Stock Market Forecasting Through Charting: An Introduction

Stock Market Profits Through Charting Page 1 of 18
Stock Market Forecasting

Through Charting
By Carl Birkelbach
A brief but comprehensive review and analysis of the technical
methods of stock price forecasting.
TABLE OF CONTENTS
INTRODUCTION
FORWARD
PRICE FORECASTING
This memorandum is presented for informative
purposes only. It does not constitute an offer for
The Fundamental Approach The Technical
sale or the solicitation of an offer to buy any
Approach
security. The material herein was obtained from
various sources which we consider reliable but is
CYCLE THEORY not guaranteed by us as to accuracy. Additional
information is available at our office and will be
The Dow Theory furnished upon request.
The Elliott Wave Theory
CHARACTERISTICS OF THE MARKET CYCLE
General Market --- Accumulation, Progression Phase I, Phase I Correction, Progression

Phase II, Phase II Correction, Progression Phase III, Distribution, Reversion Phase I,
Correction Phase I, Reversion Phase Il.
Industry Groups
Individual Stock Cycles
Summary of Cycles
VERTICAL LINE CHARTS
Construction of Vertical Line Charts
Chart Reading --- Resistant Area, Support Area, Trendlines, Change of Intensity, Channels,
Saucers, V Formation, Head & Shoulder, Double Top & Bottom, and Triangles
http://www.my-broker.com/charting/index.html 10/15/2009
POINT AND FIGURE AND MOVING AVERAGE CHARTS
Point and Figure Charts
Moving Average Charts
TECHNICAL MARKET INDICATORS
Yield Spread
Short Interest Ratio
Advance-Decline Line
The Standard & Poor's 500 Stock Average
New Highs
New Lows
The Dow Jones Industrial Average, NASDAQ, etc
BIBLIOGRAPHY
STOCK MARKET FORECASTING

THROUGH CHARTING
INTRODUCTION
The purpose of this booklet is to show how profits may be achieved through price forecasting using
technical methods. To forecast prices using technical methods, one must understand charts. This text
shows how charts can be constructed and analyzed. It must be remembered that technical analysis is not
the ultimate or magic answer to investing but is an additional source of information about which
investors should have some knowledge before making investment decisions.
PRICE FORECASTING
The Fundamental Approach

The fundamental approach forecasts price movements by logical cause and effect thinking.
Consideration is given to all accounting methods and ratios, future earnings possibilities, current news
events and various other pertinent facts about a company and its industry. Although this approach may
seem quite logical, there are certain disadvantages in thinking only as a fundamentalist. For instance,
accounting methods are often misleading. The assets and liabilities of a balance sheet may be
undervalued or overvalued, depending upon a company's accounting policy. Future earnings are often
difficult to predict because there are many known and unknown facts that must be taken into
consideration. It is also difficult to analyze what effect news events will have on prices, for most market
information refers to a situation that has happened in the past, which market prices have probably
already discounted.
While the fundamental approach is based on logic, prices do not necessarily move based on logic,
because people are also affected by emotion. Price movements are directly related to supply and
demand. Through technical analysis, supply and demand can best be measured.
The Technical Approach

Price change reflects strength in either supply or demand depending on the direction of the price
movement. The technician believes that all factors are reflected in price, that each investor's
fundamental knowledge and emotions are shown through price movements. Thus the price is the end
result of all economic and psychological pressures. By studying these price movements, the technician
attempts to forecast future price swings by charting the prices of stocks and interpreting their formations
and trends using historic precedent as a guide.
The following material deals with cycle theory, the characteristics of cycles in the general market,
groups and individual stocks, vertical line charts point and figure charts, moving average charts, and
technical market indicators, illustrating the technical approach.
CYCLE THEORY
The Dow Theory
FIG. 1
Charles H. Dow is considered to be the first person to
recognize that cycles occur in the stock market. Because of
this he is considered father of technical analysis. Today the
theory he developed, and that which was later expanded on
by William Hamilton and Robert Rhea, is known as the
Dow Theory. Dow recognized that stock prices did not drift
aimlessly but seemed to rise and fall in definite patterns. He
noticed over the years that stock prices moved in trends
which had definite characteristics and that these trends
repeated themselves. To help prove his theory, he FIGs. 2 & 3
formulated what is known today as the Dow Jones

Averages. By careful observation of these averages, he
concluded that the stock market moved in three
simultaneous movements. He compared these movements to
the ocean, its main trend being the tide, its secondary
movements being waves, and the minor fluctuations being
ripples. Dow's first movement in the stock market is the
primary trend (See Fig. 1). This movement may last for
many years. It is either a rising 'Bull Market' or falling 'Bear
Market'. There are secondary movements against the primary trend lasting for only a few days to a few
months. These are Dow's second simultaneous movements. Dow's third simultaneous movement is the
daily fluctuations of the market which he believed to have little significance.
Dow also observed that the primary trend went through three phases. In the case of a 'Bull Market' these
phases (See Fig. 2) would be Phase 1, a rebound from depressed prices bringing them back to their more
logical value; Phase II, a further rise in prices due to the recognition of better business; and Phase III, the
last rise of prices on the speculation that the future will continue to be prosperous. During this latter
period investor's tend to be overly optimistic about the future.
In a Bear Market (See Fig. 3) Phase I would be a return of prices to their more logical value. This would
be a price, less the hopes and expectations expressed in Phase III of the Bull Market. Phase II would be
the further decline of prices due to a down turn in business. Phase III would be the last decline in prices
due to overly pessimistic business prospects.
The Elliott Wave Theory

R. N. Elliott believed, like Dow, that cycles occurred in the stock market. Elliott further believed that the
stock market cycles moved in certain law-abiding, mathematical relationships that repeated themselves
in a rhythmic pattern. In his theory Elliott describes cycles in great detail and how they can be broken
down into smaller and smaller cycles; and the use of patterns, time, and ratios in prices forecasting. The
most important part of this theory deals with the wave count of a primary trend.
Elliott observed in primary trends that every Bull Market has five impulses (See Fig. 4) with three
moves up and two moves down. He also observed that each Bear Market had three impulses with two
moves down and one move up. (See Fig. 4)
CHARACTERISTICS OF THE MARKET

CYCLE
The following section deals with the characteristics of the market cycle, taking into consideration the
Dow and Elliott Theories and some common observations. Although the market cycle is not always
consistent, the following characteristics are generally prevalent.
The market cycle can be broken down into four distinct phases. (See Fig. 5). The first phase is
Accumulation, which occurs when prices resist going lower or higher after a general decline of prices.
This phase is followed by the Progression phase, which is characterized by a rise in prices, generally in
three phases with two corrections. The Distribution phase, which occurs when prices resist going higher
or lower after a general rise, is the fourth phase. The last phase is referred to here as Reversion, a decline
of prices generally in two phases with one correction.
The general market, the individual market groups (technology, airlines, etc.), and individual stocks move
generally through these phases. Because of this, it is important to know in what phase of a cycle a
particular stock, its group, and the general market is in.
General Market
The general economy has gone through a continuing cycle of prosperity and recession. Why these
fluctuations take place is not the major concern to the technician. To understand why the economy
fluctuates, a person would have to study all forms of psychological and economic theory. It is higly
probable that the cycle of prosperity and recession will continue. History proves this to be true.
The stock market shows a group opinion of what people believe the general economy and corporate
earnings may be like in the future. In general the stock market moves ahead of the actual economic cycle
by about six months. Since the stock market is only a prediction of the economy, it is sometimes wrong.
Whether the stock market predicts the economy correctly or not, each phase of the general market cycle
has certain characteristics. These characteristics are helpful in recognizing the phase of the general
market cycle and, therefore, helpful in forecasting future price movements.
Accumulation: This segment of the general market cycle occurs after the market has come down from
its highs and, after making new lows, the market resists going lower. Price trends tend to move sideways
for a period of time lasting anywhere from weeks to years. Neither good nor bad business news affects
prices appreciably in this period. Volume tends to be small. Yields on stocks are relatively high. During
this period people are generally pessimistic about the general economy.
Progression Phase I: Progression begins when stock prices begin to move upward, outside the base of
Accumulation. "Blue Chip" stocks generally lead the move up, on higher volume. Yields on stocks at
this level are at or about the same as bonds. The investing public begins to think that maybe business is
not as bad as was thought. Stock prices return to more realistic values.
Phase I Correction: The correction of Progression Phase I develops under generally lower volume.
This correction is usually caused by profit taking.
Progression Phase II: During this phase stock prices move above the high of Phase I. This rise in prices
is a result of the recognition that the business situation has improved. Volume is high and the Blue Chips
are still leading the upward market trend.
Phase II Correction: This phase is primarily the same as Phase I Correction.
Progression Phase III: In this phase market prices rise over those of Phase II. Generally investors are
optimistic about the market going higher. This rise is based on the hopes and expectations that future
earnings will increase. Most bad business news is largely disregarded. Speculative stocks become
popular. Blue Chips set new highs, subsequently moving back from those highs.
Distribution: At this point the market hesitates. Volume is often erratic. Blue Chips have moved down
from their highs while speculative less quality stocks make new highs. Corporate news is good. Average
yields are relatively low. At this point the investing public buy stocks in large volume with the theme,
"The future couldn't look brighter!"
Reversion Phase I: In this phase market prices fall on larger volume, returning to more realistic values.
Blue Chips generally hold up better than the rest of the market. The market reacts downward on bad
news while largely disregarding good news.
Correction Phase I: This correction phase results when many people who believe that the Bull Market
has not ended continue to buy, creating a temporary return to prices. Those who sold short may be
covering. To do this, they must buy the shares they were short, creating an artificial rise in prices. These
moves are under generally lower volume.
Reversion Phase II: During this phase market prices break down completely. At this point prices
decline more than might be logically expected. Selling hysteria drives stock prices to new lows. The
general opinion is that a recession in the economy is near. Most good news is overlooked. Few people
think the market will go up. After Phase II of Reversion, we are back to Accumulation and the cycle is
ready to start again.
Industry Groups
The general market may be divided into industry groups such as automobiles, steels, energy, aerospace,
technology, airlines, drugs, paper, health-care, financials, retail stores, transportation, utilities, etc.
Stocks within groups generally move together in cycles. They go through the phases of Accumulation,
Progression, Distribution, and Reversion, which may or may not coincide with the same phases of the
general market.
Generally there is a Blue Chip leader within the group that signals the beginning of Progression by
breaking out of the base of Accumulation, accompanied by higher volume. The rest of the stocks of the
group ordinarily follow this leader, in order of quality. During the Distribution phase of the group cycle,
the higher quality stocks back away from their highs while the speculative stocks of the group make new
highs. The first sign of Reversion occurs when these speculative issues break downward.
Groups tend to become popular and unpopular. One year a group may act better than the general market
and the next year worse. Sometimes this action is logical, sometimes not.
When picking a particular stock, it is as important to not only know in what phase of cycle the general
market is in but also what part of the cycle the stock's group is in. As a general rule, if a stock's group is
not popular and not acting well when compared to the general market, it is quite probable that the stock
will act no better than the general market.
Individual Stock Cycle

The prices of individual stocks also go through the phases of cycle in much the same way as the general
market and industry groups. Accumulation occurs after investors who have lost faith in a company's
earning potential sell, and other investors, perhaps better informed about the Company's earnings
prospects, buy.
As and when investors' interest increases, the company's stock moves up in Phase I of Progression.
Some stockholders who had bought at lower prices sell, taking profits, resulting in the first Correction of
Phase I. Progression Phase II may be attributed to improved business and earnings reports. Some
investors who bought during Phase I now sell, taking profits, resulting in the Correction of Phase II. The
rise of prices of Phase III may be attributed to an over estimation of earnings in the future.
During the Distribution Phase the price of the stock sells at relatively unrealistic levels. It does so and
will continue to do so as long as it is supported from buying by perhaps less sophisticated investors who
are attracted to the stock by the preceding rise in price in the Progression Phase.
When interest and consequently support from this group wanes, prices begin to drop back to more
realistic levels. At a point during the Reversion Phase, the decline in prices appears to offer a good
buying opportunity to certain investors, in turn resulting in a temporary flurry of buying activity and
consequently resulting in an increase in the stock's price. Having tested recovery prospects and finding
support only temporary, this ultimately leads to a further deterioration in the stock's price, even to the
point of "panic selling." When the price falls below realistic levels, the cycle is ready to begin again.
Summary of Cycles
In studying the cycles of the general market, industry groups, and individual stocks, it can be seen that
all cycles have many things in common. Investors first underestimate earning power, depressing prices
to unrealistic levels, and then overestimate earning power, boosting prices beyond their values. In
Progression, there are corrections against the main trend caused by people who sell, taking profits. In
Reversion there are always corrections caused by people who do not believe the bull market is over. It is
interesting to note that even when earnings of a company remain fairly constant, prices still go through a
cycle because people as a group are first underestimating and then overestimating earnings and growth
potential.
VERTICAL LINE CHARTS

A technician's main tool in price forecasting is the chart. Charts provide a graphic picture of price
swings, the support and resistance areas, and various patterns that aid in forecasting price change. There
are a wide variety of charts. The most frequently used is the Vertical Line Chart or Bar Chart. The
Vertical Line Chart is easy to maintain and, at a glance, shows the high, low, and closing prices, and
volume.
Construction of Vertical Line Charts

The Bar Chart's vertical scale shows price and the horizontal scale shows time. Volume is plotted on the
bottom of the vertical scale. To make a price entry, the high and low are marked with a dot and
connected by a straight line. A small horizontal line across the vertical line is used for the close. (See
Fig. 6) The high, low, and closing prices can be charted for either daily, weekly, or monthly time
periods, depending on the degree of detail desired by the chartist.
Below are the daily high, low, closing prices, and volume of a stock as it would appear in a daily
newspaper and how this would be charted: (See Fig. 6)
Date High Low Close Volume
Nov. $ $ $ (thousands)
1 65 63 64 15
2 66 64 65 20
3 67 66 66.50 25
4 67.50 66.25 67 30
5 66.50 65 65.50 23
8 67.50 64.75 64.75 35
9 65.50 62.25 63 30
10 63.50 62 62.50 15
11 63 62 62.25 10
12 63 62.50 62.75 11
When holidays occur and the market is closed, that day's space is left blank. When splits occur the price
on the vertical price scale is altered proportionately to compensate for the change.
Daily, weekly, and monthly charts of the same period may appear very different from each other. If one
is interested in forecasting long term trends, monthly charts are recommended. Weekly charts are used
for intermediate term; daily charts for short term. It is suggested that all three types be kept for each
trend influences the other. (Of course, to keep a daily, weekly, and monthly chart for many stocks is
very time consuming. To solve this problem, various chart services are available.)
Chart Reading
Chart reading is relatively simple and easy to understand. The picture on a chart is worth a thousand
words. Every price movement tells a story and has a meaning.
Resistance Area
Resistance areas are formed by human emotion. (See Fig. 7) When a person buys a stock at a certain
price (A, B) and that stock price goes down to (D), chances are that when the price returns to the original
purchase price (E), that person will be anxious to get his money back and will sell. If a lot of people
bought at about the same price (A, B) as in the above example, (See Fig. 7) they will tend to act the
same way. This area where people have a tendency to sell is called a Resistance Area.
Support Area
(See Fig. 9) When a group of people buy a stock at a certain price (A, B) and the stock goes up to (D)
and the price then returns to the purchase price (E), the stock will usually receive support at that level.
This is because the people who purchase at price (A, B) have conditioned themselves to only sell at a
profit and now will not sell to just break even on their investment. Also to many people the old price (A,
B) appears to be a bargain price at which to buy.
Each base area is a potential resistance or a support area. When prices return to the base area, they will
tend to be stopped in this area. If prices break through the base area, they will tend to stop at the next
resistance or support area.
Trends
Stocks tend to move in a particular direction over a period of time. This direction is called the stock's
trend. When stock prices are generally rising, the trend is said to be up and conversely when prices are
generally dropping, the trend is said to be down. If neither is the case, the trend is said to be sideways.
Once a stock starts moving in a trend, it will tend to continue to move in that way, resisting change.
Stock prices act in this way because during an uptrend, people will be attracted to buying a stock
because it is going up, causing it to go up further and attracting more buying interest, etc. During the
downtrend, the decrease of prices will tend to keep possible purchasers away from the stock, causing the
price to go down further which causes the price to go down further still. When a stock moves sideways,
it attracts neither the buyer nor the seller and continues to move sideways.
Trendlines
Trends tend to move along a straight line. This is a unique and useful characteristic of price movements.
(See Fig. 9)
The purpose of the trend line is twofold. First, it shows very clearly what kind of a trend is currently
being experienced. Secondly, if the trend line is broken, it shows that there has been a change in the
direction of the trend. We are primarily concerned with the trend line connecting the bottoms of an
uptrend and the tops of a downtrend because the breaking of this trend line shows that there has been a
change in direction of the trend. To confirm that the trend line has been broken, the trend line must be
broken by at least three per cent, and on high volume.
The main trend line may be difficult to identify and may be confused by minor trends until it is fairly
well established. (See Fig. 10) Some experience is necessary before one is able to distinguish between
minor and major trends, but once mastered, the trend line can be a useful and faithful tool.
Change of Intensity
Trend lines can also be drawn joining the tops of the waves of an uptrend or joining the bottoms of the
waves of a downtrend. (See Fig. 11) Breaking of this trend line shows a change in the intensity of the
trend. Stock prices will usually move up in the case of an uptrend and go down in the case of a
downtrend at a faster rate than previously experienced.
Channels
Channels are formed when a trend line connecting the highs of a wave runs parallel to the trend line
connecting the lows of a wave. (See Fig. 12)
This formation does not occur often, but when it does, the trendlines of the channel are often quite a
significant factor in the price movement of the stock. Breakout rules apply as previously described.
Saucers
Sometimes trends move along curved lines. This is most significant on the bottom or top of a cycle.
These formations are called saucers. (See Fig. 13)
Saucers reflect a gradual change in opinion regarding the future outlook of the company. Volume on
saucers should decrease on the old trend and pick up upon starting the new trend.
V Formation
The V Formation, as the name implies, look much like a "V". (See Fig. 14)
A V formation shows that there has been a sudden change in opinion about the company. This sudden
change in trend is usually caused by a news event, accompanied by high volume at the climax.
Head & Shoulder
The oldest, best known, and possibly most reliable formation that signals a change of trend is the Head
& Shoulder formation. (See Fig. 15)
A sell signal is given when a head and shoulder top is formed and prices break the neckline; conversely
a buy signal is given when head and shoulder bottom is formed and prices break the neckline (See Fig.
15). After prices break the neckline there is usually a quick retracement back toward the neckline,
followed by another reversal and continuation of the basic trend.
Double Top.and Bottom
Double tops and bottoms are signals of a trend reversal. (See Fig. 16)
A double top indicates that the stock is in a technically weak position because investors are unwilling to
purchase a stock that hesitates to go up and make new highs. The double bottom shows strength because
people tend to shy away from a stock that is falling in price. Once it shows resistance to further decline,
investors begin purchasing again.
These formations can be dangerous if the investors tends to predict that a double top or bottom will be
formed before the formation is completed. One can be fooled if prices slowly back away from "C" and
then break on past that point. To protect oneself, the chart history of the company, the price action of
other stocks in its group, and the trend of the general market should be checked first.
Triangles
When converging trends meet, triangles are formed. (See Fig. 17) Triangles show a struggle between
two factions, one tending to push prices up, the other tending to push prices down. When the trendline is
broken on the upside, this indicates that the upside faction has won and that prices should continue to go
up. Conversely when the trend line is broken on the downside, this indicates that the downside faction
has won and prices should continue lower.
Generally speaking, ascending triangles and wedges will break out on the upside and descending
triangles and wedges will break out on the downside. The symmetrical and expanding head triangles do
not tend to break out in any established direction. Prices tend to break out of a triangle in the direction
prices were going before its formation. However, no forecast should be made until the breakout occurs.
POINT AND FIGURE AND MOVING

AVERAGE CHARTS
Point and Figure Charts
Point and figure charts are kept differently than line charts. The point and figure chart paper is a series of
squares rathern than lines. Each square represents a unit of price. Volume is not kept on this chart. The
value of each square is determined by the degree of detail desired and by the volatility of the stock. As a
general rule the scale in Fig. 18 can be used.
FIG. 18
Price of Stock Value Per
Square
$3 and under $.12
$3 1/8 - $7 $.25
$7 1/8 - $19 $.50
$19 1/8 - $80 $1
$80 1/8 and over $3 - $5
Dow Jones Industrial 3 points
Averages
Dow Jones Rail Averages 2 points
Dow Jones Utilities 1 points
Averages
To indicate price, X's are marked in the square. (See Fig. 18) They are only marked when the price
moves three squares in value. For example, if a stock was selling at $60, one would use the scale one
box equals $1.00. The price would have to move $3.00 to $57 or $63 before the appropriate X's could be
entered.
Entries are made in the same column as long as the price continues in that direction. But when the price
changes three squares in value in the opposite direction, this is entered in the next column. For example,
if a stock moved from $61 to $66 and then down to $63, it would be entered as in Fig. 19.
An example of a point and figure chart using the same figures as the line chart in Fig. 6 is shown above
in Fig. 20. Point and figure charts may be read in much the same manner as line charts. However, they
have two important distinguishing characteristics: i.e., the breakout and extent of move after breakout.
The Breakout
The breakout is a signal either for sale or purchase. It occurs when the column of X's rise above or
below the previous column of X's by two as below: (See Fig. 21)
Extent of Move After Breakout:
To measure the extent of any move after a buy or sell signal, one can count horizontally across the base
of the breakout signal. Count straight across that base, counting even the empty squares. This horizontal
count, when applied vertically from the breakout signal, will give the extent of the move. (See Fig. 22)
The point and figure charts have many advantages. They are easy to keep, the breakout signal is clear,
and the extent of move can be made after a breakout. The count, however, may not always be relied
upon to be accurate. The point and figure charts have some other disadvantages too. Because the price
has to move three squares in value before an entry is made, some detail is missed and the vertical line
chart will usually give signals sooner. Also, volume, which can be an important factor, cannot be used
with point and figure charts.
Moving Average Charts

Moving averages simplify price movements into one line, thereby eliminating erratic price swings and
making the trend easier to analyze. The moving average of a stock is calculated by adding the closing
prices for a certain number of days, such as 10, and then dividing that total by 10, the number of days, to
find the average price for that time period. The next day the new closing price is added to that total, the
lst day's closing price is subtracted, and the new total is divided by 10, again the number of days in the
moving average. This is done every day and the average price for each 10 days is then plotted each day
on a chart as a dot. When those dots are connected, the moving average line is formed.
The most commonly used moving average charts use from 5 to 200 days as their base period. The longer
the time used, the less sensitive it will become to a change in trend. Generally speaking, if one is
interested in a near term trend, a 10 day moving average may be used, for an intermediate trend a 50 day
moving average, and for a long term trend a 200 day moving average.
The direction the moving average is slanted towards, indicates the direction of the trend. Moving
averages are used mostly with vertical line charts. A change of trend is signaled when the stock breaks
through the moving average line as shown on the following page.(See Fig. 23)
TECHNICAL MARKET INDICATORS

Technical market indicators give signals that a change in the trend of the stock market is about to occur.
Some indicators show underlying strength or weakness in the market, while others show the investment
attitude of a specialized group, such as the professional investor or the public.
It is unwise to depend on any one indicator for buy or sell signals, for no one indicator is always correct.
It is best to use a combination of indicators. Following is a list of some of the most reliable market
indicators which appear in either daily or weekly newspapers:
Yield Spread
The Yield Spread shows the relationship between the dividend yield of the Dow Jones Industrial
Average and the yield of top-quality, long term corporate bonds such as Standard and Poors AAA
Composite Bond Index or Barron's High Grade Bond Average.
Because many investors are yield conscious, the yield spread between stocks and bonds affects their
investment decisions. Over the past five years or so, stocks in general have tended to yield about one per
cent less than bonds. When this spread is over minus one (-l) per cent, investors tend to invest more
funds in bonds than stocks. Conversely, when this spread is under minus one (-1) per cent, investors
tend to invest more funds in stocks rather than bonds. Therefore, the Yield Spread is technically bullish
under minus one per cent and technically bearish over minus one per cent.
Short Interest Ratio

The Short Interest Ratio shows the relationship between the total short sale interest and the average daily
trading volume. The Short Interest Ratio is bullish when the short interest is high because at some future
date each short seller must ''cover" his short by buying stock. The Short Interest Ratio is bearish when it
is low because in this instance there is not a great deal of future buying to be done. As a general rule, if
the Ratio figure is above 1. 5, it is bullish and if it is below 1 it is bearish. The Short Interest appears
once a month in Barrons weekly newspaper.
Advance-Decline Line
The Advance Decline (A-D) Line is the difference between the number of stocks that have advanced on
a given day from the number of stocks that have declined on the same day, expressed as a running total.
When there are more advances than declines, the difference is added to the running total. When declines
are more numerous than advances, the difference is subtracted from the running total. The Advance
Decline Line represents the overall market action of all stocks, whereas the Dow Jones Industrial
Average is made up of only 30 stocks. By matching the moves of the Advance Decline Line against the
moves of the Dow Jones Industrial Average, it may be determined whether or not the general market is
confirming the moves of the averages.
A buy signal is given when the Advance Decline Line breaks the top of the last upwave before the Dow
Jones Industrial Average breaks the same top. (See Fig. 24)
A sell signal is given when the Advance Decline Line breaks the bottom of the last down wave before
the Dow Jones Industrial Average breaks the same bottom. (See Fig. 25)
The Standard & Poor's 500 Stock Average

The Standard and Poor's 500 Stock Average measures the price changes of 500 stocks in contrast to the
Dow Jones Industrial Average's 30 stocks. Like the Advance-Decline Line, the Standard and Poor's 500
represents the general market and should confirm the moves of the Dow Jones Industrial Average if
trends are to continue.
New Highs
The number of daily New Highs shows the underlying strength or weakness of a market trend and is
best kept as a 10 day moving average. When the trend of the New High Moving Average turns up, a buy
signal is indicated. Conversely, when the trend turns down, a sell signal is indicated.
New Lows
The number of daily New Lows also shows the underlying strength or weakness of a market trend and is
also best kept as a ten day moving average. When the trend of the New Low Moving Average turns
down, a buy signal is given; when the trend turns up, a sell signal is indicated.
Dow Jones Industrial Average/ NASDAQ/ etc

The various indexes and averages themselves can be used as an indicator in forecasting the major
general trend of the market. By applying the technical methods of cycles, trend, patterns, support areas,
resistance areas and moving average chart patterns to these various averages and indexes and comparing
the differences, an additional insight can hopefully be obtained into the prevailing major trend of the
market. Be aware of the ever-increasing variety of averages and indexes that are available in different
sectors of the market and the overall effect they have in forecasting price movements.
BIBLIOGRAPHY
Technical Analysis Of Stock Trends Edwards and Magee

Natures Law Elliott, R. N.
The Wave Principal Elliott, R. N.
A Strategy Of Daily Stock Market Timing For Granville, Joseph E.
Maximum Profits
The Stock Market Barometer Hamilton, William Peter
How Charts Can Help You In The Stock Market Jiler, W. L.
Mind and Markets Larson, Bert
The Dow Theory Today Russell, Richard
Bear Markets Schultz, Harry D.
Common Stocks And Business Cycles Smith, E. L.
The Dow Theory Explained Stansbury, Charles B.
Study Helps In Point And Figure Technique Wheelan
Public Participation In The Stock Market Wilson, Sloan J.
FOR INFORMATION PURPOSES ONLY. ADDITIONAL INFORMATION AVAILABLE UPON REQUEST. THIS REPORT HAS BEEN PREPARED
FROM SOURCES AND DATA, WE BELIEVE TO BE RELIABLE. HOWEVER, WE MAKE NO REPRESENTATION AS TO ITS INTERPRETATION,
PROFITABILITY, ACCURACY OR COMPLETENESS. IN ADDITION, THERE MAY NOT BE ENOUGH INFORMATION AVAILABLE IN THIS
REPORT TO MAKE INFORMED DECISIONS. INVESTMENTS SHOULD NOT BE MADE UNTIL ENOUGH INFORMATION IS OBTAINED AND
RISKS UNDERSTOOD.

Stock Market Forecasting Through Charting: An Introduction

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Stock Market Forecasting Through Charting: An Introduction

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Stock Market Profits Through Charting Page 1 of 18

Stock Market Forecasting

CHARACTERISTICS OF THE MARKET CYCLE

General Market --- Accumulation, Progression Phase I, Phase I Correction, Progression

Individual Stock Cycles

VERTICAL LINE CHARTS

Construction of Vertical Line Charts

POINT AND FIGURE AND MOVING AVERAGE CHARTS

Point and Figure Charts

Moving Average Charts

TECHNICAL MARKET INDICATORS

Short Interest Ratio

The Standard & Poor's 500 Stock Average

The Dow Jones Industrial Average, NASDAQ, etc

STOCK MARKET FORECASTING

The Fundamental Approach

The Technical Approach

formulated what is known today as the Dow Jones

The Elliott Wave Theory

CHARACTERISTICS OF THE MARKET

Phase II Correction: This phase is primarily the same as Phase I Correction.

Individual Stock Cycle

VERTICAL LINE CHARTS

Construction of Vertical Line Charts

Date High Low Close Volume

8 67.50 64.75 64.75 35

Head & Shoulder

Double Top.and Bottom

POINT AND FIGURE AND MOVING

Price of Stock Value Per

Extent of Move After Breakout:

Moving Average Charts

TECHNICAL MARKET INDICATORS

Short Interest Ratio

The Standard & Poor's 500 Stock Average

Dow Jones Industrial Average/ NASDAQ/ etc

Technical Analysis Of Stock Trends Edwards and Magee

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