. Thegeneral importance of the ephemera to the subject is always discussed.
About GenderI quote here from my foreword to the 2nd edition of Magee’s General Semantics of Wall Street, (charmingly renamed according to the current fashions,Winning the Mental Game on Wall Street):
About Gender in GrammarIch bin ein feminist. How could any modern man, sonof a beloved woman, husband of an adored woman,and father of a joyful and delightful daughter not be?I am also a traditionalist and purist in matters of usage,grammar, and style. So where does that leave me andmy cogenerationalists, enlightened literary (sigh) men(and women) with regards to the use of the masculinepronoun when used in the general sense to apply tothe neuter situation?In Dictionary of Modern American Usage, Garnernotes: ‘English has a number of common-sex generalwords, such as person, anyone, everyone, and no one,but it has no common-sex singular personal pronouns.Instead we have he, she, and it. The traditionalapproach has been to use the masculine pronouns heand him to cover all persons, male and female alike... .The inadequacy of the English language in this respectbecomes apparent in many sentences in which thegeneric masculine pronoun sits uneasily.’
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Inadequate or not it is preferable to s/he/it and otherbastardizations of the English language. (Is it not interesting that “bastard,” in common usage, is never usedof a woman, even when she is illegitimate?) As for thelegitimacy of the usage of the masculine (actually neuter) pronoun in the generic, I prefer to lean on Fowler,who says, ‘There are three makeshifts: first as anybodycan see for himself or herself; second, as anybody cansee for themselves; and third, as anybody can see forhimself. No one who can help it chooses the first; it iscorrect, and is sometimes necessary, but it is so clumsyas to be ridiculous except when explicitness is urgent,and it usually sounds like a bit of pedantic humor. Thesecond is the popular solution; it sets the literary man’s(!) teeth on edge, and he exerts himself to give the samemeaning in some entirely different way if he is notprepared to risk the third, which is here recommended.It involves the convention (statutory in the interpretation of documents) that where the matter of sex is notconspicuous or important the masculine form shall beallowed to represent a person instead of a man, or saya man (homo) instead of a man (vir).’Politically correct fanatics may rail, but so are my teethset on edge; thus, I have generally preserved theauthors’ usage of the masculine for the generic case.This grammatical scourge will pass and be forgotten,and weak-willed myn (by which I intend to indicatemen and women) who pander to grammatical terrorists will in the future be seen to be stuck with malformed style and sentences no womyn will buy. Whatwould Jane Austen have done, after all?
About Gender in InvestorsAs long as we are on the subject of gender, we mightas well discuss, unscientifically, gender in investors.Within my wide experience as a trading advisor,teacher, and counselor, it strikes me that the womeninvestors I have known have possessed certain innateadvantages over the men. I know there are womengamblers. I have seen some. But I have never seen inthe markets a woman plunger (shooter, pyramider,pie-eyed gambler). I have known many men who fit
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this description. I have also noted among my studentsand clients that as a group women seem to have morepatience than men as a group. I refer specifically to thepatience that a wise investor must have to allow themarkets to do what they are going to do.These are wholly personal observations. I have madeno study of the question and can’t speak to the entireclass of women investors — and do not personallyknow Barbra Streisand (who I understand is a formidable investor, especially in IPOs). But just as I believethat the world would be better off if more women rancountries and were police officers, I expect that theworld of finance will benefit from the steadily increasing number of women investors and managers.
A Crucial Question — Sensitivity Indexes and BetasLong before the investment community had formalized the beta measure —the coefficient measuring a stock’s volatility relative to the market — Mageeand Edwards were computing a Sensitivity Index, which, for all practicalpurposes, was the same thing. Readers interested in this aspect of their workmay find references in Resources which will enable them to obtain betas toplug into the Composite Leverage formula with which Magee intended todetermine risk levels. The old appendix on Sensitivity Indexes has beenconsigned to Appendix A, along with the chapter on Composite Leverage,both originals of which have been emended to reflect current practices infinance theory and practice.
Betwixt and Between, 1/8 of a Dollar or 12.5 CentsAs this edition went to press the financial services industry was once againthreatening to implement decimals in stock prices. Pricing in eighths hasendured long past its time because it was in the self-interest of the financialindustry — it allowed brokers and market makers to enforce larger bid–askspreads and fatten their profit margins. The importance for this book, andfor traders, is what will happen as full decimalization occurs. Often in thesepages, Magee will recommend placing a stop 1/8 off the low or high, orplacing progressive near stops in eighths. We do not yet know what thepsychological interval will be in the new era. It may be 12.5 cents, or morepsychologically, 10 cents, or for gaming purposes, 9 or 11 cents. This remainsto be seen. As all the charts in this book are in the old notation that usagehas been preserved in this edition.
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The Editorial “I”Readers will quickly note that the “Editorial We” of Edwards and Mageehas been replaced by the first person voice — or, the “Editorial I” or perhapsthe “Professorial I.” Well, there were two of Edwards and Magee, and thereis only one of me. So my text is immediately noticeable as mine, and thereader may discriminate quickly. As for the use of “I” as an expression ofego, the reader is assured that after 40 years in the market the editor has noego left to promote. Perhaps the best way to put the editor’s sense of importance in perspective is to quote Dr. Johnson’s definition of lexicographerfrom his dictionary. Some people might have thought Johnson self-importantin creating the first English dictionary. His definition of his trade put thatright. “Lexicographer: a writer of dictionaries. A harmless drudge.” Aneditor is something like the same.As this book goes to the printer, the publisher, recognizing the importance of the work done on this edition, will credit the Editor as co-author ofthe 8th Edition. John Magee would be pleased. We had a cordial master–student relationship, and nothing pleases a Zen master more than to transferthe dharma to a passionate student.
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AcknowledgmentsIn General:John Magee, for his ever-patient tutoring.Blair Hull, for teaching me the mercurial nature of options.Bill Dreiss, for teaching me the nature of trading systems.Art von Waldburg, respected colleague and discoverer of the Fractal WaveAlgorithm.Fischer Black, who should have lived to get the Nobel Prize.Bill Scott, friend and fellow trader.For specific support and assistance in the preparation of this 8th edition:Professor Henry Pruden, Golden Gate University, San Francisco, for invaluable support and advice.Martin Pring; Lawrence Macmillan; Mitch Ackles, Omega Research Corporation; Carson Carlisle; Edward Dobson; David Robinson; Shereen Ash;Steven W. Poser; Lester Loops, late of Hull Trading Company; Tom Shanks,Turtle.At St. Lucie Press, the dedication and support of the publisher, DrewGierman, and Production Associate, Pat Roberson, have been invaluable, ashas been the dedication of Gail Renard, the Production Editor.And special acknowledgment to my Research Assistant, Don CarlosBassetti y Doyle.Special appreciation goes to makers of software packages used in thepreparation of this and previous editions:AIQ SystemsP.O. Box 7530Incline Village, NV 89452702-831-2999www.AIQsystems.comMetastockEquis International, Inc.3950 S. 700 East, Suite 100Salt Lake City, UT 84107www.equis.comTradestationOmega Research14257 SW 119th AvenueMiami, FL 33186305-485-7599www.tradestation.com
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In MemoriamThis book is a memorial for John Magee, who died on June 17, 1987. JohnMagee was considered a seminal pioneer in technical analysis, and hisresearch with co-author, Robert D. Edwards, clarified and expanded theideas of Charles Dow, who laid the foundation for technical analysis in 1884by developing the “Averages,” and Richard Schabacker, former editor ofForbes in the 1920s, who showed how the signals, which had been consideredimportant when they appeared in the averages, were applicable to stocksthemselves. The text, which summarized their findings in 1948, was, ofcourse, Technical Analysis of Stock Trends, now considered the definitive workon pattern recognition analysis. Throughout his technical work, John Mageeemphasized three principles: stock prices tend to move in trends; volumegoes with the trend; and a trend, once established, tends to continue in force.A large portion of Technical Analysis of Stock Trends is devoted to thepatterns which tend to develop when a trend is being reversed: Head-andShoulders, Tops and Bottoms, “W” patterns, Triangles, Rectangles, etc. —common patterns to stock market technicians. Rounded Bottoms and Drooping Necklines are some of the more esoteric ones.John urged investors to go with the trend, rather than trying to pick abottom before it was completed, averaging down a declining market. Aboveall, and at all times, he refused to get involved in the game of forecastingwhere “the market” was headed, or where the Dow–Jones Industrial averages would be on December 31st of the coming year. Rather, he preachedcare in individual stock selection regardless of which way the market“appeared” to be headed.To the random walker, who once confronted John with the statementthat there was no predictable behavior on Wall Street, John’s reply wasclassic. He said, “You fellows rely too heavily on your computers. The bestcomputer ever designed is still the human brain. Theoreticians try to simulate stock market behavior, and, failing to do so with any degree of predictability, declare that a journey through the stock market is a random walk.Isn’t it equally possible that the programs simply aren’t sensitive enough orthe computers strong enough to successfully simulate the thought processof the human brain?” Then John would walk over to his bin of charts, pullout a favorite, and show it to the random walker. There it was — spike up,heavy volume; consolidation, light volume; spike up again, heavy volume.A third time. A fourth time. A beautifully symmetrical chart, moving aheadin a well-defined trend channel, volume moving with price. “Do you reallybelieve that these patterns are random?” John would ask, already knowingthe answer.
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We all have a favorite passage or quotation by our favorite author. Myfavorite quotation of John’s appears in the short booklet he wrote especiallyfor subscribers to his Technical Stock Advisory Service: “When you enter thestock market, you are going into a competitive field in which your evaluations and opinions will be matched against some of the sharpest and toughestminds in the business. You are in a highly specialized industry in whichthere are many different sectors, all of which are under intense study by menwhose economic survival depends upon their best judgment. You will certainly be exposed to advice, suggestions, offers of help from all sides. Unlessyou are able to develop some market philosophy of your own, you will notbe able to tell the good from the bad, the sound from the unsound.”I doubt if any man alive has helped more investors develop a soundphilosophy of investing on Wall Street than John Magee.Richard McDermottPresident, John Magee, Inc.September 1991
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Preface to the Seventh EditionMore than 100 years ago, in Springfield, MA, there lived a man namedCharles H. Dow. He was one of the editors of a great newspaper, TheSpringfield Republican. When he left Springfield, it was to establish anothergreat newspaper, The Wall Street Journal.Charles Dow also laid the foundation for a new approach to stock marketproblems.In 1884, he made up an average of the daily closing prices of 11 importantstocks, 9 of which were rails, and recorded the fluctuations of this average.He believed that the judgment of the investing public, as reflected in themovements of stock prices, represented an evaluation of the future probabilities affecting the various industries. He saw in his average a tool forpredicting business conditions many months ahead. This was true becausethose who bought and sold these stocks included people intimatelyacquainted with the industrial situation from every angle. Dow reasonedthat the price of a security, as determined by a free competitive market,represented the composite knowledge and appraisal of everyone interestedin that security — financiers, officers of the company, investors, employees,customers — everyone, in fact, who might be buying or selling stock.Dow felt that this market evaluation was probably the shrewdestappraisal of conditions to come that could be contained, since it integratedall known facts, estimates, surmises, and the hopes and fears of all interestedparties.It was William Peter Hamilton who really put these ideas to work. Inhis book, The Stock Market Barometer, published in 1922, he laid the groundwork for the much-used and much-abused Dow Theory.Unfortunately, a great many superficial students of the market neverunderstood the original premise of the “barometer” and seized on the barebones of the theory as a sort of magic touchstone to fame and easy fortune.Others, discovering that the “barometer” was not perfect, set aboutdevising corrections. They tinkered with the rules of classic Dow Theory,trying to find the wonderful formula that would avoid its periodic disappointments and failures.Of course, what they forgot was that the Averages were only averagesat best. There is nothing very wrong with the Dow Theory. What is wrongis the attempt to find a simple, universal formula — a set of measurementsthat will make a suit to fit every man, fat, thin, tall, or short.During the 1920s and 1930s, Richard W. Schabacker reopened the subjectof technical analysis in a somewhat new direction. Schabacker, who had beenfinancial editor of Forbes Magazine, set out to find some new answers. Herealized that whatever significant action appeared in the average must derivefrom similar action in some of the stocks making up the average.
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In his books, Stock Market Theory and Practice, Technical Market Analysis, and Stock Market Profits, Schabacker showed how the “signals” thathad been considered important by Dow theorists when they appeared in theAverages were also significant and had the same meanings when they turnedup in the charts of individual stocks.Others, too, had noted these technical patterns. But, it was Schabackerwho collated, organized, and systematized the technical method. Not onlythat, he also discovered new technical indications in the charts of stocks;indications of a type that would ordinarily be absorbed or smothered in theaverages, and, hence, not visible or useful to Dow theorists.In the final years of his life, Richard Schabacker was joined by hisbrother-in-law, Robert D. Edwards, who completed Schabacker’s last bookand carried forward the research of technical analysis.Edwards, in turn, was joined in this work in 1942 by John Magee. Magee,an alumnus of the Massachusetts Institute of Technology, was well orientedto the scientific and technical approach.Edwards and Magee retraced the entire road, reexamining the DowTheory and restudying the technical discoveries of Schabacker.Basically, the original findings were still good. But with additional history and experience, it was possible to correct some details of earlier studies.Also, a number of new applications and methods were brought to light. Theentire process of technical evaluation became more scientific.It became possible to state more precisely the premises of technicalanalysis: that the market represents a most democratic and representativecriterion of stock values; that the action of a stock in a free, competitivemarket reflects all that is known, believed, surmised, hoped, or feared aboutthat stock; and, therefore, that it synthesizes the attitudes and opinions ofall. That the price of a stock is the result of buying and selling forces andrepresents the “true value” at any given moment. That a Major Trend mustbe presumed to continue in effect until clear evidence of Reversal is shown.And, finally, that it is possible to form opinions having a reasonably highprobability of confirmation from the market action of a stock as shown indaily, weekly, or monthly charts, or from other technical studies derivedfrom the market activity of the security.It is important to point out that the ultimate value of a security to theinvestor or trader is what he or she ultimately receives from it. That is tosay, the price the investor gets when it is sold, or the market price obtainablefor it at any particular time, adjusted for dividends or capital distributionin either case. If, for example, he or she has bought a stock at $25 a share,and it has paid $5 in dividends and is now bid at $35, he or she has realizedan accrued benefit of $5 plus $10, or $15 in all. It is the combination ofdividends and appreciation of capital that constitutes the total gain.It seems futile to try to correlate or compare the market value of a stockwith the “book value” or with the “value” figured on a basis of capitalizedearnings or dividends, projected growth, etc. There are too many otherfactors that may also affect the value, and some of these cannot easily be
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expressed in simple ratios. For example, a struggle for control of a corporation can as surely increase the value of its securities in the market as a growthof earnings. Again, a company may lose money for years and pay no dividends, yet still be an excellent investment on the basis of its developmentof potential resources as perceived by those who are buying and selling itsstock. For the market is not evaluating last year’s accomplishments as such,it is weighing the prospects for the year to come.Then, too, in a time of inflation, a majority of stocks may advance sharplyin price. This may reflect a depreciation in the purchasing power of dollarsmore than improvement in business conditions — but it is important, nonetheless, in such a case to be “out of dollars” and “into” equities.As a result of their research from 1942 to 1948, Edwards and Mageedeveloped new technical methods. They put these methods to practical usein actual market operation. And, eventually, in 1948, these findings werepublished in their definitive book, Technical Analysis of Stock Trends.This book, now in its seventh edition, has become the accepted authorityin this field. It has been used as a textbook by various schools and colleges,and is the basic tool of many investors and traders.In 1951, Edwards retired from his work as a stock analyst and JohnMagee continued the research, at first, independently, and then from January1953 to March 1956 as Chief Technical Analyst with an investment counselingfirm.Meanwhile, beginning in 1950, Magee started on a new road, which, asit turned out, was destined to open up virgin fields of technical marketresearch.Using the methods of Dow, Hamilton, Schabacker, and Edwards as abase, he initiated a series of studies intended to discover new technicaldevices. These investigations were long and laborious, and, often, they werefruitless. One study required four months of work, involved hundreds ofsheets of tabulations, many thousands of computations, and proved nothing.But from this type of work, eventually in late 1951, there began to emergesome important new and useful concepts — new bricks to build into thestructure of the technical method.The new devices are not revolutionary. They do not vitiate the basictechnical approach. Rather, they are evolutionary and add something to thevaluable kit of tools already at hand. The new studies often make it possibleto interpret and predict difficult situations sooner and more dependably thanany other method previously used.Mr. Magee has designated these newest technical devices the Delta Studies. They are basically an extension and refinement of the technical method.There is no magic in the Delta Studies. They do not provide infallible formulas for sure profits at all times in every transaction, but they have provedeminently successful over a period of years in practical use in actual marketoperations, as an auxiliary to the methods outlined in the book, TechnicalAnalysis of Stock Trends.
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Through his technical work, John Magee emphasized these three principles:1. Stock prices tend to move in trends.2. Volume goes with the trends.3. A trend, once established, tends to continue in force.A large portion of the book, Technical Analysis of Stock Trends, isdevoted to the patterns that tend to develop when a trend is being reversed.Head-and-Shoulders, Tops and Bottoms, “W” Patterns, Triangles, Rectangles, etc., are common patterns to stock market technicians. Rounded Bottoms and Drooping Necklines are some of the more esoteric ones.Magee urged investors to go with the trend, rather than trying to picka Bottom before it was completed, or averaging down in a declining stock.Above all, and at all times, he refused to get involved in the game of forecasting where “the market” was headed, or where the DJIA would be onDecember 31st of the coming year. Rather, he preached care in individualstock selection regardless of which way the market “appeared” headed.Finally, his service recommended short positions as regularly as it did longpositions, based simply on what the charts said.Richard McDermottEditor and ReviserTechnical Analysis of Stock Trends, Seventh EditionJanuary 1997
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Preface to the Fifth EditionDuring the 16 printings of the fourth edition of Technical Analysis of StockTrends, very few changes have been made in the original text, mainly becausethe lucid presentation of market action by the late Robert D. Edwards covered so thoroughly the basic and typical market action of common stocks.There has seemed no reason, for example, to discard a chart picture illustrating some important technical phenomenon merely because it occurredseveral or many years ago.Instead, over the various printings of the book, pages have been addedshowing similar examples, or in some cases entirely new types of marketaction taken from recent history; but these demonstrate mainly that theinherent nature of a competitive market does not change very much overthe years, and that “the same old patterns” of human behavior continue toproduce much the same types of market trends and fluctuations.The principal change in this fifth edition, and it is a spectacular improvement, is that practically all of the chart examples drawn to the TEKNIPLATscale have been redrawn and new plates of these have been substituted. Inthe course of this work, several minor errors of scaling, titling, etc., previously undiscovered, came to light and have been corrected.The difficult work of revision was initiated in our charting room by twoambitious teenagers, Anne E. Mahoney and Joseph J. Spezeski, who took onthe entire job of preparing the finished drawings and making necessarycorrections. This enormous project was undertaken and carried through bythese two young people spontaneously. In order to free them entirely fromother distractions, their regular charting work was taken over for a periodof months by the rest of the chartroom staff, so that a great deal of credit isdue to the fine efforts of the entire chartroom group.John MageeDecember 3, 1966
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Preface to the Fourth EditionIn the several years since publication of the first edition of this work, “thestock market goes right on repeating the same old movements in much thesame old routine.” Nearly all of the technical phenomena outlined in thefirst edition have appeared many times since then, and we see no reason toexpect that these habits of stocks will change materially in the years ahead,barring revolutionary changes in the economy, such as the abolishment ofthe free market entirely.Since the basic nature of the market has not changed appreciably, it hasbeen unnecessary to make sweeping alterations in the text of Part One:Technical Theory. The previous edition has been very carefully restudied,and revisions have been made where they were called for to bring thematerial up to date. In Part Two: Trading Tactics, more extensive changeswere needed, due to the more specific nature of the material and somedifferences in the present margin requirements, trading rules, etc. Also, therehave been some improvements in the application of technical methods atthe tactical level, and these have been incorporated in this section.Somewhat less emphasis has been put on the use of stop-loss orders,since their need is not so great in the case of the experienced trader as itmight be with the novice. The principle of always following the Major Trendhas been modified to achieve better protection of capital through balanceand diversification. In line with avoiding “all-out” situations, with theirconsequent dangers, the idea of using an Evaluative Index has been introduced, and this concept has modified somewhat the tactics of following theMajor Trend. It also has a bearing on the Composite Leverage or determination of total risk.Type for the entire book has been reset in this edition. The illustrativecharts originally used have been, in the main, retained, since they demonstrate the various points very well, but a new chapter includes a number ofadditional charts taken from the market history of recent years, showinghow the same phenomena continue to appear again and again.The appendix on the Sensitivity Indexes has been completely recomputed, and extended to cover a broad list of the more important issues. Thearduous labor of determining these index figures was undertaken by FrankJ. Curto and Marcella P. Curto. Material help in proofreading and revisionfor this edition was given by Beverly Magee and Elinor T. Magee.John MageeJanuary 1, 1957
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Preface to the Second EditionIt is, needless to say, gratifying to the authors of this treatise to report thatnot only has a large first edition been exhausted (although it was originallyassumed that it would suffice for many years), but also that the demand forcopies has been increasing at a rather astonishing pace during the past 6months without any “promotion” except word-of-mouth recommendationfrom one investor to another.In preparing this new edition, a careful perusal of everything that waswritten in the previous printing, checked by the market events of the past24 months and compared with all of the additional chart data accumulatedduring that period, resulted in the not unexpected, but nevertheless mildlysurprising conclusion that nothing whatever of real consequence needed tobe changed or amplified. Hence, only minor revisions of an editorial naturehave been made.It would have been interesting to augment our already copious illustrations with a number of charts from current months of market action, butcosts of engraving and printing have risen to such a distressingly high levelthat any additions of that sort would, it was found, be prohibitively expensive. Aside from their novelty, they would add nothing to the book; theywould only be substituted for other charts of precisely the same nature andsignificance, and fully as pertinent to present-day conditions.The stock market, as I wrote in the original Foreword, “goes right onrepeating the same old movements in much the same old routine. Theimportance of a knowledge of these phenomena to the trader and investorhas been in no whit diminished.” We see the same forecasting patternsdeveloping on the charts today that we have seen over and over again forthe past twenty years. Neither the mechanics nor the “human element” ofthe stock market has changed, and there is no reason to think that they will.Robert D. EdwardsMay 1, 1951
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ForewordThis book has been written for the layman rather than for the Wall Streetprofessional. But, it assumes that the reader is already possessed of at leastan elementary knowledge of the nature of stocks and bonds, that he has hadsome dealings with a broker and some familiarity with the financial pagesof his newspapers. Hence, no attempt is made herein to define commonstock market terms and procedures. Every effort, however, has been exertedto explain, in full, the theories and the terminology of our specific subject,technical market analysis.Part One is based, in large part, on the pioneer researches and writingsof the late Richard W. Schabacker. Students of his Technical Analysis andStock Market Profits (the latest revision of which is now out of print wasmade in 1937 by the present writer and Albert L. Kimball) will find in thepages of this section much that is familiar and, except for the illustrations,only a little that is really novel. It has been a matter of surprise, in fact, tothe authors and other students of market technics that all the new controlsand regulations of the past several years, the new taxes which have placeda heavy handicap on successful investors, the greatly augmented andimproved facilities for acquiring dependable information on securities, eventhe quite radical changes in certain portions of our basic economy, have notmuch altered the “pattern” of the stock market.Certain of the evidences of pool manipulation which used to appear onthe charts are now seldom seen. A few of the price formations which formerlywere quite common, now appear rarely or may have lost much of theirpractical utility for the trader; they have been omitted from this text. Othershave altered their habits slightly, or their consequences to a degree (but nottheir fundamental nature), which has, of course, been noted herein. Thedistressing thinness of the market at times — one of the undoubted