course, serves as the first stage of the trailing profit preservation process. Since you are presumably in the stock just as it is pulling away from a multiplicity of cyclic lows, the very next low you expect to see is that of the shortest duration component present. Following the stock by cyclic analysis you should fairly well know in advance when this should occur. As soon as it does come about-and you know it has happened because the price has then pulled away again on the upside-mark the new low (above the previous one) as a new sell-out level. If your trading cycle is the one which is next longer in duration than this shortest observable one, you may continue in this manner until you are automatically sold out. Normally, this wiU not be so. There will be several periodicities with durations between those of the shortest duration one and your selected trading cycle.

Where this is true, you should maintain your original trailing loss level until you experience a low of the component next diorter in duration than your trading cycle. Then, as prices pull away confirming this low, a new level may be marked. Continue cyclic analysis as time passes. Always keep updating your estimate of when the next low will occur for all components-but especially for the trading cycle and the next shorter duration component

Suppose the trading cycle normally contains three of the next shorter duration fluctuations. When the first low of this cycle is reached (and confirmed by prices pulling away from it again), mark this low as an emergency sell-out point. At this time, your sell level should assure you of a fair amount of profit retention. Notice this: if you had continued to use the lows of the diortest duration cycle to establish these sell levels, you would probably have been sold out at the just-reached low of the component next shorter in duration than your trading cycle!

Now note the position of prices within your best estimate of where the trading cycle envelope is. You should be approximately halfway to the upper bound. If you are close to the upper bound, shift immediately to use of the sell levels created by the shortest duration component. If about midway, you should continue to use the level set by the last low of the component just shorter than the trading cycle. All through the process, use your envelope as a guide. Remember, for months in the past your stock price motion has oscillated within this envelope. It is highly unlikely that it is going to go screaming out the top of it just because youre in it. Any time prices approach the upper bound and cyclic analysis indicates youve got the channel drawn correctiy, you should be using the shortest duration component as a means of setting emergency sell levels. In fact, as you approach upper bounds, it is best to shift to a series of uptrend lines, using the valid one to provide a take-profit signal. No matter what happens-as 1 2 as vour emergency sell levels and valid uptrend lines are not violated, the signal is "hold." You never know, you may get caught in one of those short-sharp fundamental things that override cyclicality and drive prices s? iy upward and youd hate to miss the ride! .nd if it iiappens to occur on tiie downside, your sell signal criteria should still preserve profits for you-or at least prevent loss.

Applying these concepts to Gruen, return your attention to Figure V-1. The trading cycle selected for both edge-and mid-band buys was the 19-week one. (All shorter duration components were used only as verniers in setting up precise buy timing.) The next shorter duration component is the four-week one and it is the

Hard up.

1. Sum of components longer in duration than 19 weeks (center line of envelope enclosing 19-week component)

2. 19-week component 9 weeks along.

Topping out.

3. 4-week component 2V4 weeks along.

Hard down.

4. 2-week component Bottoming out to go up.

5. 1-week component Bottoming out to go up.

Our signals are mixed as expected this far along in the trading cycle. However, we expect immediate strength from two components, about one and a half weeks of bottoming-out activity on a third, sideways push from a fourth and a general push-up by the sum of the long duration ones. We would conclude that an upside resolution is imminent but that the upside motion to be expected is Umited. We are immediately put on guard that profit-taking sell signals are to be watched for closely.

At this point we reverse our vaUd trend line buy signal methods. Figure V-2 shows the resulting uptrend lines formed since the buy. The spot at which price has

demonstrated lows of this cycle that should be used to establish traihng loss levels until the time for profit-taking draws close. The successive lows of this periodicity are shown in the figure as TLL 1,3, and 4 respectively. The use of an in-between level in this case (TLL 2) is predicated on the size of the pull-away move from the first two-week low. With this kind of price action we know weve timed our transaction well. Accordingly, we do not expect the next two-week low to see the one marked TLL 2 again, and we can validly "up" our loss level a small amount.

HOW TO CONSTRUCT SELLING ANALOGS

To this point, we have discussed sell signals which prevent excessive transaction loss or preserve profits in case our price objectives are not reached for some reason. However, as time passes, we must reach a peak of our trading cycle somewhere along the Une. We could use our traOing sell signals to tell us when to get out, but doing so wUl sacrifice a goodly part of the maximum gain potential. Therefore, we would Uke a bag of tricks which provides us with definitive, in advance signals that it is tune to take profits. In most cases such seU signals are analogs of the ones used to buy.

Continued envelope analysis is, of course, a requirement. Triangle analysis is always helpful when applicable. Lets study Figure V-1 again closely. Weve made either an edge- or mid-band purchase. TraiUng loss levels have been set up continuously as time passes. The data shown in this figure is up to date through the eighth week of the 19-week cycle. We know the time to take profits is not too far away. Should the stock be sold at this point?

On this precise day a fourth point on the boundary of a well-defined triangle has been formed. Immediately we set up a cychc analysis of the probable direction of resolution.

Valid Uptrend Lines-And A Snal

pulled away from each successive trailing loss level establishes a new point on a generally upcurving trend Hne series. At the triangle apex, we shift to trend Unes based upon shorter and shorter duration cycles. The day after the triangle analysis, price did indeed break out on the upside, providing an opportunity to steepen our trend line from one based on a four-week component to one based on a two-week cycle. Our triangle analysis has assured us that the breakout will be short-lived, in fact we expect a four-week cycle low in about one and a half weeks. We would anticipate this to be a lower low than the last one, and desire to take profits before then if this should come about On the other hand if prices should continue to rise rapidly, we would like to remain invested.

Figure V-2 shows what happened. The first days trading following triangle resolution stalled prices at our latest trend line. The next day pulled nicely away again. There has been no opportunity to set up a steeper uptrend hne, so we live by the one drawn. The next day the trend line was broken at 12i, providing the desired sell signal-and a tidy profit! The validity of our decision is indicated by the fact that the price of Gruen dechned from this point steadily (though cychcally!) to 9 over the next five weeks!

HOW TO MAKE AND USE NON-REAL TIME ENVELOPES

You now have available simple graphical techniques to provide all of the needed investment action signals. However, the trading philosophy developed in Chapter One places great emphasis on risk reduction and profit maximization. It never does any harm to have an extra ace or two up your sleeve for this purpose.