INSEAD Library

Includes bibliographical references and index and glossary

Digitized

Technical Analysis of Stock Trends Contents Preface to the Ninth Edition............................................................................. v Preface to the Eighth Edition.......................................................................... ix In Memoriam....................................................................................................... xxiii Prefaces to Previous Editions........................................................................ xxv Part 1: Technical Theory Chapter 1 The Technical Approach to Trading and Investing................ 3 Technical vs. Fundamental Theory -- Philosophy of Technical Approach -- Drawbacks of Fundamental Approach Charts.............................................................................................. 9 Different Types of Charts -- Data Required --Arithmetic and Logarithmic Scales The Dow Theory......................................................................... 13 The Forerunner of All Technical Theories -- Use of Market Averages -- Basic Tenets of Dow Theory --Characteristic Phases of Bull and Bear Trends The Dow Theory in Practice.................................................... 25 Applying Dow Theory to the Averages through 1941 --The 1942 Action -- The Bull Market Signal -- The Secondary Correction of 1943 -- Bull Market Reaffirmed -- The Spring of 1946 -- Third Phase Symptoms -- The Bear Market Signal The Dow Theory's Defects....................................................... 41 Second Guessing -- The "Too Late" Criticism -- The Fifty-Year Record of Results -- Little Help in Intermediate Term Trading Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 5.1 The Dow Theory in the 20th and 21st Centuries.................... 45 Updating the Record of the Dow -- Results to 2005 -- Reconsidering Dow Theory Chapter 6 Important Reversal Patterns.................................................. 55 Divergence between Individual Stocks and Averages -- Definition of Reversal and Reversal Formation -- Time Required to Build -- How Insiders Distribute -- The Headand-Shoulders Top Pattern -- Volume Characteristics -- Breaking the Neckline -- Symmetry and Variations -- Measuring Formula Important Reversal Patterns -- Continued.......................... 75 Head-and-Shoulders Bottoms -- Volume and Breakout Differences -- Multiple Head-and-Shoulders Patterns -- Rounding Tops and Bottoms -- Trading Activity on Rounding Turns -- Dormant Bottoms -- Patterns on Weekly and Monthly Charts Important Reversal Patterns -- The Triangles.....................99 Triangles -- The Symmetrical Form -- Volume -- How Prices Break Out -- A Theoretical Example -- Reversal or Consolidation -- Right Angle Triangles, Ascending and Descending -- Measuring Implications -- On Weekly and Monthly Charts Important Reversal Patterns -- Continued........................ 129 Rectangles -- Pool Tactics -- Relation to Dow Line --Double and Triple Tops and Bottoms -- Important Recognition Criteria -- Completion and Breakout --Triple Tops and Bottoms Chapter 7 Chapter 8 Chapter 9 Chapter 10 Other Reversal Phenomena........................................................151 Broadening Formations -- The Broadening Top --RightAngles Broadening Patterns -- Diamonds --Wedge Formations -- The Falling Wedge -- Rising Wedges in Bear Market Rallies -- The One-Day Reversal -- Selling Climax Chapter 10.1 Short-Term Phenomena of Potential Importance............... 181 Key Reversal Days -- Spikes -- Runaways Chapter 11 Consolidation Formations......................................................... 189 Flags and Pennants -- Pennant vs. Wedge -- Measuring Formula -- Reliability Tests for Flags and Pennants --On Weekly and Monthly Charts -- Head-andShoulders Consolidations -- Scallops and Saucers --Modern vs. OldStyle Markets Chapter 12 Gaps.............................................................................................. 211 Which Gaps Are Significant? -- Common or Area Gaps -- Breakaway Gaps Continuation or Runaway Gaps -- Measuring Implications -- Exhaustion Gaps -- Island Reversals -- Gaps in the Averages Chapter 13 Support and Resistance............................................................231 Definition of Support and Resistance Levels -- How They Reverse Their Roles -- Reasons for Support/Resistance Phenomena -- Tests for Determining Potential -- Importance of Volume -- Rules for Locating -- Implications of a Breakthrough --Round Figures -- Historical Levels -- Panic Moves and Recoveries -- Pattern Resistance -- SupportResistance in the Averages Chapter 14 Trendlines and Channels.......................................................... 253 Basic Trendlines -- How They Form -- Arithmetic vs. Logarithmic Scale -- Intermediate Uptrends -- Tests for Trendline Authority -- Validity of Penetration --Throwback Moves -- Amendment of Trendlines --Double Trendlines -- Trend Channels -- Practices to Avoid -- Consequences of Penetration -- Intermediate Downtrends -- Corrective Trends -- The Fan Principle Chapter 15 Major Trendlines................................................................................... 281 Different Forms of Major Uptrends -- Arithmetic and Logarithmic Scaling -- Tests for Significance -- Major Downtrends -- Major Trend Channels -- Trendlines in the Averages Chapter 15.1 Trading the Averages in the 21st Century.......................... 295 Power of Trendlines in Trading the Averages --Redrawing the Trendlines as Markets Accelerate Chapter 16 Technical Analysis of Commodity Charts.............................. 301 Theoretical Application -- Commodity Markets of the 20th (and 21st) Century Suitable for Technical Trading -- Intrinsic Differences Between Stocks and Commodities as Trading Mediums Chapter 16.1 Technical Analysis of Commodity Charts, Part 2.............. 307 A 21st Century Perspective Chapter 17 A Summary and Some Concluding Comments......................... 319 Philosophy of Technical Approach -- Review of Technical Methods -- Need for Perspective -- Patience Chapter 17.1 Technical Analysis and Technology in the 21st Century: The Computer and the Internet, Tools of the Investment/ Information Revolution.......................325 The Computer and the Internet -- Tools of the Investment/Information Revolution -- Separating the Wheat from the Chaff Chapter 17.2 Advancements in Investment Technology............................333 Options and Derivatives -- Quantitative Analysis -- Futures on Indexes -- Options on Futures and Indexes -- Modern Portfolio Theory -- Importance to the Private Investor Part 2: Trading Tactics Midword...................................................................................................................... 355 Chapter 18 The Tactical Problem.....................................................................359 Characteristics of Desirable Speculative Stocks Chapter 18.1 Strategy and Tactics for the Long-Term Investor................ 367 What's a Speculator, What's an Investor? -- Strategy of the Long-term Investor (Hypothetical) -- Rhythmic Investing Chapter 19 The All-Important Details............................................................375 Source of Data -- Suggestions on Chart Keeping --Using Computer Technology Chapter 20 The Kind of Stocks We Want -- The Speculator's Viewpoint..379 Leverage -- Swing Habit -- Volatility Chapter 20.1 The Kind of Stocks We Want -- The Long-Term Investor's Viewpoint................................................................ 383 Changing Opinions about Conservative Investing --Index Shares and Similar Instruments -- Importance of Modern Trading Instruments Chapter 21 Selection of Stocks to Chart................................................... 391 Character and Habits -- Number -- Advantages of Listed Issues Chapter 22 Selection of Stocks to Chart -- Continued............................ 395 Diversification -- Price Range -- Swing Power within Groups -- Slow-Moving Groups Chapter 23 Choosing and Managing High-Risk Stocks: Tulip Stocks, Internet Sector, and Speculative Frenzies........... 401 Managing Speculative Frenzies and Runaways Chapter 24 The Probable Moves of Your Stocks...............................................419 Choosing Stocks which Have the Potential to Move --Volatility Chapter 25 Two Touchy Questions..............................................................425 Use of Margin -- Short Selling Chapter 26 Round Lots or Odd Lots?...........................................................433 Extra Cost of Odd Lots -- Occasional Advantages -- Determining Trade Size and Risk Chapter 27 Stop Orders................................................................................. 435 Protective Stops -- Computing Stop Levels -- Table of Stop Distances -- Progressive Stops Chapter 28 What Is a Bottom -- What Is a Top?.............................................. 441 The Three Days Away Rule -- Basing Points -- Volume Signals Chapter 28.1 Basing Point Case Analyzed, Illustrated............................. 446 Chapter 29 Trendlines in Action............................................................................451 Buying Stock -- Selling Long Stock -- Selling Stock Short -- Covering Short Sales -- Additional Suggestions Chapter 30 Use of Support and Resistance................................................461 Formulating a Rule for Buying -- When a Support Fails -- Placing Stop Orders -- Software for Determining SupportResistance Chapter 31 Not All in One Basket............................................................... 467 Diversification -- Its Cost and Benefits -- Trading Index Shares Chapter 32 Measuring Implications in Technical Chart Patterns............. 469 Reactions vs. Primary Moves Chapter 33 Tactical Review of Chart Action............................................... 473 Dow Theory -- Head-and-Shoulders -- Multiple HeadandShoulders -- Rounding Tops and Bottoms -- Triangles -- Broadening Tops -- Rectangles -- Double Tops and Bottoms -- Diamonds -- Wedges -- One-Day Reversals -- Flags and Pennants -- Gaps -- Support and Resistance -- Trendlines Chapter 34 A Quick Summation of Tactical Methods................................ 501 When to Get Out -- When to Get In Chapter 35 Effect of Technical Trading on Market Action........................ 505 Many Types of Investors -- Technicians a Minority Group -- Persistence of Ingrained Evaluative Habits Chapter 36 Automated Trendline: The Moving Average............................. 507 Sensitizing Moving Averages -- Crossovers and Penetrations Chapter 37 "The Same Old Patterns"............................................................. 513 Repetitive Character of Market Behavior Over the Years -- Additional Chart Examples Covering Market Action up through 2005 Chapter 38 Balanced and Diversified........................................................... 577 The "Not All" Principle -- The Evaluative Index --Reducing Risk and Anxiety -- Identifying Bull and Bear Market Tops and Bottoms with the Magee Evaluative Index Chapter 39 Trial and Error.............................................................................. 585 Putting Experience to Work Chapter 40 How Much Capital to Use in Trading.........................................587 Chapter 41 Application of Capital in Practice............................................. 591 Using Composite Leverage According to the Market's Condition -- Overall Strategy Chapter 42 Portfolio Risk Management........................................................ 597 Finding the Sensible Risk Posture -- Overtrading and Undertrading -- Controlling Risk per Trade -- Risk of a Single Stock -- Risk of a Portfolio -- Pragmatic Portfolio Theory -- Pragmatic Portfolio Risk Measurement -- Pragmatic Portfolio Analysis -- The Magee Method of Controlling the Risk Chapter 43 Stick to Your Guns..................................................................... 609 APPENDIX A Chapters A­D Chapter A The Probable Moves of Your Stocks (Chapter 24 from the Seventh Edition).............................. 611 Relative Sensitivity -- The Market Reciprocal -- Normal Range-for-Price-Volatility Chapter B A Discussion of Composite Leverage (Chapter 42 from the Seventh Edition).............................. 613 Overtrading and a Paradox -- The Composite Leverage Index of a Single Stock -- Composite Leverage of a Portfolio -- Investment Account Policy -- Negative Composite Leverage Normal Range-for-Price Indexes (Appendix B, Fifth Edition).................................................... 619 Sensitivity Indexes of Stocks (Appendix C, Fifth Edition)....................................................621 Chapter C Chapter D Appendix B........................................................................................................ 629 Section 1: The Mechanics of Building a Chart (Chapter 23 from the Fifth and Seventh Editions) Section 2: TEKNIPLAT Chart Paper Appendix C Technical Analysis of Futures Charts (Chapter 16 from the Seventh Edition by Richard McDermott).......................................................... 639 Applications for the Use of Chart Patterns and Other Indicators in the Trading of Futures/Derivatives --Moving Averages, Bollinger Bands, Stochastics, and Others Appendix D Resources................................................................................... 669 Important Internet Sites -- References for Further Study -- Investment Oriented Sites -- The Sharpe Ratio --Calculating Volatility -- Gambler's Ruin -- Essence of Fundamental Analysis -- Useful Software and Specific Internet Technical Analysis Sites Appendix E Example of Trading Manual: Original Turtle Trading Systems and Procedures........................................ 681 List of Illustrations and Text Diagrams.................................................. 703 Index of Charts by Stock Name................................................................ 722 Glossary...................................................................................................... 743 Bibliography................................................................................................. 769 Index............................................................................................................. 773