However, apart from this introduction and the further reading section, the rest of the book is relatively unchanged. Rather, it was to give you a feel for the lie of the land between here and there.
I ntroduction
Consider this graph of the share price of Diageo, one of the world's largest branded drinks companies (Figure I.1). And that even if the true nature of the journey had become clear to observers halfway through, they would still have found it worthwhile to then jump on board.
TO BE SUPPLIED
The fact is that even a successful chartist will make almost as many bad decisions as good ones. Six years after writing this exploration of mapping, I remain on the skeptical side of the fence.
FUNDAMENTAL ANALYSIS
2 Is the sector in which the firm operates likely to follow a different path than the economy as a whole. 4 Based on all of the above and past experience, what profits will the firm make this year and next year.
TECHNICAL ANALYSIS
In fact, it is rare for a technical analyst to completely avoid any reference to fundamentals. And this emphasis on price history as opposed to fundamentals can help you recognize why some fundamental analysts consider charts akin to reading tea leaves.
NOT SO DIVIDED AFTER ALL?
This "even the unexpected is predetermined" view of the world is anathema to fundamental analysts. Perhaps the most compelling argument for the Chartists is one that would appeal to any student of the roulette wheel.
SURELY, IF THESE PATTERNS ARE SO
Just as Picasso and Rembrandt would show strikingly different paintings of the same figure, you can find technical analysts who will give you completely different interpretations of the same price histories. They all talk in terms of triple bottom, rise, consolidation and breakthrough, just as Picasso and Rembrandt would agree on reds, blues and yellows.
OBVIOUS, YOU CAN’T PROFIT FROM THEM?
One explanation for this effect is that small companies should be more capable of serious growth than larger companies. There have been many launches of bond and investment trusts designed to capitalize on the effect of small companies.
THE STOCK MARKET IS NOT WHERE YOU’LL FIND MOST CHARTISTS
OPTIONS, FUTURES AND INDEXES
If your own feelings turn out to be correct and the dollar does indeed strengthen, to say $1.32, for example, you can forget about the option contract and sell your dollars at $1.32. But if you were wrong and the dollar weakened to $1.44, you're protected by.
WHERE FUNDAMENTALISTS WRING THEIR HANDS
It's that the translation of fundamentals into prices tends to be a much more nebulous process than is true in the stock market (and it's pretty nebulous there). The triple bottom, pure and simple, is not in the same league as a complex indicator.
CHARTISTS DO IT UP AND DOWN
Nevertheless, you can use this to support your judgment that a share price is about to fall (or rise). If you think the price will fall further than the difference between the current price and the strike price (and more than the cost of the option), you can buy the put option and wait for the stock price to fall.
BUYERS, SELLERS, FEAR, GREED AND PSYCHOLOGY
It consists of medium-term trends alternately in the direction or in the opposite direction of the long-term trend. Medium-term trends that go against the direction of the long-term trend are known as reactions.
TREND LINES
In Figure 2.7, the trend line could have been drawn, as the expectation of where it would go, once the second low was reached in the middle of year 1. Let's assume that the chartists consider the chart in Figure 2-7 at the beginning. of year 5 with a view to analyzing what will happen in year 6.
MOVING AVERAGES
See how the daily price drops sharply in the last three days of the month. The intersection of the two moving averages is now a true golden cross as the longer one is already rising when the shorter one breaks through it.
SCALES
Now consider the same information presented on a log scale graph, where prices cluster closer together as they get higher (Figure 2.22). When you're dealing with someone who does, it's just as well to look at it on a log scale.
WORDS OF WARNING ON THE CLASSIC PATTERNS
8 Always carefully examine the value scale (the vertical) of the graph you are considering. Thus, a head and shoulders spread across a 20p span of the vertical scale should in theory be followed by a 20p drop in price.
REVERSAL PATTERNS – TOPS
The price target after the right shoulder is completed remains the difference between the top of the head and the neckline directly below (a). A neckline is drawn through the beginning and end of the formation and the price difference between the neckline and the extreme high or low is measured.
REVERSAL PATTERNS – BOTTOMS
CONTINUATION PATTERNS
If the resistance line is pierced, the price is considered to be good for an advance equal to the height of the rectangle. As with the descending triangle (Figure 3.11) the target after the breakout (which should see high volume) is given by the base of the triangle.
VOLUME
Hopefully, these will support the conclusions from the price pattern, pointing to the same conclusion from other evidence.
RELATIVE STRENGTH OR SHARE PRICE RELATIVE
A minority of chartists apply trendlines to the relative strength line with much the same enthusiasm as they apply the technique to stock prices. If a top forms in the relative strength line, it can confirm or predict the same pattern in the price itself.
BREADTH AND THE
ADVANCE/DECLINE LINE
MOMENTUM
This secondary indicator is therefore known as a momentum oscillator and the table in Figure 4.3 demonstrates how it is calculated. 1 Oscillator steady while stock price changes because change is the same amount every day (ie it doesn't get faster or slower).
WELLES WILDER’S RSI
The choice is crucial, as shown in Figure 4-5, which adds a ten-day oscillator to the graphs already shown in Figure 4-4. The formulation is shown in the table in Figure 4.6, and Figure 4.7 shows how it looks in a graph.
STOCHASTIC
But here is a 'Buy' signal. Part 1: Stochastic does not confirm new low in share price. Part 2: 'Slow %D' crosses 'Fast %D', then cuts up through the oversold line Stochastic fails to deliver. It would have done that on the top, as it does on the other top.
MOVING AVERAGE CONVERGENCE- DIVERGENCE (MACD)
What is plotted is the MACD line, which is simply the difference between these two: this is what happens in column 5 of the table. The first step in MACD is to create 13 and 26 day moving averages (actually these are . 'exponential' moving averages - see text) of the stock price.
BODIES AND SHADOWS
Along with the elegance of candlesticks comes a bunch of theory and catchy new terminology. Candlestick planning techniques echo the general Japanese enthusiasm for diminutives by highlighting the importance of very short-term stock price movements.
CANDLESTICK PATTERNS
A white candle is followed by a longer black one whose body limbs are up and down (opened higher than yesterday's close and closed lower than yesterday's open). A long white candle is followed by a higher short candle (immaterial color), then a long black candle, lower than the high one.
WINDOWS
JACK SCHWAGER’S TESTS
Other chartists do this too, but it is more typical of the point and figure technique. If the price today does not move through the point and figure chartist's selected quantum, he simply.
HOW TO COMPILE A POINT AND FIGURE CHART
The effect of the point and figure method is to compress the five main trends of the conventional chart into five simple columns of O's and X's. Second, professional point and figure chartists often use daily highs and lows, not closing prices.
TREND LINES AND TRADING SIGNALS
THE COUNT
The recurring theme is that of the cycle - that ups will be followed by downs will be followed by ups - just like the tide, the moon and the seasons.
FIBONACCI
There is no record of Fibonacci using his numbers for investment purposes. Many of nature's finest creations are apparently modeled after Fibonacci numbers, including spiral galaxies, musical notes, and the vital statistics of Venus de Milo.
ELLIOTT WAVE THEORY
In Elliott's book Nature's Law: The Secret of the Universe, published in 1945, he listed the significant ups and downs in the Dow shown in Figure 7.3. He predicted that this would end in the late 1980s to complete the growth phase. Figure 7.3 Elliott Waves on Wall Street.
GANN
When October 1987 proved to be a less than modest reversal, he assigned it the status of 'end of wave 5'. Fanlines are meant to be drawn from significant lows or highs, especially all-time lows and highs – and in abundance.
COPPOCK
The signals were rare – for the whole decade there were only three buys (all official) and four sells – but most were gilt. These are very evident in Figure 7.6, where strong gains can be seen in the month or two leading up to each of the last three IC/Coppock buy signals.
Update for the 2002 edition
Coppock also devised a short-term indicator that was said to work well in the US but not in the UK. As I wrote in the summer of 2002, it is too early to judge whether this Coppock signal is a disappointment or a disaster.
OTHER CYCLISTS
There has been a remarkable uniformity in the conclusions of the studies made for all forms of technical analysis. It would have been possible (albeit difficult work) to identify six direct success stories to cover in this chapter.
JESSE LIVERMORE
Well, when it got to 98, I said to myself, 'Bethlehem is going clean through 100, and when it does, the roof is going to blow off!' The band more than clearly said the same thing. This is surely one of the most compelling passages in all of the investment literature.
VICTOR SPERANDEO
He says his style integrates “knowledge of the odds” — he claims to be an excellent card player — “the markets and their instruments, technical analysis, statistical probability, economics, politics, and human psychology.” The rest of the technical component of Sperandeo's style consists of momentum oscillators, moving averages ("I never buy a stock when prices are below the moving average"), and relative strength—not the Welles Wilder version—which he uses as secondary indicators. used.
MONROE TROUT
As with everyone in this chapter, there is much more to Trout's success than technical analysis. Despite dominating the market in books on technical analysis (see Further Reading) and holding a senior position at a prominent New York securities firm, Schwager is basically a writer not a doer, or was at all happened when he wrote the two Wizardbooks.
STANLEY KROLL
Trout rejects the typical amateur trader whose research is what their broker tells them or what they read in the weekend press and what 'think you can earn 100 percent a year. He describes how, encouraged in part by interviews with the Wizards, he is resuming the trading activity he had previously given up due to its lack of success.
ANTHONY BOLTON
For him, the key weather indicator is relative strength, in terms of how a stock is performing relative to the market. Bolton does not have a detailed assessment of the individual components that are linked in the QAS chart.
CRISPIN ODEY
But after the War Loan rose 40 percent — which, by Odey's reading of the fundamentals, was just the first rate — it went relentlessly back to the starting point: "by then I'd lost nine-tenths of my clients." That helped me a lot to learn that you have to follow the charts.' The charts also allowed Hendry to come out of the bubble fairly neatly.
Postscript
Odey further argues that at other times you should follow the fundamentals and ignore the charts. In 1994, during his embrace with War Loan, he transferred his fund about once every four years.
CONCLUSION
The idea was to take a random but fairly broad and representative selection of stock price charts and search them for chart signals.
NOT A SCIENTIFIC TEST
I have absolutely no doubt that many professional artists will find many of the renderings I have arrived at unsatisfactory.
A SPRINKLING OF EXPERT VIEWS
Chartanalysts is a division of Stockcube, a small independent equity research company based on the merger of the investment newsletter, FullerMoney, and the long-established American charting firm, Chartcraft. I also have to give credit here to Trendsetter Software whose custom analyst software I used to create many of the secondary charts.
A SYMPATHETIC HEARING
You should be able to track down this very valuable chronicle on the Sunday Times website. I use an Apple computer, which means I am unable to use most of the major house design packages on the market as they only work on PC.
HOW TO USE THIS CHAPTER
RANDOMNESS IS RESTRICTED
If a stock stalls in a certain price area after a rally, it can stay there for a short time or a long time. It can bounce up and down between two fairly set prices, or it can move in a descending range.
GET A SYSTEM AND LOOK TWICE
It will also be in one of these three positions relative to last month's response. There is no thorough 'system' that drives the entry or exit of any of these trades.
Key to Chapter 9 figures
Three days after the start of A, the candlesticks give a classic top signal - a bearish captured formation (a dark candlestick whose extreme ends are higher and lower than the previous day). Instead, it's the day BT spun off its mobile operations under the name MMO2, which started life with a share price of around 80p.
