Market Tactics

MARKET TACTICS

Like a traffic light, the chart advises the knowledgeable investor when to go ahead, slow down or stop. As long as an established upward trendline is intact, the traffic signal is bright green. New stock purchases can be made and previous investments should be held. Any break in a trendline flashes the amber caution light, especially if the break is on increased volume. New purchases should be deferred, and existing stockholdings should be re-examined. The longer the trendline has held, the more significant will be the eventual breaking of this line as a "bear” signal. Finally, evidence that a downtrend is developing flashes the red light, indicating that it’s time to sell and cash in on profits, or take other defensive measures to avoid losses. (Brokers are familiar with such defensive steps as selling short "against the box,” and buying "puts and calls,” which need not be discussed here.)

Assuming that one has decided to buy or sell a stock, he may gain an advantage of as much as several dollars a share by being familiar with the trend channel through which the stock has been fluctuating. He would buy at the bottom of the channel, and sell at the top. And of course, the break of a trendline or the return move to a trendline may represent highly favorable buying or selling opportunities.

To "buy at the bottom and sell at the top” of major price moves is of course the unattainable dream of all investors. To try for the last eighth of a point is unwise, and unnecessary. The investor should use imagination at all times, and avoid being bound by hard and fast rules, or fascinated by a formula that offers too precise a forecast of prices. But the trendline is the first and most significant picture to be looked for in any systematic approach to chart reading.

The chart above shows how Kerr-McGee Oil tripled in value in less than seven months. For the first six months, prices adhered remarkably close to an imaginary uptrend line (heavy line) and within the confines of a relatively narrow channel (outlined by the dotted line drawn parallel to trendline). Further examination will reveal that the trendline was well established within the first month of the advance. In April, 1961, prices broke through the upside of the channel and accelerated into a blow-off or climax phase of development. This type of action often marks a temporary or major top. The vertical part of the rise was attributed to anticipation of a 2 for 1 stock split, which became effective May 31. By early 1962, prices were still well below the highs recorded on this chart.

Note how prices broke through the upper limit of the uptrend channel at the end of April and, as in the Kerr-McGee chart on the preceding page, this proved to be the start of a "blow-off” which signaled the end of an upswing. Price movements on the downswing stage appeared to be glued to the trendline except for occasional sharp reactions and rallies which served to outline the over-all channel development. This situation proved rather ideal for market tactics based on buying stocks as they hit the lower rims of channels and selling as they approach the upper limits. After the long downtrend line was finally broken by the rally of the first week in November, prices "pulled back" to the trendline at the end of November. Also note how the volume pattern changed in November—increasing on rallies and decreasing on declines.

The uptrend which got under way in July and August was preceded by a sideways price movement of several months’ duration. The curving was gradual until January, of 1961, when Korvette started to curve sharply higher and by the end of Match entered a "blow-off” stage, characterized by a vertical price rise, which marks either a temporary or major turn. As explained in Chapter 2, the curving uptrend line usually leads to this type of market action, but pinpointing the end of the vertically rising stage is extremely difficult, since it can carry a considerable distance in a very short time. In the case above, the high on the last day charted (68) proved to be a temporary top. Prices reacted all the way back to 47% in June, 1961, before again turning up to an eventual 1961 high of $129.

The curving downtrend line starts off the same way as the uptrend variety. There is a very gradual curving along the top of the formation and this becomes steeper as the move progresses. As in the chart above, volume remains relatively stable until the decline is well under way and then begins to pick up as the climax stage is reached. The upcurving trendline on the Korvette chart (plate 3) climaxed with very sharp moves but not unusually high volume. In Flintkote, the climax occurred on exceptionally high volume, but day-to-day price moves were not unusual. Climaxes are marked by either wide price moves or exceptional volume or both.