back start next
[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [ 14 ] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71]
14 • A model of price motion can be constructed as the basis for such analysis. The principles of summation, commonality, variation, nominality, and proportionality describe the most important aspects of this model. • The graphical method of data enclosure by special "envelopes" is a useful method of roughly determining the status of cyclicality. • The price-motion model permits the development of numerous techniques for refined transaction timing which are described in later chapters. A firm understanding of the nature and meaning of the price-motion elements of the model is essential to the proper application of these techniques.
chapter three Verify Your Chart Patterns • Why Trend Lines and Channels Form and Repeat • Where Head and Shoulder Patterns Coroe From • About Double Tops and Bottoms • The Significance of Triangles • How to Tell in Advance If a Chart Pattern Will "Fail" • Understanding Other Chart Patterns • How Cyclicality Gives Meaning to Chart Patterns • The Significance of Moving Averages • Why Ten-and 30-Week Moving Averages Are Useful • How to Plot and Interpret a Moving Average Properly • How a Moving Average Can Aid Cyclic Analysis • Summarizing Chart Patterns In Chapter Two you were introduced to an unconventional concept of stock price motion. Before applying the resulting price-motion model you must develop confidence in it-and that is part of the purpose of this chapter. If the "X motivation" concept is valid, it must be able to explain the existence and reoccurrence of common chart patterns-and why they impart information to the investor. Thus, reconciliation of the model with the precepts of charting is strong evidence of the validity of the model-which adds to confidence in usage. The second purpose of the chapter is to show you how the price-motion model can be used to resolve chart patterns. Such patterns can be used to help determine the status of cyclic activity, and this in turn can be used to determine which way and when price motion will go at pattern termination. For those of you that are unfamiliar with chart patterns, reference is provided in the bibliography to several good books on the subject.
WHY TREND LINES AND CHANNELS FORM-AND REPEAT These are two of the very most basic tools of the chartist. The chartist will note two or more consecutive fluctuation lows, and if each one occurs at a higher price level, he wall draw an "uptrend" line connecting or just below them. Similarly, he will draw a "downtrend" Une connecting or just above two or more consecutive fluctuation highs when each successive high is at a lower price level. He will then draw upon the adage that "trends tend to persist," and expect the uptrend or downtrend to continue-untfl the trend Une is broken. Furthermore, our chartist wiU often note a situation where prices are generally trending in one direction or another, but appear to bounce back and forth between two imaginaryj parallel lines. He will draw these lines in on the chart and call them a channel. In Figure III-l we have extracted the simplest possible set of elements from our model. One of our cyclic components (any one) is shown at "A." It is assumed that all longer duration components sum for the time being to the straight Une at "B." At each point in time, the price values of "A" and "B" are added to get the resultant, "C." As a ruit of this highly simpUfied extraction from our model, both an uptrend line and an uptrending channel are formed! Trend lines and channels have often been described in awe-filled tones, for it does sometimes seem like magic when stock prices consistently reverse themselves at channel or trend line boundaries almost as if these were very real constraints. At this point, however, we can see that there is no magic to it at all: is simply the natural result of the existence of "X" cyclicality! WHERE HEAD AND SHOULDER PATTERNS COME FROM Now we wUl add just a Uttle more complexity to our simulated price action. In Figure 1II-2, we see two of the cycUc elements of our model at "A" and "C." The magnitude and duration relationships between these are approximately those that our model says should exist between the 18-week and I8-rnonth periodicities. As before, we will not clutter up the picture with any other cycUc activity, and will assume that all regularities of longer than 18 months duration sum to the straiglit line at "B." Again we wiU add the value of all three together for each interval of time and show the results as Figure III-3. Quite a complex bit of price motion for such a simple beginning, isnt it? Imagine what its like with all 12 periodicities at vfork-and with fluctuation of magnitude and duration added! Now lets put a few of the chartists favorite lines in place in Figure -4. Pay Dirt! Almost everywhere we look we see a chart pattern of traditional significance! An uptrend line and a downtrend Une both appear. These are each parts of short up and dovra channels respectively. Both downside and upside breakouts from trend lines are present, and in each case forecast what the chartist says they should-a reversal of trend! Another charting favorite also strikes the eye. The head and shoulder pattern is
[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [ 14 ] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71]
|
Menu
