Technical Analysis Explained by Martin Pring PDF

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MARTIN-J. PRING

Technical Analysis Explained The Successful Investor's Guide to Spotting Investment Trends and Turning Points

Fourth Edition

Martin J. Pring

McGraw-Hill New York Chicago San francisco lisbon London Madrid Mexico City Milan New Deihl San Juan Seoul Singapore Sydney Toronto

Library of Congress Cataloging-in-Publication nata Pring, Martin J. Technical analysis explained / the successful investor's guide to spotting investment trends and turning points / by Martin Pring.-4th ed. p. em. ISBN 0-07-138193-7 1. Investment analysis. I. Title HG4529 .P75 2002 332.63'22-dc21

McGraw-Hill

2001044981

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A DivisionofThdf&G_.H4lComptmies

Copyright ©2002 by McGraw-Hill. All rights reserved. Printed in the United States ofAmerica. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. 67890 DOC/DOC 0876 ISBN: 0-07-138193-7 The sponsoring editor for this book was Stephen Isaacs and the production supervisor was Clare Stanley. It was set in New Baskerville by MacAllister Publishing Services, LLC. Printed and bound by R R Donnelley & Sons Company. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. -From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers McGraw-Hill books are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please write to the Director of Special Sales, Professional Publishing, McGraw-Hili, Two Penn Plaza, New York, NY 10121-2298. Or contact your local bookstore.

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This book is printed on recycled, acid-free paper containing a minimum of 50% recycled de-inked fiber.

To my son, Thomas William Pring

Contents Preface Acknowledgments

Introduction

Part r, Trend-Determining Techniques 1 The Market Cycle Model

xi

xiv

1 13 15

..........2. Financial Markets and the Business Cycle

26

/3. Dow Theory

36

_4. Typical Parameters for IntermediateTrends

50

.>

5.

" 6.

Price Patterns

63

Smaller Price Patterns

98

7.

One- and Two-Bar Price Patterns

111

8.

Trendlines

136

9.

Moving Averages

154

10. Momentum Principles

179

11. Individual Momentum Indicators I

211 vii

VnI

Ix

/"", 12 . Individual Momentum Indlcaton D

237

30. Technical Analysis of Global Stock Markets

564

__ 13. Candle Charts

257

31. Technical Analysis of individUal Stocks

574

/ 14 . Point and figure Charting __ 15. Miscellaneous Techniques for Detennlnlng Trends

277

EpUogue

593

Appendix TIle Elliott Wave

595

./ 16. The Concept of Relative Strength

Glossary

600

304

Bibliography

604

Index

609

287

17. Putting the Indicators Together: The OJ Transports 1990·2001

322

Part II.

329

Market Structure

,./ 18. Price: The Major Averages

331

/ , 19 . Price: Group Rotation

352

.,./ 20. TIme: Longer-Tenn Cycles

/

364

21. Practical Identification of Cycles

391

22. Volume: General Principles

397

/"" 23. Volume Oscillators

409

,./ 24. Breadth

435

Part

m.

Other Aspects of Market Behavior

25. Why Interest Rates Affect the Stock Market

/'" 26. Sentiment Indicators

461 463

485

27. Applying Technical Analysis to the Theory of Contrary Opinion

511

28. Checkpoints for Identifying Primary Stock Market Peaks and Troughs

526

29 . Automated Trading Systems

539

There is no reason why anyone cannot make a substantial amount of money in the financial marJ lowing the completion of two in term ediate cycles, tech nicians should be ~ "talerted to the fact tha t a reversal of th e primary trend itself may be about

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Part I: Trend-Determining Techniques

57

Typical Parameters for Intermediate Trends

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to take place. Again. if only one intermediate cycle has been completed, the chances of prices reaching higher levels (lower levels in a bear market) are quite high.

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Characteristics of a Final Intermediate Cycle in a Primary Trend

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Reversal from Bull to Bear Market Since volume leads price, the failure ofvolume to increase above the levels of the previous intermediate cycle up phase is a bearish sign. Alternatively, if over a period of 3 to 4 weeks volume expands on the intermediate rally close to the previous peak in volume but fails to move prices significantly. it represents churning and should also be treated bearishly. Coincidence of either of these characteristics with a .downwar~ cros~over of a 4Q-week moving average (see Chapter 9) or a divergence m an intermediate-term momentum indicator (see Chapter 10) would be an additional reason for caution. There are essentially two broad characteristics that suggest that the downward phase of an intermediate cycle could be the first downleg of a bear market. The first is a substantial increase in volume during the price decline. The second is a cancellation or retracement of 80 percent or more of the up phase of that same intermediate cycle. The greater the retracement, the greater the p~obability that the basic trend has reversed, especially ~ecause a retracement m excess of 100 percent means that any series of rismg troughs has been broken. thereby placing the probabilities in favor of a change in the primary trend. Other si~s would include the observation of a mega-oversold or an extreme swmg (see Chapter lOon momentum for a full explanation of these terms).

Reversal from Bear to Bull Market The first intermediate up phase of a bull market is usually accompanied by a substantial expansion in volume that is ~ignificantly greater than those of previous intermediate up ph~es (see Fig. 4-3). In other words, the first upleg in a bull market attracts noticeably more volume than any of the intermediate rallies in the previ-

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In a~dition to actually counting the number of intermediate cycles, it is also possible to compare the characteristics of a particular cycle with those of a primary trend's typical pivotal or reversal cycle. These characteristics are discussed in the following section.

Bea' """kIt with 2 lfJ. inbo,medilltl c:y~.

Agure 4-3

Intermediate trends and volume.

ous bear market. Another sign of a basic reversal occurs when prices retrace at least 80 percent of the previous decline. Again, the.greater ~e proportion of retracement, the greater the odds of a reversal m the basic trend. If the retracement is greater than 100 percent, the odds clearly indicat~ ~at a reversal in the downward trend is likely because the series of declining . ' peaks will have broken down. Since volume normally expands substantially as the mtermediate down phase during a bear market reaches a low, a shrinkage in volume during an intermediate decline could well be a warning that the bear market has run its course. This is especially true if the price does not reach a new.1ow dU~­ ing this intermediate decline, since the series of declining intennediat~ cyclical lows which is a characteristic of a bear market, may no longer be intact, An example of this is shown in Chart 5-10, where the overall peak in volume was seen in the June 1962 decline rather than the August to October sell-off.Chart 5-7 shows no perceptible slackening ofvolume at the lows, but

58

Part I: Trend-Determining Techniques

59

Typical Parameters fOT intermediate Trends

~he volume expansion during the January rally, combined with the better-

The median average primary intermediate advance since 1897 appears to be around 20 to 22 percent. The median primary intermediate upmove in the 1933-1982 period does not differ from that of the earlier period classified by Rhea. However, the median duration' appears to have increased considerably from 13 weeks in the 1897-1933 period to 24 weeks in the 1933-1982 period.

109 of the

October to November high (a 100 percent retracement), offered a valuable clue that the bear market was over. The final decline in October represe?ted the down phase of the third intennediate cycle in the bear mar~et, which should have warned of its probable maturity. A final sign might include a mega-overbought condition or an extreme swing. Again, please refer to Chapter 10 for an explanation of these concepts.

Amplitude and Duration of Primary Intermediate Downmoves

Intermediate Trends in the U.S. Stock Market, 1897-1982

Using Rhea's classification, 39 cases of a primary intermediate decline developed between 1900 and 1932, as summarized in Table 4-3. My research shows that between 1932 and 1982 there were 35 ~rimary intermediate declines, with a median of 16 percent (the declme was measured as a percentage from the high). The results are summarized in Table 4-4. The results in the 1932-1982 period did not differ appreciably from those in the 1897-1933 period. Rhea's median average swing was 18 percent, as compared to the more recent 16 percent, whereas the median duration in the earlier period was 13 weeks, as compared to 14 weeks in the 1932-1982 period.

Amplitude and Duration of Primary Intermediate Upmoves

Be~een 18~7 and 1933, Robert Rhea, the author of Dota Theory, classified

?3 lOte~edlate-trend advances within a primary bull market, which ranged magnItude from 7 to 117 percent, as shown in Table 4-1. I have classified 35 intermediate-term moves between 1933 and 1982 and the median averaged 22 percent from low to high. The results are shown in Table 4-2. . 10

Table 4-1

Primary Intermediate Upmoves, 1897-1933

Porportion of intermediate moves

Table 4-3 Primary Intermediate Downmoves, 1900-1932

Price magnitude

25 50

25 100

7-14

Proportion of intermediate moves

Price magnitude

15-28 28-117

25 50

3-12 13-27

25

28-54

Median 20

Table 4-2

Median 18

Primary Intermediate Upmoves, 1933-1982 Swings from low to high, percent

Mean average Median Range

30

22 10-105

Duration, weeks

22 24 3-137

Table 4-4 Primary Intermediate Downmoves, 1932-1982

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Mean average Median

Range

Swings from high

Duration (weeks)

18 16

17

7-40

3-43

14

60

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61 Amplitude and Duration of BuD Narkat Secondary Reactions

i.

Between 1898 and 1933. Rhea classifiC'd 0 cues ofbull market secondaries. In terms of retracemem oCthe previous primary Imermedtaee upm~.lhcy ranged from 12.4 to ISO percent. with a median of 56 percent. This compared with a range in the 193~1982 period from 25 to 148 percent, wilh a median of5 1 percent. The duntion oCthe median in the earlier period was 5 weeks, as compared to 8 weeks between 1933 and J982. The median per. centage lou from the previous primary Intermediate peak WOlS 12 percent (the man average was 13 percent) be~en 1933 and 1982.

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Amplitude and Duration of Bear Market Rallies

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Rhea estimattd that the median bar market rally ~traced 52 percent of the previ o us decline. which is comparable to my own median estimate of 61 percent in the 1932-1 982 period. The two ranges were 30 and 116 percent and 26 and 99 percent, ~pectively. Median dur.ations were 6 weeks in 1898-1 933 and 7 weeks in 1932-1982. Rallies off the low averaged 12 and 10 percent for mean and median, respectively, for the 19S3-1982 perioo. .

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Intermediate Trends in the U.S. Stock Market Since 1982 Charu 4-1 and 4-2 show the Standard & Poor's (S&P) Composite between the end of 1982 and the opening of the twenty-fint century. The thick vertical lines approximate interm ediate rally peals and the thin ones intermediate troughs. The lower panel co ntains an intermediate oscillator, the Intermediate KST (see Chapter 12 for an explanation), which roughly renece the tuming points. This period en compassro. the secular buU market that began in 1982 and ended at the turn of the century. The classifIcation ofintennediate trends WilS particularly difficu lt compared to previous periods. I tried (a.s much as possible) to make the intermediate tre nds fit the swings in the oscillator. Because oscillaton have a tendency to lead in buD markets, the actual peaks in the intermediate rallies usually lag those in the &sT. The two charts show that the classification of these trends is far from a precise task and co nfinns earlier research between 1897 and 1982 that the range of intermediate trends varies tremendous ly. I n the period

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62

Part I: Trend-Determining Techniques

covered by Chart 4-1,for instance, the first intermediate rally in the bull market lasted well over a year from August 1982 to October 1983. Even if I had taken theJuly 1983 top as a reference point, the rally would still have lasted for almost a year. Moreover, the whole year of 1995 was consumed by one complete intermediate advance.

5 Price Patterns

Summary • The typical primary trend can be divided into two one-half primary intermediate cycles, each consisting of an upmove and a downmove. In a bull market, each successive upwave should reach a new cyclical high, and in a bear market, each successive downwave of the intermediate cycle should reach a new low. Breaking the pattern of rising lows and falling peaks is an important, but not unequivocal, warning of a reversal in the primary trend. For more conclusive proof, technicians should derive a similar conclusion from a consensus of indicators. • A secondary movement or reaction is that part of an intermediate cycle that runs counter to the main trend, a downward reaction in a bull market or a rally in a bear market Secondary intermediate movements typically last from 4 weeks to 3 months and retrace between one-third and two-thirds of the previous primary intermediate price movement. Secondary price movements may also take the form of a line or horizontal trading pattern. • The character of intermediate cycles can be used to help identify primary trend reversals. • As an approximate rule, the stronger an intermediate rally, the less the retracernent is likely to be, and vice versa for primary bear markets.

Basic Concepts . d i Ch ters 6 through16 are The techniques discussed in this chapter an 10 ap d . d by the concerned with analysis of any price trend that has been etenn10e 5-1 and 5-2. Figinteraction of buyers and sellers i?, a free marke~. F' The concept of price patterns IS demonstrate 10 Igs. d . ure 5-1 represents a typical price cycle in which ~ere are ~ree:nrS~~~ 'deways and down. The sideways trend is essentially a honz?~ o. SI , . k ments Sometlmes . sitional one, which separates the two major mar et move t

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Figure 5·1 Normal reversal.

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,{ J a highly e-motional mark~ can change without warning. as in Fig. 5-2. but this rarel y bappees. Consider a fast-moving train, which takes il long time to slow down and then go into reverse: the same is normally true of financial markets,

To the market technician, the transitional phase has great rignificana marks the tu~ing poilJ.1-~~tl il rising and a falling market. If . pnq! ~yc...~n advancing , the eri~a.sm of the bu~n has outweighed ~~ the petsiiiilsm of sellers up to this point. and pri ces have risen accordingly. During th e tra nsitio n phase, the balance becomes more or less even until finally, for one reason or ano the r. it lttitpid in a new direction as the relative weigh t of selling pushes th e trend (of prices) down. At th e termination ofa bear market, the reverse prpc~.o.ccurs . Th ese transition phases are almosr?d\ran~iy signaled by clearly defi nab le price patterns or formations. The successful completion of suc h patterns or formations alerts the tec h...