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P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD The Visual Investor i P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD Founded in 1807, John Wiley & Sons is the oldest independent publish- ingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe, AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarket- ing print and electronic products and services for our customers’ profes- sionalandpersonalknowledgeandunderstanding. TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide theadviceandstrategiesneededtoprospertodayandwellintothefuture. Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com. ii P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD The Visual Investor How to Spot Market Trends Second Edition JOHN J. 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LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategies containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossof profitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidethe UnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Murphy,JohnJ. Thevisualinvestor:howtospotmarkettrends/JohnJ.Murphy.–2nded. p. cm.–(Wileytradingseries) Includesindex. ISBN978-0-470-38205-9(cloth) 1. Investmentanalysis. 2. Portfoliomanagement. I. Title. HG4529.M8632009 332.63(cid:2)22–dc22 2008048202 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 iv P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD ToClareandBrian v P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD vi P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD Contents Preface xv Acknowledgments xix SECTION ONE INTRODUCTION 1 WhatHasChanged? 1 FundCategories 2 GlobalFunds 2 InvestorsNeedtoBeBetterInformed 3 BenefitsofVisualInvesting 3 StructureoftheBook 3 CHAPTER 1 What Is Visual Investing? 5 WhyMarketAnalysis? 5 TheTrendIstoBlend 6 What’sinaName? 6 WhyStudytheMarket? 7 ChartistsAreCheaters 7 It’sAlwaysJustSupplyandDemand 7 ChartsAreJustFaster 8 ChartsDoLookAhead 8 PicturesDon’tLie 9 PictureAnythingYouWant 9 TheMarket’sAlwaysRight 9 It’sAllAboutTrend 10 Isn’tthePastAlwaysPrologue? 10 vii P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD viii CONTENTS TimingIsEverything 13 Summary 13 CHAPTER 2 The Trend Is Your Friend 15 WhatIsaTrend? 15 SupportandResistanceLevels 18 RoleReversal 18 ShortVersusLongTerm 25 Daily,Weekly,andMonthlyCharts 28 RecentversusDistantPast 28 Trendlines 31 ChannelLines 34 RetracingOurStepsbyOne-Third,One-Half,andTwo-Thirds 34 WeeklyReversals 38 Summary 38 CHAPTER 3 Pictures That Tell a Story 41 ChartTypes 41 TimeChoices 46 Scaling 46 VolumeAnalysis 50 ChartPatterns 52 MeasuringTechniques 61 EventheFedIsCharting 65 TheTriangle 65 Point-and-FigureCharts 66 ChartPatternRecognitionSoftware 70 SECTION TWO INDICATORS 73 CHAPTER 4 Your Best Friend in a Trend 75 TwoClassesofIndicators 75 TheMovingAverage 76 TheSimpleAverage 76 P1:JYS FM JWBT015-Murphy December2,2008 9:9 Printer:TBD Contents ix WeightingtheAverageorSmoothingIt? 77 MovingAverageLengths 77 MovingAverageCombinations 78 Summary 95 CHAPTER 5 Is It Overbought or Oversold? 97 MeasuringOverboughtandOversoldConditions 97 Divergences 97 Momentum 99 WellesWilder’sRelativeStrengthIndex 100 TheStochasticsOscillator 110 CombineRSIandStochastics 113 Summary 119 CHAPTER 6 How to Have the Best of Both Worlds 121 MACDConstruction 121 MACDasTrend-FollowingIndicator 123 MACDasanOscillator 123 MACDDivergences 125 HowtoBlendDailyandWeeklySignals 125 HowtoMakeMACDEvenBetter—TheHistogram 128 BeSuretoWatchMonthlySignals 130 HowtoKnowWhichIndicatorstoUse 130 TheAverageDirectionalMovement(ADX)Line 133 Summary 135 SECTION THREE Linkage 137 CHAPTER 7 Market Linkage 139 TheAssetAllocationProcess 140 TheRelativeStrengthRatio 142 2002ShiftfromPapertoHardAssets 142 Commodity/BondRatioalsoTurnedup 144 TurnsintheBond/StockRatio 144