The problem of the purchase of stock in any particular company can be approached in either of two ways. One way is to pose the problem as: “Should I buy the stock of the XYZ Company?” The other is to pose the problem as: “When shall I buy the stock of the XYZ Company?”
The person who asks the question “Should I?” is taking the fundamental approach to the stock market analysis. The person who asks the question “When shall I?” is taking the technical approach to stock market analysis.
The fundamental analyst concerns himself with financial statements, history, quality of management, earnings, dividends, popularity of products, relative position in the industry,, etc.
The technical analyst concerns himself with supply and demand, accumulation and distribution. Practically all stocks have substantial moves at one time or another. Fluctuation in price is as true of a “blue chip” as of a “cat and dog.”
No stock goes up in price of its own accord. Before a stock goes up it goes through a period of accumulation by “insiders,” it is passing from “weak hands” into “strong hands” until demand is greater than supply and the upward move is on its way. Before a stock drops in price, it goes through a period of distribution by the same “insiders.”
It is passing from “strong hands” into “weak hands.” When support is withdrawn, supply overcomes demand and the panicky downward move is on. The technical analyst is concerned with the right time to buy and the right time to sell short. He attempts to determine the moment when either supply or demand has taken control of the situation. He is an “outsider” making use of various techniques to determine what the “insiders” are doing.
When should a stock be bought? The broad answer to this question is that a stock should be bought only when ( 1) the general market is in an uptrend, (2) the industry group of which it is a member is in an uptrend, and (3) the stock itself is in an uptrend.
Uptrend, as used herein, refers to price – the price of a market average, the price of the industry group index, the price of the stock. It does not refer to earnings, cash flow, growth, etc.; such factors may answer the question what to buy but never the question when to buy.
When should a stock be sold short? The broad answer to this question is that a stock should be sold short only when ( 1) the general market is in a downtrend, (2) the industry group of which it is a member is in a downtrend, and (3) the stock itself is in a downtrend. The trader or investor who does not like the short side of the market should at least be out of stocks in such a situation. Here again, downtrend refers only to price and nothing else.
The tools used by the technical analyst in making such determinations are primarily charts – charts of a particular stock, charts of an industry group, charts of a market Average or Index. There are three types of charts: line, bar, and Point and Figure. This book is devoted to Point and Figure charting and interpretation.
It is the oldest form of charting used in the stock market, it is indigenous to and grew out of the stock market, and once mastered and understood it is also the simplest and clearest method of determining the right time to buy and the right time to sell. The Point and Figure chart shouts where other charts merely stutter.
- The Point & Figure Chart and Construction
- Chart Patterns
- Trend Lines
- Price Objectives
- Relative Strength
- Industry Groups
- The Dow-Jones Industrial Average
- Trading Tactics
- Convertible Bonds
- Technical Indicators
- Puts and Calls
- Adjusting a Chart for a Stock Split
- The 5-Point Reversal Chart