Table Of Content

7700++ DDVVDD’’ss FFOORR SSAALLEE && EEXXCCHHAANNGGEE wwwwww..ttrraaddeerrss--ssooffttwwaarree..ccoomm wwwwww..ffoorreexx--wwaarreezz..ccoomm wwwwww..ttrraaddiinngg--ssooffttwwaarree--ccoolllleeccttiioonn..ccoomm wwwwww..ttrraaddeessttaattiioonn--ddoowwnnllooaadd--ffrreeee..ccoomm CCoonnttaaccttss aannddrreeyybbbbrrvv@@ggmmaaiill..ccoomm aannddrreeyybbbbrrvv@@yyaannddeexx..rruu SSkkyyppee:: aannddrreeyybbbbrrvv EIGHTH EDITION TECHNICAL ANALYSIS OF STOCK TRENDS Technical Analysis of Stock Trends 8th Edition Robert D. Edwards John Magee and Editor and Co-Author of the 8th Edition W.H.C. Bassetti Adjunct Professor Department of Finance and Economics Golden Gate University San Francisco Library of Congress Cataloging-in-Publication Data Edwards, Robert D. (Robert Davis), 1893–1965 Technical analysis of stock trends / by Robert D. Edwards, John Magee, and W.H.C. Bassetti.—8th ed. p. cm. Includes bibliographical references and index. ISBN 1-57444-292-9 (alk. paper) 1. Investment analysis. 2. Stock exchanges—United States. 3. Securities—United States. I. Magee, John. II. Bassetti, W. H. C. III. Title. HG4521 .E38 2001 332.63′2′0420973—dc21 00-068427 Catalog record is available from the Library of Congress This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. A wide variety of references are listed. Reasonable efforts have been made to publish reliable data and information, but the author and the publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming, and recording, or by any information storage or retrieval system, without prior permission in writing from the publisher. The consent of CRC Press LLC does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from CRC Press LLC for such copying. Direct all inquiries to CRC Press LLC, 2000 N.W. Corporate Blvd., Boca Raton, Florida 33431. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. Dow–JonesSM, The DowSM, Dow–Jones Industrial AverageSM, and DJIASM are service marks of Dow– Jones & Company, Inc., and have been licensed for use for certain purposes by the Board of Trade of the City of Chicago (CBOT®). The CBOT’s futures and future options contracts based on the Dow–Jones Industrial AverageSM are not sponsored, endorsed, sold, or promoted by Dow–JonesSM, and Dow–JonesSM makes no representation regarding the advisability of trading in such products. Visit the CRC Press Web site at www.crcpress.com © 2001 by CRC Press LLC St. Lucie Press is an imprint of CRC Press LLC No claim to original U.S. Government works International Standard Book Number 1-57444-292-9 Library of Congress Card Number 00-068427 Printed in the United States of America 1 2 3 4 5 6 7 8 9 0 Printed on acid-free paper Preface to the Eighth Edition Here is a strange event. A book written in the mid-20th century retains its relevancy and importance to the present day. In fact, Technical Analysis of Stock Trends remains the definitive book on the subject of analyzing the stock market with charts. Knock-offs, look-alikes, pale imitations have proliferated in its wake like sea gulls after a productive fishing boat. But the truth is, they have added nothing new to the body of knowledge Edwards and Magee originally produced and Magee refined up to the 5th edition. What accounts for this rare occasion of a book’s passing to be a classic? To be more, in fact, than a classic, to be the manual or handbook for current usage? To answer this question we must ask another. What are Chart formations? Chart formations identified and analyzed by the authors are graphic representations of unchanging human behavior in complex multivariate situations. They are the depiction of multifarious human actions bearing on a single variable (price). On price converge a galaxy of influences: fear, greed, desire, cunning, malice, deceit, naivete, earnings estimates, broker need for income, gullibility, professional money managers’ need for performance and job security, supply and demand of stocks, monetary liquidity and money flow, self-destructiveness, passivity, trap setting, manipulation, blind arrogance, conspiracy and fraud and double dealing, phases of the moon and sun spots, economic cycles and beliefs about them, public mood, and the indomitable human need to be right. Chart formations are the language of the market, telling us that this stock is in its death throes; that stock is on a rocket to the moon; that a life and death battle is being waged in this issue; and in that other, the buyers have defeated the sellers and are breaking away. They are, in short, the unerasable fingerprints of human nature made graphic in the greatest struggle, next to war, in human experience. As Freud mapped the human psyche, so have Edwards and Magee mapped the human mind and emotions as expressed in the financial markets. Not only did they produce a definitive map, they also produced a method- ology for interpreting and profiting from the behavior of men and markets. It is difficult to imagine further progress in this area until the science of artificial intelligence, aided by yet unimaginable computer hardware, makes new breakthroughs. If It Is Definitive, Why Offer a New Edition? Unlike Nostradamus and Jules Verne (and many current investment advi- sors), the authors did not have a crystal ball or a time machine. Magee did not foresee the electronic calculator and made do with a slide rule. And while he knew of the computer, he did not anticipate that every housewife and investor would have 1000 times the power of a Whirlwind or Univac I on his (her) desk (cf. Note on Gender). In short, the March of Time. The Progress of Science. The Inexorable Advance of Technology. Amazingly, the great majority of this book needed no update or actual- ization. Who is to improve on the descriptions of chart formations and their significance? But insofar as updates are necessary to reflect the changes in technology and in the character and composition of the markets, that is another story. Human character may not change, but in the new millennium there is nothing but change in the character and composition of the markets. And while reg- ulatory forces might not be completely in agreement, the majority of these changes have been positive for the investor and the commercial user. Of course, Barings Bank and some others are less than ecstatic with these developments. An Outline of the Most Important Additions Made to This Book to Reflect Changes in the Times, Technology, and Markets Generally speaking, these additions, annotations, and updates are intended to inform the general reader of conditions of which he must be aware for investing success. In most cases, because of the enormous amount of material, no attempt is made to be absolutely exhaustive in the treatment of these developments. Rather the effort is made to put changes and new conditions in perspective and furnish the investor with the resources and proper guide to pursue subjects at greater length if desired. In fact, an appendix has been provided, entitled Resources, to which the reader may turn when he has mastered the material of the book proper. The stubborn individualist may realize investment success with the use of this book alone (and paper, pencil, ruler, and chart paper (cf. Section on Tekniplat™ chart paper). Technology In order to equip this book to serve as a handbook and guide for the markets of the new millennium, certain material has been added to the text of the 5th and 7th editions. Clearly the astounding advances in technology must be dealt with and put in the context of the analytical methods and material of the original. To achieve success in the new, brave world, an investor must be aware of and utilize electronic markets, the Internet, the microcomputer, wireless communications, and new exchanges offering every kind of exotica imaginable. The advanced investor should also be aware of and understand some of the developments in finance and investment theory and technology — the Black–Scholes Model, Modern Portfolio Theory, Quantitative Analysis. For- tunately, all these will not be dealt with here, because in truth one intelligent investor with a piece of chart paper and a pencil and a quote source can deal with the markets, but that is another story we will explore later in the book. Some of these germane subjects will be discussed sufficiently to put them in perspective for the technical analyst, and then guides and resources will be pointed out for continued study. My opinion is that the mastery of all these subjects is not wholly necessary for effective investing at the private level. What need does the general investor have for an understanding of the Cox–Ross–Rubinstein options analysis model to recognize trends? The Ed- wards–Magee model knows things about the market the CRR model does not. Trading and Investment Instruments The new universe of available trading and investment instruments must be taken into account. The authors would have been in paradise at the profusion of alternatives. In this future world, they could have traded the Averages (one of the most important changes explored in this book); used futures and options as investment and hedging mechanisms; practiced arbitrage strate- gies beyond their wildest dreams; and contemplated a candy store full of investment products. The value and utility of these products would have been immeasurably enhanced by their mastery of the charting world of technical analysis. As only one example, one world-prominent professional trader I know has made significant profits selling calls on stocks he correctly analyzed to be in down trends, and vice versa — an obvious (or, as they say, no-brainer) to a technician, but not something you should attempt at home without expert advice. Techniques like this occasioned the loss of many millions of dollars in the Reagan Crash of 1987. Changes and Developments in Technical Analysis Have any new chart patterns (that is to say, changes in human behavior and character) emerged since the 5th edition? Not to my knowledge, although there are those who take the same data and draw different pictures from them. How else could you say that you had something new! different! better!? There are other ways of looking at the data which are interesting, sometimes valuable, and often profitable, which goes to prove that many are the ways and gateless is the gate to the great Dow. Point and figure charting have been used very effectively by traders I know, and candlestick charting depicts data in interesting ways. Furthermore, since Magee’s time, aided by the computer, technicians have developed innumerable, what I call, number- driven technical analysis tools: (the puzzlingly named) stochastics, oscilla- tors, exponential and other moving averages, etc., etc., etc. It is not the intent of this book to explore these tools in depth. That will be done in a later volume. These concepts are briefly explored in an appendix supplied by Richard McDermott, editor of the 7th edition. I have also made additions to the book (Chapter 18.1) to give a perspective on long-term investing, since Magee specifically addressed the second part of the book (on tactics) to the speculator. I have substantially rewritten Chapters 24 and 42 to reflect current ideas on portfolio management and risk management. I have expanded on the idea of rhythmic trading — an idea which is implicit in the original. I have expanded the treatment of runaway markets so that the Internet stocks of the 1990s might be put in perspective (Chapter 23). And then, paradigms. Paradigms, as everyone should know by now, are the last refuge of a fundamentalist when all other explanations fail. Paradigm Changes Whenever the markets, as they did at the end of the 20th century, depart from the commonly accepted algorithms for determining what their prices ought to be, fundamentalists (those analysts and investors who believe they can determine value from such fixed verities as earnings, cash flow, etc.) are confronted with new paradigms. Are stock prices (values) to be determined by dividing price by earnings to establish a reasonable price/earnings (p/e) ratio? Or should sales be used, or cash flow, or the phase of the moon, or — in the late 1990s, should losses be multiplied by price to determine the value of the stock? Technicians are not obliged to worry about this kind of financial legerdemain. The stock is worth what it can be sold for today in the market. Next to last and hopefully not least, in the near future the large audience for this book and its accumulated wisdom may expect a CD-ROM edition, which should make navigation and study of the book marvelously easy on a computer. The Crystal Ball Investors will get smarter and smarter, starting with those who learn what this book has to say. The professionals will stay one step ahead of them, because they are preternaturally cunning and because they spend all their time figuring out how to keep ahead of the public, but the gap will narrow. Software and hardware will continue to advance, but not get any smarter. Mechanical systems will work well in some areas, and not in others. Me- chanical systems are only as good as the engineer who designs them and the mechanic who maintains them. Buying systems is buying trouble. Every- one should find his own method (usually some variant of the Magee method, in my opinion). All good things will end. All bad things will end. The bag of tricks with which the insiders bilk the public will get smaller and smaller. New and ingenious procedures will be developed by the insiders. The well of human naivete is bottomless. For every one educated, a new one will be born in a New York minute. It is deeply disturbing at the turn of the century