TTeecchhnniiccaall AAnnaallyyssiiss aanndd SSttoocckk MMaarrkkeett PPrrooffiittss Richard W. Schabacker's great work, Technical Analysis and Stock Market Profits, is a worthy addition to any technical analyst's personal library or any market library. His "pioneering research" represents one of the finest works ever produced on technical analysis, and this book remains an example of the highest order of analytical quality and incisive trading wisdom. SS cc hh RR Originally devised as a practical course for investors, it is as alive, vital and instructional today aa iicc TTeecchhnniiccaall as the day it was written. It paved the way for Robert Edwards and John Magee's best-selling bb hh aa aa Technical Analysis of Stock Trends – a debt which is acknowledged in their foreword: 'Part One cc rr kk dd is based in large part on the pioneer researches and writings of the late Richard Schabacker.' ee rr AAnnaallyyssiiss Schabacker presents technical analysis as a totally organized subject and comprehensively lays out the various important patterns, formations, trends, support and resistance areas, and TT associated supporting technical detail. He presents factors that can be confidently relied on, and aanndd ee gives equal attention to the blemishes and weaknesses that can upset the best of analytical cc forecasts. Factors which investors would do well to absorb and apply when undertaking the hh fascinating game of price, time and volume analysis. nn SSttoocckk MMaarrkkeett ii cc RRiicchhaarrdd SScchhaabbaacckkeerr aa ll Richard Schabacker achieved his financial fame in the 1920s and 1930s. First as Financial Editor AA of Forbes and later as Editor of The Annalist, a weekend section of the New York Times. During nn PPrrooffiittss this time he also authored three books. To many in the markets, who know of him, he is known aa as "the father of technical analysis". ll yy ss ii "To be a successful trader, you need to understand markets deeper than your competitors. Agood ss ““TThhee rreeaall bbiibbllee ooff way to get started is to read this ground-breaking book - a major text on technical analysis that aa has already helped countless traders find their way to market profits while avoiding dangerous nn pitfalls." dd tteecchhnniiccaall aannaallyyssiiss”” Dr Alexander Elder, author of Trading for a Living SS tt oo "Today's technician has all the modern computer methods of interpreting price and buying cc trends. No matter how sophisticated they get, all technicians must get back to basics and there is kk no finer way of reviewing those time-honored technical principles, rules and precepts than with MM RRiicchhaarrdd WW.. SScchhaabbaacckkeerr the original version of Schabacker's Technical Analysis and Stock Market Profits." Ralph Acampora aa rr kk "If you think you know all there is to know about technical analysis as it pertains to charting and IInnttrroodduucceedd aanndd eeddiitteedd bbyy DDoonnaalldd MMaacckk ee chart trading then you must read Technical Analysis and Stock Market Profits by Richard tt Schabacker. This original work by the founder of technical analysis will teach you many PP valuable things that you don't know." rr oo J. Welles Wilder ff ii tt ss HHhh Harriman House Classics HHhh HHhh Harriman House Classics 7.44 x 9.69 7.44 x 9.69 .951 TECHNICAL ANALYSIS AND STOCK MARKET PROFITS A Course in Forecasting RICHARD W. SCHABACKER TECHNICAL ANALYSIS AND STOCK MARKET PROFITS A Course in Forecasting RICHARD W. SCHABACKER former Financial Editor of Forbes Magazine and author of Stock Market Theory and Practice and Stock Market Profits Introduced and edited by Donald Mack HARRIMANHOUSELTD 43 Chapel Street Petersfield Hampshire GU32 3DY Tel: +44 (0) 1730 233870 Fax: +44 (0) 1730 233880 email: [email protected] web site: www.harriman-house.com Technical Analysis and Stock Market Profits first printed in the United States of America in 1932 Second edition 1937 First published in Great Britain 1997 by Pearson Professional Limited This edition published by Harriman House Ltd © Harriman House Ltd 2005 ISBN 1897597568 British Library Cataloguing in Publication Data ACIPcatalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P0LP. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. Printed and bound by Lightning Source ABOUT THE AUTHOR Richard W. Schabacker Richard W. Schabacker achieved his financial fame in the 1920s and 1930s first as Financial Editor of Forbesand later as editor of the Annalist, a weekend section of the New York Times. During this time he also authored three books: Stock Market Theory and Practice, 1930; Technical Analysis and Stock Market Profits, 1932; and Stock Market Profits, 1934. ABOUT THE SERIES EDITOR Donald Mack If any phrase describes the editor of the Traders’ Masterclass series, which is dedi- cated solely to bringing back to traders and investors everywhere many of the great and rare Technical Analysis classics from the past, that phrase would be “a perpet- ual student of the market”. Students in high school or college eventually graduate. Not so students of speculative markets. The study and the work is never finished, especially when there is an enduring interest in Technical Analysis. The editor’s interest grew by leaps and bounds when in the late 1970s and the 1980s he estab- lished in Los Angeles the only bookstore in the USA that dealt exclusively in stock and commodity books; those that were in print at the time and those that were out of print. Current books were generally unchallenging and of various degrees of quality. Many out-of-print books were also of varying degrees of quality, but so many fascinating rare works from the 1920s to the 1950s, of great creativity and mar- velous technical analytics and application came his way, that a life long appreciation of their quality grew. Almost needless to say, more attention was focused on the old books than on the new, for he found those old books that made up the great classics were superior to the new in so many ways. While operating the bookstore, there was a natural inflow and outflow of many thousands of books and from those thousands of books a per- sonal library and collection numbering a good 5,500 plus individual titles was put together. A little of the knowledge contained in these great market classics rubbed off on the editor (actually more than a little) and he trusts that it will also rub off on the many market students of today and tomorrow as they also come in contact with the superb Technical Analysis classics that will come their way through this Series. 380 380 360 360 340 340 320 320 300 INDUSTRIALS 300 280 280 260 260 240 240 220 220 200 200 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 5 5 DAILY S4 AVERAGE STOCK 4M HARE TRADING-BY MONTHS ILLIO S N N 3 3 S O H MILLI2 2ARES 1 1 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 THE DOW-JONES INDUSTRIAL STOCKS AVERAGE Monthly High and Low of Closing Prices -- 1897 Through August, 1937. TABLE OF CONTENTS Editor’s Introduction xi Preface to First Edition xix Study I TECHNICAL APPROACH TO STOCK TRADING 1 Definition of a Stock Chart · Technical vs. Fundamental Factors · Technical Position of Market Most Important · Sources for Chart Data · Advantages of Making Your Own Charts · Which Stocks to Chart and How Many · Method of Constructing Charts · Price, Volume and Time Scales · Major, Intermediate and Minor Movements Study II IMPORTANT REVERSAL FORMATIONS 29 Public vs. Insiders · Detecting Professional Operations · Determining Major Turning Points or Reversals · Volume Signs at Reversals · The One-Day Reversal · Comparative Volume at Tops and Bottoms · Price and Volume Must be Considered Together · The Head and Shoulders Formation · Volume Action on Head and Shoulders · Importance of Neck-Base Line · Varying Width of Shoulders · The Time to Act on Head and Shoulders · Ascending and Descending Neck-Base Lines · Flat Shoulder Variants of Head and Shoulders Formation · Reliability of Head and Shoulders Formation · Logic of Chart Patterns Study III IMPORTANT REVERSAL FORMATIONSCONTINUED 65 The Common or Rounding Turn · Volume Action on Rounding Turns · The Symmetrical Triangle as a Reversal Formation · The Break-away Move from Triangle Patterns · Volume Action on Break-Outs · Comparative Reliability of Early and Late Break-Outs · Relation of Price Move to Patterns Size · Wave Movement Following Apex · The Right-Angle Triangle as Reversal · The Descending Triangle · Volume on Break-Out From Descending Triangle · Effect of General Market on Individual Stocks · Ascending Triangles as Reversals · The Wedge Formation · Action Following Up-Turned and Down-Turned Wedges Compared · Strict Definition Required for Wedge Patterns · Probable Causes for Triangles Study IV IMPORTANT REVERSAL FORMATIONSCONTINUED 105 The Double Top and Double Bottom · Requirements for Valid Double Reversal Formations · Multiple Tops and Bottoms · Illustration of a False Double Top · Double Tops and Bottoms on Long-Range Charts · “M” and “W” Formations · Complex Reversal Formations · Relation to Multiple Formations and Head and – vii– TABLE OF CONTENTS Shoulders · Varieties of Complex Patterns · Volume Indications in Complex Reversals · The Broadening Top Reversal · Analysis of Broadening Top · Broadening Top Ending Bull Market · Rally Following Completion of Broadening Top · Broadening Formations Which Fail · Possible Explanation for Broadening Top Study V MINOR REVERSAL FORMATIONS 143 The Inverted Triangle · Differences Between Inverted and Normal Triangle · Inverted Right-Angle Triangle · The Diamond Formation · The Rectangle as a Reversal · Break out of Dormancy · Relative Dormancy in an Active Stock · The Island Reversal · Strict Requirements for Island Formation · The One-Day Island Study VI MAJOR CONTINUATION FORMATIONS 177 Logic of the Intermediate Area Patterns · The Symmetrical Triangle as a Continuation · Volume Action in Continuation Triangles · Right-Angle Triangles as Continuations · The Ascending Triangle in Up-Trends · The Descending Triangle in Down-Trends · Inverted Triangles as Continuations · The Rectangle as a Continuation · Volume Action in Rectangle Continuations · The Flags and Pennants · Various Flag Aspects and Interpretations · Flags in Up and Down-Trends · Relation of Pennant to Wedge Pattern · The Head and Shoulders Continuation Pattern · Review of Continuation Patterns · Formations Which Change Their Nature Study VII MISCELLANEOUS INTERMEDIATE PATTERNS AND PHENOMENA 219 Patterns with Drooping Bottom · Patterns with Accelerating Peaks · Trading on the Accelerating Patterns · The Horn Formation · The Inverted Horn · Out-of-Line Price Movements · Interpretation of Out-of-Line Action · The Zig-Zag Movement · Recurrent Patterns of Price Action · Warning Given by Recurring Movements · The Price Gap – General Description · Classification of Gaps · The Common Gap · The Break-Away Gap · Interpretation of the Break-Away Gap · Continuation Gaps · The Exhaustion Gap · The Interpretation of the Exhaustion Gap · Variants of the Island Formation · Gaps on Ex-Dividend and Ex-Rights Days Study VIII TREND LINE ACTION 263 Definition of the Trend Line · The Theory of Trend Lines · Practical Uses of Trend Lines · Methods of Establishing Trend Lines · Practicing on the Chart · Patterns Appearing Within Trends · Trading on the Primary Trend Line · The Double Trend Line or Trend Channel · Playing the Major Trend · Relative Profits With and Against the Major Trend · Trend Lines Signaling Reversals · Horizontal Trading Areas · What Constitutes a Significant Break · Volume Action on Breaking of Trend Line · Fanning Trend Lines and Flattening Trends · The Throw Back After a Trend is Broken · Estimating the Extent of Probable Movement by Trend Lines · Logarithmic vs. Arithmetic Scales GENERAL REVIEW OF VOLUME:Volume as an Indication of Reversal · Volume Action at Temporary Halts in Trends · Declining Volume During Patterns Formulation · – viii– TABLE OF CONTENTS Volume as an Indication of Continuation · Relation of Volume to Price Movement · Relation of Volume Action to Basic Trends THE DOW THEORY:Its Major Tenets · Limitations of Dow Theory in Practical Trading Study IX SUPPORT AND RESISTANCE LEVELS 301 Definition of Support and Resistance Levels · Logical Explanation for Reversal Levels · Reliability of Support and Resistance Levels · Bottoms Become Tops and Tops Become Bottoms · Value of Weekly Charts in Forecasting · The Volume Factor in Estimating Future Influence · Practical Application of Support and Resistance Study to Current Charts · Resistance and Support Levels in Minor Fluctuations · Resistances Set Up by Trend Lines · The Cradle Formation · Resistance and Support Levels Set Up by Head and Shoulders Formation · Support and Resistance Levels Set Up by Multiple Formations · Support and Resistance Levels Set Up by Rectangles and Right-Angle Triangles · Support and Resistance Levels Set Up by Symmetrical Triangles · Support and Resistance at Gaps · Practical Uses of Pattern Resistance Study · The Longevity of Support and Resistance Levels · 50 and 100 as Critical Levels · The Half-Way Intermediate Movement Theory · Price Action at Support or Resistance Levels Study X MEASURING RULES AND FORMATIONS 333 Use of Support and Resistance Factors in Measuring · Trend Lines as Measuring Indications · Measuring Implications of Patterns in Bull and Bear Markets · Measuring Implications of Head and Shoulders Formation · Measuring Implications of Triangle · Flags and Pennants as Measuring Patterns · The Half- Mast Congestion Pattern · Measuring Theories Applied to Gaps · The Single Gap Measuring Theory · The Multiple Gap Measuring Theory · Dependability of Gap Theories · The Time Element in Measuring FALSEMOVESANDSHAKE-OUTS:Definition of False Move and Shake-Out · Triangles Most Susceptible to False Moves · Volume Action on False Moves · False Moves From Right-Angle Triangles · False Moves out of Rectangles · False Move vs. Out-of-Line Movement · False Moves Follow Head and Shoulders Formations · Defense Against False Moves · Strict Construction of Break-Out Rules · Use of Stop-Loss Orders Against False Moves · The Bright Side of False Moves · The End Run Price Action STOP-LOSS ORDERS:The Mechanics of Stop Orders · When to Place Stop Orders · Where to Place Stop Orders · The 5% Allowance Rule · Shifting the Stop Order · The “Two Days Away” Rule · Stop-Loss Orders in Short Selling · Judgment in Placing Initial Stop · Use of “Mental” Stops · Stop Orders Not Recommended Within Patterns · Doubling or Switching Stops · Use of Stops to Make New Commitments Study XI USE OF LONG-TERM CHARTS, AVERAGES AND GROUPS 377 Monthly Charts · Average Charts · Group Charts · Shorter Time Intervals in Charts · Hourly Charts · The Ticker Chart · Minor Move Chart · Minor Trend Line Chart · Point or Figure Charts CHARTING BONDS AND COMMODITIES:The Bond Market · Commodity Charts · The Wheat Market · Formations Appearing on Wheat Charts · The Cotton Market – ix–