want to indicate by a dotted line theapproximate level between the closing bid and the offer prices on the dayno sale occurred. But there is no need to make this a regular procedure.Ex-dividend dates can be indicated by an “x” along the bottom marginof the volume scale, and any data about dividends can then be written in
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on the extreme bottom margin; for example, “$.5D Unchanged Quarterly”or “Payable in American funds, $1.00.” Or the amount of the dividend maybe written in vertically right on the face of the chart on the line representingthe ex-dividend date. Stock dividends and rights should be entered in thesame way, and their market value indicated. When stocks go ex-dividend,especially if the dividend is a large one, there may be a price gap which cansometimes appear to change or spoil a technical chart pattern. An Ex-Dividend Gap is not a significant gap in the technical sense, and if it is no largerthan the amount of the dividend (or rights or other benefit), it may bedisregarded. The newspaper tabulation of stock prices takes this intoaccount. For example, if a stock goes ex-dividend 50 cents and closes ⅜ ofa point lower than the previous day, the paper will report the stock “plus⅛” not “minus ⅜.”In the case of Ex-Dividend Caps, you may, if you wish, extend the pricerange of the stock by a dotted line equal to the amount of the dividend; andyou should, on the day of ex-dividend or similar distribution, move downstop-order levels, limit orders, trendlines, etc. Very often the stock will continue in the (adjusted) pattern or trend even though its level has beenchanged on the ex-dividend day.Stock split-ups or other changes in capitalization cause extra work incharting. Where the split is two-for-one or four-for-one, there is no problembecause the entire scale from that point on is simply changed to the newprice by halving or quartering each horizontal line’s previous value. Yourescale the chart and continue. The chart may, and probably will, becomemore active as to volume (because of the larger number of shares outstanding) and may develop “coarser texture” in its patterns from this point on,but it will respect the (adjusted) Resistance and Support Levels, trends, etc.,previously established. Where a split-up is not 2-for-1 or 4-for-1, but someodd figure such as 3-for-1 or 4-for-7, you will usually have to start a newsheet, plotting the chart at the new prices, and then extending it back a fewweeks by dividing the previous prices by 3 or by 4/7, and plotting them onthe new scale.You may find it convenient to mark on your charts special informationon certain companies — purchases of subsidiaries, reduction of bond issues,earnings or other important data — although, in this work, we do notconcentrate on these “fundamental” matters, but on the chart itself.
When the Chart Goes Off the PaperWhen one of your stocks which has been selling in the neighborhood of20 moves up close to 40 and appears likely to rise through 40, it will be wellto rescale the center of the chart at 40. For a time, you can chart the stockon both scales simultaneously, so that if it should proceed up through the40 level, you will have a few weeks of the chart in centered position all ready
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to continue. If, on the other hand, the stock recedes to 35 or so, the newauxiliary chart may be dropped for the time being. Naturally, when such asituation exists, where you are carrying the same stock on two scales simultaneously, the next following chart sheet will be scaled to continue only thechart on which the price trend is nearer the center of the paper.
The Chart Record of TransactionsIt would be possible to give a good deal of space to the interesting study of“paper accounts” in which theoretical trades are marked and recorded onthe charts, without actually making commitments in real cash. Detailedsuggestions for this work were outlined, and it was planned to include achapter on the subject, but the authors decided that very few readers wouldbe willing to carry out the detailed study, records, and analysis which, to beof any value, would require as much work as actual trading.However, it should be pointed out that anyone who contemplates furtherresearch or original work in technical analysis, or who intends to make hiscareer in the stock market, will need a great many more cases for tabulationthan his own actual trades will supply. He will need hundreds of situationsin order to strike an average, so that he can say, “This particular idea seemsto work out in 75% of the cases,” or, “That plan does not provide, on theaverage, enough gain to justify the risk and the costs of taxes, commissions,etc.”The important thing about theoretical trading is that the buying or sellingpoints should be clearly marked on the chart before the expected move hasoccurred, and theoretical orders should be assumed to have been executedexactly as they would have been in a broker’s office, with proper deductionmade from the final gross gain (or additions to the loss) to cover broker’scommissions, odd-lot fractions, dividends or rights received, and (in case ofshort sales) dividends or rights paid. It does not pay to cheat at solitaire,and the only possible value of such “paper trading” is a record of experiencethat represents exactly what would have happened in an actual account.By recording every promising situation and the action to be taken as itunfolds, an analyst will maintain an alertness to possible opportunities foractual trading. He will be ready to seize opportunities as they appear, andhe will acquire confidence as he sees his own predictions materializing. Ifhe keeps a careful and honest record of his theoretical trades, and tabulatesall of these on the completion of each series of charts, he will have a yardstickfor studying his own improvement, and the comparison between his theoretical work and his actual results. Furthermore, he will have source materialfor almost any type of advanced research he may want to delve into.For the beginner (although these words will fall mostly on deaf ears), itwill pay to make all trades “on paper” for a number of months beforeventuring any actual capital in the market. If good opportunities for profitoccur, there is no need to feel that this or that situation is the last good chance
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the market will offer. The market will be there next month and next year;there will be other opportunities just as good. Meanwhile, it is possible toappraise a situation, indicate what you would like to do, and study whatsubsequently happens. If only more novices had the patience to experimentin this way for a time before risking their money, they could avoid many ofthe pitfalls and traps that so often lead to losses and discouragement.
Supplementary Memoranda on the ChartThere are several special marks to go on the chart which should be mentioned. We have already spoken of keeping (on the chart itself) a record ofpossible buys and sells, and of theoretical trades — when bought, when sold,time of holding, net gain or loss after commissions and after dividends,etc. You should also record any actual purchases or sales, noting the number of shares, price, broker (if you carry more than one account), etc. Thisrecord can be kept near the top of the sheet, perhaps in blue if long andred if short, extending from the date of original commitment to the dateof closing out.On starting a new (continuation) chart sheet, transfer to its left marginany notes as to actual or theoretical commitments that are still open, stoporders, etc. Also, it would be a good idea to mark all sheets covering a certain52-week period with an identifying series number or letter (“A,” “B,” etc.)in the upper left corner. This would make it easy to refile charts in theirproper chronological folder after they have been taken out for study.In the left-hand margin, at the proper price levels, mark the highestclosing price of the previous sheet with a dotted blue line. Also mark thelowest closing price of the previous page with a dotted red line. These levelsgive you important high and low points, violation of which often meansimportant further moves in the same direction. They also give you the“range” of the stock in the preceding 52-week period, which is essential infiguring its velocity, or what we call the sensitivity of the stock during thatperiod. We will use this range in making the longer-term Sensitivity Indexwhich is a factor in determining Composite Leverage ratios.One last point on chart mechanics: the longer you keep a record of astock, the more useful your chart will be. Do not make unnecessary changesin your chart portfolio, but add and drop stocks only gradually and whenyou feel certain the change will improve the group. When you first start anew chart, mark it “New,” showing that it is an addition to your portfolio.Then you will not waste time later on looking for a previous sheet on thatstock. Also, a new chart may well have to be carried along for a number ofweeks or even months before you have enough definite chart informationto enable you to trade in it. If it seems desirable to make a commitment ina stock you do not now chart, it would be best to run back a chart for atleast 3 months from your files of the financial pages, which we hope youcherish and keep to meet just this need.
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EN: Alternatively you can get the data from the Internet, which saves all thespace which used to be dedicated to years of The Wall Street Journal yellowing inthe corner.
Section 2TEKNIPLAT Chart PaperIf you have never kept charts on this type of paper, known as semilogarithmic, ratio, or proportion, these instructions will help you to read and understand the charts more easily, and they will help you in getting started if youare setting up charts of your own.There will be no problem here for the engineer or the experienced chartist, but many people who have not kept charts before, or who are familiaronly with the arithmetic price scale where the intervals are uniform throughout, may be puzzled at first by the continually changing vertical spaces. Asyou will discover, however, this very feature makes for easier and fastercharting, because the various prices always lie at the same point in one ofthe “banks,” and the eye becomes adept in placing the point needed automatically, without reference to the index figures along the left margin.On many simple charts, showing hours of work, temperature changes,depth of water, etc., it is perfectly satisfactory to use ordinary cross-sectionpaper, so that each “hour,” “degree,” or “foot” is represented by the samevertical distance on the chart. The difference between 5 feet and 10 feet isthe same as the distance between 105 feet and 110 feet.But this is not a good way to represent the differences in stock prices. Itis perfectly true that the difference in market value between a stock sellingat $5 a share and one selling at $10 a share is $5, or $500 on a block of100 shares. And that the difference between the value of a stock selling at100 and one at 105 is also $5, or $500 on a block of 100 shares. But in thislatter case, there is a great deal more of your capital involved.For example, if you put $1000 into a stock at 5, you would get (disregarding commission) 200 shares. And if you sold these at 10, you wouldreceive $2000. You would have a profit of $1000, or 100%. But if you putyour $1000 into a stock selling at 105, you would be able to buy only 9 shares.And when you sold five points higher at 110, your profit would be only $45,or 4½%.It will give you a better comparison of the percentages of profit in variousstock transactions if the price scale of your chart is designed to show equalpercentages of advance or decline of equal vertical distances, regardless ofthe price of the stock. This is exactly what the TEKNIPLAT charting paperdoes. A certain vertical distance on the paper will always indicate the samepercentage change, and a trend moving at a certain angle will always indicatethe same rate of percentage change, no matter what the price of the stockmay be.
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Obviously, one point of advance or decline is much more important toyou in a stock selling at $5 or $6 a share than in one selling at $100. So itshould not surprise you that the interval between 5 and 6 is much largerthan that between 100 and 101. And since the stocks at lower prices makelarger percentage moves for each point, or half point, or one-eighth point,these moves will show up more plainly on their charts. Actually, it is notpossible on the TEKNIPLAT paper to show a single eighth of change for astock selling as high as 100. But this is just another way of saying that asingle eighth is not important at that price. You might well be concernedabout the difference between 1¼ and 1⅜. But you would not care too muchwhether you sold at 103 or 103⅛.Since all your stocks will be plotted on a proportion basis, you cancompare directly the action of any one stock with any other as to pattern,trend, etc. Thus, a stock selling at 16 can be compared with a stock sellingat 56. However, although the percentage moves will be strictly comparable,it should be pointed out that, typically, the very high-priced issues makesmaller percentage moves than the low-priced ones.The price scale on TEKNIPLAT paper consists of two “banks,” occupyingthe upper and lower halves of the main chart space. These two banks areexactly alike. Each represents a doubling of prices from its bottom to its top,so that whatever value is assigned to the center line, the top line will betwice that figure and the bottom line will be half of it. Let us say the centerpoint is marked 20; then the top will be 40, and the 9 Intermediate lines willbe 22, 24, 26, 28, 30, 32, 34, 36, and 38, reading from center to top, with eachof the smallest spaces representing ¼ point. In the lower half of the chart,the bottom line will be 10, the Intermediate heavy lines to the center will be11, 12, 13, 14, 15, 16, 17, 18, and 19, and each of the smallest spaces will be⅛ point. Since the spaces get smaller as one goes up the chart, one bankshades into the next, making a continuous scale. Obviously, you could have20 at the top, 10 at the center, and 5 at the bottom; or 10 at the top, 5 at thecenter, and 2½ at the bottom.At first you may have some trouble with the different values assignedto the small spaces at different price levels; you may wonder whether asingle small space represents ¼ or ⅛ or perhaps a full point. Do not let thisbother you. You can see from the scale where 19 is and where 20 is, andobviously 19½ is the midpoint, 19¼ is one quarter of the way up, and so on.Very quickly, you will find that your mind and your eye adjust almostinstantly without any conscious thought or effort.Where a stock goes off the top or bottom of the paper, it is a simplematter to rescale by moving the chart scale down one bank. If the chart runsoff the top at 40, mark the center of the paper 40; from then on, the topbecomes 80 and the bottom, 20.For uniformity, and because the paper is ruled to divide either bank ofthe heavy Intermediate lines into 10 parts, with smaller spaces representingstandard stock-trading fractions of these main divisions, you must use thefigures 5, 10, 20, etc., as the values for the center lines, tops, and bottoms of
COPYRIGHT 1961 BY JOHN MAGEE, SPRINGFIELD, MASS.
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Published and Distributed by JOHN MAGEE, Inc. Technical Analysis of Stock Trends, 360 Worthington Street, Springfield 3, Massachusetts
Type RU
DIAGRAM 11. A sheet of TEKNIPLAT chart paper cut away to show six price scales most frequently used.
TEKNIPLAT Chart Paper
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charts. For selection of scales on stocks for which you are starting new charts,use this table.If the stock nowsells between224 and 448112 and 22456 and 11228 and 5614 and 287 and 143½ and 71¾ and 3½
Center linewill be
Top
Bottom
3201608040201052½
640320160804020105
1608040201052½1¼
Note: This table can, of course, be continued up or down as far asnecessary by multiplying or dividing the key figures by two.
The Time ScaleThe paper provides for a full year of charting. The sheet is divided into53 weeks, each consisting of 6 days in which the heavier line represents aSaturday, and this is ordinarily left blank since the major markets are notopen on Saturday. However, the heavier line will serve to make it easier tolocate a day within a week, quickly. The omission of the Saturday will notperceptibly affect the trend of the technical patterns.Holidays, when they occur, are skipped. Usually, a small “H” is insertedat the bottom of the chart to note the holiday and explain the break in thechart.Many technicians start their charts as of the first of a calendar year, fillingin the dates of Saturdays marking the end of each week at the bottom of thepaper in the spaces provided, and immediately above these dates, themonths. There is no reason, however, that charts cannot be started at anytime, and if you keep a large number of charts, it may be a help to start someof these in each calendar quarter. Thus, you might start all charts from A toF in January, from G to M in April, from N to S in July, and from T to Z inOctober.The volume scale that has proved most satisfactory is arithmetic, thatis, each unit measured vertically represents the same number of sharestraded. Space for volume entries is provided in a special section above thedates. At one time, a logarithmic volume scale was used, but it was givenup because the highly significant volumes on very active days tended to becompressed, while low volume in periods of dullness was given too muchemphasis.
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It is necessary to determine the proper figures for the volume scale. Norule for this can be suggested. It is simply a matter of trial and error. Witha little experience, you will be able to estimate, from your knowledge of thestock you are about to chart, about how much volume is likely to appear onvery active days, and you can set up a volume scale that will allow for themaximum expected peak. What you want to avoid is the situation wherevolume too frequently runs beyond the top of the volume section; it shoulddo this only at times of unusual activity.Where a stock is new to you, and you have no knowledge of its habits,it may be best to mark a tentative volume scale, lightly and in pencil, andkeep the volume on this scale for a few weeks. Then if it is necessary tochange the scale, you can do so without having to draw the entire chart over.
Ex-Dividends and Split-UpsWhen a stock goes “ex-dividend,” “ex-rights,” etc., the price will usuallydrop approximately the amount of the benefit that was “ex.” A note shouldbe made on the chart on this day, and this can be entered conveniently atthe very bottom, below the dates, showing the amount of the dividend,approximate value of the rights, or other benefits. If the amount involvedwas substantial and the price drop is large enough to require explanation,a dotted line may be drawn vertically on that date from the old price to the“ex” price, showing that this drop was not a market fluctuation, but merelythe adjustment of price to the distribution.In the case of a split-up, spin-off, or other capital change, a similarprocedure is followed. If the stock is split three-shares-for one, for example,the price level will change, and the chart will be continued at a new level.A dotted vertical line plus an explanatory note will make clear what happened. In order to get continuity of the chart in such a case, the previousprice pattern can be traced and then transferred with carbon paper in thecorrect position to give a continuous chart adjusted to the new basis for asfar back as you need it.However, if a stock is split two-shares-for-one or four-for-one, you willnot have to make any change in the chart except to note the fact on the split,and to change the scale by dividing all figures by 2 or 4, as the case may be.In other words, if a stock has been selling at 80 and is split 2-for-1, we simplyrescale the chart with the price at 40 and carry on. Very often it will help torule a vertical red line through the date on which a split-up or other capitaladjustment takes effect.EN: As the reader is aware by now, most of the charts in this book are drawnon TEKNIPLAT paper. Figure 246 offers a full view of the form. Readers interestedin manual charting may purchase TEKNIPLAT paper at www.edwards-magee.com.
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appendix CTechnical Analysis of Futures Charts(Using Number Driven Methods)EN: This Appendix is an edited version of Chapter 16 from the seventh edition bythe redoubtable editor of that edition, Richard McDermott. It will serve as a handybrief introduction to some of the concepts of number-driven analysis. For an excellent(and highly recommended) work on the technical analysis of futures see Jack Schwager’sOn Futures, Technical Analysis.EN9: The reader should understand clearly the purpose and intent of this Appendixand of all treatments of number-driven methods in this book. This Appendix is notintended to be a comprehensive treatment of number-driven technical analysis inthe futures area. It is presented to give the reader a brief survey of some of themethods used by this breed of analysts. The original authors of this work (and thepresent editor) were and are chart analysts and practitioners of natural systems.AND I believe that the methods presented here can be better used when practicedby a competent chart analyst.
Commodities FuturesFutures (a standardized instrument allowing the investor to buy at currentprices for future delivery) are traded on commodities such as agriculturalproducts (e.g., corn, oats, wheat, soybeans, livestock); metals (e.g., gold,silver, platinum, palladium); forest, fiber, and food (e.g., lumber, cotton,orange juice, sugar, cocoa, coffee); energy, (e.g., crude oil, heating oil, gasoline, natural gas); financial and other derivative markets (e.g., debt instruments such as U.S. Treasury Bonds, stock indexes, currencies).The futures industry began in the United States in the early 1800s as away to stabilize crop producers’ and buyers’ incomes by locking in a currentcommodity price for delivery at a later date. As the futures market developedand became standardized, the primary investment strategies of hedging andspeculation evolved. Trading of futures and options has expanded to numerous types of investment products and, in recent years, has become global.Empirical experience demonstrates that chart patterns exist for equityshares of stock and also for other financial instruments traded on publicexchanges. Commodities trading is another place to look for indicativechart patterns. Price trends of actively traded properties, limited only by
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the constraints of supply and demand, also illustrate meaningful patternswhen plotted on a graph. Rising or Declining Trends, Congestion, Consolidation, and Reversals will be evident, similar to the pattern formation createdby shares of common stock. Activities of the speculators and the underlyinginvestor psychology are similar, whether the securities are stock shares orfutures contracts.Principles of technical analysis apply to any of the active commodityfutures such as: corn, cotton, cocoa, coffee, wheat, and others. Some allowance must be made for the intrinsic differences between commodity futurescontracts and equity stocks or bonds, of which four are noted here.1. Limited Life — One of the most prominent differences is the fact thatcommodity futures have a limited life; they expire on a set date.Although each futures contract has a certain life of its own, it willtend to trade in a pattern similar to cash for delivery prices andsimilar to other comparable contracts. The limited independent lifehas consequences of long-term Support and Resistance Levels whichhave less value for analysis, although they have some value for theshort term.2. Hedging — Another important difference between commodity andstock analysis is the fact that many investors are using futures forhedging, a conservative strategy, rather than speculating. The resultof this situation is the fact that near-term levels of Support or Resistance have less meaning than with equities. Futures with commodities grown as crops can also have seasonal influences which areobserved and evaluated by both hedgers and speculators. Seasonalfactors can have an effect on the reliability of signals in the technicalanalysis of commodities.3. Volume — A third major difference is volume. Volume’s relation tostock trading is not complex. A specific number of shares exist fortrading. Changes in the total number of shares available must gothrough an approval process and be well publicized. Average dailyvolumes can be calculated and used as a benchmark to show suddenincreases or declines. With futures, there is virtually no limit to thetotal number of contracts which can be bought or sold for futuredelivery on any one commodity, although there are limits on thenumber of contracts a single investor can buy or sell on a specificfutures contract. It is possible for the open interest to exceed theamount of an underlying commodity actually delivered. In fact, mostcontracts are closed out before the delivery date.4. Weather — A final major difference is the fact that weather newsregarding such things as droughts, floods, etc., can impact the commodity crop and change the trend of the futures market immediatelyand dramatically. The stock market has few such influences.EN: Except for Alan Greenspan and the Federal Reserve Board.
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9 DAY MOVING AVERAGE18 DAY MOVING AVERAGE
¢/BUSHEL400
CORN – CBOTMARCH 1997
380
Resistance
360340320Support300ResistanceSupport
280VOL & O.I400000200000
24 1
8 15 22 29 5 12 19 26 2JULAUG
9 16 23 30 7 14 21 28 4 11 18 25 2 9 16SEPOCTNOVDEC
FIGURE 180. Corn Futures, March 1997. A declining market. A rally from Support(the Double Bottom in July–August). Resistance met at 360, and a reversal. As theprice declines areas of Support become Resistance. Note the Support Line from earlyNovember, well into December. (See Chapters 13 and 30 for more on Support andResistance.)
Observable PatternsWith the differences accounted for, under normal market conditions, chartpatterns can still be observed and used for analysis of commodities, as theyare used with common stocks, such as:• Head-and-Shoulder Formations• Rounding Tops and BottomsBasic Trendlines can be observed and plotted. Other patterns, commonwith equities, like Triangles, Rectangles, Flags, etc., appear less frequentlyin commodities and tend to be unreliable in forecasting many directionalchanges of some commodity futures prices. Support and Resistance Levelsseem to be accurate at times and insignificant at other times (probably dueto supply and demand factors outside the patterns established by hedge andspeculative trading). Price gaps also seem to have less meaning.Triangle patterns occur less frequently in commodities and aren’t asreliable as with equities, but they do occur. Breaks tend to be stronger initiallywhen they do not occur at the apex of the Triangle, which is the sametendency as with stock chart patterns.
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Successful speculation in commodities futures requires an extensive background in understanding the influences on their prices. Although chart patternscan be observed, as shown here, reliability of signals due to inherent differencesbetween stocks and commodities should be approached with caution.
Importance of Stop-Loss OrdersA stop-loss order is a closing transaction for an open order. It is an order tosell at the current market price, if the stop price is traded on or through, orif the opening transaction was a buy (long position). It is an order to buy atthe current market price, if the stop price is traded on or through or if theopening transaction was a sell (short position).Whereas stop orders are much debated in the equities market, any professional commodities trader will acknowledge their importance to avoidcatastrophic losses. The 1990s served witness to incidents where public andprivate institutions lost billions of dollars in the futures and other derivatives. Where were their stop-loss orders? The