will come to life and complete what would have been an extremelyprofitable move.You might just as well prepare yourself for this sort of disappointment;for it will happen to you. But to avoid nights of pacing the floor and daysof worry, you should decide, at the time you make the original commitment, justhow much leeway you are prepared to give the stock. Then you will not betempted to put off a decision from day to day if things are not going theway you hoped.In the case of purchases or short sales made against Minor Peaks orBottoms, as the case may be, you might set up the following rule. Measuringfrom the extreme high of the previous (Supporting) Minor Top, or theextreme low of the previous (resisting) Minor Bottom, set a stop using themethod we have outlined in Chapter 27. (EN9: See also Chapter 28. Andconsider the risk limitation procedures in Chapter 42.) This would often be theintraday high or low, not necessarily the closing price. Penetration to thatextent should be presumptive evidence that your expected Support or Resistance is not going to function.Where you are buying against Major or Intermediate Support, or sellingshort against Major or Intermediate Resistance, you can allow a little moreleeway for penetration. In such cases, examine the Support or ResistanceArea, and estimate visually its core or axis; in other words, try to gauge the“center of gravity” of this area, the point which is most nearly the meanprice of sales occurring there, taking into account the volume, since theimportant thing is to determine the approximate price level at which a greatmany shares changed hands. Having determined this point, set your stopbeyond it, according to the methods specified in Chapter 27.Up to this point we have concerned ourselves (reversing the usual order)with how to get out of situations which have gone bad. We have said nothingabout where, precisely, to get in, nor where, precisely, to take profits.
AU3772_book.fm Page 464 Saturday, November 18, 2006 5:29 PM
464
Technical Analysis of Stock Trends
In the matter of getting in, i.e., making the original commitment, youwill feel, perhaps, that there is a conflict between acting on Support orResistance, and acting on either trendline action or a computed reaction of40% to 50% after a previous move. At times there is such conflict, and it isnot possible to state any exact rule which will reconcile these three differenttrading indications. However, in a great number of cases, you will bedelighted to observe that a reaction of about 45% will bring your stock tothe trendline, and will also bring it near to the Support or Resistance Level.After a move to a new Minor Top, a stock may be expected to react: (1) about40% to 50% of that move, (2) to the Basic Trendline, and (3) to the previoussupporting Minor Top. Your purchase, then, will be based on a consideration of all three factors. If you have bought “early,” on the basis of onefactor alone, you may expect the stock to react a bit further without spoilingthe triple indications to the extent of catching your stop. It would be bestto make your purchases on the basis of whichever factor indicates thesmallest reaction, and to place your stop beyond the greatest reactionindicated by any of the three. Ordinarily, there will not be too muchdifference between these three points. As usual, the method applies inreverse to short sales.Where you are buying after an Intermediate Decline, or selling after anIntermediate Rally, you will lean somewhat more heavily on Support andResistance than on either a computed percentage for the Secondary Moveor a trendline. You will, of course, examine the history of the stock, preferablyon weekly or monthly charts first, to see its Major Trend, to locate importantSupport or Resistance Areas, and to estimate roughly the extent of the Corrective Move, the termination of which you are trying to gauge. You willthen check these data in the more detailed picture you can get from yourdaily charts. As the Intermediate Corrective Move approaches within 4% or5% of the Support or Resistance Level, you may come to a day of extremelyheavy volume; and this day may also be a One-Day Reversal. If so, yourcommitment should be made at once, protected, of course, by a stop. Otherwise, you may make your commitment whenever the chart begins tohesitate or flatten out, or, lacking other indications, when it has come towithin 3% of the Support or Resistance.Now in this case, your problem in taking profits is a bit more difficultthan in the case of Minor Moves. You are expecting a Reversal of the Intermediate Corrective Move and the establishment of a new Intermediate Trendin the Primary Direction. You are at a point where the course of the marketis uncertain. You must realize that prices may stay at the Support (or Resistance) Level, forming a Line or Rectangle, and finally penetrate that level,establishing Reversal of the Major Trend. Or they may be stopped and turnedat the Support or Resistance Level, only to make a small move away andthen return for another, and possibly successful, attempt at penetration. Or(and this is what you hope, of course) a continuation of the Major Trendmay develop, with a sharp move on increased volume in the favorabledirection, to be followed, perhaps, by a Minor Corrective Move and another
AU3772_book.fm Page 465 Saturday, November 18, 2006 5:29 PM
Chapter thirty:
Use of Support and Resistance
465
thrust in the Primary direction; perhaps a new series of Minor Moves carrying the entire Primary Trend into new ground.Taking these cases one by one, if the stock remains at the Support orResistance Level for many days or several weeks, and then penetrates thatlevel, closing at a price that is clearly through it, get out at once. If the stockmakes a small move in the right direction and returns to the Support orResistance, prepare to get out if there is a definite penetration. If, however,the move is in the right direction, watch for volume indications, and prepareto set tight stops to take your profits as soon as heavy volume appears (excepton a day of breakout). Of course, once such a signal has appeared, you arethen justified in continuing to make new commitments on the followingMinor Correction, and the one following that, for you are again moving inthe Major Trend.There is one other situation that should be mentioned here. Up to thispoint, we have assumed that all of your commitments have been made totake advantage of a move in the direction of the Major Trend. Let us suppose,however, that a move which has carried a stock up to new high levels in aseries of Minor steps proceeds to form and then breaks out of a ReversalPattern. We must now look for a Secondary Move of Intermediate extent.We may sell short on the rally to the Minor Resistance, and, if the movecontinues down, we may make a second and even (more cautiously) a thirdcommitment against successive Minor Bottoms. But, in this case, we will belooking for the decline to end somewhere in the vicinity of the last previousIntermediate Top, which is now a Support Level. Similarly, following arecognized Reversal Pattern and upward breakout on volume during a BearMarket, we may expect an Intermediate Rally which can be used for tradingup to the previous Intermediate Bottom where strong Resistance is likely toshow up. A skillful trader can turn these Secondary Moves into profits duringperiods when it is not possible to trade along the indicated Primary Trend;but it should be remembered that, ordinarily, such moves cannot be expectedto go as far as will those in the Primary Direction.We might close this chapter by reminding you again that, while Supportand Resistance action in the Minor Trend is shown clearly in daily charts,the Intermediate and Major Supports and Resistances are most easily recognized on weekly or monthly charts.EN9: It seems to this editor that Magee’s discussion here of the use of Supportand Resistance is really most pertinent to position building and pyramiding. Alternatively the method applies to an issue which has just caught the analyst’s attention,and he has missed the breakout, which is usually obvious (at least in hindsight). Ifeel strongly that the serious trader should not miss the original breakout. Chasingmoving trains is never a helathy activity. Does this appear an impossible occupation,watch thousands of stocks? Impossible for your average analyst, but not for youraverage computer. For example the computer may be programmed to alert you whena stock is gapping on volume or trading at volumes which are suspiciously large.And given the plethora of services and user groups the trader stands a good chanceof spotting an issue to put on his watch list before it takes off.
AU3772_book.fm Page 466 Saturday, November 18, 2006 5:29 PM
466
Technical Analysis of Stock Trends
Investors should, in theory, never miss a breakout, because they should bewatching a much more limited group of issues. In my opinion these are primarilyindices and ishares. Of course an investor’s portfolio might include a few well chosenindividual issues, but these would be of obvious visibility to the individual, e.g.,biotechs for an investor with some knowledge of the area, or Internets for an engineer,etc.The unending effort to remove ambiguity from market interpretation extendsto identifying areas of support and resistance. Metastock (metastock.com), an excellent software package, has a number of value added packages. One of the moreinteresting of these, Powerstrike™ by John Slauson of Adaptick, Inc. (adaptick.com)attempts to mathematically define support and resistance zones. Slauson’s packageis interesting, and the reasoning and observation behind it are interesting. Marketanalysis is rooted in one thing: the intelligent observation of the operation of themarket. Dow watched the markets for years and came to the understanding of waveswhich led to Dow Theory. Schabacker and Edwards, equipped with these observationsand comments, collated and observed more data and recognized the persistent patterns which occurred over and over in the markets, and added Magee for his practicalengineer’s approach to solving the tactical and strategic questions. In the 1980s oneof my friends, a Chicago market maker in the options pit, noticed that there was a90 second delay on data coming out of the futures pits to the options pit. He set upa “human ticker” with a direct phone connection to his pit and enjoyed a 90 secondadvantage over other market makers until the glitch was noticed and corrected.Slauson (among others) noticed that important trading and support and resistance in optionable stocks tended to cluster around important option strike pricelevels. In fact these levels influence stock prices and may be said to determine where“important” buying and selling occur. Obviously support and resistance levels areset by concentrated face offs between buyers and sellers. A battleground metaphoris appropriate: Since the time of the Greeks battles have occurred time and again inthe same physical locations. The reason is obvious. You need physical space to deployan army. So commanders will be attracted to the plain or open ground for face offs,and to the high ground for defensive purposes. Option strike prices have the sameattractiveness for traders that a good battleground has for a military commander. Agood place to test the enemy.Powerstrike™ analyzes the instrument price and volume around the nearbyoption strike prices and determines whether support or resistance is stronger. Allin all a clever application of number-driven analysis to the support and resistancequestion. The chart analyst may supplement his analysis with a routine like this.
AU3772_book.fm Page 467 Saturday, November 18, 2006 5:29 PM
chapter thirty-one
Not All in One BasketEN: As diversification for the small investor is nowadays infinitely easier, an interesting endnote follows Magee’s text.Diversification is important because technical patterns do not alwayscarry out their original promise. If all your capital is tied up in one stock, orin a few stocks of the same group or line of business, you may be hurt by afalse move affecting only your holdings, even though the rest of the marketmay continue to hold firm or even to move farther along the Primary Trend.By diversifying, you are protected by the law of averages against all of yourholdings going the wrong way, except of course, in the case of some Reversalthat affects the entire market or a large segment of it.Intelligent diversification calls for study of the costs of buying and sellingstocks, especially in small quantities. You might wish to have a portfolio ofstocks representing the entire Dow–Jones Averages, or a selection thatincludes at least one stock of every major group. But if your capital is limited,this might mean buying only a half-dozen shares of each stock, and theminimum commission charges would make this an expensive operation,entirely too costly for short-term trading. The short-term trader must alwaysthink of these costs. They are more important to him than to the long-terminvestor who may intend to hold the same stock for many months or years.To you as a trader, a quarter point or a half point may mount up to seriousproportions when it is multiplied through a number of transactions.Your broker can give you a schedule showing commission and tax costs,and in case there are any important changes in the rates, you should studythem to see what effect they will have on your costs of trading in stocks atvarious prices. EN: You may also evaluate these charges at gomez.com and bychecking websites of scottrade.com, etrade.com and tdameritrade.com. google.com isas ever an important price checking resource, and Barron’s publishes a yearly editionevaluating brokerage houses. In general this editor believes that the investor whodoes it the “old-fashioned way,” i.e., by phone and human broker operates at adisadvantage unless the broker’s value added can be quantified and proven.You will find that your round-trip costs are a higher percentage of thecapital invested in low-priced stocks than in high-priced stocks. Also, thatthe percentage costs will be higher on a smaller number of shares than ona round lot, and increasing as the number of shares decreases. Also, that thepercentage costs rise as the total amount of capital used is less.If your capital is, say $1000 or $2000, you might do well to divide it intounits of about $500 each and confine your trading to odd lots of stocks selling467
AU3772_book.fm Page 468 Saturday, November 18, 2006 5:29 PM
468
Technical Analysis of Stock Trends
at 40 or higher. With larger capital, you could use larger trading units andextend the range of trading into somewhat lower-priced stock. In any case,it is important to diversify your holdings. By dividing your capital and usingit in such a way as to avoid unnecessary penalties in high costs, you willhave greater protection against freak moves and sudden changes that mightaffect a single stock very seriously.On the other hand, if you have sufficient capital to secure plenty ofdiversification (8 or 10 stocks should be a maximum for an active tradingaccount), you can increase the size of the trading units. The whole questionhere is as to the minimum amounts to be invested in a single commitment,and if these amounts were doubled or tripled, it would not increase costs,but would, in many cases, reduce them.
EN: Diversification and CostsIn this original chapter, Magee discussed the necessity for considering costs whilestriving for diversification. In present-day markets, diversification may be achievedthrough the use of SPDRs and DIAMONDS and similar instruments at comparatively reasonable costs. Index funds and mutual funds also represent diversificationand cost control for the general investor. Mutual funds will not control costs andexpenses as efficiently as the Index Shares. This is because mutual funds create coststhat the Index Shares do not: management fees and expenses, slippage, the spread,turnover, and taxes resulting from realized gains. These costs may be avoided bythe careful independent investor.An internationally prominent trader has told me, on more than one occasion,that his respectable trading fortune amounts to what brokers and specialists wouldhave made off him if he had been a member of the general public. The most importantweapon in his quiver was seats in Chicago, New York, and San Francisco.The message is extremely clear. The general investor must control his costs. Themore frequently he trades the greater his chances of having his capital ground tohamburger meat by brokers, specialists, floor traders, market makers, tax authorities,Exchanges, etc. Etcetera, because there is undoubtedly another party out there takinga chunk as the capital changes hands. The phone company maybe.Trading costs are the last item brokerage firms want to focus on (see the bookWhere are the Customer’s Yachts?). For years the Street firms and Exchangescontrolled commission costs, but entering the Internet Age a different ethos rules —Cutthroat (and cutfees) competition, reluctantly brought to the old-line exchangesby upstart competitors, and not suppressed by the SEC and CFTC.It would be misleading to attempt to analyze costs in this book because of themercurial nature of cost figures as firms compete in the Internet Age.The SEC, runs a mutual fund calculator for computing costs of mutual funds.Mutual funds are among those that manage somehow to not be overly punctiliousin estimating (read, disclosing) their costs to investors. (See Resources, AppendixD.) morningstar.com is also a good resource for researching mutual funds.But let me emphasize once again that ishares and etfs have really made mutualfunds obsolete if the investor uses the simple procedures outlined in this book.
AU3772_book.fm Page 469 Saturday, November 18, 2006 5:29 PM
chapter thirty-two
Measuring Implicationsin Technical Chart PatternsIf you show one of your charts to a friend and tell him it looks Bullish, hewill reply immediately, “How far do you think it will go?” This is an automatic response; you can count on it.The question is a good one. How far is this expected move likely to go?You don’t know. Nobody knows. Very often you can say, with a fair degreeof assurance, “This stock, which has just made such-and-such an advance,is likely to react to around such-and-such a price.” That you can estimatefairly closely seven or eight times out of ten, by referring to the BasicTrendline, the parallel projection of the top trendline, or the Support Level.These rules work out fairly well as applied to reactions in the Bull Trend,and similarly, we can estimate rallies in a Bear Trend. Not so with the movein the direction of the trend itself. A Bullish Move may, and often does,overrun the upper trendline by running up as far again as the move to thetrendline. A Bearish Move may exceed the downtrend, dropping apparentlywithout limit. (That is one reason we have protective stops — to preventdisaster in case the trend suddenly reverses itself.) And that is why we preferthe use of nearby progressive stops as a method of taking profits, rather thanusing limit orders placed at a trendline, Resistance Level, or at some otherdefinite point. Very often, to be sure, a stock will check its advance at one ofthese indicated points, but the cases where a move carries beyond its objectives are fairly common, and in such cases, no one can make even a reasonable guess as to what limit the stock will reach on the move.This follows because the move itself is an unreasonable one. It is anexample of public participation, the surge of uncontrolled speculation (andvery often, it is the final surge of that particular trend).In exactly the same way, and often more violently, the uncontrolledfalling out of trend in a downward move is an example of Panic, and beingcompletely beyond reason, it follows no rule and knows no predeterminedlimits.There are, however, certain patterns and certain situations where we canmake some estimate of the probable extent of a move in the Primary Direction — usually an estimate of its minimum extent. In these cases, we havea guide to help us in making the decision as to whether the situation offers
469
AU3772_book.fm Page 470 Saturday, November 18, 2006 5:29 PM
470
Technical Analysis of Stock Trends
enough potential gain to be worth the risks involved. Also, the indicatedmeasurement gives us at least a hint of about where we might reasonablybegin to look for the volume which will indicate the Top.For example, a decisive breakout from a Symmetrical Triangle is likelyto carry at least as far as the height of the Triangle measured along its firstreaction. This is a conservative measurement. The move may go much farther. In fact, the trend implications of the Triangle would suggest a continuation equal to the move preceding the Triangle and leading into it, for ifthe trend continues valid, the move should run up to the upper limit of thechannel. In the case of a Reversal, we would also use the height of the firstreaction as a minimum measure. With Right-Angle Triangles, we also cantake the long side (formed by the first reaction) as a rough measure of theminimum expected move.And with Rectangles, the minimum we may reasonably expect after abreakout is a distance equal to the height of the Rectangle. The Head-andShoulders Pattern carries a good measuring stick. The height of the formationfrom the extreme Top of the head down to the point directly beneath wherethe neckline crosses represents the minimum probable move from the neckline down. Again, this is a matter of Trend Channels, and most emphaticallythis is only a minimum move. Some Head-and-Shoulders Patterns, representing an implied move of no more than three or four points, have markedthe start of a decline eventually running to hundreds of points.The rather unusual breakout which takes the form of an almost vertical“mast” running up (or down) many points before arriving at a stoppingpoint, where some Consolidation Pattern is made, carries with it a mostexplicit measuring rule, and one which works out with amazing accuracy.The Flag or Pennant Consolidation will occur at the halfway point — “theFlag flies at half mast.” The speculation move leading up to the Flag verylikely will be duplicated by another rise, at least equal to the first, in thenear future. Following this rise, there may be another Consolidation andother rises, or there may not. After two surges of this sort, it is best to standback and let someone else carry the ball. If you keep enough charts, and fora long enough time, you will see many perfect examples of this beautifulformation. You will also see some imperfect examples, some failures. Andbecause the move is so spectacularly profitable when it works out, you willbe tempted to buy on every Consolidation Pattern formed after a sharp rise.It would be best to wait until the example is clear — a nearly vertical, almostunbelievable rise, followed by several days of congestion with practicallyno volume. If the congestion continues or sags off for more than about3 weeks, sell the stock; it is probably not the real thing.Needless to say, this same pattern appears in reverse in downtrends andcan be traded on accordingly.The questions relating to the measuring attributes of gaps have beenreviewed in detail in Chapter 12. The only type of gap which carries substantial implications as to the extent of the move to follow is the Runawayor Continuation Gap. The appearance of such a gap during a rapid price
AU3772_book.fm Page 471 Saturday, November 18, 2006 5:29 PM
Chapter thirty-two:
Measuring Implications in Technical Chart Patterns
471
move is likely to mark approximately the halfway point; and two or moresuch gaps can be weighed, in connection with volume and total extent ofthe move, to estimate the probable mid-point of the move, and thus to predicta probable ultimate objective.Measuring properties have been ascribed to other patterns and occasionally work out according to plan. In general, however, the best measuringdevices are your trendlines, Support-and-Resistance Levels, and the allimportant signals of increased volume.EN9: I have always been extremely chary of measuring moves. If the measurement does not lead the trader to indulge in expectations which distract him fromthe crucial nature of the moment at hand it might be quite all right. So as anoff hand casual tool it might serve some use. Always better to observe closely whatthe situation is when the price arrives at the measured point. Decisions shouldalways be made in the here and now, not in the I measured it then.
AU3772_book.fm Page 472 Saturday, November 18, 2006 5:29 PM
AU3772_book.fm Page 473 Saturday, November 18, 2006 5:29 PM
chapter thirty-three
Tactical Reviewof Chart ActionThe Dow TheoryThe record shows that an investor who had bought a representative groupof stocks on every Major Bull Market signal according to the Dow Theoryas outlined in Chapters 3, 4, and 5, and had sold all his stocks on every MajorBear Market signal, since the start of the Dow Averages, would have comeout very well indeed over the years (EN: See tables, Chapters 5 and 5.1).Although this tabulation does not take short sales into account, (EN9: Nowtaken into account in the 9th Edition) it would be perfectly consistent to addthat a representative group of stocks might be sold short on every MajorBear Market signal and covered at the next Bull Market signal. And if thefigures for such short sales, based on the level of the Industrial Average,were included, the total profits on these theoretical transactions, both longand short, would be enormous. (EN9: Buy and Hold to 2004: $39,685.03. DowTheory, long only: $347,895.51. Dow Theory, long and short: $1,914,490.)We believe that this record carries some weighty implications whichhave a bearing on the operations of every trader and investor. We willcomment on these shortly.But before doing so, it should be pointed out that few, if any, investorshave actually followed the long-time Dow signals, buying or selling 100%on every Major signal.In the first place, to do so would require a long market lifetime, andwould presuppose that the investor had accepted the Dow Theory in itsclassic form in toto from the start, and that he had never wavered, neveraltered the definitions nor his method of trading, and that he had neverwithdrawn any of his capital during the entire period.In the second place, we would have to assume that our ideal investorhad an extraordinary degree of courage in order to stand firm in periodsduring which the Major Trend appeared to be making dangerous threatsagainst his position, and an extraordinary degree of patience in order to waitout the many months of stagnation when the trend seemed to be gettingnowhere at all.And in the third place, we would have to make the assumption that thegroup of stocks actually bought or sold really represented a fair cross-section473
AU3772_book.fm Page 474 Saturday, November 18, 2006 5:29 PM
474
Technical Analysis of Stock Trends
72
H
S
S
6864
NL
60
48
XD 1.00
52
XD 1.00
56
SOUTHERN PACIFIC
1946
SX
44Sales100’s
125100755025
SHAPRILMAY6 13 20 27 4 11 18 25 1
S
JUNEJULYAUGUSTSEPTEMBER8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 211. Head-and-Shoulders Top. The Bull Market that carried Southern Pacific from 8 to 70 in the years 1941 through 1946 culminated in June 1946 with thisformation. Notice the heavy volume on the left shoulder, lower volume on the head,and small volume on the right shoulder. The breakout signal, which was decisive onJuly 15, served notice on holders of long commitments to sell at the market the nextday (at about 63) instead of waiting for the protective stop, which would have beenset at 61, to be caught. Volume eventually developed at the Bottom of the breakoutmove at about 58½, which move, incidentally, carried out the minimum measure ofthe Head-and-Shoulders prediction.From this point, however, a weak rally on low volume started, and continued upfor 4 weeks. The weakness of this picture would justify a short sale on a rally of 40to 50% of the move from the left shoulder to the bottom, or on a return to the neckline,say, at 63. The rally actually extended to the neckline at 64, broke away on a gapwith volume, and continued down in a move that led, in the next 3 months, to pricesbelow 40, and later even lower.An extraordinary feature of Head-and-Shoulders Tops is the frequency with whicha comparatively small formation, such as the one shown here, will herald a MajorMove, changing the course of the stock for months or even years to come. Not allpatterns of this type will lead to such big moves as this, but no Head-and-Shouldersshould be regarded lightly, ever.
of the Averages in that they would make about the same moves as theAverage itself. As a matter of fact, if the group were well diversified, thechances are good that its moves might approximate those of the Averages.But it is taking a lot for granted to suppose that an investor could meetall these conditions over a period of years, which he would have to do in
AU3772_book.fm Page 475 Saturday, November 18, 2006 5:29 PM
Chapter thirty-three:
Tactical Review of Chart Action
475
order to operate strictly as a “Dow Theory” trader. It is not seriously suggested that anybody try to follow any such plan literally. EN: Well, in retrospect, why not? Given, in the Internet Age, the availability of trading instrumentsand markets, (DIA, SPY) it might not be such a bad idea. The implementation ofsuch a plan in Magee’s time would have been extremely cumbersome and expensive,but it is eminently practicable in modern markets.The important implications of which we spoke are these: if the recordof the Averages shows that on these Major Signals it is possible to takesubstantial theoretical profits over the long term, and if the Averages arecomposed of the prices of individual stocks, then the probabilities favorbuying or selling a majority of stocks in line with the Major Trend of theAverages. The evidence shows that Major Trends normally continue formonths or years. The line of “most probable gain,” therefore, is the line ofthe Major Trend.On this basis, we would be on safe ground to say that when a trend ofsufficient importance gives a Major Signal that the Averages are under way,there will be a greater likelihood of finding profitable situations amongindividual stocks moving in that trend than among those moving in thereverse trend.It is suggested that you read this preceding paragraph again, carefully.It means that we do not try to sell stocks “at the Top” in a Bull Market. Wedo not try to “pick up bargains at the Bottom” in a Bear Market. We do notdeliberately buck the kind of trend that history shows is likely to continuefor an undetermined and possibly long time.What we have said here is stated with a little different emphasis thanin previous editions of this book. You will notice we have not said that youwill never sell a stock short during a Major Bull Market, nor buy a stock ina Bear Market. There will be, and often are, cases of stocks which are movingagainst the Major Trend, and which, on the basis of their individual technicalbehavior, may justify a commitment against the trend of the Averages.But we feel such trades should be made cautiously and with a full realization that the majority of stocks are moving in a contrary manner. Such tradesmight be made, for example, in particular cases as indicated by the charts ofthe stocks involved, as partial hedges to reduce overall risk. For example, if aBull Market had persisted for several years and was still presumably in effect,but certain stocks had broken badly and showed individual weakness, a tradermight continue to hold three quarters of his capital in good long positions, butmight make a limited number of short sales in the weaker stocks. If, then, theBull Market continued, he might eventually have to close out the shorts forlosses, which could be regarded as the reasonable cost of “insurance.” On theother hand, if the general weakness became greater and eventually reversedthe Major Trend, then the short sales would cushion the depreciation of thelongs up to the time of the Reversal signal