INVESTOR’S GUIDE TO Charting SECOND EDITION In an increasingly competitive world, we believe it’s quality of thinking that will give you the edge – an idea that opens new doors, a technique that solves a problem, or an insight that simply makes sense of it all. The more you know, the smarter and faster you can go. That’s why we work with the best minds in business and finance to bring cutting-edge thinking and best learning practice to a global market. Under a range of leading imprints, including Financial Times Prentice Hall, we create world-class print publications and electronic products bringing our readers knowledge, skills and understanding which can be applied whether studying or at work. To find out more about our business publications, or tell us about the books you’d like to find, you can visit us at www.business-minds.com For other Pearson Education publications, visit www.pearsoned-ema.com INVESTOR’S GUIDE TO Charting An analysis for the intelligent investor SECOND EDITION ALISTAIR BLAIR An imprint ofPearson Education London · New York · Toronto · Sydney · Tokyo Singapore · Hong Kong · Cape Town · New Delhi Madrid · Paris · Amsterdam · Munich · Milan · Stockholm PEARSON EDUCATION LIMITED Head Office: Edinburgh Gate Harlow CM20 2JE Tel: +44 (0)1279 623623 Fax: +44 (0)1279 431059 London Office: 128 Long Acre London WC2E 9AN Tel: +44 (0)20 7447 2000 Fax: +44 (0)20 7447 2170 Website: www.financialminds.com www.business-minds.com First published in Great Britain in 2003 © Pearson Education Limited 2003 The right of Alistair Blair to be identified as Author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. 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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, investing, or any other professional service. If legal advice or other expert assistance is required, the service of a competent professional person should be sought. The publisher and contributors make no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any responsibility or liability for any errors or omissions that it may contain. C ontents Preface ix Introduction xi 1 The art of the chart 1 Fundamental analysis 3 Technical analysis 5 Not so divided after all? 6 Surely, if these patterns are so obvious, you can’t profit from them? 9 The stock market is not where you’ll find most chartists 11 Options, futures and indexes 11 Where fundamentalists wring their hands 13 Chartists do it up anddown 15 Buyers, sellers, fear, greed and psychology 17 2 The trend is your friend: basic components of any price chart 21 Trends 23 Trend lines 28 Moving averages 34 Scales 41 3 The head and shoulders and friends 45 Words of warning on the classic patterns 48 Reversal patterns – tops 53 Reversal patterns – bottoms 65 Continuation patterns 65 4 The supporting cast: secondary signals to support the main conclusion 75 Volume 77 Relative strength or share price relative 78 Breadth and the advance/decline line 80 Momentum 80 v Contents Welles Wilder’s RSI 83 Stochastic 89 Moving average convergence-divergence (MACD) 92 There are many more … 94 5 The technique from Japan: an introduction to candlestick charting 97 Bodies and shadows 99 Candlestick patterns 101 Windows 103 Jack Schwager’s tests 103 6 Is the price moving? Reallymoving? – Point and figure charts 105 How to compile a point and figure chart 108 Trend lines and trading signals 113 The count 114 7 A quick guide to the chartist gospels 117 Fibonacci 119 Elliott Wave Theory 120 Gann 124 Coppock 126 Other cyclists 132 8 Whoever made money from charting? 133 Jesse Livermore 135 Victor Sperandeo 137 Monroe Trout 138 Stanley Kroll 139 Anthony Bolton 140 Crispin Odey 142 Conclusion 145 9 A modest grapple with real life: a look at some real charts 147 Not a scientific test 149 Asprinkling of expert views 150 Asympathetic hearing 151 vi Contents How to use this chapter 152 Randomness is restricted 152 Get a system and look twice 153 10 Will it work for you? 197 Two charts 199 What works for the professionals? 203 Just the gold-plated signals? 205 Or dime-a-dozen? 206 Not needing to understand 208 But needing to change 208 Should professional chartists be rich? 209 And fundamentalists? 209 And you? 210 11 Net gains for charting: what the internet can do for chartists 211 Obliging online brokers 214 Community offerings 215 Gold standard 219 Breathless in the US – platinum standard 220 Net advice 224 Glossary 227 Further reading 234 Index 237 vii P reface Without question, some people have made astonishing amounts of money from studying share price charts (and virtually nothing else) and foretelling whether the shares would rise or fall. It is equally certain that further astonishing amounts of money have been lost in the same endeavour. Sometimes the same people have clocked up both achievements, or just the second. But a few have restricted themselves to the first. And many more strive to do so. This book is intended to help non-chartist investors understand what chartists do. Few claims in the world of investment attract more divided views than whether a head and shoulders formation denotes anything more than nothing. Many investors have heard of this and other oddly named tools of the chartists’ trade, without understanding them. Even if you see no financial benefit in gaining this understanding, you may well be interested to discover how the other half lives (and if you take in the currency, commodities and derivatives markets, it is probably more than half). There may well be more books about charting (or technical analysis as it is also known) than there are books about the more conventional approach – fundamental analysis. This book’s modest claim to differentiation is that it is not written by a chartist. It tackles the subject from your side of the fence. Although I have both feet in the fundamentalist’s camp, I do not scorn every chartist utterance. Asignificant fraction, but not all. I do believe that some chartists – a comparative few, indeed – have been remarkably successful over very long periods of time. In the 12 years to 1991, Mr Gil Blake, a small private US money manager, averaged a 45 per cent annual return. This was not the outcome of a few lucky years combined with many poor ones: his lowest annual return was 20 per cent. All of Mr Blake’s investment decisions are derived from technical analysis. In the 1980s, Mint, another US investment management company (but 50 per cent owned by the UK firm Man Group) achieved annual returns of ix