, that, once the supply at 40 has all been absorbed, the marketwill advance rapidly and easily. As soon as prices break out above 40, thosewho took over the supply at that figure will feel their judgment has beenvindicated and will not be disposed to sell until they, in turn, can register agood profit.The crux of the matter is, of course, contained in the two precedingsentences. Demand must continue to come in at higher and higher levels;
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403836SOUTHERN RAILWAY PFD.
SR Pr
3432302826193624
22
20Sales100’s
50403020104
APRIL11 18 25
2
MAY9 16 23 30
6
JUNE13 20 27
4
JULY11 18 25
1
AUGUST8 15 23 29
FIGURE 59. An Ascending Triangle at an Intermediate Bottom. This chart runsfrom April through August 1936. Extreme shrinkage in trading volume during thisformation indicated a very strong situation technically.
otherwise, our formation will cease to be an Ascending Triangle. And theoverhead supply must eventually be absorbed, permitting an upside breakout. If demand begins to falter any time before the Supply Line (horizontalTop boundary) has been broken through, the ensuing reaction may dropprices down “out of pattern,” and then the chart technician is faced with thenecessity of revising his chart picture. One might think that such a development, blasting the earlier promise of the chart, would occur fairly often, but,as a matter of experience, it is surprisingly rare. We say “surprisingly”because it is obvious that in many cases of Ascending Triangle development,the group whose selling creates its Top boundary or Supply Line mustbelieve that level to be just about as high as the stock has any right to go.As holders of a large enough block to influence the market for several weeks,
AM1946–1947
FIGURE 60. One of the early 1947 disappointments (to the Bulls) was the failure of “AM” to break out topside from thelong Ascending Triangle depicted above. Here is a case (see page 112) where supply at 15 finally overwhelmed demand. Apattern such as this indicates a potentially strong underlying situation for the long pull. Ordinarily, the consequence of anAscending Triangle’s “failure” of this sort is the development either of an extended Rectangular base within the generalrange of the Triangle (in this case, 10 to 15), or formation of a Double Bottom at or near the earlier low (in this case near10). However, “AM” dropped lower after several more attempts to overcome the Major Supply at the 15 level, which wasnot substantially penetrated until 1955.
MAYJUNEJULYAUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARYMARCH4 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 23 30 7 14 21 28 4 11 18 25 1 8 15 22 1 8 5 22 29 5
ARMOUR & COMPANY
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and sometimes for months, their judgment is hardly to be scorned. Yet, onceit becomes evident that the lower boundary or Demand Line is slanting up,the odds are certainly somewhere in the neighborhood of 9–1 that the newbuyers will eventually have the best of it.On occasion, the third reaction or fourth reaction within an AscendingTriangle Formation will break down through the previously establishedup-slanting Demand Line (lower boundary), but will be halted at the samelevel as the previous reaction. The pattern from there on is apt to developas a Rectangle, a formation to be discussed in our next chapter, and shouldbe treated as such. (The tactics of trading on Ascending and DescendingTriangles, including protection against the rare cases of collapse, will be takenup in the second section of this book.)
Descending TrianglesDescending Triangles have a horizontal lower boundary or Demand Lineand a down-sloping upper boundary or Supply Line. It is evident that theyare created by market conditions just the reverse of those responsible for theAscending Pattern. Their implications are equally strong and their failuresequally rare. Development of a Descending Formation hinges upon a campaign by a group or syndicate (often an investment trust) (EN9: or MutualFund or a takeover group) to acquire a large block of shares in a certaincompany at a predetermined price below the market. Their orders are placedand allowed to stand until executed at that level. If the successive ralliestherefrom, which their buying generates, are stifled by new supplies of stockfor sale at lower and lower levels (thus creating the typical Descendingpicture on the chart), orders to buy are eventually all filled and quotationsbreak through and on down. The mere breaking of the critical line, whichmany traders have seen function as a support under the market for a moreor less extended period, often shakes the confidence of holders who had notpreviously considered selling. Their offerings now come on the market andaccelerate the decline.
Volume Characteristics Same as Symmetrical TypeThe volume section of the Right-Angle Triangle’s chart requires little comment. It will ordinarily present a picture practically identical with thataccompanying the development of a Symmetrical Triangle. Activity tends tolessen as prices move out toward the apex. In the Ascending Formation,there will usually be a pickup on each rally and an ebb in turnover on eachdecline within the pattern; in the Descending Formation, the opposite is true,but sometimes not quite so evident. These Minor fluctuations, however, donot affect the overall diminishing trend of volume until the breakout pointis reached.
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12SOCONY VACUUM OIL
SOV
1941–1943
1110
9
8
7
6Sales100’s
125100755025S O
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FIGURE 61. The 1942 Bear Market Bottom in Socony–Vacuum was an unusualHead-and-Shoulders formation, the head consisting of an Ascending Triangle. Noteincrease in volume on the breakout from the Triangle in July and again on the breakthrough the Head-and-Shoulders neckline in October.
As to breakouts also, practically everything we have said about the Symmetrical Triangle will apply as well to the Right-Angle type. Upside breakouts(from an Ascending Pattern, of course) are attended by a conspicuous increasein trading volume; if not, they should be treated as suspect. Downside breakouts (from Descending Patterns) may not evince much of a pickup in activity,but turnover usually speeds up the second or third day out of pattern. Throwback reactions to the pattern’s boundary line after a breakout are fairly common;their occurrence seems to depend largely on general market conditions. Thus,if prices break down out of a Descending Triangle in an individual stock at atime when the rest of the market is firm, a Pullback Rally is fairly certain tointervene before any very extensive further decline takes place.Good, reliable breakouts from Right-Angle Triangles usually occur atabout the same stage of pattern completion as they do in Symmetrical Triangles. The earlier the breakout, the less apt it is to be a false move (althoughfalse moves from Right-Angle Formations are considerably rarer, it shouldbe noted, than from Symmetrical). In those infrequent cases when prices
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3836343230
262422
X D S1.00
28
BATH IRON WORKS
BIW
1946
Sales100’s
125100755025JANUARYFEBRUARYMARCHAPRILMAY5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1
JUNE8 15 22 29
FIGURE 62. Because a dividend of $1.00 went ex on March 14, the lower boundaryof this Descending Triangle Top in “BIW” had to be dropped 1 point from 33 andredrawn at 32. Despite the added leeway thus afforded, however, the original patternimplications were quickly carried out. Prices pulled back three times to the new lowerboundary line of this Triangle on April 4, April 16, and May 31 — unusual, butexplained by the existence of a strong general market uptrend during this period.Whenever a stock goes ex-dividend during the formation of an Area Pattern of anytype, the lines bounding that pattern should immediately be adjusted to the newvalue by lowering them a distance corresponding to the amount of the dividend.
“squeeze” right on out of the apex without producing a definite breakout,the pattern seems to lose much of its power.
Measuring Implications of TrianglesWe have stated (in Chapter 6) a minimum measuring rule to apply to pricemovements developing from a Head-and-Shoulders Formation, and we canlay down a somewhat similar rule for Triangles — one that applies to both theSymmetrical and the Right Angle species. The method of deriving the Triangleformula is not easy to explain in words, but the reader can familiarize himselfwith it quickly by studying its application on several of the actual exampleswhich illustrate this chapter. Assuming that we are dealing with an up-movement (upside breakout), draw from the Top of the first rally that initiated the
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323028262422
REVERE COPPER & BRASS
RVB
1946
201918
Sales100’s
125100755025
MAYAPRIL6 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 63. On the basis of “fundamentals,” Revere was an attractive holding in1946, which may account for its reluctance to “give up” when the market generallystarted downhill in earnest in June of that year. Its fluctuations from mid-May to lateAugust constructed a fine, large Descending Triangle, in which, however, BearishVolume Signals had already appeared in late June and on July 23. The breakout came(with a wide Breakaway Gap) on August 27. Prices clung to the edge of the patternfor 4 days, then collapsed. The small formations outlined in April and May are Flags,to be discussed in Chapter 11.
pattern (in other words, from its upper left-hand corner) a line parallel to theBottom boundary. This line will slope up away from the pattern to the right.Prices may be expected to climb until they reach this line. Also, as a rule, theywill climb, following their breakout from the pattern, at about the same angleor rate as characterized their trend prior to their entering the pattern. Thisprinciple permits us to arrive at an approximate time and level for them toattain the measuring line. The same rules apply (but measuring down, ofcourse, from the lower left corner) to a descending move.Although application of the above formula does afford a fair estimateof the extent of move to be expected from a Triangle, it is neither as definitenor as reliable as the Head-and-Shoulders formula. Do not forget the important qualification that the Triangle has somehow lost a part of its potentialstrength if the breakout is delayed until prices are crowded into the apex.
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160152144136128120WESTINGHOUSE ELECTRIC
WX
1936–1937
112104Sales100’s
5040302010OCTOBER NOVEMBER DECEMBER3 10 17 24 31 7 14 21 28 5 12 19 26 2
JANUARYFEBRUARY MARCH9 16 23 30 6 13 20 27 6 13 27 20
FIGURE 64. The 1937 Bull Market Top in Westinghouse was this Descending Triangle which started in January and broke on February 15. Prices hung at the loweredge of the Triangle for 4 days, fell away, and then pulled back to its lower line onMarch 4 at the time when the general market Averages were making their final Bullhighs.This chart, and a number that have preceded it, illustrate an important point forthe market technician which may well be restated here: When a large number ofindividual issues, after an extensive advance, make well-defined Reversal Patternsof plainly Bearish import, break down out of them, and then succeed only in pullingback no farther than their lower boundaries or “Resistance Lines” at a time whenthe Averages are going on up to new highs, the whole market is in a dangerouscondition, and a Major Downturn is imminent. Divergences of this particular sortbetween many important issues and the Averages seldom develop at IntermediateTurns. The warning is particularly pointed when stocks of the caliber of Westinghouse, DuPont, General Motors, etc., fail to “confirm” new highs in the Averages.Refer back to Figures 12, 15, 18, and 58, for example, and compare the “timing” inthose with the trend of the Averages for the same periods. The Saucer-like ReactionPattern of October to January in the above chart analyzes into a ComplexHead-and-Shoulders Consolidation, a formation which will be taken up inChapter 11.Incidentally, “WX” continued on down to 130 in April 1937, made a Rectangle basethere, and recovered to 158 (cf. above Descending Triangle) in August, and then fellto 88 in November. Compare this daily chart with the monthly chart of “WX” for1935 to 1938 in Chapter 15.
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FIGURE 65. A series of Triangles, Symmetrical and Descending, which evolvedduring the 1929–32 Bear Market in Hudson Motors. Note that at no time during thisdecline did anything resembling a Major Bottom appear. Note also how each Triangle’s measuring implications were carried out before any temporary halt or consequential rally developed. Follow your daily charts for the proper timing of yourtrading operations, but keep an eye always on the longer-range pictures which evolveon weekly and monthly projections, so as to maintain your perspective on the MajorTrend.
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14AMERICAN ROLLING MILLS
1941–1943
RM
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FIGURE 66. The curious, and in its early stages confusing, Major Bottom Formationwhich American Rolling Mills constructed in 1941–43. The recovery from the “PearlHarbor Panic” of 1941 ran into a large Symmetrical Triangle which broke out on thedownside in April 1942. The subsequent decline satisfied the measuring requirementsof that Triangle, but did not carry below the December low. The rally of June andreaction of August–September built the whole area out into another and largerSymmetrical Triangle, out of which prices broke on the upside in September. Thenthe reaction to the apex of the latter, in December 1942, and the following advancebuilt up into a 15-month Ascending Triangle which constituted the final Major Bottomfor a trend that carried prices up eventually to 42 in 1946. The low volume on theJune and August–September reactions, the increase on the October markup and, evenmore, the January 1943 rise and breakout in February were unmistakably of MajorBullish implications. It takes time, remember, to build a foundation for a Bull Market.
Triangles on Weekly and Monthly ChartsWe have seen in preceding studies how Head-and-Shoulders Formationsmay appear on the long-range (weekly or monthly) charts and will haveimportance commensurate with their size. Triangles also may develop. Onweekly charts, their implications are usually clear and dependable, but thecoarse Triangular Patterns which can be found on graphs of monthly priceranges, especially the great, loose convergences that take years to complete,had better be dismissed as without useful significance.
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36343230GOODRICH ( B. F. ) COMPANY
GR
28261941–194324222019181716151413Sales100’s
25020015010050S
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FIGURE 67. A beautifully compact Ascending Triangle which turned out to be theMajor Bear-to-Bull Reversal in Goodrich in 1942. The breakout from this pattern (inApril) was not signaled by any extraordinary pickup in activity so far as this weeklyrecord shows (but remember that significant volume detail is often hard to see in aweekly plotting). The Triangle’s measuring implications were carried out by the firstupswing which reached 18¼ at the end of May. Supply had to be absorbed in the 18to 21 range (refer back to this chart when you study Support and Resistance inChapter 13), but a Major Up Signal was given in September when prices eruptedthrough that zone with a conspicuous increase in trading volume.
Other Triangular FormationsThere are other patterns of price consolidation or congestion that can bebounded by converging lines and might, therefore, be classified as Triangles.
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ebay Inc-(Nasdaq NM) 57.75 0.240 0.417%
635751454239363330271998–2003 Porphet Financial Systems, Inc.Volume (Millions)
Terms of use apply.
241251007550250
02
Apr
Jul
Oct
03
Apr
Jul
Oct
FIGURE 67.1. A real time chart from prophet.net. The volume blow out in July2002 drew attention to Ebay and the sloping line was drawn at that time. Althoughthe lines are sloppy and the pattern is ragged it looked at the time like a DescendingTriangle with all its implications. But when it broke out of the pattern on emphaticvolume in October 2003 the handwriting was on the wall. Ebay was for real. So,what’s for real? It could really make money, not just capture free eyeballs, like itsInternet brothern and sistern. It actually performed a service of economic benefit tomany people. Unlike the Internet fantasy follies. See Figure 104.4 for a longer perspective on Ebay. Lessons for the attentive: power of trendlines; alarm-clock natureof unusual volume; not believing any forecast. Forecast in this case would have beenfor a downtrend if, as seemed, the pattern was a descending triangle.
But they deviate from the true Triangles of this chapter so markedly in oneor more important respect that they are best treated under other headingselsewhere. Such are the Flags, Pennants, and Wedges. Still another group ofchart patterns develops between diverging boundary lines, on which accountthey have sometimes been called Inverted Triangles. But their causes, characteristics, and forecasting implications are so radically different that wehave chosen to rename them Broadening Formations and discuss them in alater chapter.
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The reader may have become dismayed at this point by our frequentrecourse to such qualifying adverbs as usually, ordinarily, and the like. Itcannot be avoided if one wishes to present a true picture of what actuallyhappens. No two chart patterns are ever precisely alike; no two market trendsdevelop in quite the same way. History repeats itself in the stock market,but never exactly. Nevertheless, the investor who familiarizes himself withthe historical pattern, with the normal market action, and refuses to betempted into a commitment in the belief that “this time will be different,”will be far and away ahead of the fellow who looks for the exception ratherthan the rule.The beginner is proverbially lucky. He will find Triangles, Head-andShoulders, or other significant patterns, one after the other, on his charts,watch them develop, and see them carry through with profitable movesaccording to rule. And then the exception will come along — or he willoverlook the larger picture while concentrating on some Minor Patterndevelopment — and suddenly awake to the fact that he is caught in a verybad play. Hence our constant emphasis on the nonconforming movements.Our words of qualification are necessary because technical analysis of marketaction is not an exact science and never will be.
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chapter nine
Important ReversalPatterns — ContinuedThe Rectangles, Double and Triple TopsThe Triangular Price Formations which we examined in the preceding chaptercan be either Reversal or Consolidation Patterns. In the case of the Right-AngleTriangles, we know as soon as they have attained recognizable form in whichdirection the trend will (or should) proceed. With the Symmetrical Triangles,we have no way of knowing whether they point up or down until pricesfinally break away from them, although the odds are, as we have seen, thatthe previous trend will be continued rather than reversed. In this respectand in many others, our next class of technical formations, the Rectangles,resemble the Symmetrical Triangles. There are, in fact, so many points ofsimilarity between them that we can forego any long and detailed discussion.A Rectangle consists of a series of sideways price fluctuations, a “tradingarea,” as it is sometimes called, which can be bounded both top and bottomby horizontal lines. A glance at any one of the examples which illustrate thesepages will show how it got its name. On rare occasions, you may discover achart pattern whose upper and lower boundary lines are parallel but eitherslightly down-sloping or up-sloping. So long as their departure from the horizontal is trivial, they may be treated as Rectangles. You will also find, onoccasion, patterns whose boundaries, while nearly horizontal, tend somewhatto converge. These may be considered Rectangles or Symmetrical Triangles; itdoesn’t matter which, since the “prognosis” will be the same in either case.If you will give a quick mental review also to the Head-and-Shoulders,the Complex and the Rounding types of formations, you will see how, if youdisregard the volume part of their charts, any one of these patterns mightmerge or grade into a Rectangle. As a matter of fact, however, you willseldom be left in doubt as to proper classification because the circumstancesof trading, the type of buying and selling, which produce Rectangles aredifferent and that difference is usually apparent.We characterized the Symmetrical Triangle as a “picture of doubt.” TheRectangle might, with even greater propriety, be called a picture of conflict.Of course, any fairly compact price formation represents conflict in thesupply–demand sense. A Head-and-Shoulders Top, for example, portrays aconflict between “strong” sellers and “weak” buyers, with the outcome129
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26242220
NASH – KELVINATOR
NK
1945–1946
Sales100’s
25020015010050OCTOBER NOVEMBER6 13 20 27 3 10 17 24 1
DECEMBER JANUARYFEBRUARY8 15 22 29 5 12 19 26 2 9 16 23 2
MARCH9 16 23 30
FIGURE 68. Although its Bottom boundary had a slight tendency to “lift,” theformation which put a Top on Nash–Kelvinator in 1946 was an unmistakable 4-monthdistribution Rectangle. Long and rather loose Rectangular Patterns of the type shownhere may not evince constantly and noticeably diminishing volume, but note, nevertheless, the general, though irregular, downtrend in volume from mid-October tomid-February.
already clearly to be seen before the combat has ended. But a Rectangledefines a contest between two groups of approximately equal strength —between owners of the stock who wish to dispose of their shares at a certainprice and others who wish to accumulate the stock at a certain lower figure.They bat the ball back and forth (up and down, that is) between them untilultimately, and usually quite suddenly, one team is exhausted (or changesits mind) and the other then proceeds to knock the ball out of the lot. Nobody(often, not even the contestants themselves) can tell who is going to winuntil one line or the other is decisively broken.We speak of two groups operating in the development of a rectangulartrading area because, under present-day conditions, that is what is usuallythe fact behind the scenes. This, it should be noted, does not imply “manipulation” in any invidious sense. An investment trust or an estate or, in somecases, an individual heavy stockholder has good and sufficient reasons forselling at the top price (the “Supply Line” of the Rectangle) with no intentto mislead the public. And another investment trust or a group of insidersinterested in the company may have equally good and, from their point ofview, wise reasons for buying at the bottom price (“Demand Line”). Suchare the forces at work in the market at the start of most Rectangular ChartPatterns, but if the “spread” between top and bottom lines is wide enough(say 8–10% of the market value of the stock), the situation may quickly attracta following from quick-turn scalpers and the professional element. Thus, a
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5652G
4844
LIMA LOCOMOTIVE WORKS
LMW
1944–1945
Sales100’s
5040302010OCTOBER NOVEMBERDECEMBER JANUARYFEBRUARYMARCH7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 3 10 17 24 3 10 17 24 31
FIGURE 69. Consolidation Rectangles in uptrends have been less common in recentyears than during the 1920s and early 1930s. The large price gap (G) in this exampleis of the “last in pattern” type which we shall come to in Chapter 12. When a gapwithin a pattern area is followed by breakout from that pattern, as in this case, thegap is seldom quickly closed.
syndicate holding a large block of U.S. Steel may decide to liquidate at 76,while another group decides to invest heavily in “Steel” at 69. The price ofX will naturally fluctuate for a time between those two levels. Traders, seeingthis, will try to “ride the play,” buying at 69 and selling at 76 (perhaps alsoselling short at 76 and covering at 69). Their operations will tend to accentuate or extend the Rectangle, although the number of shares involved insuch “parasitic” trading is seldom great enough to affect the final outcome.As a matter of fact, this type of trading inside a Rectangle can be quiteprofitable at times, especially if protected by judicious stops (see Part Two).
Pool OperationsIn times past, before the SEC outlawed the practice, Rectangles were frequently created by the well-organized operations of a single “pool” or syndicate. Such a pool might undertake to accumulate a large block of stock ina certain company with a view to marking it up and taking profits whensome piece of good news, of which they had inside knowledge, eventuallybecame public. In order to acquire the desired “line,” they would find itnecessary first to shake out shares held by other traders and uninformedinvestors. They might start their campaign by suddenly selling short a fewhundred shares in order to quench any current demand and start a reaction.Then, on that reaction to the previously determined accumulation level, theywould start to buy, scattering their orders carefully and avoiding any publicity.
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