Content

Part I: Introduction

1 Introduction to Technical Analysis

2 The Basic Principle of Technical Analysis— The Trend

C hapter O bjectives

H ow Does the Technical Analyst M ak e M oney?

W hat Is a Trend?

H ow Are Trends Identified?

Trends Develop from Supply and Demand

W hat Trends Are There?

W hat O ther Assumptions Do Technical Analysts M ak e?

C onclusion

R eview Q uestions

3 H istory of Technical Analysis

C hapter O bjectives

E arly F inancial M ark ets and E xchanges

M odern Technical Analysis

C urrent Advances in Technical Analysis

4 The Technical Analysis C ontroversy

C hapter O bjectives

Do M ark ets F ollow a R andom W alk ?

Fat Tails

Large Unexpected Drawdowns

Proportions of Scale

C an Past Patterns Be U sed to Predict the F uture?

W hat About M ark et E fficiency?

New Information

Are Investors Rational?

Will Arbitrage Keep Prices in Equilibrium?

Behavioral F inance and Technical Analysis

Pragmatic C riticisms of Technical Analysis

W hat Is the E mpirical Support for Technical Analysis?

C onclusion

R eview Q uestions

Part II: M ark ets and M ark et Indicators

5 An O verview of M ark ets

C hapter O bjectives

In W hat Types of M ark ets C an Technical Analysis Be U sed?

Types of C ontracts

Cash Market

Derivative Markets

Swaps and Forwards

H ow Does a M ark et W ork ?

W ho Are the M ark et Players?

H ow Is the M ark et M easured?

Price-Weighted Average

Market Capitalization Weighted Average

Equally Weighted (or Geometric) Average

C onclusion

R eview Q uestions

6 Dow Theory

C hapter O bjectives

Dow Theory Theorems

The Primary Trend

The Secondary Trend

The Minor Trend

Concept of Confirmation

Importance of Volume

C riticisms of the Dow Theory

C onclusion

R eview Q uestions

7 Sentiment

C hapter O bjectives

W hat Is Sentiment?

M ark et Players and Sentiment

H ow Does H uman Bias Affect Decision M ak ing?

C rowd Behavior and the C oncept of C ontrary O pinion

H ow Is Sentiment of U ninformed Players M easured?

Sentiment Indicators Based on Options and Volatility

Polls

Other Measures of Contrary Opinion

Unquantifiable Contrary Indicators

Historical Indicators

Unusual Indicators

H ow Is the Sentiment of Informed Players M easured?

Insiders

Sentiment in Bonds

Treasury Bond Futures Put/Call Ratio

Treasury Bond COT Data

Treasury Bond Primary Dealer Positions

T-Bill Rate Expectations by Money Market Fund Managers

G old Sentiment

C onclusion

R eview Q uestions

8 M easuring M ark et Strength

C hapter O bjectives

M ark et Breadth

The Breadth Line or Advance-Decline Line

Double Negative Divergence

Traditional Advance-Decline Methods That No Longer Are Profitable

Advance-Decline Line to Its 32-Week Simple Moving Average

Breadth Differences

Breadth Ratios

Breadth Thrust

Summary of Breadth Indicators

U p and Down Volume Indicators

The Arms Index

Volume Thrust with Up Volume and Down Volume

Ninety Percent Downside Days (NPDD)

10-to-1 Up Volume Days and 9-to-1 Down Volume Days

Net New H ighs and Net New Lows

New Highs Versus New Lows

High Low Logic Index

Hindenburg Omen

U sing M oving Averages

Coppock Curve

Number of Stocks Above Their 30-Week Moving Average

Very Short-Term Indicators

Breadth and New Highs to New Lows

Net Ticks

C onclusion

R eview Q uestions

9 Temporal Patterns and C ycles

C hapter O bjectives

Periods Longer Than F our Years

Kondratieff Waves, or K-Waves

Population Waves

17–18-Year Alternating Stock Market Cycles

Decennial Pattern

Periods of F our Years or Less

Four-Year or Presidential Cycle

Election Year Pattern

Seasonal Patterns

January Signals

January Barometer

January Effect

E vents

C onclusion

R eview Q uestions

10 F low of F unds

C hapter O bjectives

F unds in the M ark etplace

Money Market Funds

Margin Debt

F unds O utside the Security M ark et

Household Financial Assets

Money Supply (M1 & M2)

Money Velocity

Yield Curve

Bank Liquidity

The C ost of F unds and Alternative Investments

Short-Term Interest Rates

Long-Term Interest Rates (or Inversely, the Bond Market)

Corporate Bond and Stock Market Yield Spread

The Misery Indices

F ed Policy

The Federal Reserve Valuation Model

Federal Funds

Free Reserves

Three Steps and a Stumble and Two Tumbles and a Jump

C onclusion

R eview Q uestions

Part III: Trend Analysis

11 H istory and C onstruction of C harts

C hapter O bjectives

H istory of C harting

W hat Data Is Needed to C onstruct a C hart?

W hat Types of C harts Do Analysts U se?

Line Charts

Bar Charts

Candlestick Charts

W hat Type of Scale Should Be U sed?

Arithmetic Scale

Semi-Logarithmic Scale

Point and F igure C harts

One-Box (Point) Reversal

Box Size

Multibox Reversal

Time

Arithmetic Scale

Logarithmic Scale

C loud C harts (Ichimok u Kink o H yo)

O ther C harting M ethods Independent of Time

Kagi Chart

Renko Chart

Line-Break Chart (2 or 3 Lines)

C onclusion

R eview Q uestions

12 Trends— The Basics

C hapter O bjectives

Trend— The Key to Profits

Trend Terminology

Basis of Trend Analysis— Dow Theory

H ow Does Investor Psychology Impact Trends?

H ow Is the Trend Determined?

Peaks and Troughs

Determining a Trading R ange

What Is Support and Resistance?

Why Do Support and Resistance Occur?

What About Round Numbers?

How Are Important Reversal Points Determined?

How Do Analysts Use Trading Ranges?

Directional Trends (U p and Down)

What Is a Directional Trend?

How Is an Uptrend Spotted?

Channels

Internal Trend Lines

O ther Types of Trend Lines

Trend Lines on Point and Figure Charts

Speed Lines

Andrews Pitchfork

Gann Fan Lines

C onclusion

R eview Q uestions

13 Break outs, Stops, and R etracements

C hapter O bjectives

Break outs

How Is Breakout Confirmed?

Can a Breakout Be Anticipated?

Stops

What Are Entry and Exit Stops?

Changing Stop Orders

What Are Protective Stops?

What Are Trailing Stops?

What Are Time Stops?

What Are Money Stops?

How Can Stops Be Used with Breakouts?

Using Stops When Gaps Occur

Placing Stops for a False (or “Specialist”) Breakout

R etracements

Pullbacks and Throwbacks

Waiting for Retracement

Calculating a Risk/Return Ratio for Breakout Trading

C onclusion

R eview Q uestions

14 M oving Averages

C hapter O bjectives

W hat Is a M oving Average?

H ow Is a Simple M oving Average C alculated?

Length of Moving Average

Using Multiple Moving Averages

W hat O ther Types of M oving Averages Are U sed?

The Linearly Weighted Moving Average (LWMA)

The Exponentially Smoothed Moving Average (EMA)

Wilder Method

Geometric Moving Average (GMA)

Triangular Moving Average

Variable EMAs

Strategies for U sing M oving Averages

Determining Trend

Determining Support and Resistance

Determining Price Extremes

Giving Specific Signals

W hat Is Directional M ovement?

Constructing Directional Movement Indicators

Using Directional Movement Indicators

W hat Are E nvelopes, C hannels, and Bands?

Percentage Envelopes

Bands

13

Trading Strategies Using Bands and Envelopes

Channel

C onclusion

R eview Q uestions

Part IV: C hart Pattern Analysis

15 Bar C hart Patterns

C hapter O bjectives

W hat Is a Pattern?

Common Pattern Characteristics

Do Patterns E xist?

Behavioral Finance and Pattern Recognition

C omputers and Pattern R ecognition

M ark et Structure and Pattern R ecognition

Bar C harts and Patterns

H ow Profitable Are Patterns?

C lassic Bar C hart Patterns

Double Top and Double Bottom

Rectangle (Also “Trading Range” or “Box”)

Triple Top and Triple Bottom

Standard Triangles

Descending Triangle

Ascending Triangle

Symmetrical Triangle (Also “Coil” or “Isosceles Triangle”)

Broadening Patterns

Diamond Top

Wedge and Climax

Patterns with R ounded E dges— R ounding and H ead-and-Shoulders

Rounding Top, Rounding Bottom (Also “Saucer,” “Bowl,” or “Cup”)

Head-and-Shoulders

Shorter Continuation Trading Patterns—Flags and Pennants (Also “Half-Mast Formation”)

Long-Term Bar C hart Patterns with the Best Performance and the Lowest R isk of

F ailure

C onclusion

R eview Q uestions

16 Point and F igure C hart Patterns

C hapter O bjectives