...................................................................... 623
xv
Preface to the eleventh edition
Beyond Edwards & Magee
I would be remiss if I did not note the passing of two important figures in the discipline
of technical analysis—Richard Arms Jr. and Professor Hank Pruden of Golden Gate
University. Well liked and admired they leave large gaps in the community. The article
here by Arms is literally his last contribution to the field. Long the central figure in San
Francisco, Hank Pruden, much loved and admired leaves the entire field with an enormous
gap. He was my particular friend and mentor. He will be infinitely missed.
The reader is advised to read the prefaces to previous editions. They are of a piece
with the internal text and some practices—of notation and treatment may not make sense
otherwise. Those who think gender should be catered to will find my previous comments
on that issue. Why repeat it here?
Let me address the central question focused on by this new edition: This book has
studiously ignored an entire field of technical analysis—number driven and statistical
analysis. This has left previous new readers without the guidance they need if they are
uneasy with the qualitative method as invented (or discovered) by Edwards & Magee. That
lack is resolved by Appendix C. There the new reader will find number-driven material
presented from the point of view of an Edwards & Magee analyst. There also the reader
will find presentations of tools by their creators—a very special treat, and extremely
educational. I venture to say any analyst will have his field of vision broadened by Mike
Moody’s presentation of Point and Figure charting and the tools of Richard Arms, two
prominent analysts for whom many of us, especially we chartists, have not given their
work the study it deserves.
The list of acknowledgments is as long as a Hollywood awards night. I will shorten it by
pointing out previously acknowledged colleagues, assistants, and supporters in previous
prefaces. Generally speaking, it is the usual suspects. Some especially merit additional
mention here: Nehemiah Brown III, my much-valued and sometime graduate student helps
me keep my spreadsheets rational and accurate. My old friend Mark Wainwright (a Tuck
graduate) helps me solve technological problems. Part of the pleasure of preparing a new
edition comes from interacting with these bright and capable people.
I have not mentioned Ralph Vince (a formidable figure) or Chris Glon, Richard Arms,
and Mike Moody.
My efforts have been made easier by the support of Chip Anderson of stockcharts.com,
an invaluable resource. I am also indebted to thinkorswim. If I mention them often it is a
measure of their importance to my work—and not a paid promotion.
W. H. C. Bassetti
San Francisco, California
June 15, 2018

xvii
Preface to the tenth edition
A 10th milestone
Sixty-three years. Sixty-three years and Technical Analysis of Stock Trends still towers over
the discipline of technical analysis like a mighty redwood. An evergreen sequoia. And now
a 10th edition. It is a propitious moment to refresh it for the new millennium, to prune its
solecisms and obsolescence, and to further develop the sometimes prescient work of its
originators.
With this premise in mind, I have attempted to make the book shorter, simpler, and
more usable in the modern context. I know there are still manual chartists out there.
Occasionally they are ecstatic when they find that—as a profit-losing service—I still have
TEKNIPLAT™ chart paper in my attic. Like travelers in the desert finding an oasis.
But they are the 1%. Everyone else uses software, desktop or internet to do his charting
(See note “ About Gender” in the Preface to the eighth edition.). So, I have excised the
material on manual charting from the new edition. Budding manual chartists may always
turn to the eighth and ninth editions. I have also deleted Magee’s chapters on “Composite
Leverage” (Chapter 42 in the seventh edition, Appendix A in the eighth) as they are abstruse
and cumbersome in the modern context—not to mention being rooted in manual chart
analysis. I have made every attempt to summarize and replace Magee’s work, as I believe it
has intellectual validity. Primarily this is done in the present Chapter 42. I repeat, Magee’s
thinking and practical work predated much modern portfolio management and volatility
theory. Additionally, Modern Portfolio Theory has still not caught up to his work on trend
analysis and risk. All this material is available in previous editions.
I have moved, perhaps, the most difficult chapter in the book, Chapter 4, to Appendix
A. Edwards’ chapter on the minutiae of the operation of Dow Theory has stopped more
than one reader cold. Now it is available to the detail scholar, and the general reader is
relieved of the necessity of slogging through it.
Many critics deplored Chapter 16 from the seventh edition, which I relegated to an
appendix in the ninth edition. This chapter covered an analysis of futures and derivatives
using number-driven analysis. Critics said it was shallow. More important, it was completely
extraneous to the theme of the book, chart analysis, not the exploration of statistical routines
and indicators, which is a different branch of technical analysis. There are numerous books
on the subject, starting with Murphy, Kirkpatrick, and Kaufman. I have deleted it along
with other material in the book that was not compatible with Edwards and Magee’s original
intent.
xviii Preface to the tenth edition
I quote here appropriate remarks from the preface to the eighth edition:
About apparent anachronisms
Critics with limited understanding of long-term trading success may
think that discussions of “what happened in 1929” or “charts of ancient
history from 1946” have no relevance to the markets of the present
millennium. They will point out that AT&T no longer exists in that
form, that the New


n
I quote here appropriate remarks from the preface to the eighth edition:
About apparent anachronisms
Critics with limited understanding of long-term trading success may
think that discussions of “what happened in 1929” or “charts of ancient
history from 1946” have no relevance to the markets of the present
millennium. They will point out that AT&T no longer exists in that
form, that the New Haven has long since ceased to exist as a stock,
that many charts are records of long-buried skeletons. This neglects
the value of the charts as metaphor. It ignores their representations
of human behavior in the markets which will be replicated tomorrow
in some stock named today.com or willtheynevergetit.com. Even
more important, it ignores the significance of the past to trading in
the present. I cite here material from Jack Schwager’s illuminating
book, The New Wizards of Wall Street . Schwager, in conversation
with Al Weiss: “Precisely how far back did you go in your chart
studies?” Answer: “It varied with the individual market and the
available charts. In the case of the grain markets, I was able to go
back as far as the 1840s.” “Was it really necessary to go back that far?”
Answer: “ Absolutely. One of the keys in long-term chart analysis
is realizing that markets behave differently in different economic
cycles. Recognizing these repeating and shifting long-term patterns
requires lots of history. Identifying where you are in an economic
cycle—say, an inflationary phase versus a deflationary phase—is
critical to interpreting the chart patterns evolving at that time.
Identification of original manuscript and revisions
True believers (and skeptics) will find here virtually all of the original material written
by Edwards and Magee, including their charts and observations on them. Changes and
comments introduced by editors since the fifth edition have been rearranged and, when
appropriate, have been identified as a revision by that editor.
Maintaining this policy, where updates to the present technological context and market
reality were necessary, the present editor has clearly identified them as his own work by
beginning such annotations with “EN” for Editor’s Note. (The eighth edition was the first
to use editor’s notes. Editor’s notes for the ninth edition are identified as EN9, and notes
added for the present edition are identified as EN10).
So, we have here a simpler, shorter, clearer edition of the famous book—easier to read,
easier to understand, and easier to use. None of the considerable virtues of the book have been
affected. I have attempted to add to these virtues with my work on Magee’s Basing Points
Procedure (see Chapter 28, 28.1, and 28.2) and portfolio control and risk (see Chapter 42).
In spite of my remarks, I have listened to critics of the hand-drawn charts in this book.
These charts are the glory of the book and of the discipline of technical analysis. Their
application to modern markets seems ridiculously obvious to me—and I am perhaps a
dinosaur. So, I have decided to take a number of examples of the manual charts and post
them at http:/ /www.edwards-magee.com along with the same data charted by computer
so skeptics can compare the two methods. These will be found at http:/ /www.edwards-
magee.com/manualcharts.html.
xixPreface to the tenth edition
The internet so extends one’s capabilities and is so easy to use that it would be
irresponsible not to avail oneself. In Figures 9.2 and 9.3, I have printed charts that demand—
scream—to be viewed in a larger format. These will be found at http:/ /www.edwards-
magee.com/supercharts.html.
The reader is urged to read the prefaces to the eighth and ninth editions. I have not
repeated here all the editorial conventions detailed in those prefaces.
W. H. C. Bassetti
San Francisco, California
Acknowledgments for the tenth edition
So many colleagues and friends contribute to a book like this that one is in danger of getting
into the Academy Awards syndrome—endless thank yous and acknowledgments until
they bring out the hook and pull you off stage. So, I will not thank my parents and aunts
and uncles and wife and family, although they should be and by this mention are thanked.
More particularly, acknowledgments are due to my editorial and research assistant,
Carlos Bassetti.
My colleagues at Golden Gate University (GGU) are an invaluable source of advice,
wisdom, and support, particularly Professor Henry Pruden. It is no mystery why he is
internationally known and respected—besides being a world authority on Wyckoff. GGU
has also furnished me with an unending supply of bright, formidable graduate students
who have made major contributions to my work and to my thinking. Nehemiah Brown does
his best to keep me semi-organized as to spreadsheets. Matt Mullens and Brian Brooker
have assisted me with many of the Basing Point studies herein. Stergios Marinopoulos
has stimulated and challenged me in my systems work. All these people are members in
the local technical analysis fraternity and our much-valued organization, the Technical
Securities Analysts Association of San Francisco.
More remote colleagues have also assisted me in many invaluable ways—Jack Schannep
with Dow Theory data, Robert Colby, also with Dow data; Tim Knight with Prophet data
(now part of http:/ /www.thinkorswim, http:/ /www.tdamertrade.com), Chip Anderson
at http:/ /www.stockcharts.com, and Scott Brown of Metastock for support with charting
software.
I am indebted to Ralph Vince and Nelson Freeburg for material found herein that
increases the value of this book.
And finally, amigo Française, and fellow chart enthusiast Chris Glon at http:/ /www.
publicharts.com, for his charts, assistance, and friendship. He has supplied some of the
most interesting charts in this book.

xxi
Preface to the ninth edition
Warp speed universe. Warp speed financial markets. The eighth edition of this classic book
appeared when it seemed t

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


increases the value of this book.
And finally, amigo Française, and fellow chart enthusiast Chris Glon at http:/ /www.
publicharts.com, for his charts, assistance, and friendship. He has supplied some of the
most interesting charts in this book.

xxi
Preface to the ninth edition
Warp speed universe. Warp speed financial markets. The eighth edition of this classic book
appeared when it seemed the millennium and paradise had been achieved and that, like
Mackay’s Tulipomania, the price of stocks would rise forever and men would rush from the
world over and pay whatever price was asked for what-was-its-name.com, internet groceries,
or ihype.com or icon.com or gotcha.com. and, feature this, Dow 36,000. The bubble was just
in the process of bursting, of course. Before it burst, fabulous fortunes were made by roller
blader and scooter tycoons and by young geeks with nothing but chutzpah and a laptop. One
of my favorite stories is of the young entrepreneur who said, “Why don’t I deserve it (the $100
million he made in the IPO)? I’ve devoted three years of my life to this project.” He is now dead.
Now, many of those people are in prison and the hangover lingers on along with lying,
cheating, and stealing on all sides. From Enron to Arthur Anderson, billions, if not trillions,
fell into a black hole. As all this developed, I warned of the impending collapse in the John
Magee Investment Letters on the web. There was nothing magical or brilliant about seeing
what was going on; perspective and perception came from applying the lessons taught in
this book by Edwards and Magee. Like Benedict XVI (in a different area), I am a humble
worker in their vineyard.
I press on attempting to modernize (where necessary) and extend their work, fit it to
the modern situation, and make it even more useful to current day traders and investors.
In this ongoing labor of love, I have been immeasurably assisted by my graduate
students and colleagues at Golden Gate University in San Francisco. In constant interaction
with them I have been stimulated to see important aspects of Edwards and Magee’s work
and develop and emphasize these elements in my teaching and in this new edition.
Specifically, both long-term and short-term traders will find important new material
in this edition. In my graduate seminars, I have seen the power of what Magee called the
“Basing Points Procedure” and so have extended the treatment of this material. My interest
in, and respect for, Dow Theory has recently increased as the result of a paper done with
Brian Brooker for the Market Technicians Association (“Dissecting Dow Theory”). Material
from that paper will be found in this edition. Short-term traders and futures speculators
will appreciate extensive new material on commodity trading. These traders have been
entirely too influenced by mechanical number-driven systems of recent years and need to
restore perspective by mastering the material of this book.
It was never the intent of this book to forecast or analyze current markets; rather, its
purpose was, and is, to learn from history and the past to better deal with the present
and the future. Current markets are analyzed (and forecast?) at the John Magee website.
Nonetheless, the very process of keeping current involves picturing issues and instruments
in play. The major indexes themselves in 2005 are in play, along with gold, silver, and oil.
We don’t know how they will pan out, but we can make an analysis with the data we have,
for this is the situation the analyst is faced with every day. He doesn’t know how it will turn
xxii Preface to the ninth edition
out, but, by following the methods and principles taught in this book, he can put himself
on the right side of the probabilities.
This is no idle remark. The power and effectiveness of classical chart analysis can
be seen by examining how it performed in the past at critical times. At the John Magee
Technical Analysis website, the following comment was made in January 2000:
Dow: The Dow can expect to find support at 10000 and is buyable, but
in small commitments or portions of a portfolio or additions thereto.
We expect to see it in a very large see saw from 9–12000 for some time
and would hedge at the high end and increase commitments and lift
hedges on oversold conditions at the low end.
In November 2000, the following comment was made:
November 18, 2000
There is really only one chart pattern of significance in these markets,
and that is the big one, more than 12 months long now, and the pattern
is a big serpent, whipping back and forth and, as Shakespeare said,
signifying nothing. Nothing that is but more of the same. How will we
know when it signifies something? Well, we won’t really know till we
know, but we’ll let you know when we know. So, we would continue to
pick likely shorts and employ short term trading strategies for traders,
and hedge at interim tops and lift the hedges at bottoms. Based on the
chart picture and last week’s anemic behavior, we would not trade
for bounces in the NASDAQ. If anything, it is a short, but a risky one.
These past letters, dramatically illustrating the effectiveness of the methods of this book,
may be found online through links at the address specified below. Your editor, personally,
is not a genius for having made these analyses. It is the method which is to credit, and any
number of my graduate students can make the same analyses, as can any alert chart analyst.
The reader should not skip the prefatory material to the eighth edition. The same
practices outlined there have been followed in this edition. Magee said the reader should
not skim through this book and put it on his library shelf. Instead, it should be read and
reread and constantly referred to and so the reader should, yes, so he should.
Richard Russell, the dean of Dow Theory Analysts, has reportedly said the price of the
Dow and the price of gold will cross in coming years. He


es outlined there have been followed in this edition. Magee said the reader should
not skim through this book and put it on his library shelf. Instead, it should be read and
reread and constantly referred to and so the reader should, yes, so he should.
Richard Russell, the dean of Dow Theory Analysts, has reportedly said the price of the
Dow and the price of gold will cross in coming years. He has also remarked that the S&P
appears to evince a 10-year head-and-shoulders pattern. Robert Prechter believes we are at
the crest of the tidal wave and the tsunami cometh.
Dow 36,000. Dow 3,000. This book contains the best tools to cope with whatever the
future holds.
W. H. C. Bassetti
San Francisco, California
May 1, 2005
A special note concerning resources on the Web
In the age of instant and easy (and free) access to information on the internet, it would
be foolish to ignore the opportunities available to interact with the material of this book.
The reader will find free materials that augment the book at http://www.edwards-magee.
com. For example, when the reader learns in Chapter 28 of the Basing Points Procedure, he
xxiiiPreface to the ninth edition
will be able to go to the website and print out a PDF of material that he can place beside
Figure 28.1 for instant and easy cross-reference, instead of having to turn pages constantly
back and forth from the chart to the keys and commentary or having to bend the book
into pretzels at a copy machine. In general, wherever references are made in the text to the
website, it is for this purpose, to give the reader easy and flexible usage of the material. And,
likewise, at this address the reader will find links to past letters that show how the method
functioned in real time in real markets.
A special note about Dow Theory
Senator Everett Dirkson said one time that trying to get U.S. senators herded together and
moving in one direction was like trying to transport bullfrogs in a wheelbarrow. Trying
to synchronize the signals of the various Dow Theory analysts is a similarly challenging
proposition. No Ayatollah exists to issue the final fatwa as to whether the signal is valid.
Always one to abhor a vacuum, I have organized a committee at Golden Gate University
to evaluate pronouncements of signals and opine as to whether the signals are valid. This
committee died an unnatural death, unfortunately, for lack of demand as to its expertise.
Acknowledgments for the ninth edition
For professional assistance: Jack Schannep, Robert W. Colby, Curtis Faith, Greg Morris, John
Murphy, Tim Knight, and Chi Huang.
For assistance at Taylor and Francis: Richard O’Hanley, Raymond O’Connell, Pat
Roberson, Andrea Demby, and Roy Barnhill.
For research assistance and manuscript preparation: Brian Brooker and Grace Ryan,
my fearsomely bright and efficient teaching and research assistants. And my inimitable
technical assistant, Samuel W. D. Bassetti.
At Golden Gate University for ongoing support and assistance: Professor Henry
Pruden, Barbara Karlin, Janice Carter, Tracy Weed, and Cassandra Dilosa.
Special appreciation goes to makers of software packages and their supportive
executives for software used in the preparation of this and previous editions:
John Slauson
Adaptick
1082 East 8175 South
Sandy, UT 84094
http://www.adaptick.com
Steven Hill
AIQ Systems
P.O. Box 7530
Incline Village, NV 89452
702-831-2999
http://www.AIQsystems.com
Alan McNichol
Metastock
Equis International, Inc.
3950 S. 700 East, Suite 100
Salt Lake City, UT 84107
http://www.equis.com

xxv
Preface to the eighth edition
Here is a strange event—a book written in the mid-20th century retains its relevancy and
importance to the present day. In fact, Technical Analysis of Stock Trends remains the definitive
book on the subject of analyzing the stock market with charts. Knock-offs, look-alikes, and
pale imitations have proliferated in its wake like seagulls after a productive fishing boat.
But the truth is they have added nothing new to the body of knowledge Edwards and
Magee originally produced and Magee refined up to the fifth edition.
What accounts for this rare occasion of a book’s passing to be a classic? To be more, in
fact, than a classic, to be the manual or handbook for current usage?
To answer this question, we must ask another: What are chart formations? Chart
formations identified and analyzed by the authors are graphic representations of
unchanging human behavior in complex multivariate situations. They are the depiction
of multifarious human actions bearing on a single variable (price). On price, converge a
galaxy of influences: fear, greed, desire, cunning, malice, deceit, naiveté, earnings estimates,
broker need for income, gullibility, professional money managers’ need for performance
and job security, supply and demand of stocks, monetary liquidity and money flow, self-
destructiveness, passivity, trap setting, manipulation, blind arrogance, conspiracy and
fraud and double dealing, phases of the moon and sun spots, economic cycles and beliefs
about them, public mood, and the indomitable human need to be right.
Chart formations are the language of the market, telling us that this stock is in its death
throes; that stock is on a rocket to the moon; that a life and death battle is being waged in
this issue; and in that other, the buyers have defeated the sellers and are breaking away.
They are, in short, the inerasable fingerprints of human nature made graphic in the
greatest struggle in human experience, next to war.
As Freud mapped the human psyche, so have Edwards and Magee mapped the human
mind and emotions as expressed in the financial markets. Not only did they produce a
definitive map, they also produced a methodology for interpreting and profiting from the
behavior of men and markets. It is difficult to imagine further progress in this area until
the science of artificial intelligence, aided by yet unimaginable computer hardware, makes
n


e Edwards and Magee mapped the human
mind and emotions as expressed in the financial markets. Not only did they produce a
definitive map, they also produced a methodology for interpreting and profiting from the
behavior of men and markets. It is difficult to imagine further progress in this area until
the science of artificial intelligence, aided by yet unimaginable computer hardware, makes
new breakthroughs.
If it is definitive, why offer a new edition?
Unlike Nostradamus and Jules Verne (and many current investment advisors), the authors
did not have a crystal ball or a time machine. Magee did not foresee the electronic calculator
and made do with a slide rule. And while he knew of the computer, he did not anticipate
that every housewife and investor would have 1,000 times the power of a Whirlwind or
Univac I on his (her) desk (cf., “ About Gender”). In short, the March of Time. The Progress
of Science. The Inexorable Advance of Technology.
xxvi Preface to the eighth edition
Amazingly, the great majority of this book needed no update or actualization. Who is
to improve on the descriptions of chart formations and their significance?
But insofar as updates are necessary to reflect the changes in technology and in the
character and composition of the markets, that is another story. Human character may
not change, but in the new millennium, there is nothing but change in the character and
composition of the markets. And while regulatory forces might not be completely in agreement,
the majority of these changes have been positive for the investor and the commercial user. Of
course, Barings Bank and some others are less than ecstatic with these developments.
The most important additions to this book to reflect
changes in the times, technology, and markets
Generally speaking, these additions, annotations, and updates are intended to inform the
general reader of conditions of which he must be aware for investing success. In most cases,
because of the enormous amount of material, no attempt is made to be absolutely exhaustive
in the treatment of these developments. Rather, the effort is made to put changes and new
conditions in perspective and furnish the investor with the resources and proper guide to
pursue subjects at greater length if desired. In fact, an appendix has been provided, entitled
Resources (EN10: now Appendix B), to which the reader may turn when he has mastered the
material of the book proper.
The stubborn individualist may realize investment success with the use of this book
alone (and paper, pencil, ruler, and chart paper [cf., Section on TEKNIPLAT™ chart paper]).
Technology
In order to equip this book to serve as a handbook and guide for the markets of the new
millennium, certain material has been added to the text of the fifth and seventh editions.
Clearly, the astounding advances in technology must be dealt with and put in the context of
the analytical methods and material of the original. To achieve success in the new, brave world,
an investor must be aware of and utilize electronic markets, the internet, the microcomputer,
wireless communications, and new exchanges offering every kind of exotica imaginable.
The advanced investor should also be aware of and understand some of the
developments in finance and investment theory and technology—the Black–Scholes Model,
Modern Portfolio Theory, Quantitative Analysis. Fortunately, all these will not be dealt
with here because, in truth, one intelligent investor with a piece of chart paper, a pencil,
and a quote source can deal with the markets, but that is another story we will explore
later in the book. Some of these germane subjects will be discussed sufficiently to put them
in perspective for the technical analyst, and then guides and resources will be pointed
out for continued study. My opinion is that the mastery of all these subjects is not wholly
necessary for effective investing at the private level. What need does the general investor
have for an understanding of the Cox–Ross–Rubinstein (CRR) options analysis model to
recognize trends? The Edwards–Magee model knows things about the market the CRR
model does not.
Trading and investment instruments
The new universe of available trading and investment instruments must be taken into
account. The authors would have been in paradise at the profusion of alternatives. In this
future world, they could have traded the Averages (one of the most important changes
xxviiPreface to the eighth edition
explored in this book); used futures and options as investment and hedging mechanisms;
practiced arbitrage strategies beyond their wildest dreams; and contemplated a candy
store full of investment products. The value and utility of these products would have been
immeasurably enhanced by their mastery of the charting world of technical analysis. As
only one example, one world-prominent professional trader I know has made significant
profits selling calls on stocks he correctly analyzed to be in down trends, and vice versa—
an obvious (or, as they say, no-brainer) to a technician, but not something you should
attempt at home without expert advice. Techniques like this occasioned the loss of many
millions of dollars in the Reagan Crash of 1987 .
Changes and developments in technical analysis
Have any new chart patterns (that is to say, changes in human behavior and character) emerged
since the fifth edition? Not to my knowledge, although there are those who take the same data
and draw different pictures from them. How else could you say that you had something new!
different! better!? There are other ways of looking at the data that are interesting, sometimes
valuable, and often profitable, which goes to prove that many are the ways and gateless is the
gate to the great Dow. Point and figure charting have been used very effectively by traders I
know, and candlestick charting depicts data in interesting ways. Furthermore, since Magee’s


ad something new!
different! better!? There are other ways of looking at the data that are interesting, sometimes
valuable, and often profitable, which goes to prove that many are the ways and gateless is the
gate to the great Dow. Point and figure charting have been used very effectively by traders I
know, and candlestick charting depicts data in interesting ways. Furthermore, since Magee’s
time, aided by the computer, technicians have developed innumerable, what I call, number-
driven technical analysis tools: (the puzzlingly named) stochastics, oscillators, exponential and
other moving averages, etc., etc., etc. It is not the intent of this book to explore these tools in
depth. That will be done in a later volume. These concepts are briefly explored in an appendix
(Appendix C, 8th edition) supplied by Richard McDermott, editor of the seventh edition.
I have also made additions to the book (see Chapter 18) to give a perspective on long-
term investing, since Magee specifically addressed the second part of the book (on tactics)
to the speculator. I have substantially rewritten Chapters 24 and 42 to reflect current ideas
on portfolio management and risk management. I have expanded on the idea of rhythmic
trading—an idea which is implicit in the original. I have expanded the treatment of runaway
markets so the internet stocks of the 1990s might be put in perspective (see Chapter 23).
And then, paradigms. Paradigms, as everyone should know by now, are the last refuge
of a fundamentalist when all other explanations fail.
Paradigm changes
Whenever the markets, as they did at the end of the 20th century, depart from the commonly
accepted algorithms for determining what their prices ought to be, fundamentalists (those
analysts and investors who believe they can determine value from such fixed verities as
earnings, cash flow, etc.) are confronted with new paradigms. Are stock prices (values)
to be determined by dividing price by earnings to establish a reasonable price/earnings
(p/e) ratio? Or should sales be used, or cash flow, or the phases of the moon, or—in the late
1990s—should losses be multiplied by price to determine the value of the stock? Technicians
are not obliged to worry about this kind of financial legerdemain. The stock is worth what
it can be sold for today in the market.
The crystal ball
Investors will get smarter and smarter, starting with those who learn what this book has to say.
The professionals will stay one step ahead of them because they are preternaturally cunning
and spend all their time figuring out how to keep ahead of the public, but the gap will narrow.
xxviii Preface to the eighth edition
Software and hardware will continue to advance, but not get any smarter. Mechanical systems
will work well in some areas, yet not in others. Mechanical systems are only as good as the
engineer who designs them and the mechanic who maintains them. Buying systems is buying
trouble. Everyone should find his own method (usually some variant of the Magee method, in
my opinion). All good things will end; all bad things will end. The bag of tricks with which the
insiders bilk the public will get smaller and smaller. New and ingenious procedures will be
developed by the insiders. The well of human naiveté is bottomless. For every one educated, a
new one will be born in a New York minute. It is deeply disturbing at the turn of the century
that the owners of the NASDAQ and the NYSE should be thinking of going public. Could there
be any more ominous sign that enormous changes are about to occur?
Vigorous development of the systems, methods, procedures, and philosophy outlined
in this book is about the only protective shield I know of to guard against inimical change.
W. H. C. Bassetti
San Geronimo, California
January 1, 2001
About the editorial practices in this eighth edition
Needless to say, one approaches the revision of a classic work with some trepidation. Every
critic and reader has his or her (cf., “ About Gender”) opinion as to how revision should
be done—whether the authors’ original text should be invisibly changed as though they
had written the book in 2000 instead of 1948 and were omniscient, or whether errors and
anachronisms were to be lovingly preserved, or footnoted, or … etc., etc . (I have preserved
Magee’s favorite usage of “etc., etc., etc.” against the protestation of generations of English
composition teachers because I like its evocation of an ever-expanding universe.)
Notwithstanding every reader having an opinion, I am certain all critics will be
delighted with the practices followed in this third millennium edition of the most important
book on technical analysis written in the second millennium.
Integrity of the original text
By and large, the fifth edition has been the source of the authors’ original text. Amazingly,
almost no stylistic or clarifying emendation has been necessary to that edition. This is a
tribute to the clarity, style, and content of the original—one might almost say awesome if
the word were not in such currency on “Saturday Night Live” and the Comedy Central.
Considering its complex subject was written in the middle of the last century and the
markets were one-tenth of their present complexity, awesome may be the appropriate word.
No change or update has been necessary to the technical observations and analysis. They
are as definitive today as they were in 1950.
While I have preserved the authors’ original intent and text, I have taken the liberty of
rearranging some of the chapters. Novices wishing to learn manual charting will find the
appropriate chapters moved to appendices at the back of the book, along with the chapters
on Composite Leverage and Sensitivity Indexes.
About apparent anachronisms
Critics with limited understanding of long-term trading success may think that
discussions of “what happened in 1929” or “charts of ancient history from 1946”
xxixPreface to the eighth edition


o learn manual charting will find the
appropriate chapters moved to appendices at the back of the book, along with the chapters
on Composite Leverage and Sensitivity Indexes.
About apparent anachronisms
Critics with limited understanding of long-term trading success may think that
discussions of “what happened in 1929” or “charts of ancient history from 1946”
xxixPreface to the eighth edition
have no relevance to the markets of the present millennium. They will point out that
AT&T no longer exists in that form, that the New Haven has long since ceased to exist
as a stock, that many charts are records of long-buried skeletons. This neglects the
value of the charts as metaphor. It ignores their representations of human behavior
in the markets which will be replicated tomorrow in some stock named today.com or
willtheynevergetit.com. Even more important, it ignores the significance of the past to
trading in the present. I cite here material from Jack Schwager’s illuminating book, The
New Wizards of Wall Street . Schwager, in conversation with Al Weiss: “Precisely how far
back did you go in your chart studies?” Answer: “It varied with the individual market
and the available charts. In the case of the grain markets, I was able to go back as far as
the 1840s.” “Was it really necessary to go back that far?” Answer: “ Absolutely. One of the
keys in long-term chart analysis is realizing that markets behave differently in different
economic cycles. Recognizing these repeating and shifting long-term patterns requires
lots of history. Identifying where you are in an economic cycle—say, an inflationary
phase versus a deflationary phase—is critical to interpreting the chart patterns evolving
at that time.”
Identification of original manuscript and revisions
True believers (and skeptics) will find here virtually all of the original material written
by Edwards and Magee, including their charts and observations on them. Changes and
comments introduced by editors since the fifth edition have been rearranged, and, when
appropriate, have been identified as a revision by that editor.
Maintaining this policy, where updates to the present technological context and market
reality were necessary, the present editor has clearly identified them as his own work by
beginning such annotations with “EN” for Editor’s Note. Figure insertions are identified
as “x.1, x.2.”
Absolutely necessary revisions
Not too long ago my youngest son, Pancho, overheard a conversation in which I referred
to a slide rule. “What’s a slide rule, Dad?” he asked. Well, needless to say the world has, in
general, moved on from the time of Edwards and Magee when instead of calculators we
had slide rules. Where time has made the text useless, moot, or irrelevant, that problem has
unobtrusively been corrected.
Where the passage of time has made the text obsolete, I have either footnoted the
anachronism and/or provided a chapter-ending annotation, which are marked in the text
with “EN.” It is absolutely essential to read the annotations; failure to do so will leave the
reader stranded in the 20th century.
In some cases, these annotations amount to new chapters—for example, trading
directly in the averages was difficult in Magee’s time. Nowadays, if there is not a proxy
or option or index for some Index or Average or basket of stocks, there will be one in
less than a New York minute (which, as everyone knows, has only 59 seconds). This new
reality has resulted in major additions to this new edition, which are detailed in the
Foreword. Major chapter additions necessary to deal with developments in technology
and finance theory have been clearly identified as this editor’s work by designating
them as interpolations, viz., Chapter 18 (with the exception of Chapter 23, which I have
surreptitiously inserted).
xxx Preface to the eighth edition
Absolutely necessary revisions that arose in the 30
minutes since this editorial note was written
In a number of instances, the book relayed information that, in those days of fixed
commissions and monopolistic control by the existing exchanges, remained valid for long
periods of time; for instance, brokerage commissions and trading costs. It is no longer
possible to maintain such information in a printed book because of the rate of change
in the financial industry. It must now be filed and updated in real time on the internet.
Consequently, readers will be able to refer to the internet for this kind of ephemeral data.
The general importance of the ephemera to the subject is always discussed.
About gender
I quote here from my foreword to the second edition of Magee’s General Semantics of Wall
Street (charmingly renamed according to the current fashions, Winning the Mental Game on
Wall Street):
About Gender in Grammar
Ich bin ein feminist. How could any modern man, son of a beloved
woman, husband of an adored woman, and father of a joyful and
delightful daughter not be? I am also a traditionalist and purist in
matters of usage, grammar, and style. So where does that leave me
and my cogenerationalists, enlightened literary (sigh) men (and
women), with regards to the use of the masculine pronoun when
used in the general sense to apply to the neuter situation?
In Dictionary of Modern American Usage, Garner notes: “English
has a number of common-sex general words, such as person, anyone,
everyone, and no one, but it has no common-sex singular personal
pronouns. Instead we have he, she, and it. The traditional approach
has been to use the masculine pronouns he and him to cover all
persons, male and female alike … . The inade quacy of the English
language in this respect becomes apparent in many sentences in
which the generic masculine pronoun sits uneasily.”
Inadequate or not, it is preferable to s/he/it and other
bastardizations of the English language. (Is it not interesting that
“bastard,” in common usage, is never used of a woman, even
when she is illegit


over all
persons, male and female alike … . The inade quacy of the English
language in this respect becomes apparent in many sentences in
which the generic masculine pronoun sits uneasily.”
Inadequate or not, it is preferable to s/he/it and other
bastardizations of the English language. (Is it not interesting that
“bastard,” in common usage, is never used of a woman, even
when she is illegitimate?) As for the legitimacy of the usage of the
masculine (actually neuter) pronoun in the generic, I prefer to lean
on Fowler, who says, “There are three makeshifts: first, as anybody
can see for himself or herself; second, as anybody can see for
themselves; and third, as anybody can see for himself. No one who
can help it chooses the first; it is correct, and is sometimes necessary,
but it is so clumsy as to be ridiculous except when explicitness is
urgent, and it usually sounds like a bit of pedantic humor. The
second is the popular solution; it sets the literary man’s (!) teeth
on edge, and he exerts himself to give the same meaning in some
entirely different way if he is not prepared to risk the third, which
is here recommended. It involves the convention (statutory in the
xxxiPreface to the eighth edition
interpretation of documents) that where the matter of sex is not
conspicuous or important the masculine form shall be allowed to
represent a person instead of a man, or say a man (homo) instead
of a man (vir).”
Politically correct fanatics may rail, but so are my teeth set on
edge; thus, I have generally preserved the authors’ usage of the
masculine for the generic case. This grammatical scourge will pass
and be forgotten, and weak-willed myn (by which I intend to indicate
men and women) who pander to grammatical terrorists will, in the
future, be seen to be stuck with malformed style and sentences no
womyn will buy. What would Jane Austen have done, after all?
About Gender in Investors
As long as we are on the subject of gender, we might as well discuss,
unscientifically, gender in investors. Within my wide experience as a
trading advisor, teacher, and counselor, it strikes me that the women
investors I have known have possessed certain innate advantages
over the men. I know there are women gamblers—I have seen some.
But I have never seen a woman plunger (shooter, pyramider, pie-eyed
gambler) in the markets, though I have known many men who fit this
description. I have also noted among my students and clients that,
as a group, women seem to have more patience than men. I refer
specifically to the patience that a wise investor must have to allow
the markets to do what they are going to do.
These are wholly personal observations. I have made no study of
the question and can’t speak to the entire class of women investors—
and do not personally know Barbra Streisand (who I understand is a
formidable investor, especially in IPOs). But just as I believe the world
would be better off if more women ran countries and were police
officers, I expect the world of finance will benefit from the steadily
increasing number of women investors and managers.
A crucial question: sensitivity indexes and betas
Long before the investment community had formalized the beta measure—the coefficient
measuring a stock’s volatility relative to the market—Magee and Edwards were computing
a Sensitivity Index, which, for all practical purposes, was the same thing. Readers interested
in this aspect of their work may find references in Resources (EN10: now Appendix B), which
will enable them to obtain betas to plug into the Composite Leverage formula with which
Magee intended to determine risk levels. The old appendix on Sensitivity Indexes has been
consigned to Appendix A (8th edition), along with the chapter on Composite Leverage,
both originals of which have been emended to reflect current practices in finance theory
and practice.
Betwixt and between, 1/8 of a dollar or 12.5 cents
As this edition went to press, the financial services industry was once again threatening
to implement decimals in stock prices. Pricing in eighths has endured long past its time
xxxii Preface to the eighth edition
because it was in the self-interest of the financial industry—it allowed brokers and market
makers to enforce larger bid–ask spreads and fatten their profit margins. The importance
for this book, and for traders, is what will happen as full decimalization occurs. Often
in these pages, Magee will recommend placing a stop 1/8 off the low or high, or placing
progressive near stops in eighths. We do not yet know what the psychological interval will
be in the new era; it may be 12.5 cents, or more psychologically, 10 cents, or for gaming
purposes, 9 or 11 cents. This remains to be seen. As all the charts in this book are in the old
notation, that usage has been preserved in this edition.
The editorial “I”
Readers will quickly note the “editorial we” of Edwards and Magee has been replaced by
the first-person voice—or, the “editorial I” or perhaps the “professorial I.” Well, there were
two authors in Edwards and Magee, and there is only one of me; my text is immediately
noticeable as mine, and the reader may discriminate quickly. As for the use of “I” as an
expression of ego, the reader is assured that after 40 years in the market, the editor has
no ego left to promote. Perhaps the best way to put the editor’s sense of importance in
perspective is to quote Dr. Johnson’s definition of lexicographer from his dictionary. Some
people might have thought Johnson self-important in creating the first English dictionary;
his definition of his trade put that right: “Lexicographer: a writer of dictionaries. A harmless
drudge.” An editor is something like the same.
As this book goes to the printer, the publisher, recognizing the importance of the work
done on this edition, will credit the editor as co-author of the eighth edition. John Magee
would be pleased. We had a cordial master–st


e first English dictionary;
his definition of his trade put that right: “Lexicographer: a writer of dictionaries. A harmless
drudge.” An editor is something like the same.
As this book goes to the printer, the publisher, recognizing the importance of the work
done on this edition, will credit the editor as co-author of the eighth edition. John Magee
would be pleased. We had a cordial master–student relationship, and nothing pleases a Zen
master more than to transfer the dharma to a passionate student.
Acknowledgments
In General:
John Magee, for his ever-patient tutoring.
Blair Hull, for teaching me the mercurial nature of options.
Bill Dreiss, for teaching me the nature of trading systems.
Art von Waldburg, respected colleague and discoverer of the Fractal Wave Algorithm.
Fischer Black, who should have lived to get the Nobel Prize.
Bill Scott, friend and fellow trader.
For specific support and assistance in the preparation of this eighth edition:
Professor Henry Pruden, Golden Gate University, San Francisco, for invaluable support
and advice.
Martin Pring; Lawrence Macmillan; Mitch Ackles, Omega Research Corporation;
Carson Carlisle; Edward Dobson; David Robinson; Shereen Ash; Steven W. Poser;
Lester Loops, late of Hull Trading Company; Tom Shanks, Turtle.
At St. Lucie Press, the dedication and support of the publisher, Drew Gierman, and
Production Associate, Pat Roberson, have been invaluable, as has been the dedication
of Gail Renard, the Production Editor.
And special acknowledgment to my Research Assistant, Don Carlos Bassetti y Doyle.
xxxiiiPreface to the eighth edition
Special appreciation goes to makers of software packages used in the preparation of
this and previous editions:
AIQ Systems
P.O. Box 7530
Incline Village, NV 89452
702-831-2999
http://www.AIQsystems.com
Metastock
Equis International, Inc.
3950 S. 700 East, Suite 100
Salt Lake City, UT 84107
http://www.equis.com
Tradestation
Omega Research
14257 SW 119th Avenue
Miami, FL 33186
305-485-7599
http://www.tradestation.com

xxxv
In memoriam
This book is a memorial for John Magee, who died on June 17 , 1987 . John Magee was
considered a seminal pioneer in technical analysis, and his research with co-author, Robert
D. Edwards, clarified and expanded the ideas of Charles Dow, who laid the foundation for
technical analysis in 1884 by developing the “ Averages,” and Richard Schabacker, former
editor of Forbes in the 1920s, who showed how the signals, which had been considered
important when they appeared in the averages, were applicable to stocks themselves. The
text, which summarized their findings in 1948, was, of course, Technical Analysis of Stock
Trends, now considered the definitive work on pattern recognition analysis. Throughout
his technical work, John Magee emphasized three principles: stock prices tend to move in
trends; volume goes with the trend; and a trend, once established, tends to continue in force.
A large portion of Technical Analysis of Stock Trends is devoted to the patterns which
tend to develop when a trend is being reversed: Head and Shoulders, Tops and Bottoms,
“W” patterns, Triangles, Rectangles, etc.—common patterns to stock market technicians.
Rounded Bottoms and Drooping Necklines are some of the more esoteric ones.
John urged investors to go with the trend, rather than trying to pick a bottom before it
was completed, averaging down a declining market. Above all, and at all times, he refused
to get involved in the game of forecasting where “the market” was headed, or where the
Dow–Jones Industrial Averages would be on December 31st of the coming year. Rather, he
preached care in individual stock selection regardless of which way the market “appeared”
to be headed.
To the random walker, who once confronted John with the statement that there was
no predictable behavior on Wall Street, John’s reply was classic. He said, “You fellows
rely too heavily on your computers. The best computer ever designed is still the human
brain. Theoreticians try to simulate stock market behavior, and, failing to do so with any
degree of predictability, declare that a journey through the stock market is a random walk.
Isn’t it equally possible that the programs simply aren’t sensitive enough or the computers
strong enough to successfully simulate the thought process of the human brain?” Then John
would walk over to his bin of charts, pull out a favorite, and show it to the random walker.
There it was—spike up, heavy volume; consolidation, light volume; spike up again, heavy
volume. A third time. A fourth time. A beautifully symmetrical chart, moving ahead in a
well-defined trend channel, volume moving with price. “Do you really believe that these
patterns are random?” John would ask, already knowing the answer.
We all have a favorite passage or quotation by our favorite author. My favorite quotation
of John’s appears in the short booklet he wrote especially for subscribers to his Technical
Stock Advisory Service: “When you enter the stock market, you are going into a competitive
field in which your evaluations and opinions will be matched against some of the sharpest
and toughest minds in the business. You are in a highly specialized industry in which there
are many different sectors, all of which are under intense study by men whose economic
xxxvi In memoriam
survival depends upon their best judgment. You will certainly be exposed to advice,
suggestions, offers of help from all sides. Unless you are able to develop some market
philosophy of your own, you will not be able to tell the good from the bad, the sound from
the unsound.”
I doubt if any man alive has helped more investors develop a sound philosophy of
investing on Wall Street than John Magee.
Richard McDermott
President, John Magee, Inc.
September 1991
xxxvii
Preface to the seventh edition
More than 100 years ago, in Springfield, MA, there lived a man named Charles H. Dow.
He was one of the editors of a great newsp


good from the bad, the sound from
the unsound.”
I doubt if any man alive has helped more investors develop a sound philosophy of
investing on Wall Street than John Magee.
Richard McDermott
President, John Magee, Inc.
September 1991
xxxvii
Preface to the seventh edition
More than 100 years ago, in Springfield, MA, there lived a man named Charles H. Dow.
He was one of the editors of a great newspaper, the Springfield Republican . When he left
Springfield, it was to establish another great newspaper, the Wall Street Journal.
Charles Dow also laid the foundation for a new approach to stock market problems.
In 1884, he made up an average of the daily closing prices of 11 important stocks, nine
of which were rails, and recorded the fluctuations of this average.
He believed the judgment of the investing public, as reflected in the movements of stock
prices, represented an evaluation of the future probabilities affecting the various industries.
He saw in his average a tool for predicting business conditions many months ahead. This
was true because those who bought and sold these stocks included people intimately
acquainted with the industrial situation from every angle. Dow reasoned the price of a
security, as determined by a free competitive market, represented the composite knowledge
and appraisal of everyone interested in that security—financiers, officers of the company,
investors, employees, customers—everyone, in fact, who might be buying or selling stock.
Dow felt this market evaluation was probably the shrewdest appraisal of conditions to
come that could be contained, since it integrated all known facts, estimates, surmises, and
the hopes and fears of all interested parties.
It was William Peter Hamilton who really put these ideas to work. In his book, The
Stock Market Barometer, published in 1922, he laid the groundwork for the much-used and
much-abused Dow Theory.
Unfortunately, a great many superficial students of the market never understood the
original premise of the “barometer” and seized on the bare bones of the theory as a sort of
magic touchstone to fame and easy fortune.
Others, discovering the “barometer” was not perfect, set about devising corrections.
They tinkered with the rules of classic Dow Theory, trying to find the wonderful formula
that would avoid its periodic disappointments and failures.
Of course, what they forgot was the Averages were only averages at best. There is
nothing very wrong with the Dow Theory. What is wrong is the attempt to find a simple,
universal formula—a set of measurements that will make a suit to fit every man, fat, thin,
tall, or short.
During the 1920s and 1930s, Richard W. Schabacker reopened the subject of technical
analysis in a somewhat new direction. Schabacker, who had been financial editor of Forbes
Magazine, set out to find some new answers. He realized whatever significant action appeared
in the average must derive from similar action in some of the stocks making up the average.
In his books, Stock Market Theory and Practice, Technical Market Analysis, and Stock Market
Profits, Schabacker showed how the “signals” that had been considered important by Dow
theorists when they appeared in the Averages were also significant and had the same
meanings when they turned up in the charts of individual stocks.
xxxviii Preface to the seventh edition
Others, too, had noted these technical patterns, but it was Schabacker who collated,
organized, and systematized the technical method. Not only that, he also discovered
new technical indications in the charts of stocks; indications of a type that would
ordinarily be absorbed or smothered in the averages, and, hence, not visible or useful
to Dow theorists.
In the final years of his life, Richard Schabacker was joined by his brother-in-law, Robert
D. Edwards, who completed Schabacker’s last book and carried forward the research of
technical analysis.
Edwards, in turn, was joined in this work in 1942 by John Magee. Magee, an alumnus of
the Massachusetts Institute of Technology, was well oriented to the scientific and technical
approach.
Edwards and Magee retraced the entire road, reexamining the Dow Theory and
restudying the technical discoveries of Schabacker.
Basically, the original findings were still good; however, with additional history and
experience, it was possible to correct some details of earlier studies. Also, a number of new
applications and methods were brought to light. The entire process of technical evaluation
became more scientific.
It became possible to state more precisely the premises of technical analysis: that the
market represents a most democratic and representative criterion of stock values; that the
action of a stock in a free, competitive market reflects all that is known, believed, surmised,
hoped, or feared about that stock; and, therefore, that it synthesizes the attitudes and
opinions of all. That the price of a stock is the result of buying and selling forces and
represents the “true value” at any given moment. That a Major Trend must be presumed to
continue in effect until clear evidence of Reversal is shown. And, finally, that it is possible to
form opinions having a reasonably high probability of confirmation from the market action
of a stock as shown in daily, weekly, or monthly charts, or from other technical studies
derived from the market activity of the security.
It is important to point out that the ultimate value of a security to the investor or trader
is what he or she ultimately receives from it. That is to say, the price the investor gets when it
is sold, or the market price obtainable for it at any particular time, adjusted for dividends or
capital distribution in either case. If, for example, he or she has bought a stock at $25 a share,
and it has paid $5 in dividends and is now bid at $35, he or she has realized an accrued
benefit of $5 plus $10, or $15 in all. It is the combination of dividends and


e price the investor gets when it
is sold, or the market price obtainable for it at any particular time, adjusted for dividends or
capital distribution in either case. If, for example, he or she has bought a stock at $25 a share,
and it has paid $5 in dividends and is now bid at $35, he or she has realized an accrued
benefit of $5 plus $10, or $15 in all. It is the combination of dividends and appreciation of
capital that constitutes the total gain.
It seems futile to try to correlate or compare the market value of a stock with the “book
value” or with the “value” figured on a basis of capitalized earnings or dividends, projected
growth, etc. There are too many other factors that may also affect the value, and some of
these cannot easily be expressed in simple ratios. For example, a struggle for control of a
corporation can as surely increase the value of its securities in the market as a growth of
earnings. Again, a company may lose money for years and pay no dividends, yet still be
an excellent investment on the basis of its development of potential resources as perceived
by those who are buying and selling its stock. The market is not evaluating last year’s
accomplishments as such; it is weighing the prospects for the year to come.
Then, too, in a time of inflation, a majority of stocks may advance sharply in price. This
may reflect a depreciation in the purchasing power of dollars more than improvement in
business conditions—but it is important, nonetheless, in such a case to be “out of dollars”
and “into” equities.
As a result of their research from 1942 to 1948, Edwards and Magee developed new
technical methods. They put these methods to practical use in actual market operation.
xxxixPreface to the seventh edition
Eventually, in 1948, these findings were published in their definitive book, Technical Analysis
of Stock Trends.
This book, now in its seventh edition, has become the accepted authority in this field.
It has been used as a textbook by various schools and colleges and is the basic tool of many
investors and traders.
In 1951, Edwards retired from his work as a stock analyst and John Magee continued
the research, at first, independently, and then from January 1953 to March 1956 as Chief
Technical Analyst with an investment counseling firm.
Meanwhile, beginning in 1950, Magee started on a new road, which, as it turned out,
was destined to open up virgin fields of technical market research.
Using the methods of Dow, Hamilton, Schabacker, and Edwards as a base, he initiated
a series of studies intended to discover new technical devices. These investigations were
long and laborious, and, often, they were fruitless. One study required four months of
work, involved hundreds of sheets of tabulations, many thousands of computations, and
proved nothing.
But from this type of work, eventually in late 1951, there began to emerge some important
new and useful concepts—new bricks to build into the structure of the technical method.
The new devices are not revolutionary. They do not vitiate the basic technical approach.
Rather, they are evolutionary and add something to the valuable kit of tools already at
hand. The new studies often make it possible to interpret and predict difficult situations
sooner and more dependably than any other method previously used.
Mr. Magee has designated these newest technical devices the Delta Studies. They are
basically an extension and refinement of the technical method. There is no magic in the
Delta Studies. They do not provide infallible formulas for sure profits at all times in every
transaction, but they have proved eminently successful over a period of years in practical
use in actual market operations, as an auxiliary to the methods outlined in the book,
Technical Analysis of Stock Trends.
Through his technical work, John Magee emphasized these three principles:
 1. Stock prices tend to move in trends.
 2. Volume goes with the trends.
 3. A trend, once established, tends to continue in force.
A large portion of the book, Technical Analysis of Stock Trends, is devoted to the patterns
that tend to develop when a trend is being reversed. Head and Shoulders, Tops and Bottoms,
“W” Patterns, Triangles, Rectangles, etc., are common patterns to stock market technicians.
Rounded Bottoms and Drooping Necklines are some of the more esoteric ones.
Magee urged investors to go with the trend, rather than trying to pick a Bottom before
it was completed or averaging down in a declining stock. Above all, and at all times, he
refused to get involved in the game of forecasting where “the market” was headed, or
where the Dow Jones Industrial Average® would be on December 31st of the coming year.
Rather, he preached care in individual stock selection regardless of which way the market
“appeared” headed. Finally, his service recommended short positions as regularly as it did
long positions, based simply on what the charts said.
Richard McDermott
Editor and Reviser
Technical Analysis of Stock Trends, Seventh Edition
January 1997

xli
Preface to the fifth edition
During the 16 printings of the fourth edition of Technical Analysis of Stock Trends, very few
changes have been made in the original text, mainly because the lucid presentation of
market action by the late Robert D. Edwards covered so thoroughly the basic and typical
market action of common stocks. There has seemed no reason, for example, to discard a
chart picture illustrating some important technical phenomenon merely because it occurred
several or many years ago.
Instead, over the various printings of the book, pages have been added showing similar
examples, or in some cases entirely new types of market action taken from recent history;
but these demonstrate mainly that the inherent nature of a competitive market does not
change very much over the years, and that “the same old patterns” of human behavior
continue to produce much the same types of market tr


ead, over the various printings of the book, pages have been added showing similar
examples, or in some cases entirely new types of market action taken from recent history;
but these demonstrate mainly that the inherent nature of a competitive market does not
change very much over the years, and that “the same old patterns” of human behavior
continue to produce much the same types of market trends and fluctuations.
The principal change in this fifth edition, and it is a spectacular improvement, is
that practically all of the chart examples drawn to the TEKNIPLAT™ scale have been
redrawn and new plates of these have been substituted. In the course of this work, several
minor errors of scaling, titling, etc., previously undiscovered, came to light and have been
corrected.
The difficult work of revision was initiated in our charting room by two ambitious
teenagers, Anne E. Mahoney and Joseph J. Spezeski, who took on the entire job of preparing
the finished drawings and making necessary corrections. This enormous project was
undertaken and carried through by these two young people spontaneously. In order to
free them entirely from other distractions, their regular charting work was taken over for
a period of months by the rest of the chartroom staff, so that a great deal of credit is due to
the fine efforts of the entire chartroom group.
John Magee
December 3, 1966

xliii
Preface to the fourth edition
In the several years since publication of the first edition of this work, “the stock market
goes right on repeating the same old movements in much the same old routine.” Nearly all
of the technical phenomena outlined in the first edition have appeared many times since
then, and we see no reason to expect these habits of stocks will change materially in the
years ahead, barring revolutionary changes in the economy, such as the abolishment of the
free market entirely.
Since the basic nature of the market has not changed appreciably, it has been
unnecessary to make sweeping alterations in the text of “Part One: Technical Theory.” The
previous edition has been very carefully restudied, and revisions have been made where
they were called for to bring the material up to date. In “Part Two: Trading Tactics,” more
extensive changes were needed, due to the more specific nature of the material and some
differences in the present margin requirements, trading rules, etc. Also, there have been
some improvements in the application of technical methods at the tactical level, and these
have been incorporated in this section.
Somewhat less emphasis has been put on the use of stop-loss orders, since their need is
not so great in the case of the experienced trader as it might be with the novice. The principle
of always following the Major Trend has been modified to achieve better protection of
capital through balance and diversification. In line with avoiding “all-out” situations, with
their consequent dangers, the idea of using an Evaluative Index has been introduced, and
this concept has modified somewhat the tactics of following the Major Trend. It also has a
bearing on the Composite Leverage or determination of total risk.
Type for the entire book has been reset in this edition. The illustrative charts originally
used have been, in the main, retained, since they demonstrate the various points very well,
but a new chapter includes a number of additional charts taken from the market history
of recent years, showing how the same phenomena continue to appear again and again.
The appendix (Appendix C, 5th edition) on the Sensitivity Indexes has been completely
recomputed and extended to cover a broad list of the more important issues. The arduous
labor of determining these index figures was undertaken by Frank J. Curto and Marcella
P . Curto. Material help in proofreading and revision for this edition was given by Beverly
Magee and Elinor T. Magee.
John Magee
January 1, 1957

xlv
Preface to the second edition
It is, needless to say, gratifying to the authors of this treatise to report that not only has a
large first edition been exhausted (although it was originally assumed it would suffice for
many years), but also, the demand for copies has been increasing at a rather astonishing
pace during the past six months without any “promotion” except word-of-mouth
recommendation from one investor to another.
In preparing this new edition, a careful perusal of everything that was written in the
previous printing, checked by the market events of the past 24 months and compared
with all of the additional chart data accumulated during that period, resulted in the not
unexpected, but nevertheless mildly surprising conclusion that nothing of real consequence
needed to be changed or amplified. Hence, only minor revisions of an editorial nature have
been made.
It would have been interesting to augment our already copious illustrations with a
number of charts from current months of market action, but costs of engraving and printing
have risen to such a distressingly high level that any additions of that sort would, it was
found, be prohibitively expensive. Aside from their novelty, they would add nothing to
the book; they would only be substituted for other charts of precisely the same nature and
significance, and fully as pertinent to present-day conditions.
The stock market, as I wrote in the original Foreword, “goes right on repeating the same
old movements in much the same old routine. The importance of a knowledge of these
phenomena to the trader and investor has been in no whit diminished.” We see the same
forecasting patterns developing on the charts today that we have seen over and over again
for the past 20 years. Neither the mechanics nor the “human element” of the stock market
has changed, and there is no reason to think they will.
Robert D. Edwards
May 1, 1951

xlvii
Foreword
This book has been written for the layman rather than for the Wall Street professional


diminished.” We see the same
forecasting patterns developing on the charts today that we have seen over and over again
for the past 20 years. Neither the mechanics nor the “human element” of the stock market
has changed, and there is no reason to think they will.
Robert D. Edwards
May 1, 1951

xlvii
Foreword
This book has been written for the layman rather than for the Wall Street professional. But,
it assumes the reader is already possessed of at least an elementary knowledge of the nature
of stocks and bonds, and he has had some dealings with a broker and some familiarity with
the financial pages of his newspapers. Hence, no attempt is made herein to define common
stock market terms and procedures. Every effort, however, has been exerted to explain, in
full, the theories and the terminology of our specific subject, technical market analysis.
Part One is based, in large part, on the pioneer researches and writings of the late
Richard W. Schabacker. Students of his Technical Analysis and Stock Market Profits (the latest
revision of which is now out of print was made in 1937 by the present writer and Albert
L. Kimball) will find in the pages of this section much that is familiar and, except for the
illustrations, only a little that is really novel. It has been a matter of surprise, in fact, to the
authors and other students of market technics that all the new controls and regulations of
the past several years, the new taxes which have placed a heavy handicap on successful
investors, the greatly augmented and improved facilities for acquiring dependable
information on securities, even the quite radical changes in certain portions of our basic
economy, have not much altered the “pattern” of the stock market.
Certain of the evidences of pool manipulation that used to appear on the charts are now
seldom seen. A few of the price formations that formerly were quite common, now appear
rarely or may have lost much of their practical utility for the trader; they have been omitted
from this text. Others have altered their habits slightly, or their consequences to a degree
(but not their fundamental nature), which has, of course, been noted herein. The distressing
thinness of the market at times—one of the undoubted effects of regulation—has resulted
in a few more “false moves,” more spells of uninteresting (and unprofitable) inactivity. But,
in the main, the market goes right on repeating the same old movements in much the same
old routine. The importance of a knowledge of these phenomena to the trader and investor
has been in no whit diminished.
Part Two, which has to do with the practical application of these market patterns and
phenomena, with the tactics of trading, is all new. For more than 15 years (his total market
experience extends back nearly 30 years), John Magee has invested and traded exclusively
via the technical theory, kept thousands of charts, made hundreds of actual trades, tested
all sorts of applications, audited and analyzed methods, tactics, and results from every
conceivable angle, depended on his profits for his living. His contribution is that of one
who has tried and knows.
It may well be added here—and will be often repeated in the following pages—that the
technical guides to trading in stocks are by no means infallible. The more experience one
gains in their use, the more alive one becomes to their pitfalls and their failures. There is no
such thing as a sure-fire method of “beating the market”; the authors have no hesitancy in
saying that there never will be. Nevertheless, a knowledge and judicious application of the
xlviii Foreword
principles of technical analysis does pay dividends—is more profitable (and far safer) for
the average investor than any other of the presently recognized and established approaches
to the problems of buying and selling securities.
Robert D. Edwards
July 1948
part one
Technical theory

3
chapter one
The technical approach to
trading and investing
Few human activities have been so exhaustively studied during the past century, from
so many angles and by so many different sorts of people, as the buying and selling of
corporate securities. The rewards the stock market holds out to those who read it right
are enormous; the penalties it exacts from careless, dozing, or “unlucky” investors are
calamitous. No wonder it has attracted some of the world’s most astute accountants,
analysts, and researchers, along with a motley crew of eccentrics, mystics, “hunch players,”
and a multitude of just ordinary hopeful citizens.
Able brains have sought, and continue constantly to seek, for safe and sure methods
of appraising the state and trend of the market, as well as discovering the right stock
to buy and the right time to buy it. This intensive research has not been fruitless—far
from it. There are a great many successful investors and speculators (using the word in its
true sense, which is without opprobrium) who, by one road or another, have acquired the
necessary insight into the forces with which they deal and the judgment, the forethought,
and the all-important self-discipline to deal with them profitably.
In the course of years of stock market study, two quite distinct schools of thought
have arisen, providing two radically different methods of arriving at the answers to the
trader’s problem of what and when. In the parlance of “the Street,” one of these is commonly
referred to as the fundamental or statistical, and the other as the technical. (In recent years a
third approach, the cyclical, has made rapid progress, and although still beset by a “lunatic
fringe,” it promises to contribute a great deal to our understanding of economic trends.)
The stock market fundamentalist depends on statistics. He examines the auditors’
reports, the profit-and-loss statements, the quarterly balance sheets, the dividend records,
and the policies of the companies whose shares he has under observation. He ana


apid progress, and although still beset by a “lunatic
fringe,” it promises to contribute a great deal to our understanding of economic trends.)
The stock market fundamentalist depends on statistics. He examines the auditors’
reports, the profit-and-loss statements, the quarterly balance sheets, the dividend records,
and the policies of the companies whose shares he has under observation. He analyzes
sales data, managerial ability, plant capacity, and the competition. He turns to bank and
treasury reports, production indexes, price statistics, and crop forecasts, to gauge the state
of business in general, and reads the daily news carefully to arrive at an estimate of future
business conditions. Taking all these into account, he evaluates his stock; if it is selling
currently below his appraisal, he regards it as a buy. (EN9: And, no surprise, the buyer’s name
is Warren Buffet, and he buys the company, not the stock, for although this is an excellent way to
buy companies, it is not a very good way to buy stocks.) EN: Read Robert Prechter’s summation of
the fundamental methodology as an amusing endnote at the end of this chapter.
As a matter of fact, aside from the greenest of newcomers when they first tackle the
investment problem, and to whom, in their inexperience, any other point of view is not
only irrational but incomprehensible, your pure fundamentalist is a rare bird. Even those
market authorities who pretend to scorn charts and “chartists” utterly are not oblivious
to the “action” chronicled by the ticker tape, and they do not conceal their respect for the
Dow Theory, which, whether they realize it or not, is, in its very essence, purely technical.
4 Technical Analysis of Stock Trends
Definition of technical analysis
The term “technical,” in its application to the stock market, has come to have a special
meaning, quite different from its ordinary dictionary definition. It refers to the study of the
action of the market itself as opposed to the study of the goods in which the market deals.
Technical Analysis is the science of recording, usually in graphic form, the actual history of
trading (price changes, volume of transactions, etc.) in a certain stock or in “the Averages”
and then deducing from that pictured history the probable future trend. EN: With the advent
of the computer, many schools of technical analysis have arisen. Number-driven technical analysis
(e.g., moving average studies, oscillators, etc.) attempts to completely objectify the analysis of the
markets. The work of Edwards and Magee is the embodiment and definition of “classical technical
analysis.”
The technical student argues thus: it is futile to assign an intrinsic value to a stock
certificate. One share of U.S. Steel, for example, was worth $261 in the early fall of 1929,
but you could buy it for only $22 in June 1932. By March 1937 , it was selling for $126 and
just one year later it was selling for $38. In May 1946, it had climbed back up to $97 , and
10 months later, in 1947 , had dropped below $70, although the company’s earnings on
this last date were reputed to be nearing an all-time high and interest rates in general
were still near an all-time low. The book value of this share of U.S. Steel, according to the
corporation’s balance sheet, was about $204 in 1929 (end of the year), $187 in 1932, $151
in 1937 , $117 in 1938, and $142 in 1946. This sort of wide divergence between presumed
value and actual price is not the exception—it is the rule. It is going on all the time. The
fact is the real value of a share of U.S. Steel common is determined at any given time
solely, definitely, and inexorably by supply and demand, which are accurately reflected
in the transactions consummated on the floor of the New York Stock Exchange (see
Figure 1.1).
Of course, the statistics fundamentalists study play a part in the supply– demand
equation—that is freely admitted. But many other factors are affecting it as well. The market
price reflects not only the differing value opinions of many orthodox security appraisers,
but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds
of potential buyers and sellers, as well as their needs and their resources—in total, factors
that defy analysis and for which no statistics are obtainable, but that nevertheless are
synthesized, weighed, and finally expressed in the one precise figure at which a buyer and
a seller get together and make a deal (through their agents, their respective stock brokers).
This is the only figure that counts.
Moreover, the technician claims, with complete justification, that the bulk of the
statistics the fundamentalists study are past history, already out of date and sterile because
the market is not interested in the past or even in the present. It is constantly looking ahead,
attempting to discount future developments, weighing and balancing all the estimates and
guesses of thousands of investors who look into the future from different points of view
and through glasses of many different hues. In brief, the going price, as established by the
market itself, comprehends all the fundamental information the statistical analyst can hope
to learn (plus some that is perhaps secret from him or known only to a few insiders) and
much else besides of equal or even greater importance.
All of which, admitting its truth, would be of little significance were it not for the fact,
which no one of experience doubts, that prices move in trends and trends tend to continue
until something happens to change the supply–demand balance. Such changes are usually
detectable in the action of the market. Certain patterns or formations, levels or areas, appear
on the charts that have a meaning and that can be interpreted in terms of probable future
5Chapter one: The techn ical approach to trading and investing
trend development. They are not infallible, it must be noted, but the odds are defi


ns to change the supply–demand balance. Such changes are usually
detectable in the action of the market. Certain patterns or formations, levels or areas, appear
on the charts that have a meaning and that can be interpreted in terms of probable future
5Chapter one: The techn ical approach to trading and investing
trend development. They are not infallible, it must be noted, but the odds are definitely in
their favor. Time after time, as experience has amply proved, they are far more prescient
than the best informed and most shrewd of statisticians.
The technical analyst may go even further in his claims. He may offer to interpret the
chart of a stock whose name he does not know, so long as the record of trading is accurate
and covers a long enough term to enable him to study its market background and habits. He
may suggest he could trade with profit in a stock knowing only its ticker symbol, completely
ignorant of the company, the industry, what it manufactures or sells, or how it is capitalized.
Needless to say, such practice is not recommended, but if your market technician is really
experienced at his business, he could, in theory, do exactly what he claims.
240
220
200
180
160
140
120
100
80
60
40
20
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946
U. S. STEEL X
Figure 1.1 Monthly price ranges of U.S. Steel common from January 1929 to December 1946. Compare
the great swings in the market price for this stock—from 1929 (extreme high, 261 3/4) to 1932 (extreme
low, 21 1/4), from 1932 to 1937 , from 1937 to 1938, from 1942 to 1946—with its book values for those
years as cited on the previous page.
6 Technical Analysis of Stock Trends
Should the reader, at this point, find the technical approach to trading or investing, as
explained in the foregoing, completely abhorrent, perhaps he had better close the book now,
for it is primarily the technical approach, the science of technical analysis, with which the
remainder of the book deals.
EN: The Elliott Wave Theory: perspective and comments from a Magee investment letter of the
80s. This week, we had the pleasure of attending the December meeting of the Market Technicians
Association of New York (MTANY).
Long-term subscribers will remember the MTANY as the organization that honored John Magee
with its Man of the Year award in 1978. The speaker was Robert Prechter, publisher of “The Elliott
Wave Theorist,” an investment advisory that bases its forecasts on interpretations of R. N. Elliott’s
work on the stock market.
Of primary interest to subscribers are Prechter’s comments on technical analysis itself. The
Elliott Wave Theory, it must be remembered, is really no more than a “catalog” of stock market
price movements, laid one on top of the other, so to speak, until a grand, underlying, and enduring
pattern is observed; in short, pure technical analysis. Among Prechter’s definitions and observations
regarding fundamental analysis are the following:
 1. First, let’s define “technical” versus “fundamental” data … technica l data is that
which is generated by the action of the market under study.
 2. The main problem with fundamental analysis is its indicators are removed from the
market itself. The analyst assumes causality between external events and market
movements, a concept which is almost certainly false. But, just as important (and less
recognized), is that fundamental analysis almost always requires a forecast of the
fundamental data itself before conclusions about the market are drawn. The analyst is
then forced to take a second step in coming to a conclusion about how those forecasted
events will affect the markets! Technicians only have one step to take, which gives
them an edge right off the bat. Their main advantage is they don’t have to forecast
their indicators.
 3. What’s worse, even the fundamentalists’ second step is probably a process built on
quicksand. … The most co mmon application of fundamental analysis is estimating
companies’ earnings for both the current year and next year and recommending stocks
on that basis. … And the rec ord on that basis alone is very poor, as Barron’s pointed
out in a June 4 article, which showed that earnings estimates averaged 18% error in
the 30 Dow Jones Industrial Average (DJIA) stocks for any year already completed
and 54% error for the year ahead. The weakest link, however, is the assumption that
correct earnings estimates are a basis for choosing stock market winners. According
to a table in the same Barron’s article, a purchase of the 10 DJIA stocks with the
best earnings estimates would have produced a 10-year cumulative gain of 40.5%,
while choosing the 10 DJIA with the worst earnings estimates would have produced
a whopping 142.5% gain.
We enjoyed Prechter’s polished exposition of a technical approach, which is different from our
own. As for his observations about fundamental analysis, we simply couldn’t agree more.
7
chapter two
Charts
Charts are the working tools of the technical analyst. They have been developed in a
multitude of forms and styles to represent graphically almost anything that takes place in
the market as well as to plot an “index” derived therefrom. They may be monthly charts
on which an entire month’s trading record is condensed into a single entry, or they may be
weekly, daily, hourly, transaction, “point-and-figure,” and candlestick charts. They may be
constructed on arithmetic, logarithmic, or square-root scale, or they may be projected as
“oscillators.” They may delineate moving averages, proportion of trading volume to price
movement, average price of most active issues, odd-lot transactions, the short interest, and
an infinitude of other relations, ratios, and indexes—all technical in the sense that they are
derived, directly or indirectly, from what actually has been transacted on the exchanges.
Fortunately, we shall not need to concern ourselves with most of thes


g averages, proportion of trading volume to price
movement, average price of most active issues, odd-lot transactions, the short interest, and
an infinitude of other relations, ratios, and indexes—all technical in the sense that they are
derived, directly or indirectly, from what actually has been transacted on the exchanges.
Fortunately, we shall not need to concern ourselves with most of these charts; they are
of interest only to the full-time economic analyst. Many of these charts have derived from a
completely futile (so far, at least) endeavor to discover a “mechanical” index or combination
of indexes that will always, automatically, without ever failing or going wrong, give warning
of a change in trend; in our experience, such charts are often confusing and sometimes
downright deceptive at a most critical juncture. This book, however, is designed for the
layman, the professional who cannot spend all of his hours on his investing or trading
operations, but to whom these operations are, nevertheless, of sufficient importance or
interest to warrant his devoting at least a few minutes a day to their study and management.
(EN9: In retrospect, this is an underestimation of the importance of the work. In the 21st century,
the best professionals are acutely aware of the importance of trend analysis and use this work as their
textbook.) The theories and methods outlined herein will require only the simplest form of
stock chart—a record of the price range (open, high/low and close) and volume of shares
traded each day. These daily graphs will be supplemented, for certain purposes that will
be discussed later in this text, by weekly or monthly charts, which for most stocks can be
easily generated by almost all commercially available investment software and websites.
Nearly all the illustrations throughout the following chapters are examples of such
daily charts. They are easy to make and maintain manually, requiring only a supply of
graph or cross-section paper (almost any kind can serve), a daily newspaper that gives full
and accurate reports on stock exchange dealings, a sharp pencil, and a few minutes of time.
EN: Alternatively, numerous data services are available for use with computer software packages, not
to mention internet sites (which are mentioned in Appendix B, Resources). The use of this technology
eliminates the burden of manual chart keeping. If there is a drawback to this technology, it might be
in the loss of the “feel” the investor gets through manual charting.
It is customary in preparing ordinary daily stock charts to let the horizontal axis
represent time, with the vertical cross-lines (or as some prefer, the spaces between them)
from left to right, thus standing for successive days. The vertical scale is used for prices,
with each horizontal cross-line then representing a specific price level. Space is usually
provided at the bottom of the sheet to plot volume, that is, the number of shares that change
hands each day. The newspapers publishing complete stock market reports give the day’s
turnover or volume (exclusive of odd-lot transactions that for our present purpose may
8 Technical Analysis of Stock Trends
be disregarded), the highest and lowest price at which each stock sold during the day, the
closing price (which is the price at which the last sale effected during the day was made),
and usually the opening or first sale price. On our charts, the daily price range is plotted
by drawing a vertical line connecting the points representing the high and the low. Then
a short horizontal “tick” is added, either crossing the vertical range line or extending out
to the right from it, at the level of the closing price. Sometimes all transactions in a stock
during a day take place at one and the same price; the high, low, and close are thus all on
level and the only mark on our chart will be the horizontal dash representing the closing
figure. Volume is depicted by drawing a vertical line up from the baseline of the chart.
The opening price need not be recorded. (EN10: Candlestick charts require this piece of
data.) Experience has shown that it seldom, if ever, has any significance in estimating future
developments, which is all that ordinarily should interest us. The closing price is important,
however. It is, in fact, the only price that many casual readers of the financial pages ever
look at. It represents the final evaluation of the stock made by the market during the day.
The closing price may be registered in the first hour of trading, provided no other sales are
subsequently affected, but, it nevertheless becomes the figure upon which a majority of
prospective traders base their plans for the following day. Hence, its technical significance
is evident and will appear in various contexts in later chapters.
Different types of scales
Many specific suggestions as to the details of charting are deferred for discussion in Section
II of this book, but there is one chart feature that may well be considered here. Until recent
years, nearly all stock price charts were kept on the common form of graph paper ruled to
what is known as plain or arithmetic scale. But more and more chartists have now come to
use what is known as semilogarithmic paper, or sometimes as ratio or percentage paper.
Our experience indicates that the semilogarithmic scale has definite advantages in this
work, and most of the charts reproduced in this book employ this scale. The two types
of scales may be distinguished at a glance: on arithmetic paper, equal distances on the
vertical scale (i.e., between horizontal lines) represent equal amounts in dollars, whereas on
the semilogarithmic paper, they represent equal percentage changes. Thus, on arithmetic
paper, the distance between 10 and 20 on the vertical scale is exactly the same as that
from 20 to 30 and from 30 to 40. On the semilogarithmic scale the difference from 10 to 20,
representing an incr