LMAYJUNEJULYAUGUST SEPTEMBER6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 102. The strong One-Day Reversal which marked Greyhound’s 1946 BullMarket high. Note climax volume. A less conspicuous Reversal Day appeared onAugust 26. It is suggested that the reader go back over all charts in precedingchapters; he will find many Reversal Days of greater or lesser consequence. Manygaps (G) were of measuring type — see Chapter 12.
It is worth noting that the type of false move or shakeout that wedescribed in Chapter 8 as occurring at the apex end of a Symmetrical Triangleoften takes the form of a One-Day Reversal.
The Selling ClimaxIn the “bad old days” when stocks could be bought by putting up as littleas 10% of their cost in cash, and there were no restrictions on short selling,professional operators could (and tradition says they often did) organizeBear Raids to shake out weakly margined holdings. By selling short inquantity at a favorable moment when the “public” had gotten itself prettywell extended on the long side, they could break prices down. Brokers thenwould send out calls for more margin from their “long” accounts, many ofwhom could not or would not put it up, with the result that their stockswere dumped on the market. That, in turn, produced further declines. Theprofessionals could then step in, cover their shorts with a profit, and securea line of long stock for the next advance. Bear Raids of this sort wereeffectively checked by the imposition of the SEC regulations, but margincalls and forced selling will, of course, always exist as a market factor solong as stocks can be bought on margin, and will come into play wheneverprices drop extensively following a spree of public buying.
AU3772_C010.fm Page 174 Tuesday, November 21, 2006 1:30 PM
174
Technical Analysis of Stock Trends
APPLE COMPUTER INC-(Nasdaq NM) 62.72 –0.03 –0.05%1413121110987
6
5
4
Aug
Sep
Oct
Nov
Dec
87
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
3
©1998-2004 Prophet Financial Systems, Inc. Terms of use apply.
FIGURE 102.1. Apple. 1987 Reagan Crash. Does this plunge appear to be out ofthe blue? Not really. Numerous signs are given: break of major trendline; short-termmomentum down before crash in an environment of extreme top psychology; thenthe crash itself, the panic selling exhibiting the typical pattern of short covering, thenfurther decline.
Most true Selling Climaxes, if not all, have been produced by distressselling of the type referred to in the preceding paragraph. They have comeat the end of rapid and comprehensive declines which exhausted the marginreserves of many speculators and necessitated the dumping of their sharesat whatever the market would bring. This process is progressive — feedingupon itself, so to speak — with each wave of forced sales jeopardizinganother lot of margined accounts, until, at last, millions of shares are tossedoverboard, willy-nilly, in a final clean-up. Such is a Selling Climax in whichthe total turnover may exceed any single day’s volume during the previousswing up. It is a harvest time for traders who, having avoided the Bullishinfection at the top of the market, have funds in reserve to pick up stocksavailable at panic prices.Obviously, a clean-out day or Selling Climax radically reverses the technical condition of the market, for in its process, shares have passed fromweak hands into strong hands at very much lower prices. The ominousweight of potential selling that has been overhanging the market has beenremoved. And usually the Panic has carried quotations (although only
AU3772_C010.fm Page 175 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
HS
175
S
401937
NL
35
30
25
NEW YORK CENTRAL
20
SC
Sales100’s
400300200100
CN
S
HS
JULYOCTOBERAUGUST SEPTEMBERNOVEMBER DECEMBER3 10 17 24 31 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 25
FIGURE 103. The “Panic” selling of October 19, 1937, produced a conspicuousClimax Reversal Day in nearly all leading stocks, as well as in the Averages. ThisNew York Central chart shows, beside the Selling Climax (SC), its Head-and-Shoulders Recovery Top of July–August and a Consolidation Rectangle which ended as aTriangle in early October. “CN” made a final Bear Market low the following Marchat 10½. On a logarithmic price scale, its down trendline from August was not brokenuntil June 1938.
temporarily, as a rule) well below even conservative values based on currentbusiness conditions.A Selling Climax need not be completed, and the Reversal of Trendactually become evident, within a single day. We have classified it as a varietyof One-Day Reversal, but some of them have actually spread out over 2 days,with the decline exhausted and coming to a halt late on the first day, toonear the end of the session to permit much recovery. The next day sees anextensive rally right from the opening gong, as it is immediately apparentthen, if not late the preceding day, that there are no more distress offerings.The all-time percentage record for Selling Climaxes is held by October 29,1929. Prices in terms of the Dow–Jones Industrial Average opened that daypractically at their high, 252.38, which was more than 8 points below the
AU3772_C010.fm Page 176 Tuesday, November 21, 2006 1:30 PM
176
2700.00
Technical Analysis of Stock Trends$INDUA LAST-Daily 12/24/1987 C = 1998 .67 –9000 .74 –81 .82% O = 10039 .58 H = 10204 .03 L = 10029 .96 V = 1181488000Created with TradeStation www.TradeStation .com
2700.00
2600.00
2600.00
2500.00
2500.00
2400.00
2400.00
2300.00
2300.00
2200.00
2200.00
2100.00
2100.00
2000.00
2000.00
1900.00
1900.00
1800.00
1800.00
1700.00
1700.00Volume 108803664.00
55000000
5500000
45000000
4500000
35000000
3500000
25000000
2500000
15000000
15000003/1987
4/1987
5/1987
6/1987
7/1987
8/1987
9/1987
10/1987
11/1987
12/1987
FIGURE 103.1. Dow Industrials, 1987 Reagan Crash. Rumors proliferated — ironically, one that Reagan had Alzheimer’s. Proximate cause: professional panic exacerbated by an ill-considered portfolio insurance scheme propagated by academics.Note that the authoritative (lower) trendline here (75 days) is broken by more than2% (Magee’s suggestion) in early September. The broken upper trendline (25 days)would have pulled the ripcord for the more agile trader. Savvy investors werehedging and liquidating through September, and fund managers panicked in October. According to the Brady Report, Hull Trading Co. bought the bottom October 20,thus saving American capitalism.
previous day’s closing level. Panic selling flooded the Exchange from thestart, and before it was over, the Industrial Average had lost 40.05 points!From that low, 212.33, it rallied in the final 2 hours to 230.07 for a gain ofnearly 18 points, and went on up another 28 points the following day. This1929 climax set the all-time record also for daily turnover: 16,410,000 shareswere traded in those 5 hours, more than twice as many as in any one dayduring the entire preceding Bull Market. But the low level of October 29 wasbroken a week later, and the bottom of that particular early phase of the1929–32 Bear Market was not reached until November 13. EN: See commentson the following page on the Reagan Crash of 1987.The Panic of 1937 ended with a classic Selling Climax on October 19,another “Black Tuesday” in stock market annals. The Dow Industrials hadclosed at 125.73 the night before. Prices had already fallen without a rallyof consequence from a high of 190 in mid-August, and margin accounts werenearly all in a precarious situation. The telephones had been worked overtime the preceding day by brokers demanding additional margin, most ofwhich was not forthcoming. When the Exchange opened on the 19th, quotations hit the toboggan under a flood of offerings. By 11:30 a.m., with theIndustrial Average around 115, the selling was over and offerings disappeared. An hour later, prices were jumping a point between sales and the
AU3772_C010.fm Page 177 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
177
day closed at 126.85, recovering its entire loss. Volume on that climax was7,290,000 shares, double that of any day at the top of the preceding BullMarket. An intraday high of 141.22 was reached 10 days later, but the PanicLow was subsequently broken on November 20, 1937, and that Bear Marketfinally ended at 98.95 (Dow–Jones Industrials’ closing level) on March 31,1938.EN: Compare 1987. No wonder investors have instinctual angst on October19. In 1987 the Bear returned to create another great Panic — on the very samedate. From a high of 2746.65 on August 25 the Dow bungeed to a low of 1616.21on October 20. The actual full-blown panic took place from October 14 (high2485.15) to October 20 (low 1616.21) with October 19 and 20 traversing a rangeof 547.95 points or 25% of the market at that point. Top to bottom 1130 points werelost comprising a percentage retracement of 41%. The more things change the morethey stay the same, as André Malraux is said to have remarked. Actually he said itin French, which is more elegant, and expresses the same idea: Plus ça change,c’est plus la meme chose. Readers should not assume that similar crashes willnot occur in the future.The foregoing were general market climaxes, a phenomenon which, ofcourse, produces (or rather is produced by) simultaneous selling in practically every actively traded individual issue. A Climax Bottom, as a matterof fact, appears in an individual stock chart, as a rule, only as a concomitantof a general market clean-out, although there are cases where some particularand completely unexpected piece of bad news affects one certain companyand causes panicky liquidation of its shares alone, terminating with a OneDay Reversal. The Top Reversal Day, on the other hand, is normally a manifestation of an individual stock rather than of the general market average.The two outstanding examples of Selling Climaxes that we have citedabove, and numbers of others which have appeared at the conclusion ofvarious Panic Sell-offs, obviously offered extraordinary opportunities for aquick turn to the trader who was smart (or lucky) enough to get in at thebottom. He could cash in a few days later with exceptional profits. Professional operators capitalize on such opportunities. The problem is to recognize the climactic nature of the selling in time to seize the chance — and thatisn’t as easy as it may have sounded in our discussion. Just to emphasizethe possibilities of error, there was a 30-point drop, followed by a 30-pointrecovery, on a turnover of nearly 13 million shares, on October 24, 1929, butthe trader who didn’t grab his profits within 48 hours never had anotherchance to get out even (in terms of the Averages, that is).But it isn’t impossible to recognize a Selling Climax, if you have friendsin the Street to keep you informed on the condition of margin accounts andthe amount of necessitous selling to be expected. EN: This information is nownot difficult to come by. It is easily obtainable in the general financial press. Theclimax comes after a decline approaching Panic proportions. The day usuallyopens with a substantial Downside Gap (opening prices considerably belowthe previous night’s closing); offerings appear too great to be absorbed; pricescollapse; the ticker runs late; the market is exceptionally “broad” with nearly
AU3772_C010.fm Page 178 Tuesday, November 21, 2006 1:30 PM
178
Technical Analysis of Stock Trends
2422
NATIONAL CASH REGISTER
NC
2019
1941–1943
1817161514131211Sales100’s
5040302010S O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 104. The Selling Climax discussed on the preceding pages is typically a1-day phenomenon, and on only one occasion (April 1939) in history has a generalmarket One-Day Reversal signaled the final low of a Primary Bear Trend (althoughmany individual stocks evinced a Selling Climax on their charts in March 1938).Occasionally, a weekly chart will produce a formation which might be called a“One-Week Reversal,” in some such conspicuous fashion as is shown above in “NC.”In this instance, the subsequent rise proves that a Major change in its technical balanceoccurred in December 1941. Curiously enough, no other obvious Reversal Patternappeared on the weekly chart at this turn in the Primary Trend of “NC.” (Its dailychart showed an Ascending Triangle.) But this example of a One-Week Reversal isnot shown to give the idea that such phenomena carry important technical indications. On the contrary, most “Reversal weeks” are followed by very disappointingmoves.
every listed stock crowding into the record. Then, some time after 11 a.m.,perhaps not until afternoon, the selling appears to dry up; a few issuescontinue to decline while others begin to climb. Suddenly prices are jumping.That is the time to act. Buy a stock that has been thoroughly depressed butone which normally has at all times a good following (for example, U.S.Steel). Don’t hang on too long; take a reasonable profit as soon as it is
AU3772_C010.fm Page 179 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
179
available and sell, in any event, whenever the recovery shows signs ofbogging down.Remember, a One-Day Reversal is not a dependable Major Trend indicator. Selling Climaxes do not normally occur at the final Bottoms of BearMarkets — weak holdings usually have been shaken out long before thatstage is reached. Only one Primary Downtrend in all the record has, in fact,ended with the first Panic Phase, that being the 5-month Bear Market of1938–39 which was followed by an equally short Bull Market.One remaining Reversal Formation, the Island Pattern, involves the wholesubject of Gaps which we have not yet had an appropriate occasion to discuss.Gaps will be taken up in detail in Chapter 12, and we will defer the IslandReversal until then.
AU3772_C010.fm Page 180 Tuesday, November 21, 2006 1:30 PM
AU3772_C010.fm Page 181 Tuesday, November 21, 2006 1:30 PM
chapter 10.1
Short-Term Phenomenaof Potential ImportanceVery short-term phenomena — of a one-day or a few days’ duration — cansometimes be indicative of not only short-term direction, but also give hintsas to longer-term price behavior. Gaps (Chapter 12), and One-Day Reversals(Chapter 10), which have been discussed, belong to this group. Other shortterm patterns of interest include Spikes, Key Reversal Days (sometimes calledmerely Reversal Days), and Runaway Days (sometimes called Wide-RangingDays).
SpikesOn the day it occurs, a Spike is not immediately identifiable, for by definitionit protrudes head and shoulders above days before and after if it is at ornear a Top, and plunges much below the surrounding days if it occurs at aBottom. So after a day that exhibits an unusually wide range, the subsequentdays must be observed to discriminate the day from a Runaway Day. Bothare the marks of a far-ranging battle between bulls and bears, with the closegiving a clue as to whom the eventual winner will be. The importance ofthe spike is highlighted byA. The strength and length of the action which preceded itB. The close of the day, whether up on a Bottom or down on a TopC. Its prominence when compared to the days before and after itAn extremely wide-range day at the end of a long bull move whichcloses down after making unusual new highs might even be construed as aone-day signal. Whether one trades on it or not would depend on his particular style and taste and the nature of his trading — long range, scalping,etc. In fact, the Spike might also be a One-Day Reversal — that pattern whereoften an opening gap is followed by avid buying which collapses and closesbelow the opening or at the low of the day. Such action might be comparedto an army pursuing a seemingly defeated enemy only to discover the retreatwas a ruse, then turning and fleeing the other way in a rout.
181
AU3772_C010.fm Page 182 Tuesday, November 21, 2006 1:30 PM
182
Technical Analysis of Stock Trends
QUALCOMM (58.7500, 62.0625, 58.0000, 59.8750, →1.5625)
21020019018017016015014013012011010090807060504030
Created with Meta Stock www.equis.com
1000090008000700060005000400030002000x100 000
September October November December 2000
February March
April
May
June
July
August
FIGURE 104.1. A church spire top in Qualcomm. The December gap might bemistaken for a buy signal, as might be the runaway days, but they are actually handengraved invitations to leave the party with near progressive stops ⅛ off the day’slow. Also valid—exit on the Key Reversal on day 2 after the gap. How does the traderknow this is a blow-off and not a signal to pyramid? By the age, length, state, andslope of the market. When trendlines go vertical, blow-off management must be used.The return to the base of the first runaway day is notification that it is a bull trap.The first bull trap. The second bull trap is the breakout of the triangle in March. Awonderful chart filled with fin de siècle and fin de millennium lessons.
Turn this description on its head and you have a Spike Bottom. It is notinfrequent that a Spike will be followed by significant price movement inthe opposite direction. Figure 104.1 illustrates a modern Spike. Figures 1 and35 show some spikes on Edwards’ and Magee’s charts.
Runaway DaysA Runaway Day is a day that stands out on the chart as having an unusuallylong range, often opening at the low and closing at the high, or vice versafor bear runaways. Here the enemy has retreated precipitously, or treacherously to draw the bulls into a trap. The holders and sellers cannot or willnot satisfy the eager demand of the buyers and so the price transversesperhaps two to three times the daily range. While the agile speculator mayjump on this charging train and realize a nice scalp, it is the following daysthat reveal the true significance. Nice consolidation and continued volumewill confirm the day as significant while a tapering of volume and roundingor volatile pullback will call into question its validity. While these days maybe taken as hair-trigger buy signals (or sell signals, depending) the return
AU3772_C010.fm Page 183 Tuesday, November 21, 2006 1:30 PM
Chapter 10.1:
Short-Term Phenomena of Potential Importance
183
MSFT(D) - Daily NASDAQ L = 27.56 +0.35 +1 .29% B = 27.55 A = 27.56 O = 27.67 Hi = 27.73 Lo = 27.44 C = 27.56 V = 57145012
Bull Trap
48.00Runaway Days
Department of Justice Gap
44.06
42.00Runaway Gap
35.30
37.00
32.0031.33
Exhasution Gap
28.00
25.00
S
O
N
D
00
F
M
A
M
J
J
A
S
O
N
Created with TradeStation
FIGURE 104.2. Microsoft. A Key Reversal Day in March. Department of Justicebreakaway gaps: runaway gaps, exhaustion gaps. Selling climax. As usual, furtherlows are achieved. A cornucopia of chartist’s delights.
of prices to the low of the Runaway Day will probably indicate that the daywas a false signal, and that a trade in the opposite direction is shaping up.See Figure 39 for runaways complete with gaps.Figure 104.2 showing Microsoft in 2000 was one such example where abull trap precipitated by a Runaway Day with a subsequent collapse foretoldthe 50% decline in Microsoft stock.
Key Reversal DaysThe Key Reversal Day pattern occurs when one sees a new high in anupmove and then a close below the close of the previous day. As a shortterm trading signal it has much to recommend it, but like every other technical pattern, judgment and timing are required to profit from it. In a BullMarket there will be some if not many such interim highs marked by KeyReversal Days. On the Key Reversal Day at a major or important Top thetrader shorts the stock on the close with a stop at the high of the reversalday, or slightly above. He may then exit on the profit side on the occurrenceof a Key Reversal Day in the opposite direction, or on a profit target, or a chartpattern. Or he may, if adventurous, use the trade as the first of accumulatinga position for an anticipated Bear Market, adding other positions as moresignificant patterns occur and as support levels are broken.This pattern also is useful in trading range markets, as shown in someInternet stocks from 2000, where trading with Key Reversal Days would
AU3772_C010.fm Page 184 Tuesday, November 21, 2006 1:30 PM
184
Technical Analysis of Stock Trends
EBAY INC-(Nasdaq NM) 39.00 –0.29 –0.74%32302826k
k
k
24k
k
k
22
k
201816
14
12
10
8Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
00
Feb
Mar
Apr
1998–2004 Prophet Financial Systems, Inc. | Terms of use apply.
FIGURE 104.3. Ebay. As Ebay broke its trendline and drifted sideways, it becamea good subject for Key Reversal Day trading. Note several instances.
have allowed the trader to escape unscathed in the minicrash of the NASDAQin early 2000. (Cf. Figures 104.3 and 104.4 on the following pages for Ebayand Lucent.)Of all the Very Short-Term Patterns, Gaps, One-Day Reversals, KeyReversal Days, Spikes, and Runaway Days, it should be noted that returnof prices to the origination of the formation marks the formation as a falsesignal and reason to reverse the trade direction and look for perhaps significant profits.Clearly these are the tactics of scalpers and speculators, but it does nothurt the long-term investor to know and understand them.
AU3772_C010.fm Page 185 Tuesday, November 21, 2006 1:30 PM
Chapter 10.1:
Short-Term Phenomena of Potential Importance
185
EBAY(D) -Weekly NASDAQ L = 35 .14 –0 .24 –0 .68% B = 35 .14 A = 35 .15 O = 35 .15 Hi = 35 .58 Lo = 34 .93 C = 35 .14 V = 11216380
47.0035 .83
35.1425.0018.0013.0010.007.005.004.003.00
2.00
1999
2000
2001
2002
2003
2004
2005
Created with TradeStation
FIGURE 104.3.1. If you can’t deliver groceries electronically what good is the Internet? Meg Whitman (a competent, well, more than competent, CEO) and Ebayfound a use for it: The biggest flea market ever invented (and growing every day).Every military commander knows the axiom, Exploit Success! and Ebay exploits andexploits and exploits. Is there a fundamental lesson here for the technician? Absolutely. Although the technician should be able to take a nameless chart and trade itcompetently (CEO of his own ship) no real information or data should be ignored.In this case the real information – that Ebay was an 800 pound gorilla (or flea) – fitthe chart perfectly. So Ebay separated itself from a bunch of nags to run long andhard. Handicappers know to always keep an eye on winning jockeys: Whitman.Ellison at Oracle. Moore at Intel. Gates at Microsoft. Jobs at Apple (and Pixar andNEXT and etc., etc., etc…). In 2005 what’s to be done with Ebay? Draw a trendline,raise your stops and sell it if it reverses.
© 2002-2006 Prophet Financial Systems, Inc. All Rights Reserved.
186
FIGURE 104.4. Lucent. Late 20th and early 21st century schizophrenia. Runaway Days, Breakaway Gaps. Maalox is to be prescribed forthe investor. Ecstasy for the trader. Reversal Days and short-term tactics win the day when the subject is insane. An excellent example offitting the trader to the stock. Why would a rational investor own such a stock?
LU (Lucent Tech Inc)08/26/2006 3:34 PM EDT
AU3772_C010.fm Page 186 Tuesday, November 21, 2006 1:30 PM
Technical Analysis of Stock Trends
AU3772_C010.fm Page 187 Tuesday, November 21, 2006 1:30 PM
Chapter 10.1:
Short-Term Phenomena of Potential Importance
187
LU(D) -Weekly NYSE L = 2 .84 –0 .02 –0 .70% B = 0 .00 A = 0 .00 O = 2 .85 Hi = 2 .90 Lo = 2 .81 C = 2 .84 V = 31864800
55.0040.008th EditionFig. 104 .4
29.0021.0015.0011.008.00
5.003.97
4.003.002.84
1.99
2.00
1.00
1998
1999
2000
2001
2002
2003
20042005Created with TradeStation
FIGURE 104.4.1. In the caption to Figure 104.4, the editor asked, apparently rhetorically why a rational investor would own Lucent. The picture here shows whathappens when apparently rational investors do not set a stop to protect themselvesfrom irrational volatility. The market knows things investors do not know. But it willreveal these things to the most basic of investors if he reads the chart. This chart isadded for the 9th Edition to pick up the picture where the 8th left it.
AU3772_C010.fm Page 188 Tuesday, November 21, 2006 1:30 PM
AU