941–19431211
Sales100’s
252015105S O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 82. The Major Reversal Formation in “CNR” at the start of a PrimaryAdvance which reached 54. Note how an attempt at an Ascending Triangle turnedinto a Double Bottom.
Triple Tops and BottomsLogically, if there are Double Tops, then we might expect that there will alsobe Triple Tops, which will develop in somewhat similar fashion. Fact is thatReversal Formations, which can only be classed as Triple Tops, do occur, butthey are few and far between. Of course, there are many patterns evolvedat an important turn from up to down in the trend which contain three Toppoints, but most of these fall more readily into the category of Rectangles.For that matter, any Head-and-Shoulders Formation, particularly if it berather “flat,” with the head not extending much above the level of the twoshoulders, might be called a sort of Triple Top.The true Triple Top (as distinct, that is, from other types of three-peakformations) carries a recognizable family resemblance to the Double Top. ItsTops are widely spaced and with quite deep and usually rounding reactionsbetween them. Volume is characteristically less on the second advance thanon the first, and still less on the third, which often peters out with noappreciable pickup in activity. The three highs need not be spaced quite so
AU3772_book.fm Page 147 Saturday, November 18, 2006 5:29 PM
Chapter nine:
201918
Important Reversal Patterns — Continued
TRINITY INDUSTRIES INC.
17
TRN
147
1985
1615141312
1
2
3
ONE DAY
Sales100’s
57 60
REVERSAL
11
500400300200100
APRILMAYJUNEJULYAUGUST SEPTEMBER OCTOBER23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 5 12 19X D.125X D.125
FIGURE 83. Although Trinity Industries did not have the well-formed patternexhibited by our other recommendations, we found the high-volume plunge, withthe low of the day the third test of the year’s low, a very beguiling technical situation.Basically, it was a Triple Bottom with a One-Day Reversal to get the uptrend started.
far apart as the two which constitute a Double Top, and they need not beequally spaced. Thus, the second Top may occur only about 3 weeks afterthe first, and the third 6 weeks or more after the second. Also, the interveningvalleys need not bottom out at exactly the same level; the first may beshallower than the second and vice versa. And the three highs may not comeat precisely the same price; our 3% tolerance rule is again useful here. Yet,despite all these permissible variations, there should be, and generally is,something suspiciously familiar about the overall picture, something whichimmediately suggests the possibility of a Triple Top to the experienced chartist.The conclusive test, however, is a decline from the third Top which breaksprices down through the level of the valley floor (the lower one, if the twovalleys form at different levels). Not until that has occurred can a Triple Topbe regarded as confirmed and actually in effect, since so long as demandpersists at the valley price range, the trend can be turned up again. Only inthose cases where activity is conspicuously lacking on the third peak andthen begins to show Bearish characteristics by accelerating on the ensuingdecline is one justified in “jumping the gun.”Triple Bottoms are simply Triple Tops turned upside down, with thesame qualifications we noted when we were discussing Double Bottoms. Thethird low should always be attended by small volume, and the rise therefrommust show a decided increase in turnover and carry prices decisively above
AU3772_book.fm Page 148 Saturday, November 18, 2006 5:29 PM
148
Technical Analysis of Stock Trends
641946605652484440
PUBLICKER INDUSTRIES
PUL
UP FROM 24IN MARCHOVER THE COUNTER
38Sales100’s
5040302010APRILMAY6 13 20 27 4 11 18 25 1
JUNEJULYAUGUSTSEPTEMBER8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 84. Publicker made its Bull Market high only a few weeks after it waslisted on the “big board.” Then it started to build a Descending Triangle, but pulledup out of it. Final outcome was a Triple Top, completed in August. (See Figures 60and 82.)
the Tops of the rallies that formed between the Bottoms. One is never justifiedin “jumping the gun” on a presumed Triple Bottom Formation unless nearlyevery other chart in the book is in an unmistakably Bullish position. The riskof premature buying is expressed in a saying one sometimes hears in theboardrooms to the effect that “a Triple Bottom is always broken.” This is nota true saying. Once a Triple Bottom has been established and confirmed bythe necessary up-side breakout, it seldom fails — almost always producesan advance of distinctly worthwhile proportions. But an uncompleted “possible” Triple Bottom chart picture must be regarded as treacherous. Stick tothe breakout rule and you will be safe.Triple Tops are sometimes referred to as “W” Patterns because of theiroccasional resemblance to that capital letter on the chart. There is a sort ofhybrid between the Double and Triple Top, in which the middle one of thethree Tops does not attain the height of the first and third, and thus, evenmore strikingly resembles a “W.” For the same reason, Double Tops aresometimes called “M” Formations.Because the elements in Double and Triple patterns are normally spacedwell apart in time, they are often easier to detect and appreciate on a weekly
AU3772_book.fm Page 149 Saturday, November 18, 2006 5:29 PM
Chapter nine:
Important Reversal Patterns — Continued
149
8
NATIONAL GYPSUM
NG
7
1941–1943
6
54 12
4
3 12Sales100’s
125100755025S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 85. In the ordinary course of events, at the time this Bottom Patterndeveloped in “NG,” consisting, as it did, of fluctuations for 10 long months withina range of only 1 full point, most traders would pay no attention to it. Certainly itsuggested very little opportunity for short-term profits. On an arithmetically scaledchart, the pattern could hardly be seen. Logarithmic price scaling, however, as wehave remarked in an earlier chapter, has the great advantage of bringing to light thepercentage importance of significant market action at very low price levels.Note that this formation qualifies in every detail — spacing between Bottoms,extent in percent of intervening rallies, volume — as a Triple Bottom. Of course, itscompletion, in October 1942, did not necessarily forecast that “NG” would climb to33, as it ultimately did. But the fact that many other stocks were making sound MajorBottom Formations at higher price levels at the same time certainly warranted theconclusion that “NG” was on its way up, and that it was a bargain at 5.
chart than on a daily. Monthly graphs disclose numbers of widely spreadDouble and Triple Bottoms but, on the other hand, are too coarse to revealmany good Double and Triple Top Patterns.In our foregoing discussion of the Triple Top, we referred to a sort ofintuition which comes with experience and enables a technical analyst to
AU3772_book.fm Page 150 Saturday, November 18, 2006 5:29 PM
150
Technical Analysis of Stock Trends
recognize the potentialities for Reversal of a certain chart development,sometimes long before it has reached a conclusive stage. This is a not uncommon talent, but it is one that is seldom attained except through searchingstudy and long experience (in which the latter usually involves a few expensive mistakes). The reader of this book need not despair of acquiring “chartsense” and without undue cost — if he will concentrate on his study, watch,check, and double-check every new development on his charts, and “keepscore” on himself.It has been said that chart interpretation is not a science, but an art. It isnot an exact science, to be sure, because it has no rules to which there arenot exceptions. Its finer points defy expression in rule or precept. It requiresjudgment in appraisal of many factors, some of which may seem, at times,to conflict radically with others. But to call it an art, which implies the needfor genius, or at least for a high degree of native talent, is certainly improper.Say, rather, that it demands skill, but a skill that can be acquired by anyoneof ordinary intelligence.
AU3772_C010.fm Page 151 Tuesday, November 21, 2006 1:30 PM
chapter ten
Other Reversal PhenomenaWe have considered so far seven classes of chart patterns which appear atmore or less important Reversals of direction in the trend of prices. Theywere:1.2.3.4.5.6.7.8.
The Head-and-ShouldersMultiple or Complex Head-and-ShouldersRounding TurnsSymmetrical TrianglesRight-Angle TrianglesRectanglesDouble and Triple Tops and BottomsOne-Day Reversal
Of these, 1, 2, 3, and 7 develop most often at Major Turns, while 4, 5,and 6 occur more frequently at Intermediate Stages. Numbers 1, 2, 3, and 5give indication before they are completed as to which way the price trend islikely to proceed from them. Numbers 4 and 6 give no such indication and,as we have seen, are rather more apt to signal Consolidation or Continuationthan Reversal. But all of them can, and on occasion do, appear at both MajorTops or Bottoms. EN: Number 8 appears typically after out of control moves, upand down.We have yet to take up a few other technical patterns which, because oftheir limited significance, or their rarity, or their doubtful utility to the longterm traders, have been relegated to the end of our Reversal studies.
The Broadening FormationsIn concluding our discussion of Triangles in Chapter 8, we mentioned certaintypes of price congestion or trading areas which have sometimes been called“Inverted Triangles” because, starting with very narrow fluctuations, theywiden out between diverging rather than converging boundary lines. Herein,we have chosen to classify them instead as Broadening Patterns because,except for that inverted resemblance in superficial appearance, they are quitedifferent in nature and trend implications.
151
AU3772_C010.fm Page 152 Tuesday, November 21, 2006 1:30 PM
152
Technical Analysis of Stock Trends
484440383634
CRANE COMPANY
CR
1945–1946
Sales100’s
125100755025NOVEMBER DECEMBER JANUARY FEBRUARYMARCHAPRIL10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4
FIGURE 86. The Symmetrical type of Broadening Formation, which develops mostfrequently in the later and more “excited” stages of a Primary Bull Market, is perfectlyexemplified in this Crane Company chart. Note that the Broadening Pattern herestarted to form in December 1945 after a 10% reaction; if it had formed on Top of arally, it would have been suspected as a possible Broadening Top. Nevertheless, itcarried the usual Bearish implications. “CR” topped out at 49½ in June.
If the Symmetrical Triangle presents a picture of “doubt” awaiting clarification, and the Rectangle a picture of controlled “conflict,” the BroadeningFormation may be said to suggest a market lacking intelligent sponsorshipand out of control — a situation, usually, in which the “public” is excitedlycommitted and which is being whipped around by wild rumors. Note thatwe say only that it suggests such a market. There are times when it is obviousthat those are precisely the conditions which create a Broadening Pattern inprices, and there are other times when the reasons for it are obscure orundiscoverable. Nevertheless, the very fact that chart pictures of this typemake their appearance, as a rule, only at the end or in the final phases of along Bull Market lends credence to our characterization of them.Hence, after studying the charts for some 20 years and watching whatmarket action has followed the appearance of Broadening Price Patterns, wehave come to the conclusion that they are definitely Bearish in purport —that, while further advance in price is not ruled out, the situation is, nevertheless, approaching a dangerous stage. New commitments (purchases)should not be made in a stock which produces a chart of this type, and anyprevious commitments should be switched at once, or cashed in at the firstgood opportunity.The Broadening Formation may evolve in any one of three forms, comparable, respectively, to inverted Symmetrical, Ascending, or Descending
AU3772_C010.fm Page 153 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
153
Triangles. The “Symmetrical” type, for example, consists of a series of pricefluctuations across a horizontal axis, with each Minor Top higher and eachMinor Bottom lower than its predecessor. The pattern may thus be roughlymarked off by two diverging lines, the upper sloping up (from left to right)and the lower sloping down. But these Broadening Patterns are characteristically loose and irregular, whereas Symmetrical Triangles are normally regular and compact. The converging boundary lines of a Symmetrical Triangleare clearly defined as a rule, and the Tops and Bottoms within the formationtend to fall with fair precision on those boundary lines. In a BroadeningFormation, the rallies and declines usually do not all stop at clearly markedboundary lines.
Volume During Broadening FormationsAnother distinction between Triangle and Broadening Formation is in thevolume chart. The construction of a true Triangle is attended, as we haveseen, by diminishing activity, starting with high volume on the first MinorReversal which initiates the pattern, but growing less and less as pricesfluctuate in ever smaller waves out toward the apex. Then activity picks upagain after prices have broken out of the Triangle, immediately and sharplyif the breakout is through the top side. With the Broadening Formation, onthe other hand, trading activity usually remains high and irregular throughout its construction. If it develops after an advance, as is almost always thecase, the first Minor Reversal which starts the pattern will occur on largeturnover, but so will the second rally in the pattern, and the third, and highvolume also frequently develops on one or more of its Minor Bottoms. Thewhole picture — both price and volume — is, thus, one of wild and apparently “unintelligent” swings.As can easily be seen, under such circumstances, a true breakout fromthe area may be difficult, if not impossible, to detect at the time it eventuates.The volume part of the chart obviously furnishes no clue, while the verylooseness and lack of definition of the price pattern prevents the drawing ofany line which surely says, “this far and no farther.” (We are referring nowto the “Symmetrical” type only of Broadening Formation.) Of course, onceprices have run well away, either up or down, from the pattern area, itbecomes plain that a breakout has occurred, but by that time, it may be toolate to risk a trade on the situation; the move may already have gone toofar. What can we do about Broadening Formations then? Well, we havealready noted that, nine times out of ten, they carry Bearish implications.They appear most often at or near an important topping out of the trend.Hence, it is reasonably safe to assume that prices, when they finally breakaway from the formation, will go down, or if they do go up, will very soonturn around and come back down again. Therein lies one answer to theproblem of what to do about a Broadening Formation.
AU3772_C010.fm Page 154 Tuesday, November 21, 2006 1:30 PM
154
Technical Analysis of Stock Trends
In addition, the price action within the formation, in many cases, furnishes an advance indication of breakout direction. If the trend is going tobreak down from the Broadening Area, the last rally within the area mayfail to rise as high as its predecessor, thus breaking the sequence of everhigher Tops within the pattern. And, alternatively, if the trend is going toemerge on the top side, the last reaction within the pattern may fail to depressprices as low as the preceding reaction. These “failures” within the patternoccur, as we have stated, in a majority of all Broadening Formations. Butnote that one cannot be sure of such a significant development (what wehave referred to above as a failure, for lack of a better descriptive name)until prices go on and out the other side of the formation or, more precisely,have exceeded the last preceding move in that direction by a decisive margin(our 3% rule again).
A Typical ExampleNo doubt the foregoing paragraph sounds rather complicated. It will beeasier to visualize the development of a “failure” signal if we cite an exampleusing actual price figures. Easier yet, perhaps, if the reader will sketch outour example on a scrap of chart paper. Suppose stock XYZ, after advancingsome 30 points on gradually increasing turnover, runs into heavy selling at62 and reacts to 58. But there is still plenty of interest in the issue; it stopsat 58 and then swings up to a new peak at 63. It “churns” there for a day ortwo and drops back again, this time to 56½ before it is halted by anotherburst of buying. Its third rally takes it up to 62, where it hesitates and fallsback to 59, but is then picked up again and carried on to 65. (By this time,of course, a Broadening Formation has become evident on the chart.) At 65,there is a great show of trading, followed by another reaction which dropsquotations quickly back to 60. Support appears there momentarily and pricesfluctuate for 3 or 4 days between 60 and 62 and then fall away again, finallyto close at 56, with volume running high all through this phase. A fourthrally starts, but now the traders who bought in at 60 on the precedingdownswing are frightened and looking for a chance to “get out even,” andthe advance is stifled at that level. Quotations start to slip and soon are downto 55, below the previous pattern Bottom. When this occurs, the “failure” of thepreceding rally is confirmed — its failure, that is, to rise above 65 and, thus,carry on the Broadening Movement. The decline below 56, by virtue of thatfailure, may be regarded as a breakout.If you followed the foregoing example closely, you will have noted thatthere can be (and very often are) Minor Fluctuations inside the pattern thatdo not affect its outcome. Thus, the rise from 56½ to 65 really consisted of 3moves, first from 56½ to 62, then from 62 back to 59, and, finally, from 59 upto 65. The reaction from 62 had no significance so long as it stopped above56½ and was succeeded by a new rise carrying beyond the previous patternhigh, which, in this case, had been 63.
AU3772_C010.fm Page 155 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
155
The example just detailed is one of the more common types in whichthe failure occurs on a rally and the breakout eventuates on the downside.But it could have been converted into the opposite form if the last declinehad stopped at 60, and then, instead of fluctuating for a few days between60 and 62 and breaking down again, had pushed right back up and past 65.That action would have given us a failure on a decline and an upsidebreakout. (The odds would be, however, that the final Top was not far away.)
The Orthodox Broadening TopThere is one particular manifestation — a special case, as the mathematiciansmight say — of the Broadening Price Formation whose general nature wehave discussed in the preceding paragraphs. This particular form appearedat the 1929 Tops of many of the active and popular stocks of that day, butwith less frequency at Bull Market highs since 1929, and rarely at highvolume Tops preceding extensive Intermediate Declines, as in 1933 and 1934.It is known to market technicians under the specific name of Broadening Top,and although it conforms to our general descriptions for all SymmetricalBroadening Price Patterns, it has been so precisely defined, and so often citedin technical writings, that we may well take some time to examine it.The Orthodox Broadening Top has three peaks at successively higherlevels and, between them, two Bottoms with the second Bottom lower thanthe first. The assumption has been that it is completed and in effect as animportant Reversal indication just as soon as the reaction from its third peakcarries below the level of its second Bottom.Perhaps we can best see what this formation is like if we examine oneof the classic patterns which developed in 1929. Our chart (Figure 87) showsthe daily market action (price and volume) of Air Reduction from July 1 toDecember 31 of that year. We have numbered from 1 to 5 the significantturning points within the Broadening Top which ended that stock’s BullMarket in October. A Broadening Price Pattern was not detectable, of course,until prices had started to move up from the second Minor Low (point 4);by then 3 had formed above 1, and 4 below 2. New highs at 5 (a and b), followedby the definite downside breakout at B (nearly 6% under 4), completed thepattern and, according to the rules, signaled a Major Reversal Trend. In thiscase, there can be no doubt as to the importance of the Reversal indication,since, as our chart shows, the price of Air Reduction dropped from above220 on October 18 to below 80 on November 14, just 4 weeks later, and thefinal Bottom was not seen until nearly 3 years later in 1932!There are some fine points of this classic example which should be noted.First, a new high, i.e., a third and higher Top, was made at 5a and thesubsequent reaction was halted at 195, well above 4, and succeeded byrenewed advance. This looked like one of the advance notices (“failures”)to which we have referred on a preceding page, portending an upside breakout. But the example before us will serve to emphasize the warning which
AU3772_C010.fm Page 156 Tuesday, November 21, 2006 1:30 PM
156
Technical Analysis of Stock Trends
240224
3
1
5a
5b1929
208P192
RG
2
BG4
176
B
160152144136
EG
128120112104AIR REDUCTION CO.
AN
96888076Sales100’s25020015010050JULYAUGUSTSEPTEMBER OCTOBERNOVEMBER DECEMBER6 13 20 27 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28
FIGURE 87. Although this particular Major Reversal Formation appeared on thecharts over 35 years ago, it is so perfectly developed and on such a large scale thatit may well stand as our elementary model for an Orthodox Broadening Top. Thispattern in Air Reduction is discussed in detail on previous pages. Note also theSymmetrical Triangle Consolidation of July–August, and the examples of Runaway,Breakout, and Exhaustion Gaps (RG, BG, and EG), which will be taken up inChapter 12.
AU3772_C010.fm Page 157 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
157
4038
1946
5
3
1
2
4
363432AMERICAN ROLLING MILLS
RM
3028Sales100’s
125100755025JULYAPRILMAYJUNEAUGUSTSEPTEMBER6 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 88. A small but perfect 1946 Broadening Top that formed at the end of a3-month chart pattern which also had overall Broadening (and, hence, Bearish) aspects. The five critical points of Reversal are numbered on the chart. The “breakout”was registered on August 27. The Pullback Rally that followed immediately wasstrong, but still held within normal bounds. Another interesting Broadening Top of1946 appears in Figure 217.
we attached thereto — that such an indication is not to be trusted until priceshave decisively exceeded the previous Top. At 5b Air Reduction was tradedbriefly at 223, 2 points, but less than 3%, higher than 5a, and the day closedwith quotations below 5a. The break on October 24 (to B) took prices morethan 3% under the level of 4. Now occurred a development typical of Broadening Tops — a Pullback Rally (to B) retracing about half of the ground lostbetween the last pattern Top (5b) and the end of the initial breakout move(B). Such a recovery (and failure) will be attempted, according to our experience, in at least four out of five Broadening Top Patterns, and may not failuntil it has regained two thirds of the preceding decline, although it usuallypeters out around or even below the halfway mark.This, as we have said, is a classic example; there were many others atthat time. The very fact that so many did evolve at the 1929 peak, whichwas followed by history’s most disastrous losses, probably accounts for theextremely Bearish implications market technicians have ascribed to theBroadening Top Formation. We regard it now with somewhat less awe; itsmeasuring implications are probably no greater than those of a large, highvolume Head-and-Shoulders, but it is a pattern characteristic of the laststages of a Primary Uptrend.
AU3772_C010.fm Page 158 Tuesday, November 21, 2006 1:30 PM
158
Technical Analysis of Stock Trends
FIGURE 89. When they appear as plain and as compact as this example, BroadeningTops on weekly charts carry very powerful Reversal indications. The Top of the fifthturn in this formation was capped on the daily chart by a Head-and-Shoulders, whichwas pictured in Figure 16. The dashed lines on the above chart are trendlines — tobe discussed in Chapter 14.
The insistence that the third Top (our number 5), when followed by adecline below the second Bottom (our number 4), completes the ReversalPattern may be regarded, in the light of experience, as setting too strict alimitation, since Broadening Formations do, on occasion, go on to make afourth and higher Top. Yet this rule may be, and usually is, justified by thefact that the overall indications are undeniably Bearish and, hence, oneshould not wait too long to get out. On the other hand, the requirement thatthere be a third Top does seem to be justified on the score that Major Reversalsare seldom completed until at least three attempts have been made to pushprices on in the direction of the previous trend. This is the reason, of course,why pioneer technical students lumped together many formations under theclassification “Five-Point Reversals.” The Broadening Top is a Five-PointReversal (our numbers 1 to 5) and, so, obviously is a Head-and-Shoulders.A Broadening Top might, in fact, be called a Head-and-Shoulders with ahigh right shoulder and a down-sloping neckline.
Why No Broadening Bottoms?All of the other types of Reversal Formations we have studied thus far canoccur as either Tops or Bottoms. They can develop at the end of a decline toturn the trend up, or at the end of an advance to turn the trend down. Butthis does not seem to be true of the Broadening Formation. It has beenassumed in the past that Broadening Bottoms must exist, but the writer has
AU3772_C010.fm Page 159 Tuesday, November 21, 2006 1:30 PM
Chapter ten:
Other Reversal Phenomena
159
561945–19475248444038INTERNATIONAL PAPER
36Sales100’s5040302010N
D
J
F
M A
M
J
IP
J
A
S
O
N
D
J
F
M
A M
FIGURE 90. Broadening tendencies that appear on monthly charts, or very widespread (with Tops 5 or 6 months apart) like the above on weekly charts, should notbe regarded as significant technical formations. Reversal points in a true BroadeningTop should not be more than 2 months apart, as in Figure 89.
never found a good one in his examination of the charts of thousands ofindividual stocks over many years, and only one or two patterns which borea resemblance to it in the charts of the Averages. Apparently, the circumstances that create Broadening Formations do not exist after a prolongeddecline in prices. This would seem to bear out our earlier characterizationof this sort of pattern as suggesting active, excited trading with much public(and, hence, not too well informed or managed) participation. Such conditions are naturally associated with the final phases of a Bull Market.
Right-Angled Broadening Formations