FordGlass are examples. (The trends of these on a logarithmic scale show adecelerating curve, of course.) Still a third class, made up largely of highgrade preferred stocks, produces a rounding over or decelerating BullTrendline even on the arithmetic scale. And, finally, there are a number ofissues whose normal Bull Market Trendlines fall somewhere between ourfirst two types; that is, they curve up away from a straight path on thearithmetic scale, but curve over to the right (breaking through a straight line)on the logarithmic scale. EN: Fortunately, in this age of computers and easilyprocessed data, there is analytical software which allows the analyst to instantaneously switch between the scales. Desktop packages are available (see Appendix D,Resources) and a number of Internet sites have these capabilities.
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All of which, the reader, at this point, no doubt finds most discouraging.Some stocks do this and some stocks do that, and what help is there for usin such a mix-up? The answer lies in studying the history of each issue inwhich you may be interested. Stocks — most of them, at least — do notchange their habits and their technical characteristics much from one Bulland Bear cycle to the next. An issue which, like General Motors, producesa straight-line Bull Trend on an arithmetic chart in one Primary Upswing islikely to repeat that performance in the next.As a matter of interest, stocks do sometimes change, of course, over along period of years. Companies which were regarded as extremely speculative when their shares were first listed may attain a more and more important and stable position in the general economy, with the result that, eventually, their stock acquires a solid investment rating. Their Bull MarketTrends will then gradually change from an up-curve to a straight-line and,finally, to a decelerating curve. Other old, established corporations may loseposition and rating, shift from the investment type of trendline to the speculative. But, it is true in general, nevertheless, that Major Patterns do repeat.If you are keeping your own set of manual monthly charts, you canchoose whichever scale you please. But most technical chart followers preferto buy their long-range pictures ready made, thereby getting a much moreextensive history of many more issues than they could hope to chart themselves. Since the only comprehensive portfolios of monthly charts that areavailable at reasonable cost are arithmetically scaled, you will possibly haveto make these serve all purposes. EN: No longer necessary because of availabilityof good software and also Internet chart sites. See Appendix D, Resources. You willfind with a little experimentation that an architect’s French curve can beused to plot good Major Uptrend Lines on many of the issues whose normalBull Trends accelerate away from a straight line.The tests for the technical significance of a Major Trendline are substantially the same as those specified for Intermediate Lines in the precedingchapter. A little more leeway must be allowed on penetrations — again, amatter of judgment — but you are dealing with coarse data and long swingshere, and what you want from your monthly charts, primarily, is perspectiveon the broad picture.One more point regarding the construction of Major Bull Trendlines: thebest lines — the most useful — are drawn, as a rule, not from the absolute lowof the preceding Bear Market, but starting, rather, from the next IntermediateBottom. The accumulation area at the beginning of a Bull Market is usuallylong and drawn out in time, and relatively flat. The first trendline that can bedrawn from the extreme low point may, therefore, be too nearly horizontal toexpress the genuine Bull Trend which starts with the markup phase. The severalcharts showing Major Trendlines which illustrate this chapter will demonstratethis point. EN: Especially Figure 177. It applies as well, we might add, to manyIntermediate Moves which start from Area Formations. Take theHead-and-Shoulders Pattern for example: the true Intermediate Trendline usually starts from the right shoulder rather than from the head.
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GENERAL MOTORS
GM
80
60
40
20Sales100’s400020001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 164. The straight-line Bull Market Trend of General Motors on an arithmetic monthly chart. 1941 low, 28⅝; 1946 high, 80⅜.
40HUDSON MOTORS
HT
30
20
10
Sales100’s10005001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 165. The up-curving trend of a speculative motors stock, Hudson Motors.Compare this with “GM.” 1941 low, 2⅝; 1946 high, 34½.
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160
CURTIS PUBLISHING $ 7 PFD. CPC Pr
120
80
40
Sales100’s100501938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 166. Typical decurving Major Bull Trend of a high-grade preferred stock.This is Curtis Publishing $7 Preferred. 1942 low, 12; 1945 high, 154.
CURTIS PUBLISHING COM.
CPC30
20
10
Sales100’s120010001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 167. The accelerating uptrend of the common stock of the same publishingcompany. 1942 low, ⅜; 1946 high, 26.
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COMMONWEALTH EDISON
CWE
1939
1944
40
30
20
Sales100’s8004001938
1940
1941
1942
1943
1945
1946
FIGURE 168. A conservative investment-type utility stock makes a straight-lineMajor Bull Trend. This is Commonwealth Edison. 1942 low, 17⅜; 1946 high, 36⅛.Leverage is an important factor in trends.
INTERNATIONAL HYDRO-ELECTRIC
IH
15
10
5
Sales100’s4002001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 169. The up-curving trend of a low-priced “junior” utility, InternationalHydro-Electric. 1942 low, ¼; 1946 high, 15½.
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HOUSTON OIL
HO
30
20
10
Sales100’s10005001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 170. A speculative oil stock, Houston Oil. 1942 low, 2¼; 1946 high, 30.Compare this picture with “SOH” in Figure 171.
STANDARD OIL OF OHIO
SOH30
20
10
Sales100’s2001001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 171. Straight-line uptrends in an investment oil, Standard Oil of Ohio.1942 low, 10⅛; 1946 high, 30. Note: trendline unbroken until 1948.
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REPUBLIC STEEL
RS
40
30
20
10
1938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 172. Steel stocks have the speculative or accelerating type of PrimaryUptrend. Republic Steel. 1942 low, 13⅜; 1946 high, 40⅞.
80AMERICAN CAR & FOUNDRY
AF
60
40
20
Sales100’s4002001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 173. The normal Major Bull Trend of heavy industrial issues is up-curving.American Car & Foundry. 1942 low, 20; 1946 high, 72⅜.
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40CELOTEX CORP.
CLO
30
20
10
2 for 1Sales100’s4002001938
FIGURE 174.high, 38⅛.
1939
1940
1941
1942
1943
1944
1945
1946
A low-priced building stock, Celotex Corporation. 1942 low, 6⅛; 1946
10CLAUDE NEON LIGHTS
CEO8
6
4
2
Sales100’s10005001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 175. A highly speculative, low-priced issue, traded on the Curb Exchange,Claude Neon Lights. 1942 low, ⅛; 1946 high, 9.
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LIGGETT & MYERS
135
LM–B
105
75
45Sales100’s2001001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 176. The tobacco stocks follow the investment type of trend. This isLiggett & Myers. Note Double Trendline. 1942 low, 50½; 1946 high, 103½.
CORN PRODUCTS REFINING
CFG70
60
50
40Sales100’s4002001938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 177. High-grade food issues (Corn Products Refining) resemble the tobaccos. 1940 low, 40¼; 1946 high, 75¾.
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Major DowntrendsFrom the technical analyst’s point of view, it is to be regretted that few BearMarkets have produced Major Trendlines of any practical significance on thecharts of individual stocks. A notable exception was the long Bear Marketof 1929–32 which produced magnificently straight trendlines on the arithmetic plotting of a host of issues (as well as in the Averages, to which weshall refer later). But it is almost impossible to find other instances where aBear Trendline having any forecasting value can be drawn on either arithmetic or semilogarithmic scale.The normal Major Bear Market Trend is not only steeper than the normalBull Trend (because Bear Markets last, on the average, only about half aslong as Bull Markets), but it is also accelerating or down-curving in its course.This feature is accentuated and, hence, particularly difficult to project effectively on the semilogarithmic scale.The net of it is that the technician cannot expect to obtain much, if any,help from his Major Trendlines in determining the change from a PrimaryDown to a Primary Upswing. This should not be taken, however, as adviceto draw no trendlines on a Major Down Move, or to disregard entirely anytrendlines which may develop with some appearance of authority. If you donot expect too much of them, they may, nevertheless, afford some usefulclue as to the way in which conditions are tending to change.The student of stock market action who is not altogether concerned withdollars and cents results from his researches will find Bear Market Trendlinesa fascinating field of inquiry. They do some strange things. Even though theyfail in the practical function of calling the actual Major Turn, and go shootingoff into space, they sometimes produce curious reactions (or, at least, appearto produce what would be otherwise inexplicable market action) when thereal price trend catches up with them months or years later. But such effects,interesting as they may be, are, in our present state of knowledge, uncertainand unpredictable. EN: This fact may persist into the mists of the future and bethought of like Fermat’s Last Theorem. Our present state of knowledge in the 21stcentury is no further advanced than it was in Magee’s time.We must dismiss this rather unfruitful topic with the reminder that oneclue to the end of a Primary Bear Market is afforded by the IntermediateTrendline of its final phase, which we cited in the preceding chapter.
Major Trend ChannelsWe run into another difficulty when we try to draw Return Lines and construct channels for Major Trends on an arithmetic chart. Owing to the markedtendency for prices to fluctuate in ever wider swings (both Intermediate andMinor) as they work upward in a Primary Bull Market, their channel growsprogressively broader. The Return Line does not run parallel to the BasicTrendline (assuming that we have a good Basic Trendline to begin with) but
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diverges from it. Occasionally, a stock produces a clear-cut Major ChannelPattern, but the majority do not.Semilogarithmic scaling will, in many cases, correct for the WideningChannel effect in Bull Trends, but then we run into the opposite tendencyin Primary Bear Markets, and for that, neither type of scaling will compensate.
Trendlines in the AveragesPractically everything stated in the preceding chapter regarding Intermediate Trendline development in individual stocks applies, as well, to the various Averages. The broad Averages or Indexes, in fact, produce more regulartrends and, in consequence, more exactly applicable trendlines. This may bedue, in part, to the fact that most Averages are composed of active, well-publicized, and widely owned issues whose market action individually is “normal” in the technical sense. Another reason is that the process of averagingsmooths out vagaries of component stocks, and the result, thus, more trulyreflects the deep and relatively steady economic trends and tides.In any event, it is a fact that such averages as the Dow–Jones Rails,Industrials and 65-Stock Composite, The New York Times 50, and Standard &Poor’s Average of 90 stocks (the last two named being probably the mostscientifically composed to typify the entire broad market) (EN: As the readerwill note most of these are obsolete. In the modern age, the S&P 500 probably bestfulfills this function) do propagate excellent trendlines on their charts.The very accuracy of their trends, particularly their Intermediate Moves,permits us to construe their trendlines more tightly. Less leeway need beallowed for doubtful penetrations. Thus, while we ask for a 3% penetrationin the case of an individual stock of medium range, 2% is ample in theAverages to give a dependable break signal.Experienced traders know that it pays to heed the Broad Market Trend.It is still easier to swim with the tide than against it.
EN: Trendlines in the Averages, and Tradingin the AveragesNumerous averages and indexes have come online since the 5th edition: S&P 100,S&P 500, Russell 2000, and so on. It would be an exercise in daily journalism toattempt to list all the indexes now available. New ones spring up like weeds afterthe spring rain. This is because the invention of a widely adopted index can be verylucrative for its creator. S&P and Dow–Jones collect licensing fees from the “use”of their indexes by the exchanges. The constant addition of new trading instrumentsrequires that current lists be kept in Resources, and the reader may also consult TheWall Street Journal, Barron’s, and The Investor’s Business Daily where pricesof indexes and averages are reported. Online brokerages and financial news sites
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FIGURE 178. In the process of “pulling back” to a very steep Up Trendline, pricesmay easily go to a new high. Note the Pullback of August 1936 in this weekly chartof Westinghouse Electric. The second, less steep line turned out to be the true MajorBull Trend. Note that the February–April price pattern in 1936 could not be considered a true Double Top Reversal of Primary import because the recession betweenthe two highs was only about 10% of the Top’s value (around 122). Figure 64 on page119 shows on a daily chart the final Top Reversal Formation which “WX” made in1937.A large Rectangle base was made on this weekly chart in April, May, and June1937, but observe the poor volume which accompanied the breakout and rise fromthat formation — an extremely Bearish indication for the Major Trend. The “measurement” of the Rectangle was carried out by August, but that was all.As is usually the case, it was impossible to draw a Major Down Trendline whichhad any forecasting value on this chart. The beautiful straight trendlines whichappeared in the 1929–32 Primary Bear Market led many chart students to expectsimilar developments in every Bear Market, but the fact is that 1929–32 was uniquein that respect.
also offer up-to-the-minute lists and quotes on virtually all trading instruments. Alist and links to these sites may also be found in Resources (Appendix D) and atedwards-magee.com.
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DOW – JONESINDUSTRIAL AVERAGE
400
E360
320D280
240
200
C
160B120F80
H
A
G
40
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
FIGURE 179. The 1929–32 Primary Bear Market was the only one in all stock marketrecords which produced a Straight-Line Major Downtrend. Trace also the Supportand Resistance Levels throughout this 14-year history of the Dow Industrials. Eachrally in the great Bear Move stopped at or near a previous Bottom level. Each declinestopped near the level of a Congestion in the 1924–29 Bull Market. See also level of1937 Top. Chart courtesy of Market Research, Inc. (Internet: barchart.com).
As of the turn of the century, the most important of these indexes, joining theDow, are probably the S&P 500, the S&P 100, and the NASDAQ. In fact these areprobably sufficient for economic analysis and forecasting purposes, and certainly
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good trading vehicles by means of surrogate instruments, options, and futures. Somewould include the Russell 2000 in this list. These indexes and averages have beencreated to fill needs not filled adequately by the Dow–Jones Averages.With this proliferation of measures of the market and various parts of it adifferent question arises. That is, the value of the Dow alone in indicating the BroadMarket Trend is now questionable. Limited research has been done on this question.It is, however, my opinion that the Broad Market Trend must now be determinedby examining the Dow Industrials, the S&P 500, and the NASDAQ Composite.
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chapter 15.1
Trading the Averagesin the 21st CenturyAs I have pointed out in other new chapters and notes in the eighth edition,the ability to trade the Averages instead of individual stocks is a powerfulchoice offered by modern markets. Magee was of the opinion that the Averages offered technical smoothness often lacking in individual issues. Thiswould seem to be true intuitively. After all, just as a moving average smoothsdata, the average of a basket of stocks should dampen price volatility. Ofcourse, as Mandelbrot pointed out, in a 10-sigma market storm everythingsinks.Illustrated in this chapter are several detailed cases following Magee’ssuggestion of Average trading. I attempt to demonstrate here two perspectives: one, the horror of the immediate, that is, what the crash and paniclook like as they occur, and two, what the crash and panic look like inretrospect. Of course we all live in the present, except for the great billionaires, who can afford to doze through horrific Bear Markets. Bill Gates’ networth varied by $16B (billion) or $17B in early 2000. This, of course, wouldput the ordinary investor out of business.So the ordinary investor, you and I, have to respect the great yawningBear Market. We must step to the sidelines and let the bear eat the foolishvirgins, to borrow a Biblical metaphor.You will remember that Magee opined that a trendline break of 2% wassufficient to cause liquidation of longs when analyzing the Averages. In theaccompanying figures, this hypothesis is examined.EN9: In respect to the breaking of trendlines (by 2% or 5%) I should note thatthe breaking of a trendline is as much a warning as a signal to act. The break,instead of a change of trend to the reverse, may indicate a change of trend to thesideways – into a reversal or continuation pattern.
295
3/1986 4/1986 5/1986 6/1986 7/1986 8/1986 9/1986 10/1986 11/1986 12/1986
87
2/1987 3/1987 4/1987 5/1987 6/1987 7/1987 8/1987 9/1987 10/1987 11/1987 12/1987
FIGURE 179.1. S&P Reagan Crash. As can be clearly seen this crash sent numerous signals, starting withthe breaking of a major trendline by more than 2% in late August. Once this occurs extreme caution andwatchfulness must be exercised. The darker and darker complexion of things is brought out by the “smartselling,” which shows many “downthrust days” toward the end (October 10–20). The April trendline breaks(by more than 2%) would have ejected the trend trader also to be put back long in June. Observance of the2–3% trendline-break rule and/or use of Basing Points and progressive stops (Chapters 27 and 28) wouldhave avoided much needless grief. NOTE: Figures 180–197 have been moved to Appendix C.
219.99
Created with TradeStation www.TradeStation.com
SPX LAST-Daily
296
229.99
239.99
249.99
259.99
269.99
279.99
289.99
299.99
309.99
319.99
329.99
339.99
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196519701975
1980
1985
1990
1995
Trading the Averages in the 21st Century
FIGURE 179.2. S&P Long-Term Perspective. Viewed from afar it seems an exercise in futility to attempt to“time the market.” One must keep in perspective the crashes in market prices which are timed to coincidewith personal and business needs for short-term liquidity, or, in a word, cash. One must also remember themarket behavior from 1965–82, as well as the chart of Dow Theory Performance in Chapter 5.1.
200.00
400.00
Created with TradeStation www.TradeStation. com
SPX LAST-Monthly 02/29/2000 C = 1366.42 O = 1357.56 H = 1369.63 L = 1356.05 V =1181488000
Chapter 15.1:
600.00
800.00
1000.00
1200.00
1400.00
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$INDUA LAST-Daily 10/26/1987
380
2700
360
26002500
340
2400320
2300
300
22002100
280
20002601900240
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5/1987 6/1987 7/1987 8/1987 9/1987
$INDUA LAST-Daily 09/01/1998
920090008800860084008200800078007600www.TradeStation
740012/1997 98
2/1998 3/1998 4/1998 5/1998 6/1998 7/1998 8/1998
FIGURE 179.3. Three Bull Market Tops, 1929, 1987, 1998. Notice here that in eachcase the crash occurred after the nearest important trendline had been decisivelybroken — usually trendlines of approximately 3 months by 2% or more, and sometimes accompanied by reversal formations. All historic tops will show evidence ofattempts to resume the trend after a break of this kind. Belief dies hard. Nonetheless,hedging or exiting on these trend breaks proves to be the best strategy over and overagain.
19981999200020012002
2003
2004
2005
2006
Created with TradeStation
749.00
817.00
890.00
971.00
Trading the Averages in the 21st Century
FIGURE 179.3.1. The bull ’90s top in the S&P gave much clearer readings than the Dow top, the broken trendlines being paramount. Butwhile the Dow flirted with the emotions of bulls who wanted to believe in Dow 36,000 the S&P broke its trendlines and went south for thewinter. Potentially a very long winter. This might have started off as a rounding top and then became a complex-complex top, and youcan even see traces of Head-and-Shoulders top in it. It is the editor’s opinion that we may never see such unruly tops again in thisgeneration. The pent up greed and lust and naiveté as even the bootblacks (they still have those don’t they?) rushed to get the latest tulipbulbs. Tulips are like century plants. They only bloom once each hundred years. A little old lady with a ruler could have saved her portfoliohere. All it takes is not believing the hype (Dow 36,000 indeed!) and making an unemotional analysis and honoring the stops.
952.30
1,059.00
1,154.0