Technical Analysis and Stock Market Profits

472 Pages·2005·2.46 MB·English

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Richard W. Schabacker's great work, Technical Analysis and Stock Market Profits, is a worthy
addition to any technical analyst's personal library or any market library. His "pioneering
research" represents one of the finest works ever produced on technical analysis, and this book
remains an example of the highest order of analytical quality and incisive trading wisdom. SS
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is based in large part on the pioneer researches and writings of the late Richard Schabacker.' ee
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Schabacker presents technical analysis as a totally organized subject and comprehensively lays
out the various important patterns, formations, trends, support and resistance areas, and
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associated supporting technical detail. He presents factors that can be confidently relied on, and aanndd
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gives equal attention to the blemishes and weaknesses that can upset the best of analytical
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forecasts. Factors which investors would do well to absorb and apply when undertaking the hh
fascinating game of price, time and volume analysis. nn
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Richard Schabacker achieved his financial fame in the 1920s and 1930s. First as Financial Editor
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of Forbes and later as Editor of The Annalist, a weekend section of the New York Times. During
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this time he also authored three books. To many in the markets, who know of him, he is known
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"To be a successful trader, you need to understand markets deeper than your competitors. Agood ss ““TThhee rreeaall bbiibbllee ooff

way to get started is to read this ground-breaking book - a major text on technical analysis that
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Dr Alexander Elder, author of Trading for a Living
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"Today's technician has all the modern computer methods of interpreting price and buying
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trends. No matter how sophisticated they get, all technicians must get back to basics and there is
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no finer way of reviewing those time-honored technical principles, rules and precepts than with
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the original version of Schabacker's Technical Analysis and Stock Market Profits."
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chart trading then you must read Technical Analysis and Stock Market Profits by Richard tt

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valuable things that you don't know." rr
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J. Welles Wilder
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TECHNICAL ANALYSIS
AND STOCK MARKET
PROFITS
A Course in Forecasting
RICHARD W. SCHABACKER

TECHNICAL ANALYSIS
AND STOCK MARKET
PROFITS
A Course in Forecasting
RICHARD W. SCHABACKER
former Financial Editor of Forbes Magazine
and author of
Stock Market Theory and Practice
and
Stock Market Profits
Introduced and edited by
Donald Mack
HARRIMANHOUSELTD
43 Chapel Street
Petersfield
Hampshire
GU32 3DY
Tel: [phone]
Fax: [phone]
email: [email protected]
web site: www.harriman-house.com
Technical Analysis and Stock Market Profits
first printed in the United States of America in 1932
Second edition 1937
First published in Great Britain 1997 by Pearson Professional Limited
This edition published by Harriman House Ltd
© Harriman House Ltd 2005
ISBN 1897597568
British Library Cataloguing in Publication Data
ACIPcatalogue record for this book can be obtained
from the British Library.
All rights reserved; no part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise without either
the prior written permission of the Publishers or a licence permitting restricted
copying in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1P0LP. This book may not be lent,
resold, hired out or otherwise disposed of by way of trade in any form
of binding or cover other than that in which it is published,
without the prior consent of the Publishers.
Printed and bound
by Lightning Source
ABOUT THE AUTHOR
Richard W. Schabacker
Richard W. Schabacker achieved his financial fame in the 1920s and 1930s first as
Financial Editor of Forbesand later as editor of the Annalist, a weekend section of the
New York Times. During this time he also authored three books: Stock Market Theory
and Practice, 1930; Technical Analysis and Stock Market Profits, 1932; and Stock Market
Profits, 1934.
ABOUT THE SERIES EDITOR
Donald Mack
If any phrase describes the editor of the Traders’ Masterclass series, which is dedi-
cated solely to bringing back to traders and investors everywhere many of the great
and rare Technical Analysis classics from the past, that phrase would be “a perpet-
ual student of the market”. Students in high school or college eventually graduate.
Not so students of speculative markets. The study and the work is never finished,
especially when there is an enduring interest in Technical Analysis. The editor’s
interest grew by leaps and bounds when in the late 1970s and the 1980s he estab-
lished in Los Angeles the only bookstore in the USA that dealt exclusively in stock
and commodity books; those that were in print at the time and those that were out
of print. Current books were generally unchallenging and of various degrees of
quality. Many out-of-print books were also of varying degrees of quality, but so
many fascinating rare works from the 1920s to the 1950s, of great creativity and mar-
velous technical analytics and application came his way, that a life long appreciation
of their quality grew.
Almost needless to say, more attention was focused on the old books than on the
new, for he found those old books that made up the great classics were superior to
the new in so many ways. While operating the bookstore, there was a natural inflow
and outflow of many thousands of books and from those thousands of books a per-
sonal library and collection numbering a good 5,500 plus individual titles was put
together. A little of the knowledge contained in these great market classics rubbed
off on the editor (actually more than a little) and he trusts that it will also rub off on
the many market students of today and tomorrow as they also come in contact with
the superb Technical Analysis classics that will come their way through this Series.
380 380
360 360
340 340
320 320
300 INDUSTRIALS 300
280 280
260 260
240 240
220 220
200 200
180 180
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
5 5
DAILY
S4 AVERAGE STOCK 4M
HARE TRADING-BY MONTHS ILLIO
S N
N 3 3 S
O H
MILLI2 2ARES
1 1
1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937
THE DOW-JONES INDUSTRIAL STOCKS AVERAGE
Monthly High and Low of Closing Prices -- 1897 Through August, 1937.
TABLE OF CONTENTS
Editor’s Introduction xi
Preface to First Edition xix
Study I TECHNICAL APPROACH TO STOCK TRADING 1
Definition of a Stock Chart · Technical vs. Fundamental Factors · Technical Position
of Market Most Important · Sources for Chart Data · Advantages of Making Your
Own Charts · Which Stocks to Chart and How Many · Method of Constructing
Charts · Price, Volume and Time Scales · Major, Intermediate and Minor Movements
Study II IMPORTANT REVERSAL FORMATIONS 29
Public vs. Insiders · Detecting Professional Operations · Determining Major Turning
Points or Reversals · Volume Signs at Reversals · The One-Day Reversal ·
Comparative Volume at Tops and Bottoms · Price and Volume Must be Considered
Together · The Head and Shoulders Formation · Volume Action on Head and
Shoulders · Importance of Neck-Base Line · Varying Width of Shoulders · The Time
to Act on Head and Shoulders · Ascending and Descending Neck-Base Lines · Flat
Shoulder Variants of Head and Shoulders Formation · Reliability of Head and
Shoulders Formation · Logic of Chart Patterns
Study III IMPORTANT REVERSAL FORMATIONSCONTINUED 65
The Common or Rounding Turn · Volume Action on Rounding Turns · The
Symmetrical Triangle as a Reversal Formation · The Break-away Move from
Triangle Patterns · Volume Action on Break-Outs · Comparative Reliability of Early
and Late Break-Outs · Relation of Price Move to Patterns Size · Wave Movement
Following Apex · The Right-Angle Triangle as Reversal · The Descending Triangle ·
Volume on Break-Out From Descending Triangle · Effect of General Market on
Individual Stocks · Ascending Triangles as Reversals · The Wedge Formation ·
Action Following Up-Turned and Down-Turned Wedges Compared · Strict
Definition Required for Wedge Patterns · Probable Causes for Triangles
Study IV IMPORTANT REVERSAL FORMATIONSCONTINUED 105
The Double Top and Double Bottom · Requirements for Valid Double Reversal
Formations · Multiple Tops and Bottoms · Illustration of a False Double Top ·
Double Tops and Bottoms on Long-Range Charts · “M” and “W” Formations ·
Complex Reversal Formations · Relation to Multiple Formations and Head and
– vii–
TABLE OF CONTENTS
Shoulders · Varieties of Complex Patterns · Volume Indications in Complex
Reversals · The Broadening Top Reversal · Analysis of Broadening Top · Broadening
Top Ending Bull Market · Rally Following Completion of Broadening Top ·
Broadening Formations Which Fail · Possible Explanation for Broadening Top
Study V MINOR REVERSAL FORMATIONS 143
The Inverted Triangle · Differences Between Inverted and Normal Triangle ·
Inverted Right-Angle Triangle · The Diamond Formation · The Rectangle as a
Reversal · Break out of Dormancy · Relative Dormancy in an Active Stock · The
Island Reversal · Strict Requirements for Island Formation · The One-Day Island
Study VI MAJOR CONTINUATION FORMATIONS 177
Logic of the Intermediate Area Patterns · The Symmetrical Triangle as a
Continuation · Volume Action in Continuation Triangles · Right-Angle Triangles as
Continuations · The Ascending Triangle in Up-Trends · The Descending Triangle in
Down-Trends · Inverted Triangles as Continuations · The Rectangle as a
Continuation · Volume Action in Rectangle Continuations · The Flags and Pennants
· Various Flag Aspects and Interpretations · Flags in Up and Down-Trends ·
Relation of Pennant to Wedge Pattern · The Head and Shoulders Continuation
Pattern · Review of Continuation Patterns · Formations Which Change Their
Nature
Study VII MISCELLANEOUS INTERMEDIATE PATTERNS
AND PHENOMENA 219
Patterns with Drooping Bottom · Patterns with Accelerating Peaks · Trading on the
Accelerating Patterns · The Horn Formation · The Inverted Horn · Out-of-Line Price
Movements · Interpretation of Out-of-Line Action · The Zig-Zag Movement ·
Recurrent Patterns of Price Action · Warning Given by Recurring Movements · The
Price Gap – General Description · Classification of Gaps · The Common Gap · The
Break-Away Gap · Interpretation of the Break-Away Gap · Continuation Gaps · The
Exhaustion Gap · The Interpretation of the Exhaustion Gap · Variants of the Island
Formation · Gaps on Ex-Dividend and Ex-Rights Days
Study VIII TREND LINE ACTION 263
Definition of the Trend Line · The Theory of Trend Lines · Practical Uses of Trend
Lines · Methods of Establishing Trend Lines · Practicing on the Chart · Patterns
Appearing Within Trends · Trading on the Primary Trend Line · The Double Trend
Line or Trend Channel · Playing the Major Trend · Relative Profits With and Against
the Major Trend · Trend Lines Signaling Reversals · Horizontal Trading Areas ·
What Constitutes a Significant Break · Volume Action on Breaking of Trend Line ·
Fanning Trend Lines and Flattening Trends · The Throw Back After a Trend is
Broken · Estimating the Extent of Probable Movement by Trend Lines · Logarithmic
vs. Arithmetic Scales
GENERAL REVIEW OF VOLUME:Volume as an Indication of Reversal · Volume Action
at Temporary Halts in Trends · Declining Volume During Patterns Formulation ·
– viii–
TABLE OF CONTENTS
Volume as an Indication of Continuation · Relation of Volume to Price Movement ·
Relation of Volume Action to Basic Trends
THE DOW THEORY:Its Major Tenets · Limitations of Dow Theory in Practical Trading
Study IX SUPPORT AND RESISTANCE LEVELS 301
Definition of Support and Resistance Levels · Logical Explanation for Reversal
Levels · Reliability of Support and Resistance Levels · Bottoms Become Tops and
Tops Become Bottoms · Value of Weekly Charts in Forecasting · The Volume Factor
in Estimating Future Influence · Practical Application of Support and Resistance
Study to Current Charts · Resistance and Support Levels in Minor Fluctuations ·
Resistances Set Up by Trend Lines · The Cradle Formation · Resistance and Support
Levels Set Up by Head and Shoulders Formation · Support and Resistance Levels
Set Up by Multiple Formations · Support and Resistance Levels Set Up by
Rectangles and Right-Angle Triangles · Support and Resistance Levels Set Up by
Symmetrical Triangles · Support and Resistance at Gaps · Practical Uses of Pattern
Resistance Study · The Longevity of Support and Resistance Levels · 50 and 100 as
Critical Levels · The Half-Way Intermediate Movement Theory · Price Action at
Support or Resistance Levels
Study X MEASURING RULES AND FORMATIONS 333
Use of Support and Resistance Factors in Measuring · Trend Lines as Measuring
Indications · Measuring Implications of Patterns in Bull and Bear Markets ·
Measuring Implications of Head and Shoulders Formation · Measuring
Implications of Triangle · Flags and Pennants as Measuring Patterns · The Half-
Mast Congestion Pattern · Measuring Theories Applied to Gaps · The Single Gap
Measuring Theory · The Multiple Gap Measuring Theory · Dependability of Gap
Theories · The Time Element in Measuring
FALSEMOVESANDSHAKE-OUTS:Definition of False Move and Shake-Out · Triangles
Most Susceptible to False Moves · Volume Action on False Moves · False Moves From
Right-Angle Triangles · False Moves out of Rectangles · False Move vs. Out-of-Line
Movement · False Moves Follow Head and Shoulders Formations · Defense Against
False Moves · Strict Construction of Break-Out Rules · Use of Stop-Loss Orders
Against False Moves · The Bright Side of False Moves · The End Run Price Action
STOP-LOSS ORDERS:The Mechanics of Stop Orders · When to Place Stop Orders ·
Where to Place Stop Orders · The 5% Allowance Rule · Shifting the Stop Order · The
“Two Days Away” Rule · Stop-Loss Orders in Short Selling · Judgment in Placing
Initial Stop · Use of “Mental” Stops · Stop Orders Not Recommended Within
Patterns · Doubling or Switching Stops · Use of Stops to Make New Commitments
Study XI USE OF LONG-TERM CHARTS, AVERAGES AND GROUPS 377
Monthly Charts · Average Charts · Group Charts · Shorter Time Intervals in Charts ·
Hourly Charts · The Ticker Chart · Minor Move Chart · Minor Trend Line Chart ·
Point or Figure Charts
CHARTING BONDS AND COMMODITIES:The Bond Market · Commodity Charts · The
Wheat Market · Formations Appearing on Wheat Charts · The Cotton Market
– ix–