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TECHNICAL ANALYSIS of STOCK TRENDS - GBV

TECHNICAL ANALYSIS of STOCK TRENDS TENTH EDITION Robert D. Edwarayjohn Magee 'f.H.C. Bassetti CRC Press Taylor &. Francis Group Boca Raton London New York

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Text of TECHNICAL ANALYSIS of STOCK TRENDS - GBV

TECHNICAL ANALYSISof STOCK TRENDSTENTH EDITIONRobert D. Edwarayjohn Magee' BassettiCRC PressTaylor &. Francis GroupBoca Raton London New YorkCRC Press is an imprint of theTaylor & Francis Group, an informa businessContentsPreface to the tenth edition xvPreface to the ninth edition xixPreface to the eighth edition xxiiiInmemoriam v -. xxxiiiPreface to the seventh edition ... xxxvPreface to the fifth edition xxxixPreface to the fourth edition xliPreface to the second edition xliiiForeword xlvSection I: Technical theoryChapter 1 The technical approach to trading and investing 3Definition of technical analysis 4Chapter 2 Charts 7Different types of scales : : 8Chapter 3 The Dow Theory 11The Dow Averages 12Basic tenets 12Tide, wave, and ripple : 14Major trend phases 14Principle of confirmation 16Chapter 4 The Dow Theory's defects 21The Dow Theory is too late 21The Dow Theory is not infallible 23The Dow Theory frequently leaves the investor in doubt 23The Dow Theory does not help the Intermediate Trend investor 23The Dow Theory in the 20th and 21st centuries 24Chapter 5 Replacing Dow Theory with John Magee's Basing Points Procedure 31The fractal nature of the market 31Chapter 6 Important Reversal Patterns 41Important Reversal Patterns 42vi ContentsTime required to reverse a trend 43The Head and Shoulders 44Volume is important 45Breaking the neckline 47Variations in Head-and-Shoulders Tops 49Price action following confirmation: the measuring formula 53Relation of Head and Shoulders to Dow Theory 55Chapter 7 Important Reversal Patterns: continued 57Head-and-Shoulders (EN: or Kilroy) Bottoms 57Multiple Head-and-Shoulders Patterns 59Tendency to symmetry 61A leisurely pattern 65Rounding'Tops and Bottoms 66How Rounding Turns affect trading activity 70The Dormant Bottom variation 73Volume pattern at Tops 75Chapter 8 Important Reversal Patterns: the Triangles 77Symmetrical Triangles 78Some cautions about Symmetrical Triangles 80How prices break out of a Symmetrical Triangle 80A typical Triangle development 82Reversal or Consolidation 86The Right-Angle Triangles 92A planned distribution 92Descending Triangles 94Volume characteristics same as the Symmetrical type 95Measuring implications of Triangles 98Triangles on weekly and monthly charts 99Other Triangular formations 100Chapter 9 Important Reversal Patterns: continued 103The Rectangles, Double and Triple Tops 103Pool operations 105Relation of rectangle to Dow Line 108Rectangles from Right-Angle Triangles 109Double and Triple Tops and Bottoms IllDistinguishing characteristics 113Double Bottoms 116Triple Tops and Bottoms 117Chapter 10 Other Reversal phenomena 121The Broadening 121Volume during Broadening Formations 122A typical example 123The Orthodox Broadening Top 124Why no Broadening Bottoms? 126Right-Angled Broadening Formations 128Contents viiThe Diamond 129Wedge Formations 130The Falling Wedge 134Wedges on weekly and monthly charts 135Rising Wedges common in Bear Market Rallies 136The One-Day Reversal 136The Selling Climax 140Short-term phenomena of potential importance 144Spikes ' 145Runaway Days '.. . 147Key Reversal Days 148Chapter 11 Consolidation Formations 151Flags and Pennants 151The Pennant: a pointed Flag '. .'. 153The measuring formula .*; 154Reliability of Flags and Pennants 156Where they may be expected 157Flag pictures on weekly and monthly charts 158Rectangular Consolidations: an early phase phenomenon 159Head-and-Shoulders Consolidations :, 160Scallops: repeated Saucers ).. 162Modern versus old-style markets 166Chapter 12 Gaps .171Which gaps are significant? 171Closing the gap 171Ex-dividend gaps 172The common or area gap 173Breakaway gaps 174Continuation or runaway gaps and the measuring ; 177Two or more runaway gaps 179Exhaustion gaps i 181The Island Reversal 184Gaps in the Averages 186Chapter 13 Support and Resistance 189Normal trend development 190The explanation 191Estimating Support-Resistance potential 193Locating precise levels 196Significance of Support failure 197Popular misconceptions 198The round figures 200Repeating historical levels 200Pattern Resistance 202Volume on breaks through Support , 205Support and Resistance in the Averages 206viii ContentsChapter 14 Trendlines and Channels 207TheTrendline 207How Trendlines are drawn 208Arithmetic versus logarithmic scale 211Tests of authority 211Validity of penetration 214Amendment of Trendlines 216Double Trendlines and trend ranges 216Trend Channels ...218Experimental Lines :. 219Consequences of Trendline penetration: Throwbacks 220Intermediate Downtrends 221Corrective trends: the Fan Principle 225Chapter 15 Major Trendlines .1 229Major Downtrends . 237Major Trend Channels 238Trendlines in the Averages 244Trading the Averages in the 21st century 244Chapter 16 Technical analysis of commodity charts 247Technical analysis of commodity charts, part 2: A 21st-century '. 251Rocket scientists 252Turtles? 253The application of Edwards and Magee's methods to 21st-century futures markets 254Stops 258A variety of methods 261Everything you need to know as a chart analyst trading futures 261The return of the great markets of the 1970s 262Chapter 17 A summary and concluding comments 263Technical analysis and technology in the 21st century: the computer and theInternet: tools of the investment/information revolution 267The importance of computer technology 269Summary 1 270Other technological developments of importance to the technical Magee analystand all investors 270The Internet: the eighth wonder of the modern world (EN9: Appendix B, >Resources, for the ninth edition has been enormously expanded and is ofparamount importance to modern investors.) 270Marking-to-market 271Separating the wheat from the chaff 272Chaff 272Summary 2 272Advancements in investment technology, part 1: Developments in finance theoryand practice 273Options 273Quantitative analysis 274Options pricing models and their importance 275Contents ixFutures on indexes 1275Options on futures and indexes 276Modern Portfolio Theory 277The wonders and joys of investment technology 277Advancements in investment technology, part 2: futures and options on futures onthe Dow-Jones Industrial Index at the CBOT 277Investment and hedging strategies using the CBOT DJIASM futures contract 278Settlement of futures contracts 278Marking-to-market 278Fungibility < ,.. 278Differences between cash and futures 279Dow Index futures 279Using stock index futures to control exposure to the market 279Investment uses of Dow Index futures 281Situation 1: Portfolio prptection 281Situation 2: Increasing exposure with futures 282Situation 3: Using bond and index futures for asset allocation 282Perspective 284Options on Dow Index futures 284Option premiums 285Volatility 285Exercising the option :.. 286Using futures options to participate in market movements 286Profits in rising markets 286Exploiting market reversals 287Using puts to protect profits in an appreciated portfolio 287Situation 1 287Improving portfolio yields 2 ...287Using option spreads in high- or low-volatility markets 288Situation 3 288Situation 4 .'. 289Perspective 289Recommended further study 289Section II: Trading tacticsMidword 291Chapter 18 The tactical problem 295Strategy and tactics for the long-term investor. What's a speculator, what'san investor? 299One definition of the long-term investor 301The strategy of the long-term investor 301Rhythmic investing 302Summary 304Chapter 19: The all-important details 305The simplest and most direct way to use a computer for charting analysis 306Summary 307x ContentsChapter 20 The kind of stocks we want: the speculator's viewpoint .....309The kind of stocks we want: the long-term investor's viewpoint 310Changing opinions about conservative investing 310The kinds of stocks long-term investors want: The long-term investor's viewpoint 311Construction of the Index Shares and similar instruments 312An outline of instruments available for trading and investing 313The importance of these instruments: diversification, dampened risks, tax, and,most important, technical regularity 314Summary 316Chapter 21 Selection of stocks to chart 317Chapter 22 Selection of stocks to chart: continued 321Chapter 23 Choosing and managing high-risk stocks: tulip stocks, Internetsector, and speculative frenzies 327Managing tulipomanias and Internet frenzies 328Detailed techniques for management of the runaway issues 330Hope springs eternal and there is one born every second 334Chapter 24 The probable moves of your stocks 343Chapter 25 Two touchy questions 1 347The use of margin 347Short selling 348Chapter 26 Round lots or odd lots? 353Chapter 27 Stop orders .'. 355The progressive stop 357Stop systems and methods 359A brief survey of stop methods 360Some other stop methods 360Average True Range ' 360Parabolic stop and reverse 361Target stops 361A natural method used by the Turtles 361Chapter 28 What is a bottom, what is a top? ; 363Basing Points 364Basing Points: a case analyzed 366The Basing Points paradigm 367Key to Figure analysis 368A narrative of the events in the chart 369The complete Basing Points Procedure: taking into consideration the setting ofBasing Points on both wave lows and new highs 370The complete Basing Points procedure 371Two charts giving a long-view perspective on the complete (Variant 2) 372The representative case fully analyzed using wave lows and new highs 372A narrative of the events in the chart 373Contents xiChapter 29 Trendlines in action 375Buying stock, "going long" 376Liquidating, or selling a long position 377Selling stock short 380Covering short sales 381Additional suggestions 381General outline of policy for trading in the Major Trend 382Chapter 30 Use of Support and Resistance 385Chapter 31 Not all in one basket 391EN: diversification and costs 392Chapter 32 Measuring implications in technical chart patterns 393Chapter 33 Tactical review of criart action 395The Dow Theory 395Head-and-Shoulders Top 402Head-and-Shoulders Bottom 403Complex or multiple Head-and-Shoulders 405Rounding Tops and Bottoms 405Symmetrical Triangles .'. 408Right-Angle Triangles 410Broadening Tops 410Rectangles 410Double Tops and Bottoms 411Right-Angled Broadening Formations 411The Diamond 411Wedges 412One-Day Reversals 412Flags and Pennants 412Gaps 413Support and Resistance 416Trendlines 416Chapter 34 A quick summation of tactical methods 419Get out of present commitments ;... 419Make new commitments 420Chapter 35 Effect of technical trading on market action 421Chapter 36 Automated trendline: The Moving Average 423Sensitizing Moving Averages 424Crossovers and penetrations 424The PENTAD Moving Average system from Formula Research 426Chapter 37 The same old patterns 429Not all the same 430xii ContentsChapter 38 Balanced and diversified 483September 28,1985: an oversold market 488Chapter 39 Trial and error 489Chapter 40 How much capital to use in trading 491Chapter 41 Application of capital in practice 493Put and call options 495Chapter 42 Portfolio risk management 497Overtrading: and a paradox 498Risk of a single stock 500Risk of a portfolio : 501EN9: Risk and trend , : 501Value-at-Risk Procedure , 501Pragmatic Portfolio Theory (and practice) 502Pragmatic portfolio risk measurement 502Determining the risk of one stock 502Determining the risk for a portfolio 503Measuring maximum drawdown, or maximum retracement ...504Pragmatic portfolio analysis: measuring the risk ':.. 504Portfolio Ordinary or Operational Risk 504Portfolio risk over time 505Portfolio extraordinary or catastrophic risk 505Controlling the Risk 505Summary of Risk and Money Management Procedures 505Infinitely more sophisticated risk and money management procedures Ralph :Vince and optimal f 506Chapter 43 Stick to your guns 507Appendix A The Dow Theory in practice 509Five years of Dow interpretation 509The first severe test 510Failure to confirm 512Signs of Major Turn 513The Bull signal 515The first correction 516Bull Trend reaffirmed '. 517The Rails falter 518The spring of 1946 519Final Up-Thrust 521The Bear Market signal 521Appendix B Resources 525Section 1: important and indispensable sites 525Section 2: references for further study 526On risk 526Contents xiiiOn candlesticks 526On futures 526On portfolio management 526Section 3: investment-oriented sites 526Brokerage Houses 528Section 4: the Sharpe Ratio 529Section 5: calculating volatility 529Section 6: the essence of fundamental analysis 530The Elliott Wave Theory: perspective and comments 530Section 7: software packages and Internet technical analysis sites 533AIQ: TRADING EXPERT PRO 533Tradestation 2000i and Tradestation 8 534The Internet: prophet ( ) 534The Internet: *'com 534A brief summary t 534Section 8: the Leverage Space Portfolio Model 534Glossary 539Bibliography 565Index 567

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