ued
87
201918PUBLIC SERVICE CORP.
OF N. J.
PJ
17161941–194315141312S
11
S
10
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H
1000800600400200
S O
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FIGURE 31. Another variant of the Head-and-Shoulders within a Major ReversalFormation. The smaller Head-and-Shoulders pattern was easily overlooked on thedaily chart. Moreover, although it was 6 months long, this pattern in itself did notnecessarily imply Primary Reversal. But when it pushed “PJ’s” prices up in Octoberthrough the great supply which had been lodged at 12–13 the previous December,something more than a Secondary Advance could obviously be in prospect. An upmove of consequence was not finally signaled, however, until February 1943 whenthe upper neckline was penetrated and prices closed at 14. Public Service “threwback” to 12 in November 1943 (to the old neckline exactly), but then advanced steadilyto 30. Study this again when you take up Support and Resistance, Chapter 13. Thischart reiterates the point that, whereas Top Formations are often completed in arelatively short time, Major Bottoms usually require many months, and call for agreat deal of patience. Allowing for the greater time needed, however, most TopPatterns have their counterparts in Bottom Formations.
How Rounding Turns Affect Trading ActivityWe have not, as yet, mentioned the volume half of the Rounding Turn picture.It is interesting, as well as meaningful. In the case of Rounding Bottoms, itspattern is usually as clean-cut and decisive as the price pattern. The first stepin the gradual conquest of supply by demand, which produces a Rounding
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242220191817
NATIONAL SUPPLY
NS
1946
161514
Sales100’s125100755025
APRILMAY6 13 20 27 4 11 18 25 1
SEPTEMBERJULYJUNEAUGUST8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 32. Still another form that the Complex Reversal may take. This can bedescribed as a Head-and-Shoulders Pattern with two widely separated heads. Studyits volume pattern, noting breakout June 20 and subsequent Pullback. Compare itwith Bethlehem Steel’s Bottom Reversal shown in Chapter 12, Figure 123.
Bottom, appears as a lessening in selling pressure. Volume, which has beenrunning high, gradually decreases. Demand is still timid, but the pressureon it less; so, while prices still decline, the pace is slower and the trend curvesmore and more to the horizontal. At the Bottom, with the two forces technically in balance, relatively few transactions are recorded. Then demandbegins to increase, and as the price curve turns up, trading becomes moreactive. Volume accelerates with the trend until often it reaches a sort ofclimactic peak in a few days of almost “vertical” price movement on thechart.In such formations, the tips of the volume lines at the bottom of thechart, when connected, will describe an arc that often roughly parallels thearc formed by the price “Bowl” above. These patterns, when they occur afteran extensive decline, are of outstanding importance, for they nearly alwaysdenote a change in Primary Trend and an extensive advance yet to come.That advance, however, seldom carries in a “skyrocket” effect which completes the entire Major Move in a few weeks. On the contrary, the uptrendthat follows the completion of the pattern itself is apt to be slow and subjectto frequent interruptions, tiring out the impatient trader, but yielding eventually a substantial profit.
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89
7268
G
6460PHILIPS PETROLEUM
P
1946
56Sales100’s125100755025
APRILMAY6 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 33. Major Top Reversal Patterns in high-priced investment issues arefrequently long and “flat.” The 1946 Top of Phillips Petroleum could be classified aseither a Multiple Head-and-Shoulders or an irregular Rounding Top. An importanttrendline (Chapter 14) was broken downside in July.
403836
AMERICAN & FOREIGN POWER 2d PFD. A
FPD Pr
34323019452826Sales100’s125100755025AUGUSTJULY7 14 21 28 4 11 18 25 1
DECEMBERSEPTEMBER OCTOBER NOVEMBER8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29
FIGURE 34. The war-end reaction of 1945 in American & Foreign Power 2d Preferred, as well as in many other issues, took the form of a Rounding Bottom. Comparethe price and volume trends. By October 4, the implications here were plain to see.
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20AMERICAN SAFETY RAZOR
ARZ
15
10
3/ SPLIT1
3/ SPLIT1
5
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 35. Monthly chart, on arithmetic scale. American Safety Razor’s 1932Major Bottom was a Head-and-Shoulders, also its 1936 Bull Top. Its 1942 to 1946 BullMarket started from a Rounding Bottom nearly two and a half years long! Monthlychart study pays.
Let us repeat that trading volume should ebb to an extreme low at theBottom of a Bowl Pattern if its implications are to be trusted. After priceshave passed dead center, however, and begun their first gradual climb withas yet only a slight pickup in activity, something in the nature of a prematurebreakout may occur. Without warning, a burst of buying may shoot quotations straight up for a day or two. These incidents are by no means rare, but,almost invariably, prices will quickly drop back again into their formerchannel, and the gradual rounding movement is resumed. There is no particular danger for the trader in these premature bursts but, if he is temptedto jump in on such a sudden showing of strength, he should realize thatthere probably will still be need for patience. A classic example of this typeof premature break appears in one of our accompanying illustrations,Figure 38.
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30
91
BUDD CO. BF
20
10Sales100’s2001001938 1939 1940 1941 1942 1943 1944 1945 1946
FIGURE 36. Monthly chart of Budd Company. Note that 1942 was the first year toproduce a dull Saucer-shaped Pattern, a Rounding Bottom of Major import. “BF”climbed from below 3 in 1942 to above 26 in 1946.
CERTAIN–TEED PRODS. CT
30
20
10Sales100’s100501938 1939 1940 1941 1942 1943 1944 1945 1946
FIGURE 37. Similar formation in CertainTeed Products, which rose from below 2in 1942 to above 25 in 1946. Study volume, 1940 to 1945. The up-curving type ofMajor Bull Trend shown on these charts will be discussed in Chapter 15.
See Chapter 16.1 for some interesting 2005 rounding bottoms.
The Dormant Bottom VariationThere is one sort of Major Bottom chart picture that has been called a DormantBottom, but which relates logically to our Bowl Pattern, being, in effect, anextreme development of the “extended, flat-bottomed form” to which wehave alluded above. It appears characteristically in “thin” stocks, i.e., thosein which the total number of shares outstanding or, more particularly, thefloating supply of shares is very small. In such issues, a normal day’s turnover may be only two or three hundred shares in an active rising market.Finally, weeks and sometimes months will pass during which no sales will
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60
50
J. I. CASE
J I
1932
40
30
20
10Sales100’s800600400200MARCHAPRILMAYJUNEJULY20 27 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13
FIGURE 38. A classic example of Rounding Bottom at the Major Trend Reversal of1932. The jump out of line on June 10 and subsequent return to the Saucer Patternis a common development in Rounding Bottoms.
be registered for days at a time, or only an occasional lot at a figure whichfluctuates within a fractional range. The chart appears “fly specked.”Eventually, there may appear a sudden and usually quite inexplicableflurry of activity. Several hundred shares appear on the tape and pricesadvance sharply. This “breakout of dormancy” can be a premature move,such as we have noted in connection with typical Rounding Bottoms, to befollowed by several more weeks of inactivity, or it can be the first lift in asort of step-up process with shorter and shorter intervals between each step,until finally a consistent uptrend develops. In any event, it is a signal thatwe are dealing with an important Accumulation Pattern.What has happened to form these Dormant Bottoms is easy to guess.With relatively few shares outstanding, and only an occasional lot put upfor sale “at the market,” investors (perhaps insiders connected with thecompany) would succeed only in running the price up out of reach if theystarted to bid for the stock. So they simply “hold a basket under it,” as the
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42403836
GAMEWELL CO.
GAC
1944
3432302826Sales100’s
252015105JUNEMAYJANUARY FEBRUARYAPRILMARCH8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1
FIGURE 39. An extreme case of “Dormant Bottom.” There were many days in thefirst 4 months during which no shares were traded. A “buy” signal appeared onApril 26. Note volume.
saying goes, quickly picking up anything that is offered but never reachingfor it, until eventually the tree is shaken clean. Then they may raise theirbids a point or so; if that seems to bring out a lot of stock for sale, they goback to their waiting tactics.
Volume Pattern at TopsThe volume pattern on Rounding Tops is seldom as clearly defined as atBottoms. Indeed, it is apt to be rather high and irregular throughout theentire rounding-over movement in prices. Under close scrutiny, one canusually see some signs of a change from Bullish to Bearish activity in theMinor Fluctuations after the peak has been passed, but the volume warningsdo not become conspicuous in most cases until the downtrend has begun toaccelerate toward the vertical.We know of no measuring formula which can be applied to RoundingTurns (except for the minimum qualifications we mentioned in connectionwith Head-and-Shoulders, i.e., they cannot be counted upon to produce agreater move than the preceding price swing in the opposite direction). Butthey almost never deceive. Their implications can be roughly estimated fromthe magnitude of the trends that led to them and the length of time theytake in the rounding-over process. The Rounding Turns that often appearon weekly and monthly charts, thus, have major import.
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6864INLAND STEEL
IAD
60G565248193544Sales100’s5040302010MAYJUNEJANUARY FEBRUARYMARCHAPRIL5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 40. The March 1935 reaction produced many Rounding Bottoms. This oneverges on the dormant type. The gap (G), a Breakaway through a Resistance Level,was not closed until late 1937. (See Chapter 12.)
This leads us to the general consideration of weekly and monthly chartpatterns. Thus far, we have been speaking in detail of only daily chartdevelopments, but all of the formations we have taken up appear, as well,in the much larger swings into which daily movements are condensed onweekly and monthly charts, and with identical significance. Thus, volumerecord may not be quite so easy to read (climactic activity may occur on oneday of a week and the other days run dull, which would not show at all inthe week’s total figure) but is less critical — may almost be disregarded.Head-and-Shoulders Tops are particularly plentiful on monthly charts andshould be accorded due respect. In fact, any clearly defined pattern, whichis built to completion on a weekly or monthly chart, is proportionatelysignificant (bearing always in mind that “a Reversal must have somethingto reverse”).
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20
Important Reversal Patterns — Continued
APPLIED MAGNETICS CORP.
APM
95
1988
19181716
SDT
15141312Sales100’s1000800600400200JULYJUNEAUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER18 25 2 9 16 23 30 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 3 10 17 24 31
FIGURE 41. In a broad trading range (11–17½) during 1988, “APM” turned downfrom Resistance in the summer. The reaction, however, was slow, forming a Saucerlike Pattern from July through November on generally Bullish price/volume correlation. Of particular note was the fact that the low point of the Saucer was above theFebruary low, i.e., higher lows were beginning to emerge. The High-Volume Rallythrough the Short-Term Downtrend Line signaled the start of the next upleg.
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1441361281201121049688CRAY RESEARCH INC.
CYR
1987
Sales100’s200016001200800400JANUARYFEBRUARY MARCHAPRILMAYJUNEJULY3 10 17 24 31 7 14 21 28 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18
FIGURE 42. Cray Research, a powerhouse stock for over a decade. Trading at underone dollar in 1976, it reached 135¾ before the late April gap, through the Bottom ofa 7-week Diamond, started the decline. However, after the High-Volume Rally inmid-January, “CYR” also managed to form an impressive Rounding Top. The concavevolume pattern, clearly evident after the high-volume decline to Support that followed the Diamond breakdown, was particularly significant in illuminating thisTopping Pattern.
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3028262422201918171615
NORTHERN INDIANA PUBLIC SERVICE
NI
1984
14
8420
564213990
11Sales100’s
890010018
1312
200016001200800400JANUARYFEBRUARY MARCHAUGUST SEPTEMBER OCTOBERJULYAPRILMAYJUNE7 14 21 28 4 11 18 25 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 6 13XD . 39XD . 39XD . 375
FIGURE 43. 1984. We love the Scalloping tendency of Northern Indiana PublicService. Although it is obviously not a pattern portending rocket-like advance, thetechnical picture brightens with the high-volume breakout through Resistance atchart end.
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chapter eight
Important ReversalPatterns — The TrianglesWe come next to an entirely different family of technical patterns, the Triangles,a group that has not been as well represented on the charts of the decade ofthe 1940s as it was during the 1920s and 1930s. Their scarcity in that decadeis regrettable because they are an intriguing lot with excellent profit potential.(EN: Demonstrating that charts from the 1920s may be intermixed with charts fromthe 2000s, compare Figures 269 and 269.1.) Before we examine them in detail,however, a quick review of the basic theory, which gives meaning and valueto technical analysis, may be appropriate. That theory can be resummarizedin the following brief statements.1. The market value of a security is determined solely by the interactionof supply and demand.2. Supply and demand are governed at any given moment by manyhundreds of factors, some rational and some irrational. Information,opinions, moods, guesses (shrewd or otherwise) as to the futurecombine with blind necessities in this equation. No ordinary mancan hope to grasp and weigh them all, but the market does thisautomatically.3. Disregarding Minor Fluctuations, prices move in trends that persistfor an appreciable length of time.4. Changes in trend, which represent an important shift in the balancebetween supply and demand, however caused, are detectable sooneror later in the action of the market itself.By this time, the fact expressed in the italicized words of the last statement may have begun to raise some misgivings in your mind. The complaintthat the Dow Theory is often “late” has already been discussed. The ReversalPatterns studied in the two preceding chapters give no certain signal untilafter the trend has changed, usually “sooner” as compared with Dow Theory,but never at the absolute top or bottom price. The man who sells a stock assoon as, but not until, a Head-and-Shoulders Top has been completed on itschart may cash in on no more than half of the total decline from its extremehigh to extreme bottom, since by the very terms of our measuring formula,the first half of the decline can have taken place before the Top ReversalFormation was finally confirmed.99
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Make up your mind that there is no help for it. Somebody, of course,managed to sell his shares at the very top eighth of a point on the peak ofthe “head” (and some poor devil bought them). The seller was just plainlucky! His exploit can be truly compared with a “hole-in-one” in golf. Evena complete duffer occasionally enjoys that thrill. But the more experienceda player, the better satisfied he is to land safely on the green and not too farfrom the cup. The more experienced an investor, the less concerned he iswith getting the last point, or even the last ten points, out of his marketcommitments.No one can ever be sure at the time that he is selling at the final high.No rules or methods have ever been devised — or ever will be — to ensurebuying within fractions of the Bottom, or selling within fractions of the Top.Of course, a man can make certain of buying a stock at its absolute lowprovided he is prepared to take at that figure every last share offered, evento the entire outstanding issue if necessary. It might, in theory, require asmuch as $3.7 billion to “put a bottom” under U.S. Steel at 70, (EN9: ca. 1950s)in case you are tempted.The reader, who at this point may think we “protest too much,” will seemore excuses for the foregoing remarks when we take up the habits ofTriangles, for these formations are not always indicative of Trend Reversal.On the contrary, except in certain rather uncommon varieties, they are moreapt to signal what may most conveniently be termed Consolidation, terminating an up or down move only temporarily and setting the stage foranother strong move in the same direction later on. (Schabacker called suchchart formations “Continuation Patterns.”) The reason for including Triangles in this section of our studies under the general heading of ReversalFormations is that they do, at times, develop at periods of Major Trendchange, and those are, by all odds, the periods which it is most essential forthe investor to recognize.
Symmetrical TrianglesThe most common form of a Triangle is composed of a series of price fluctuations, each of which is smaller than its predecessor, each Minor Top failingto attain the height of the preceding rally, and each Minor Recession stoppingabove the level of the preceding Bottom. The result is a sort of contracting“Dow Line” on the chart — a sideways price area or trading range whoseTop can be more or less accurately defined by a down-slanting boundary lineand whose Bottom can be similarly bounded by an up-slanting line. This typeof Triangle is called a Symmetrical Triangle. If we wanted to make a moreaccurate application of the language of geometry, we might better call it anAcute Triangle, since it is not at all necessary that its Top and Bottom boundaries be of equal length or, in other words, make the same angle with thehorizontal axis. However, there is a very strong tendency in these formationsto approximate the symmetrical form; so, the established name will do wellenough. This pattern is also sometimes referred to as a “Coil.”
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26HUDSON BAY MINING & SMELTING
HD
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FIGURE 44. A fine Symmetrical Triangle Reversal Formation on a weekly chart.Upper boundary sloping down from February 1942 recovery high at 21 and lowerboundary sloping up from “Pearl Harbor” Bottom at 16⅜ converge to an apex atabout 18⅝. From this Major Bottom Pattern, “HD” advanced to 45 in 1946. Noteshrinkage in volume as pattern formed, and increase as price broke out through Topin October 1942. Breakout came not quite three quarters of the way over from firstTop to apex.
While the process of contraction or coiling, which makes up the priceaction of the Symmetrical Triangle Pattern, is going on, trading activityexhibits a diminishing trend, irregularly perhaps, but nevertheless quitenoticeably as time goes on. The converging upper and lower boundary linesof the price formation come together somewhere out to the right (the futurein the time sense) of the chart, at the apex of our Triangle. As prices worktheir way along in narrower and narrower fluctuations toward the apex,volume ebbs to an abnormally low daily turnover. Then, if we are dealingwith a typical example, comes the action which first suggested the name“Coil.” For suddenly and without warning, as though a coil spring had beenwound tighter and tighter and then snapped free, prices break out of theirTriangle with a notable pickup in volume, and leap away in a strong movewhich tends to approximate in extent the up or down move that precededits formation.There is seldom any clue given on the one chart containing the Triangleto tell in which direction prices are going to break out of the pattern untilthat action finally occurs. Sometimes you can get a pretty good idea of whatis likely to happen by observing what is going on at the same time in thecharts of other stocks (which is an important topic for later discussion), but
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SEARS, ROEBUCK
48
S
4440
1946
38Sales100’s
25020015010050APRILMAY6 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 45. Sear’s Roebuck made a Symmetrical Triangle Reversal at its Bull Market Top in 1946, and then went into another long Triangle which turned out to be aConsolidation rather than Reversal Formation. (Logarithmic volume scaling minimizes volume variations.) Sell signal was given at 44½ and again at 41. Declinecontinued to 30½.
often, there is nothing to do but wait until the market makes up its mindwhich way to go. And “making up its mind” is just what the market seemsto be doing when it builds a Triangle; everything about this pattern appearsto exemplify doubt, vacillation, and stalling until finally a decision is reached.
Some Cautions About Symmetrical TrianglesA compact, clean-cut Triangle is a fascinating picture, but it has its trickyfeatures. The beginner in technical chart analysis is quite naturally prone tolook for Triangles constantly, and will often think he has detected them when,in fact, something entirely different is in the process of development. Remember that it takes two points to determine a line. The top boundary line of aprice area cannot be drawn until two Minor Trend Tops have been definitelyestablished, which means that prices must have moved up to and then downaway from both far enough to leave the two peaks standing out clear andclean on the chart. A bottom boundary line, by the same token, cannot bedrawn until two Minor Trend Bottoms have been definitely established.Therefore, before you can conclude that a Symmetrical Triangle is building,you must be able to see four Reversals of Minor Trend. If it comes after anadvance in prices, you must have first a Top, next a Bottom, next a secondTop lower than the first, and finally a second Bottom higher than the firstBottom (and prices must move up away from the second Bottom before youcan be sure it is a Bottom). Then, and only then, can you draw your boundarylines and proceed on the assumption that you have a Symmetrical Triangle.
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Another point to remember — and one which does not conform at allto the “coil” simile — is that the farther out into the apex of the Triangleprices push without bursting its boundaries, the less force or power thepattern seems to have. Instead of building up more pressure, it begins tolose its efficacy after a certain stage. The best moves (up or down) seem toensue when prices break out decisively at a point somewhere between halfand three quarters of the horizontal distance from the base (left-hand end)to the apex. If prices continue to move “sideways” in narrower and narrowerfluctuations from day to day after the three quarter mark is passed, they arequite apt to keep right on to the apex and beyond in a dull drift