Technical Analysis of the Financial Markets : A Comprehensive Guide to Trading Methods and Applications

About the Author xxiii(2) About the Contributors xxv(2) Introduction xxvii(4) Acknowledgments xxxi 1 Philosophy of Technical Analysis 1(22) Introduction 1(1) Philosophy or Rationale 2(3) Technical versus Fundamental Forecasting 5(1) Analysis versus Timing 6(1) Flexibility and Adaptability of Technical Analysis 7(1) Technical Analysis Applied to Different Trading Mediums 8(1) Technical Analysis Applied to Different Time Dimensions 9(1) Economic Forecasting 10(1) Technician or Chartist? 10(2) A Brief Comparison of Technical Analysis in Stocks and Futures 12(2) Less Reliance on Market Averages and Indicators 14(1) Some Criticisms of the Technical Approach 15(4) Random Walk Theory 19(2) Universal Principles 21(2) 2 Dow Theory 23(12) Introduction 23(1) Basic Tenets 24(6) The Use of Closing Prices and the Presence of Lines 30(1) Some Criticisms of Dow Theory 31(1) Stocks as Economic Indicators 32(1) Dow Theory Applied to Futures Trading 32(1) Conclusion 33(2) 3 Chart Construction 35(14) Introduction 35(1) Types of Charts Available 36(1) Candlesticks 37(2) Arithmetic versus Logarithmic Scale 39(1) Construction of the Daily Bar Chart 40(1) Volume 41(1) Futures Open Interest 42(3) Weekly and Monthly Bar Charts 45(1) Conclusion 46(3) 4 Basic Concepts of Trend 49(50) Definition of Trend 49(2) Trend Has Three Directions 51(1) Trend Has Three Classifications 52(3) Support and Resistance 55(10) Trendlines 65(9) The Fan Principle 74(2) The Importance of the Number Three 76(1) The Relative Steepness of the Trendline 76(4) The Channel Line 80(5) Percentage Retracements 85(2) Speed Resistance Lines 87(3) Gann and Fibonacci Fan Lines 90(1) Internal Trendlines 90(1) Reversal Days 90(4) Price Gaps 94(4) Conclusion 98(1) 5 Major Reversal Patterns 99(30) Introduction 99(1) Price Patterns 100(1) Two Types of Patterns: Reversal and Continuation 100(3) The Head and Shoulders Reversal Pattern 103(4) The Importance of Volume 107(1) Finding a Price Objective 108(2) The Inverse Head and Shoulders 110(3) Complex Head and Shoulders 113(2) Triple Tops and Bottoms 115(2) Double Tops and Bottoms 117(4) Variations from the Ideal Pattern 121(4) Saucers and Spikes 125(3) Conclusion 128(1) 6 Continuation Patterns 129(28) Introduction 129(1) Triangles 130(2) The Symmetrical Triangle 132(4) The Ascending Triangle 136(2) The Descending Triangle 138(2) The Broadening Formation 140(1) Flags and Pennants 141(5) The Wedge Formation 146(1) The Rectangle Formation 147(4) The Measured Move 151(2) The Continuation Head and Shoulders Pattern 153(2) Confirmation and Divergence 155(1) Conclusion 156(1) 7 Volume and Open Interest 157(24) Introduction 157(1) Volume and Open Interest as Secondary Indicators 158(4) Interpretation of Volume for All Markets 162(7) Interpretation of Open Interest in Futures 169(5) Summary of Volume and Open Interest Rules 174(1) Blowoffs and Selling Climaxes 175(1) Commitments of Traders Report 175(1) Watch the Commercials 176(1) Net Trader Positions 177(1) Open Interest In Options 177(1) Put/Call Ratios 178(1) Combine Option Sentiment With Technicals 179(1) Conclusion 179(2) 8 Long Term Charts 181(14) Introduction 181(1) The Importance of Longer Range Perspective 182(1) Construction of Continuation Charts for Futures 182(2) The Perpetual Contract(TM) 184(1) Long Term Trends Dispute Randomness 184(1) Patterns on Charts: Weekly and Monthly Reversals 185(1) Long Term to Short Term Charts 185(1) Why Should Long Range Charts Be Adjusted for Inflation? 186(2) Long Term Charts Not Intended for Trading Purposes 188(1) Examples of Long Term Charts 188(7) 9 Moving Averages 195(30) Introduction 195(2) The Moving Average: A Smoothing Device with a Time Lag 197(10) Moving Average Envelopes 207(2) Bollinger Bands 209(1) Using Bollinger Bands as Targets 210(1) Band Width Measures Volatility 211(1) Moving Averages Tied to Cycles 212(1) Fibonacci Numbers Used as Moving Averages 212(1) Moving Averages Applied to Long Term Charts 213(2) The Weekly Rule 215(5) To Optimize or Not 220(1) Summary 221(1) The Adaptive Moving Average 222(1) Alternatives to the Moving Average 223(2) 10 Oscillators and Contrary Opinion 225(40) Introduction 225(1) Oscillator Usage in Conjunction with Trend 226(2) Measuring Momentum 228(6) Measuring Rate of Change (ROC) 234(1) Constructing an Oscillator Using Two Moving Averages 234(3) Commodity Channel Index 237(2) The Relative Strength Index (RSI) 239(6) Using the 70 and 30 Lines to Generate Signals 245(1) Stochastics (K%D) 246(3) Larry Williams %R 249(2) The Importance of Trend 251(1) When Oscillators are Most Useful 251(1) Moving Average Convergence/Divergence (MACD) 252(3) MACD Histogram 255(1) Combine Weeklies and Dailies 256(1) The Principle of Contrary Opinion in Futures 257(4) Investor Sentiment Readings 261(1) Investors Intelligence Numbers 262(3) 11 Point and Figure Charting 265(32) Introduction 266(4) The Point and Figure Versus the Bar Chart 270(1) Construction of the Intraday Point and Figure Chart 270(4) The Horizontal Count 274(1) Price Patterns 275(2) 3 Box Reversal Point and Figure Charting 277(1) Construction of the 3 Point Reversal Chart 278(4) The Drawing of Trendlines 282(4) Measuring Techniques 286(1) Trading Tactics 286(2) Advantages of Point and Figure Charts 288(4) P&F Technical Indicators 292(1) Computerized P&F Charting 292(2) P&F Moving Averages 294(2) Conclusion 296(1) 12 Japanese Candlesticks 297(22) Introduction 297(1) Candlestick Charting 297(2) Basic Candlesticks 299(2) Candle Pattern Analysis 301(5) Filtered Candle Patterns 306(2) Conclusion 308(1) Candle Patterns 309(10) 13 Elliott Wave Theory 319(24) Historical Background 319(1) The Basic Tenets of the Elliott Wave Principle 320(4) Connection Between Elliott Wave and Dow Theory 324(1) Corrective Waves 324(7) The Rule of Alternation 331(1) Channeling 332(2) Wave 4 as a Support Area 334(1) Fibonacci Numbers as the Basis of the Wave Principle 334(1) Fibonacci Ratios and Retracements 335(3) Fibonacci Time Targets 338(1) Combining All Three Aspects of Wave Theory 338(2) Elliott Wave Applied to Stocks Versus Commodities 340(1) Summary and Conclusions 341(1) Reference Material 342(1) 14 Time Cycles 343(34) Introduction 343(1) Cycles 344(11) How Cyclic Concepts Help Explain Charting Techniques 355(3) Dominant Cycles 358(3) Combining Cycle Lengths 361(1) The Importance of Trend 361(1) Left and Right Translation 362(1) How to Isolate Cycles 363(6) Seasonal Cycles 369(4) Stock Market Cycles 373(1) The January Barometer 373(1) The Presidential Cycle 373(1) Combining Cycles with Other Technical Tools 374(1) Maximum Entropy Spectral Analysis 374(1) Cycle Reading and Software 375(2) 15 Computers and Trading Systems 377(16) Introduction 377(2) Some Computer Needs 379(1) Grouping Tools and Indicators 380(1) Using the Tools and Indicators 380(1) Welles Wilder's Parabolic and Directional Movement Systems 381(6) Pros and Cons of System Trading 387(2) Need Expert Help? 389(1) Test Systems or Create Your Own 390(1) Conclusion 390(3) 16 Money Management and Trading Tactics 393(20) Introduction 393(1) The Three Elements of Successful Trading 393(1) Money Management 394(3) Reward to Risk Ratios 397(1) Trading Multiple Positions: Trending versus Trading Units 398(1) What to Do After Periods of Success and Adversity 399(1) Trading Tactics 400(3) Combining Technical Factors and Money Management 403(1) Types of Trading Orders 403(2) From Daily Charts to Intraday Price Charts 405(2) The Use of Intraday Pivot Points 407(1) Summary of Money Management and Trading Guidelines 408(1) Application to Stocks 409(1) Asset Allocation 409(1) Managed Accounts and Mutual Funds 410(1) Market Profile 411(2) 17 The Link Between Stocks and Futures: Intermarket Analysis 413(20) Intermarket Analysis 414(1) Program Trading: The Ultimate Link 415(1) The Link Between Bonds and Stocks 416(2) The Link Between Bonds and Commodities 418(1) The Link Between Commodities and the Dollar 419(1) Stock Sectors and Industry Groups 420(2) The Dollar and Large Caps 422(1) Intermarket Analysis and Mutual Funds 422(1) Relative Strength Analysis 423(1) Relative Strength and Sectors 424(2) Relative Strength and Individual Stocks 426(1) Top-Down Market Approach 427(1) Deflation Scenario 427(1) Intermarket Correlation 428(1) Intermarket Neural Network Software 429(1) Conclusion 430(3) 18 Stock Market Indicators 433(20) Measuring Market Breadth 433(1) Sample Data 434(1) Comparing Market Averages 435(1) The Advance-Decline Line 436(1) AD Divergence 437(1) Daily Versus Weekly AD Lines 437(1) Variations in AD Line 437(1) McClellan Oscillator 438(1) McClellan Summation Index 439(1) New Highs Versus New Lows 440(1) New High-New Low Index 441(2) Upside Versus Downside Volume 443(1) The Arms Index 444(1) TRIN Versus TICK 444(1) Smoothing the Arms Index 445(1) Open Arms 446(1) Equivolume Charting 447(1) Candlepower 448(1) Comparing Market Averages 449(3) Conclusion 452(1) 19 Pulling It All Together--A Checklist 453(10) Technical Checklist 454(1) How to Coordinate Technical and Fundamental Analysis 455(1) Chartered Market Technician (CMT) 456(1) Market Technicians Association (MTA) 457(1) The Global Reach of Technical Analysis 458(1) Technical Analysis by Any Name 458(1) Federal Reserve Finally Approves 459(1) Conclusion 460(3) A Advanced Technical Indicators 463(12) Demand Index (DI) 463(3) Herrick Payoff Index (HPI) 466(3) Starc Bands and Keltner Channels 469(4) Formula for Demand Index 473(2) B Market Profile 475(18) Introduction 475(3) Market Profile Graphic 478(1) Market Structure 479(1) Market Profile Organizing Principles 480(4) Range Development and Profile Patterns 484(2) Tracking Longer Term Market Activity 486(4) Conclusion 490(3) C The Essentials of Building a Trading System 493(12) 5-Step Plan 494(1) Step 1: Start with a Concept (an Idea) 495(2) Step 2: Turn Your Idea into a Set of Objective Rules 497(1) Step 3: Visually Check It Out on the Charts 497(1) Step 4: Formally Test It with a Computer 497(3) Step 5: Evaluate Results 500(1) Money Management 501(1) Conclusion 501(4) D Continuous Futures Contracts 505(6) Nearest Contract 506(1) Next Contract 506(1) Gann Contract 507(1) Continuous Contracts 507(1) Constant Forward Continuous Contracts 508(3) Glossary 511(12) Selected Bibliography 523(4) Selected Resources 527(4) Index 531