0001
`
`IBG 1033
`CBM of U.S. Patent No. 7,412,416 B2
`
`

`
`Investment
`Books
`To Help
`You Profit
`In The
`Stock Market
`
`• 43 Famous Contributors • 736 Pages-Over 200 Charts
`1971 Encyclopedia of Stock Market Techniques
`
`Now-in one handy volume-every investor can have at his
`fingertips a complete encyclopedia of investing by 43 of the
`world's most noted financial writers and analysts. A compre·
`hensive survey of the methods developed over the years by
`traders and investors to realize income and appreciation. This
`is the only one-volume reference that cuts across the entire
`field of charting, fundamental and technical investing, spe(cid:173)
`cialized approaches. Compiled by the editors of Investors Intel·
`ligence, this new 1971 edition includes 11 new chapters, plus
`over 200 charts and tables.
`
`Richard W. Arms, Jr.
`Justin F. Barbour
`Arnold Bernhard
`Frank H. Buck, Jr.
`Harlan L Cheney
`Ira U. Cobleigh
`A. W. Cohen
`E. s. c. Coppock
`Benjamin and
`Or. Diane Crocker
`John D. Cunnion
`
`Cur:tiss Dahl
`Benton W. Davis
`Paul S. Deii'Aria
`Herbert Filer, Sr.
`James l. Fraser
`Edson Gould
`Perry P. Greiner
`Walter A. Heiby
`John S. Herold
`William A. Kent
`John R. Kreidle
`
`Wilfrid Ledoux
`J. A. Lempenau
`George lindsay
`S. B. Lurie
`John Magee
`Robert W. Mansfield
`leslie M. Pollack
`D. B. Poole
`Jesse B. Reid
`William X. Scheinman
`Maurece Schiller
`
`William Schwartz
`Sam Shulsky
`Edgar Lawrence Smith
`Thomas A. Stark
`Richard A. Stevenson
`Robert H. Stova II
`Edwin H. Tompkins
`Kenneth Ward
`Fred Whitmore
`Sloan J. Wilson
`Only $24.95
`
`The Relative Strength Concept Of Common Stock
`Price Forecasting
`By Robert A. Levy, Ph.D.
`An Evaluation of Selected Applications of Stock Market Timing Techniques,
`Trading Tactics, and Trend Analysis.
`This book had Wall Street Analysts buzzing when it first came to
`light as the doctoral dissertation of Robert Levy, done at American
`University at Washington, D.c. His basic findings upheld the concept
`of "relative strength continuation," i.e., stocks strong in the recent
`past are better bets than stocks weak in the recent past. Levy's re(cid:173)
`search results, in designing optimal trading strategies, are indicative
`intnguing relation(cid:173)
`of a fascinating detection skill. He has found an
`shiP in many areas of investing. Or. levy writes with clarity and with
`easy mastery of technicalities. A thorough examination of the dom·
`inant trend
`in contemporary market analysis, his book will be of
`consummate value both to those specially interested in the resolution
`of the current controversy between technical and fundamental ap(cid:173)
`proaches and to those directly concerned with the immediate problems
`of what and when to buy and sell stocks. This book contains 384 pages
`and is 6 x 9 with a hard cover.
`
`SEE BACK FLAP FOR ADDITIONAL
`INVESTMENT BOOKS
`
`_...,.,
`/---/$i25o
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`...,.,~
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`--
`
`0002
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`

`
`1
`
`1
`i
`
`.•
`
`0003
`
`

`
`N
`II
`I
`
`RICHARD W. ARMS JR.
`RICHARD VV. ARNIS JR.
`INVESTORS INTELLIGENCE
`ECNEmIL.ILETW3an0TSEVm
`
`0004
`
`

`
`RICHARD W. ARMS JR.
`INVESlORS INlEtEIGENGE -
`
`0005
`
`

`
`Copyright 1971 by Richard W. Arms, Jr.
`Published by Investors Intelligence, Inc., Larchmont, N.Y.
`Library of Congress Catalogue Card Number: 73-146979
`
`Manufactured in the United States of America
`
`0006
`
`

`
`CONTENTS
`
`Page
`
`INTRODUCTION ••••.
`
`CHAPTER
`
`I METHODS OF TECHNI·CAL ANALYSIS.
`
`II
`
`EQUIVOLUME CHARTING- THE REASONING BEHIND IT
`
`. • . .
`
`HI
`
`EQUIVOLUME CHART CONSTRUCTION .•••
`
`IV TOPS . . . . . . . . . . . . . . . . . . . . . .
`
`V THE END OF A DECLINE
`
`• • . • • • • • • . . • . . • . • . • • •
`
`VI
`
`VII
`
`CONSOLIDATION FORMATIONS •...•...•••••••.
`
`SUPPORT AND RESISTANCE . . . • . • • • • • . . • . . . • • . •
`
`VIII
`
`TREND LINES AND CHANNELS •..••.•...
`
`IX GAPS . . . . . . . . . . . . . . . . . . · ·
`
`X
`
`TARGETS • • • • • • . . . . . • • . . . . .
`
`XI
`
`CHARTING THE AVERAGES
`
`XII
`
`CHARTING COMMODITIES
`
`XIII
`
`THE SHORT TERM TRADING INDEX •...
`
`XIV
`
`LONG TERM APPLICATIONS OF THE INDEX
`
`5
`
`8
`
`15
`
`23
`
`29
`
`48
`
`60
`
`77
`
`86
`
`96
`
`112
`
`120
`
`128
`
`134
`
`149
`
`0007
`
`

`
`INTRODUCTION
`
`Two schools of thought exist regarding the behavior of the stock market. The
`
`first consists of those who believe that the stock market is an orderly meeting place
`
`of buyers and sellers, who exchange stocks when they feel that the values which the
`
`stocks represent have changed. They believe that the price of a stock is the logical
`
`outgrowth of that company•s earning capacity, future prospects, backlog of orders,
`
`dividend payments and hundreds of other simi lor factors. They feel that by knowing
`
`and carefully analyzing these factors they can recognize issues which should be sell(cid:173)
`
`ing at higher or lower prices than the current market price. In short, they believe
`
`that the price of a stock is logical. If the market does not do what they expect of it,
`
`they assume that they analyzed the stock incorrectly, or missed some very important
`
`piece of information.
`
`The second group visualizes stock prices as an outgrowth of human emotions,
`
`devoid of all logic. They believe that the main factors affecting stock prices are
`
`not earnings and dividends, but a delicate balance between the two emotions: fear
`
`and greed. To this group the price of a stock is determined by what people are wi !l(cid:173)
`
`ing to pay for it, and has no connection with the earning capacity of the company.
`
`These people try to recognize stocks which are in demand and capitalize on that
`
`demand, riding with the move, and letting the emotionalism of the market make
`
`-5-
`
`0008
`
`

`
`INTRODUCTION
`
`money for them.
`
`These two groups could be compared to other groups in a different field:
`
`religious believers and atheists. Where the stock market ubeliever" must accept on
`
`faith, the atheist throws out all belief, and becomes a complete pragmatist.
`
`Regardless of his religious persuasion, we would ask the reader of this book
`
`to become a stock market agnostic. _If he wishes to make money in the stock market
`
`we be I i eve that he should
`
`the fundamenta I factors that n,-, • .,., •. ,..
`
`,corporations, but realize that thesE:l~.J(ls;te>rs SJI~bED::ond his analxsisand inteq:}rE;ltq,.(cid:173)
`
`tion. He must know that emotions play a large part in stock prices, but realize that
`
`trying to capitalize on these emotions without carefully analyzing and interpreting
`
`them can lead to financial disaster.
`
`Perhaps the best way to follow this idea is to visualize a very large compu(cid:173)
`
`ter, into which all of the factors affecting a stock are carefully fed. These factors
`
`are more than just the company's latest financial statement, or a list of its board of
`
`directors.
`
`It includes the recent price action of the stock, and of the market in gen(cid:173)
`
`eral. It can involve a casual remark the president of the company made over a Sat(cid:173)
`
`urday evening bridge game; it includes how the manager of a large mutual fund felt
`
`this morning, and his subsequent attitude toward the acquisition of the stock.
`
`It in(cid:173)
`
`volves every factor which could conceivably play any part in any investor's or
`
`group of investors' decisions in buying or selling this stock. After feeding oil of the
`
`information into the computer, we push the "compute" button, and it prints out the
`
`price at which the stock should be trading.
`
`-6-
`
`0009
`
`

`
`INTRODUCTION
`
`This computer does in fact exist, and is already programmed. It is called
`
`11The Investing Public 11 and its output is available in every brokerage office, and is
`.
`.
`
`recapped in most newspapers. The millions of modules ~is.h!l:l.c:J.~~:\Jp_thecomputer_
`
`~an bra i n~.L~i fti ng through a II !he funda_menta I and !~-~ht:JJ_c_:_ql_£actor_~, buxi ng_
`
`.Qut with onlx two sigt")ificant piecesgfjnfoxmati<:m:_Jh~terl£.~Uan9 .. XQ.I.tJ_'!1~tS?JJhe
`
`stock.
`
`In this book we wi II be concerned with the interpretation of this computer
`
`output. We realize that there are factors upon which people base their decisions,
`
`and that emotions are only a part of the total picture, but being stock market agnos-
`
`tics, we wi II strive to analyze the results of these factors, and thereby project prob-
`
`able price moves in the future.
`
`-7-
`
`0010
`
`

`
`CHAPTER I
`
`METHODS OF TECHNICAL ANALYSIS
`
`When the exchange closes and stocks cease trading for the day there areonly
`
`two pieces of information left for the technical analyst to deal with:
`
`the prices of
`
`stocks and the volume on which those prices were established. All of the emotions
`
`and all of the facts relating to each company have boiled down to these two bits of
`
`information. It is the job of the analyst to try to properly correlate this information,
`
`and reach correct decisions as to future price action.
`
`It is obvious then, that in this book all we can present is a new method of
`
`correlating this information in an attempt to reach more reliable conclusions. We
`
`still have only price and volume to work with, but we will try to emphasize differ(cid:173)
`
`ent relationships that are brought out by these two factors. Previously, volume has
`
`always been regarded by technicians as a minor piece of information, to be put along
`
`the lower margin of the chart, and only referred to in passing, with the emphasis al1
`-
`
`most entirely upon the price. Very little has been done in an attempt to relate price
`
`action to volume.
`
`In addition, there has always been a tendency to pay the most at(cid:173)
`
`tention to price changes, rather than ranges. We wi II show the price range to ~e the
`
`,most important conJ19-!:!9JiQD n,ext lQ',tQium~.
`
`Before looking closely at this new method of stock analysis, we must review
`
`-8-
`
`0011
`
`

`
`METHODS
`
`the other major charting methods, and find their strengths and weaknesses. This
`
`groundwork is necessary in order to underst~nd Equivolume Chart_ing.
`
`At the present time, there are only two widely accepted methods of depicting
`
`stock market behavior. These are vertical line charts and point and figure charts.
`
`As we shall see, both have their strengths and their weaknesses.
`
`Vertical Line Charts. This method of charting places prices on the vertical
`
`axis, and time on the horizontal axis. Each day's trading range is depicted by a ver(cid:173)
`
`tical line, the top of the line being the highest point at which the stock traded dur(cid:173)
`
`ing that day, and the bottom being the lowest point at which the stock traded. There
`
`is attached to this line a small horizontal line which shows the price at which the
`
`stock closed for the day.Some chartists and chart publication services stop here, but
`
`most include volume figures across the bottom of the chart. The higher the vertical
`
`volume line the more volume during that trading session. (See Figure 1.)
`
`There are many variations upon this, such as different time periods, so that
`
`each vertical line represents a week, a month or a year, but in any case, the hori(cid:173)
`
`zontal scale remains constant. Many chartists prefer to use a logarithmic vertical
`
`scale; rather than an arithmetic one, so that percentage changes always appear in the
`
`same way.
`
`In addition, work has been done depicting the volume in two manners,
`
`such as two different colors, or solid lines and dashed lines to indicate upside volume
`
`and downside volume.
`
`Vertical line charts are the oldest and most widely used method of charting,
`
`and are certainly an easily understood and worthwhile method of depicting stock
`
`-9-
`
`0012
`
`

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`• ~-· .. "
`
`-10-
`
`0013
`
`

`
`METHODS
`
`market activity. Their attributes far overshadow their drawbacks.
`
`Advantages and Disadvantages. The biggest single advantage of vertical
`
`line charts is that they are easily read and understood by anyone, after only a few
`
`seconds of explanation. They present a good visual impression of the present price
`
`of the stock as compared to where it has recently been. In addition, it is easy to
`
`see how volatile the stock is. The fact that time is a constant along the horizontal
`
`axis is important, in that the student can very easily relate price moves to time per(cid:173)
`
`iods. Vertical line charts depict daily trading ranges well, also.
`
`The volume figures which appear at the bottom of most charts are extremely
`
`important.
`
`It is possible on a vertical line chart to relate volume to the price moves
`
`on a given date. We feel, in fact, that the volume figures are so important that _a_
`
`chart which omits volume is close to being useless as a means of reaching logical
`
`market decisions.
`
`Many of the factors which make vertical line charts good also contain the
`
`drawbacks of the system. The most important single drawback is the difficulty in
`
`correctly correlating volume and price. The analyst finds himself constantly going
`
`from the prices to volume figures, and trying to ascertain what goes with what. In addition,
`
`he is hard pressed to compare volumes in different parts of the chart. This is especially
`
`true if the analyst puts as much emphasis upon the trading range as we do. It is next
`
`to impossible to equate volumewith trading range correctly onavertical line chart.
`
`The fact that the horizontal axis represents time is also a slight drawback.
`
`It makes it necessary to give every day equal weight. Each trading session is assigned
`
`-11-
`
`0014
`
`

`
`METHODS
`
`one vertical line, whether one thousand or one hundred thousand shares traded on
`
`that day. This idea wi II be discussed further in the next chapter.
`
`Point and Figure Charts. Although the system was known earlier, the point
`
`and figure chart was not widely used or understood prior to the work of Richard
`
`Wyckoff in the early 1930s. In this method of charting it is assumed that time is of
`
`little importance, and that the primary factor is price movement. The idea is that
`
`more price movement indicates more stock moving between the professionals and the
`
`amateurs. At the bottom of the market the amateurs are selling and the professionals
`
`are accumulating, and exactly the opposite is occurring at the top of a market.
`
`In order to depict this, price remains on the vertical axis but the horizontal
`
`axis represents price activity. Every time the stock being charted changes direction
`
`the chartist moves one column to the right, and posts the price by placing an x in
`
`the box representing the price. As long as the stock continues to move in the same
`
`direction he will place more x•s up or down the same column. Only when the stock
`
`again changes its direction wi II he move to a new column., (See Figure 2.)
`
`There are many variations upon this. The sensitivity can be varied by chang-
`
`ing the amount of price reversal that is necessary in order to move to the next column.
`
`For example, a three-point reversal chart requires that the stock move three points
`
`or more in the opposite direction before it is considered a reversal, and before a new
`
`column is begun.
`
`In addition, the vertical scale is often varied so that each square
`
`represents two points or more. The reader who is unfamiliar with point and figure
`
`charting may find this brief explanation difficult to understand. However 1 if he
`
`-12-
`
`0015
`
`

`
`FIGURE 2
`
`1-1 ·
`!..U+J-
`
`.. Lj_.!
`I :J.
`
`l
`
`I
`
`:
`
`I '
`
`-13-
`
`0016
`
`

`
`METHODS
`
`understands the ideas and reasoning behi"nd point and figure charting that is all that
`
`wi II be necessary within the scope of this book.
`
`Advantages and Disadvantages. Richard Wyckoff felt that the more a stock
`
`moved back and forth while within a trading range, the further the stock would move
`
`up or down once it broke out of its trading range. He considered point and figure
`
`to be primarily a too I for predicting the probable extent of market moves. For this
`
`it serves remarkably well. The width of a base is a very reliable indicator as to the
`
`extent of the ensuing move. Most of the drawbacks to point and figure are due to
`
`later technicians who have tried to use point and figure as a method of predicting
`
`market action rather than just price objectives. Through the use of trendlines and
`
`various patterns they have attempted to do all of their analysis from point and figure
`
`charts a lone.
`
`On point and figure charts time is extremely hard to ascertain, and volume
`
`is non-existent. There is no way of knowing how much stock changed hands at a
`
`given price, and it is usually very difficult to tell when the trading which established
`
`the price occurred. If a stock is moving fast, it may form a number of reversals, and
`
`therefore a number of columns in a single trading day. At another time it may not
`
`post any x's at all for days on end as it continues to trade in a narrow range.
`
`In the next chapter we wi II introduce a method of charting which contains
`
`the advantages of point and figure and vertical line charts and eliminates most of
`
`the disadvantages of both. It is called 11 Equivolume Charting. 11
`
`-1+-
`-14-
`
`0017
`
`

`
`CHAPTER II
`
`EQUIVOLUME CHARTING- THE REASONING BEHIND IT
`
`The basic difference between Equivolume charting and all other charting
`
`methods is the horizontal axis. As we have seen in the previous chapter, both verti-
`
`cal line charts and point and figure charts place prices on the vertical axis. On the
`
`horizontal axis point and figure charts use price reversals, while vertical line charts
`
`use time. _In Equivolume charting the horizontal axis represents volume:
`
`therefore
`
`%"%~,?~-~~-
`
`the name of the system. Equal distances on the horizontal axis reflect an equal a-
`
`mount of stock changing hands.
`
`Figure 3 shows a typical Equivolume chart. Each day of trading is represent-
`
`ed by a rectangle, rather than a single line as in vertical line charts. ~JLc;.o~
`
`is no question of assigning the correct volume to the correct trading day. The two
`
`parts of the vertical line charts, the price and the volume, have been combined into
`
`one understandable entry.
`
`The Importance of Trading Range. Equivolume charting makes a very radical
`
`departure from all other systems in that it stresses the trading range' of a stock. We
`
`-15-
`
`0018
`
`

`
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`
`-16-
`
`0019
`
`

`
`REASONING
`
`believe that the trading range and the volume are the two primary factors involved
`
`in technical security analysis. They give an accurate appraisal <?f the supply and
`
`demand factors which are influencing a stock.
`
`Although the trading range is represented on vertical line charts, it is not
`
`as obvious as it is on Equivolume charts. There is a tendency when working with
`
`vertical line charts to ignore the range, and concentrate on the extent of price
`
`moves, day to day. The result is that an extremely important factor is hardly being
`
`used in analyzing the stock.
`
`The market is not a steady flow of trading. Out of every twenty-four hours
`
`in a weekday, only five and one-half are trading hours. The remainder of the day
`
`the market is closed. Only during market hours are stocks able to balance supply and
`
`demand, and come up with a price which the public is willing to pay for the stocks.
`
`The trading range represents the variety of different prices at which the public was
`
`wi I ling to exchange the shares in a company during a single session. By studying the
`
`trading range we can see how easy or difficult it is for a stock to move .
`
`. If the range of a stock during a trading session is v~_smallctb<Jt stqs:kjJ.
`
`evidentl~eeting with Of2f?.Q?iJJ<?.r:UQ~CI_riX~rn2_y§!..!
`
`If it tries to move up, there is evi(cid:173)
`
`dently stock waiting to be sold, and if it tries to move down, there are buyers present.
`
`t- \Vide trading range£ on the other hg_IJSL._n~f1C2£.t?J9Ldy_e~q~ l'!lQY~ment. Either the
`
`buyers or the sellers are backing away, and the price is having to move for trades to
`
`be consummated.
`
`On the other hand, studying price changes is of little value. If a stock closes
`
`-17-
`
`0020
`
`

`
`REASONING
`
`on its high of the day today, after closing on its low yesterday, the net price change
`
`may be quite large. It is possible, however, that on both days the stock traded in the
`
`same trading range, and the net change is meaningless.
`
`Market Equilibrium. Generally we have very little idea why a stock moves
`
`up or down an eighth between trades. There are certainly no fundamental factors
`
`which make a stock worth more ten minutes from now than jt is. rigbt now. The only
`
`way to realistically look at these minor moves is to attribute them to a myriad of
`
`factors which are probably known only to the individuals making the trades. A sell-
`
`er may have to pay for a new car, or he may be switching to another stock which he
`
`considers more attractive. The buyer may have some worthwhile information about
`
`the company, but he may also be acting on a "tip" from his barber. The individual
`
`reasons mean nothing to us, but the overall effect is worth our consideration.
`
`The basic premise upon which the market operates is that the highest bid
`
`and the lowest offer have priority on the floor of the exchange. When a trade takes
`
`place these two are the same. The buyer has to be willing to meet the seller'sprice,
`
`or vice versa, or no trade takes place. When the buyer and seller agree on a price
`
`an equilibrium has been reached, and at that instant the value of that stock has been
`
`established. Between trades the value of the stock has been closely bracketed by
`
`the bid and asked prices, but an equilibrium does not exist. Essentially there is a
`
`small disagreement between the buyers and the sellers as to the value of the stock.
`
`Each time a trade is consummated an equilibium is established, but a buyer and a
`
`seller have been eliminated from the marketplace, and new factors come intoplay
`
`-18-
`
`0021
`
`

`
`REASONING
`
`which wi II decide the price at which buyer and seller again agree upon a price.
`
`The above discussion may appear to the reader to be looking too closely at
`.
`.
`
`the very minor moves, but it is these moves, when put together, that make up the
`
`trading day, and give us the information upon which we must base our investment
`
`decisions. As each individual transaction takes place it reveals to the analyst the
`
`status of supply and demand in the marketplace. As trading progresses, if the sellers
`
`have more stock to sell, than the buyers want to absorb, prices will have to move
`
`downward. In addition, if holders of the stock are worried about the company, or
`
`the economy, they may be more anxious to se II than the buyers are to buy.
`
`In this
`
`case also the stock will move down.
`
`In Equivolume charting our primary concern
`
`will be with analysis of the supply-demand balance.
`
`Volume and Its Importance. No single factor involved in stock market an-
`
`alysis is more important or misunderstood than volume. Its analysis can be the basis
`
`for successful trading if it is used correctly, yet very few analysts use it correctly.
`
`For example, there is a tendency for most market commentators, and especially
`
`brokers, to believe that heavy upside trading in a stock is a good sign. A quick
`
`look at a few charts should make it fairly obvious that the heaviest trading in a
`
`stock almost invariably occurs right at the top. Similarly, heavy downside volume
`
`is always spoken of as a bad sign. Look at a few stocks, though, and you wi II see
`
`that heavy trading is often a sign that a decline is ending.
`
`In this book we will be· constantly studying volume, and attempting to de-
`
`termine investor sentiment by it. The number of shares that change hands are our
`
`-19-
`
`0022
`
`

`
`REASONING
`
`best indication of how anxious the buyers are to buy and the sellers are to se II.
`
`In
`
`addition, heavy volume in a stock is very often reflecting large block transactions.
`
`This serves as an indication of the activity of institutions in the stock we are studying.
`
`The Volume-Range Relationship. We have now looked at the importance of
`
`range and volume.
`
`It is in the combination of these two factors that Equivolume
`
`serves its purpose.
`
`looking at the range in which a stock trades gives us a fairly
`
`good idea how tight the trading is. That is, a narrow trading range indicates that the
`
`llipply and demand factors are close to a balance 1 and neither buyers nor sellers are
`
`able to get the upper hand. A wide trading range indicates a large discrepancy be-
`
`tween the buyers and the sellers. The price moves rapidly, because a steady balance
`
`of supply and demand does not exist. Similarly, studying volume alone gives us a
`
`good idea as to how anxious the traders are as they move a stock upward or downward.
`
`When these two factors are combined, we are observing the exact force of the
`
`buying and selling pressures.
`
`It is obviously more significant when a stock moves
`
`one-half point on 1000 shares than it would be if it moves one-eighth of a point on
`
`the same 1000 shares. By combining volume and spread we are able to see the ease
`
`or difficulty with which that stock is moving. As is readily seen, this puts volume
`
`figures in a different light. Rather than trying to say that volume is good or bad in
`-
`an uptrend or a downtrend, we are seeing how easy or hard it is for the stock to move
`
`at this time. We immediately become conscious of pressures on the stock which would
`
`have been almost unnoticeable in a vertical line chart. ,A narrow spread with fairly_
`
`.heavy volume shows up as a short wide day •. Evidently the stock is meeting some re-
`
`-20-
`
`0023
`
`

`
`REASONING
`
`able to progress. By studying this day in context, as we will in la_ter chapters, we
`
`can tell whether it is overhead supply that is restricting the stock or downside de(cid:173)
`
`mand that is holding it up.
`
`Simi larly,_g~day~in which the stock move~ througlJ. a fairlyyvide !£ading ran~
`
`QO ligbt volume can provide us with worthwhile information. _A_dgyqftbis sortyyQuJ~.
`
`J2rovide a ta11 1.JlQ.~.rectangle qnthe EquivqJum~ _ _c::b_a_rj, and would indicate that
`
`the stock is finding movement to be very easy. It takes few shares to move it up or
`
`down. --~Y.Lci~rrtly_}h_~.....§!e>ck is not being hindered by either a heavy SURply or a large_
`
`demand.
`
`The important thing about Equivolume charting is that every day is telling a
`
`story. No trading session becomes unimportant, because each entry is telling us how
`
`easy that stock is finding it to move. This wi II allow us to be more objective on our
`
`investments and reduce the emotional decisions which so often end up costing us
`
`money.
`
`How About the Closing Price? One feature on vertical line charts which is
`
`omitted on Equivolume charts is the closing price. The omission is intentional; they
`
`would be very easy to include. In fact we included it in some of the original work
`
`with this method, but then decided to omit it. The reason is simple; people pay too
`
`much attention to closing prices. Many people read only the closing prices of their
`
`stocks in the newspaper, and base their decisions on this figure. They are influenced
`
`by the net change from the previous day's closing price, and interpret the stock's
`
`-21-
`
`0024
`
`

`
`REASONING
`
`action by these figures.
`
`The closing price is only one trade out of the entire day of trading, and it
`
`may be at the top or the bottom of the trading range. It may reflect a large block,
`
`but is more likely to reflect a few hundred shares only. We can see no magic rea(cid:173)
`
`son for assigning this price a position of prominence. It is just another trade, and is
`
`reflected in our trading rectangle for the day represented. To enter is again is to
`
`give it extra weight which can throw off our judgment. The closing price plays no
`
`special part in our supply-demand equation.
`
`As we have seen, Equivolume charting can provide all of the information
`
`found on a vertical line chart, and present it in a more easily analyzed manner.
`
`Since each day is a separate entry there is no problem in recognizing time intervals,
`
`although time is not constant as it is on the horizontal axis of a vertical line chart.
`
`A later chapter which deals with price objectives will.point out how this method
`
`also provides the advantages of a point and figure chart, without its drawbacks, and
`
`by going directly to the volume rather than the roundabout ~ethod of reaching price
`
`objectives by looking at the number of price reversals.
`
`-22-
`
`0025
`
`

`
`CHAPTER Ill
`
`EQUIVOLUME CHART' CONSTRUCTION
`
`Equivolume charting calls for no equipment nor techniques which are notal(cid:173)
`
`ready known to anyone who has ever charted a stock using vertical line charts. The
`
`only real difference is the use of volume on the horizontal axis.
`
`Chart Paper. Any chart paper which could be used for vertical line charts
`
`can be used for Equivolume charts, as long as the paper is not semi-logrithmic. We
`
`,prefer to use a paper which is divided into eighths between each major division on
`
`the vertical axis. A division of tenths on the horizontal axis is handy when large
`
`volume days are being dealt with, but is by no means necessary. The paper which we
`
`like to use is printed by Reliance Chart Paper Company, 608 South Dearborn, Chica(cid:173)
`
`go, Illinois, and is their style "ASl." This is a large enough sheet (measuring 11
`
`inches x 17 inches) so that about six months of market activity wi II fit on a sheet.
`
`The Vertical Scale. The vertical scale used in a stock should be a function
`
`of the normal trading range of a stock, rather than merely its price. The chart paper
`
`mentioned above is divided into twenty parts on the vertical dimension, with each
`
`section divided into eighths. Ideally the stock should use most of this range during
`
`a six months period. Looki