It is still possible for “insiders” to hold back for a limited time, or to prematurely
release announcements of good or bad portent with regard to the affairs of a particular
corporation to serve their personal strategic purposes. But the stock purchase and sales of
officers, directors, and principal owners are now too closely watched to allow a great deal of
“skullduggery.” (Nevertheless, the average investor had better still be a trifle skeptical as to
the probability of any great advance in the market following publication of a good report.)
Collusion between investment advisory services and trading pools has been effectively
outlawed. (It is safe to say it never did exist as flagrantly, even in the 1920s, as many amateur
traders seem to think.) The SEC (with the thorough cooperation of the Stock Exchange)
polices the investment counsel profession thoroughly, constantly, and most effectively. No
well-established investment counsel can afford to indulge in deceptive or collusive practices
even if the desire were there. Most professionals go far beyond the most reasonable needs
to safeguard themselves against any contacts that, however innocent or useful, might be
viewed with suspicion.
The old-time “plunger” has not disappeared entirely, but high margins and regulations
preventing “Bear Raiding” have made present-day stock markets relatively difficult and
unprofitable for him. The out-and-out boardroom gamblers (EN: day traders rushing to and fro
probably exacerbates daily volatility) still come in, although high margins have cramped them
too. In recent years, they have appeared in numbers only in the final stages of Bull Markets.
(EN: Note the day-trading craze that infected the markets in the late 1990s.) Their operations never
did affect the