t substantially penetrated until 1955.
89Chapter eight: Importa nt Reversal Patterns: the Triangles
a two- or three-day “shakeout,” which quickly reverses itself and is followed by a genuine
move in the up direction.
All of the above the reader will have undoubtedly found most disconcerting.
Here is a pretty technical pattern, and it cannot always be trusted. Unfortunately,
Symmetrical Triangles are subject to false moves to a far greater extent than the Head-
and-Shoulders Formation or any of the other formations we have discussed or will
discuss later. Unfortunately, some of these false moves cannot be identified as such until
after a commitment has been risked (although good trading tactics should prevent their
occasioning much more than a trivial loss). Unfortunately again, even a typical shakeout,
such described in the preceding paragraph, may produce a double cross, proceeding right
on down in a genuine decline. No technical chart formation is 100% reliable and, of all our
present subject, is the worst offender.
But most Symmetrical Triangles—lacking an actual statistical count, our experience
would suggest more than two-thirds of them—behave themselves properly, produce no false
signals that cannot be spotted before any damage is done. Upside breakouts on high volume
may be premature in the sense that prices return to pattern and do some more “work” there
before the genuine uptrend gets under way, but they seldom are false. We shall have a little
more to say about false signals in this chapter and more later on that we trust will be helpful
in developing the experience a trader needs to defend himself against them.
SOCONY-VACUUM OILS OV 1941–1943
12
11
10
9
8
7
6
125
100
75
50
25
S O N D J F M A M J J A
S O N D J F M
Sales
100’s
Figure 8.18 The 1942 Bear Market Bottom in Socony–Vacuum was an unusual Head-and-Shoulders
Formation, with the head consisting of an Ascending Triangle. Note the increase in volume on the
breakout from the Triangle in July and again on the break through Head-and-Shoulders neckline
in October.
90 Technical Analysis of Stock Trends
A typical Triangle development
The several actual chart examples of Symmetrical Triangles that illustrate this chapter
will serve, we trust, to give the reader a working acquaintance with their appearance in
various manifestations. Yet it may help to clear up some of the more important points
if we describe in detail just how a typical pattern develops step by step. Let us suppose
you are watching a stock on your charts that has climbed, with only the normal, brief
hesitations and inconsequential reactions, from around 20 to 30, 32, 35, and is still moving
up. (Let’s hope you bought it at 20!) Lower down, its turnover ran between 300 and 600
shares daily, but now, above 30, it has attracted quite a following, and daily volume has
increased to around 1,000. As it approaches 40, activity shoots up to nearly 2,000 shares,
the market “churns” between 39 and 40, and then prices begin to drop. As they fall back,
you (especially if you own the stock) watch it with some concern, but you know it is hardly
likely that it is going to go straight down again to 20; stocks do not act that way. (EN9:
Sometimes they do now, in the twenty-first century.) If the trend of this issue has actually been
reversed, it should, nevertheless, spend some more time and effort around its top levels
and make some sort of a Distribution Pattern.
BATH IRON WORKS BIW1 946
JANUARYF EBRUARYM ARCH APRILM AY JUNE
51 21 92 62 92 3 1629 16 23 30 61 32 02 74 11 18 25 18 15 22 29
38
36
34
32
30
28
26
24
22
125
100
75
50
25
X D S1.00
Sales
100’s
Figure 8.19 Due to a dividend of $1.00 went ex on March 14, the lower boundary of this Descending
Triangle Top in “BIW” had to be dropped 1 point from 33 and redrawn at 32. Despite the added
leeway thus afforded, however, the original pattern implications were quickly carried out. Prices
pulled back three times to the new lower boundary line of this Triangle on April 4, April 16, and May
31—unusual, but explained by the existence of a strong general market uptrend during this period.
Whenever a stock goes ex-dividend during the formation of an Area Pattern of any type, the lines
bounding that pattern should immediately be adjusted to the new value by lowering them a distance
corresponding to the amount of the dividend.
91Chapter eight: Importan t Reversal Patterns: the Triangles
The decline continues for 10 days with the turnover also declining quite appreciably.
By the time prices have worked back to 33, volume is running at about 700 shares daily. At
33, it may pick up again for a single day to 800 or 900 shares, but the reaction stops there,
and after a day or two, prices begin to climb again with little change in their turnover
rate. In eight or nine days, quotations have gotten back into the upper 30s and activity
increases and reaches, say, 1,200 shares on the day 39 is reached. Instead of going on to 40
or beyond, however, a new reaction sets in and prices drift back to 37 . (Perhaps you will find
this growing picture easier to visualize if you pencil its development on a scrap of chart
paper.) Now it is evident that a second Top has formed at 39; you can now draw a tentative
pattern line (there are other names for this, as we shall see later) on your chart across the
two extreme high ranges (not closing prices), which will slant downward from left to right.
So far you have only one Bottom point, so you cannot draw lines from that, but this second
decline brings out even less trading activity than the first. Volume ebbs to 400 shares and
the down move halts at 34; the price track “rounds out” and turns up again; trading is very
dull, but it begins to pick up as 36 is reached.
This action defines a second Minor Bottom and now you can draw a Bottom “tangent,”
an up-slanting line across the extreme low prices registered on the two reactions, the first
at 33


even less trading activity than the first. Volume ebbs to 400 shares and
the down move halts at 34; the price track “rounds out” and turns up again; trading is very
dull, but it begins to pick up as 36 is reached.
This action defines a second Minor Bottom and now you can draw a Bottom “tangent,”
an up-slanting line across the extreme low prices registered on the two reactions, the first
at 33 and the second at 34. Your two pattern lines will converge, meeting near the 36H
REVERE COPPER & BRASSR VB 1946
APRIL MAYJ UNEJ ULYA UGUSTS EPTEMBER
32
30
28
26
24
22
20
19
18
125
100
75
50
25
61 32 02 74 11 25 18 18 15 22 29 61 32 02 73 10 17 24 31 71 42 12 8
Sales
100’s
Figure 8.20 On the basis of “fundamentals,” Revere was an attractive holding in 1946, which may
account for its reluctance to “give up” when the market generally started downhill in earnest in
June of that year. Its fluctuations from mid-May to late August constructed a fine, large Descending
Triangle, in which, however, Bearish Volume Signals had already appeared in late June and on July
23. The breakout came (with a wide Breakaway Gap) on August 27 . Prices clung to the edge of the
pattern for four days and then collapsed. The small formations outlined in April and May are Flags,
to be discussed in Chapter 11.
92 Technical Analysis of Stock Trends
level about four weeks ahead (i.e., to the right) on your chart. You have a Symmetrical
Triangle—but you do not know whether prices are going to fall out of it eventually or shake
off present doubts and push up in a new advance worth following. You can only watch
further developments very closely and be prepared to take whatever action is, in due time,
indicated.
The second rally picks up a little in activity, attains a daily turnover of about 700 shares,
and pushes up to 38 and on for part of a day to 38 3/ 4. This nudges through the previously
drawn pattern line by perhaps a quarter of a point (because each swing is shorter in points
traveled and, accordingly, in duration). But the volume on this Minor Penetration is less
than on the preceding Top (at 39) and buying again ebbs. As the price range line falls back
to 37 and 36, draw a new upper tangent across the first Top at 40 and the last Top at 38½.
There is the suggestion here in this slight “lift” that the balance may be swinging slightly to
the demand side, but do not count on it. Pinpoint accuracy is not to be expected; Triangles
must be allowed some leeway.
On the third reaction, activity dwindles away to the lowest yet. The up-slanting Bottom
boundary will be reached at about the 35 level, if prices continue their present course. It is
worth noting now whether they will come all the way down to it this time because if they
do not—if their recession is halted half a point or so above it—that action would give some
significance to the previous bulge through the upper boundary. But this does not happen;
the drift continues right on down to 35, and now volume is running at the rate of only 200
shares daily, less than it ran in the early stages of the original advance above 20. This is a
critical spot. The price track flattens out momentarily, turns up feebly, yet keeps hitching
WESTINGHOUSE ELECTRIC WX 1936–1937
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
160
152
144
136
128
120
112
104
50
40
30
20
10
31 01 72 43 17 14 21 28 51 21 92 62 91 62 33 06 13 20 27 61 32 72 0
Sales
100’s
Figure 8.21 The 1937 Bull Market Top in Westinghouse was this Descending Triangle, which started
in January and broke on February 15. Prices hung at the lower edge of the Triangle for four days, fell
away, and then pulled back to its lower line on March 4 at the time when the general market Averages
were making their final Bull highs.
93Chapter eight: Importa nt Reversal Patterns: the Triangles
up, crosses 36½, picks up activity, reaches the (new) upper Triangle boundary at 37½ and,
on the next day, punches through on a turnover of 1,500 shares to close at 39 ⅛. This is a
breakout; the doubt is resolved and (barring a false move, unlikely at this point) the trend
is once again up. Note that it was not necessary for prices to surpass the previous high at 40
to produce this signal—that is one of the interesting things about Symmetrical Triangles.
Figure 8.22 A series of Triangles, Symmetrical and Descending, which evolved during the 1929–1932
Bear Market in Hudson Motors. Note that at no time during this decline did anything resembling a
Major Bottom appear. Note also how each Triangle’s measuring implications were carried out before
any temporary halt or consequential rally developed. Follow your daily charts for the proper timing
of your trading operations but keep an eye always on the long-range pictures that evolve on weekly
and monthly projections, so as to maintain your perspective on the Major Trend.
94 Technical Analysis of Stock Trends
Reversal or Consolidation
We started to discuss Symmetrical Triangles as Reversal Patterns, yet our example has
turned out to be, instead, a Consolidation Pattern, that is, only a sort of resting stage in a
continued uptrend. Well, three out of four of these formations will turn out to be just that;
the fourth is the dangerous one (if you own the stock). How would it differ?
The example described might have been a Reversal instead of a Consolidation Formation
any time up to the point of the decisive breakthrough to 39. If it had been a typical Reversal,
the first change probably would have appeared shortly after the final rally started up from
the third Bottom at 35. That rally would have petered out at about 36½, and prices would
have started to drift back again. Then, with the activity increasing slightly, the Bottom
boundary would be penetrated. As quotations dropped to 34, daily volume might mount
to 600 or 700 shares. Any further decline would constitute a down signal, resulting in a
further pickup in turnover and an acceleration in the price decline as

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


t rally would have petered out at about 36½, and prices would
have started to drift back again. Then, with the activity increasing slightly, the Bottom
boundary would be penetrated. As quotations dropped to 34, daily volume might mount
to 600 or 700 shares. Any further decline would constitute a down signal, resulting in a
further pickup in turnover and an acceleration in the price decline as the stop-loss orders
(to be discussed later) spotted under 34 were “touched off.”
Before we leave our typical example, we might make some mention of the post-breakout
reactions or Pullbacks that sometimes occur. As in the case of the Head-and-Shoulders
AMERICAN ROLLING MILLSR M 1941–1943
SO ND JF MA MJ JA SO ND JF M
14
13
12
11
10
9
125
100
75
50
25
Sales
100’s
Figure 8.23 The curious, and in its early stages confusing, Major Bottom Formation that American
Rolling Mills constructed in 1941–1943. The recovery from the “Pearl Harbor Panic” of 1941 ran into
a large Symmetrical Triangle that broke out on the downside in April 1942. The subsequent decline
satisfied the measuring requirements of that Triangle, but it did not carry below the December low.
The rally of June and reaction of August–September built the whole area out into another and larger
Symmetrical Triangle, out of which prices broke on the upside in September. Then the reaction to the
apex of the latter, in December 1942, and the following advance built up into a 15-month Ascending
Triangle, which constituted the final Major Bottom for a trend that carried prices up eventually to 42
in 1946. The low volume on the June and August–September reactions, the increase on the October
markup, and, even more, the January 1943 rise and breakout in February were unmistakably of Major
Bullish implications. It takes time, remember, to build a foundation for a Bull Market.
95Chapter eight: Importan t Reversal Patterns: the Triangles
Formation, the initial breakout move from a Symmetrical Triangle may halt before prices
are carried very far away from the pattern and be followed by a Minor Reaction, usually
lasting only two or three days, which will carry quotations back to the nearest pattern
boundary. Thus, in our first example in which the break, when it came, took our stock
up through the top side to 39 ⅛, the next day might have seen a push on to 40, and then
prices might have backed off again in a couple of days of decreased activity to 37½ or 38.
The up-move would then normally be resumed with greater vigor. Downside breakouts
are sometimes followed in much the same manner by pullbacks to the lower boundary
GOODRICH ( B. F. ) COMPANYG R
1941–1943
SO ND JF MAM JJ AS ON DJ FM
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
250
200
150
100
50
Sales
100’s
Figure 8.24 A beautifully compact Ascending Triangle that turned out to be the Major Bear-to-
Bull Reversal in Goodrich in 1942. The breakout from this pattern (in April) was not signaled by
any extraordinary pickup in activity so far as this weekly record shows (but remember significant
volume detail is often hard to see in a weekly plotting). The Triangle’s measuring implications were
carried out by the first upswing, which reached
18 14 at the end of May. Supply had to be absorbed
in the 18 to 21 range (refer to this chart when you study Support and Resistance in Chapter 13), but a
Major Up Signal was given in September when prices erupted through that zone with a conspicuous
increase in trading volume.
96 Technical Analysis of Stock Trends
of the pattern, after which the decline is resumed with an increase in volume. However,
these post-breakout reactions occur less often with Triangles than they do with Head-and-
Shoulders Patterns.
Another matter we might take up before going on to study the next formation is the
rationale of the Symmetrical Triangle. It may help to fix its characteristics in mind if we try to
deduce what sequence of events might typically produce it. Of course, any effort of this sort
can result only in a gross oversimplification, which will not fit all of the Triangle’s various
manifestations, but it is an interesting mental speculation—and one not without benefit to
our understanding of the general theory of chart formations. Let us turn back again to our
typical example. We started with a stock that ran up rather steadily from around 20 to 40
and then reacted. It is fairly obvious what happened at 40: many investors had substantial
paper profits, approaching 100% at that price. (A “round figure” such as 40, 50, 75, or 100
ebay Inc-(Nasdaq NM) 57.75 0.240 0.417%
63
57
51
45
42
39
36
33
30
27
24
125
100
75
50
25
0
1998–2003 Prophet Financial Systems, Inc. Terms of use apply.
Volume (Millions)
02 A
pr Jul Oct 03 A pr Jul Oct
Figure 8.25 A real-time chart from prophet.net. The volume blowout in July 2002 drew attention to
eBay and the sloping line was drawn at that time. Although the lines are sloppy and the pattern is
ragged, it looked at the time like a Descending Triangle with all its implications. Nevertheless, when
it broke out of the pattern on emphatic volume in October 2003 the handwriting was on the wall.
eBay was for real. So, what’s for real? It could really make money, not just capture free eyeballs, like
its internet brethren and sistern. It actually performed a service of economic benefit to many people,
unlike the internet fantasy follies. See Figure 10.26 for a longer perspective on eBay. Lessons for the
attentive: power of trendlines; alarm-clock nature of unusual volume; not believing any forecast.
Forecast in this case would have been for a downtrend if, as it seemed, the pattern was a descending
triangle.
97Chapter eight: Importa nt Reversal Patterns: the Triangles
is apt to become a sort of mental profit objective and, hence, bring in increased selling.)
Some of them were ready to cash in and did so, temporarily swinging the technical balance
from demand to supply; they sold less freel


Forecast in this case would have been for a downtrend if, as it seemed, the pattern was a descending
triangle.
97Chapter eight: Importa nt Reversal Patterns: the Triangles
is apt to become a sort of mental profit objective and, hence, bring in increased selling.)
Some of them were ready to cash in and did so, temporarily swinging the technical balance
from demand to supply; they sold less freely, of course, as prices receded. Other would-be
investors had been attracted to the stock, but too late to “get aboard” below 30. Unwilling
to “chase” it up to 40, they welcomed the reaction and, by the time prices had dropped back
to 33, enough of them were ready to buy to swing the balance back again to the demand
side of the equation.
Watching the ensuing rally, however, were the owners of the stock who had failed to
grab their profits near 40 on the previous advance and had made up their minds to be a
little less greedy if given a second opportunity. Their offerings began to come in above 37 ,
say, and were sufficiently copious at 39 to stem the advance at that level. Behind the scenes,
we can imagine this process repeated again and again, with new money constantly coming
in and meeting supply from owners increasingly anxious to cinch their profits. Eventually,
the offerings of the latter are all absorbed, or perhaps withdrawn, and then professionals,
as well as hopeful investors, suddenly discover there is no stock ahead on the books and
rush to buy results.
Since the advance (or decline) that follows the completion of a Symmetrical Triangle
usually runs to worthwhile trading proportions (we shall discuss measuring implications
later), there would be an evident advantage to the trader who could tell in advance of the
breakout which way prices were going to move. The odds are, as already stated, the new
move will proceed in the same direction as the one before the Triangle’s formation. These
odds are greatest, of course, in the early stages of either a Primary Bull or Bear Market with
the chances of Reversal increasing as those Major Trends mature. Nevertheless, the charts
of other stocks often furnish valuable collateral evidence; thus, if at the same time you
detect a Symmetrical Triangle in the process of formation in “PDQ,” a majority of your
charts are showing Saucers or Head-and-Shoulders Bottoms or Ascending Triangles or
some other pattern of typically Bullish import, it is a fair assumption that your Symmetrical
Triangle will break out topside. There are times when advance indications of this sort are
strong enough to justify taking a position on it.
The Right-Angle Triangles
We mentioned Ascending Triangles in the preceding paragraph. The Ascending and
Descending are the Bullish and Bearish manifestations, respectively, of our next class of
patterns, the Right-Angle Triangles. In many respects, in most in fact, they perform like their
Symmetrical cousins, but with this very gratifying difference: they give advance notice of
their intentions. Hence, their names, for the supposition always is that prices will ascend
out of the Ascending form and descend from the Descending form.
The Symmetrical Triangles, as we have seen, are constructed of a series of successively
narrower price fluctuations that can be approximately bounded across their Tops by a
down-sloping line and across their Bottoms by an up-sloping line. Right-Angle Triangles
are distinguished by the fact that one of their boundaries is practically horizontal, whereas
the other slants toward it. If the top line is horizontal and the bottom line slopes up to
meet it somewhere out to the right of the chart (at the apex), the Triangle is of the Ascending
persuasion. If the bottom line is horizontal and the top line slopes down, the Triangle is
Descending.
These formations are perfectly logical and easy to explain. The Ascending Triangle, for
instance, pictures in the simplest and most normal form what happens when a growing
demand for a certain stock meets a large block of shares for sale at a fixed price. If the demand
98 Technical Analysis of Stock Trends
continues, the supply being distributed at that price will eventually be entirely absorbed by new
owners looking for still higher levels, and prices will then advance rapidly. A typical Ascending
Pattern starts to develop in much the same way as the “ideal” Symmetrical Triangle previously
described, with an advance in our certain stock from 20 to 40 at which point sufficient supply
suddenly appears on the market to fill the orders of all buyers and produce a reaction. Sensing
the temporary satiation of demand, some owners may dump their holdings on the decline,
but offerings are soon exhausted as prices drop back to, say, 34, and renewed demand then
stimulates a new rally. This runs into supply again at 40, and again, all buyers are accommodated
at that level. The second recession, however, carries quotation down only to 36 before another
up-move develops. But the pool or inside group that is distributing at 40 still has some of its
holdings left to sell, so it may take more time, another backing away and another attack at the
40 line before the supply there is exhausted and the trend can push along up.
A planned distribution
This type of market action evidences a planned campaign by owners of a fairly large
quantity of shares to liquidate at a predetermined price. It contains little of the element of
doubt that we mentioned as characterizing the Symmetrical Pattern. So long as demand
persists, the distributing pool knows it can ultimately cash in its entire line at 40 and need
not sell for less. It is equally apparent, so long as demand keeps coming in at higher and
higher levels that, once the supply at 40 has all been absorbed, the market will advance
rapidly and easily. As soon as prices break out above 40, those who took over the supply
at that figure will feel their judgment has been vindicated and will not be dis


timately cash in its entire line at 40 and need
not sell for less. It is equally apparent, so long as demand keeps coming in at higher and
higher levels that, once the supply at 40 has all been absorbed, the market will advance
rapidly and easily. As soon as prices break out above 40, those who took over the supply
at that figure will feel their judgment has been vindicated and will not be disposed to sell
until they, in turn, can register a good profit.
The crux of the matter is contained in the two preceding sentences. Demand must
continue to come in at higher and higher levels, otherwise, our formation will cease to be
an Ascending Triangle. Plus, the overhead supply must eventually be absorbed, permitting
an upside breakout. If demand begins to falter any time before the Supply Line (horizontal
Top boundary) has been broken through, the ensuing reaction may drop prices down “out of
pattern,” and then the chart technician is faced with the necessity of revising his chart picture.
One might think that such a development, blasting the earlier promise of the chart, would
occur fairly often, but, as a matter of experience, it is surprisingly rare. We say “surprisingly”
because it is obvious that in many cases of Ascending Triangle development, the group selling
creates its Top boundary or Supply Line must believe that level to be just about as high as the
stock has any right to go. As holders of a large enough block to influence the market for several
weeks, sometimes months, their judgment is hardly to be scorned. Yet, once it becomes evident
the lower boundary or Demand Line is slanting up, the odds are certainly somewhere in the
neighborhood of 9–1 that the new buyers will eventually have the best of it.
On occasion, the third reaction or fourth reaction within an Ascending Triangle
Formation will break down through the previously established up-slanting Demand Line
(lower boundary), but it will be halted at the same level as the previous reaction. The pattern
from there on is apt to develop as a Rectangle, a formation to be discussed in our next chapter,
and should be treated as such. (The tactics of trading on Ascending and Descending Triangles,
including protection against the rare cases of collapse, will be taken up in Section II.)
Descending Triangles
Descending Triangles have a horizontal lower boundary or Demand Line and a down-
sloping upper boundary or Supply Line. It is evident they are created by reverse market
99Chapter eight: Important R eversal Patterns: the Triangles
conditions than those of the Ascending Pattern; however, their implications are equally
strong and their failures equally rare. Development of a Descending Formation hinges on
a campaign by a group or syndicate (often an investment trust) (EN9: or Mutual Fund or a
takeover group) to acquire a large block of shares in a certain company at a predetermined
price below the market. Their orders are placed and allowed to stand until executed at that
level. If the successive rallies therefrom, which their buying generates, are stifled by new
supplies of stock for sale at lower and lower levels (thus creating the typical Descending
picture on the chart), orders to buy are eventually all filled and quotations break through
and on down. The mere breaking of the critical line, which many traders have seen
function as a support under the market for a more or less extended period, often shakes
the confidence of holders who had not previously considered selling. Their offerings now
come on the market and accelerate the decline.
Volume characteristics same as the Symmetrical type
The volume section of the Right-Angle Triangle’s chart requires little comment. It will
ordinarily present a picture practically identical with that accompanying the development
of a Symmetrical Triangle. Activity tends to lessen as prices move out toward the apex.
In the Ascending Formation, there will usually be a pickup on each rally and an ebb in
turnover on each decline within the pattern; in the Descending Formation, the opposite
is true, but sometimes it is not quite so evident. These Minor fluctuations do not affect the
overall diminishing trend of volume until the breakout point is reached.
As to breakouts, practically everything discussed about the Symmetrical Triangle will
apply as well to the Right-Angle type. Upside breakouts (from an Ascending Pattern, of
course) are attended by a conspicuous increase in trading volume; if not, they should be
treated as suspect. Downside breakouts (from Descending Patterns) may not evince much
of a pickup in activity, but turnover usually speeds up the second or third day out of
pattern. Throwback reactions to the pattern’s boundary line after a breakout are fairly
common; their occurrence seems to depend largely on general market conditions. Thus, if
prices break down out of a Descending Triangle in an individual stock at a time when the
rest of the market is firm, a Pullback Rally is fairly certain to intervene before any extensive
further decline takes place.
This chart, and a number that have preceded it, illustrate an important point for the
market technician that may well be restated here: When a large number of individual
issues, after an extensive advance, make well-defined Reversal Patterns of plainly Bearish
import, break down out of them, and then succeed only in pulling back no farther than
their lower boundaries or “Resistance Lines” at a time when the Averages are going on
up to new highs, the whole market is in a dangerous condition and a Major Downturn
is imminent. Divergences of this particular sort between many important issues and the
Averages seldom develop at Intermediate Turns. The warning is particularly pointed when
stocks of the caliber of Westinghouse, DuPont, General Motors, and others fail to “confirm”
new highs in the Averages.
Refer back to Figures 6.3, 6.6, 6.9, and 8.15, for example, and compare the “timing” in


Major Downturn
is imminent. Divergences of this particular sort between many important issues and the
Averages seldom develop at Intermediate Turns. The warning is particularly pointed when
stocks of the caliber of Westinghouse, DuPont, General Motors, and others fail to “confirm”
new highs in the Averages.
Refer back to Figures 6.3, 6.6, 6.9, and 8.15, for example, and compare the “timing” in
those with the trend of the Averages for the same periods. The Saucer-Like Reaction Pattern
of October to January in the above chart analyzes into a Complex Head-and-Shoulders
Consolidation, a formation that will be taken up in Chapter 11.
Incidentally, “WX” continued on down to 130 in April 1937 , made a Rectangle base there,
and recovered to 158 (see above Descending Triangle) in August and then fell to 88 in November.
Compare this daily chart with the monthly chart of “WX” for 1935 to 1938 in Figure 15.15.
100 Technical Analysis of Stock Trends
Good, reliable breakouts from Right-Angle Triangles usually occur at about the same
stage of pattern completion as they do in Symmetrical Triangles. The earlier the breakout,
the less apt it is to be a false move (although false moves from Right-Angle Formations are
considerably rarer, it should be noted, than from Symmetrical). In those infrequent cases
when prices “squeeze” right on out of the apex without producing a definite breakout, the
pattern seems to lose much of its power.
Measuring implications of Triangles
In Chapter 6, we stated a minimum measuring rule to apply to price movements developing
from a Head-and-Shoulders Formation, and we can lay down a somewhat similar rule
for Triangles—one that applies to both the Symmetrical and the Right-Angle species. The
method of deriving the Triangle formula is not easy to explain in words, but the reader
can familiarize himself with it quickly by studying its application on several of the actual
examples that illustrate this chapter. Assuming we are dealing with an up-movement
(upside breakout), draw from the Top of the first rally that initiated the pattern (in other
words, from its upper left-hand corner) a line parallel to the Bottom boundary. This line
will slope up away from the pattern to the right. Prices may be expected to climb until they
reach this line. Also, as a rule, they will climb, following their breakout from the pattern,
at about the same angle or rate as characterized their trend before entering the pattern.
This principle permits us to arrive at an approximate time and level for them to attain the
measuring line. The same rules apply (but measuring down, of course, from the lower left
corner) to a descending move.
Although application of the above formula does afford a fair estimate of the extent of
move to be expected from a Triangle, it is neither as definite nor as reliable as the Head-and-
Shoulders formula. Do not forget the important qualification that the Triangle has somehow
lost a part of its potential strength if the breakout is delayed until prices are crowded into
the apex.
Triangles on weekly and monthly charts
We have seen in preceding studies how Head-and-Shoulders Formations may appear on
the long-range (weekly or monthly) charts and will have importance commensurate with
their size. Triangles also may develop on weekly charts with their implications usually
clear and dependable, but the coarse Triangular Patterns—which can be found on graphs of
monthly price ranges, especially the great, loose convergences that take years to complete—
had better be dismissed as without useful significance.
Other Triangular formations
There are other patterns of price consolidation or congestion that can be bounded by
converging lines and might, therefore, be classified as Triangles. However, they deviate
from the true Triangles of this chapter so markedly in one or more important respects
that they are best treated under other headings elsewhere, such as Flags, Pennants, and
Wedges. Still another group of chart patterns develops between diverging boundary lines,
on which account they have sometimes been called Inverted Triangles. But their causes,
characteristics, and forecasting implications are so radically different that we have chosen
to rename them Broadening Formations and discuss them in a later chapter.
101Chapter eight: Importa nt Reversal Patterns: the Triangles
The reader may have become dismayed at this point by our frequent recourse to such
qualifying adverbs as usually, ordinarily, and the like. It cannot be avoided if one wishes to
present a true picture of what actually happens. No two chart patterns are ever precisely
alike; no two market trends develop in quite the same way. History repeats itself in the
stock market, but never exactly. Nevertheless, the investor who familiarizes himself with
the historical pattern, with the normal market action, and refuses to be tempted into a
commitment in the belief that “this time will be different,” will be far and away ahead of
the fellow who looks for the exception rather than the rule.
The beginner is proverbially lucky. He will find Triangles, Head-and-Shoulders, or
other significant patterns, one after the other, on his charts, watch them develop, and see
them carry through with profitable moves according to rule, until the exception comes
along—or he will overlook the larger picture while concentrating on some Minor Pattern
development—and suddenly awake to the fact he is caught in a very bad play. Hence,
we constantly emphasize the nonconforming movements. Our words of qualification are
necessary because technical analysis of market action is not an exact science and never
will be.

103
chapter nine
More important Reversal Patterns
The Rectangles, Double and Triple Tops
The Triangular Price Formations, which we examined in Chapter 8 , can be either Reversal
or Consolidation Patterns. In the case of the Right-Angle Triangles, we know as soon as they
have attained


fication are
necessary because technical analysis of market action is not an exact science and never
will be.

103
chapter nine
More important Reversal Patterns
The Rectangles, Double and Triple Tops
The Triangular Price Formations, which we examined in Chapter 8 , can be either Reversal
or Consolidation Patterns. In the case of the Right-Angle Triangles, we know as soon as they
have attained recognizable form in which direction the trend will (or should) proceed. With
the Symmetrical Triangles, we have no way of knowing whether they point up or down
until prices finally break away from them, although the odds are, as we have seen, the
previous trend will be continued rather than reversed. In this respect, and in many others,
our next class of technical formations, the Rectangles, resemble the Symmetrical Triangles.
There are, in fact, so many points of similarity between them that we can forego any long
and detailed discussion. (For illustrations in this chapter, see Figures 9.1 through 9.18.)
A Rectangle consists of a series of sideways price fluctuations, a “trading area,” as it is
sometimes called, which can be bounded both top and bottom by horizontal lines. A glance
at any one of the examples that illustrate these pages will show how it got its name. On
rare occasions, you may discover a chart pattern whose upper and lower boundary lines
are parallel but either slightly down-sloping or up-sloping. So long as their departure from
the horizontal is trivial, they may be treated as Rectangles. You will also find, on occasion,
patterns whose boundaries, while nearly horizontal, tend somewhat to converge. These
may be considered Rectangles or Symmetrical Triangles; it does not matter which because
the “prognosis” will be the same in either case.
If you will give a quick mental review also to the Head-and-Shoulders, the Complex,
and the Rounding types of formations, you will see how, if you disregard the volume part
of their charts, any one of these patterns might merge or grade into a Rectangle. As a matter
of fact, however, you will seldom be left in doubt as to proper classification because the
circumstances of trading, the type of buying and selling, which produce Rectangles are
different, which is usually apparent.
We characterized the Symmetrical Triangle as a “picture of doubt.” The Rectangle
might, with even greater propriety, be called a picture of conflict. Of course, any fairly
compact price formation represents conflict in the supply–demand sense. A Head-and-
Shoulders Top, for example, portrays a conflict between “strong” sellers and “weak”
buyers with the outcome already clearly seen before the combat has ended. But a Rectangle
defines a contest between two groups of approximately equal strength—between owners
of the stock who wish to dispose of their shares at a certain price and others who wish to
accumulate the stock at a certain lower figure. They bat the ball back and forth (up and
down, that is) between them until ultimately, and usually quite suddenly, one team is
exhausted (or changes its mind) and the other proceeds to knock the ball out of the lot.
Nobody (often, not even the contestants themselves) can tell who is going to win until one
line or the other is decisively broken.
We speak of two groups operating in the development of a rectangular trading area
because, under present-day conditions, that is what is usually the fact behind the scenes.
This, it should be noted, does not imply “manipulation” in any invidious sense. An
investment trust or an estate or, in some cases, an individual heavy stockholder has good
104 Technical Analysis of Stock Trends
and sufficient reasons for selling at the top price (the “Supply Line” of the Rectangle) with
no intent to mislead the public. Another investment trust or a group of insiders interested
in the company may have equally good and, from their point of view, wise reasons for
buying at the bottom price (“Demand Line”). Such are the forces at work in the market at
the start of most Rectangular Chart Patterns, but if the “spread” between top and bottom
NASH – KELVINATOR NK 1945–1946
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
26
24
22
20
250
200
150
100
50
61 32 02 73 10 17 24 18 15 22 29 51 21 92 62 91 62 32 91 62 33 0
Sales
100’s
Figure 9.1 Although its Bottom boundary had a slight tendency to “lift,” the formation that put a
Top on Nash–Kelvinator in 1946 was an unmistakable four-month distribution Rectangle. Long and
rather loose Rectangular Patterns of the type shown here may not evince constantly and noticeably
diminishing volume, but note, nevertheless, the general, although irregular, downtrend in volume
from mid-October to mid-February.
LIMA LOCOMOTIVE WORKS LMW 1944–1945
56
52
48
44
50
40
30
20
10
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
71 42 12 84 11 18 25 29 16 23 30 61 32 02 73 10 17 24 31 01 72 43 1
Sales
100’s
G
Figure 9.2 Consolidation Rectangles in uptrends have been less common in recent years than during
the 1920s and early 1930s. The large price gap (G) in this example is of the “last in pattern” type,
which we shall come to in Chapter 12. When a gap within a pattern area is followed by breakout
from that pattern, as in this case, the gap is infrequently closed quickly.
105Chapter nine: More impor tant Reversal Patterns
lines is wide enough (say 8%–10% of the market value of the stock), the situation may
quickly attract a following from quick-turn scalpers and the professional element. Thus, a
syndicate holding a large block of U.S. Steel may decide to liquidate at 76, whereas another
group decides to invest heavily in “Steel” at 69. The price of X will naturally fluctuate for
a time between those two levels. Traders, seeing this, will try to ride the play, buying at 69
and selling at 76 (perhaps also selling short at 76 and covering at 69). Their operations will
tend to accentuate or extend the Rectangle, although the number of shares


de to liquidate at 76, whereas another
group decides to invest heavily in “Steel” at 69. The price of X will naturally fluctuate for
a time between those two levels. Traders, seeing this, will try to ride the play, buying at 69
and selling at 76 (perhaps also selling short at 76 and covering at 69). Their operations will
tend to accentuate or extend the Rectangle, although the number of shares involved in such
parasitic trading is seldom great enough to affect the final outcome. As a matter of fact, this
type of trading inside a Rectangle can be quite profitable at times, especially if protected by
judicious stops (see Section II).
Pool operations
In times past, before the U.S. Securities and Exchange Commission (SEC) outlawed
the practice, Rectangles were frequently created by the well-organized operations of a
single “pool” or syndicate. Such a pool might undertake to accumulate a large block of
1936–1937
LOEW’S, INC. LW
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
96
80
76
72
68
64
60
56
52
48
44
125
100
75
50
25
31 01 72 43 17 14 21 2851 21 92 62 91 62 33 06 13 20 2761 32 02 7
Sales
100’s
Figure 9.3 A perfect example of Consolidation Rectangle that formed in Loew’s near the end of the
1932–1937 Bull Market. In this case, a large block of “inside” stock was distributed at 64 to 65 but taken
over around 62 by other investors who had the satisfaction of seeing it go on up to 87 the following
August. Note the Throwback following breakout in January.
106 Technical Analysis of Stock Trends
SOCONY–VACUUM OILS OV 1946
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
19
18
17
16
15
14
13
Sales
100’s
250
200
150
100
50
61 32 02 74 11 18 25 18 15 22 29 61 32 02 7310 17 24 31 71 42 12 8
X D 5.25
Figure 9.4 Here is a Rectangle in Socony–Vacuum, a low-priced stock characterized by fluctuations
within a narrow range. After reaching a high of 18 in December 1945, it fell back to 15 and then rallied
in mid-1946 as shown above. In late August, prices broke down through an Intermediate Trendline
(see Chapter 14) and four days later fell out of the Rectangle. This formation, in conjunction with
the earlier and higher Top, implied lower levels for “SOV” for some time to come. See also comment
under Figure 9.5.
YOUNGSTOWN SHEET & TUBE YB
1946
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
80
76
72
68
64
60
Sales
100’s
50
40
30
20
10
61 32 02 74 11 18 25 18 15 22 29 61 32 02 7310 17 24 31 71 42 12 8
Figure 9.5 Another long, loose Rectangle of Major Reversal implications, somewhat similar to that
pictured in Figure 9.1 . Both an Intermediate and Major Up Trendline (to be discussed later) were
decisively punctured by “YB” in August, just before its Rectangle broke down. Under Figure 8.21, we
discussed one sort of warning of a Primary Downturn that may be derived from the comparison of
individual stock charts with the Averages. Here is another hint: the better-grade steels and oils (see
“ S OV,” Figure 9.4) frequently hold up, or make stronger Secondary Recoveries, after the Averages
have turned down at Major Tops. The Street sometimes speaks of “distribution under cover of
strength in the steels.”
107Chapter nine: More import ant Reversal Patterns
stock in a certain company with a view to marking it up and taking profits when some
piece of good news, of which they had inside knowledge, eventually became public. To
acquire the desired “line,” they would find it necessary first to shake out shares held by
other traders and uninformed investors. They might start their campaign by suddenly
selling short a few hundred shares to quench any current demand and start a reaction.
Then, on that reaction to the previously determined accumulation level, they would
start to buy, scattering their orders carefully and avoiding any publicity. Their buying
would, sooner or later, engender a rally, but then they would “plant” rumors around the
boardrooms to the effect that such-and-such insiders were selling, or that a projected
merger was being called off, or a dividend would have to be passed, and, if necessary,
they would ostentatiously let out a few of their own recently purchased shares to
give color to the rumor. The process might be repeated several times with the “pool”
gradually securing more and more shares on balance until, finally, its intended line is
completed or could not shake out more of the floating supply. Often, what was going
on was fairly evident to the alert chartist back in the 1920s even before the operation
was concluded, and perfectly evident, of course, as soon as prices broke out topside
from their Rectangle.
But such tactics are no longer permitted. “Wash sales” are strictly condemned; the
constant policing of all exchange transactions and prompt investigation by the SEC of any
suspicious news or activity in a stock effectually deters the blatant “pool” manipulations
of previous years. This probably is the chief reason why Rectangles are nowhere near so
common on the charts of the 1950s as they were in the 1920s. (EN: Not uncommon in the 2000s.)
EASTERN AIRLINES EAL
1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
64
60
56
52
48
44
40
50
40
30
20
10
G
G
61 32 02 73 10 17 24 31 01 72 43 17 14 21 28 5
12 19 26 29 16 23 30
Sales
100’s
Figure 9.6 The Rectangle in early 1945 in “EAL ” was actually the final stage of a nearly two-year
Consolidation in the rise, which started around 17 in 1942 and ended above 125 in December
1945. G, G mark gaps (see Chapter 12), the first a Breakaway and the second a Measuring Gap,
which marked the probable objective of the move as 55. When prices reached that level, another
Consolidation developed, a Symmetrical Triangle. Neither of these gaps was “closed” during the
following two years.
108 Technical Analysis of Stock Trends
Perhaps we can clear up various details of the Rectangle formation most quickly and
easily by comparison with that most nearly related chart pattern, the Symmetrical Triangle,
as follows:
• Volume—Follows the same rules


d that level, another
Consolidation developed, a Symmetrical Triangle. Neither of these gaps was “closed” during the
following two years.
108 Technical Analysis of Stock Trends
Perhaps we can clear up various details of the Rectangle formation most quickly and
easily by comparison with that most nearly related chart pattern, the Symmetrical Triangle,
as follows:
• Volume—Follows the same rules as in the Triangles, gradually diminishing as the
Rectangle lengthens. Any contrary development, unless it be a momentary news
flurry, is suspect.
• Breakouts— Here also the same rules apply as with Triangles. Review volume
requirements, margin of penetration, and so on thereunder.
• False moves—Much less frequent from Rectangles than from Symmetrical Triangles.
A clearly defined Rectangle is, in fact, almost as reliable as a Head-and-Shoulders,
although not as powerful in its implications.
• Premature breakouts— Slightly more frequent, perhaps, from Rectangles than from
Triangles.
(Note: Both false moves and premature breakouts, in the sense in which we employ these
terms, are indistinguishable at the time they occur from genuine breakouts. Following both
false and premature breaks, prices return inside the pattern. But, in the case of a false move,
the trend ultimately proceeds out of pattern in the opposite direction, while in the case of
the premature move, the trend finally breaks out again and proceeds in the same direction.)
AMERICAN ZINC, LEAD & SMELTINGZ A
1945–1946
DECEMBER JANUARY FEBR UARY MARCHA PRIL MAYJ UNE JULY AUGUST SEPTEMBERO CTOBER NOVEMBER
17
16
15
14
13
12
11
10
9
8
7
6
250
200
150
100
50
S S
S
S H
H
NL
81 52 2295 12 19 2622 91 62 391 62 33 06 13 20 2741 11 82 51 81 52 22 96 13 20 2731 01 72 4317 14 21 2851 21 9262 91 6
S
S
S S
H H
H H
Sales
100’s
Figure 9.7 An extraordinary, fine, long Rectangle that developed after “ZA” had broken down out of
a Head-and-Shoulders Top in February 1946. A perfect opportunity to sell this stock short was given
by its Pullback of July 17–18 after prices had broken out of the Rectangle on the 15th. The Multiple
Head-and-Shoulders Bottom that it subsequently made from September to November produced a
recovery to 11, but prices later fell to 6 in early 1947 .
109Chapter nine: More impor tant Reversal Patterns
SEARS ROEBUCK S 1941–1943
76
72
68
64
60
56
52
48
50
40
30
20
10
S ON DJ FM AM JJ AS ON DJ FM
Sales
100’s
Figure 9.8 In this weekly chart showing Sears Roebuck’s 1942 Bear Market Bottom, a Consolidation
Rectangle (June to November) forms the right shoulder of a large “unbalanced” Double Head-and-
Shoulders Pattern.
BELL AIRCRAFT BLL 1945
22
20
19
18
17
16
15
14
13
Sales
100’s
125
100
75
50
25
JANUARYF EBRUARYM ARCH APRILM AY JUNE
61 32 02 73 10 17 24 31 01 72 43 17 14 21 28 51 21 92 62 91 62 33 0
G
Figure 9.9 After advancing to 16 in January 1945, “BLL ” dropped back to 13 and then constructed
a 15-week Rectangle. Note that the down gap (G) on April 30 was caused by a $1.00 dividend going
off. The revised bottom line of the pattern, drawn $1.00 lower, was not violated.
110 Technical Analysis of Stock Trends
• Pullbacks—Return of prices to the boundary of the pattern, subsequent to its initial
penetration (breakout), takes place more frequently with Rectangles than with
Symmetrical Triangles. Our estimate would be that a Pullback or Throwback (the
first is the common term for a rally after a downside breakout, and the second for a
reaction following an upside breakout) occurs within three days to three weeks in
about 40% of all cases.
• Directional tendency—The Rectangle is more often a Consolidation Formation than
a Reversal Formation, the ratio being about the same as with Symmetrical Triangles.
As Reversal Patterns, Rectangles appear more frequently at Bottoms (either Major or
Intermediate) than at Tops. Long, thin, dull Rectangles are not uncommon at Primary
Bottoms, sometimes grading into the type of Flat-Bottomed Saucer or Dormancy
described in Chapter 7 .
• Measuring implications—A safe minimum measuring formula for the Rectangle is
given by its width. Prices should go at least as far in points beyond the pattern as the
difference in points between the top and bottom lines of the pattern itself, though
they may go much farther. Generally speaking, the brief, wide-swinging forms, which
appear nearly square in shape on the chart and in which turnover is active, are more
dynamic than the longer and narrower manifestations. Moves out of the latter almost
always hesitate or react at the “minimum” point before carrying on.
KENNECOTT COPPERK N
1937
JULY AUGUST SEPTEMBERO CTOBER NOVEMBER DECEMBER
64
60
56
52
48
44
40
38
36
34
32
30
28
250
200
150
100
50
31 01 72 4 31 71 42 12 84 11 18 25 29 16 23 30 61 32 02 7411 18 25
Sales
100’s
Figure 9.10 A brief and very “high” Rectangle formed in September 1937 in the rapid Bear Market
Decline of “KN,” followed by a Descending and then a Symmetrical Triangle Consolidation.
111Chapter nine: More impor tant Reversal Patterns
UNITED AIRCRAFT UR
1941–1943
40
38
36
34
32
30
28
26
24
50
40
30
20
10
S ON DJ FM AM JJ AS ON DJ FM
Sales
100’s
Figure 9.11 This formation, constructed by United Aircraft in 1942, was not completed and could
not be called a Double Bottom until prices rose above 31 in February 1943. (See following pages.)
INCO CO LTDN1988
S
S
H
NL
APRIL MAY JUNE JULY AUGUST SEPTEMBERO CTOBER
38
36
34
32
30
28
26
4000
3200
2400
1600
800
62 91 62 33 07 14 21 28 41 11 82 52 91 62 33 06 13 20 27 31 01 72 41 81 52 2
XD.2 X0D .20
Sales
100’s
Figure 9.12 INCO quickly recovered from the Reagan Crash of 1987 and by year’s end, it was nearly
back to its 1987 high; the latter was decisively broken in April 1988. The powerful rally continued
to carry “N” higher. But the August reaction, followed by a poor rally in September, created a large
Head-and-Shoulders Top. The early September decline broke the neckline to confirm the Reversal
and the subsequent Throwback, to Neckline


the Reagan Crash of 1987 and by year’s end, it was nearly
back to its 1987 high; the latter was decisively broken in April 1988. The powerful rally continued
to carry “N” higher. But the August reaction, followed by a poor rally in September, created a large
Head-and-Shoulders Top. The early September decline broke the neckline to confirm the Reversal
and the subsequent Throwback, to Neckline Resistance, was an excellent selling point.
112 Technical Analysis of Stock Trends
Relation of rectangle to Dow Line
The resemblance of this individual stock chart formation, which we have discussed under
the name of Rectangle, to the Average formation known to Dow theorists as a “Line” has
doubtless occurred to you. Obviously, their rationale and forecasting implications are much
the same, but true Rectangles with sharply delimited Top (Supply) and Bottom (Demand)
boundaries are truly characteristic only of trading in individual issues. Line formations
in the Averages are seldom rigorously defined, with successive Minor Heights forming
quite precisely at a certain horizontal tangent and successive Bottoms at a similarly precise
horizontal level. If you will examine the separate charts of the issues composing an Average
at a time when the Average is “making a Line,” you will surely find some of them showing
an irregular uptrend, others showing an irregular downtrend, still others may be forming
Triangles, and a few may be constructing Rectangles, or what not, but it is the algebraic sum
of all these more or less divergent pictures that makes up the Average “Line.”
To be sure, there is some tendency on the part of active traders to sell (or buy) stocks
when a certain Average reaches a certain figure, regardless of the status of individual
issues involved. An investment counsel will occasionally advise his clients, for example, to
“sell all speculative holdings when the Dow Industrials reach 500” (EN: or 5,000 or 15,000).
But trading commitments based solely on general Average levels are so seldom followed
consistently that they have little effect. (EN10: In the modern era, with the availability of index
exchange-traded funds, this is no longer true.)
REPUBLICS TEEL RS
1945–1946
G
G
G
G
DECEMBER JANUA RY FEBRUARY MARCHA PRIL MAYJ UNEJ ULYA UGUST
52
48
44
40
38
36
34
32
30
28
26
24
22
25020015010050
18 15 22 2951 21 9262 91 62 32 91 62 3306 13 20 27 11 18 25 18 15 22 2961 32 02 7310 17 24 3171 44
Sales
100’s
Figure 9.13 Owing to the long-time-between-Tops requirement for true Double Top Reversals, these
formations can seldom be seen to advantage on a daily chart, but here is a good 1946 example in Republic
Steel. Note the five months and 20% decline between Tops. This chart contains many interesting lesser
technical formations also. The “Broadening” Swings (see Chapter 10) in June and July, as the second Top
was made, and the rounding rally in August were extremely Bearish in their implications.
113Chapter nine: More impor tant Reversal Patterns
Rectangles from Right-Angle Triangles
In the preceding chapter, we referred to a type of partial “failure” in the development of
a Right-Angle Triangle that necessitates reclassifying the Triangle as a Rectangle. Now
that we have examined the latter pattern in detail, we need say little more about this
phenomenon, except to note the odds still appear to be somewhat in favor of ultimate
breakout in the direction originally implied by the incipient Triangle. The fact there is this
slight presumption, however, certainly does not warrant disregard of an opposite breakout
from the rectangular reconstruction.
Double and Triple Tops and Bottoms
To some of the old hands in the Street, our relegation of that good old byword, the Double
Top, to a Minor Position in our array of Reversal Formations may seem almost sacrilegious.
It is referred to by name perhaps more often than any other chart pattern by traders who
possess a smattering of technical “lingo” but little organized knowledge of technical facts.
True Double Tops and Double Bottoms are exceedingly rare; Triple Forms are even rarer.
Additionally, the true patterns (as distinguished from chart pictures that might mistakenly
AMERICAN AIRLINES AMR
1945–1947
19
18
17
16
15
14
13
12
11
10
9
50
40
30
20
10
A MND JF MA MJ JA SO ND JF M
Sales
100’s
Figure 9.14 Shares of “ AMR,” then selling for around 90, were split 5-for-1 in April 1946, resulting in
a quick rally to a new high. But the overall aspect of a Double Top with the high made the previous
December was nevertheless apparent and confirmed when prices broke down through the “valley”
level on August 28. Popular buying brought in by “splits” is usually short-lived and only temporarily
distorts the broad picture.
114 Technical Analysis of Stock Trends
be called such but are really assignable to some one of our other Reversal Formations) can
seldom be positively detected until prices have gone quite a long way away from them, and
can never be foretold or identified as soon as they occur from chart data alone.
But we are getting ahead of our story; we should first define what we are talking about.
A Double Top is formed when a stock advances to a certain level with, usually, high volume
at and approaching the Top figure, then retreats with diminishing activity, then comes up
again to the same (or practically the same) top price as before with some pickup in turnover,
but not as much as on the first peak, and then finally turns down a second time for a Major
or Consequential Intermediate Decline. A Double Bottom is the same picture upside down;
the Triple types make three Tops (or Bottoms) instead of two.
It is not difficult to skim through a book of several hundred monthly charts and pick
out two or three examples of Major Double Tops and, perhaps, one or two Double Bottoms.
One will find cases in which stocks made two successive Bull Market Peaks several years
apart at almost identical levels. Such phenomena stand


ure upside down;
the Triple types make three Tops (or Bottoms) instead of two.
It is not difficult to skim through a book of several hundred monthly charts and pick
out two or three examples of Major Double Tops and, perhaps, one or two Double Bottoms.
One will find cases in which stocks made two successive Bull Market Peaks several years
apart at almost identical levels. Such phenomena stand out, in distant retrospect, like the
proverbial sore thumb, which undoubtedly accounts for the undue awe with which the
amateur chartist regards them. He neglects, for the moment, to consider the fact a thousand
other issues might have done the same thing but did not—that some of these even acted,
for a time, as though they were going to Double Top, but then went on through and higher.
Is there any practical utility for the trader or investor in the Double Top concept? Yes,
there is, but it will be easier for us to formulate it if we first consider what is not a Double Top.
Refer back for a moment to the Ascending Triangles and the Rectangles previously studied;
CONTAINER CORPORATION CNR
1941–1943
22
20
19
18
17
16
15
14
13
12
11
25
20
15
10
5
S ON DJ FM AM JJ AS ON DJ FM
Sales
100’s
Figure 9.15 The Major Reversal Formation in “CNR” at the start of a Primary Advance that reached
54. Note how an attempt at an Ascending Triangle turned into a Double Bottom.
115Chapter nine: More impor tant Reversal Patterns
when these start to evolve, the majority of the time their first step is the construction of two
Tops at an identical level with an intervening recession, and with less volume on the second
Top than on the first. In the ordinary course of events, a third Top will develop there, and
ultimately, prices will break through and move on up to still higher levels. Thus, we see we
must have some rule or criterion to distinguish a true Double Top Reversal Pattern from
the Double Tops that do not imply Reversal when they appear as a part of a Consolidation
Area in an uptrend.
Distinguishing characteristics
No absolute and unqualified rule can be laid down to fit all cases involving stocks of
different values and market habits, but one relative distinction quickly suggests itself when
we study these different kinds of chart formations: if two Tops appear at the same level but
quite close together in time and with only a Minor Reaction between them, chances are
they are part of a Consolidation Area; or, if a Reversal of Trend is to ensue, there will first
be more pattern development—more “work” done—around those top ranges. If, on the
other hand, there is a long, dull, deep, and more or less rounding reaction after the initial
peak has appeared, and then an evident lack of vitality when prices come up again to the
previous high, we can at least be suspicious of a Double Top.
How deep is deep, and how long is long? Fair questions, to which, unfortunately, it
is impossible to give simple, definite answers, but we can attempt approximations. Thus,
if the two Tops are more than a month apart, they are not likely to belong to the same
Consolidation or Congestion Formation. If, in addition, the reaction between the first and
second high reduces prices by 20% of their top value, the odds swing toward a Double Top
TRINITY INDUSTRIES INC. TRN1 985
1 2 3 ONE DAY
REVERSAL
APRIL MAY JUNE JULY AUGUST SEPTEMBERO CTOBER
20
19
18
17
16
15
14
13
12
11
500
400
300
200
100
23 30 61 32 02 74 11 18 25 18 15 22 29 61 32 02 73 10 17 24 31 71 42 12 85 12 19
57 60
X D.125 X D.125
Sales
100’s
Figure 9.16 Although Trinity Industries did not have the well-formed pattern exhibited by our other
recommendations, we found the high-volume plunge, with the low of the day the third test of the
year’s low, a very beguiling technical situation. Basically, it was a Triple Bottom with a One-Day
Reversal to get the uptrend started.
116 Technical Analysis of Stock Trends
interpretation. But both of these criteria are arbitrary, and not without exception. There
are cases in which the two peaks have occurred only two or three weeks apart, and others
in which the “valley” between them descended only about 15%. Most true Double Tops,
however, develop two or three months or more apart. Generally speaking, the time element
is more critical than the depth of the reaction. The greater the time between the two highs,
the less the need of any extensive decline of prices in the interim.
Given the conditions we have specified, namely, two Tops at approximately the
same level but more than a month apart on the chart, with somewhat less activity on
the second advance than on the first, and a rather dull or irregular and rounding type of
recession between them, we can then be suspicious that a Double Top Reversal has actually
evolved. Should a small Head-and-Shoulders or Descending Triangle start to develop at
the second Top, as is frequently the case, we can be on guard, to the extent of protecting
long commitments at once with a close stop or by switching to something else with a more
promising chart picture.
Yet, even all these signs together are not final and conclusive. The situation can still
be saved, and often is. Let us take a look at what is, presumably, going on behind the
scenes to create our chart picture up to this point. The first Top on relatively high volume
was a normal incident and tells us little except that here, for the moment, demand met
with sufficient supply to stop the advance and produce a reaction. That supply may have
represented only traders’ profit-taking, in which event the trend is likely to push on up
after a brief setback. But, when the reaction drifts off lower and lower until it has given up
15% and more of the stock’s peak market value, and flattens out without any prompt and
PUBLICKER INDUSTRIESP UL
1946
UP FROM 24
IN MARCH
OVER THE COUNTER
APRIL MAY JUNE JULY AUGUSTS EPTEMBER
64
60
56
52
48
44
40
38
50
40
30
20
10
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31


o push on up
after a brief setback. But, when the reaction drifts off lower and lower until it has given up
15% and more of the stock’s peak market value, and flattens out without any prompt and
PUBLICKER INDUSTRIESP UL
1946
UP FROM 24
IN MARCH
OVER THE COUNTER
APRIL MAY JUNE JULY AUGUSTS EPTEMBER
64
60
56
52
48
44
40
38
50
40
30
20
10
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
Sales
100’s
Figure 9.17 Publicker made its Bull Market high only a few weeks after it was listed on the “big
board.” Then it started to build a Descending Triangle but pulled up out of it. The final outcome was
a Triple Top, completed in August (see Figures 8.17 and 9.15).
117Chapter nine: More impor tant Reversal Patterns
vigorous rebound, it becomes evident that either the demand was pretty well played out on
the last advance or the selling represented something more than short-term profit cashing.
The questions then are these: did the first high give evidence of important distribution, and
is there much more to meet at the same price range?
Nevertheless, as our chart picture shows, demand did finally come in and absorb
enough of the floating supply to turn the trend around. When prices pushed up and
began to run into selling again near the level of the first Top, that was to be expected on
“psychological” grounds; many quick-turn operators naturally would take profits at the old
high (perhaps with the intention of jumping right back in at a still higher price if the old
high should be exceeded). Hence, a Minor Hesitation there was quite in order. But selling
in sufficient quantity to produce another extensive reaction would be quite another matter.
We have, by now, established a zone of Supply or Resistance at the peak levels and a zone
of Support or Demand at the Bottom of the valley between. The final and decisive question
now is this: will the “valley” Support reappear and stop the second decline?
NATIONAL GYPSUM NG
1941–1943
8
7
6
5
4
125
100
75
50
25
S ON DJ FM AM JJ AS ON DJ FM
4 2
1
3 2
1
Sales
100’s
Figure 9.18 In the ordinary course of events, at the time this Bottom Pattern developed in “NG,”
consisting, as it did, of fluctuations for 10 long months within a range of only 1 full point, most traders
would pay no attention to it. Certainly, it suggested very little opportunity for short-term profits. On
an arithmetically scaled chart, the pattern could hardly be seen. Logarithmic price scaling, however,
as we have remarked in an earlier chapter, has the great advantage of bringing to light the percentage
importance of significant market action at very low price levels.
118 Technical Analysis of Stock Trends
The conclusive definition of a Double Top is given by a negative answer to that last
question. If prices, on their recession from the second peak, drop through the Bottom level
of the valley, a Reversal of Trend from up to down is signaled, which is usually a signal of
major importance. Fully confirmed Double Tops seldom appear at turns in the Intermediate
Trend; they are characteristically a Primary Reversal phenomenon. Hence, when you are
sure you have one, do not scorn it. Even though prices may have already receded 20%, the
chances are they have very much farther to go before they reach bottom.
As to measuring implications, the Double Top affords no formula comparable with what
we have attributed to Head-and-Shoulders and Triangle Formations, but it is safe to assume
the decline will continue at least as far below the valley level as the distance from peak to
valley. It may not be so in one interrupted slide; on the contrary, considerable time may be
required to carry out the full descent in a series of waves. Pullbacks to the “valley” price
range, following the first breakthrough, are not uncommon. (Take into account the general
rule that a Reversal Formation can be expected to produce no more than a retracement of
the trend that preceded it.)
One more point: we have said the Tops need not form at precisely the same level. Use
here the 3% rule we have previously laid down as a measuring stick for breakouts. A first
Top at 50, for example, and a second at 51 1/2 would come within this limit. Curiously
enough, the second peak often does exceed the first by a fraction. The important points are
(1) that buying cannot push prices up into the clear by a decisive margin, and (2) the Support
below is subsequently broken.
Double Bottoms
In identifying a Double Bottom, we can apply all of the precepts we have formulated
for the Double Top Pattern, but upside down. The differences between the two pictures
are just what you might expect them to be, having in mind the characteristic differences
between Head-and-Shoulders Tops and Bottoms, for example. Thus, the second Bottom is
usually conspicuously dull (little trading volume) and is apt to be quite rounded, whereas
the second Top in a Double Top is moderately active and nearly as sharp and “spiky” in
contour as the first. The rally up from the second Bottom shows an increase in turnover,
and volume should pick up to a marked degree as the valley level, or more properly, in this
case, the height between the two Bottoms, is surpassed. Double Bottoms appear just about as
frequently as do Double Tops at Primary Trend Reversals, and Double Bottoms also occur
sometimes at the end of Intermediate Corrections in a Major Uptrend.
If you are familiar with some of the jargon of the Street, it has probably occurred to you
that the second low of a Double Bottom is an example of the market action so often referred
to as a “test.” In a sense, that is just what it is—a test or corroboration of the Support (i.e.,
demand) that stemmed the first decline at the same level. The success of that test is not proved,
however—and this is a point to remember—until prices have demonstrated their ability to
rise on increasing volume above the preceding high (the height of the rally between the two
Bott


often referred
to as a “test.” In a sense, that is just what it is—a test or corroboration of the Support (i.e.,
demand) that stemmed the first decline at the same level. The success of that test is not proved,
however—and this is a point to remember—until prices have demonstrated their ability to
rise on increasing volume above the preceding high (the height of the rally between the two
Bottoms). Until such time, there is always the possibility a second test (third bottom) may be
necessary, or even a third, and that one of these will fail with prices then breaking on down
into further decline. This thought leads us to our next type of Reversal Formation.
Triple Tops and Bottoms
Logically, if there are Double Tops, then we might expect that there will also be Triple Tops,
which will develop in somewhat similar fashion. The fact is that Reversal Formations,
119Chapter nine: More impor tant Reversal Patterns
which can only be classed as Triple Tops, do occur, but they are few and far between.
Many patterns evolve at an important turn from up to down in the trend that contains
three Top points, but most fall more readily into the category of Rectangles. For that
matter, any Head-and-Shoulders Formation, particularly if it be rather “flat” with the
head not extending much above the level of the two shoulders, might be called a sort of
Triple Top.
The true Triple Top (as distinct, that is, from other types of three-peak formations)
carries a recognizable family resemblance to the Double Top. Its Tops are widely spaced and
with quite depth and usually rounding reactions between them. Volume is characteristically
less on the second advance than on the first, and still less on the third, which often peters
out with no appreciable pickup in activity. The three highs need not be spaced quite so far
apart as the two that constitute a Double Top, and they need not be equally spaced. Thus,
the second Top may occur only about three weeks after the first and the third six weeks or
more after the second. Also, the intervening valleys need not bottom out at exactly the same
level; the first may be shallower than the second and vice versa. Also, the three highs may
not come at precisely the same price; our 3% tolerance rule is again useful here. Yet, despite
all these permissible variations, there should be, and generally is, something suspiciously
familiar about the overall picture, something that immediately suggests the possibility of
a Triple Top to the experienced chartist.
The conclusive test, however, is a decline from the third Top that breaks prices down
through the level of the valley floor (the lower one, if the two valleys form at different
levels). Not until that has occurred can a Triple Top be regarded as confirmed and actually
in effect; so long as demand persists at the valley price range, the trend can be turned up
again. Only in those cases in which activity is conspicuously lacking on the third peak and
then begins to show Bearish characteristics by accelerating on the ensuing decline is one
justified in “jumping the gun.”
Note this formation qualifies as a Triple Bottom in every detail—spacing between
Bottoms, extent in percent of intervening rallies, volume. Of course, its completion in
October 1942 did not necessarily forecast that “NG” would climb to 33, as it ultimately did.
But the fact that many other stocks were making sound Major Bottom Formations at higher
price levels at the same time certainly warranted the conclusion that “NG” was on its way
up, and that it was a bargain at 5.
Triple Bottoms are simply Triple Tops turned upside down, with the same qualifications
noted when discussing Double Bottoms. The third low should always be attended by small
volume, and the rise therefrom must show a decided increase in turnover and carry prices
decisively above the Tops of the rallies that formed between the Bottoms. One is never
justified in “jumping the gun” on a presumed Triple Bottom Formation unless nearly
every other chart in the book is in an unmistakably Bullish position. The risk of premature
buying is expressed in a saying one sometimes hears in the boardrooms to the effect of “a
Triple Bottom is always broken.” This is not a true saying. Once a Triple Bottom has been
established and confirmed by the necessary up-side breakout, it seldomly fails—it almost
always produces an advance of distinctly worthwhile proportions. But an uncompleted
“possible” Triple Bottom chart picture must be regarded as treacherous. Stick to the
breakout rule and you will be safe.
Triple Tops are sometimes referred to as “W” Patterns because of their occasional
resemblance to that capital letter on the chart. There is a sort of hybrid between the Double
and Triple Top, in which the middle one of the three Tops does not attain the height of
the first and third, and thus, even more strikingly resembles a “W.” For the same reason,
Double Tops are sometimes called “M” Formations.
120 Technical Analysis of Stock Trends
Because the elements in Double and Triple patterns are normally spaced well apart
in time, they are often easier to detect and appreciate on a weekly chart than on a daily.
Monthly graphs disclose numbers of widely spread Double and Triple Bottoms but, on the
other hand, are too coarse to reveal many good Double and Triple Top Patterns.
In our foregoing discussion of the Triple Top, we referred to a sort of intuition that
comes with experience and enables a technical analyst to recognize the potentialities for
Reversal of a certain chart development, sometimes long before it has reached a conclusive
stage. This is a not uncommon talent, but it is one that is seldom attained except through
searching study and long experience (in which the latter usually involves a few expensive
mistakes). The reader of this book need not despair of acquiring “chart sense” and without
undue cost—if he will concentrate on his study, watch, check,


evelopment, sometimes long before it has reached a conclusive
stage. This is a not uncommon talent, but it is one that is seldom attained except through
searching study and long experience (in which the latter usually involves a few expensive
mistakes). The reader of this book need not despair of acquiring “chart sense” and without
undue cost—if he will concentrate on his study, watch, check, and double-check every new
development on his charts, and “keep score” on himself.
It has been said that chart interpretation is not a science but an art . It is not an exact
science, to be sure, because it has no rules to which there are not exceptions. Its finer points
defy expression in rule or precept. It requires judgment in appraisal of many factors,
some of which may seem, at times, to conflict radically with others. But to call it an art,
which implies the need for genius, or at least for a high degree of native talent, is certainly
improper. Say, rather, that it demands skill, but a skill that can be acquired by anyone of
ordinary intelligence.
121
chapter ten
Other Reversal phenomena
We have considered so far eight classes of chart patterns that appear at more or less
important Reversals of direction in the trend of prices. They are as follows:
 1. The Head-and-Shoulders
 2. Multiple or Complex Head-and-Shoulders
 3. Rounding Turns
 4. Symmetrical Triangles
 5. Right-Angle Triangles
 6. Rectangles
 7 . Double and Triple Tops and Bottoms
 8. One-Day Reversal
Of these, numbers 1, 2, 3, and 7 develop most often at Major Turns, whereas numbers 4,
5, and 6 occur more frequently at Intermediate Stages. Numbers 1, 2, 3, and 5 give indication
before they are completed as to which way the price trend is likely to proceed from them.
Numbers 4 and 6 give no such indication and, as we have seen, are rather more apt to
signal Consolidation or Continuation than Reversal. But all of them can, and on occasion
do, appear at both Major Tops or Bottoms. EN: Number 8 appears typically after uncontrollable
moves, up and down.
We have yet to take up a few other technical patterns that, because of their limited
significance, rarity, or doubtful utility to long-term traders, have been relegated to the end
of our Reversal studies (see Figures 10.1 through 10.28).
The Broadening Formations
In concluding our discussion of Triangles in Chapter 8, we mentioned certain types of price
congestion or trading areas that have sometimes been called “Inverted Triangles” because,
starting with very narrow fluctuations, they widen out between diverging rather than
converging boundary lines. Herein, we have chosen to classify them instead as Broadening
Patterns since, except for that inverted resemblance in superficial appearance, they are quite
different in nature and trend implications.
If the Symmetrical Triangle presents a picture of “doubt” awaiting clarification and
the Rectangle a picture of controlled “conflict,” the Broadening Formation may be said to
suggest a market lacking intelligent sponsorship that is out of control—a situation, usually,
in which the “public” is excitedly committed and is being whipped around by wild rumors.
Note though we say it only suggests such a market; there are times when it is obvious those
are precisely the conditions that create a Broadening Pattern in prices, yet other times when
the reasons for it are obscure or undiscoverable. Nevertheless, the very fact that chart
pictures of this type make their appearance, as a rule, only at the end or in the final phases
of a long Bull Market lends credence to our characterization of them.
122 Technical Analysis of Stock Trends
Hence, after studying the charts for some 20 years and watching what market action
has followed the appearance of Broadening Price Patterns, we have come to the conclusion
they are definitely Bearish in purport—that, while further advance in price is not ruled
out, the situation is, nevertheless, approaching a dangerous stage. New commitments
(purchases) should not be made in a stock that produces a chart of this type, and any
previous commitments should be switched at once or cashed in at the first good opportunity.
The Broadening Formation may evolve in any one of three forms, comparable, respectively,
to inverted Symmetrical, Ascending, or Descending Triangles. The “Symmetrical” type,
for example, consists of a series of price fluctuations across a horizontal axis, with each
Minor Top higher and each Minor Bottom lower than its predecessor. The pattern may
thus be roughly marked off by two diverging lines, the upper sloping up (from left to
right) and the lower sloping down. But these Broadening Patterns are characteristically
loose and irregular, whereas Symmetrical Triangles are normally regular and compact. The
converging boundary lines of a Symmetrical Triangle are clearly defined as a rule, and the
Tops and Bottoms within the formation tend to fall with fair precision on those boundary
lines. In a Broadening Formation, the rallies and declines usually do not all stop at clearly
marked boundary lines.
Volume during Broadening Formations
Another distinction between Triangle and Broadening Formation is in the volume chart.
The construction of a true Triangle is attended, as we have seen, by diminishing activity,
starting with high volume on the first Minor Reversal that initiates the pattern, but growing
less and less as prices fluctuate in ever-smaller waves out toward the apex. Then activity
picks up again after prices have broken out of the Triangle, immediately and sharply if the
breakout is through the topside. With the Broadening Formation, on the other hand, trading
activity usually remains high and irregular throughout its construction. If it develops after
CRANE COMPANYC R 1945–1946
NOVEMBERD ECEMBERJ ANUARY FEBRUARY MARCHA PRIL
48
44
40
38
36
34
Sales
100’s
125
100
75
50
25
10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4
Figure 10.1 T


y if the
breakout is through the topside. With the Broadening Formation, on the other hand, trading
activity usually remains high and irregular throughout its construction. If it develops after
CRANE COMPANYC R 1945–1946
NOVEMBERD ECEMBERJ ANUARY FEBRUARY MARCHA PRIL
48
44
40
38
36
34
Sales
100’s
125
100
75
50
25
10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4
Figure 10.1 The Symmetrical type of Broadening Formation, which develops most frequently in
the later and more “excited” stages of a Primary Bull Market, is perfectly exemplified in this Crane
Company chart. Note that the Broadening Pattern here started to form in December 1945 after a 10%
reaction; if it had formed on Top of a rally, it would have been suspected as a possible Broadening
Top. Nevertheless, it carried the usual Bearish implications. “CR” topped out at 49½ in June.
123Chapter ten: Other Rever sal phenomena
an advance, as is almost always the case, the first Minor Reversal that starts the pattern will
occur on a large turnover, but so will the second rally in the pattern, and the third, and high
volume also frequently develops on one or more of its Minor Bottoms. The whole picture—
both price and volume—is, thus, one of wild and apparently “unintelligent” swings.
As can easily be seen, under such circumstances, a true breakout from the area may be
difficult, if not impossible, to detect at the time it eventuates. The volume part of the chart
AIR REDUCTION CO.A N
1929
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBERD ECEMBER
RG 2
4
B
P
31 5a 5b
BG
EG
Sales
100’s
250
200
150
100
50
240
208
192
176
160
152
144
136
128
120
112
104
96
88
80
76
224
61 32 02 73 10 17 24 31 7 14 21 28 51 21 92 62 91 62 3 30 71 42 12 8
Figure 10.2 Although this particular Major Reversal Formation appeared on the charts more than
35 years ago, it is so perfectly developed and on such a large scale that it may well stand as our
elementary model for an Orthodox Broadening Top. This pattern in Air Reduction is discussed in
detail on previous pages. Note also the Symmetrical Triangle Consolidation of July–August, and the
examples of Runaway, Breakout, and Exhaustion Gaps (RG, BG, and EG), which will be taken up in
Chapter 12.
124 Technical Analysis of Stock Trends
AMERICAN ROLLING MILLSR M
1946
APRILM AY JUNE JULY AUGUST SEPTEMBER
Sales
100’s
125
100
75
50
25
40
38
36
34
32
30
28
61 32 02 741 11 82 51 81 52 22 96 13 20 27 31 01 72 4 31 71 42 12 8
1 3 5
2 4
Figure 10.3 A small, but perfect, 1946 Broadening Top that formed at the end of a three-month chart
pattern, which also had overall Broadening (and, hence, Bearish) aspects. The five critical points of
Reversal are numbered on the chart. The “breakout” was registered on August 27 . The Pullback Rally
that followed immediately was strong, but it still held within normal bounds. Another interesting
Broadening Top of 1946 appears in Figure 33.7 .
CONSOLIDATED EDISON ED
J
1
2 4
3 550
45
40
35
30
25
20
A SO ND JF MMAJ JA SO ND JF MAM JJ AS ON DJ FM A
1935 1936 1937 1938
Figure 10.4 When they appear as plain and as compact as this example, Broadening Tops on weekly
charts carry very powerful Reversal indications. The Top of the fifth turn in this formation was
capped on the daily chart by a Head and Shoulders, which was pictured in Figure 6.7 . The dashed
lines on the above chart are trendlines—to be discussed in Chapter 14.
125Chapter ten: Other Reve rsal phenomena
INTERNATIONAL PAPERI P
1945–1947
56
52
48
44
40
38
36
Sales
100’s
5040
302010
ND JF SO ND JF MM AMMAJ JA
Figure 10.5 Broadening tendencies that appear on monthly charts, or very wide spread (with Tops
five or six months apart) like the above on weekly charts, should not be regarded as significant
technical formations. Reversal points in a true Broadening Top should not be more than two months
apart, as in Figure 10.4.
ASSOCIATED DRY GOODSD G
1945
JANUARYF EBRUARYM ARCH APRILM AY JUNE
28
26
24
22
20
19
18
Sales
100’s
50
40
30
20
10
XD .25
XD .25
61 32 02 731 01 72 431 01 72 43 1714 21 28 51 21 92 6 29 16 23 30
Figure 10.6 Three successive reactions in “DG” in February–March 1945 made successively lower
Bottoms, but the intervening rallies came up to the same high (about 21¼), thus forming a Right-
Angled Broadening Formation with a horizontal Top (Supply) Line. Penetration of this technically
important top line on April 16 was a Bullish signal. The flat-topped type of pattern does not
necessarily portray a Bearish situation.
126 Technical Analysis of Stock Trends
PARAMOUNT PICTURES PX
1946
88
80
76
72
68
64
60
56
Sales
100’s
125
100
75
50
25
JANUARY FEBRUARY MARCHA PRIL MAYJ UNE
51 21 92 62 91 62 32 91 62 33 06 13 20 2741 11 82 5 18 15 22 29
Figure 10.7 The 1946 Top in Paramount Pictures, from which it fell to 46 a year later, was a Right-
Angled Broadening Formation with a horizontal bottom line that was “cracked” the first week of
June, but not decisively broken until June 20. (This stock was later split 2-for-1.)
ALLIED STORES LS
1945 G
GG
G
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
48
44
40
38
36
34
32
30
28
Sales
100’s
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 2961 32 02 73 10 17 24 18 15 22 29
Figure 10.8 Another example of the Flat-Topped type of Broadening Price Pattern that appeared near
the end of 1945. “LS” went on up to 63 in 1946. Prices broke out of this formation with a Breakout
Gap (G) and another Breakout Gap appeared on December 3. G-G marks an “Island.” See Chapter 12
for Gaps.
127Chapter ten: Other Reve rsal phenomena
obviously furnishes no clue, while the very looseness and lack of definition of the price
pattern prevent the drawing of any line that surely says, “this far and no farther.” (We are
referring now to the “Symmetrical” type only of Broadening Formation.) Once prices have
run well away, either up or down, from the pattern area, it becomes plain that a breakout
has occurred, but by that time, it may be too late to risk a trade on the situation; the move


lack of definition of the price
pattern prevent the drawing of any line that surely says, “this far and no farther.” (We are
referring now to the “Symmetrical” type only of Broadening Formation.) Once prices have
run well away, either up or down, from the pattern area, it becomes plain that a breakout
has occurred, but by that time, it may be too late to risk a trade on the situation; the move
may already have gone too far. What can we do about Broadening Formations then? Well,
U. S. STEEL X 1946
APRILM AY JUNE JULY AUGUSTS EPTEMBER
96
88
80
76
72
68
Sales
100’s
250
200
150
100
50
XD 1.00
61 32 02 74 11 18 25 18 15 22 2961 32 02 731 01 72 4 31 71 42 12 8
Figure 10.9 The 1946 Bull Market Top in U.S. Steel was a three-month Diamond that might also be
construed as a Head-and-Shoulders.
AMERICAN BOSCH CORP.B OS
1945
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBERD ECEMBER
24
22
20
19
18
17
16
Sales
100’s
50
40
30
20
10
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Figure 10.10 A Diamond (November) that broke out topside and thus functioned as Consolidation
rather than Reversal.
128 Technical Analysis of Stock Trends
we have already noted 9 times out of 10 they carry Bearish implications. They appear most
often at or near an important topping out of the trend. Hence, it is reasonably safe to assume
that prices, when they finally break away from the formation, will go down, or if they do
go up, will very soon turn around and come back down again. Therein lies one answer to
the problem of what to do about a Broadening Formation.
In addition, the price action within the formation, in many cases, furnishes an advance
indication of breakout direction. If the trend is going to break down from the Broadening
Area, the last rally within the area may fail to rise as high as its predecessor, thus breaking
the sequence of ever higher Tops within the pattern. Alternatively, if the trend is going to
emerge on the topside, the last reaction within the pattern may fail to depress prices as low
as the preceding reaction. These “failures” within the pattern occur, as we have stated, in
a majority of all Broadening Formations. Note that one cannot be sure of such a significant
development (what we have referred to above as a failure, for lack of a better descriptive
name) until prices go on and out the other side of the formation or, more precisely, have
exceeded the last preceding move in that direction by a decisive margin (our 3% rule again).
A typical example
No doubt the foregoing paragraph sounds rather complicated. It will be easier to visualize
the development of a “failure” signal if we cite an example using actual price figures. Easier
yet, perhaps, if the reader will sketch out our example on a scrap of chart paper. Suppose
stock XYZ, after advancing some 30 points on gradually increasing turnover, runs into
heavy selling at 62 and reacts to 58. But there is still plenty of interest in the issue; it stops
SHELL UNION OILS UO
1945–1947
44
40
38
36
34
32
30
28
26
24
Sales
100’s
125
100
75
50
25
ND JF SO ND JF MM AMMAJ JA
Figure 10.11 Diamond Reversal Formations are often easier to detect on weekly than on daily charts.
Trace out the price swings and volume in this May–June 1946 Diamond in Shell. Note also the
remarkable Descending Triangle that developed from September 1946 to February 1947 , and the
March Pullback to its apex, another ideal place to sell short.
129Chapter ten: Other Reve rsal phenomena
at 58 and then swings up to a new peak at 63. It “churns” there for a day or two and drops
back again, this time to 56½ before it is halted by another burst of buying. Its third rally
takes it up to 62, where it hesitates and falls back to 59, but it is then picked up again and
carried on to 65. (By this time, a Broadening Formation has become evident on the chart.)
At 65, there is a great show of trading, followed by another reaction that drops quotations
quickly back to 60. Support appears there momentarily and prices fluctuate for three or
four days between 60 and 62 and then fall away again, finally to close at 56, with volume
running high all through this phase. A fourth rally starts, but now the traders who bought
in at 60 on the preceding downswing are frightened and looking for a chance to “get out
even,” and the advance is stifled at that level. Quotations start to slip and soon are down
to 55, below the previous pattern Bottom . When this occurs, the “failure” of the preceding
rally is confirmed—its failure, that is, to rise above 65 and, thus, carry on the Broadening
Movement. The decline below 56, by virtue of that failure, may be regarded as a breakout.
If you followed the foregoing example closely, you will have noted there can be (and
very often are) Minor Fluctuations inside the pattern that do not affect its outcome. Thus,
the rise from 56½ to 65 really consisted of three moves, first from 56½ to 62, then from 62
back to 59, and, finally, from 59 up to 65. The reaction from 62 had no significance so long
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Created with TradeStation 2000i by Omega Research1999
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Figure 10.12 Technicians in the future will look back with amazement at the Top, which put the
exclamation point on the Bull 1990s. The most amazing thing being that what was going on at the
time was recognizable and subject to analysis with a ruler (see Resources). The analysis furthermore
indicated the party 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 fak