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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
November 24, 2014 1:08 pm

Re; David Weiss’ Trades About to Happen (final)
– When a spring/upthrust occurs, look for a bullish/bearish change in behavior. If the selling/buying pressure diminishes on the next pullback, take the trade and always protect with a close stop below/above the extremity. The same works with a high volume breakout/down. When these occur on heavy volume, watch the character of the pullback. Low volume indicates a successful test of the breakout/down and trend should resume. Stop protection goes immediately above/below the pullback pivot.

Addendum to rules:
1) You must have the patience to wait for the set-ups to appear.
2) Operate without bias – don’t the market what to do, let it tell you.

– Choosing the best box size, reversal and data field for a Point and Figure chart requires practice.
– Charts made from daily closes filters out intraday Lows and Highs.
– 5-yr note is an excellent vehicle for low capital/less experienced traders.
– Renko charts are the consumate tape reading medium because it tracks the amount of time and volume for each “X” and “O”.
The book “Profits in the Stock Market” by H. M. Gartley (1981 edition) is recommended.

That is it for my summary. I hope it helps. I am still absorbing (no pun intended) the information and will be rereading this many times as well as back test. A good place (I believe) to learn about Renko charts is stockcharts.com

Financially successful trading to all.

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mary
mary
November 24, 2014 4:39 pm

Jean-Pierre, Thank you for all the above posts. Between caring for grand-children and working 12-hr shifts, I have not yet had time to read all in detail. When you post “trade setting up” is this to buy or sell?

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sandiegojp
November 24, 2014 4:40 pm
Reply to  mary

Re: Chart analysis Post #82
Hi Mary. You’re most welcome. Wish my “calls” were more on the spot. I should note that I’ll be adding Richard Wyckiff’s Renko chart analysis soon which, hopefully, will improve the “calls.”
Good question. I will endeavor to note whether the trade is being set up on the long or short side.

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mary
mary
November 24, 2014 5:29 pm
Reply to  sandiegojp

Your calls may not always be right but I am sure the chart indication is just one of many factors to determine if the price goes up or down. It is good to see what you have posted, then consider other factors. Thank you for your input!

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sandiegojp
November 24, 2014 8:59 pm

Re: $ACHN chart analysis
TSM- No trade
P/V- Higher vol. and range. Close near low (20%). Lower High, Low and Close. Open same as 11/23. EMAs trending up. Fast > Slow. Both >0. Fast trending down, appears ready to cross Slow which is still inching up. MACDH >0, trending down. 2FI flattish at ~0. Vol. has been below avge. for last 6 sessions. Buyers couldn’t take the High of 11/21 but crossed the High of 11/20 ($0.02). Sellers were in charge as Close was near low. However, Sellers couldn’t break what appears to be a Resistance level ~$13. Prices above 22- and 50-EMAs. Sellers likely in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ACHN. Full disclosure: Long ACHN.

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sandiegojp
November 25, 2014 12:40 am

Re; $ARWR char analysis
TSM- Trade was set up and executed on 11/21.
P/V-Higher vol. and range. Higher High, Low, Close and Open. Close near High (4% off). EMAs trending down but beginning to tapper. Fast and Slow in parallel <0, trending up. MACDH >0 trending up. 2FI >0, trending up. High appears to be at Resistance level. Buyers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ARWR. Full disclosure: Long ARWR.

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sandiegojp
November 25, 2014 12:58 am

Re: $CLDN chart analysis
TSM- No trade.
P/V-Lower Vol. and Range. Close near Low (12% off). Higher High and Low. Lower Open. Close at 11/21 Close. EMAs rising. Fast under Slow, >0, trending down. MACDH<0, trending down. 2FI flat at 0. Last 45 mins. Sellers were in charge on higher vol. than avge. According to Wyckoff this is a "hinge" from which a larger swing may occur. Direction is unknown but be ready for something decisive (My opinion is that Sellers will be in charge).
For the record, yesterday’s “call” was neither RIGHT nor WRONG (close at 11/21 close).
This is NOT a recommendation to BUY/SELL CLDN. Full disclosure: Long CLDN.

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sandiegojp
November 25, 2014 1:07 am

Re: $CTIX chart analysis
TSM- Per TSM order filled.
P/V- Per TSM, order filled. Higher range and vol. Close near High (14% off). Higher Low, High, Open and Close. EMAs flat. Close above 22EMA. Vol. increased 461% over 11/21 but range only increased 50% and Close increased a little over 50%. Fast < Slow, both >0. Fast trending up. Slow trending down. MACDH <0, trending up. 2FI>0, trending up. Buyers in charge.
For the record, yesterday’s “call” was neither RIGHT nor WRONG (order filled per TSM).
This is NOT a recommendation to BUY/SELL CTIX. Full disclosure: Long CTIX.

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sandiegojp
November 25, 2014 1:15 am

Re: $ESPR chart analysis
TSM- No trade.
P/V- Lower vol. and higher Range. Close near High (22% off). Higher Low, High, Open and Close. EMAs rising. Fast at Slow, >0, flat. MACDH zig-zagging at 0, trending down from 11/21. 2FI>0, trending up. Buyers in charge during last 15 mins of trading. Buyers in charge.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL ESPR. Full disclosure: Long ESPR.

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sandiegojp
November 25, 2014 1:23 am

Re: $GILD chart analysis
TSM- No trade
P/V- Higher Vol. and range. Low close to middle (59% off High). Lower High, Low and Open. Higher Close. Fast under Slow, both <0, Trending down. MACDH<0, trending up. 2FI<0, trending up. Buyers in charge during last hour of trading. Buyers in charge.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL GILD. Full disclosure: Long GILD.

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sandiegojp
November 25, 2014 1:34 am

Re: $NBY chart analysis
TSM- No trade.
P/V- TSM order not filled. Lower Buy order one tick above the latest price bar. Lower vol. and range. Close at Low. Higher High. Lower Open. Close and Low at 11/21 Close and Low. Fast under Slow, both <0, coming to a parallel flat. MACDH<0, trending up. 2FI<0, rising. Wyckoff describes this as a "hinge" with unknown direction but be prepared for decisive action (in my opinion, buyers in charge).
For the record, yesterday’s “call” was neither WRONG nor RIGHT.
This is NOT a recommendation to BUY/SELL NBY. Full disclosure: Long NBY.

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sandiegojp
November 25, 2014 1:47 am

Re: $XENE chart analysis
TSM- Trade being set up long side.
P/V- Lower vol. and range. Close near Low (8% off). Lower High, Low, Close and Open. Fast under slow. Both >0 and falling. MACDH<0, falling. 2FI<0 rising. EMAs flattening. Sellers in charge last hour of trading. Sellers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL XENE. Full disclosure: Long XENE.

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sandiegojp
November 26, 2014 12:25 am

Re: $ACHN chart analysis
TSM- No trade
P/V- Lower vol. and range. Close nearer Low (32% off). Lower High, Low, Close and Open. EMAs rising. Downtrend since it high High ($15) on 11/13. Fast just crossed under Slow and falling. Slow flattening. MACDH just crossed under 0.2FI<0 and falling. 15-min chart looks positive. Low at 22EMA. Sellers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL ACHN. Full disclosure: Long ACHN.

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sandiegojp
November 26, 2014 12:34 am

Re: $ARWR chart analysis
TSM- No trade
P/V- Higher vol. and range. Close near Low (26% off). Higher High and Open. Lower Close and Low. Fast over Slow, both <0 and rising. MACDH>0 and flat/falling. 2FI<0 and flat. EMAs falling. High < EMAs. Close at lower envelope. Buyers in charge. For the record, yesterday’s “call” was WRONG. This is NOT a recommendation to BUY/SELL ARWR. Full disclosure: Long ARWR.

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sandiegojp
November 26, 2014 12:51 am

Re: $CLDN chart analysis
TSM- No trade
P/V- Lower vol. and Higher Range. Close nearer High (31% off). Higher High, Low, Close and Open. EMAs rising. Fast under Slow. Both>0. Slow falling. Fast Rising. Looking to cross. MACDH<0 and rising. 2FI>0 and rising. Buyers in charge.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL CLDN. Full disclosure: Long CLDN.

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sandiegojp
November 26, 2014 12:59 am

Re: $CTIX chart analysis
TSM- No trade
P/V- Lower vol. and Range. Close near High (7% off). Higher Low, Open, High and Close. Uptrend since 11/20. Fast rising. Slow falling. Looking to cross. Both >0. MACDH<0 rising. 2FI>0 falling. EMAs rising. Buyers in charge.
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
November 26, 2014 1:05 am

Re: $ESPR chart analysis
TSM- No trade
P/V- Higher vol. and lower range. Close nearer Low (21% off). Higher High, Low and Open. Lower Close. Fast under Slow, both >0, flat. MACDH<0, flat/falling. 2FI>0 looking to cross<. EMAs rising. Buyers in charge. For the record, yesterday’s “call” was WRONG. This is NOT a recommendation to BUY/SELL ESPR. Full disclosure: Long ESPR.

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sandiegojp
November 26, 2014 1:13 am

Re: $GILD chart analysis
TSM- No trade
P/V- Higher vol. and range. Close near High (9% off). Lower High, Low and Open. Higher Close. 22EMA crossing under 50EMA. EMAs falling. F0 rising. Buyers in charge.
For the record, yesterday’s “call” was RIGHT.
This is NOT a recommendation to BUY/SELL GILD. Full disclosure: Long GILD.

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SoGiAm
November 26, 2014 1:19 am

ROSNEFT CEO
Russia will not cut Oil Output this sent oil to 4 year low in Vienna
Best-Ben

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sandiegojp
November 26, 2014 1:19 am

Re: $NBY chart analysis
TSM- No trade
P/V- Higher vol. and range. Close at Low. Lower High and Close. Higher Open. Low at same level as 11/24. EMAs falling. Fast < Slow, <0, falling. MACDH<0, rising. 2FI<0, falling. Buyers in charge. For the record, yesterday’s “call” was WRONG. This is NOT a recommendation to BUY/SELL NBY. Full disclosure: Long NBY.

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sandiegojp
November 26, 2014 1:31 am

Re: $XENE chart analysis
TSM- No trade.
P/V- Lower vol. and higher range. Close near 1/2. Higher High, Low and Close. Lower Open. EMAs rising. Fast < Slow. Both >0 and falling. MACDH<0 and falling. 2FI<0, rising. Buyers in charge.
For the record, yesterday’s “call” was WRONG.
This is NOT a recommendation to BUY/SELL XENE. Full disclosure: Long XENE.

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SoGiAm
November 26, 2014 1:38 am

JP check news on oil prices

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sandiegojp
November 26, 2014 10:50 am
Reply to  SoGiAm

Good morning. Yes, I’ve been monitoring as I’ve been looking to enter trades on BP and COP. I don’t think (but don’t know) that OPEC will agree to cuts tomorrow. Even if they do, however, will it have an impact as shale producers consolidate and expand production? Well, this is again is where a crystal ball would be useful. If I could have one wish it would be to have access today to the Wall Street Journal edition of a year from today!
Happy Thanksgiving to all. May you remember the “things” we all take for granted but most of the world does not have like electricity any time you turn on the switch, and potable water (though usually with Fluoride and Chlorine) when you turn the faucet on – including steaming hot water! A nice, warm bed to sleep in. Roads that are paved (even if full of potholes… hello Chicago and New York!). Garbage pick up at the curb. Grocery stores that are stocked full of products (most non-healthy, but that’s a different story). The sun and the moon that keep coming up every day and night. The random acts of kindness we are too often blind to. The renewal of the planet every day. And much, much more that we see sometimes – often? – fail to acknowledge as we race through our day.

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