The Visual Investor How to Spot Market Trends John J. Murphy ® JOPNWALEY & SONS, INC. ew York « Chichester # Brisbane + Toren « Singapore + einhelm “a Patty who has now sunsived the wriings oF tives books, To Clave ond tran, who asked: Dad, ttyour Frst too Boake were so goad, why do you need sie a thd one? And to Kine ancl, tho ciuys cemplinent sme on my ties Copy 1886 yak Murphy Pulsed le Wey & Son, ‘cits eeservel rine somutapcousty'n Can apeoduetio or eanshton uct pat whic werk beyond shat pesmited ection WOT ori he [9T6 ved States Cit on He ermine ofthe enpriht ever onal Requests or perieslon vee nermatien Shu be mister Persson earn, oh ing & Sun. ‘ricytioton eget 0 proves nd aha nonsaton ler naj matercor. wa honing a ee eeepc mbar mer arantce rei Meee Sis conwetsn rteeiond porsonsienlaioso ht ICM & Sscatarson ov sSICOSNTS JON ADMPTED UY ACCMBITTROF Thr NARA a ASSOCUATON AMO ACOMBETTEF OF PBLEHESS scat Print ine Une Sate of Aceon wooarassa2 Contents Preface bx Acknowledgments xi SECTION 1 Winat Has Changed? 1 Mutat Fund Categeries 2 Giobat Funds 2 INTRODUCTION. 1 Investors Need te Be Eetlerhionued 3 Honetits of Vswal vests Scructurewfthe Rk 3 ‘Ghopter Is What ts Vinal Investing? Why Market Anatses? The Trend sto lend 6 What's ina Name? Why Sud’ the Market? Chartists Ate Chesters Is Always dust Sopply and Demanc. ‘charts Are hist Faster 8 tagrln De Linh Alowal 3 Plenures Don't Lie 9 Pieture anyeting You Want a ie Contents The Market's Always Right 11 We AN shoot rend 11 [an't the Past Always Protogne? 12 Timing is Evervtbiag 12 Sumearg 12 Chnpler 2: Tae Trend Is Your Fond 15 Whatiea Tread? Me Suppne aod Reststanee Levels 16 Role Rowena 16 Shor! vertu Long'Teem 7% Dil Weel, and Monthly Charts 28 Recent versa Distant Past 28 Urine AL channetTines 34 eteacing On Steps by One-tirrd, Oneal, aud TwueThuds WeeklyRevessals 3? Soumary 2 Chapter 3; Plomrea That Tell aStory at Charctypes 4 time Choices 44 Sealing 48 Volume Analysis 4 Chart Palteras 58 Msasuring Tectmiqies vou the Fei Ts Charting 64 The Tetanete Pree Gaps 70 Summary 70 SECTION 2; INDICATORS 77 (Chapter 4: Your Hest friend by aTrend 73 “Two Classes on hieators 7 the Moving Aversge 74 TheSinple Average 14 Wiighting the Sveragecor Smoothing I? 75 Contents ‘Moving Average Lengths 75 ‘Mowing Average Somhinations. 78 Summary 9% Chapter : felt Overhought or Oversold? 55 Measuring Overbougnt and ersélu Conditions Tiverpences 95 Momentum 96 Welles Wilder's Relative Strength index (RS) Wk The Stachastics Osellator 108 Coubie RS and Stocnasties U4 Summary 14 Chopter 6: How tu Wave the Beat of Botl Worlds 110 MAUD Construction 19 MACD as Trendfollawing budicaswr 120 MACDasan Grellter 120, MACDBicongenees 123 Howe to end Daily ane Wockly Signals 128 ovr {o Moke MAD Tova Bello The Matogram 1 Using WACD with Slochasticn 125 Huss lo Kaw Bil baiealars ts Use 131 te Average Directional Mewcement (ADN) Lins ISL oummnary 133 SECTION 3: LINKAGE 135 Chapter 7: Market Unkayes 137 Iwtroduetien 197 Haw This Asset Classes Interact 138 ‘Te lapertance of Zeaumodlty Prices (32 Wate Industral Poees 12 old and OM Are Also important 41 Journal ef Commerce JOC) buder 141 SGotaman Seens Commouity tudes 145 ‘The Impact of Bonas on Stole. 149 iting: Loss Was Metals’ Gata 1, 1985 Markets Reverselatermarkel Picture. 148 “The CRE IndexsTressury Bond Rabio I ‘The International Dimens.on 155 Summary 155 Chapter & Stock Sectors 150 Iutroduetion 359 ‘The New York Stork Exchange (NYSE) Advance Dectine Line Smilev Storks and Market Breadth 188 ‘The Delta's pact ve Salar Stucks 169 Virracial Stocks and Bde 168 Commodny stated Sncks 177 Soumnary 173 Chapter % Relative Strength and Rotaion 177 Iokredhwctlon 177 What bs Refetive Strength? 178 op Tawn Anatysis 178 Relative versus Alseinte Percrmance 78 Why Rotate at AI) 179 Gold Snares and Relatwesteenyllt_ TE Gold Shares versas Gola Pulbon. 181 Simple Analysis Applied to Relative Strergth Charts 18 Rotation withia Secor. U4 Rotation tram Ore Sector to Auolber 188 Fuud Stocks Shi ia Late 1995 188 Swamary 188 SECTION 4; MUTUAL FUNDS 193 (Chapter 1; Sectors and Industry Groups 195 Ineenductioa 188 Standard &J"c0r's Groug Dora 196 Pines Vendors 196 xchange Traded Index Op Investor dines: Daity 199 The at Stet Jour #4 BA Morual Fone Data 200 Summary 218 ws 19 eeONS 199 Contents Chapter 11; Mutual Funds 215 fuchsin 215 ‘What Works on Nua Fuss? 218 Sources cfintormation 216 Blending Fondamental and Tectcical Data 216 Open-versus Closeé-Bnd Funds 257 [Another Look at Relative Strength Analysis 227 Chart Besmples 21 Some Charting Adjustments an Mutual Funds 232 Summary 238 Chapler 1%: Global Inventing 285 Introduction 235. Why Gu Overseat? 236 Currency Considerations 236 American Bopastony Raveints 24 ‘ClowesdTind Favelgn Funds 240 Open Gnd Funds 213 Chat Beamnples 251 ‘Watch Cortelation to Achieve Diverificaiet 251 Sommary 257 CONCLUSION 259 ‘wy ts Calle Vie omsting 259 ‘Te Secon! ThesnerSeetee Investing 261 Application coMutual Funes 20 losing tnovghts 262 Getting Siarted 253 ‘The Computer 263 Soine Wellnown Places toStirt 266 Tecinacat Anuiysis Magazine 264 ‘ihe Market Tecticians Association 264 ouraea ant Seminars 265 Computrac under New Names. 265 ‘Adaitigual Technueal Material 256 ‘Menual Fond Data 26 sal Contents Resowrres 207 Charting Sotbware 267 bala Vendans 26% Recommended Books 269 Where to Buy Funanedal Books 270 QotiveHelp 270 Appendix A: Mauket Beesdth 273 Iotrocctioa 273 Delntions 7 Tally Data Exemple 274 AdvaneeDecline Line 274 Nowe High Lows 275 Metlellon Osciltor 275 MeCtelles Summation inden 281 Ifermation Sources 280 Appendix B: Japauess Candlesticks 281 oversaw 281 Candlestick Charting 281 Candia Pattorn Analysis. 282 Sumuary 285) Information Sourees 285 Glomary 289 index. 299 _ Preface eebesn prolly hey as awrite, Ton years ago, Leompled! my first B00, Yeeanical Anaiyils af the Futures Marker (New York brstltste of ‘Enanceytrenties Hall, 1986). whic Ras been described hy many as the Bible of technical analysis. Thal Obpage volume hes sance been Lr Ieted fato she foreign languages, including Chinese, German, alias, Japa fpese, Polsh, and Spanish, That book Introduerd mang readers to the tvorld of muaret analysis and ale ialroduced to the investing community pany ofthe comiantertzed indicators thal have since became so popular Fiee years agn, U completed huermurket Techateal Arnabsis (John Wiley & Sars, 1990). That second book has heer described as lance publicition hecausa ait emphasis oa linkages belsoen Hnanctal markers land ossef chases, Im happy to s0y that the Markel Technlclane Associa: Tian nw comin intermarket analysis an offen ranch of market analy sis, Rath bonks have beua labeled bestoellers, wlich always provides a certain degree of satisaction as well 38 fnanctel rewards This latest book, Ze Viswottnvettr, has een he mos: enjuyabe ome tu erite ad, al the same time the most challenging, tt bus 2cen envoyable leeause Pve been able to focus on anly these techniques Pve came to favor over the years. I's en the most challenging becansel'n writing far ‘Reople whe, have on idea whet [m talking abvul Wel, tha's prababiy an. x Preface ‘exaggeration, Lets just say that this boolrbas keun weilea forthe average person who inves i the stock marker for thinking about W), wha Mikes tatual funds Gil i merwhelined by so many? whe owns a cemprter [oF Isthinking of oeing one, nd haz bought nclarting software package oe fs thinking of buying one), but ln't eure how to ose i ‘This book is written primary for tho taausanle @aepety fll) ‘ot vlowars OF CNC, where 72 served as technical aalyst cr the past ve ‘Years. My llevision workon CNEC has been bol rewseling and frustrat- ‘ng, Rewardiag because Fve heen given a platter to explain haw makes ‘Work, ulifiing many of the vical tools Lhat professionals bave Beco using for decades. Judalng ftom the lange nucbers of cards and letters | have veceived over the years from CNBC viewers. uny efforts in that direction hve beled many viewers gain a better understanding nf how the financial markets work and have improved their investing nests. “Tekevisior wore has eon frestratioy because of tne constraints and {ho constant sirugals to expisin market movements in 8 space af fve mir tis to an audience that nay not even understird lle visual too shown fon the screw IT span the weusl too. shore’ imeto gettothe main ‘souclushan or the vearon forthe story IFT juin fo the mata conclusion, 1 loge those Hiewers why ar ol eyiy lo figure wet hat those “squiggly ‘iyes" ream in the frst place. Then cere ate the "This just lo" storles that seem to appear jest asm gelting te my punehtine, "Thanks to a tot of cussing by Myles Thompson at John Wiley Sons, ‘aud alot of consultation wil zy editor, Pamela van Giessen, we decided. ‘Thal iL was tine snrtenne role a Hook explaining what all those squigely Hines eeally nesn, Ara wo Letler Lad than the guy wha has been show Ing hows scrlggy fines tor the past (ev Years on television and lsaving rrr thai a fw viewers wondering “Whal the heck is that guy lalking Ahagh sd does ke really expoct ule Ielieve that those lines mean any tang?” Then after a while thinking fo Iheswselves, “Then again. he tes svein to be ight most of the time: Mayle there's something oi st wish hed stow dowa ad exp sia eget those lines trom and whereTan fet shen an learn how 197994 them mys: ve Lee seutggly mes comes from Ted David, ry colleague ana suchor at CNBC, Ted, slang with Suc Herera and other anchors I've hart ‘the plecsore of inrddng with af CNBC, sas Laught me theneed to avai jar gon and get to the pol as quickly 48 possible (and te make sure that have a poin), Sue hes taght re never to underestinale the wlne of a ‘eeman’s ntntion. Sua has a way of asking a cmestion about a market in ‘uch 2 way that | koa shat she alraady thighs i6 the elght answer oe Fretace wd learned never to disagree with her, bosanse she's usually right. Of course, thete ere yours of arse experience hehind that frie iefuition “My years of working with Ted David have taught ene wu aller vale le lessons. One is that tis possible tn have alte fon with market avy ss wlihoot taking away from its seriaus side. The seco be tha Ble tvoiledge ean be a dangerous thing. you've ever len exprsel 19 Tes ‘occualonal attempts at chart pending, yon know what Lean. The tazt of the matter Is that Ted went te the trouble to allsnd a Hance conn cnt ‘chart analysis an awe more about the subject than some of the peogie Te interviews. Wie daciead te call is book The Visual Zaveto. Wi deta that just for cosmetie reasons. What} co uu CNBC i lol at planes of markers in rmnich the some way thal meleorolugits “ack at pleturas of weather maps. Ing all vices. There's no point calling anything ele, Istavted caling what [do wal anabs to lassen the fear Jactor of pradcers at CEC, who seam terrified by tae subject. I's a funny thing. Every enmmetator at CNBC uses a chart to explain a marlet story. Fknow; because I promée thei wits most of the charts. When I use the seme chart during my 32% tment, however, ls often deserited ns "too tesnleal So heve iis: My attempt to slow down ard explain what a: these ‘squiggly Unes nveun I's uot Lal ical, Ye pom ko great Regt te keep Aeimple, I've deliberately chosen these lacheators that I believe to be most usc. Lalso lel vou where to get tbe same charts tat L use. you ‘ean read a line ona chart and Jeary to tel up from doton. you woul have: ny trouble graspiug what eiualanaissisls allatout. You‘ also leaea why arkets ssually lead the news, why Uwy reuct ta fundamentat news the sway they do, and why mach of what Laypens actually makers sense if you Jno what tock for ‘As you begin to aderstal whal vival analysis is al about, yor ms tice an increase im your own sellrlisnes. You may find that yon don't really aced te Histon to all thane aslyste and ceanomists stho like 10 expan why the markets did wl hey did yesterday (which they dda. Ktow ori Luter Ul yu abut the ay before yesterday). Hn ey leven get to the pomt where yeu won't need to wateh CNPC anjmor® (Gops, shouldnt bave said that. Sorry, CNBC} would leet express my deen gratis ta Greg Moms or hls inva ‘ble aaalstanea inthe production ofthis book, Greg has heer. develoning trading systems and ineheators for 21 years end has an extensive knowk ‘edge of hat suftwrare products are available ta Phe averagainvestar today (becausehe developed some of them hirael). Grey's imighls acd ime wi Prefoce surably lo the-walne of ths book. Gres is alse largely responsible forthe proton nf the charts tn this ook. lle wrote the Appendlees on Hanke Breadth and Japanese Candtestiee Ue hae autre twa backs of bis ova find made my work on this ones gwd dea] easier ‘We atartee aut to male this me back We wanted ts show alot! stares of mans that could feta story on thely ow. As asosu,yot're fing te see aot of charts, lve clus we eliase were taken from the ast recent market cata available Wo Us, They werent choseu 1 Uepiel perfec! terthook examples, bat to sli rea! hfe examples of visual principles at wera the onrrent market eivizonment. | hope we've clusen wisel ‘Even ale yur've hecomea prelly la visual analyst yoursel here's ‘no reason why you can't etl tune ia 1 keep an eve on ty squiggly lines. After reading this book, you" even knoss what they mea Acknowledgments inorder w perfor visual analysis a the simplest and cca efficient way Dossib.c, UNe Investor needs charcny soltwave aukl access Io am anllue fata service. it that In ming, the chazLs used ihtoughont “his hark were fleveloped wilh only thase scftware aud dala serviess reacly avatlabhe (Ga reasombly priced) 10 the investing publc, Mast ofthe shuts were developed wilh the ro heawyweighls o chulingsotrware, “eraStock trom quis lnernations| and superharte rows Omega Research. Our primary data sources are feo Dopular online services, Dal Oata and Yetessan. by the section mr natal find, we also make reerence to two services that spotialize in that aves, FastTrack and TeeChond 2000 Rath of those rms provide cata nnd chaeting capability or motual funds, whieh [san impor- tant part of this book. A speci! ord of thanks gous la Knight Ridder for the use of their Teskaster terminal, whieh proved most helplul sm the research for mls book More mnforaiation «aut Ue fowl un wack of these tine products the Resources sect ofthis 300K. ie SECTION 1 Introduction “Traders and investors have been using ieual approach fa Savesting for overacentury Up unt the past decade, the use cf vista analyse se. tus method ol tring and tnverting wae preity much Janited to pres ‘Salsa falHline traders, Most suecesel traders would aever Pn of raking a trade without tirst couul.ing Iie ptetares on ther elects, Even. the Federal Reserve Roard nu uses price charts to ai i Ueciding when to intervene in the foreigs excsange mates. WHAT HAS CHANGED? For the avetege investor, however, the world of visual “racng had been nicly closed. The ictimidaliog fagon and complicated formulas were bay theeack and, indeed. he nteret of the nonprolessiual Investor. ‘Aecoulsof portant factors have charged that ia Ue past darade. The mont import t2 ths avilsbilty of Inexpensive compuiee and corte: Shnnding zofteave packngex. The investing public now has an impressive array of ectunlogicel wl viseal tools that were’! evan avaadle te the pprofessieual community 20 years age, ‘ve second davelapment has been che dramatte expausiat oe matua fadindustry to the polo where spore mut sa [une est than stocks 2 necuetion nw traded on Te New York Stock Fxchange, This phenomenal growth has produced bath henefts andl challenges for the average investor ‘be chal- lenge lea fn the fare f¥a te oh of chonsing among mutual funds bas been sreatly complicated. In every teal serse, the mutual fund yr has made Ihe tas nf the ndrldual nestor move dificult. The original porpese ol rutual nds was to simply investing. somoura ifaw thi Fim tnportiee to pick stocks, that task could he furs ever a zulu end manager. Hesldes prafesa:onal managcment, inetio! «ereilealion wr provided, An tnvestor could buy one fund and be in the sel. Nev ee ‘ever, enutual funds ave so Segsmesed Ural the investor Tos Imei sett cones te make MUTUAL FUND CATEGORIES onesie sluck Funds are caleyorzed by goal and stvle—aggessine [rew, growh, grows a income, ated eatity income. Mts funds are also divided by the slze or capitalization ofthe stocks Included in thelr nsclulion Largeonn stock funds Wilt trest pareline to those stacks fockudad ia the Standand & Poor's SOD stock incex Midsize funds focus on storks inchuledia the SEP 400 Mld-Cap ludey or the WishlreMld-Cap 750. Suualienp Jars choose thee portolios from the Russell 2000 or the SEP 500 Sinall-Cap Iles. Murua finds can be finther idercted by thelr spe lalzation Th yarns stock marker sectors, such as tehnolowy, baste ‘ngustry, Rea care, faneaat services, energy, precious metal, and wil ‘ies. Stock sectors ean he further subtvie! nto industries with ewon tore specified mutual funds. The technology sector, for example would include (nds thet emphasize compuners, defence and aerospace, comma nleatigns, cleenontrs, software, sermicondacirs, and telecommuncations Fideliy Investinents ilers as many as 35 sector hinds fr the individual leveling from, GLOBAL FUNDS Anat dimenslon has been the growing popularly of glean invetlog Investors can now trave Li iodividual fureig cules ce fengrap ae regions by select the appropriate meal fond. Asa result lavestors are forced lo keep abresst of market devcloprienls aot just ithe UnIted States, bul all cer the werld. While oversuos iuwesting carries 2:0F8 MSH than domestic luc, Uke rewards ate well wert it. Dring 1985, interna inna fines rosea modest & percent, while US, [uns soared 10 pecvent Benettsof Vinal Ieesting Donng 1993, buwerer, American investors whe mvsied oyrisis wee ovaries with yoink of 38 percent while the American nae! Yose a rela Lively modest 5 percent. Emeryiny marke fines are te tsklest of al Stace 1989, however, emerging market funds have gained 18 percent annvaly vyersts average uatns of 18 percent fr the US market. Overseas investing dwevides diversfleation fom ‘he U.S, marker, which i why financial ads sors recomnmd Weaving as uch a6 A third of one’s portato abroad 20 improve rturos and lassen ris INVESTORS NEED 70 BE BETTER INFORMED. For many investors, muted fa! lovesting has replied indi! stock selection, However, with the degree cI segueatstion that has tekee place ‘the mutual hind iadustey, vestars have idle chee Wut 19 besome. etter informed and mre activaly involved In the mutaal fund selection process. Investors must be avare of whal dllerent sectors othe American tarkelaze dring as well as how global markets are faring. The mumber of choices avilable to the bwestor is a mixed blessing. Sn. teo. are the technological advances of Une past decade. The invnstor can rar solar on his or her PC, paying as ile 2s $29.95 for a Carling program, The prablem is knowing how to select and use the feaburces that aro mvallaba, The technology has eaipaved the public's ability to use she new data m the moo! lliclan way, Which besngs us tothe Dinpase oF tls buwieto help the mverage Investor get acclimated to Distal rading id the qulekest aud siaplest way possible, And, second, to Show haw these elatvely mpi pelatples can be syylies tothe prob of sector investing primarily steough miteal funds, BENEFITS OF VISUAL INVESTING “The bright side of tne Inernased syectahetion zcaung mata fal is tk2t the havestor has sever hefore teen ptorlded will so many vehicles to choose frem, Individuslz who favor a certain markel sector ar indsty, bat don't want ba choose which stacks to ‘suy, can nase buy Lhe whole group, Seetor fonds alee provids atonal ways lo adversity one's are Stock lihbngs and to pursvereaee aggressive yrowth opporturities with a portion of one's wanes, Thate where visual malyala comes i “Te cools explained fa Une ext can Ine applied to any eat or fun anpwherem newer. Wh theald of acompulter sul wasy access to price data the ask of momoring and aanyeing macTual fu bas Ines made 4 nveduction Jmmasasurably easier. The power ofthe H cau ak ve hamessed for such tings a8 easutorig portolios, bacesting rules Jor Luying ace selling Seelstous,scarmizgscharts for stractve appotlunities, and ranking mata! fonds by relative performance, While the challenges of learning have to ‘apply new technology to mutual faud aud sect investing are there, so are Uke rewards fyow’veln the marke, you've already accepted the challenge “This beuk wll shove yon nen tn weap the wars, STRUCTURE OF THE BOOK ‘The book is divided nto four sections. Section Cexplsias wliat vata fund bow it ean be blended with more traditional forms of bivest- ‘ment milysis, The crivcally uportant subject af marked arena is ‘explained along vith some vsualtonls to help identify the tend, You may he surprise to dlscover hovr much vale tes some ofthe slinples: tools that are covered Ln the tat section. ection 2 covers sone of the tore papular market midicalors ia use toay. We stress the concent Lelad the varions indlestors end Row Lie 272 interpreted. We Ini our coverate to anly the most isefa Rani, Ror those wishing to explore The wnrld of indicators more fll, reference Sources are glvan in the Resonrces wection at the end of the bor, Sectlon 3 ibodiuces the ele of markce tinkages, Tha ts expecally Important in ender ta apprecinte why stock market investors should or monitor movements ln comuahly prices, bune prices, 2nd the dolla, Jicrmarket analysis ls also hell n understanding axes allocation and acess of sector rotatian within the slock market. Along the way, ou'l gain some insight Into polley-mking decisions a the Feteral egerve. Youll be able to watch many ofthe sae things the Fed watches, Section 4 tacuses on sector sialyeis and mutual funes. Relative streregh analysis sheen to play a imapurlant role in the selection bprucuss. le alse shew gers hove to anabize lve xlobal markets ‘The Resources section ix devoted lo helyrng you get started on your ‘van visual analysis. It names sore mnpaxtantyublishing al educational ‘reswurnes that will holp you get goirg, ae well as listing some ofthe more Dighly naga softwace products and deta vendors that you will eed in [Your ques Lu bcm troy vista investor What ts Visual Investing? “They say 6 pian ts worth a thousaad words. Maybe ley shoul have said thousand daars, Afterall, wee lalkighere about sing petires ‘make money. And that's realy what this book sal abot W's that simple Astorielther goas up or dewa, [iL goes up, and you om i that's gond. If 4 goes dawn, and you own il thats bad, You can talk a yom want about what a stock should be esiey or why i Sst duing what stovid be doing ‘You can talk abot Intatinn interest rates, caraints, and livestor eect ‘on Misty, however i comes denen to the piclure. Is the stock golng Lup or down? Racwing the reasons behind 2 stork’ menor! is btenest. ‘ng, but wo erftfeal, K'your etock goes up-on avon day, ney ron take ‘the money avray rom you Ifyou don't knw why iH west wp. And If you ean ‘explain why it went down, they won't give your bark yor oat ehaney. AL that really matters fsa pleture, asnpe ive oa wel. The tech visa lavesting is learning io tel the dilerence derveer what ts golng op art ‘ati ois down, The goat thls Dock Is to help you tll hat diference WHY MARKET ANALYSIS? {As the various chapters anfuld. you wil be provided with some eealivel ‘Sipe visual tools to ald yeu in market analysis and timing. Notlee aur use 5