does not halt andreverse at the level of the previous Minor Top, but sifts on down throughthat zone, perhaps to the level of the preceding Minor Bottom. This movehas “broken its Support,” and any such action carries a distinct warning ofa change in trend, a particularly emphatic warning if activity shows a tendency to increase as or after the Support is violated. Note that we said changein trend rather than Reversal, since the puncturing of a Minor Support Levelmay signify only a halt for sideways Consolidation. But it may also foretokenan impending Reversal. Either of these is a change.If you will now call to mind the picture of a typical Head-and-ShouldersTop, you will see that the decline from the head constitutes just such a breakin Minor Support since it comes down through the level of the top of theleft shoulder, and you will recall that this decline is often the first intimationwe have that something in the nature of a Reversal Formation is developing.Thus, even the violation of a nearby Support Level has a practical meaning in technical chart analysis. The breaking of a Minor Support shouldalways be regarded as the first step in the Reversal of the Intermediate Trend.(If it turns out to be Consolidation only, there will be an opportunity laterto reenter an abandoned commitment if desired.) By the same token, thebreaking of an Intermediate Support Range is frequently the first sign of aReversal in the Major Trend. We do not believe it is necessary to expatiatefurther on this principle. Recommended trading tactics based thereon arediscussed in the second part of this book; Support and Resistance Levels areparticularly useful as basing points for stop-loss orders which are discussedthere.
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4844403836343230REMINGTON RAND
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FIGURE 140. When prices broke down out of the large Descending Triangle whichformed on Remington Rand’s weekly chart in 1946, the decline might have halted,at least temporarily, around 37 at the level of the 4-week Congestion made in April,and should have “caught Support” at 35–36, the level of the February top. Failure ofthe latter carried Major Trend significance (see next page). Note later Resistance at40½.
Popular MisconceptionsThe reader will understand, of course, that all we have said here about thebreaking of Supports applies, as well, but in reverse direction, to the penetration of Resistance Levels. One more point may well be mentioned beforewe leave this subject. If you happen to have spent much time in boardrooms,you will have noticed that the concepts of Support and Resistance that areprevalent there are somewhat different from those outlined in this chapter.For example, if X has advanced to 62, reacted to 57, then pushed on to 68,many traders will speak of 57 as being the Support Level, presumablybecause that was the last price at which X was supported in sufficientstrength to turn its trend from down to up. We, however, as you have seen,would name the vicinity of 62 as the Support Range. The distinction isimportant to grasp, and sometimes extremely important in practical results.Admittedly, it does not come easy to think of a former Top as denotingthe level at which a later Bottom should form, or vice versa; it would seemsuperficially to be much more logical to relate Top to Top and Bottom to
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262422201918
YORK CORPORATION
YOK
171945–194616Sales100’s125100755025OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARYMARCH6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30
FIGURE 141. York is a relatively thin stock, which normally makes many small,technically meaningless gaps, but its large, high-volume gap of October 8, 1945,demanded attention. It looked like a Runaway Gap, and as such implied continuationto 26½ plus. But prices halted their advance at 24½ and went into a 3-month Rectangle. An upside breakout on January 10, 1946, carried out the minimum measurement of the Rectangle (and October gap); prices then reacted. See sequel in Figure 142.
Bottom. Moreover, it is perfectly true, to use our X example again, that someof the investors who wanted to buy it at 57 might not have succeeded ingetting it before the second advance to 68 took it away, and that their buyorders might still stand at 57 or might be reentered on any return to thatprice. Nevertheless, there is certainly no assurance that such is the case; thereis no “vested interest” in X at 57 that will “automatically” bring in newbuying. On the other hand, we have seen how there is a sort of vested interestset up at an old Bottom which produces selling (Resistance), and therebycreates a new Top, and at an old Top which produces buying (Support) andthereby creates a new Bottom.The reader is urged to keep this concept well in mind. Any analyticalstudy of the chart records will quickly show that it is much easier for pricesto push up through a former Top level than through the Resistance set upat a previous volume Bottom (and vice versa, of course, with respect todeclines). You will find that a little selling may come in at a former high, butusually only enough to cause a brief halt rather than the more or less extensive reactions or Consolidations that develop when the trend comes upagainst a real Resistance Zone.
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1716Sales100’s5040302010APRILMAYJUNEJULYAUGUSTSEPTEMBER6 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 142. The February reaction in Figure 141 met momentary Support at 24;prices bounced far enough to close the February 7 gap, and then broke down throughthe Rectangle Top-Line Support — technically a distinct warning. Then a SymmetricalTriangle formed, but the breakout came too near the apex, produced only a rally tothe former high, and then an “end run.” One did not need to wait for the DoubleTop signal on August 22 to forecast a decline of more than Minor consequence.
The Round FiguresThere are certain other levels that may, at times, evidently produce considerable Resistance or Support without any reference to a previous “vestedinterest.” We have in mind the “round” Figures 20, 30, 50, 75, 100, etc. Insetting a goal for taking profits when we buy a stock, it is natural for us tothink in terms of such round prices. If a low-priced stock has advancedsteadily from around 10, it is pretty certain on this account to meet withprofit-taking sales at 20, especially if that figure represents a new high for it forseveral years. In fact, any time an issue gets out into new all-time high ground,where there is nothing in its chart history to indicate otherwise, it is a fairlysafe bet that Resistance will appear at the round figures. In old and activelytraded stocks, such as U.S. Steel (EN: Or IBM and GE), the round figuresdiminish in importance.
Repeating Historical LevelsIf, once they had been set up, important Support and Resistance Levelsalways “worked,” we should see Intermediate Tops and Bottoms form at
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exactly the same ranges year after year in one Bull and Bear cycle afteranother. As a matter of fact, there is a well-marked tendency for this to occurin old-line, actively traded stock. In General Electric, for example, the 22–24,34–35, 40–42, and 48–50 zones have been characterized by large turnover(and, consequently, by many Intermediate Reversals of trend), throughoutthe 1920s to 1950s. In Southern Pacific, there are historical Support andResistance Zones at 21–22, 28–30, 38–40, and 55–56. In U.S. Steel, 42–45,55–58, 69–72, 78–80, and 93–96 are conspicuously marked as ReversalRanges. And many other stocks might be cited. EN9: While the particular stocksare dead or transmogrified the principle is alive and well.Over long periods, however, such Support and Resistance Levels do tendto be gradually modified, broadened, or “blurred,” and new ones created.One source of many important new Supply Zones is a Bear Market Panic.For this is the one type of decline that can be counted on to pay no heedwhatever to previous underlying Support Zones. Panics (which, as we haveseen in our earlier study of Primary Swings in connection with Dow Theory,typify the second phase of Bear Markets), once they get under way, seem tosweep away all potential Support in their calamitous plunges until theyexhaust themselves in a general market Selling Climax. And that climax mayor may not come at a level that bears a relation to some previously established Support. To use U.S. Steel again as an example, the 1937 Panic Declinetook the stock down through its 93–96 range, hesitated briefly at the 78–80level, and then plunged through 69–72 and 55–58 to stop just above 50. Inthe 1946 Panic, X again broke swiftly through 78–80 and 69–72 to halt at 66.When there is a large turnover at a Panic Bottom in any given stock, thatlevel acquires a strong “vested interest” for the future, and will usuallyfurnish conspicuous Resistance to a subsequent advance (after another BearMarket Decline has taken quotations below the Panic Level).This discussion of Panics brings us back to a consideration of Supportand Resistance performance at other stages of the Primary Trend — a matteron which we stated early in this chapter we should have more to say. Bearingin mind the relation of Resistance to volume, it is easy to see why in a longdrawn out, but otherwise typical Bear Swing, in which trading interestdiminishes to a very low ebb as the final low is approached, the next to thelast Intermediate Bottom may produce relatively little supply, and consequently, only a small reaction when the new uptrend reaches its level. Addto this the fact that many of the buyers in the last stages of a Major Declineare deliberate scale-down investors who fully expect prices will go lowerand, hence, are not easily shaken out. The slow progress so often seen in thefirst part of a new Primary Bull Market is due not so much to overheadResistance as to lack of impatient public bidding.The Recovery Trends that follow precipitous Bear Market Panics usuallyexhaust themselves, for obvious reasons, long before they get back up to thelast Resistance Level left behind in that Primary Downswing (which is usually the Bottom of the first Intermediate Decline from the extreme Top of the
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cycle), but they often meet supply at a lower Resistance Zone set up in thepreceding Bull Market. Look way back on your charts, therefore, when sizingup the prospective advance in such situations.A further thought along that line is: there is no law that requires anadvancing trend to keep right on climbing until it reaches a distant overheadSupply Zone. It is true, as a corollary which we have already mentioned toour Support and Resistance Theory, that prices can and do rise easily througha price range where no Bottoms or Congestion Areas have formed in previous downtrends, but if the first established Resistance Level is a long waysabove, the advance may exhaust itself before it gets there. Heavy supply maycome in for other reasons at a lower level. Think, then, of a distant ResistanceLevel as a maximum possibility rather than as a certain goal. However,between two stocks whose purchase you are considering, you should selectthe one which, other things being equal, has the “thinner” track overhead,can rise farther before it encounters a charted Supply Zone.
Pattern ResistanceWe can revert now to some of the Minor phenomena discussed in connectionwith Reversal and Consolidation Patterns in earlier chapters. Take gaps, forinstance. You will now see why it is easy and, hence, quite in order for areaction that comes soon after a gap has been made to slip back and closethat gap. There is no “vested interest” whatever in the range through whichprices skipped to form the gap on the chart. You will also see why such areaction may stop short and reverse as soon as it has closed the gap, providedthere was a high-volume turnover in the price range immediately precedingthe gap. Such is usually the case with a Breakaway Gap.Any gap, for the same reason, is easy to close once a reaction starts pricesmoving back in that direction, if it is not too far away and if there are nointervening Resistance Levels to stop the reaction before it gets there. In thecase of a Runaway Gap, however, there is no reason why a reaction shouldhalt as soon as it has covered the gap range; on the contrary, it will probablycontinue on through the “thin” price track that preceded the gap.Pullbacks and Throwbacks — the quick return moves which we notedas developing so often shortly after a breakout from a Head-and-Shouldersor other Area Pattern — exemplify the principles of Support and Resistance.When prices break down, for example, out of a Descending Triangle, thehorizontal lower boundary of the formation, which was originally a DemandLine, promptly reverses its role and becomes a Resistance Level. Any attemptto put prices back up through it, therefore, after a decisive breakout, isstopped by supply at or near the line. By the same token, the neckline of aHead-and-Shoulders Top, which was a Demand Line, becomes a ResistanceLevel after it has been broken. The Top or Supply Line of a Rectangle becomesa Support after prices have pushed above it on volume and by a decisivemargin.
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76726864605652481945–1947
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FIGURE 143. We first discussed Pullbacks in connection with the Head-and-Shoulders in Chapter 6 and refer to them again in this chapter (page 243) as Support–Resistance phenomena. At least one Pullback to the neckline (after the breakout) occursin the great majority of cases. Many Head-and-Shoulders Formations produce two,the first within a few days after the breakout and before prices have gotten very faraway, and the second weeks later, sometimes after the minimum measurement ofthe Head-and-Shoulders has been fulfilled. Goodyear saw the unusual number offour Pullbacks to its 1946 neckline — the first two weeks after the August breakout,another in October, a third in November, and a fourth in February 1947, which metthe Double Resistance of the neckline and the down trendline (Chapter 14) projectedfrom the 1946 April head and August right shoulder.
Earlier in this chapter, in our discussion of the three criteria for appraising the amount of Resistance to be expected at a former Bottom level, wenamed “distance away” as one of them and stated as a general rule thatprices should have gone at least 10% beyond that level in a medium-pricedstock before much Resistance would be set up. This 10%-away rule does notapply, however, in the case of a Throwback to a well-defined area formation,when it follows shortly after a breakout. All that is necessary to establishstrong Resistance to such moves at the pattern boundary is a conclusivebreakout.The Symmetrical Triangle has a different sort of Support and Resistance“field.” You will recall that the first Reversal point in the formation of aSymmetrical Triangle (a Top, if it forms on a rising trend, or a Bottom if ona decline) is normally accompanied by high trading volume, but that activity
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3019452826242220
INTERNATIONAL TEL. & TEL.
IT
19Sales100’s500400300200100JANUARY FEBRUARYMARCHAPRILMAYJUNE6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
FIGURE 144. Several examples of the support “field” of the Symmetrical Triangleappear in this 1945 daily chart of “IT.” Following the belated February 5 breakoutfrom the first Triangle, prices returned on the 9th to the level of the mid-January Top,but then suffered a more extensive reaction, which came down on February 26 tothe Triangle’s apex level. This was a critical juncture. The apex point itself is a strongSupport (or Resistance), but its level becomes weaker as time passes. In this case an“end run” might have been developing. Stop-loss orders should always be enteredunder an apex level (see Chapter 27). Here the apex held, however, and prices wentinto another “Coil,” breaking out topside on March 10. Their next reaction wassupported, as was to be expected after an early breakout like this, at the Top PatternLine.The price track from mid-March to the end of April fell into an Ascending TrianglePattern, the top boundary of which functioned as Support in June but was brokenin July. Refer back to Figure 120, page 204.
diminishes rapidly on succeeding fluctuations within its converging boundaries. Consequently, once prices have broken out of the Triangle and haveproceeded well beyond the level of the pattern’s first Reversal point, thatlevel, because of the volume of shares traded there, becomes a Support (orResistance) against a subsequent reaction. But, if the breakout move doesnot carry beyond the Triangle’s first Reversal Level by a clear margin, anyThrowback will probably bring quotations back to the extended (sloping)pattern boundary, and if the reaction does not occur until the trend hasworked out to or beyond the Triangle’s apex, then the Throwback usuallywill not meet Support (or Resistance) until it has carried back to the level ofthe apex. The apex, in brief, represents the concentration level or axis of theTriangle’s Support and Resistance.
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INTERLAKE IRON
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FIGURE 145. In this instance, a belated upside breakout (August 10) from a Symmetrical Triangle failed quickly and the subsequent reaction, after holding for severaldays at the apex level, finally broke down for an “end run.” Thereafter, note that theapex level turned into a Resistance against Recovery Moves.
The intersection of the two converting boundary lines of a SymmetricalTriangle has sometimes been called a “cradle.” The axis Support (or Resistance) is strongest near the cradle point and gets weaker as the axis line(apex level) is extended out to the right on the chart (i.e., as time passes).Thus, if a late breakout move fails to carry prices very far from the Trianglearea, and the trend then peters out, flattens, and begins to react after thecradle point has been passed in terms of time, its action, as it reaches theaxis line, must be closely watched. (A stop-loss order may be indicated here.)Should the axis Support fail to hold, the reaction may plunge through andaccelerate in a more extensive swing, which has aptly been termed an “endrun around the line.”
Volume on Breaks Through SupportOn those occasions when prices fail to retreat when they hit a Resistance (orSupport) Range, but, after perhaps holding there for several days, push onthrough, there is nearly always a sudden acceleration and a marked pickupin volume. This may be taken as confirmatory evidence of a decisive breakand, consequently, an indication that the move will carry on. The reasonsfor this volume increase are obscure. Some say, “It takes volume to overcomeResistance,” which is true enough, but the volume usually comes after theResistance has been penetrated. Therefore, others say, “The volume is evidence that technicians see what has happened and are now jumping in.” Butthat line of thought, in the authors’ opinions, also has little to substantiateit. (We shall have more to say about the questionable influence of technicianson the trend later on.) Many of the arguments over volume change vs. price
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FIGURE 146. Here is a typical case of two Pullbacks to a Head-and-Shouldersneckline, the first immediately after the breakout and the second 3 weeks later. Notethat the initial breakthrough “bounced” from the early April Top Support, and thelate July decline met Support at the general April–May Congestion Area. But whatthis chart illustrates, particularly, is how volume increases when a good SupportRange is penetrated. Note the decided pickup on August 27, when the April–Mayarea was left behind.
change savor of the old hen-or-egg riddle. In any event, causes for manytechnical phenomena, such as this one, may be left to the academicians,provided the practical implications are clear.
Support and Resistance in the AveragesAs has been the case with nearly every other technical phenomenon we havestudied, the principles of Support and Resistance apply, with suitable allowances, to Averages as well as to individual stocks. Since an Average reflectsthe combined charts of the majority of the issues that compose it, but witha minority of them frequently evincing quite divergent patterns, it followsnaturally that Support and Resistance Zones in the Averages cannot be assharply and narrowly construed. Minor Tops and Bottoms in the Averages,particularly, are less dependable as Resistance Levels. Clearly defined and
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important Intermediate Reversals, however, since they nearly always represent Reversals in the entire market (practically all stocks), will normallyproduce strong Resistance (or Support, as the case may be) in the subsequentAverage Trend.When the Averages break down through a Support Level, but one ormore stocks, at the same time, hold firm at or above their correspondingindividual Supports, there is a presumption that those particular stocks arein a stronger position than others to participate in the next recovery. Thephrase “other things being equal” should be added, however, for there arequalifications to this presumption which must be considered. For instance,it may be that the stock that has resisted decline will, for that very reason,be less attractive to new buyers than one which broke drastically and is,therefore, now purchasable at a more “attractive” price.Many of the claims made regarding future prospects for stocks that have,by one criterion or other, previously evinced “better-than-Average” or“worse-than-Average” market performance permit argument either way. Itis safest to treat all such relative performance indications as only one minorfactor to be appraised in the overall chart picture.
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chapter fourteen
Trendlines and ChannelsOne of our basic tenets in this system of technical stock chart analysis —indeed, a fact which any neophyte can quickly verify for himself by inspection of the market records for whatever period he chooses — is that pricesmove in trends. The market in general, and the many stocks which composeit, do not jump up and down in an altogether random fashion; on thecontrary, they show definite organization and pattern in their charted course.Prices move in trends. These trends may be either up or down or sideways (horizontal). They may be brief or of long duration. They may beclassified as Major (Primary), Intermediate (Secondary), or Minor, accordingto the rules of Dow Theory, or as Horizontal Line Formations. (The distinction between a short Intermediate and an extended Minor Trend is oftenmore difficult to make with individual stocks than it is with the Averages,but it is not so important.) But sooner or later, trends change; they maychange by reversing from up to down or down to up, and they may alsochange direction without reversing as, for example, from up to sidewaysand then perhaps to up again, or from a moderate slope to a steep slope,and vice versa.Profits are made by capitalizing on up or downtrends, by following themuntil they are reversed. The investor’s problem is to recognize a profitabletrend at the earliest possible stage of its development and then later to detect,again as quickly as possible, its end and Reversal. The Reversal of anyimportant trend is usually characterized, as we have already seen, by theconstruction of some sort of joint price and volume pattern — in brief, of aReversal Formation.
The TrendlineAll of the foregoing statements regarding trends have been expressed orimplied in earlier chapters of this text. It is our purpose now to examinetrends, as such, more closely, to see how they may be plotted most effectivelyon the charts, and determine to what extent they can be used to reinforce orsupplement the technical forecasts derived from our other chart formationand Support–Resistance studies — sometimes to furnish even earlier forecasts or warnings of change.
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One of the first discoveries a new student is likely to make when hebegins to inspect stock charts with a critical eye is that nearly all Minor andmost Intermediate Trends follow nearly straight lines. A few readers will,perhaps, dismiss this as perfectly natural, something to be taken for granted.But the majority become increasingly amazed and excited as they delvedeeper. Not only the smaller fluctuations, but, frequently, also the greatPrimary Swings of several years’ duration appear on the charts as thoughtheir courses had been plotted with a straight-edge ruler. This phenomenonis, in truth, the most fascinating, impressive, and mysterious of all that thestock charts exhibit.If we actually apply a ruler to a number of charted price trends, wequickly discover that the line which most often is really straight in an uptrendis a line connecting the lower extremes of the Minor Recessions within thosetrends. In other words, an advancing wave in the stock market is composedof a series of ripples, and the Bottoms of each of these ripples tend to formon, or very close to, an upward slanting straight line. The Tops of the ripplesare usually less even; sometimes, they also can be defined by a straight line,but more often, they vary slightly in amplitude, and so any line connectingtheir upper tips would be more or less crooked.On a Descending Price Trend, the line most likely to be straight is theone that connects the Tops of the Minor Rallies within it, while the MinorBottoms may or may not fall along a straight edge.These two lines — the one that slants up along the successive waveBottoms within a broad up-move and the one that slants down across successive wave Tops within a broad down-move — are the basic trendlines.It is unfortunate that a more distinctive name for them has never beendevised than the threadbare word “line,” which has so many other uses andconnotations. A few analysts have called them “tangents,” a term that hasthe advantage of novelty, but, because it is a distinct perversion of the truemeaning of the word tangent, confuses many readers even more. Perhapstangent will eventually become established in this new sense. However, weshall be satisfied herein with the overworked “line,” but can give it somedistinctiveness in its present context by joining it to trend in the one word“trendline.”Trendlines, you may have heard it said, “are made to be broken,” butthat is one of those exasperatingly sententious remarks which fails to clarifyanything. Of course they are broken; they are all always broken, ultimately,and some very shortly after they are set up. The problem is to decide whichbreaks (i.e., penetrations by a price movement) are of important technicalsignificance and which are of no practical consequence, requiring possiblyonly a Minor Correction in the drawing of the original trendline. There areno 100% certain, quick answers to this problem; the significance of somepenetrations cannot be determined as soon as they appear, but must awaitconfirmatory indications from other chart developments. In a great majorityof instances, however, an important break — one that requires a promptreview and possibly a revision of trading policy — is easy to recognize.
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