Praise for Investing with Volume Analysis “Investing with Volume Analysis is a compelling read on the critical role tha 17MB Size Report. DOWNLOAD PDF . turned off and the lights in the studio go down, and I think about what women them the way Act Like a Lady, Think Like Complex Analysis (Princeton. “Investing with Volume Analysis is a compelling read on the critical role that “In Investing with Volume Analysis, the reader should be prepared to discover a.
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Editorial Reviews. Review. The Technical Analyst names Investing with Volume Analysis Book. new PDF Investing with Volume Analysis: Identify, Follow, and Profit from Trends Full Online, new PDF Investing with Volume. critical role that changing volume patterns play on predicting - do, 28 mrt GMT INVESTING WITH VOLUME ANALYSIS PDF - site S3.
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You can change your ad preferences anytime. Upcoming SlideShare. Like this presentation? Why not share! An annual anal Embed Size px. Start on. Show related SlideShares at end. Kristy Hart Project Editor: Deadline Driven Publishing Proofreader: Larry Sweazy Compositor: Nonie Ratcliff Manufacturing downloader: Publishing as FT Press Upper Saddle River, New Jersey This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book.
Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. Technical analysis is only one form of analysis.
Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decisions. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
The solutions discussed might not be suitable for your personal situation, even if it is similar to the example presented. Investors should make their own decisions based on their specific investment objectives and financial circumstances. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to download any security or instrument or to participate in any trading strategy.
FT Press offers excellent discounts on this book when ordered in quantity for bulk downloads or special sales. For more information, please contact U. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Pearson Education Singapore, Pte. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Investment analysis.
Investments—Decision making. D Two Perspectives of Market Analysis. The History of Technical Analysis. Babylonian Charts. Early European Markets. Samurai Trading. Early American Market Analysis. The Root—Charles H. Budding Practitioners. The Rise of the Fundamentals. Contrasting the Ages. Chapter 3: Digging Deeper. Volume Terminology. Volume Data in Market Analysis. Volume Validates Price. Volume Liberates Liquidity. Volume Substantiates Information.
Volume Reveals Convictions. Volume Expresses Interest and Enthusiasm. Volume Denotes the Disparity of Opinions. Volume Is the Fuel of the Market. Volume Exposes the Truth. Volume Is the Cause. Volume Gives Rise to Velocity. Chapter 5: The Force of the Market. Volume Leads Price. Volume Interprets Price. Volume Analysis—Use the Force. Support and Resistance. Applying the Laws of Motion in Volume Analysis. Chapter 6: Understanding the Symbols of the Language. Fear and Greed. Analyzing Price and Volume Bar by Bar.
Volume Price-Spread Analysis. High Volume Depreciation. Low Volume Price Movements. Chapter 7: The Words of the Market. Drawing Trend Lines. Evaluating the State of the Trend with Volume Analysis. The Four Phases of Volume Analysis. Volume Rules and Laws: Cracking the Contradiction Code. Volume Seasonality Trends. Chapter 8: The Interactions of Two Major Trends. Measuring Volume Information.
A Warning. Pure Volume Indicators. Volume Moving Averages. Volume Oscillators. Volume Bands. Interday Volume Accumulation Indicators. Intraday Volume Accumulation Oscillators. Price Range Volume Indicators. Price Accumulation Based on Volume Indicators. Tick-Based Volume Indicators. Volume-Weighted Price Indicators. Volume-Weighted Moving Averages. Trend Thrust Indicator.
The Volume Price Confirmation Indicator. Using VPCI. VPCI in Action. The Study. Other Applications: Other Applications. A Compendium of Breadth Indicators. Breadth Statistics: A Source of Market Information. Warning Construction Ahead: Breadth Data Pit Falls. Breadth-Based Indicators. Positive and Negative Volume Index. Buff Up Your Volume: Introducing Capital Weighted Volume.
Traditional Volume: Price Volume Relationship Disconnect. Blue Chips to Cow Chips. Index Volume Analysis Alternatives. Cap-Weighted Volume. Flash Crash: Cap-Weighted Volume in Action. Cap-Weighted Volume: Rebuilding Breadth Indicators. Risky Business. The Best and the Worst of It. The download and Hope Strategy. Dynamic Asset Allocation. Risk Management. The Anti-Volume Stop Loss. Putting It All Together: Volume-Dictated Strategies.
Understanding the Market: Supply and Demand. Modern Day Volume Issues. Contrasting Market Ages. Volume Data Reliability.
Volume tracks quantities of things, whether shares of stocks, contracts in options, or commodities. In business, volume tracks sales, inventory, customers, and the amount of goods bought or sold. In Investing with Volume Analysis, Buff Dormeier presents new ideas, digging deeper into volume by identifying secrets these often overlooked statistics hold. He has devised methods for identifying when to climb on board and stay with sustainable trends, and perhaps more importantly, when to bail out of trends when unsustainable.
It was a significant enough discovery to earn him the internationally prestigious Charles Dow Award in , only given to a work deemed surprisingly new and innovative. He found that technical analysis, at its core, is about the flow of money into and out of securities. Yet these technical findings were not always consistent with what fundamental analysts and company management were saying.
As an analytic approach, he settled on two primary tools: He then remembered an important concept he used in fundamental analysis for assessing the overall health of the economy, the turnover of money. A healthy economy turns money over faster than a weak economy. So he set out to measure money flow in the markets. He turned to one of the grandfathers of technical analysis and masters in volume analysis, Joseph E.
Granville, and he studied his On-Balance Volume concepts. Many considered these concepts a hallmark in technical analysis. Granville taught that volume precedes prices. That resonated. Buff wondered if there might be a way to measure a dynamic relationship between price and volume, one that one might influence the other, and he wondered whether he could design a method for discerning such nuances when they occurred. He examined the differences between a volume-weighted moving price average and the corresponding simple moving price average.
The differences he found would often expose information about the relationship between price and volume that was not visible any other way.
He now had a way to assess the staying power or enthusiasm of investors, the force behind price moves. He had a metric for gauging the flow of money.
Although this topic of volume analysis is by nature quite technical, Buff is skilled at presenting and documenting the essentials of volume theory with exceptional clarity.
He explains the depths of volume analysis with amazing simplicity, and he shows by example not only what works but why it works. He should be prepared to discover a trove of new ground-breaking innovations, ideas for revolutionizing volume analysis. Jerry Blythe for all his help with the book. Your broad insights, professional resources, and technical expertise have proven to be very valuable.
Further appreciation goes to Joseph Granville. Thank you, Joe, for sharing your wisdom. Your depth of knowledge about volume surpasses all. I would also like to thank Tom McClellan. Tom, you are a brilliant technician. Your expertise in market breadth has been invaluable to me. You have given me many excellent suggestions, pointed out some inconsistencies, and provided me with some great resources. Moreover, you have given me many terrific ideas about how to rephrase sentences and even paragraphs, plus you have provided many valuable quotes and charts.
Thanks a bunch, Tom. I would like to offer praise for others who helped me with this work, such as Steve Poser, George Schade, and Dr. John Zietlow. Steve, your knowledge of technical analysis and market structure is outstanding. Thank you for your help, expertise, and advice with modern volume issues!
In my search for original resources, George Schade was hot on the trail like a bloodhound on a fresh scent! Thank you for your help and your pursuit and passion for truth, George. Professor Dr. John Zietlow, your assistance with financial formulas was very helpful to me in this assignment. Your depth of knowledge in finance is amazing.
You reflect a spiritual light, encouraging me and many others. Further praise goes to Scott Marcouiller. Thank you for sifting through each page for accuracy and advice.
In you, our firm has a valuable resource. Thanks a bunch! My appreciation to Dr. Dennis Hensley, Jeffrey Neuenschwander, and Jacqueline Ramey for your exceptional and exhaustive editorial assistance. Great work! Berman, and Philip M.
Thank you for volunteering to peer review this work. I know none you had the time to do it, but nonetheless you did it anyway. When I asked for your help in conducting the review, I really did not know what to expect as you are all among the most accomplished and respected technicians.
Thank you for your insights, kind words, and encouragement. Your personal dedication to the elevation of our profession is something to be very much admired. My sincere appreciation to my team who picked up the slack while I was hidden away writing.
Laura Rowe, thank you for being my assistant, but you are so much more than that. Not only are you wonderful with everyone, especially our clients, but you also do a fantastic job keeping me organized. Dad, thank you for teaching me the business.
You are the most honest, sincere man one could hope to know and be privileged to work with. Thank you for being my father. I spent much time researching and writing this book. So this book is dedicated to my family. Our marriage is the greatest earthly blessing God could ever bestow upon me.
You are wonderful, amazing, and incredibly beautiful. I could never reach my goals without you, nor would I want to without your support, my Love. I love you, Beautiful!
To my sister Tiffany, thank you for your selfless act and commitment to our family. Your gift to us is hope, love, and life. We are forever grateful and indebted to you. This book is much about price and value. And what is the value of the soul? Pondering this question, I am so utterly grateful to my Good Sheppard, who in love, ransomed His life, redeeming this unworthy soul. Blessed be the name of God for ever and ever, for wisdom and might are His. He changes the times and the seasons.
He removes kings and sets up kings. He gives wisdom unto the wise and knowledge to them that know understanding. He reveals the deep and secret things. He knows what is in the darkness, and the light dwells with Him. I thank thee and give You my praise. About the Author Armed with proprietary indicators and investment programs, Buff Pelz Dormeier, CMT dynamically manages private investment portfolios for affluent individuals, institutions, trusts, and endowments.
This is accomplished by utilizing proprietary state-of-the-art portfolio management tools designed to grow and preserve wealth in a risk-conscience manner. A Chartered Market Technician, Buff received the Charles Dow Award recognizing research papers breaking new ground or which make innovative use of established techniques in the field of technical analysis.
The Charles H. Dow Award is considered one of the most important recognitions in the field of technical analysis. Buff was a double major graduate of Indiana State University participating in varsity track and cross country as a student athlete. Still an avid runner, Buff is a former Indiana Marathon champion.
Introduction Do you believe navigating the markets in the coming decades will be as easy as it was in the s and s? If not, perhaps you should consider sharpening your investment skills with technical analysis, specifically volume analysis.
My exposure to technical analysis began early in my career as a financial advisor. These stock stories would make a case for why a particular company was undervalued, overlooked, or discounted relative to some future development or innovation. The best of these stories would be relayed to retail clients, who would invest in the stock of the companies featured in the stories. Occasionally, some of these stories came true, and the stock increased in value. Other times, the stock had to be relegated to the long-term holdings file while investors with losses waited until the company or industry group moved back into favor.
Unfortunately, although many of these stories originally sounded promising, they ended up being nothing more than hyped-up fairy tales told by supposed Wall Street geniuses. Fortunately, one analyst was different from all the others. His recommendations came without flashy stories. Speaking in terms of trend, support, resistance, patterns, breakouts, and risk management, his recommendations often showed profits immediately.
When they did not, he would quickly admit his mistake, something unheard of among market analysts. His approach allowed investors to preserve their capital for the next investment opportunity.
What was the difference between this analyst and the others? I was so impressed by his technical approach that I pursued my own CMT designation. So, what is technical analysis? Market analysis breaks down into two basic schools of thought: Assuming value is the sole determinant of price, fundamental analysis attempts to determine intrinsic value.
The fundamental analyst collects, analyzes, and models information about a company, including earnings, assets, liabilities, sales, and revenue. Fundamental analysts embrace as core beliefs that the markets are inefficient, all necessary information is available to the public, and valuation is quantifiable. Fundamental analysts are concerned with how value is reflected within price.
However, the fundamental approach cannot tell its practitioners when to download or sell. Yet, an investor who downloadd Cisco on January 1, , and held it until January 1, , would have experienced a 65 percent loss. On the other hand, an investor who bought Cisco on January 1, , and held it until January 1, , would have experienced a 64 percent gain.
Any investor with just a bit of experience investing during the past decade could list many more such examples. Timing represents a serious limitation to the fundamental approach in an investment strategy. The technical analyst acknowledges that fundamental analysis plays a prominent role in security analysis. However, the technical analyst believes that price is ultimately the end result of the battle between the forces of supply and demand. Price represents all that is known, feared, and hoped for by the market.
Technical analysis focuses on the forces behind supply and demand that produce price. Technical analysts hold as core beliefs that the markets are efficient at discounting even future developments, prices move in trends that can be forecast up, down, and sideways , investors are both logical and emotional creatures, and history repeats itself—more so after it has been forgotten.
Hundreds of millions of dollars are poured into fundamental research by brokerage firms, mutual fund companies, hedge funds, and advisory services, all in an effort to determine their proper intrinsic value.
With all this money invested in research, one would presume that an informed investor should know the worth of a given security. Perhaps because the fundamental information ignores the human element. And it is in the human mind, not theoretical models, that price is ultimately determined. For example, a fundamental analyst might perform a great amount of research to determine possible results of an important announcement.
The data is the critical information. In contrast, the technical analyst focuses his or her forecast on how the market participants react after the data is released. The datum themselves are inconsequential relative to the importance of predetermining investor expectations. A technical analyst studies four major areas: Sentiment indicators monitor market participants. Insiders, specialists, and institutions generally are regarded as having superior or leading opinions, whereas advisory services, journalists, and small traders usually are seen as having stale news or inferior opinions.
Cycle analysis is the study of time—the order, length, and recurrences of market trends. The preponderance of technical analysis involves price and chart analysis. Price testifies to what investors believe and how strongly they believe it. However, if fewer and fewer investors are willing to participate as the stock price continues to rise, then the volume contradicts the price movement. In this way, volume substantiates price by measuring the force and extent of investor convictions.
When volume increases, it confirms price movements; when volume decreases, it contradicts price movements. Therefore, volume analysis is a quest for truth in an otherwise scrambled investment puzzle. In volume analysis, volume is the box cover that enables us to view the markets through the lens of supply and demand. Like other skills, volume analysis is as of much an art than an exact science.
And like most skills, a little knowledge without application experience could do more harm than good. Volume analysis is no different. It deals with probabilities; it leaves room for unfavorable outcomes because many factors can affect future price movements.
Fortunately, in volume analysis, it is not necessary to wait for the outcome of often already dated, stale fundamental figures or economic statistics to develop an informed opinion. A disciplined and planned approach of analyzing moving markets allows for decisive market action.
Experience is the best teacher, but the market can charge some hefty tuition. However, the market need not be a closed-book test. We can also learn through sharing our knowledge and experience with one another other.
This book shares with you what I have gleaned from my 15 years in the field of volume research. As such, this book starts with the basics, and then rapidly builds on these essential concepts.
For those seeking further information, including where to find many of indicators and new developments discussed in the forthcoming pages, go to www. The best analog is arguing with your wife. Being right is often totally valueless if not counterproductive.
These fundamentals are so selfevident that they are often overlooked. However, a rock-solid foundation is critical to understanding the volume analysis perspective.
Your ability to succeed ultimately depends on your ability to discern. Every day, causal investors attempt to employ complicated indicators in their analyses of the market and individual securities; however, they generally do not fully understand what information the indicators are designed to reveal.
The difference between being wise and foolish is neither information nor intellect, but a depth of understanding. A thorough understanding of the basics enables investors to develop the necessary perspectives to build a cause for action.
Building a cause for action is what analysis is all about. As one of these investors yourself, a solid understanding of the basics is the bedrock that builds your perspective, shapes your beliefs, and influences your ideas. You can either seek to build a perspective on a solid foundation or be consumed with the moment—continually seeking the hottest tip, trying out the latest indicator, or reading about the newest five-step program to success.
You can continue searching for the Holy Grail of market success or you can develop the understanding required to start believing in your own ability to discern, and thereby, gauge the market.
The two most common methods of analysis are the fundamental analysis and the technical analysis. Although the two schools of research may be used together effectively, they stem from vastly different perspectives. Your perspective of the market, what it is and how it works, plays a major role in your investment success.
Early in my career, while studying for my CMT designation, I taught technical analysis to many of the top brokers at the major brokerage firm where I was employed. A colleague who was part of the CFA program taught fundamental analysis.
I once spent a day monitoring his crash course on fundamental analysis. His explanation of using financial ratios to assess the value of companies made sense. Like many fundamental analysts, the presenter had his favorite stock. He provided seemingly convincing reasons for why this stock was overlooked and undervalued in relation to earnings, the industry, and other comparative valuations.
Several days and weeks that turned into several months went by, and the stock did nothing but trade in a tight sideways channel despite the broader market being strongly bullish. I pulled it up. It had developed a huge base and was breaking out on strong volume. I bought it. I watched the stock closely and prepared to change the limit order to market if it showed further weakness.
It was at this time that I first realized that the fundamentals were indeed most likely wagging the dog, suggesting that the fundamentals were driving the technical aspects. Believing I was bearing an olive branch, I sought out my new fundamental ally to point out that he was right and thank him for helping me make a buck.
I even made a point to mention that he had bought the stock at a lower price than I had while I intentionally neglected that he had been sitting on dead money for over a year. Meanwhile, I had enjoyed participating in numerous stock issues throughout the bull market.
However, I was floored when he told me he had not sold the stock. I tried to inform him that the stock appeared to be weakening technically and perhaps he should sell part of it while he had a double in hand. No, he was far too excited. He proceeded to list many more reasons why the stock was still undervalued. As a staunch technician, those details were just not important to me.
I felt really bad for the guy. He had finally gotten it right, and yet he had missed it! How could I face him again? But, nah, I would just be wasting my good capital on bad assets.
What kind of example would that be for my stockbroker students? This anecdote shows that my colleague and I each had our own perspectives of the market. The fundamentalist viewed stocks as companies in which he could become part owner. He believed his favored company was worth significantly more than the market price, so he bought it.
This perspective of the market springs from what is called fundamental analysis. My view of the market is that stocks are shares of companies. These shares go up because eager downloaders push them up, and they go down because fervent sellers sell, forcing them down.
When I saw a stock that had previously gone nowhere suddenly pop up, I concluded the force of downloading pressure could propel the stock further, and I bought it.
Our different investment approaches did not reflect a difference in intelligence, but they did reflect a difference in our perspectives. With that clearly stated, Investing with Volume Analysis introduces you to a perspective of market analysis based on the principles of supply and demand. In security analysis, this perspective is technical analysis.
The Fundamental Approach Fundamental analysis presumes security prices are based on the intrinsic value of the underlying company. Price is formed based on these values and facts surrounding the company. Seemingly, this is a highly logical approach, one that many assume is correct in most markets most of the time.
Thus, fundamental analysis presumes the future prospects of a security are best analyzed through a proper assessment of the intrinsic value of the underlying company.
Fundamental analysis is not concerned with the behavior of investors as measured through the stock price or trading volume.
In pursuit of value, the fundamentalist collects, analyzes, and models company information, including earnings, assets, liabilities, sales, revenue, and other information required to evaluate the company. Assumptions of the fundamentalist include a belief that markets are not completely efficient and that all necessary information is available to the public, but the company may not always be efficiently priced.
Overall, fundamentalists are concerned with what the price should be according to their valuation models. Therefore, the focus of technical analysis is the behavior and motivations of investors observed primarily through their own actions. It is imperfect people who determine market prices, not highly perfected valuation models. However, the technician does not deny that the pursuit of value is a primary source of market movement. Yet, the technical perspective deems that market price is formed by the collective opinions of market participants pursuing value.
In the exchange markets, prices are determined by what one party is willing to pay and another is willing to accept. It is through the diagnostics of price, volume, and other technical metrics formed by the actions and sentiments of market participants that the technician gauges stock performance. Technical analysis assumes that market participants are efficient in price formation, thus avoiding any judgments about the intrinsic value of the underlying company.
Therefore, the technician is not concerned with what the ideal price should be; rather, he is concerned just with what it is. The core aspects of the technician include believing that the markets are efficient at discounting even future developments, price moves through trends, investors are both logical and emotional creatures, and past behaviors tend to repeat themselves more so when enough time has elapsed that the behaviors have been forgotten. Driving a Comparison Between Fundamental and Technical Analysis The movie Vantage Point begins by playing out the same scene over and over again, each time from a different vantage point as experienced by each major character.
Likewise, the fundamentalist and the technician have similar objectives in analyzing securities. Their views are, however, developed from different vantage points. An analogy can be drawn between a fundamentalist and a technician who both examine a high-performance automobile. The fundamentalist looks under the hood, kicks the tires, and inspects the frame—the physical aspects of the car.
The technician does not look under the hood. Rather, he evaluates how the car performs under a set of conditions, such as turning, accelerating, and shifting. Similarly, when the gauges exceed the threshold of the expected parameters, the technician is led to the same conclusion as the fundamentalist, but without a physical inspection of the engine.
A fundamentalist might identify a good valuation point of a stock based on his analysis of the company. What is support? Support is demand downloaders. So where does this demand come from? In this way, the two perspectives often yield the same conclusion using different methodologies.
One opinion is based on the search for intrinsic value, whereas the other is shaped by extrinsic behavior. Demand has surpassed available supply. When the available supply outweighs demand, the price must go back down. Volume is the scale weighing these forces of supply and demand that produce price.
In this way, volume ultimately reflects the ebb and flow of money into and out of the market or the security. This book explores the market from this underemployed perspective of volume analysis, providing an investor with the tools and concepts to advance his or her own abilities in evaluating the market. Which developed first—technical or fundamental analysis? Most investors assume fundamental analysis preceded technical analysis.
This conclusion appears logical. It takes two opposite opinions to come together to produce a price, and a series of prices creates the chart.
How much an item is worth is determined by how much one party is willing to pay to obtain it and how little another party is willing to accept to let it go.
Although technical analysis utilizes charts, its essence is human behavior. And behavior might be as much a part of the price equation as value. Upon moving into a new territory, Abraham allowed people to believe that Sarah, his beautiful wife, was his sister. A king then mistakenly sends for Sarah to marry him. Then Abimelech took sheep and oxen and servants—both men and women—and gave them to Abraham, and he returned his wife Sarah to him. Then he turned to Sarah. This will settle any claim against me in this matter.
Was this exchange based on fundamental value? Obviously not! One cannot put a price on the love and fidelity of a spouse. Otherwise, he would put his life in jeopardy by trying to negotiate. Abimelech probably had just one shot to strike an acceptable offer. If Abraham took offense at the first offer, Abimelech assumed he might die. Therefore, the first financial transaction recorded was based primarily on technical speculations of perceived acceptance—not fundamental considerations of intrinsic value.
The notion of unraveling the forces of supply and demand through price trends was at work even in the earliest of days. At the time, about different companies were incorporated into tradable stock shares.
News and rumors of news undoubtedly were strong motivators to exchange stocks at specific prices. These records were then taken back to the ships and spread internationally. Using his unique charting methods, Homma became a literal samurai of trading, making a killing trading rice.
In this book, Homma claims that the most important aspect of investment is gauging the psychology of the market. As such, he described the developments of bull yang and bear yin markets and their tendencies to run to extremes and then reverse.
Homma was also believed to be a practitioner of volume and weather patterns. Early American Market Analysis Today, in the United States, securities analysis is dominated by fundamental, not technical, analysis.
One might reasonably conclude that the modern markets and exchanges have always operated under these lines of thought. Yet the use of technical analysis in the modern markets has a rich history—one predating traditional fundamental analysis. Technical analysis? Perhaps it should. All of these publications and indexes, in fact, have their roots in technical analysis.
Dow The modern father of technical analysis is considered to be none other than Charles H. Dow, the founder of The Wall Street Journal. Financial information about common stocks was scarce, and the information available often was unreliable.
Historical ledgers of prices were not readily kept. This revolutionary letter contained stock-price ledgers and company financial information, plus the first ever stock index, comprised of 11 stocks. The concept of an index was revolutionary. It freed investors from tracking individual stocks, enabling them to follow the market instead. If investors knew the collective movement of just a few prominent stocks, they would have a good idea of how most stocks behaved as a whole.
If investors knew how stocks were performing, they might be able to predict the actions of the overall economy. These ideas gave rise to Dow Theory, commonly regarded as the bedrock of modern technical analysis. Such early innovations led Dow to introduce The Wall Street Journal on July 8, , a financial newspaper that he cofounded with statistician Edward Jones.
In , Dow created what is now called the Dow Jones Transportation Average from nine railroad companies. On May 26, , he created its more popular companion, the Dow Jones Industrial Average, composed of 12 industrial stocks.
As editor of The Wall Street Journal, Charles Dow employed his remarkable theories to interpret market averages and forecast the economy in its pages. These writings are now considered to be among the most superb financial editorials ever composed. Nevertheless, Dow never penned a summary explanation of his theories, to the frustration of his followers. Yet a friend of his, Samual A. Hamilton died in , clearing the way for the next person in the lineage of Dow thinking, Robert Rhea.
Rhea developed the first set of public charts for the Dow Jones industrial and transport indexes. He was a leading advocate of volume and relative strength analysis. Above all, Rhea was a master investor. Some argue Rhea was the best of a loaded field of early investing stars including the famous Jesse L. Livermore and Richard D. Budding Practitioners Other early contributors to technical analysis include Leonard P.
Ayers, Richard D. Wyckoff, and Richard W. Schabacker, each of whom put his stamp upon technical analysis by moving it in new directions from that of the late Charles Dow. It was Ayers who first developed and promoted market-breadth analysis. He published his work through his company, Standard Statistics. It later merged with H. Poor and H. Wyckoff deviated from Dow theorists because he was more interested in the underlying reasons markets moved. Wyckoff saw the economic principles of supply and demand at work in the stock exchange.
He believed that the behavior observed through price and volume movements held the key to forecasting future market movements. These observations led Wyckoff to believe that the market operated under a set of three principles: Wyckoff believed volume was the key to identifying these operations.
By applying these technically oriented ideas and principles, Wyckoff soon amassed a large fortune. His newsletter was also quite popular, reaching more than , subscribers. Toward the end of his life, Wyckoff gave back to technical analysis by teaching his theories to others in his own investment course and publishing several books expressing his beliefs about technical analysis.
He strayed from Wyckoff in that he saw his study of the markets as a scientific inquiry into the depths of the market structure.
Schabacker wrote extensively about his ideas regarding technical analysis as a weekend editor of The New York Times and the youngest editor ever of Forbes magazine. It started the next month in October. Although his life was short, ending in at the tender age of 36, Schabacker made significant contributions to the field of technical analysis. In this timeless work, Schabacker defines and defends the technical approach while contrasting it to fundamental analysis.
The book also introduced various concepts behind price trends, characterized the concepts of support and resistance, and introduced many of the classic price and volume patterns. Given this rich heritage, one might wonder why technical analysis is not more prominent today.
It was commonly used in the early days of the exchange, when manipulation of the markets was widespread, both through the dissemination of company information and in the handling of floor operations. Because of manipulation, determining a fundamental equity valuation was difficult. Many investors believed the best course of action, instead, was to observe the action and behaviors of those who might have inside knowledge.
Early technicians recognized these issues as well. In fact, the existence of market manipulation was a good reason to differentiate between the movements of the long, intermediate, and short-term trends. Although there was potential for manipulation in the shortterm, the intermediate and long-term trends were too broad to be exploited. Because of this, many early technicians confined their investment operations and advice to the big picture conveyed through the long-term trend.
Although prices could be temporarily manipulated, volume data could not.
By analyzing trading volume, a technician could more easily detect whether a price movement represented true commitment. In the issue of the Magazine of Wall Street, Wyckoff wrote of the importance of following volume called sales back then as the fundamentals alone were not enough to make competent investment decisions.
A turning point in the popularity of technical analysis occurred in the mids. Any attempts to manipulate the market now met with swift and harsh penalties. These reforms provided much needed regulation of the markets and regulation of publicly traded companies. In , about the time of these reforms, Graham and Dodd at Columbia University released Security Analysis, now considered the Bible of fundamental analysis. The approach promised that adequate returns and safety could be achieved via a thorough analysis of the underlying company.
Graham and Dodd discounted the importance of the short and intermediate movements of the markets. Instead, they advocated owning stocks as long-term investments, not in timing the market.
Their book came at a good time because the recent reforms provided an excellent setting in which to evaluate companies. No doubt, this early stage in the history of market reforms created many market inefficiencies to exploit.
Also at this time, Alfred Cowles at Yale came out against market forecasters. Gazing down from his ivory tower, Cowles thought stock market forecasting methods used at the time were crude.
He believed that highly educated economists were better suited for such tasks. That is to say, at the time Cowles did not respect the market. His views later changed, however, leading others to develop Efficient Market Theory, the notion that stock prices are always correct and no one can predict them. Then, in the aftermath of the Great Crash, many investors abandoned stocks entirely. As a result, equity investing became a business left to a small number of professionals. At the same time, the SEC changed the rules of how the stock game was played.
The investment community felt the need to be perceived as more responsible. Meanwhile, academics elevated the fundamental approach while assaulting technical thought. Now, listen to this. December , I went to Springfield, Massachusetts on behalf of the Market Technicians Association and I gave a gentleman by the name of John Magee our annual award, I think he was the third or fourth recipient. We all know who John Magee is. He wrote the famous book. The Bible on Technical Analysis comes out in When I met Mr.
Magee, he was visibly upset. And he said— they never understood the laws of supply and demand. And I said— Who? He said—the Securities and Exchange Commission. So from that date forward the whole establishment says—research is all fundamental. And as a consequence the universities started to teach their students all these fundamental things, it was the law of the land—you had to do the fundamentals. Consequently, they advocate investing solely in market indexes.
I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook Graham and Dodd was first published. But the situation has changed a great deal since then.
In the old days, any welltrained security analyst could do a good professional job of selecting undervalued issues through detailed studies. But in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficient superior selections to justify their cost. In October , the SEC passed fair-disclosure rules.
These regulations were intended to keep valuable insider information from reaching the general investing public unfairly or irregularly. But the regulations instead have caused companies to withhold too much information from the public, in fear of violating the rules. As a result, less information is disseminated. Walters, CFA, said Clearly, many of our members feel that too many companies are taking an excessively conservative stance and misinterpreting the new regulation to mean that they should have no one-to-one or small-group communication with anyone at all.
Regulation FD only prohibits selective disclosure or private communication of material, non-public information. In an effort to increase competitive pricing, the exchanges have dropped the bid-ask spreads on securities from oneeighth to a penny.
When spreads were large, specialists had plenty of room to operate and to profit from the spread. However, there is little room when the gap is one cent. Consequently, the specialists attempt to profit by facilitating large block trades and by taking advantage of their prime view of the order flow. The uniquely advantaged floor brokers are no longer compensated to absorb the risk of potential losses of stepping in order to stabilize the market.
As the crash unfolded, orders left the exchange and were routed to digital exchanges.