1946.
134
128
SOUTHERN PACIFIC.
A large Measuring Gap in the Panic Declineof late 1937.
222
211
SOUTHERN PACIFIC.
Daily, 6 months in 1946. Head-andShoulders Top, rally, and subsequentdecline.
474
155
SOUTHERN PACIFIC.
Intermediate Basic and Return Lines andFlags within Trend Channel. 1945.
269
59
SOUTHERN RAILWAYPREFERRED.
A perfect Ascending Triangle in 1936.
117
146
SOUTHERN RAILWAY.
Typical Pullbacks to Head-and- ShouldersNeckline, and increase of volume asSupport is violated. 1946.
251
AU3772_A007.fm Page 739 Sunday, November 19, 2006 2:46 PM
Alphabetic Index of Stock Charts
739
Figure Stock Name
Summary Description of Chart
Page
186
SOYBEAN FUTURES,JANUARY 1997.
Buy and sell signals generated when 9-dayand 18-day Moving Averages are used withsoybean futures.
648
203.2
SPDR.
For illustration, here is a chart of the AmexIndex Share, the SPYDR, or share based onthe S&P 500.
389
198
SPIEGEL, INC.
The Major Top of 1946 and the first part ofa Bear Trend. 1946 to 1947.
321
199
SPIEGEL, INC.
Sequel to Figure 198. Continuation of BearTrend. 1946 to 1947.
322
179.1
STANDARD & POOR’S500 INDEX.
Horrors of the 1987 Crash.
296
179.2
STANDARD & POOR’S500 INDEX.
The 1987 Crash viewed from afar.
297
179.3.1 STANDARD & POOR’S500 INDEX.
1999-2000 The top of the bubble.
299
179.3.2 STANDARD & POOR’S500 INDEX.
What happens to bubbles. Busted.
300
182
STANDARD & POOR’S500 INDEX (CASH).
July–December 1996 chart showing thesteady progress of the S&P Index with aMajor break in the trend during December.
644
197
STANDARD & POOR’S500 INDEX FUTURES
(See Fig. 196).
667
196
STANDARD & POOR’S500 INDEX FUTURES(SPX).
Two charts showing the difference in clarityof signals between a 14-day and 3-dayperiod for relative strength in 1996.
666
187
STANDARD & POOR’S500 INDEX, 1996,BOLLINGER BANDS.
Overbought and oversold indications fromthe use of the Bollinger Bands Indicator,originally developed by John Bollinger. Thechart also shows the Wilder RelativeStrength Indicator for actual buy and sellindications.
650
203.1
STANDARD & POOR’S500 INDEX.
Here the benefits of relaxed long-terminvesting may be seen.
388
203.3
STANDARD & POOR’S500 INDEX.
The Broadening Top comes home to roost.
390
20.1
STANDARD & POOR’S500 INDEX.
A Massive 10 year Head-and-Shoulders, ca2005?
73
AU3772_A007.fm Page 740 Sunday, November 19, 2006 2:46 PM
740
Technical Analysis of Stock Trends
Figure Stock Name
Summary Description of Chart
Page
188
STANDARD & POOR’S500 INDEX. 1996,MACD.
Moving Average Convergence Divergence(MACD) showing buy and sell indicationsgiven by the lines. Trendlines are alsodrawn on the MACD lines to clearlyillustrate turning points.
653
171
STANDARD OIL OFOHIO.
Straight-line Bull Trend of an investmentoil. Monthly chart, 1938 to 1946.
286
260
SUPERIOR OIL.
June to November 1962. Showing animportant Double Bottom, which becamethe base for a Major Advance.
549
179.5.4 TBONDS 2005.
Applications of charting knowledge.
315
13
TELEDYNE, INC.
1984. Large Head-and-Shoulders Top.
65
235
TEXTRON. 1956 to 1957. Descending Triangle, with sharp declineafter the breakout. 1956 to 1957.
521
101
TRANSCONTINENTAL Major One-Day Reversal and long& WESTERN AIRLINES. downtrend. 1945 to 1946.
171
83
TRINITY INDUSTRIES.
1985. Triple Bottom.
147
54
U.S. INDUSTRIALCHEMICALS.
Triangular Pattern completing an extendedreaccumulation period.
112
228
U.S. SMELTING,REFINING & MINING.
Weekly, 1951 to 1953, showing AscendingTriangle and Head-and-Shoulders Top.
514
255
U.S. SMELTING,REFINING & MINING.
April through September, 1962.Head-and-Shoulders Bottom, breakout,reaction, and advance. Daily chart.
544
265
U.S. SMELTING,REFINING & MINING.Daily,
July to December 1965. Breakout fromdormancy, Major Advance, showingSymmetrical Triangle Consolidation.
554
20
UNION CARBIDE& CARBON.
The Head-and-Shoulders within aHead-and-Shoulders Top Formation whichcapped its 1929 Bull Market.
72
205
UNION PACIFIC.
Weekly, first 6 months of 1945, showingtendency of a high-priced stock of the samegroup to make small swings.
397
78
UNITED AIRCRAFT.
The Double Bottom of 1942. Weekly chart.
141
262
UNITED ARTISTS.
Daily, February to August 1963. A MajorDowntrend, demonstrating ResistanceLevels during the decline.
551
1
UNITED STATES STEEL. Monthly price ranges from January 1929 toDecember 1946.
5
AU3772_A007.fm Page 741 Sunday, November 19, 2006 2:46 PM
Alphabetic Index of Stock ChartsFigure Stock Name
741Summary Description of Chart
Page
94
UNITED STATES STEEL. The three-month Diamond which formedthe 1946 Bull Market Top.
164
98
UNITED STATES STEEL. The Wedge as part of a Rounding Top onthe August 1937 recovery.
168
263
UTAH–IDAHO SUGARCOMPANY.
January to June 1963. Breakout and rapidadvance appearing suddenly in a normallydull stock.
552
108
VANADIUMCORPORATION.
Rapid sequence of small ConsolidationFormations in 1936 to 1937.
193
51
VERTIENTES —CAMAGUEY SUGAR
of Cuba. Triangular- like development at1946 Top.
109
18
WALT DISNEYPRODUCTIONS.
Head-and-Shoulders Top. 1986.
70
183
WEEKLY CORN PRICES Corn futures price chart (see Figure 181)(CASH).where a broad, 9-monthHead-and-Shoulders Topping Patternformed in the corn market.
645
239
WEST INDIES SUGAR.
Monthly, 1953 to 1956. Showingcontinuance of Bullish Trend through 1956.
523
245
WESTINGHOUSEELECTRIC.
Downside trend in the early stages of the1955 to 1956 collapse.
528
178
WESTINGHOUSEELECTRIC.
Major Trendlines. Weekly chart, 1935 to1938.
292
12
WESTINGHOUSEELECTRIC.
The Head-and-Shoulders Top of Januarythrough February 1946.
64
64
WESTINGHOUSEELECTRIC.
The Descending Triangle which topped out“WX” ahead of the general market.
123
240
WESTINGHOUSEELECTRIC.
Monthly, 1953 to 1956. Showing Major Topin 1955 and the collapse during the earlymonths of 1956.
523
129
WILLYS–OVERLAND.
Various types of gaps in 1944, andHead-and-Shoulders Reversal.
224
113
WYANDOTTEWORSTED.
Application of measuring formula to Flag.1946.
199
201.1.1 XEROX.
More benefits of fundamental analysis.
372
273.5.1 YAHOO.
After the tulipomania. 2005.
571
273.5
Internet rocket fuel.
570
YAHOO.
AU3772_A007.fm Page 742 Sunday, November 19, 2006 2:46 PM
742
Technical Analysis of Stock Trends
Figure Stock Name
Summary Description of Chart
Page
141
YORK CORPORATION. Measuring Gap and long Rectangle. 1945to 1946.
244
142
YORK CORPORATION. Sequel to Figure 141. Rectangle Support,false move from apex of Triangle, andDouble Top. 1946.
245
72
YOUNGSTOWN SHEET Major Top of Rectangle formed in 1946.& TUBE.
135
124
ZENITH RADIO.
Strong Breakaway Gap on weekly chart of1942 Major Bottom.
217
125
ZENITH RADIO.
Monthly chart of 1936 to 1946 forcomparison with Figure 124.
218
AU3772_book.fm Page 743 Saturday, November 18, 2006 5:29 PM
GlossaryEN: The Glossary is the work of the distinguished editor of the seventh edition,Richard McDermott. Minor changes are so noted.EN9: Some entries are written by other analysts, whose names are noted.While it requires the use of the human brain and some discrimination and judgmentthe great virtue of Magee chart analysis is that it allows the practitioner to evaluatehow well number driven indicators function. As, for example, use of a movingaverage to identify the trend works wonderfully well in a trending market. And, ifused as a signal generator in a trading market results in whip-saws. Similarly,oscillators often are useful in trading markets, but can mislead the trader when themarket begins to trend. The reasonably accomplished chart analyst can recognizethe state of the market and view the performance of number driven indicators froma more informed perspective. Thus the reader should keep this in mind while readingabout ADXs and suchlike.ACCUMULATION — The first phase of a Bull Market. The period whenfarsighted investors begin to buy shares from discouraged or distressedsellers. Financial reports are usually at their worst and the public is completely disgusted with the stock market. Volume is only moderate, but beginning to increase on the rallies.ACTIVITY — See Volume.ADX (Average Directional Movement Index) — The ADX is a trend-following indicator devised by Welles Wilder (RSI Wilder) and is based on theconcept of directional movement. It is designed to evaluate the trendingcharacteristics of a security. The ADX is frequently used to avoid trendlessmarkets, and signals when a trend reaches a profitable trading level. In atrendless market, the ADX indicates avoidance.Directional movement is a measure of the net total price movementduring a set period of time. First, the positive and negative directionalmovements are determined by summing the daily up and down moves. Thevalues obtained are next normalized by dividing them by the “True Range,”the absolute value of the total move for the period; this difference betweennormalized values (expressed as a percentage) is the directional movement.The ADX is then obtained from directional movement by the use ofexponential average and ratios. The ADX is often charted with a second line,the ADXR Indicator. ADXR is a smoothed average of the ADX.A rising ADX indicates significant directional movement and the beginning of a good trading period. The declining ADX is shown during a poorperiod for trend following. Normally, an ADX Indicator above 25 signalssignificant directional movement and good trading.743
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744
Technical Analysis of Stock Trends
APEX — The highest point; the pointed end, tip, of a Triangle.ARBITRAGE — The simultaneous buying and selling of two different, butclosely related instruments to take advantage of a disparity in their pricesin one market or different markets. EN: Those who buy the acquirer and sell theacquired in takeover situations — sometimes called “arbs” or arbitrageurs — areersatz or faux arbitrageurs. They are really spreaders. Arbitrageur is a solecism usedin that sense. It is also a false cognate to the French.AREA GAP — See Common Gap.AREA PATTERN — When a stock or commodity’s upward or downwardmomentum has been temporarily exhausted, the ensuing sideways movement in the price usually traces out a design or arrangement of form calledan Area Pattern. The shape of some of these Area Patterns, or Formations,have predictive value under certain conditions. (See also Ascending Triangle,Broadening Formations, Descending Triangle, Diamond, Flag,Head-and-Shoulders, Inverted Triangle, Pennant, Rectangle, Right-AngleTriangles, Symmetrical Triangles, and Wedges.)ARITHMETIC SCALE — Price or volume scale where the distance on thevertical axis (i.e., space between horizontal lines) represents equal amountsof dollars or number of shares.ASCENDING (PARALLEL) TREND CHANNEL — When the tops of therallies composing an advance develop along a line (sometimes called aReturn Line), which is also parallel to the basic up trendline (i.e., the linewhich slopes up across the wave bottoms in an advance); the area betweenthe two lines is called an Ascending or Up Channel.ASCENDING (UP) TRENDLINE — The advancing wave in a stock or commodity is composed of a series of ripples. When the bottoms of these ripplesform on, or very close to, an upward slanting straight line, a basic Ascendingor Up Trendline is formed.ASCENDING TRIANGLE — One of a class of Area Patterns calledRight-Angle Triangles. The class is distinguished by the fact that one of thetwo boundary lines is practically horizontal, while the other slants towardit. If the top line is horizontal and the lower slants upward to an intersectionpoint to the right, the resulting Area Pattern is called Ascending Triangle.The implication is bullish, with the expectant breakout through the horizontal line. Measuring Formula: add the broadest part of triangle to the breakoutpoint.AT-THE-MONEY — An option, the strike price of which is equal to themarket price of the underlying instrument.AVERAGES — See Dow–Jones Industrial Averages, Moving Averages,Dow–Jones Transportation Averages, and Dow–Jones Utility Averages.
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Glossary
745
AVERAGING COST — An investing technique where the investor buys astock or commodity at successively lower prices, thereby “averaging down”his average cost of each stock share or commodity contract. Purchases atsuccessively higher prices would “average up” the price of stock shares orcommodity contracts. EN: A very foolish technique for the amateur.AXIS — In the graphic sense, an axis is a straight line for measurement orreference. It is also the line, real or imagined, on which a formation isregarded as rotating.BALANCED PROGRAM — Proportioning capital, or a certain part of capital,equally between the long side and the short side of the market.BAR CHART — Also called a Line Chart. A graphic representation of pricesusing a vertical bar to connect the highest price in the time period to thelowest price. Opening prices are noted with a small horizontal line to theleft. Closing prices are shown with a small horizontal line to the right. Barcharts can be constructed for any time period in which prices are available.The most common time periods found in bar charts are hourly, daily, weekly,and monthly. However, with the growing number of personal computersand the availability of “real-time” quotes, it is not unusual for traders to usesome period of minutes to construct a bar chart.BASIC TRENDLINES — See Trendlines.BASING POINT — The price level in the chart which determines where astop-loss point is placed. As technical conditions change, the Basing Point,and stops, can be advanced (in a rising market), or lowered (in a fallingmarket). (See Progressive Stops.)BASIS POINTS — The measure of yields on bonds and notes. One BasisPoint equals 0.01% of yield.BASKET TRADES — Large transactions made up of a number of variousstocks.BEAR MARKET — In its simplest form, a Bear Market is a period whenprices are primarily declining, usually for a long period of time. Bear Marketsgenerally consist of three phases. The first phase is distribution, the secondis panic, and the third is akin to a washout, where those investors who haveheld through the first two phases finally give up and liquidate.BENT NECKLINE — See Neckline.BETA — A measurement of an individual stock’s sensitivity to marketswings.BETA (COEFFICIENT) — A measure of the market or nondiversifiable riskassociated with any given security in the market.BLOCK TRADES — Large transactions of a particular stock sold as a unit.
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746
Technical Analysis of Stock Trends
BLOW-OFF — See Climactic Top.BLUE CHIPS — The nickname given to high-priced companies with goodrecords of earnings and price stability. Also called gilt-edged securities.Examples: IBM, AT&T, General Motors, and General Electric.BLUE PARALLEL — A line drawn parallel to the trendline (Blue Trendline)which connects at least two highs. The Blue Parallel is started off a low andused to estimate the next low point.BLUE TRENDLINE — A straight line connecting two or more Tops together.To avoid confusion, Edwards and Magee use a blue line for Top Trendlinesand a red line for Bottom Trendlines.BOLLINGER BANDS (BB) — An envelope, in the form of two lines, whichsurrounds the price bars on a chart. Bollinger Bands are plotted two standarddeviations away from a Simple Moving Average. This is the primary difference between Bollinger Bands and other envelopes. Envelopes are plotted afixed percentage above and below a Moving Average. As standard deviationis a measure of volatility, Bollinger Bands adjust themselves to differingmarket conditions. The bands grow wider during volatile market periodsand narrower during less volatile periods.Bollinger’s premise is to ask the market what it is doing, rather than tellit what to do. He focused on volatility with the use of standard deviation toset the band width. The bands are normally plotted two deviations awayfrom the standard deviation, which is effectively a 20-day Moving AverageLine. The plot is valid if an average acts as a Support Line on marketcorrections. If the average is penetrated on corrections, it is too short. Bollinger recommends 10-day Moving Averages for short-term trading, 20-dayfor intermediate-term trading, and 50-day for longer-term trading. Deviations also need to be adjusted: 10 days can use 1.5 deviations, 20 days usetwo deviations, and 50 days use 2.5 deviations. The nature of the time periodsdoes not matter; the bands can be used on monthly, weekly, daily, and evenintraday figures.Bollinger Bands do not usually generate buy and sell signals alone. Mostoften they provide a framework within which price may be related to otherindicators. Bollinger recommends using the bands in relation to other buyand sell signals. However, the bands can be an integral part of the signal. Ifa price touches an upper band and indicator action confirms it, no sell signalis generated (it is a continuation signal if a buy signal was in effect). If aprice touches an upper band and an indicator does not confirm (diverges),it is a sell signal. If a Top Price Chart Formation is formed outside the bandsand is followed by a second Top inside the bands, a sell signal is generated.The exact opposite is true on the buy side.When combined with other indicators, such as the RSI, the BollingerBands become quite powerful. RSI is an excellent indicator with respect tooverbought and oversold conditions. Generally, when price touches the
AU3772_book.fm Page 747 Saturday, November 18, 2006 5:29 PM
Glossary
747
upper Bollinger Band and RSI is below 70, it is an indication that the trendwill continue. Conversely, when price touches the lower Bollinger Band, andRSI is above 30, it is an indication the trend should continue. If a situationoccurs where price touches the upper Bollinger Band and RSI is above 70(possibly approaching 80), it is an indication that the trend may reverse itselfand move downward. On the other hand, if price touches the lower BollingerBand and RSI is below 30 (possibly approaching 20), the trend may reverseitself and move upward. (See also Multicolincarity, Percent B, Wilder RSI.)BOOK VALUE — The conventional accounting measure of what a stock isworth based on the value of the company’s assets less the company’s debt.Eminently manipulable.BOTTOM — See Ascending Triangle, Dormant Bottom, Double Bottom,Head-and-Shoulders Bottom, Rounding Bottom, and Selling Climax.BOUNDARY — The edges of a pattern.BOWL — See Rounding Bottom.BRACKETING — A trading range market or a price area that is nontrending.BREAKAWAY GAP — The hole or gap in the chart created when a stock orcommodity breaks out of an Area Pattern.BREAKOUT — When a stock or commodity exits an area pattern.BROADENING FORMATION — Sometimes called Inverted Triangles, theseare formations which start with narrow fluctuations that widen out betweendiverging, rather than converging, boundary lines. (See also Right-AngledBroadening Formations, Broadening Top, Head-and-Shoulders, and Diamond Patterns.)BROADENING TOP — An Area Reversal Pattern which may evolve in anyone of three forms, comparable in shape, respectively, to inverted Symmetrical, Ascending, or Descending Triangles. Unlike Triangles, however, theTops and Bottoms of these patterns do not necessarily stop at clearly markeddiverging boundary lines. Volume, rather than diminishing in triangles,tends to be unusually high and irregular throughout pattern construction.No Measuring Formula is available.BULL MARKET — A period when prices are primarily rising, normally foran extended period. Usually, but not always, divisible into three phases. Thefirst phase is accumulation. The second phase is one of fairly steady advancewith increasing volume. The third phase is marked by considerable activityas the public begins to recognize and attempt to profit from the rising market.CALL OPTION — An option that gives the buyer the right to buy theunderlying contract at a specific price within a certain period, and thatobligates the seller to sell the contract for the premium received beforeexpiration of the designated time period.
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748
Technical Analysis of Stock Trends
CANDLESTICKS — A Japanese graphical representation of price actionusing the same data as bar charts, but which adds color to the candlestick(or data) to indicate the direction of prices from the opening. Cf. Nison,Bibliography.CATS AND DOGS — Low-priced stocks of no investment value.CHANNEL — If the Tops of the rallies and Bottoms of the reactions developlines which are approximately parallel to one another, the area between theselines is called a Channel. (See also Ascending Trend Channel, DescendingTrend Channel, and Horizontal Trend Channel.)CHART — A graphic representation of a stock or commodity in terms ofprice and/or volume. (See also Bar Chart and Point & Figure Chart.)CLEAN-OUT DAY — See Selling Climax.CLIMACTIC TOP — A sharp advance, accompanied by extraordinary volume, i.e., much larger volume than the normal increase, which signals thefinal “blow-off” of the trend, followed by either a Reversal, or at least by aperiod of stagnation, formation of Consolidation Pattern, or a Correction.CLIMAX DAY — See One-Day Reversal.CLIMAX, SELLING — See Selling Climax.CLOSING PRICE — The last sale price of the trading session for a stock. Ina commodity, it represents an official price determined from a range of pricesdeemed to have traded at or on the close; also called a settlement price.CLOSING THE GAP — When a stock or commodity returns to a previousgap and retraces the range of the gap. Also called covering the gap or fillingthe gap. (See also Gap.)COIL — Another term for a Symmetrical Triangle.COMMISSION — The amount charged by a brokerage house to execute atrade in a stock, option, or commodity. In a stock, option, or commodity, acommission is charged for each purchase and each sale. In a commodity, acommission is charged only when the original entry trade has been closedwith an offsetting trade. This is called a round turn commission.COMMON GAP — Also called Area Gap. Any hole or gap in the chartoccurring within an Area Pattern. The forecasting significance of the Common Gap is nil. (See also Gap.)COMPARATIVE RELATIVE STRENGTH — Compares the price movementof a stock with that of its competitors, industry group, or the whole market.COMPLEX HEAD-AND-SHOULDERS — Also called MultipleHead-and-Shoulders. It is a Head-and-Shoulders Pattern with more than oneright and left shoulder and/or head. (See also Head-and-Shoulders.)
AU3772_book.fm Page 749 Saturday, November 18, 2006 5:29 PM
Glossary
749
COMPOSITE AVERAGE — A stock average composed of the 65 stockswhich make up the Dow–Jones Industrial Average and the Dow–JonesUtility Average.COMPOSITE LEVERAGE — In Edwards and Magee, it is a formula forcombining the principal factors affecting a given sum of capital used (i.e.,sensitivity, price, and margin) into one index figure.CONFIRMATION — In a pattern, it is the point at which a stock or commodity exits an Area Pattern in the expected direction by an amount of priceand volume sufficient to meet minimum pattern requirements for a bona fidebreakout. In the Dow Theory, it means both the Industrial Average and theTransportation Average have registered new highs or lows during the sameadvance or decline. If only one of the Averages establishes a new high (orlow) and the other one does not, it would be a nonconfirmation, or Divergence. This is also true of oscillators. To confirm a new high (or low) in astock or commodity, an oscillator needs to reach a new high (or low) as well.Failure of the oscillator to confirm a new high (or low) is called a Divergenceand would be considered an early indication of a potential Reversal indirection.CONGESTION — The sideways trading from which Area Patterns evolve.Not all Congestion periods produce a recognizable pattern, however.CONSOLIDATION PATTERN — Also called a Continuation Pattern, it is anArea Pattern which breaks out in the direction of the previous trend. (Seealso Ascending Triangle, Descending Triangle, Hag, Head-and-ShouldersContinuation, Pennant, Rectangle, Scallop, and Symmetrical Triangle.)CONTINUATION GAP — See Runaway Gap.CONTINUATION PATTERN — See Consolidation Pattern.CONVERGENT PATTERN (TREND) — Those patterns with upper andlower boundary lines which meet, or converge, at some point if extended tothe right. (See also Ascending Triangle, Descending Triangle, SymmetricalTriangle, Wedges, and Pennants.)CORRECTION — A move in a commodity or stock which is opposite to theprevailing trend, but not sufficient to change that trend. Called a rally in adowntrend and a reaction in an uptrend. In the Dow Theory, a Correctionis a Secondary Trend against the Primary Trend, which usually lasts from 3weeks to 3 months and retraces from one third to two thirds of the precedingswing in the Primary Direction.COVERING THE GAP — See Closing the Gap.CRADLE — The intersection of the two converging boundary lines of aSymmetrical Triangle. (See also Apex.)
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Technical Analysis of Stock Trends
DAILY RANGE — The difference between the high and low price duringone trading day.DEMAND — Buying interest for a stock at a given price.DESCENDING (PARALLEL) TREND CHANNEL — When the Bottoms ofthe reactions comprising a decline develop along a line (sometimes called aReturn Line), which is also parallel to the basic down trendlines (i.e., the linewhich slopes down across the wave tops in a decline), the area between thetwo lines is called a Descending or Down Channel.DE