(Red) Trendline, to the Blue Parallel, or make
a 40% to 50% correction of the rising “mast” preceding the Flag. If the “mast” move is
the first such move out of a level or only moderately rising trend, and if the Major Trend
of the market is Bullish, we would be justified in buying at the first opportunity, which
would be on the Blue Parallel. In such a case we would expect, and ordinarily get, some
further reaction, but it is important to get in early because sometimes the reaction is
very brief and does not meet either of the other requirements for the correction. It is
most important in a situation like this that the volume drop off sharply. Volume must
decrease and remain slight; any increase of volume during the formation of the Flag
should be reviewed as casting suspicion on the entire pattern, except the increasing
volume that characteristically attends the start of the breakout drive. This drive is
usually so virile that we would be safe in placing a tight (1/8 point) stop under the
close of any day during formation of a Flag or Pennant that showed notably increased
volume. Hence, if the volume indicated failure of the pattern, we would be taken out at
once; but if the breakout was under way, we would probably be left in because the stock
would ordinarily move up then without a reaction, very often making a Breakaway
Gap.
411Chapter thirty-three: Tactical re view of chart action
In downward movements, when the Major Trend of the market is Bearish, the same
suggestions would apply, with one difference. The final high day of the Flag type of rally
may be on high volume and also may show the Exhaustion Gap or One-Day Reversal. If a
short sale has been made into such a day showing high volume, gap, or One-Day Reversal,
a stop order placed above the peak of the Flag will protect you should the advance be
resumed unexpectedly.
In either the up-moving or down-moving manifestations of this type of action, there
may be Flags having horizontal Tops and Bottoms, which are Rectangles. If the drying-up
of volume and other aspects of the picture, including the sharp upward or downward
move preceding it, suggest a Flag-type Consolidation, you would be justified in making
a commitment on the sixth Reversal point, or for that matter, at almost any point in the
pattern (because you cannot expect this pattern to continue very long).
Flags and Pennants continuing too long (more than three weeks) are open to question.
Stops should then be set at the usual computed distance above or below their extreme Tops
or Bottoms (as the case may be). The fairly frequent appearance of Flag-like Formations that
eventually fail is unfortunate because it is particularly hard to give up hoping with this
kind of pattern, and it is necessary to set the three-week time limit to prevent the stock
from drifting all the way back to previously established stop levels. On the other hand,
breakout moves from these patterns, when completed normally, are among the fastest and
most profitable forms of market action.
The question remains what to do in the case of stocks you may be holding as they
go into Flag or Pennant Formation. Obviously, they should be held if you are long and
the move leading to the Flag is up; or short positions should be retained if the move is
down. This would not happen ordinarily, however, if you had followed the trading rules
strictly. In most cases, your signals calling for tight (1/8 point) progressive stops would have
appeared during the formation of the “mast.” You would have been taken out of the picture
somewhere along the way, possibly at the extreme top of the mast (although ordinarily, you
could not count on being so fortunate).
If no signal should appear and you still are holding a position as the Flag starts to
make its appearance, by all means hold your position. The odds favor a continuation of the
original move.
Now, if you have been holding the stock long (in a Bull Market) and have seen it break
out and start leaping to new highs, say from 20 to 32, and you have been stopped out at
30, and then you see the price advance, halt, and during the next several days retreat, with
the rather high previous volume drying up to practically nothing (it must be a drastic
drying-up, and no mistake about it), then you are justified in buying right back in again,
even at a higher price than you received only a few days before.
Gaps
If you are long a stock that is in a well-marked pattern formation, or in an area of dull
movement within fairly narrow limits, and the stock suddenly breaks out on the upside
with high volume and a gap, that is a Bullish indication. You will hold the stock until signs
of exhaustion appear as the rise continues, or reappearance of high volume, or another
gap or One-Day Reversal. Then, particularly if two or all three of these indications show
up at the same time, you can protect your commitment with tight progressive stops. You
will have to consider whether a second gap should be considered an exhaustion gap or a
continuation gap, depending on the volume and the speed of the rise, as discussed in the
chapters on gaps and their measuring implications.
412 Technical Analysis of Stock Trends
Ordinarily, after a Breakaway Gap, regardless of whether you sell on the next Minor
Top, you would consider the move Bullish and would prepare to make a purchase on the
next reaction.
Now if you are long a stock and during the course of a sharp rise it develops a gap
after several days of the move, you must make your decision as to whether or not it is a
Continuation (Runaway) Gap. If so, you would prepare to hold the stock for a further rise
approximately equal to the rise up to the gap. You would watch the approach to the ultimate
objective indicated very closely; on the appearance then of Reversal signals, you could
protect your holding with tight stops.
NORTHERN PACIFICN P
1944
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
19
18
17
1


or not it is a
Continuation (Runaway) Gap. If so, you would prepare to hold the stock for a further rise
approximately equal to the rise up to the gap. You would watch the approach to the ultimate
objective indicated very closely; on the appearance then of Reversal signals, you could
protect your holding with tight stops.
NORTHERN PACIFICN P
1944
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
19
18
17
16
15
14
125
100
75
50
25
81 52 22 96 13 20 27 31 01 72 41 81 52 22 95 12 19 26 29 16 23 30
Sales
100’s
Figure 33.15 This daily chart in Northern Pacific, covering six months during 1944, shows several
examples of Support and Resistance. The entire chart covers only part of the series of Consolidations
that took place in 1943 and 1944 preceding the 1945–1946 advance that carried beyond 38.
 Support and Resistance phenomena appear on many, in fact, on most of the charts in this book, and
you will find them on the charts you set up for yourself. There is nothing unique or even unusual
about the Support–Resistance action in “NP .”
 Starting at the left in April, after the downside move on volume to 14 1/4, notice the recovery to 15
5/8 where the move stops at the Resistance Level of the preceding two weeks. After the formation
of the Symmetrical Triangle, there is a breakaway move with a gap that runs right on up to above
17 , where a small Rectangle is built during the next three weeks. The stock ultimately breaks down
from this pattern on considerable volume. It is doubtful whether one would want to trade on this
as a normal reaction after the breakout from the Triangle because of the downside volume and the
implications of the Rectangle.
 Note, however, how the reaction stops cold at the 15 line, the apex level of the Triangle, and then
moves right on up. Rather surprisingly, there is only a three-day hesitation at the Bottom of the
Rectangle, but a little setback occurs at the Top of that pattern.
 The July Top might be classed as a Head-and-Shoulders or Complex or Rounding Top; in fact, it is
almost a Rectangle, and after the downside breakout, prices hesitate at the level of the Top of the May
Rectangle, continue down, find temporary Support again at the April Support Shelf around 16, and
ultimately wind up a bit under 15. Although “NP” actually did penetrate and close slightly below
the apex of the Triangle, the violation was barely 3%, and it is interesting to note this September
Bottom was the lowest point reached. From here, the stock started its climb to the 38 level, which
was reached in December 1945.
413Chapter thirty-three: Tactical re view of chart action
If you are satisfied a gap following a good rise is actually an Exhaustion Gap, then you
should protect your stock with a tight progressive stop at once.
In Bear Markets, you would apply these same rules in reverse to your short sales,
remembering a downside breakaway is not necessarily accompanied by the high volume
you expect on an upside breakaway.
Where you are long or short a stock that is moving in a Pattern Formation and the stock
then makes a Breakaway Gap in the adverse direction, the commitment should be closed
out immediately at the market, or on tight progressive stops.
AMERICAN STEEL FOUNDRIESF J
1947
MARCHA PRIL MAYJ UNEJ ULY
38
36
34
32
30
28
26
50
40
30
20
10
XD 50C
XD 50C
81 52 21 81 52 22 9512 19 26 31 01 72 43 17 14 21 28 5 12 19 26 2
Sales
100’s
Figure 33.16 Trendlines in American Steel Foundries. This daily chart shows the tendency of
trendlines to develop along straight channels. We have already pointed out that these channels
are frequently easier to see in retrospect than during their formation, that stocks move in perfect
channels only occasionally, and that all channels come to an end, frequently without warning. In
this case, the long trend channel does give a warning of Reversal.
 In 1946, “FJ” had declined from 48 to a Support Level of 30. From here it rallied for three months
in a Trend Channel that brought us to the February Top at 37 . The next decline broke the previous
trend, and volume developed at the bottom of this break. If you will follow the entire chart, you
will notice volume nearly always shows an increase at the points of Reversal, which are also usually
points of contact with the Trend Channel. Notice also the way the Corrective Rallies tend to stop at
or near the previous Minor Bottoms in the downward trend, and how reactions tend to stop at the
previous Minor Tops in the upward trend.
 Trading on this situation would have been profitable. The Secondary Intermediate Rally up to
February approached the Resistance Level marked by a 1946 Bottom around 40, and a correction
of the drop from 48 to 30 would indicate short sales around 37 (which objective was just barely
reached). Such sales, if made, would have been covered after the first drop (week of March 1) around
33 1/4. New shorts at 34 1/2 would have been closed in the week of March 15 at about 31 1/2. Shorts
made on the rally of the March 22 week around 33 would be covered in the week of April 19 at 30.
If shorted again, the same week at 31, the sale would have been covered after the Climactic Bottom
in the week of May 24. The combination, here, of great volume and a One-Day Reversal would have
warned against further shorts.
 The Rising Channel, being a Secondary, presumably of limited extent, would not offer any great
inducement to long-side trading in the absence of other good reasons.
414 Technical Analysis of Stock Trends
Support and Resistance
When you are long a stock, you do not want to see it violate any Minor Bottoms previously
made. Neither do you want to see it violate any of the preceding Minor Tops that it has
surpassed. Therefore, your stop orders will be placed at a computed distance, as explained
in Chapter 27 on stop orders, using both the Minor Bottoms and the Minor Tops as Basing
Points. Normally, the Minor Bottom most recently formed will be at the approximate level
of

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


iolate any Minor Bottoms previously
made. Neither do you want to see it violate any of the preceding Minor Tops that it has
surpassed. Therefore, your stop orders will be placed at a computed distance, as explained
in Chapter 27 on stop orders, using both the Minor Bottoms and the Minor Tops as Basing
Points. Normally, the Minor Bottom most recently formed will be at the approximate level
of the preceding Minor Top, so that these Basing Points often will coincide. Ordinarily,
therefore, in a rising trend, we look to the most recently formed Minor Bottom. When the
stock has, for three days, made a price range that is entirely above the entire range of the
day marking this Bottom, you may move up your stop protection to a place indicated by
this new Basing Point.
The same procedure will apply in Bear Markets; the “three-days-away” rule being
used to confirm Basing Points established by Minor Peaks and also by the preceding Minor
Bottoms. Ordinarily, it will be sufficient to use the Minor Peaks as Basing Points.
Intermediate Tops and Bottoms are used in determining the probable objectives
of Intermediate Moves because previous Tops constitute Support under Intermediate
Reactions, and previous Bottoms indicate Resistance over Intermediate Rallies.
Multiple Tops are Support Levels. Multiple Bottoms are Resistance Levels. The neckline
of a Head-and-Shoulders Pattern is a Support or Resistance Level, as the case may be. The
apex of a Symmetrical Triangle is a strong Support and Resistance point that may show its
effect again on a subsequent move. Any congestion or area at a certain price level or within
narrow price limits may provide Support or Resistance when a stock moves again to that
price or range.
Trendlines
We have already gone into the methods of following trends in stocks, and the use of the
Top and Bottom Trendlines (Basic and Return Lines) as indicators of Bullish and Bearish
opportunities, and as price determinants for executing purchases or short sales.
There remains the tactical problem of the stock in which you are committed, which
is acting badly, but which has neither broken out of a recognized pattern nor violated an
established Minor Peak. This is not a common situation, but it can present a very difficult
problem when it does come up. Let us say the Major Trend is Bullish, and a certain stock
that has been moving up irregularly in a Parallel Trend Channel confirms its uptrend by
a long, more or less continuous advance and calls for repurchase on the next reaction. You
buy on the reaction, and the stock continues down; namely, the reaction continues with
prices sagging for days and weeks, without any rallies, Consolidations, or Corrections that
are sufficiently well-defined to serve as Basing Points for stop orders.
In the absence of clear indications during the reaction, and also during the preceding
large upward move, your stop would be placed at a computed distance below the top of the
preceding rise. Plus, if the reaction continues down until that level is reached, you will have
sustained an abnormally large loss.
In a case like this, you should examine the trendlines making up the long advance
in the Trend Channel. The points of contact with the Basic Trendline can serve as a fair
emergency substitute for Minor Bottoms. Your stop level, therefore (in the absence of more
definite Basing Points), should be placed at the computed distance below the last point at
which the stock made contact with the bottom trendline and moved decisively up away
from it. If a penetration and close below this point occurs without catching the stop, sell on
415Chapter thirty-three: Tactical re view of chart action
tight progressive stops. (EN: The editor feels that such situations should occur only in position-
building or pyramiding cases. Every effort should be made to join trends on breakout or origination,
whatever the source. There is no excuse for “chasing stocks” in the modern environment in which
literally monitoring all stocks and instructing the system to alert one to the conditions attending
breakouts is possible with a computer. EN9: On the other hand, human frailty being what it is, we
will all find ourselves chasing a train at some time or other.)
The reverse of this rule would apply to the same type of situation in a Bear Market,
where stops for short sales would be placed at the computed distance above the point at
which the stock made contact with and fell away from the upper trendline.
The changes of angularity and direction in Intermediate trendlines are helpful in
showing the gradual turning of a Major Trend.

417
chapter thirty-four
A quick summation of tactical methods
There are three types of tactical operations: (1) getting into new commitments; (2) getting
out of commitments that have moved as expected and show a profit; and (3) getting out of
commitments that have not moved as expected, whether the transaction shows a profit or
a loss.
The principles of taking profits based on trends, Resistance and Support Levels,
measuring implications of patterns, and most especially, on the daily technical and volume
action of the stock, already have been covered. These profit-taking operations seldom
present very difficult problems because the picture has developed normally and in the way
you hoped and expected it would. The “stepping off” point is usually easy to determine.
The more difficult problems arise in making new commitments correctly, and in the
very important defensive operations of getting out of losing commitments with the least
possible loss.
It should be emphasized that a stock ceasing to act in a Bullish manner should,
therefore, be sold and is not necessarily a short sale on the next rally. In other words, the
signal that shows weakness or failure of a move in one trend is not always a signal to make
new commitments on the opposite side of the market. More often than not, in fact, it is
nothing of the kind


least
possible loss.
It should be emphasized that a stock ceasing to act in a Bullish manner should,
therefore, be sold and is not necessarily a short sale on the next rally. In other words, the
signal that shows weakness or failure of a move in one trend is not always a signal to make
new commitments on the opposite side of the market. More often than not, in fact, it is
nothing of the kind.
We know certain moves, such as adverse breakouts from Symmetrical Triangles or
Rectangles, advise us simultaneously to get out of commitments in what is now clearly
the “wrong” direction and to make new commitments in the “right” direction. The simple
failure of a trendline, however, where the stock merely penetrates an old Minor Bottom
without completing a Head-and-Shoulders or other Reversal Pattern, although reason
enough to get out of commitments that are showing losses, is not sufficiently conclusive by
itself to justify reversing policy and making new commitments in the opposite direction.
Therefore we separate the two types of signals as follows:
Get out of present commitments
• On adverse breakout from Head-and-Shoulders Formation.
• On adverse breakout from Symmetrical Triangle.
• On adverse breakout from Rectangle.
• On establishment of new Minor low or new Minor high in adverse direction.
• On adverse breakout from Diamond.
• On adverse breakout from Wedge.
• On One-Day Reversal if marked by heavy volume or a gap.
• On adverse breakout from Flag or Pennant.
• On clear penetration of any Resistance or Support Level in the adverse direction.
• On an adverse Breakaway Gap.
• On the appearance of an Island after a move in the favorable direction.
• On penetration of basic trendline in the absence of pattern or other favorable criteria.
418 Technical Analysis of Stock Trends
Note: It is understood all breakouts must close in the breakout area. A closing 3% beyond
the Support, trend, or pattern is sufficient to give the danger signal. All takeouts are
performed by the use of 1/8-point progressive stops.
Make new commitments
• In line with the Major Dow Trend, or to a limited extent in countertrend, moves as
insurance to reduce overall risk.
• On breakout from Head-and-Shoulders Pattern.
• On breakout from Symmetrical Triangle, provided it is not working into the final third
of its length toward the apex.
• On breakout from Right-Angle Triangle.
• On breakout from Rectangle, or (possibly) on points of contact, beginning with the
sixth Reversal.
• On breakout from a Broadening Top.
• On breakout from Double or Multiple Top or Bottom. (Namely breakout through the
Bottom of the valley between Tops, or upside penetration of the “dome” between
Bottoms.)
• On breakout from Wedge, or (possibly) commitments within the Wedge in the last
third of its length as it approaches its apex.
• On Flags and Pennants, after sufficient Secondary or Corrective Move by the pattern,
or (possibly) within the pattern, provided volume and all other indications tend
strongly to confirm the pattern.
• On clear penetration of a well-defined Support or Resistance Area.
• On Breakaway Gap (possibly).
• After formation of an important and well-defined Island following a considerable
move.
• On contact with, or penetration of, the “favorable” trendline if both trendlines are
moving in the Major Trend direction. (Blue Top Trendline in a Bull Market, Red
Bottom Trendline in a Bear Market.) Note: Breakouts and penetrations must show
a closing in the breakout area and must conform to volume requirements. Breakout
closings should conform to the 3% rule.
New commitments (marked “possibly”) may be made in certain cases within some
patterns: Rectangles, Wedges, Flags, and Pennants. Exceptional care should be used in
such cases.
It is extremely difficult to catch Breakaway Gaps; we would not recommend this
as a general practice. (EN: This is not so difficult as it was in Magee’s time thanks to modern
communications, computers, and access to the internet.)
All commitments, except those just noted, are made on the next following reaction or
rally, to rules previously stated.
All commitments are protected by stops from the moment they are made. Stops are
moved, as conditions justify moving them, but always in the favorable direction, never in
the adverse direction.
419
chapter thirty-five
Effect of technical trading
on market action
The question often is asked whether the very fact that traders are studying methods and
patterns tends to create those very patterns and trends—in other words, whether the
technical method sets up, to some extent, an artificial market in which the market action is
merely the reflection of chart action instead of the reverse.
This does not seem to be true. The charts we make today seem to follow the old patterns;
the presumption is very strong that markets have followed these patterns long before there
were any technicians to chart them. The differences mentioned briefly in Section I, due to
changed margin requirements, restraining of manipulative practices, and so on, seem to
have changed these habits, if at all, only in degree and not in their fundamental nature.
The market is big, too big for any person, corporation, or combine to control as
a speculative unit. (EN9: And even beyond big in the twenty-first century. Gargantuan.)
Its operation is extremely free and extremely democratic in the sense it represents the
integration of the hopes and fears of many kinds of buyers and sellers. Not all are short-
term traders; there are investors, industrialists, employees of corporations, those who buy
to keep, those who buy to sell years later—all grades and types of buyers and sellers.
What is more, not all short-term traders are technicians by any manner of means.
There are those who trade on fundamentals for the short term, and those who rely on tips,
hunches, on reading the stars, or on personal knowledge of the company. They are all part
of the competitive market


ations, those who buy
to keep, those who buy to sell years later—all grades and types of buyers and sellers.
What is more, not all short-term traders are technicians by any manner of means.
There are those who trade on fundamentals for the short term, and those who rely on tips,
hunches, on reading the stars, or on personal knowledge of the company. They are all part
of the competitive market and all use methods different from yours—and sometimes they
will be right and you will be wrong.
The technician using the various tools of technical analysis, Dow Theory, Point-and-
Figure charts, oscillators, scale order systems, and monthly, weekly, and daily charts is
in the minority. The cold attempt to analyze a situation on the basis of the market record
alone does not appeal to many people. Technical analysis leaves out the warmth and human
interest of the boardroom, the trading room, the fascinating rumors of fat extra dividends
to come, the whispered information on new patents, and the thrilling study of the quarterly
earnings reports. (EN9: Unless I am mistaken the only appearance of irony in Magee’s work.)
It is the influence of all these rumors, facts, and statistics that causes people to buy
and sell their stocks. It is their actions that build the familiar chart patterns. You are not
interested in why they are doing what they are doing. So far as your trading is concerned,
you are interested only in the results of their actions.
The habits and evaluative methods of people are deeply ingrained. The same kinds of
events produce the same kinds of emotional responses, hence, the same kinds of market
action. These characteristic approaches are extremely durable. It is not quite true that “you
can’t change human nature,” but it is true it is very difficult to change the perceptive habits
of a lifetime. Considering the “orthodox” investors greatly outnumber the technicians,
we may confidently assume technical trading will have little or no effect on the typical
behavior of free markets.
420 Technical Analysis of Stock Trends
(EN: This statement by Magee is still true in principle and it should be noted in modern markets
professional investors attempt to learn (or perhaps it is “the mysterious and anomalous market”)
what makes systems and other investors successful. They then take action to frustrate those methods,
which are inimical to their self-interest. For example, locals and professionals will search for stops
above a congestion zone in an attempt to cause the market to break away. This might be in an attempt
to create a trend or it might be in an attempt to create a Bull trap.
The proliferation of systems trend traders in the futures markets has, some of those traders feel,
created conditions hostile to systems traders as a group. The moral of the story is the trader–investor
must be ever alert for the false move and the changing rhythm of the markets.
No one has been able to quantify chart analysis or to disguise his own activities from the x-ray of
the charts. Nor has anyone changed human nature to eliminate treachery and perfidy and truculent
defense of self-interest.)
(EN9: And—dramatic drum roll—in 2005, Smith-Barney fires its entire technical analysis staff.
What to make of this is left to the imagination of the reader. Some commentators attribute it to the
Bearish outlook of the technical staff as opposed to the need of the firm to sell long positions to its
customers. In my view, an unintended validation of the craft. When you have to shoot the messenger,
it says something about the state of the market, as well as something about the industry.
Also, in conversation at a meeting of the Technical Securities Analysts Association of San
Francisco (http://www.tsaasf.org), Larry Williams said, “I hate technical analysis.” I am reasonably
certain the “technical analysis” referred to is number-driven analysis.)
421
chapter thirty-six
Automated trendline: the
Moving Average
In 1941, we were still filled with starry-eyed ignorance and felt if only we worked hard
enough and looked shrewdly enough, we would discover the sure, unbeatable formula or
system that would solve all our problems in the stock market, and all we would have to do
for the rest of life was apply the magic and telegraph our broker periodically from Nassau,
or Tahiti, or Switzerland, or wherever we happened to be enjoying life at the time.
We have learned (we hope) quite a bit since then. We have learned most particularly a
number of things not to do and by not repeating the same errors over and over, we have
been able to improve our performance substantially. We have also learned (to date) (EN:
still true in the twenty-first century) there are no sure, unbeatable formulas or systems in
the market, even the most useful and generally dependable forecasting methods must be
regarded as statements of probability only, subject to revision and vulnerable to failure at
all times.
One of the useful tools, and one of the first many students of market action adopt, is
the trendline. Whether a stock is moving generally up or down or sideways, there seems
to be a tendency for the Major Trend to persist. It is true every trend is broken sooner or
later, and the fact that it has been broken is often significant. But given a well-established
trend, the probabilities certainly appear to favor its continuance rather than its Reversal.
As with all other market studies, however, there are times and conditions in which the
simple trendline action seems “not quite good enough.” One feels there should be some
mechanical or mathematical way of determining the trend that might avoid some of the
perplexities of choosing the right point through which to draw a trendline. It was back in
1941 when we delightedly made the discovery (although many others had made it before)
that by averaging the data for a stated number of days, weeks, or months, one could derive
a sort of Automated Trendline that


be some
mechanical or mathematical way of determining the trend that might avoid some of the
perplexities of choosing the right point through which to draw a trendline. It was back in
1941 when we delightedly made the discovery (although many others had made it before)
that by averaging the data for a stated number of days, weeks, or months, one could derive
a sort of Automated Trendline that would definitely interpret the changes of trend over the
past 30 days, or 200 days, or 12 months, or whatever period was chosen. It seemed almost
too good to be true. As a matter of fact, it was too good to be true.
The Moving Average is a fascinating tool and has real value in showing the trend of an
irregular series of figures (like a fluctuating market) more clearly. It also has value in the
fact it can be used to cancel out the effect of any regular cyclical variation, such as a normal
seasonal range of temperatures, to get a better picture of the true secular trend.
The trouble with a Moving Average (which we discovered long since but keep bumping
into from time to time) is it cannot entirely escape from its past. The smoother the curve
(longer cycle) one has, the more “inhibited” it is in responding to recent important changes
of trend. Plus, there is a very bad fault of Moving Averages in that “the tail tends to wag the
dog”; the figures back to the first date of the current tabulation, perhaps six months ago,
or a year ago, if they are large, may unduly affect the present average, and may conceal
or mask some important feature by distorting the curve. We feel the Moving Averages
trendlines are useful, but they should be understood and used with discretion and with a
full perception of their limitations.
422 Technical Analysis of Stock Trends
After going through some of the caveats of Moving Averages, let us give you some of
the ways to construct them. Moving Averages can be classified as Simple Moving Averages,
Weighted or Exponential Moving Averages, and Linear Moving Averages. We have found
over the years, and prefer, the simple methods that work just as well and sometimes better
than the more complicated Moving Averages, while the others are more useful when using
computers.
For this reason, we will concentrate on Simple Moving Averages. The most common
are the 50-day and the 200-day Moving Averages. If you want to increase the sensitivity of
a Moving Average, shorten the Moving Average by using 10 or 20 days. Another way is to
increase the lead time by starting on the third day for the 10-day Moving Average, or on
the 20th day for a 50-day Moving Average, and so on.
To construct a Simple Moving Average, whether it is 5 days, 10 days, 50 days, or 200 days,
add the price of 5 days and divide by 5, or the 10 days and divide by 10, or the 50 days and
divide by 50, or 200 days and divide by 200. A simple way of doing the five-day Moving
Average, instead of adding all five prices each time, is to drop day one and add day six.
A similar method can be used in calculating the 50-day Moving Average or the 200-day
Moving Average. Instead of adding the 50-day Moving Average each time, just drop the
first day of the previous average and add the 51st day. The same with the 200-day Moving
Average; drop the first day of the previous 200 and add the 201st day. Another way of
calculating the 200-day Moving Average is to take one day of the week of 30 weeks, such as
Wednesday or Thursday, add them, and divide by 30. This will give you the same Moving
Averages as you would have doing 200. Another way to put it is, on the second day, take the
total, add the new day’s price, and subtract the oldest day’s price from your 5-day, 10-day,
50-day, or 200-day Moving Average, whichever way you are doing it. Repeat the process
on a daily basis and divide by the representative day—for the 5 day, you would divide by
5; for the 10 day, you would divide by 10; for the 50 day, divide by 50; and for the 200 day,
you would divide by 200.
Sensitizing Moving Averages
The shorter the time period, the greater the sensitivity you will develop in your Moving
Average. The 5-day Moving Average will be much more sensitive than a 10-day. The
problem with short-term Moving Averages is you can have a greater number of false moves.
Shorter Moving Averages are more suitable for commodities. On commodities, we would
even advise using a 30-hour, a three-day, and a six-day Moving Average.
It is often better to use two Moving Averages, one of shorter duration and one of longer
duration. In addition, you can use channels, a Moving Average of lows and a Moving
Average of highs. (EN10: In the markets of the 2000s, the most watched Moving Averages are the
50-day and the 200-day. In fact, these two have gained almost iconic status.)
Crossovers and penetrations
As a general rule, consider the crossing of two lines (EN10: as 50 and 200) by the price line
as a sell or buy signal in the direction of the crossover or penetration.
 1. Uptrends—Long positions are retained as long as the price trend remains above the
Moving Average Line.
 a. When the price line intersects or penetrates the Moving Average Line on the
upside, it activates a buy signal.
423Chapter thirty-six: Automat ed trendline: the Moving Average
 b. When the pr ice line goes above the 200-day Moving Average, but falls sharply
toward it without penetration, it is a possible buy signal. Additionally, conditions
at the time must be closely observed.
 c. When the pr ice line falls below the Moving Average Line while the line is still
rising, it could be a buy signal.
 d. When the pr ice line spikes down too fast and far below a declining Moving
Average Line, a short-term rebound toward the line may be expected: a possible
whipsaw trap.
 2. Downtrends—Short positions are held as long as the price trend remains below
the Moving Average. When the price trend reaches a bottom and turns upward, a
penetration of the Moving Average is a po


could be a buy signal.
 d. When the pr ice line spikes down too fast and far below a declining Moving
Average Line, a short-term rebound toward the line may be expected: a possible
whipsaw trap.
 2. Downtrends—Short positions are held as long as the price trend remains below
the Moving Average. When the price trend reaches a bottom and turns upward, a
penetration of the Moving Average is a possible buy signal.
 a. When the price line moves above the average line while the average line is still
falling, it is a sell signal.
 b. When the stock price line moves below the average line and rises toward it, but
fails to penetrate and breaks down again, it is a possible sell signal.
 c. If the price line rises too fast above the rising average line, a short-term reaction
may be expected: could be a whipsaw.
 d. Occasionally, penetration of the Moving Average Line will occur in close
conjunction with the penetration of a trendline, and then according to its direction,
it is a buy or sell signal.
 3. Horizontal, Diagonal, or Sideways Movements—If the fluctuations are broad in
comparison to the length of the Moving Averages being used, the price trend will
fluctuate back and forth as the Moving Average, true to its character or purpose,
moves horizontally. The trader must be alert to the need to change tactics.
 4. Gaps—Moving Averages, depending on their length, may have a tendency to be
penetrated in proximity to a Breakaway Gap, particularly at the beginning of a Major
Phase of an Intermediate cycle, and also in such cases in which Breakaway Gaps occur
at the beginning of correction phases.
Area Patterns can be a pitfall for the Moving Averages. Normally, the Moving Average
oscillates through the center of these areas, producing buy and sell signals in rapid
succession. In Area Patterns, the Moving Average is a headache to the trader because he
never knows which penetration is the one preceding either the renewal of the trend or the
Confirmation of a Reversal.
When trading areas develop in the form of Triangles—Descending, Declining, or
Symmetrical—the Moving Average will trend through the center of the Triangle. The
technician has some small advantage in judging which of the series of penetrations of a
Moving Average is the important one. When the Triangle reaches its apex and the stock
breaks out in one direction or another and penetrates the Moving Average, the penetration
is likely to be the most important one during the sideways movement of the Triangle’s
development. Penetrations occur many times in close conjunction with the penetration of
a trendline.
As a price derivative product, the Moving Average can be a trend indicator by the way
it fits a trendline. Nevertheless, it should be considered an adjunctive tool to everything
else you have learned in relation to technical analysis.
(EN10: Magee had, and I have, an instinctive aversion to mechanical systems. We want to see
and feel the analysis and the moment and consider the context and the subtle variables. A mechanical
system of any type—and a Moving Average system is not bad in broadly trending markets—is
blind. It will throw your capital in front of an on-rushing train and merrily hum along while the
424 Technical Analysis of Stock Trends
market is eating your lunch. I have called these “unnatural” systems—they interpose an algorithm
between the trader and the facts. This reduces decision-making stress but can go badly awry in some
types of markets.)
A 150-day Moving Average is charted in Figure 36.1.
The PENTAD Moving Average system from Formula Research
One of the solid and prestigious technical research firms in the country is Ned Davis
Research, Inc. (NDR). Nelson Freeburg of Formula Research has taken one of NDR’s systems
and tweaked it to yield what may be an effective long-range approach to the market. It
is presented here because Magee was interested in Moving Average systems, as well as
investors who are graphically challenged, meaning they can relate to numbers but not to
pictures.
Freeburg took an NDR Moving Average system and a 20-week Moving Average, added
a filter, and produced a system that reportedly has an 80% profitability on signals and
generated returns in the 15% range going back to 1942. Since 1980, returns averaged 19%.
We all know (or the reader can quickly demonstrate to himself with a software package)
that a Moving Average tends to create whipsaws in a sideways market. As the market
moves sideways, the Moving Average moves through the pattern creating buy and sell
$INDUA LAST-Monthly
Created with TradeStation www.TradeStation.com499.99
449.99
399.99
349.99
299.99
249.99
199.99
149.99
99.99
49.99
1920 1925 1930 1935 1940 1945 1950 1955
Figure 36.1 150-day Moving Average (dotted line). Up to the 1980s (the period during which Ronald
Reagan tripled the national debt) trading the 150-day Moving Average (buying on an up crossover
and selling on a down crossover) gave a trader somewhat the same advantage that trading the
Dow Theory afforded. In the 1980s, the system stopped working. Here in 1929 it would have been
a lifesaver, as can be seen. Not illustrated here is what the Moving Average does in a Dow Line, or
rectangle or congestion pattern. If taking signals on crossovers one could find his capital ground to
hamburger meat.
425Chapter thirty-six: Automat ed trendline: the Moving Average
signals as price oscillates about it. In a common-sense move, Freeburg added a filter to the
system that immeasurably improved it. Readers should be aware we include this method
because experience tells us this kind of system can be effective, but we have not validated
the research. Also, any system including the 1990s is guaranteed to have good, if not
spectacular, results. Diagrams illustrating the idea are shown in Figure 36.2 .
440
Nov
20-Wk MA-1%
= Buy, S&P 500 Crosses 1% Above 20-Wk MA
= Sell, S&P 500 Crosses 1% Below 20-Wk MA
= Buy, S&P 500 Crosses Above 20-Wk MA


ecause experience tells us this kind of system can be effective, but we have not validated
the research. Also, any system including the 1990s is guaranteed to have good, if not
spectacular, results. Diagrams illustrating the idea are shown in Figure 36.2 .
440
Nov
20-Wk MA-1%
= Buy, S&P 500 Crosses 1% Above 20-Wk MA
= Sell, S&P 500 Crosses 1% Below 20-Wk MA
= Buy, S&P 500 Crosses Above 20-Wk MA
440
445
450
455
460
465
470
475
480
490
485
= Sell, S&P 500 Crosses Below 20-Wk MA
Filtered Signals
20-Wk MA+1%
S&P 500 Close
20-Wk MA
S&P 600 and 20-Week MA:
Unﬁltered Signals
Dec9 4F eb Mar AprM ay JunJ ul AugS ep Oct Nov Dec9 5F eb Mar
445
450
455
460
465
470
475
480
485
490
440
445
450
455
460
465
470
475
480
485
490
440
445
450
455
460
465
470
475
480
485
490
Figure 36.2 Looking at the top chart, we can see the deleterious effects of using a Moving Average
system in a sideways market. Of course, at the end in January 1995, the system gets ready to cash in
big time. You will never miss a big market with a Moving Average system—if you have any capital
left after the whipsaws. Yet when a 1% filter is added, the number of trades is dramatically reduced
and the accuracy improved. Something systems traders never think of is a qualitative filter—looking
at the context when price crosses the average. What is the volume and what is the price action? Also,
the trader can experiment with different-size filters and filtering conditions.

427
chapter thirty-seven
The same old patterns
To the newcomer, the market appears filled with wonders and mysteries as the landscape
of Mars will appear to the first space travelers to land there. There are strange rumblings,
apparently unexplainable upheavals, weird growths. An unknown stock will suddenly
emerge from a morass of debt and deficit and proceed to soar to great heights. An old and
trusted issue will paradoxically sag and droop, although apparently rooted in the soil of
economic stability. All will seem peaceful and secure, and, suddenly, the ground opens up
and swallows values in a sensational market break. (For illustrations in this chapter, see
Figures 37.1 through 37. 5 4.)
Such a newcomer, perhaps not realizing what appears unusual and alarming is only
the normal fluctuation and adjustment that goes on continually in the market according
to the changing evaluations of millions of investors, will feel frightened, insecure, and
indecisive. He may scurry from boardroom to boardroom, personally or on the telephone,
scan the financial pages, talk with friends, accumulate a mass of conflicting information,
and end up shutting his eyes and making a blind stab in the hope he may come up with
the right answer.
Some never, even after years of contact with the market, achieve a tranquil and assured
approach.
However, it is possible to learn something about the basic nature of stock trends. It
is possible to know, within reasonable limits, about what might be expected in certain
situations. It is also possible to find ways of coping with these situations, including the
exceptional cases that persist in doing the unexpected. To repeat: it is possible to deal
successfully with the unexpected and with what cannot be precisely predicted.
To put it another way, it is possible to be wrong part of the time and still to be successful
on the balance. To do this, it is only necessary to have a background of experience sufficient
to know what will usually happen under particular conditions, about how often the
unexpected will occur, and how to deal with the unexpected when it does happen. These
are the same general problems that would confront the space traveler, the chemist, the
physician, or almost anyone else in his daily affairs.
There are men who have observed the market long enough and carefully enough to
discover there are not quite so many unexpected events as the newcomer might be led to
believe.
The charts in this book are, in the main, the same as those used for examples in the first
edition in 1947 . Some of them show situations from 1928 and 1929, others from the 1930s and
1940s. (EN: And still others from the 1980s, 1990s, and 2000s.) The reader can hardly overlook
the similarities that occur in various stocks at different times during corresponding phases
of their trends or turning points.
We have said that these same patterns, trends, and Support/Resistance phenomena
repeat themselves over and over again, and that they may be observed by anyone in his
own current charts for any period of time, in any normally active stocks, and on any
exchange or market.
By way of demonstration, there were included in this chapter of the fifth edition a
number of typical technical examples, similar to those already discussed, but taken from
428 Technical Analysis of Stock Trends
the period 1947–1966. (EN: The eighth edition includes examples taken up through the turn of the
millennium.) It would be possible to include ten times the number of good examples, for
almost every situation that has been previously illustrated has appeared again and again
in recent years.
Not all the same
Although a majority of stocks will participate in a big market trend, they will not all move
at the same time or to the same degree. Some will move quite independently and contrary
to the Averages. There was a “boom” in the 1920s and there was a Panic in October 1929,
but these are inadequate statements, half-truths if you will, and can be very misleading if
they are swallowed whole. A technician, following the individual behavior of stocks, would
have been able, through a balanced and diversified portfolio, to protect himself against
irreparable loss.
The facts are that of 676 stocks we have studied through the period 1924–1935, only 184
made a Bull Market Top in August–September–October 1929 and suffered Major Declines
in October and November of that year. There were 262 stocks actually in Major Downtrends
before the year 1929. Another 181 stoc


able, through a balanced and diversified portfolio, to protect himself against
irreparable loss.
The facts are that of 676 stocks we have studied through the period 1924–1935, only 184
made a Bull Market Top in August–September–October 1929 and suffered Major Declines
in October and November of that year. There were 262 stocks actually in Major Downtrends
before the year 1929. Another 181 stocks made their Bull Market Tops in the first nine
months of the year and were already moving down before the end of the summer. Five
stocks did not start their decline until after 1929 and 44 stocks continued to make new
highs after 1929. In Figures 37.9 through 37.11, there are three stocks showing very different
trends during the years 1927–1930.
U.S. SMELTING, REFINING AND MINING COMPANY UV
1951–1952–1953
S S
H88
80
76
72
68
64
60
56
52
48
44
40
250200
150
10050
JF MA MJ J AS ON DJ FM AM JJ AS ON DJ FM AM JJ AS ON D
Sales
100’s
Figure 37.1 A 1952 Major Head-and-Shoulders Top in U.S. Smelting, Refining and Mining. This stock
had moved up from a bottom at 33 in 1950 to the peak at nearly 88 shown here. The decline carried
down to 37 . This chart shows the typical high volume on the left shoulder. The volume at the head is
a little higher than in the “ideal” pattern. Light volume on the right shoulder is a definite warning.
Notice the Pullback Rally to the neckline in the last week of August. Also, the Secondary Recovery
in November and December. There also appears, at the left side of this chart in 1951, a beautiful
example of an Ascending Triangle, indicating the resumption of the previous interrupted advance.
429Chapter thirty-seven: The same ol d patterns
INSPIRATION COPPERI C1 956–1957
SEPTEMBERO CTOBERN OVEMBERD ECEMBERJ ANUARY
64
60
56
52
48
44
50
40
30
20
10
XD
XD
52.00
52.00
25 18 15 22 2961 32 02 73 10 17 24 18 15 22 29 51 21 92 62 91 6
Sales
100’s
Figure 37.2 Downtrends seldom show the perfect and regular trendlines we often see in uptrends,
but in spite of the irregular, ragged rallies and spotty volume action, the basic principles are about
the same as for advances. Notice in this six-month period, Inspiration Copper had no rally that
carried above the Top of a preceding rally. A well-marked downtrend of this sort must be presumed
to continue until there is a marked change in the pattern and volume action. Notice the volume on
the day “IC” broke the historically important 52 level, and subsequent action.
430 Technical Analysis of Stock Trends
GRANITE CITY STEEL GRC
1956
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBERD ECEMBER
60
56
52
48
44
40
38
Sales
100’s
125
100
75
50
25
XD 75
XD 75
14 21 28 41 11 82 51 81 52 22 96 13 20 27 31 01 72 41 81 52 22 95
Figure 37.3 Part of the Major Advance in Granite City Steel. Here we see the familiar phenomenon
of Support and Resistance in almost every move through the period shown.
The August–September Rectangle held for six weeks between the top limit of 47 , which was
reached on three occasions, and the bottom at 44. Like most Rectangles, it was marked by heavy
volume at the start on July 19, and gradually declining volume as the pattern progressed. The
breakout move on August 29 was on enormous volume.
After this breakout, there was a typical Flag-like reaction on sharply diminished volume, and
although this move penetrated the top border of the Rectangle, the penetration was not decisive or
significant, and the lower border was never violated. Now, see how volume appears on October 15
as the old high is reached, and again at the top of the move on November 14. The decline returns to
the level of the September high on a low-volume reaction. It is interesting how, on five occasions in
this chart, the 52 level served as a Support or Resistance point: twice as Resistance on the way up,
and three times after the new October high, as Support.
On the next rise, we see almost the same type of advance. In this case, the Support–Resistance
Level is about 57 . Notice the approach to the critical level, the backing away, the aggressive move into
new high ground (in mid-December), and the recession to the Support at 57 .
Advances of this sort seem to represent the ebb and flow of the Minor Moves during a Major
Trend when there are no great “news developments” to change the normal progress of the trend.
Where there are frequent and important changes in the market or in news affecting the industry, we
may see long Consolidations or Secondary Reactions, but the Major Trend is durable. We must not
assume a Major Reversal prematurely.
431Chapter thirty-seven: The same ol d patterns
MASONITE MNC1 956
JULY AUGUSTS EPTEMBERO CTOBERN OVEMBERD ECEMBER
XD .30
AND 50
AND 4% STOCK
XD .30
48
44
40
38
36
34
32
30
28
125
100
75
50
25
71 42 12 84 11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29
Sales
100’s
Figure 37.4 During the same period that Granite City Steel was making the series of steps upward,
as shown in Fig u r e 37. 3, Masonite was doing almost the same thing in reverse.
To have continued to hope for a change in trend with a stock that was acting as “MNC” did
through the latter part of 1956 would have required an unusual amount of optimism or innocence
about the habits of stocks. Actually, there would be good reason for optimism if the stock had been
sold short early in the trend.
This is almost a perfect counterpart to the “GRC” chart. We have not only a series of declines
with rallies that fail to establish even Minor highs above the previous Tops, but we are also able to
draw a trendline with a number of points of contact on the way down, which is somewhat unusual
in a downtrending situation. Notice the tendency of the rallies to stop short at the level of previous
bottoms in a series of Support–Resistance Levels. We see such action at 44, at 41, at 38, and at 36.
We would certainly not consider the breaking of the trendline on the upside in late December
as evidence of a Reversal. Such a break after a trend of this sort


down, which is somewhat unusual
in a downtrending situation. Notice the tendency of the rallies to stop short at the level of previous
bottoms in a series of Support–Resistance Levels. We see such action at 44, at 41, at 38, and at 36.
We would certainly not consider the breaking of the trendline on the upside in late December
as evidence of a Reversal. Such a break after a trend of this sort probably means no more than a
Secondary Recovery. To be of greater significance, it would certainly call for some volume showing,
which was utterly lacking here, and before we would consider the stock again strong enough to buy,
there would have to be some sort of Reversal Pattern. A faltering rally back to around 40 would, in
fact, suggest the advisability of further short sales.
432 Technical Analysis of Stock Trends
DELAWARE, LACKAWANNA AND WESTERN DL
1945–1955
SEPTEMBERO CTOBERN OVEMBERD ECEMBER JANUARYF EBRUARY
24
22
20
19
18
17
16
15
14
13
12
11
125
100
75
50
25
41 11 82 52 91 62 33 06 13 20 27 41 11 82 51 81 52 22 951 21 92 6
Sales
100’s
Figure 37.5 Very often you will hear the question, “But how can you tell whether a technical formation
or a breakout is valid?” In many cases, and in a great majority of upside patterns, the volume gives
such a decisive answer that all doubts are removed. Not always is the volume confirmation as clear
as in this chart of Delaware, Lackawanna and Western, but this is typical of a good many breakouts
in uptrends. You will see the volume was generally light during the Rectangle, in which we see five
plainly marked Tops and Bottoms.
On Thursday, November 4, the volume increased sharply as the price moved up to the top of the
Rectangle and closed at that point. The following day, Friday, we see good volume again with a close
beyond the top border. From this point on, the move is obviously upward.
There was no indication of Reversal at any time after the breakout. A Top was reached in March
at 25 1/2.
This was an especially vigorous move as it came out of the Rectangle. Normally, we would look for
Minor Setbacks such as the series of reactions in “GRC,” Fig u r e 37. 3. If these had occurred, it would
in no way have weakened the Bullish Pattern.
433Chapter thirty-seven: The same ol d patterns
AMERICAN LOCOMOTIVEL A
1954
JULY AUGUSTS EPTEMBERO CTOBER NOVEMBER DECEMBER
XD 25C
XD 25C
22
20
19
18
17
16
15
14
13
12
11
250
200
150
100
50
31 01 72 43 17 14 21 2841 11 82 52 91 62 33 06 13 20 27 41 11 82 5
Sales
100’s
Figure 37.6 The situation, somewhat similar to “DL ” in Fig u r e 37. 5, presents a little complication.
The problem would have been whether to sell or continue to hold “LA” after the late October break
down through the Bottom of the Rectangle. There was no important volume on this drift move, and
on only one day did the price close barely 3% below the bottom of the pattern. A holder of the stock
might well have sold it, might even have executed a short sale.
Suppose now, you had actually sold the stock short; observe the volume and the price action on
Thursday, November 4, and Friday, November 5. Notice the volume and the price on the following
Monday and Tuesday as it reacted slightly. Then see the quick pick up in volume as the price advanced
on Wednesday, the week and a half of dull Consolidation, and the larger volume on the move up on
Friday. Surely by the middle of the first week of December, if not before, you would have seen the
danger signals and closed out your short.
Such a turnabout does not need to be a tragedy nor even a discouragement. Some easily
discouraged traders would be so concerned about the small loss realized on their unsuccessful short
sale they would not be ready to seize the opportunity to reverse position and buy the stock after the
strong up signals. This move carried to 26 3/4 in March 1955.
434 Technical Analysis of Stock Trends
FANSTEEL METALLURGICALF NL
1955 – 1956
52
48
44
40
38
36
34
32
30
28
26
24
22
250
200
150
100
50
FM AM JJ AS ON DJ FM AM JJ
Sales
100’s
Figure 37.7 Bottoms normally take longer to complete than Tops. That is one reason we have this
chart of Fansteel on a weekly basis, so that a year and a half of the action can be shown. The pattern
shown at the left is a Consolidation formed after a rise from the 1953–1954 Multiple Bottoms around
21. The top of the Ascending Triangle corresponds roughly with the April 1953 peak.
At the time this Triangle started, in early 1955, it was not possible to identify it as such—particularly
since the February high ran a little higher than the horizontal Tops that eventually formed. However,
during the seven months preceding the first breakout move, it became increasingly clear each rally
to the neighborhood of 32 1/2 was followed by a reaction on low volume, and these reactions were
forming a series of Rising Bottoms.
In the first week of September we see a clean penetration upside, and from here on, the advances
and declines fit into the typical pattern of a Major Advance. Notice the Breakaway Gap in November
and the low volume throughout the December–January–February reaction.
435Chapter thirty-seven: The same ol d patterns
TEXTRON TXT1 956–1957
AUGUSTS EPTEMBERO CTOBERN OVEMBERD ECEMBERJ ANUARY
XD .40
XD .40
24
22
20
19
18
17
16
15
14
125
100
75
50
25
11 18 25 18 15 22 29 61 32 02 73 10 17 24 18 15 22 29 51 21 92 62
Sales
100’s
Figure 37.8 Here, in a daily chart, we see once again the dramatic sequel to a Descending Triangle.
Here is the typical series of declining Tops on rather low volume with retreats between the rallies
to a horizontal line.
Notice the important Support here was violated with heavy volume on Friday, January 25.
Although the degree of penetration was not great, in view of the generally Bearish reaction to
this point we would sell at once. A Descending Triangle has Bearish implications even before the
breakout. There was no substantial Pullback after the breakout. Since it is not possible to count on
such a reco


ne.
Notice the important Support here was violated with heavy volume on Friday, January 25.
Although the degree of penetration was not great, in view of the generally Bearish reaction to
this point we would sell at once. A Descending Triangle has Bearish implications even before the
breakout. There was no substantial Pullback after the breakout. Since it is not possible to count on
such a recovery after a break through Support, it is safest to sell long holdings immediately or to
place a very near stop on them as soon as a close outside pattern occurs (in this case, outside the
pattern as adjusted for ex-dividend).
Notice the pickup of volume as the price drops into a tailspin at the end of January. Heavy volume
is not necessarily a feature of important downside moves, but it may, and often does, accompany
them, and when it does, it simply underscores the significance of the move.
Question: does Textron look like a “bargain” to you at the end of January on this chart? Would you
be tempted to buy this stock because “it can’t go down any more,” or because it is “due for a rally,”
or because it is “selling below its true value”?
Suppose “TXT” did have a technical rally, which seems quite likely after the move shown. How far
would you look for it to go? Would you expect it to penetrate the 20 level in the near future? Would
you call this a Bullish Situation at the end of January 1957?
436 Technical Analysis of Stock Trends
LIBBY, McNEILL
AND LIBBY30
25
20
15
10
1927 1928 1929 1930
(a)
CHRYSLER
150
120
90
60
30
1927 1928 1929 1930
(b)
EAGLE-PICHER
LEAD50
40
30
20
10
1927 1928 1929 1930
(c)
Figure 37.9 (a) Libby, McNeill and Libby showed no serious effects at the time of the October 1929
panic, and went on to new highs in March and April 1930. (b) Chrysler, one of the great market
leaders, made its Bull Market Top in 1928, more than a year before the Panic, and had already lost
60% of its value before October 1929. (c) Eagle–Picher Lead never enjoyed any Bull Market at all. Aside
from an unimpressive rally in 1928, it was in a downtrend all the way.
The examples given are not rare exceptions; there are many others involving important stocks
that did not follow the pattern set by the Averages. This variety of behavior is typical of the market.
It is to be seen today. They are not “all the same,” and each stock must be studied individually. In
Fig u r e 37.10, there are a few examples showing disparate action during the years 1953–1956. There
are hundreds of others that would illustrate the point equally well.
437Chapter thirty-seven: The same ol d patterns
WEST INDIES
SUGAR50
40
30
20
750
500
250
1953 1954 1955 1956
Sales
100’s
WESTINGHOUSE
ELECTRIC100
80
60
40
3000
2000
1000
Sales
100’s
1953 1954 1955 1956
KRESGE (S.S.) CO.
50
40
30
20
600
400
200
1953 1954 1955 1956
Sales
100’s
(a) (b) (c)
Figure 37.10 (a) West Indies Sugar broke out of its “Scalloping” Pattern in late 1956 to make its own
Bull Market at a time when action in the Averages was apathetic and generally weak. (b) Although
the Averages continued to make new highs through the spring of 1956, Westinghouse Electric made
its top and went into a Major Decline more than a year earlier. (c) Here is a companion piece to
Eagle–Picher’s chart of more than 25 years ago, shown above it. Kresge, like a number of other “blue
chips,” did not participate in the Bull Market Moves of 1953–1956.
These six charts were adapted from “Graphic Stocks” (F.W. Stephens, New York). The 1927–1930
charts are from a Special Edition covering nearly 700 stocks through the period 1924–1935. The
1953–1956 charts are from a later edition of “Graphic Stocks.”
438 Technical Analysis of Stock Trends
NORTHROP AIRCRAFT NOC
1954–1955
DECEMBER JANUARYF EBRUARYM ARCH APRILM AY
Adjusted for 2/1 SPLIT
38
36
34
32
30
28
26
24
22
20
19
18
250
200
150
100
50
41 11 82 51 81 52 22 95 12 19 26 51 21 92 62 91 62 33 0714 21 28
Sales
100’s
XD 40C
Figure 37.11 A beautiful Top Formation in Northrop Aircraft, 1954–1955. The move, which ended
here at 39 3/4 in January 1955, emerged from a Bottom in 1953 at 6 1/4.
The Descending Triangle is marked by rather unusual volume at the peaks of rallies in February
and March. Otherwise it is typical of this sort of Reversal Pattern. As so frequently happens, there
was a Pullback effort after the March 14 breakout, but this rally lasted only two days.
You will notice the volume on the breakout and throughout the downside move was not so
spectacularly heavy, not nearly as heavy, in fact, as on the Minor Rallies within the Triangle. As
pointed out previously, however, we do not need or expect so much volume on a decline as we look
for in an advance.
Volume did not develop until the end of the first stage of the decline. It is quite usual for heavy
volume to show up at the end of a Minor Move whether on the upside or the downside.
Notice the Flag formed on the subsequent rally in mid-April. The measuring implications of this
Flag were approximately carried out a month later.
During the following year and a half, “NOC” never reached 31 again.
439Chapter thirty-seven: The same ol d patterns
NORTHROP AIRCRAFT NOC
1956–1957
AUGUSTS EPTEMBERO CTOBERN OVEMBERD ECEMBERJ ANUARY
XD 40C
XD 40C
28
26
24
22
20
19
18
17
125
100
75
50
25
11 18 25 18 15 22 29 61 32 02 7310 17 24 18 15 22 29 51 21 92 62
Sales
100’s
Figure 37.12 Bearing in mind the 1954–1955 chart of Northrop in Fig u r e 37.11, we now turn to the
action in this same stock in the latter part of 1956 and the beginning of 1957 . The question is whether
the Major Downtrend is still in effect or whether an important upturn has taken place.
As usual, it is the volume that must be watched and studied. Notice the Minor Peak on August
14, then the very heavy volume on August 24. See how the activity dries up during September but
resumes briskly as a new Minor Top is established in October. Observe the drying-up of volume on
declines and the activity on rallies to the


is still in effect or whether an important upturn has taken place.
As usual, it is the volume that must be watched and studied. Notice the Minor Peak on August
14, then the very heavy volume on August 24. See how the activity dries up during September but
resumes briskly as a new Minor Top is established in October. Observe the drying-up of volume on
declines and the activity on rallies to the 25 1/2 level, which, by the middle of December, has become
the horizontal Top of an Ascending Triangle.
There was no question about the validity of the breakout move on December 10, and the subsequent
reaction in the next two weeks confirmed this by the lack of activity on the decline. Again, in early
February, we see volume pick up notably as a new high is registered.
At the time this is written (EN: 1957), it is not possible to say whether or not “NOC” will continue
this upward course and eventually smash the “31 barrier.” We feel there will be no doubt in the
reader’s mind at the beginning of February, Northrop was presumably moving in an uptrend and
must be presumed to be in that trend until a definite change in its market action has taken place.
It seems quite probable if “NOC” should advance to the 30–31 level, there is likely to be a period
of Consolidation with the formation of an Area Pattern before a successful advance above 31 is
accomplished.
As a sidelight on this chart, it might be mentioned that during the period of advance shown above,
many aircraft stocks were moving lower.
440 Technical Analysis of Stock Trends
CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC ST
1954–1955
JULY AUGUSTS EPTEMBER OCTOBERN OVEMBERD ECEMBERJ ANUARYF EBRUARYM ARCH APRILM AY JUNE
XD 1.00
XD 1.50
38
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
12
11
250
200
150
100
50
31 01 72 43 17 14 21 28 41 11 82 55 12 19 26 51 21 92 629 16 23 30 29 16 23 3061 32 02 741 11 82 58 15 22 2917 14 21 28 41 11 82 52
Sales
100’s
Figure 37.13 The 1954–1955 advance in Chicago, Milwaukee, St. Paul and Pacific is an object lesson
in Bull Market techniques. Where would such a trend (of which there are many similar cases) leave
the man who sells just “because he has a good profit,” say at 15, or who feels “17 is too high a price”?
Here is a chart worth considerable study because it exemplifies a great many features of the
“ideal” uptrend. In this full year of advance, there is no point at which even a tyro technician could
find reasonable cause for anxiety or justification for selling the stock. What is more, we should not
overlook the tax advantages of long-term gains.
In August and September, we have a perfect example of the Symmetrical Triangle as a
Consolidation. The volume is typically heavy at the start of the pattern and shrinks to almost nothing
as it progresses. The breakout volume is decisive. The reaction after the breakout, also on lower
volume, as it should be, runs right back to the apex, the “cradle point” that is nearly always a strong
Support on such a reaction.
Now follow the action from here; the two days of higher volume in the early November rally
represent the penetration of the previous Minor Top, and the end of the rally, respectively. The
reaction comes back to the previous top.
The December rally is marked by heavier volume when the November top is exceeded, and again,
to a lesser degree, at the end of the move. Once more there is a reaction, this time to the November
top.
A fast move near the end of December repeats the same price and volume action, and it is followed
by a typical low-volume reaction to the early December top. (This is becoming monotonous, but it is
important. You are seeing here a long-term demonstration of Bullish technical action.)
Next, we have the January breakout. How far would you expect its Minor Reaction to go? Would
you be surprised if it found Support at the level of the three little Tops formed early in the month
at 17 1/2?
The following advance drives through the 20 level, and, in a series of small fluctuations, forms
an Ascending Triangle. By the end of February, another new high has been established. Can you
estimate where to look for support on the reaction?
441Chapter thirty-seven: The same ol d patterns
Figure 37.13 (Continued ) Now we see the formation of the second Ascending Triangle (notice the
relatively low volume), which is broken on the upside in a burst of trading activity toward the end
of April. The next reaction comes back to the support of the former Tops as you would expect. Once
again, an Ascending Triangle is formed, and you will see how the volume dries up throughout this
pattern, coming to life emphatically on the breakout on Wednesday, June 8.
Many students, on first seeing this chart, remark, “Well, the trend wasn’t broken until Tuesday,
June 21.” Actually, no break occurred on that day. The stock simply went ex-dividend $1.50, which,
as you will see if you adjust the price by that amount, merely brings it back to the Support at the top
level of the April–May Ascending Triangle.
It is inconceivable that any such regular series of Bullish Patterns could appear throughout a
full year of trading in a stock “by accident.” This is part of the normal mechanism of the market,
representing the judgments, opinions, fears, hopes, and trading tactics of thousands of traders and
investors. It should be added, however, that it is not often that one sees such a long and “perfect”
Major Advance as this. Normally, there are interruptions, distortions, or Secondary Reactions from
time to time.
442 Technical Analysis of Stock Trends
WESTINGHOUSE ELECTRIC AND MANUFACTURING CO.
WX 1955
FEBRUARYM ARCH APRIL MAYJ UNEJ ULY
XD 50C
XD 50C
80
76
72
68
64
60
56
52
48
44
250
200
150
100
50
51 21 92 651 21 92 62 91 62 33 07 14 21 28 41 11 82 52 91 62 33 0
Sales
100’s
Figure 37.14 Does it require second sight to perceive this is a Bearish stock? If you were keeping a
chart on Westinghouse Electric and Manufacturing, wouldn’t you have reco


TINGHOUSE ELECTRIC AND MANUFACTURING CO.
WX 1955
FEBRUARYM ARCH APRIL MAYJ UNEJ ULY
XD 50C
XD 50C
80
76
72
68
64
60
56
52
48
44
250
200
150
100
50
51 21 92 651 21 92 62 91 62 33 07 14 21 28 41 11 82 52 91 62 33 0
Sales
100’s
Figure 37.14 Does it require second sight to perceive this is a Bearish stock? If you were keeping a
chart on Westinghouse Electric and Manufacturing, wouldn’t you have recognized, long before the
end of the period shown above, that the trend was down, not up?
It is one of the great delusions of the market that the stock we own must be “good.” As prices
decline, the price–dividend ratio, based on past history, will improve. Additionally, the price–
earnings ratio likewise will look continually better. Investors will begin to speak of “averaging
their cost” by putting more money into a tumbling stock (instead of looking for something going
their way). They will talk endlessly about improved outlook, new products, and a forward-looking
management; they will prove to you it is selling “below its true value,” whatever that may mean.
They will bend every effort to establish what is going on before their eyes is not true; that the very
weak-looking stock is actually strong; that the American public is making a great mistake and is
misjudging this stock; that the tape is wrong because they must be right.
Nevertheless, values in the market are determined democratically and, by and large, probably
represent the best composite appraisal you can find. A move like this is not meaningless, and it is not
possible today to attribute it to the machinations of a few manipulators. In the chart, we are seeing
the reflection of a collective evaluation that cannot be lightly disregarded. Westinghouse reached 50
7 /8 in November 1956.
443Chapter thirty-seven: The same ol d patterns
TEKNIPLAT Chart Paper
Published and Distributed by JOHN MAGEE, Inc. Technical Analysis of Stock Trends, 360 Worthington Street, Springﬁeld 3, Massachusetts
Type RU
COPYRIGHT 1961 BY JOHN MAGEE, SPRINGFIELD, MASS.
DECEMBER JANUARYF EBRUARYM ARCH APRILM AY JUNE JULY AUGUST SE PTEMBERO CTOBER NOVEMBER
OTIS ELEVATOR CO. OT1954–1955
152
144
136
128
120
112
104
96
88
80
76
72
68
64
60
56
52
48
44
50
40
30
20
10
41 11 82 5 1 81 52 22 951 21 92 65 12 19 26 41 11 82 522 91 62 33 0 91 62 33 071 42 12 86 13 20 27 31 01 72 41 81 52 22 9512 19 26 3
XD .625 XD .625 XD .625
Sales
100’s
Figure 37.15 A typical stock chart on TEKNIPLAT™ charting paper. Allowing for ex-dividends, “OT” never significantly violated the apex of the Triangle.
The advance ultimately added 60% to the value of the stock. This chart, in its long, mostly sideways movement, is a good example of the importance of
making allowance for the ex-dividend drop in the price. During the first five months shown, we see an almost perfect Symmetrical Triangle. The first
critical point would be on the slight breakdown in the middle of May. The lower border of the Triangle was violated just a trifle, even if we had allowed
for the 62 1/2¢ March dividend. If one had sold the stock here, who could blame him? No great or immediate harm would have been done. However, an
experienced technician might have taken into account the insignificant volume at this point and waited a bit, with a stop at, say, 60. (See the somewhat-
similar situation in the chart of “LA,” Fig u r e 37.6.) If “OT” had been held, the volume pickup on the rally would have shown the trend had not yet reversed
itself. The second critical point came in late September and early October, at the time of President Eisenhower’s illness. However, if we allow for the two
dividends that went ex in July and October, the break did not violate the May Bottom. Furthermore, it was on relatively light volume. If the stock was still
held, there was no valid reason for selling on this decline. From here on, breaking upward sharply from the October–November Island, “OT” resumed
the Major Advance interrupted by this long period of Consolidation, and advanced to the equivalent of over 100 (adjusted for two-for-one split) in 1956.
444 Technical Analysis of Stock Trends
Close
454.82
Feb 12
Close
520.77
Jul 12
Close
419.79
Oct 12
DOW - JONES
INDUSTRIAL
AVERAGE
JANF EB MARA PR MAYJ UN JULA UG SEPO CT NOVD EC
550
540
530
520
510
500
490
480
470
460
450
440
430
420
BREAK OUT
1
2
3
4
5
Figure 37.16 The Broadening Top in the Dow–Jones Industrial Average that formed in May, June,
July, and August 1957 . Although Broadening Tops have appeared many times in individual stocks,
and, as a rule, have carried out their Bearish implications, such a chart pattern has never before been
completed in the Industrial Average. In 1929, on two occasions, there were patterns that began to
show Broadening tendencies, but because these were interrupted by continuation moves, about all
one can say of them is they may have indicated a growing technical weakness in the market.
 The 1957 situation, on the other hand, was very definite and was fully completed. During the
early stages of the pattern, several of our friends wrote, calling attention to the possible Broadening
Top, among them Charles E. Carden of Fort Worth, TX, who has handled Dow Theory comment and
analysis for the Fort Worth Star Telegram. The chart shown in Fig u r e 37.16 is adapted from one of Mr.
Carden’s charts and is reproduced with his permission.
The first significant point after the February 12 Bottom was the Minor Peak of Tuesday May 21,
marked (1). The Minor Decline from this point on Tuesday, May 28 (2), was quite normal, as was the
renewed advance to Monday, June 17 (3).
The first sign of a broadening tendency was when the Average closed on Monday, June 24 (4),
below the May 28 bottom. However, this by itself did not indicate a Reversal. The advance was
resumed, and surmounted the May 21 and June 17 Minor Tops, reaching a high closing figure of
520.77 on Friday, July 12 (5). The Broadening picture was now quite evident, and the completion of a


ay, June 17 (3).
The first sign of a broadening tendency was when the Average closed on Monday, June 24 (4),
below the May 28 bottom. However, this by itself did not indicate a Reversal. The advance was
resumed, and surmounted the May 21 and June 17 Minor Tops, reaching a high closing figure of
520.77 on Friday, July 12 (5). The Broadening picture was now quite evident, and the completion of a
Broadening Top required only a close below the June 24 Bottom.
On Tuesday, August 6, the Industrial Average closed decisively below the June 24 Bottom, signaling
the completion of the Broadening Top. This was an indication of Major weakness, a warning not to
be taken lightly.
The Broadening Top, as we have pointed out previously, is an indication of a wildly gyrating
market, a market without leadership or definite trend. The presumption is that heavy distribution is
going on under cover of the rallies and the breakout move is seldom a false one.
445Chapter thirty-seven: The same ol d patterns
$INDU - Daily US L=10125.40 -114 .52 -1 .12% O=10239.84 C=10125.40
Hand
Fenceline–Neckline
9082.62
11378.00
10897.00
10437.00
9996.00
9573.00
9169.009119.00
8781.00
8410.00
8055.00
7714.00
Oct9 9A pr JulO ct 00 AprJ ul Oct0 1A pr JulO ct
Created with TradeStation
Figure 37.17 The Broadening Top in the Dow in 1999–2000. If repetition is the heart of pedagogy,
the reader may die of heart disease with looking at the Dow Broadening Top, especially if he was
long at the time and either disregarded the signs or was not educated as to their significance. The
lesson is always the same: bad news is on the way. The numerous technical aspects of this historic
market top are discussed at length in other views of the Dow taken at this time. Remember, this
time it is different. The market paradigm has changed, and so on and so on. … Those who l isten to
fools will be fooled.
Figure 37.16 (Continued ) Since we are dealing with an Average rather than a single stock, we would
consider any closing below point (4) after the peak at (5), regardless of how slight the margin might
be, would constitute a valid breakout, because Averages are less sensitive than individual stocks,
and it is customary to consider even slight penetrations at signal points (as in Dow Theory) as
perfectly satisfactory. You will notice also that, although it would be possible to draw the Broadening
Top through the extreme ranges of the price, as we have done with the wide-dashed line, we have
used the closing prices as marked by the narrow-dashed line. This, too, is in line with Dow Theory
practice, where only closing prices are considered.
The implication of the pattern here was Bearish for the “market-as-a-whole.” As might be
expected, a majority of stocks showed weak patterns of trends at this time. As always, however,
it was necessary to examine each stock separately on its merits, because, as we will show in the
following pages, not all stocks behaved alike even in this extremely weak market situation. Compare
the broadening top from 1999 to 2000 (Fig u r e 37.17).
446 Technical Analysis of Stock Trends
TEKNIPLAT Chart Paper
Published and Distributed by JOHN MAGEE, Inc. Technical Analysis of Stock Trends, 360 Worthington Street, Springﬁeld 3, Massachusetts
Type RU
COPYRIGHT 1961 BY JOHN MAGEE, SPRINGFIELD, MASS.
JANUARYM ARCH APRILM AY JUNE JULY AUGUST SEPTEMBERO CTOBER NOVEMBER
INDUSTRIAL RAYON CORPORATION ILR1957
38
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
12
11
Sales
100’s
50
40
30
20
10
51 21 92 6 41 11 82 52 291 62 32 91 62 33 0 91 62 33 0 71 42 12 871 42 12 861 32 02 76 132 02 73 101 72 43 118 15 22 29 51 21 92 6
XD .50 ¢XD .75 ¢ XD .25 ¢ XD .25 ¢
DECEMBERFEBRUARY
Figure 37.18 1957 Bearish Trend in Industrial Rayon. At no time did this stock show significant strength.
 Averages do not tell the whole story. Each stock has to be considered on its own merits. Long before the formation of the 1957 Broadening Top in
the Industrial Average, Industrial Rayon was moving down in a Major Decline. You will find many cases in which it is difficult to “see” what a stock
is doing or to determine its Major Trend, but in such a situation as this (and this is not a rare case), it is perfectly obvious that the trend is down.
Although there were a number of Minor Rallies and Consolidations during the decline, the entire pattern was so obviously part and parcel of the same
big decline that no one who was even slightly familiar with typical stock behavior would have been tempted to buy the stock, even to cover shorts.
 On Monday, July 29, there was a sharp downward break with a gap on climactic volume. This would have suggested the probability of a Minor
Bottom, and for three and a half weeks, the stock did stabilize at around 24. But even during this Consolidation, the continuing weakness showed up
on the small Descending Triangle that was formed, and ultimately on Wednesday, August 21, the price broke sharply to continue the Major Decline.
447Chapter thirty-seven: The same ol d patterns
TEKNIPLAT Chart Paper
Published and Distributed by JOHN MAGEE, Inc. Technical Analysis of Stock Trends, 360 Worthington Street, Springﬁeld 3, Massachusetts
Type RU
COPYRIGHT 1961 BY JOHN MAGEE, SPRINGFIELD, MASS.
JANUARYF EBRUARYM ARCH APRILM AY JUNE JULY AUGUST SEPTEMBERO CTOBER NOVEMBER
LORILLARD LL1957
38
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
12
11
250
200
150
100
50
51 21 92 6 41 1 18 252 291 62 32 91 62 33 0 91 62 33 07 14 21 2871 42 12 861 32 0 27 61 3 20 27 31 0 17 24 3118 15 22 29 51 21 92 6
XD .30 XD .30
DECEMBER
Sales
100’s
Figure 37.19 1957 Bullish Trend in Lorillard. Although most stocks declined in 1957 , there were a number of strong issues like this one that appeared
to be totally unaffected by the general pessimism.
 Averages do not tell the whole story. It will come as a shock to many readers, who rightly regard the latter half of 1957 as a Major Bear Market,
to see Lorillard making a typical Bull Market Advance. Lo


7.19 1957 Bullish Trend in Lorillard. Although most stocks declined in 1957 , there were a number of strong issues like this one that appeared
to be totally unaffected by the general pessimism.
 Averages do not tell the whole story. It will come as a shock to many readers, who rightly regard the latter half of 1957 as a Major Bear Market,
to see Lorillard making a typical Bull Market Advance. Lorillard moved up from 15L to 34 during the year—and reached 54J during the first three
months of 1958. It is hard to believe this chart and the Industrial Rayon chart we just looked at cover the same period, the year 1957 .
 The majority of stocks did suffer severe depreciation, but there were a good many issues, like Lorillard, which enjoyed a generally Bullish Trend
all year. Among the important stocks that moved up consistently in 1957 were American Chicle, Anchor Hocking Glass, Colgate-Palmolive, General
Foods, General Cigar, Grand Union, National Biscuit, Parke Davis, Penick and Ford, Plough, Inc., Proctor and Gamble, Ruberoid, Vick Chemical,
Winn-Dixie Stores, and Zenith Radio.
 Whatever theories we may have as to the condition of the “market-as-a-whole,” we must always realize we are buying and selling individual
stocks. (EN: Unless we are trading Index Shares.) We may get a picture of extreme Bullishness or extreme Bearishness in the “general market,” but if
this picture conflicts with the clear evidence in a particular stock, we must recognize it is the stock, not the Average, with which we have to deal. We
cannot assume a stock “must” follow the Average. Often, it is possible to obtain greater stability and safety by buying a few strong stocks in a Bear
Market or by selling short a few weak stocks in a Bull Market, than by attempting to maximize profits with an “all-out” position one way or the other.
448 Technical Analysis of Stock Trends
AVNET ELECTRONICS CORP. AVT
1961
MAYJ UNE JULY AUGUST SEPTEMBERO CTOBER
68
64
60
56
52
48
44
40
38
36
34
32
30
28
26
24
22
500
400
300
200
100
61 32 02 731 01 72 41 81 52 22 95 12 19 26 29 16 23 30 71 42 12 8
Sales
100’s
Figure 37.20 During the latter nine months of 1961, some well-known market Averages continued
to show new all-time highs. However, the Evaluative Index (see Chapter 38), in this period did not
indicate any such overall strength; many stocks were in almost continuous decline for the nine
months. These included such important issues as Air Reduction, Allied Chemical, Allis-Chalmers,
Aluminum, Ltd., Fansteel Metallurgical, Flintkote, Heyden Newport Chemical, Sperry Rand, Texas
Instruments, Trans World Airlines, Universal Match, and many others. At such times, it is best to
choose stocks selectively and maintain adequate liquid reserves.
449Chapter thirty-seven: The same ol d patterns
BURNDY CORPORATIONB DC
1961
APRILM AY JUNE JULY AUGUST
40
38
36
34
32
30
28
26
24
50
40
30
20
10
29 1625 18 15 22 2961 32 02 7310 17 24 18 15 22 29 51 21 92 6
Sales
100’s
Figure 37.21 A familiar Top Pattern. From the end of 1957 to the spring of 1961, Burndy Corporation
moved from below 10 to 37 in a generally Bullish Trend. The advance accelerated sharply on the
postelection rally of late 1960 and early 1961. However, with Burndy, as with many other stocks, the
rally ended in the early months of 1961. Here, we have not only a perfect example of the Head-and-
Shoulders Top in the price action, but we also have the typical volume confirmation. The early April
rally was on heavy volume. The rally in the last week of April was on somewhat-disappointing
volume, although a new high was made at that time. We have a definite increase of volume on the
retreat from this peak, and practically no enthusiasm in the final rally of the first week of June. The
breakdown on Monday, June 19, accompanied by heavier volume and a definite gap in the price
track, confirmed the Top Formation. Although Burndy held around the 30 level for a time, and after
a further drop recovered to 31, the Major Trend had definitely been reversed. By June 1962, Burndy
was selling at 11 3/4.
450 Technical Analysis of Stock Trends
TEKNIPLAT Chart Paper
Published and Distributed by JOHN MAGEE, Inc. Technical Analysis of Stock Trends, 360 Worthington Street, Springﬁeld 3, Massachusetts
Type RU
COPYRIGHT 1961 BY JOHN MAGEE, SPRINGFIELD, MASS.
BRUNSWICK CORPORATIONS BC1960–1962
76
72
68
64
60
56
52
48
44
40
38
36
34
32
30
28
26
24
22
500
400
300
200
100
NJ D FM AM JJ AS ON DJ FM AM JJ AS ON DJ FM AM JA S
′
60 ′61 ′62
Sales
100’s
Figure 37.22 Weekly chart of Brunswick Corporation showing the final stages of the long Bull Market in “BC,” the Climactic Top in March 1961, the
distributive phase through December 1961, and the ultimate breakdown.
 For five years, from 1956 into early 1961, Brunswick advanced in a great Bull Market surge. During this period, the stock was split four times. In
the first week of March 1961, terminating the postelection rally, “BC” made a new high on extraordinary volume, but closed the week nearly at the
bottom of the weekly range. The One-Week Reversal might well have served as a warning to the market trader.
 Assuming, however, the owner of shares in Brunswick was not a trader and was interested in the stock from a long-term point of view, he might
have held the stock through the breakdown from the Symmetrical Triangle formed in March and early April. He might have continued to keep his
shares through the summer and fall of 1961 and the rally of September and October. If so, and if he had been watching the action of the stock, he
would realize the 50–52 level was a critical area. A break through this previous Bottom would represent a serious failure of Support and, certainly,
the decisive violation of the 50 level in the first week of January 1962 (with heavy volume) could be recognized as a very dangerous Reversal Signal,
calling for immediate sale of the stock regardless of capital gains tax or anything else. Although this move preceded the


2 level was a critical area. A break through this previous Bottom would represent a serious failure of Support and, certainly,
the decisive violation of the 50 level in the first week of January 1962 (with heavy volume) could be recognized as a very dangerous Reversal Signal,
calling for immediate sale of the stock regardless of capital gains tax or anything else. Although this move preceded the general collapse of the
market by several months, it was a clear technical indication of extreme weakness and extreme danger in Brunswick, regardless of the action of
other stocks at that time. If an investor had noted the break but decided to “wait for a rally” to sell his stock, he would have had no chance to get
out. Brunswick never recovered, never rallied, and by October 1962 it was selling at 17 .
451Chapter thirty-seven: The same ol d patterns
POLAROID CORPORATION PRD
1962
JANUARYF EBRUARYM ARCH APRILM AY JUNE
240
224
208
192
176
160
152
144
136
128
120
112
104
96
88
1100
1000
900
800
700
600
500
400
300
200
100
61 32 02 7310 17 24 31 01 72 43 17 14 21 28 51 21 92 62 91 62 33 0
Sales
100’s
Figure 37.23 A beautiful example of a Rectangle in Polaroid. Notice the low-volume fluctuations
between (approximately) 178 and 202. On Thursday, May 10, on the highest volume of that year to
date, Polaroid broke Support and plunged to 168. This was a clearly Bearish Move. It would have been
fatal to “hold for a rally,” for there was no rally. It can be very expensive to hold onto a stock wishfully
when the situation has changed radically, no matter how good it may have looked previously. Note
this break came more than two weeks before the “near-panic” of May 28. By that time, “PRD” had
dropped 50 points and was headed for still lower levels.
452 Technical Analysis of Stock Trends
COPPER RANGE CO.C PX
1962
JANUARYF EBRUARYM ARCH APRILM AY JUNE
26
24
22
20
19
18
17
16
15
14
13
50
40
30
20
10
61 32 02 73 10 17 24 31 01 72 43 1714 21 2851 21 92 62 91 62 33 1
Sales
100’s
Figure 37.24 At a time when a majority of stocks were already showing signs of serious weakness,
early in 1962, Copper Range was making vigorous new highs. Actually, the move did not get far; it
never substantially broke above the 1961 Top.
 The evidence of weakness in “CPX” did not become apparent until, after the relatively weak April
rally, the stock broke through 19 on Monday, April 30, and closed at 17 . This was the completion
of a well-marked Head-and-Shoulders Top. In this case, there were three days of rally before the
downward move really got under way, but it might have been dangerous to count on a rally after
the clearly Bearish signal.
 Incidentally, this Top Formation was completed well before the precipitous drop of May and June.
453Chapter thirty-seven: The same ol d patterns
U.S. SMELTING, REFINING AND MINING CO.U V
1962
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
40
38
36
34
32
30
28
26
24
22
50
40
30
20
10
71 42 12 851 21 92 62 91 62 33 071 42 12 84 11 18 25 18 15 22 29
Sales
100’s
Figure 37.25 Like practically all stocks, “UV” went into a tailspin in the spring of 1962. After the
“bad day,” May 28, it continued to slide throughout the month of June. At this point, there started
what could be considered no more than a technical rally in a Bear Market. This rally stopped at 29
and was followed by a dull decline lasting about two weeks.
 The next move, in the second week of August, was marked by considerable volume, and although
there was no obvious, clear-cut pattern, it seemed significant that the 29 level, briefly touched on May
23, May 28, and July 12, was penetrated on August 6.
 Whether to regard this August 6 closing as an immediate buy signal, or to wait for the completion
of the breakout move and look for an opportunity to buy on a reaction, would be a problem. In this
case, it would have paid to wait. Notice the late August reaction came back to the 29 level, where it
found Support, and then continued its upward move.
 Considering the weakness of most stocks in this period, the action of “UV” is remarkable. The
important thing to recognize is individual stocks do not necessarily follow “the main trend” of the
Averages.
454 Technical Analysis of Stock Trends
DOW–JONES INDUSTRIAL AVERAGE
1961–62
SALES IN
MILLIONS
JULY AUGS EPTO CT NOVD EC JANF EB MARA PR MAYJ UNE
740
720
700
680
660
640
620
600
580
560
540
520
5
4
3
2
1
Figure 37.26 Weekly, July 1961 through June 1962. This chart shows the Head-and-Shoulders
Top Formation in the Industrial Average that preceded the collapse of April, May, and June 1962.
Normally, especially in the charts of individual stocks, there would tend to be heavier volume on
the left shoulder. The price pattern alone is sufficient to mark the pattern as a dangerously toppy
situation. During the entire period in which this formation took shape, many individual stocks
representing important companies were showing Top Reversal symptoms, as might be expected.
Note, so far as this Head-and-Shoulders Pattern is concerned, the Reversal Signal is not definite until
the neckline has been penetrated.
455Chapter thirty-seven: The same ol d patterns
ABC VENDING CORP.A BC1961
APRILM AY JUNE JULY AUGUSTS EPTEMBER
72
68
64
60
56
52
48
44
40
38
36
34
32
30
50
40
30
20
10
SPLIT2
1
18
19
20
22
24
26
28
61 32 02 731 01 72 41 81 52 22 95 12 19 26 29 1626 18 15 22 29
Sales
100’s
Figure 37.27 Daily, April through September 1961. Here is a rather confusing and complicated chart,
but one that contains several points of interest worth a bit of analysis. Notice the beautiful little
Head-and-Shoulders Top in April and May, especially the volume weakness on the final rally before
the downside breakout. Notice also this stock was split two-for-one in June, but such a split does not
materially affect the technical action of the stock, except because there are now two shares of stock (at
half the market value) for each share of old stock, there may be some increase in the average number
of