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Their buying would, sooner or later, engender a rally, but then they would“plant” rumors around the boardrooms to the effect that such-and-suchinsiders were selling, or that a projected merger was being called off, or adividend would have to be passed, and, if necessary, they would ostentatiously let out a few of their own recently purchased shares to give colorto the rumor. The process might be repeated several times, with the “pool”gradually securing more and more shares on balance, until finally, it hadcompleted its intended line, or could shake out no more of the floatingsupply. Often, what was going on was fairly evident to the alert chartist backin the 1920s even before the operation was concluded, and perfectly evident,of course, as soon as prices broke out topside from their Rectangle.But such tactics are no longer permitted. “Wash sales” are strictly condemned. The constant policing of all exchange transactions and promptinvestigation by the SEC of any suspicious news or activity in a stock effectually deters the blatant “pool” manipulations of previous years. This probably is the chief reason why Rectangles are nowhere near so common on thecharts of the 1950s as they were in the 1920s.Perhaps we can clear up various details of the Rectangle formation mostquickly and easily by comparison with that most nearly related chart pattern,the Symmetrical Triangle, as follows:Volume — Follows the same rules as in the Triangles, gradually diminishing as the Rectangle lengthens. Any contrary development, unlessit be a momentary news flurry, is suspect.Breakouts — Here also the same rules apply as with Triangles. Reviewvolume requirements, margin of penetration, etc., thereunder.False Moves — Much less frequent from Rectangles than from Symmetrical Triangles. A clearly defined Rectangle is, in fact, almost as reliable as a Head-and-Shoulders, although not as powerful in itsimplications.Premature Breakouts — Slightly more frequent, perhaps, from Rectangles than from Triangles.(Note: both false moves and premature breakouts, in the sense in which weemploy these terms, are indistinguishable at the time they occur from genuine breakouts. Following both false and premature breaks, prices returninside the pattern. But, in the case of a false move, the trend ultimatelyproceeds out of pattern in the opposite direction, while in the case of thepremature move, the trend finally breaks out again and proceeds in the samedirection.)Pullbacks — Return of prices to the boundary of the pattern, subsequentto its initial penetration (breakout), takes place more frequently withRectangles than with Symmetrical Triangles. Our estimate would bethat a Pullback or Throwback (the first is the common term for a rallyafter a downside breakout, and the second for a reaction following
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Important Reversal Patterns — Continued
133
1936–1937
8076726864605652LOEW’S, INC.
LW
4844Sales100’s
125100755025OCTOBERNOVEMBER DECEMBER3 10 17 24 31 7 14 21 28 5 12 19 26 2
JANUARYFEBRUARYMARCH9 16 23 30 6 13 20 27 6 13 20 27
FIGURE 70. A perfect example of Consolidation Rectangle which formed in Loew’snear the end of the 1932–37 Bull Market. In this case, a large block of “inside” stockwas distributed at 64 to 65 but taken over around 62 by other investors who had thesatisfaction of seeing it go on up to 87 the following August. Note Throwbackfollowing breakout in January.
an upside breakout) occurs within 3 days to 3 weeks in about 40%of all cases.Directional Tendency — The Rectangle is more often a ConsolidationFormation than a Reversal Formation, the ratio being about the sameas with Symmetrical Triangles. As Reversal Patterns, Rectangles appear more frequently at Bottoms (either Major or Intermediate) thanat Tops. Long, thin, dull Rectangles are not uncommon at PrimaryBottoms, sometimes grading into the type of Flat-Bottomed Sauceror Dormancy described in Chapter 7.Measuring Implications — A safe minimum measuring formula for theRectangle is given by its width. Prices should go at least as far inpoints beyond the pattern as the difference in points between the top
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1918171615SOCONY–VACUUM OIL
SOV
1946X D 5.25
1413Sales100’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 71. Here is a Rectangle in Socony–Vacuum, a low-priced stock characterized by fluctuations within a narrow range. After reaching a high of 18¾ in December1945, it fell back to 15¼ and then rallied in mid-1946 as shown above. In late August,prices broke down through an Intermediate Trendline (see Chapter 14) and 4 dayslater fell out of the Rectangle. This formation, in conjunction with the earlier andhigher Top, implied lower levels for “SOV” for some time to come. See also commentunder Figure 72.
and bottom lines of the pattern itself. They may, of course, go muchfarther. Generally speaking, the brief, wide-swinging forms, whichappear nearly square in shape on the chart and in which turnover isactive, are more dynamic than the longer and narrower manifestations. Moves out of the latter almost always hesitate or react at the“minimum” point before carrying on.
Relation of Rectangle to Dow LineThe resemblance of this individual stock chart formation, which we havediscussed under the name of Rectangle, to the Average formation known toDow theorists as a “Line” has doubtless occurred to you. Obviously, theirrationale and forecasting implications are much the same. But true Rectangles with sharply delimited Top (Supply) and Bottom (Demand) boundariesare truly characteristic only of trading in individual issues. Line formationsin the Averages are seldom rigorously defined, with successive MinorHeights forming quite precisely at a certain horizontal tangent, and successive Bottoms at a similarly precise horizontal level. If you will examine theseparate charts of the issues composing an Average at a time when the
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135
8076726864194660
YOUNGSTOWN SHEET & TUBE
YB
Sales100’s
5040302010APRILMAY6 13 20 27 4 11 18 25 1
JUNEJULYAUGUSTSEPTEMBER8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 72. Another long, loose Rectangle of Major Reversal implications, somewhat similar to that pictured in Figure 68. Both an Intermediate and Major UpTrendline (to be discussed later) were decisively punctured by “YB” in August, justbefore its Rectangle broke down. Under Figure 64, we discussed one sort of warningof a Primary Downturn which may be derived from the comparison of individualstock charts with the Averages. Here is another hint: The better-grade steels and oils(see “SOV,” Figure 71) frequently hold up, or make stronger Secondary Recoveries,after the Averages have turned down at Major Tops. The Street sometimes speaks of“distribution under cover of strength in the steels.”
Average is “making a Line,” you are pretty sure to find that some of themare showing an irregular uptrend, others an irregular downtrend, still othersmay be forming Triangles, and a few may be constructing Rectangles, orwhat not, but it is the algebraic sum of all these more or less divergentpictures which makes up the Average “Line.”To be sure, there is some tendency on the part of active traders to sell(or buy) stocks when a certain Average reaches a certain figure, regardlessof the status of individual issues involved. An investment counsel will occasionally advise his clients, for example, to “sell all speculative holdings whenthe Dow Industrials reach 500 (EN: or 5000 or 15000).” But trading commitments based solely on general Average levels are so seldom followed consistently that they have little effect.
Rectangles from Right-Angle TrianglesIn the preceding chapter, we referred to a type of partial “failure” in thedevelopment of a Right-Angle Triangle which necessitates reclassifying theTriangle as a Rectangle. Now that we have examined the latter pattern indetail, we need say little more about this phenomenon, except to note that
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64605652G4844
G
EASTERN AIRLINES
EAL
1945
40Sales100’s
5040302010JANUARYFEBRUARYMARCHAPRILMAY6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2
JUNE9 16 23 30
FIGURE 73. The Rectangle in early 1945 in “EAL” was actually the final stage ofa nearly 2-year Consolidation in the rise which started around 17 in 1942 and endedabove 125 in December 1945. G, G mark gaps (Chapter 12), the first a Breakaway andthe second a Measuring Gap which marked the probable objective of the move as55. When prices reached that level, another Consolidation developed, a SymmetricalTriangle. Neither of these gaps was “closed” during the following 2 years.
the odds appear to be still somewhat in favor of ultimate breakout in thedirection originally implied by the incipient Triangle. The fact that there isthis slight presumption, however, certainly does not warrant disregard ofan opposite breakout from the rectangular reconstruction.
Double and Triple Tops and BottomsTo some of the old hands in the Street, our relegation of that good oldbyword, the Double Top, to a Minor Position in our array of Reversal Formations may seem almost sacrilegious. It is referred to by name perhaps moreoften than any other chart pattern by traders who possess a smattering oftechnical “lingo” but little organized knowledge of technical facts. TrueDouble Tops and Double Bottoms are exceedingly rare; Triple Forms areeven rarer. And the true patterns (as distinguished from chart pictures whichmight mistakenly be called such, but are really assignable to some one ofour other Reversal Formations) can seldom be positively detected until priceshave gone quite a long way away from them. They can never be foretold,or identified as soon as they occur, from chart data alone.
H
S
1945–1946
AMERICAN ZINC, LEAD & SMELTING
S
ZA
S
S
H
H
H
H
S
S
APRILJULYMAYAUGUST SEPTEMBER OCTOBER NOVEMBERMARCHJUNEDECEMBER JANUARY FEBRUARY8 15 22 29 5 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 6 13 20 27 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16
S
NL
H
Important Reversal Patterns — Continued
FIGURE 74. An extraordinary, fine, long Rectangle which developed after “ZA” had broken down out of a Headand-Shoulders Top in February 1946. A perfect opportunity to sell this stock short was given by its Pullback of July17–18 after prices had broken out of the Rectangle on the 15th. The Multiple Head-and-Shoulders Bottom which itsubsequently made from September to November produced a recovery to 11, but prices later fell to 6 in early 1947.
25020015010050
Sales100’s
6
7
8
9
10
11
S
Chapter nine:
12
13
14
15
1716
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7672SEARS ROEBUCK
68
S
1941–1943
6460565248Sales100’s
5040302010S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 75. In this weekly chart showing Sears Roebuck’s 1942 Bear Market Bottom, a Consolidation Rectangle (June to November) forms the right shoulder of alarge “unbalanced” Double Head-and-Shoulders Pattern.
But we are getting ahead of our story. We should first define what weare talking about. A Double Top is formed when a stock advances to a certainlevel with, usually, high volume at and approaching the Top figure, thenretreats with diminishing activity, then comes up again to the same (orpractically the same) top price as before with some pickup in turnover, butnot as much as on the first peak, and then finally turns down a second timefor a Major or Consequential Intermediate Decline. A Double Bottom is, ofcourse, the same picture upside down. The Triple types make three Tops (orBottoms) instead of two.It isn’t difficult to skim through a book of several hundred monthlycharts and pick out two or three examples of Major Double Tops, perhapsone or two Double Bottoms. One will find cases where stocks made twosuccessive Bull Market Peaks, several years apart, at almost identical levels.Such phenomena stand out, in distant retrospect, like the proverbial sorethumb, which undoubtedly accounts for the undue awe with which theamateur chartist regards them. He neglects, for the moment, to consider thefact that a thousand other issues might have done the same thing, butdidn’t — that some of these even acted, for a time, as though they weregoing to Double Top, but then went on through and higher.Is there any practical utility for the trader or investor in the Double Topconcept? Yes, there is, but it will be easier for us to formulate it if we first
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222019
BELL AIRCRAFT
BLL
1945
18171615G
1413Sales100’s
125100755025JANUARY FEBRUARYMARCHAPRILMAY6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2
JUNE9 16 23 30
FIGURE 76. After advancing to 16 in January 1945, “BLL” dropped back to 13 andthen constructed a 15-week Rectangle. Note that the down gap (G) on April 30 wascaused by a $1.00 dividend going off. The revised bottom line of the pattern, drawn$1.00 lower, was not violated.
consider what is not a Double Top. Refer back for a moment to the AscendingTriangles and the Rectangles previously studied. When these start to evolve,almost their first step is the construction of two Tops at an identical levelwith an intervening recession, and with less volume on the second Top thanon the first. In the ordinary course of events, a third Top will develop there,and ultimately, prices will break through and move on up to still higherlevels. Thus, we see we must have some rule or criterion to distinguish atrue Double Top Reversal Pattern from the Double Tops which do not implyReversal when they appear as a part of a Consolidation Area in an uptrend.
Distinguishing CharacteristicsNo absolute and unqualified rule can be laid down to fit all cases involvingstocks of different values and market habits, but one relative distinctionquickly suggests itself when we study these different kinds of chart formations. It is: if two Tops appear at the same level but quite close together intime and with only a Minor Reaction between them, the chances are thatthey are part of a Consolidation Area; or, if a Reversal of Trend is to ensue,
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646056524844
40
KENNECOTT COPPER
KN
3836
1937
34323028Sales100’s
25020015010050JULYAUGUSTSEPTEMBER3 10 17 24 31 7 14 21 28 4 11 18 25 2
OCTOBER NOVEMBER DECEMBER9 16 23 30 6 13 20 27 4 11 18 25
FIGURE 77. A brief and very “high” Rectangle formed in September 1937 in therapid Bear Market Decline of “KN,” followed by a Descending and then a Symmetrical Triangle Consolidation.
that there will first be more pattern development — more “work” done —around those top ranges. If, on the other hand, there is a long, dull, deep,and more or less rounding reaction after the initial peak has appeared, andthen an evident lack of vitality when prices come up again to the previoushigh, we can at least be suspicious of a Double Top.How deep is deep, and how long is long? Fair questions, to which,unfortunately, it is impossible to give simple, definite answers. But we canattempt approximations. Thus, if the two Tops are more than a month apart,they are not likely to belong to the same Consolidation or Congestion Formation. If, in addition, the reaction between the first and second high reducesprices by 20% of their top value, the odds swing toward a Double Top interpretation. But both of these criteria are arbitrary, and not without exception.
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141
4038UNITED AIRCRAFT
UR
363432302826
1941–1943
24
Sales100’s
5040302010S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 78. This formation, constructed by United Aircraft in 1942, was not completed and could not be called a Double Bottom until prices rose above 31 in February1943. (See following pages.)
There are cases in which the two peaks have occurred only 2 or 3 weeksapart, and others in which the “valley” between them descended only about15%. Most true Double Tops, however, develop 2 or 3 months or more apart.Generally speaking, the time element is more critical than the depth of thereaction. The greater the time between the two highs, the less the need ofany extensive decline of prices in the interim.Given the conditions we have specified, viz., two Tops at approximatelythe same level but more than a month apart on the chart, with somewhatless activity on the second advance than on the first, and a rather dull orirregular and rounding type of recession between them, we can then besuspicious that a Double Top Reversal has actually evolved. Should a smallHead-and-Shoulders or Descending Triangle start to develop at the secondTop, as is frequently the case, we can be on guard, to the extent of protectinglong commitments at once with a close stop or switching to something elsewith a more promising chart picture.Yet, even all these signs together are not final and conclusive. The situation can still be saved, and often is. Let us take a look at what is, presumably,going on behind the scenes to create our chart picture up to this point. Thefirst Top on relatively high volume was a normal incident and tells us littleexcept that here, for the moment, demand met with sufficient supply to stop
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38H
363432
SS
3028
NL
26INCO CO LTD
N
1988
Sales100’s4000320024001600800APRILMAYJUNEJULYAUGUST SEPTEMBER OCTOBER6 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 3 10 17 24 1 8 15 22XD.20XD.20
FIGURE 79. INCO quickly recovered from the Reagan Crash of 1987 and by year’send, it was nearly back to its 1987 high; the latter was decisively broken in April1988. The powerful rally continued to carry “N” higher. But the August reaction,followed by a poor rally in September, created a large Head-and-Shoulders Top. Theearly September decline broke the neckline to confirm the Reversal and the subsequent Throwback, to Neckline Resistance, was an excellent selling point.
the advance and produce a reaction. That supply may have represented onlytraders’ profit-taking, in which event the trend is likely to push on up aftera brief setback. But, when the reaction drifts off lower and lower until it hasgiven up 15% and more of the stock’s peak market value, and flattens outwithout any prompt and vigorous rebound, it becomes evidence that eitherthe demand was pretty well played out on the last advance or that the sellingthere represented something more than short-term profit cashing. The question then is: did the first high give evidence of important distribution, andis there much more to meet at the same price range?Nevertheless, as our chart picture shows, demand did finally come inand absorb enough of the floating supply to turn the trend around. Whenprices pushed up and began to run into selling again near the level of thefirst Top, that was to be expected on “psychological” grounds; many quickturn operators naturally would take profits at the old high (perhaps withthe intention of jumping right back in at a still higher price if the old highshould be exceeded). Hence, a Minor Hesitation there was quite in order.But selling in sufficient quantity to produce another extensive reaction wouldbe quite another matter. We have, by now, established a zone of Supply or
1
G
DECEMBER JANUARY FEBRUARY8 15 22 29 5 12 19 26 2 9 16 23 2
G
G
MARCHAPRILMAY9 16 23 30 6 13 20 27 4 11 18 25 1
1945–1946
RS
JUNEJULYAUGUST8 15 22 29 6 13 20 27 3 10 17 24 31 7 14
G
Important Reversal Patterns — Continued
FIGURE 80. Because of the long-time-between-Tops requirement for true Double Top Reversals, these formations can seldombe seen to advantage on a daily chart, but here is a good 1946 example in Republic Steel. Note 5 months and 20% declinebetween Tops. This chart contains many interesting lesser technical formations also. The “Broadening” Swings (see Chapter 10)in June and July, as the second Top was made, and the rounding rally in August were extremely Bearish in their implications.
Sales100’s25020015010050
22
24
26
28
30
32
34
36
REPUBLIC STEEL
Chapter nine:
4038
44
48
52
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Resistance at the peak levels and a zone of Support or Demand at the Bottomof the valley between. The final and decisive question now is: will the“valley” Support reappear and stop the second decline?The conclusive definition of a Double Top is given by a negative answerto that last question. If prices, on their recession from the second peak, dropthrough the Bottom level of the valley, a Reversal of Trend from up to downis signaled. And it is usually a signal of major importance. Fully confirmedDouble Tops seldom appear at turns in the Intermediate Trend; they arecharacteristically a Primary Reversal phenomenon. Hence, when you aresure you have one, do not scorn it. Even though prices may have alreadyreceded 20%, the chances are they have very much farther to go before theyreach bottom.As to measuring implications, the Double Top affords no formula comparable with that we have attributed to Head-and-Shoulders and TriangleFormations, but it is safe to assume that the decline will continue at least asfar below the valley level as the distance from peak to valley. It may not beso, of course, in one interrupted slide; on the contrary, considerable timemay be required to carry out the full descent in a series of waves. Pullbacksto the “valley” price range, following the first breakthrough, are not uncommon. (Bear in mind the general rule that a Reversal Formation can be expectedto produce no more than a retracement of the trend which preceded it.)One more point: we have said that the Tops need not form at preciselythe same level. Use here the 3% rule we have previously laid down as ameasuring stick for breakouts. A first Top at 50, for example, and a secondat 51½ would come within this limit. Curiously enough, the second peakoften does exceed the first by a fraction. The important points are (1) thatbuying cannot push prices up into the clear by a decisive margin, and (2) theSupport below is subsequently broken.
Double BottomsIn identifying a Double Bottom, we can apply all of the precepts we haveformulated for the Double Top Pattern, but, of course, upside down. Thedifferences between the two pictures are just what you might expect themto be, having in mind the characteristic differences between Head-and-Shoulders Tops and Bottoms, for example. Thus, the second Bottom is usuallyconspicuously dull (little trading volume) and is apt to be quite rounded,whereas the second Top in a Double Top is moderately active and nearly assharp and “spiky” in contour as the first. The rally up from the secondBottom shows an increase in turnover, and volume should pick up to amarked degree as the valley level, or more properly, in this case, the heightbetween the two Bottoms, is surpassed. Double Bottoms appear just aboutas frequently as do Double Tops at Primary Trend Reversals, and DoubleBottoms also occur sometimes at the end of Intermediate Corrections in aMajor Uptrend.
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145
1918171615141312AMERICAN AIRLINES
11
AMR
1945–1947
109Sales100’s
5040302010N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
A
M
FIGURE 81. Shares of “AMR,” then selling for around 90, were split 5-for-1 in April1946, resulting in a quick rally to a new high. But the overall aspect of a Double Topwith the high made the previous December was nevertheless apparent, and wasconfirmed when prices broke down through the “valley” level on August 28. Popularbuying brought in by “splits” is usually short-lived and only temporarily distortsthe broad picture.
If you are familiar with some of the jargon of the Street, it has probablyoccurred to you that the second low of a Double Bottom is an example ofthe market action so often referred to as a “test.” In a sense, that is just whatit is — a test or corroboration of the Support (i.e., demand) which stemmedthe first decline at the same level. The success of that test is not proved,however — and this is a point to remember — until prices have demonstratedtheir ability to rise on increasing volume above the preceding high (the heightof the rally between the two Bottoms). Until such time as that has happened,there is always the possibility that a second test (third bottom) may benecessary, or even a third, and that one of these will fail, with prices thenbreaking on down into further decline. This thought leads us to our nexttype of Reversal Formation.
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2220191817CONTAINER CORPORATION
CNR
161514131