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22 neURE IZ-2 FIRST ENVELOPE -CONTArNS e.O WK. INTRACHANNEL COMPONENT A First Envelope Adds Visibaity five to seven weeks in duration. One sample is only three weeks long. This one is a result of magnitude-duration fluctuation, and is to be ignored. The average duration of the remaining seven samples is 6.0 weeks. Furthermore, it is seen that prices in three places exceed envelope bounds. This is not unusual. Envelopes should be constructed so that nearly all the data is enclosed, but a second criterion calls for minimum envelope width. Quite often a compromise is necessary. Notice that in each case of envelope overrun, the envelope could not have been drawn in any other manner without considerable widening. The overrun of the third and fourth weeks was dictated by the full channel width of the price action of the fifth week (points 1 and 2). Points 3, 4, and 5 (weekly lovre and highs just prior to or just following channel overruns) forced channel bounds, showing clearly that the overruns were exceptions. The final dovraward hook to the channel is forced by point 5, the lows of the third, fourth, and fifth weeks before the end of data, and the highs of the second and third weeks before data end. We have now added a small amount of additional visibility. We know that the trend of prices is down for the immediate future. We dont know how far or for how long, but we expect about three more weeks at least on the downside (the last six-week cycle is now three weeks along). We conclude that we wouldnt want to buy the stock right now. FINDING THE OUTER ENVELOPE Now turn to Figure IV-3. Figure IV-2 cleariy displayed a cycle of duration longer than six weeks. Again the techniques of channel constniction are employed to draw a
FIGURE 12-3 SECOND CNVEUOPe C0NTAM5 19 WK. INTRACHANNEL COMPONENT 19 WKS A Second Envelope Clarifies The Picture Furtiiw second channel. Only one full cycle of this periodicity is present and it spans 19 weeks. Suddenly, a great deal of additional visibility is ours! We notice that the sum of all periodicities of duration longer than 19 weeks (represented by the center Une of the second channel) has rounded a bottom and is now up. We see also that we are about 16 weeks along on a 19-week (nominal duration) cycle. This means the 19-week cycle is due to low-out in about three weeks. We recall that the six-week cycle low is also expected in three weeks. Our interest stirs! Here is a case where long-term, large-magnitude cycles are boosting the price higher. We certainly dont want to short this issue. On the other hand, we dont want to buy it for two to three weeks yet as we suspect it will be moving sideways to down in that interval. SETTING UP PRICE-TURN PREDlCnONS In Figure IV-4 everything weve learned about the stock so far is presented on one chart. Weve gone further and sketched in an estimated continuation of each channel for the next five months. The outer envelope is simply extended at the same rate of curvature. L-3 timing is based on the three-weeks-to-a-low estimate previously formed, while the price level at that same time is determined by the lower bound of the outer envelope. is located an additional 19 weeks from L-3. The high in October is pretty much of a guess at this point, except that we know it is likely to occur more than halfway from L-3 to L-4 because of the uptrend of the outer channel.
GRUEN INOUSiraCS IP | | | | | | | 1967 | 19 8 | | | | | S I i N 0 | | | M 1 A | | J 1 J 1 A | S 1 0 N j |
Rough Prediction Using Envelopes THE KIND OF RESULTS YOU CAN ACHIEVE We started with a data tabulation which told us nearly nothing about the future actions of the stock. A conventional stock price chart was made which added a little, but still did not tell us what to do. We continued with envelope analysis and application of the concepts of the price-motion model. The result? • The stock should be bought, not sold short. • In about three weeks we should be able to get into it at around IV*. • We would expect an increase in price over the next eight to ten weeks to the region of 11%. This would represent a 55% gain in two months, or an equivalent per year yield rate of 330%. WeH worthwhile! But-is this what the stock will actually do? Now you ask your data source for the name of the company-Gruen Industries. If you wish, check out the fundamentals; youve got several week.4 of waiting anyway. If the stock moves to the vicinity of VA to IVz at about the time you expect it to, you buy it. Figure IV-5 shows what happens. The time of turns and the amount of moves were very close to being con«ct over a five-month period into the future! You were able to purchase the stock at IVi in the third week-and could have sold at your target price of 11% in just four weeks instead of the estimated eight to ten. Moreover, you would not have been idle all this time. Each week you would have rerun your analysis. As early as > II
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