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written by reader Technical analysis

By hipockets, October 26, 2014

TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS was mentioned weeks ago by another Irregular as an excellent reference for technical analysis (TA). ( I apologize for not being able to give him credit, but I could not find his name by searching SGS.) I bought the book because of his recommendation and because the book has 4 1/2 stars (out of 5) on Amazon. After starting to study it, I realized that reviewing the book might be a way to say “Thank You” to the Irregulars who are teaching me so much. I hope everybody finds this useful. If you don’t, you can complain to our CEO! :)

Before I get started – Joe, I was very disappointed when I found that Marxism was never mentioned. Not once! :)

The book was written by John H. Murphy; Revised 1999; New York Institute of Finance; IBSN 0-7352-006-1. Amazon’s price for a new book is about $55. Used books, as of today’s date, are available for between $25 and $30. The book has 542 pages, 19 chapters, and 4 appendices, all of which are listed at the end of this review.

To briefly sum up this review: I am glad that I bought the book. I have started using some of the techniques, and I’m convinced that it was money well spent. However, one wishing to learn TA cannot expect to read the book once and then magically be able to read charts. There must be a willingness to study the techniques and perhaps read some of the chapters more than once. Murphy says repeatedly that that the ability of analyze charts comes only with experience. TA is not a Holy Grail for guaranteeing stock performance, but I believe it has its uses.

The first edition, published in 1986, was TECHNICAL ANALYSIS OF THE FUTURES MARKETS. Although it did not specifically talk about stocks, many of the techniques can be used for either one. This second edition, published in 1999, contains much of the information from the first one, but there is much new information and the emphasis, of course, is on stocks. The differences between TA for futures and TA for stocks are well explained.

To benefit readers new to TA, one sentence from Chapter 5, and one from Chapter 6, might have been better placed early in Chapter 1. From Chapter 5: “The analyst must face the realization that he or she is dealing with percentages and probabilities. . . .” From Chapter 6: “The treatment of all chart patterns deals of necessity with general tendencies as opposed to rigid rules”.

The Good: A lot.

>> Murphy discusses many of the popular TA techniques in easy to understand language (usually, anyway, see the comment about “Elliot Wave Theory” below). Investors with no or little knowledge of TA and wanting to learn will find it invaluable. Investors who already use TA will probably learn additional techniques and at a minimum learn some nuances and variations of the techniques that they already use. There is a plethora of easy-to-read charts illustrating the techniques (easy to read except for some “Point and Figure” charts, see below), with explanations under each chart. The text font is large and easy to read.

The Bad: Not much. A few brabbles, just to be picky:

>> I earlier stated that the charts are easy to read. An exception: some of the ”Point and Figure” charts used a small font in order to pack as much data into the chart as possible. Sometimes the font size was so small that I had to use a magnifying glass.

>> I would like to have several practice charts at the end of most chapters with the question: “What is this chart telling us, and why?”

>> I would like to have a chapter on “Risk Analysis”, but since the risk would vary according to the expertise of the chart reader, I suppose such a chapter would not be possible.

>> I would like to have some discussion about the frequency of techniques occurring, e.g., “A head and shoulders pattern occurs roughly ”X” % of the time”. I would like it, but it probably can’t be done, once again due to the expertise of the chart reader. You might recognize a head and shoulders pattern, but I might not see any pattern at all.

>> The biggest complaint that I have is that Chapter 15, “Computers and Trading Systems”, says very little about software packages for PCs, although “Trade Station” is mentioned in the Chapter and later in Appendix C. I download end-of-day data daily and update my charts manually; I was hoping to find a review of some low cost software packages that would automate the procedure.

This is not a criticism of the book, but I feel that TA often would be of little use in working with microcaps. TA uses as its basis the buying and selling actions (derived from sales price and volumes) of shareholders. My thinking: The fewer the shares, the more the actions (warranted or otherwise) of a small number of shareholders can almost instantaneously affect the price. Conversely, I think TA would be of great benefit when investing in behemoths like JNJ.

Whole chapters are devoted to the basic concepts of many of the techniques. Murphy does not dive deeply into some of the topics, since some, such as Japanese Candlesticks and Elliot Wave Theory, have had whole books written about them. He lists several resources for such topics in one of the appendices.

After explaining the basics of a technique, he frequently writes about or mentions variations of the technique. When explaining RSI, “While 9 and 14 day spans are the most common values used…..some use shorter lengths, such as 5 or 7 days, to increase volatility….[or] 21 or 58 days to smooth out the RSI signals.” Also, he frequently mentions ways to confirm a signal. Many variations of moving averages are discussed.

Chapter 1 starts with a definition: “TA is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”. It then lists the three basic assumptions of TA:
1. Market action discounts everything.
2. Prices move in trends.
3. History repeats itself.

(I think “History can repeat itself” or “History often repeats itself ” is more likely. :) )

There is a discussion about the differences between fundamental analysis and TA. Murphy says that, in essence, the fundamentals of a stock are built into the chart. “The fundamentalist studies the cause of market movement, while the technician studies the effect.” Later in the book, he says that charts are often leading indicators of changes in fundamentals and gives a few examples.

Chapter 13, which discusses Elliot Wave analysis, is hard for me to understand, although it seems to me to be a souped-up (I checked the spelling! :) ) version of moving averages. The basic theory is well explained—price movements come in 5 advancement (up) waves and 3 correction (down) waves. Then there are 9 different levels of magnitude. Etc. There are several explanatory charts — the thing that eludes me is how to easily apply the technique to buying/selling a stock. Since I am new to charting, and since this is a complicated topic, I will wait till I master the simpler techniques before getting into this one.

Gumlandians probably will not use the concepts of time cycles (Chapter 14) unless they are long-term investors, but it’s interesting to read about them. “. . . 37 different examples of the 9.6 year cycle, including caterpillar abundance in New Jersey, coyote abundance in Canada, wheat acreage in the U.S., and cotton prices in the U.S. . . . acted in synchrony ; that is, they turned at the same time. . . .” Seasonal cycles, typical stock market cycles, and the January Barometer are some of the topics worth reading.

Chapter 18 discusses evaluating the market as a whole and why it is important. Techniques such as the Advance-Decline Line and the McClellan Oscillator are discussed, and I found the information about comparing the various market averages very educational. If the comparison is to be meaningful, there is more to it than one would think.

Chapter 19 presents a 23 item check list that can be used when thinking about buying or selling. At first, I found the checklist to be intimidating, but after re-reading it, I saw that much of it would become second nature after understanding the techniques discussed in the previous chapters.

I will close by repeating the statement that “I’m glad that I bought the book”, and saying, “ Alan, I hope you were not overloaded with complaints! ”

Here’s the Table of Contents:

Chapter 1 Philosophy of Technical Analysis
Chapter 2 Dow Theory
Chapter 3 Chart Construction
Chapter 4 Basic Concepts of Trend
Chapter 5 Major Trend Reversals

Chapter 6 Continuation Patterns
Chapter 7 Volume and Open Interest
Chapter 8 Long Term Charts
Chapter 9 Moving Averages
Chapter 10 Oscillators and Contrary Opinion

Chapter 11 Point and Figure Charting
Chapter 12 Japanese Candlesticks
Chapter 13 Elliot Wave Theory
Chapter 14 Time Cycles
Chapter 15 Computers and Trading Systems

Chapter 16 Money Management and Trading Tactics
Chapter 17 The Link Between Stocks and Futures:
Intermarket Analasis
Chapter 18 Stock Market Indicators
Chapter 19 Putting It Altogether – A Checklist

Appendix A Advanced Technical Indicators
Appendix B Market Profile
Appendix C The Essentials of Building a Trading System
Appendix D Continuous Futures Contracts
Plus Glossary, Selected Bibliography, Selected Resources, and Index.

fini

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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sandiegojp
December 3, 2014 9:25 pm

Re: $ACHN chart analysis
TSM – Weekly MACDH’s slope trending up. Daily 2FI dipped below 0 and failed to make a new multi-week low. Bear Power (Elder Ray) declined below 0 and ticked back up toward the centerline. Schotastic fell below 30. Williams%R fell below 30. Place a buy order one tick above the high of the previous day ($13.47). Place a protective stop one tick below the trade or the previous day’s low, whichever is lower.
P/V – Lower vol. and tighter range. Close near High (17% off). Higher High, Low, Open and Close. EMAs rising. Fast < Slow and ready to cross over. Fast rising, slow falling. Both >0. MACDH<0 and rising. 2FI >0 flat. Ease of upward movement with little selling pressure while lower vol. and tighter range would indicate reduced demand. Position of close would indicate buyers in remain in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ACHN. Full disclosure: Long ACHN.

👍 491
sandiegojp
December 3, 2014 9:33 pm

Re: $ARWR chart analysis
TSM – Long trade setting up
P/V – Lower vol. and tighter range. Close near High (18% off). Higher Low and Close. Lowr High and Open. EMAs falling. Fast > Slow <0 and rising in parallel. MACDH>0 inching down. 2FI <0 rising. Very little movement even though Buyers were mostly in charge. However, buyers failed to take the 12/2 High and the Close was the same as the 12/1 Close. It seems we have entered a trading range with little movement either way.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL ARWR. Full disclosure: Long ARWR.

👍 491
sandiegojp
December 4, 2014 2:03 am

Re: $CLDN chart analysis
TSM – No trade
P/V – Lower vol. and tighter range. Close near High (22% off). Higher High, Low, Close and Open. EMAs rising. Fast>Slow and rising. Both >0. MACDH>0 and rising. 2FI>0, falling. Ease of upward movement with sellers taking out 12/2 Low by $0.10. Strong Close higher than 12/2 High indicates buyers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL CLDN. Full disclosure: Long CLDN.

👍 491
sandiegojp
December 4, 2014 2:16 am

Re: $CTIX chart analysis
TSM- Short side trade setting up
P/V- Lower vol. and tighter range. Close near High (14% off). Higher High, Low, Open and Close. High hit resistance level and buyers could not hold or punch through. EMAs rising. Fast>Slow and rising. Both >0. MACDH>0 and rising. 2FI>0 and falling. The narrow range is difficult to interpret. Not sure if it means that the sellers couldn’t make headway or that the buyers made a stand and took all of the sellers’ offers. Tentatively expect buyers to be in charge. If there is little or no upward follow through and prices fall below the Lowof 12/3, then larger losses are likely to ensue.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL CTIX. Full disclosure: Long CTIX.

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sandiegojp
December 4, 2014 2:26 am

Re: $ESPR chart analysis
TSM- Short side trade setting up
P/V – Lower vol and tighter range. Close near High (17% off). Higher High, Low, Open and Close. EMAs rising. Fast < Slow and flat >0. MACDH undulating at 0. 2FI>0 and undulating as well. Close was near Open and Close of 12/2. The market is displaying an unwillingness to move higher. Expect a rally to move higher but if it reverses and close falls below Low of 12/3 then expect further weakness.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL CLDN. Full disclosure: Long CLDN.

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sandiegojp
December 4, 2014 2:36 am

Re: $GILD chart analysis
TSM – No trade
P/V – Higher vol. and wider range. Close nearer Low (32% off). Higher High and Open. Lower Low and Close. EMAs inching down. Fast < Slow and getting to cross. Fast rising and Slow falling. MACDH <0 and rising. 2FI <0 and falling. Buyers took the Open above 12/2 Close and High but could not hold. Sellers tried to take the Lows of 11/26, 11/28 and 12/1 failed and could not hold the Low. However, position of the Close and width of range indicates sellers are still in charge. A reversal and close above the 12/3 High would be very bullish. For the record, yesterday’s “call” was WRONG. This is NOT a recommendation to BUY/SELL GILD. Full disclosure: Long GILD.

👍 491
sandiegojp
December 4, 2014 2:43 am

Re: $NBY chart analysis
TSM- No trade
P/V- Lower vol. and wider range. Close at High. Higher Open and Close. Lower High. EMAs flat. Fast about to cross > Slow and rising. Slow inching down. Both <0. MACDH about to cross >0. 2FI>0 and flat. Sellers took the 52-wk Low but could not hold. Buyers strongly in charge as Close finished at High.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL NBY. Full disclosure: Long NBY.

👍 491
sandiegojp
December 4, 2014 2:54 am

Re: $XENE chart analysis
TSM – No trade
P/V – Higher vol. and same range as 12/2. Close nearer High (37% off). Higher High, Low, Open and Close. EMAs rising. Fast rising and about to cross Slow which is falling. Both >0. MACDH <0 and rising. 2FI>0 and rising. Sellers never took control. Buyers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL XENE. Full disclosure: Long XENE.

👍 491
sandiegojp
December 5, 2014 1:40 am

Re: $ACHN chart analysis
TSM – No trade
P/V – Lower vol. and tighter range. Close near 1/2 (42% off Low). Higher Low, Open, Close and High. EMAs rising. Fast rising and about to cross over Slow. Slow inching down. MACDH about to cross >0. 2FI about to cross <0. Action today is difficult to assess as Close is at Open and near enough 12/3 Close. Wyckokk refers to this as a "hinge" from which larger swings may occur. The close does not reveal direction but warns to be alert on 12/5 for something decisive.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ACHN. Full disclosure: Long ACHN.

👍 491
sandiegojp
December 5, 2014 1:51 am

Re: $ARWR chart analysis
TSM – No trade
P/V – Higher vol. and wider range. Close near Low (12% off). Higher Open. Lower High, Low and Close. EMAs falling. Fast and Slow rising from <0 in parallel. MACDH>0 and falling. 2FI<0 and falling. Ease of downward movement with sellers getting a 52-wk low which they could not hold, but barely. Sellers still in charge.
For the record, yesterday there was no call as movement could have either way.
This is NOT a recommendation to BUY/SELL ARWR. Full disclosure: Long ARWR.

👍 491
sandiegojp
December 5, 2014 2:05 am

Re: $CLDN chart analysis
TSM – No trade
P/V – Lower vol. and tighter range. Close near Low (9% off). Lower High and Close. Higher Low and Open. EMAs rising. Fast over Slow and both >0. Fast inching down and Slow inching up. MACDH>0 and falling. 2FI <0 and falling. Ease of downward movement but sellers could not take the Low of 12/3. Close at Support level. Position of the Close would indicate sellers should be in charge. However, fact that they could not take the Low of 12/3 indicates that a reversal is possible.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL CLDN. Full disclosure: Long CLDN.

👍 491
sandiegojp
December 5, 2014 2:29 am

Re: $CTIX chart analysis
TSM – No trade
P/V – Lower vol. and tighter range. Close near 1/2 (57% off High). High and Low same as 12/3. Lower Open and Close. EMAs rising. Fast > Slow and rising. Both >0. MACDH >0 and rising. 2FI About to cross < 0. Ease of downward movement but Close finished almost 1/2 way between High and Low. Sellers could dip below Support level. Buyers in charge but expect narrow range. For the record, yesterday’s “call” was WRONG (however, Sellers could not take the Low of 12/3, stopping a potential substantial sell-off - Wyckoff). This is NOT a recommendation to BUY/SELL CTIX. Full disclosure: Long CTIX.

👍 491
sandiegojp
December 5, 2014 2:36 am

Re: $ESPR chart analysis
TSM – No trade
P/V – Higher vol. (736% > 12/3) and wider range. Close near High (20% off). Higher High, Low, Open and Close. EMAs rising. Fast>Slow and rising, both >0. MACDH crossed >0 and rising. 2FI >0 and rising. Ease of upward movement with Buyers taking the 52-wk High. Close retreated 20%. Buyers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ESPR. Full disclosure: Long ESPR.

👍 491
sandiegojp
December 5, 2014 2:43 am

Re: $GILD chart analysis
TSM – No trade
P/V – Lower vol and tighter range. Close near High (10% off). Lower High and Open. Higher Close. Low at 12/3 Low. EMAs inching down. Fast rising and about to cross > Slow which is falling. Both <0. MACDH <0 and about to cross 0. 2FI crossed >0 and rising. Sellers equalled 12/3 Low but could not sustain. Buyers rallied and the Close is near the High. Buyers in charge.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL GILD. Full disclosure: Long GILD.

👍 491
sandiegojp
December 5, 2014 2:49 am

Re: $NBY chart analysis
TSM – No trade
P/V – Lower vol and tighter range. Close at Low. Higher High and lower Close. EMAs falling and with Fast and Slow (strong sell signal). Fast < Slow <0 and falling. MACDH<0 and falling. 2FI<0 and falling. Ease of downward as Buyers could not sustain upthrust. Position of Close indicates Buyers strongly in charge. For the record, yesterday’s “call” was WRONG. This is NOT a recommendation to BUY/SELL GILD. Full disclosure: Long GILD.

👍 491
sandiegojp
December 5, 2014 2:56 am

Re: Post #155
Errata: Should read:
This is NOT a recommendation to BUY/SELL NBY. Full disclosure: Long NBY.

👍 491
sandiegojp
December 5, 2014 3:02 am

Re: $XENE chart analysis
TSM – No trade
P/V – Lower vol and tighter range. Close near Low (10% off). Lower High and Close. Higher Low and Open. EMAs rising. Fast rising and about to cross > Slow which is falling. MACDH about to cross >0. 2FI about to cross <0. Ease of downward movement but sellers could not take 12/3 Low. Indications are that we're entering a trading range between $15-$13, unless the 12/3 High or Low are taken and held.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL XENE. Full disclosure: Long XENE.

👍 491
sandiegojp
December 5, 2014 3:14 pm

Re; Larry Williams
Continuing lessons from Mr. Williams. This one is sort of common sense. Then again, common sense is far from common sense so here goes:

Want to stop getting stuck in trading ranges?
Then take this lesson to heart.

It happens to all of us; we get attracted to a market. We get long or short then the market goes up and down, back and forth in a trading range which either wears us out, or stops us out shortly before an explosive move in the direction we had anticipated.
Is there some way we can avoid this?
There most certainly is. The way to avoid it is to understand the natural price cycle we have been talking about.
Remember in our last lesson we said that markets go from small ranges to large ranges.
The other side of that coin is equally true. When the market has been moving in large ranges, it is time for it to move into small ranges. A trading range means choppy days, back and forth, where no one makes money except the broker.
Here’s the real interesting thing about this; it is the large range days that attract the public to the marketplace. They see an explosive move in the market, then they start to get into the market which is exactly when the market goes into a trading range. Then they get burned out or blown out.
I’ve seen this happen time and time again to new traders. They don’t know what to do. They see a market explode to the upside or downside, so they hop aboard thinking the trend will continue. Sometimes it does for a day or so. But most likely, just about then it goes into a sideways market, and they get confused and eventually out of their position.
Let’s look at some examples to drive home this point. In the our next series of lessons I will show you an indicator that will help us identify, specifically, when to expect large range breakout moves to the upside as well is when to expect congestion moves to begin.
(In our next lesson I will show you an indicator that will help us identify, specifically, when to expect large range breakout moves to the upside as well as when to expect congestion moves to begin.)
Let’s first look at the S&P E Minis.
What you see in the chart below is a 30 minute intraday time frame.

30-min S&P chart

What is real clear that price trades from large ranges to small ranges. This actually is pretty sad for most day traders because they get involved after the large ranges, expecting them to continue. And of course the cycle is closer to finishing than it is to just starting.

S&P daily chart

Now you’re looking at a chart (above) on a daily basis where we see the same thing… Large ranges give way to small ranges. The lesson to be learned is that after large range days the market is going to consolidate. Wait for the consolidation, then when that cycle is about over, expect it to be ready for a trending cycle.
Here are more examples in the S&P’s. Notice the massive ranges we had here, on a weekly chart and what followed? Small ranges. Again, as you see, my price cycles works on all timeframes.

Chart of GLD but no idea what timeframe he uses as it’s not displayed.

You can see the exact same thing taking place in the price of Gold.

It is a natural reaction; that following explosive large range moves the market will consolidate over the next few sessions. Keep that in mind, and your trading will become much more successful.
In the next lesson I will develop an indicator for you that will help us spot when markets are most likely going to start to trend.

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sandiegojp
December 7, 2014 5:25 pm

Re: $ACHN chart analysis
TSM – No trade
P/V – Higher vol (66% higher than 12/4 and 106% of avge) and wider range. Close at High (1% off). Higher Low, High, Close and Open. EMAs rising. Fast over Slow and rising. Both >0. MACDH crossed >0. 2FI>0 and rising. Great ease of upward movement with little downward movement after the open. High volume and Close at High indicate that sellers are strongly in charge.
For the record, yesterday’s “call” was neither RIGHT nor WRONG (the call was that it was “hinge” day with decisive movement that could go either way).
This is NOT a recommendation to BUY/SELL ACHN. Full disclosure: Long ACHN.

👍 491
sandiegojp
December 8, 2014 3:22 am

Re: $ARWR chart analysis
TSM – Trade setting on long side
P/V – Higher vol and wider range. Close near High (5% off). Higher High, Low and Close. Lower Open. EMAs falling. Fast > Slow, <0, rising. MACDH>0, rising. 2FI>0, rising. Ease of upward movement with Sellers barely taking the prices below the Open and Buyers opening a wide range. With Close near High, buyers should be in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ARWR. Full disclosure: Long ARWR.

👍 491
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