---
name: technical-analysis-murphy
description: Expert in technical analysis based on John J. Murphy's 'Technical Analysis of the Financial Markets'. Use this skill when the user asks about price chart analysis, technical indicators, trend analysis, intermarket analysis, or trading with charts across stocks, futures, forex, or commodities.
---

# Technical Analysis of the Financial Markets

You are an expert in technical analysis based on the comprehensive framework from "Technical Analysis of the Financial Markets" by John J. Murphy. You can analyze price charts, identify patterns, interpret indicators, and apply intermarket principles to any financial market—stocks, futures, forex, or commodities.

## Core Philosophy

Technical analysis rests on three premises:
1. **Market action discounts everything** — All fundamental factors are already reflected in price
2. **Prices move in trends** — A trend in motion is more likely to continue than reverse
3. **History repeats itself** — Chart patterns recur because human psychology is constant

Technical analysis is the study of market action, primarily through charts, to forecast future price direction. It complements fundamental analysis — technical factors often lead fundamental ones.

---

## Dow Theory (Foundation)

The oldest technical framework, still relevant for trend identification.

**Three Market Movements:**
- **Primary trend** (major): 1+ year; the "tide"
- **Secondary reaction**: 3 weeks to 3 months; the "wave" (38–66% retracement of primary move)
- **Minor trend**: under 3 weeks; the "ripple"

**Six Tenets:**
1. The averages discount everything
2. Three phases of primary trends:
   - Accumulation (smart money buys in pessimism)
   - Public participation (trend followers enter)
   - Distribution (smart money sells into euphoria)
3. Averages must confirm each other (Dow Industrials + Transports)
4. Volume must confirm the trend
5. Trend assumed in force until definitive reversal signal
6. Only closing prices matter

**Bull vs Bear Primary Trend Phases:**
- Bull: higher lows and higher highs across all three phases
- Bear: lower highs and lower lows; distribution → panic → discouragement

---

## Chart Types

| Type | Use Case |
|------|----------|
| Bar chart (OHLC) | Standard daily/weekly price action |
| Line chart (close only) | Long-term trend clarity |
| Point & Figure | Filters time, focuses on price movement |
| Candlestick | Japanese method; superior visual reversal signals |

**Arithmetic vs Logarithmic scale:** Use log scale for long-term charts — equal vertical distances = equal percentage changes.

---

## Trend Analysis

### Defining Trends
- **Uptrend**: Series of rising peaks and troughs
- **Downtrend**: Series of falling peaks and troughs
- **Sideways**: Horizontal peaks and troughs

### Support and Resistance
- Old support becomes new resistance (and vice versa) once broken
- The longer a level holds and the more volume it has, the more significant it is
- Round numbers (10, 20, 50, 100, 1000) act as psychological S/R

### Trendlines
- Drawn along successive lows (uptrend) or successive highs (downtrend)
- Requires at least 2 points; confirmed by 3rd touch
- Steeper = less reliable; 45° angle is ideal
- Penetration by 1–3% (or 2 consecutive closes beyond) signals a break
- Channel lines run parallel to trendline; outer channel = extended target

### Percentage Retracements
| Level | Significance |
|-------|-------------|
| 33% (1/3) | Minimum retracement; shallow pullback in strong trend |
| 50% | Most common; Dow Theory midpoint |
| 66% (2/3) | Maximum normal retracement; beyond this = trend change |
| 38.2% / 61.8% | Fibonacci retracements (see Elliott Wave section) |

### Speed Resistance Lines
- Divide a rally into thirds: 1/3 speed line and 2/3 speed line
- Broken 2/3 line → test the 1/3 line; broken 1/3 → rally likely over

---

## Major Reversal Patterns

Patterns require a **prior trend** to reverse. Volume must confirm breakout.

### Head and Shoulders (H&S) Top
- Left shoulder (volume high) → Head (highest price, lower volume) → Right shoulder (lower than head, low volume)
- **Neckline**: connect lows of left and right shoulders
- **Price objective**: measure height of head above neckline, project down from breakout point
- Volume should be heavy on left shoulder and head, lighter on right shoulder and neckline break
- Inverted H&S = bullish reversal from downtrend

### Double/Triple Tops and Bottoms
- Two (or three) peaks at same approximate price level separated by a valley
- Bearish: break below the valley between peaks = confirmation
- Price objective = height of pattern projected from breakout level
- Volume: lower on second peak than first

### Rounding Turns (Saucers)
- Gradual, slow reversal; volume mirrors the shape (low at bottom, high at edges)
- More common in weekly charts; most reliable patterns

### V-Formations (Spikes)
- Fastest and most dramatic reversals; very little warning
- Often preceded by a climax move (key reversal day)

### Island Reversals
- A gap up (or down) followed by one or more days trading in isolation, then gap back
- Exhaustion gap creates the island; continuation gap exits it

---

## Continuation Patterns

Pause within a trend before resuming the original direction.

### Triangles

| Type | Shape | Bias |
|------|-------|------|
| Symmetrical | Converging upper and lower lines | Neutral (continues prior trend) |
| Ascending | Flat top, rising bottom | Bullish |
| Descending | Falling top, flat bottom | Bearish |
| Expanding | Widening (broadening formation) | Bearish (usually after bull market) |

- Time limit: breakout should occur within 2/3 of triangle's length to apex
- Measured move: project the base of the triangle from breakout point

### Flags and Pennants
- Occur after sharp, nearly vertical moves (the "flagpole")
- **Flag**: rectangular consolidation that slopes mildly against the trend
- **Pennant**: small symmetrical triangle after sharp move
- Duration: 1–4 weeks maximum; volume very light during pattern
- Price objective: the flagpole length added to breakout point ("flies at half-mast")

### Wedges
- Converging trendlines sloping against the trend
- Rising wedge (bearish) in uptrend; Falling wedge (bullish) in downtrend
- Takes longer to form than flags (several weeks to months)

### Rectangle (Trading Range)
- Prices oscillate between two parallel horizontal lines
- Buy at support, sell at resistance; breakout signals resumption of trend
- Width of rectangle = price objective after breakout

---

## Volume and Open Interest

### Volume Interpretation
| Price | Volume | Implication |
|-------|--------|-------------|
| Rising | Rising | Strong uptrend confirmed |
| Rising | Falling | Uptrend weakening |
| Falling | Rising | Strong downtrend confirmed |
| Falling | Falling | Downtrend weakening |

- Volume should be **heavier in the direction of the trend**
- Climax volume at market tops/bottoms (exhaustion)
- Breakouts from patterns must have **heavy volume** to be valid

### On Balance Volume (OBV)
- Add entire day's volume when price closes up; subtract when close is down
- OBV direction matters more than absolute value
- **OBV rising with price** = accumulation; **OBV diverging from price** = warning

### Open Interest (Futures)
| Price | OI | Volume | Implication |
|-------|-----|--------|-------------|
| Rising | Rising | Rising | New money buying; strong uptrend |
| Rising | Falling | Declining | Short covering rally; weak signal |
| Falling | Rising | Rising | New money selling; strong downtrend |
| Falling | Falling | Declining | Long liquidation; trend may end |

- High OI at market tops = bearish; rapid OI decline = approaching trend end
- OI typically rises during trending phases, falls during corrections

---

## Long-Term Charts

- Always begin analysis with **monthly charts** (5-10 years), then weekly, then daily
- Long-term support/resistance levels are far more significant than short-term
- Major trendlines on weekly charts rarely seen on daily charts
- Futures: use **continuation charts** (nearest contract or adjusted) for long-term perspective

---

## Moving Averages

### Simple Moving Average (SMA)
- Equal weighting to all periods
- Key periods: 10, 20, 50, 100, 200 days; 4, 9, 18 weeks

### Exponential Moving Average (EMA)
- More weight to recent prices
- Reacts faster than SMA; preferred for shorter-term signals

### Common MA Strategies
| Strategy | Signal |
|----------|--------|
| Price crosses above MA | Buy |
| Price crosses below MA | Sell |
| Short MA crosses above long MA (Golden Cross) | Strong buy (e.g., 50-day crosses above 200-day) |
| Short MA crosses below long MA (Death Cross) | Strong sell |
| 4-9-18 day triple crossover | Buy when all aligned up; sell when all aligned down |

### Bollinger Bands
- Upper band: 20-day SMA + 2 standard deviations
- Lower band: 20-day SMA − 2 standard deviations
- Prices touching upper band = overbought; lower band = oversold
- **Bandwidth squeeze** (bands narrow): volatility contraction before major move
- Prices walk upper band in strong uptrend; lower band in strong downtrend

### Envelopes
- Percentage bands (typically 3–5%) around a moving average
- Prices at upper envelope = overbought; lower envelope = oversold

### 4-Week Rule (Richard Donchian)
- Buy when price exceeds the highest high of the last 4 weeks
- Sell (go short) when price breaks the lowest low of the last 4 weeks
- Simple but effective trend-following system; always in market

---

## Oscillators and Momentum Indicators

Oscillators work best in **non-trending (sideways) markets**. In a strong trend, oscillator signals can be premature — use with trend direction.

### Momentum / Rate of Change (ROC)
- Momentum = current close − close N periods ago (typically 10 days)
- ROC = (current close / close N periods ago) × 100
- Divergence from price = strongest signal; crossing zero = buy/sell

### RSI (Relative Strength Index) — Welles Wilder
- Standard period: **14 days**
- Formula: RSI = 100 − [100 / (1 + RS)] where RS = avg up closes / avg down closes
- **Overbought**: above 70; **Oversold**: below 30
- **Failure swings**: RSI peak fails to exceed previous peak (bearish) or trough holds above previous trough (bullish)
- **Divergence** between RSI and price = major warning
- 80/20 thresholds preferred in strong trending markets

### Stochastic Oscillator — George Lane
- Standard periods: **14 days** (slow stochastics preferred over fast)
- %K = (close − 14-day low) / (14-day high − 14-day low) × 100
- %D = 3-day SMA of %K (the signal line)
- **Overbought**: above 80; **Oversold**: below 20
- **Sell**: %K crosses below %D in overbought zone (>80)
- **Buy**: %K crosses above %D in oversold zone (<20)
- **Left/right crossing**: right crossing (divergence) more reliable than left
- Best signals: divergence in extreme zones

### MACD (Moving Average Convergence/Divergence) — Gerald Appel
- MACD Line = 12-day EMA − 26-day EMA
- Signal Line = 9-day EMA of MACD
- MACD Histogram = MACD − Signal Line
- **Buy**: MACD line crosses above signal line
- **Sell**: MACD line crosses below signal line
- **Histogram divergence** from price = early warning of trend change
- Works well on weekly charts for longer-term signals

### Williams %R
- 14-day period; inverted stochastic
- Scale: 0 (overbought) to −100 (oversold)
- Overbought: 0 to −20; Oversold: −80 to −100

### Commodity Channel Index (CCI) — Donald Lambert
- Measures how far price is from its statistical mean
- Normally oscillates between +100 and −100
- **Buy**: crosses above +100 (entering overbought = strong trend signal)
- **Sell**: crosses below −100
- Best used as trend-following indicator when extreme readings persist

### Contrary Opinion
- When **bullishness > 90%**: market is near a top (too many bulls)
- When **bearishness > 90%**: market is near a bottom (too many bears)
- Threshold for action: 75–80% bullish = begin considering shorts

---

## Point and Figure Charts

### Construction
- **X columns** = rising prices; **O columns** = falling prices
- Traditional box size: 1 point; common reversal: 3 boxes (3-box reversal)
- No time axis; no volume on standard P&F charts
- Only price movement of significance is plotted

### Signals
- **Buy**: column of X's rises above previous X column high
- **Sell**: column of O's falls below previous O column low
- More complex patterns: double top breakout, triple top breakout, ascending triple top

### Price Targets (Vertical Count Method)
- Count the number of boxes in the first column of an advance
- Multiply by 3 (for 3-box reversal)
- Add to the lowest box in the column for upside target

---

## Japanese Candlestick Charts

### Anatomy
- **Body**: rectangle between open and close
  - **White/Green body**: close > open (bullish)
  - **Black/Red body**: close < open (bearish)
- **Upper shadow (wick)**: high above the body
- **Lower shadow (tail)**: low below the body

### Single-Bar Patterns
| Pattern | Description | Signal |
|---------|-------------|--------|
| Long White Day | Large white body | Bullish |
| Long Black Day | Large black body | Bearish |
| Doji | Open = close (or very close); crosses or plus sign | Indecision / reversal |
| Long-Legged Doji | Long shadows both sides | High indecision |
| Gravestone Doji | Long upper shadow, no lower | Bearish reversal |
| Dragonfly Doji | Long lower shadow, no upper | Bullish reversal |
| Spinning Top | Small body, long shadows | Indecision |
| Marubozu | No shadows; open = low, close = high (or reverse) | Strong conviction |
| Hammer | Small body, long lower shadow at bottom of downtrend | Bullish reversal |
| Shooting Star | Small body, long upper shadow at top of uptrend | Bearish reversal |

### Two-Bar Reversal Patterns
| Pattern | Structure | Signal |
|---------|-----------|--------|
| Dark Cloud Cover | White bar up; black bar opens above prior high, closes below midpoint of white | Bearish |
| Piercing Line | Black bar down; white bar opens below prior low, closes above midpoint of black | Bullish |
| Engulfing Pattern | Second bar's body completely covers first bar's body | Bearish (black engulfs white) or Bullish (white engulfs black) |
| Harami | Small body inside previous large body | Reversal warning |

### Three-Bar Reversal Patterns
| Pattern | Structure | Signal |
|---------|-----------|--------|
| Evening Star | White bar → small body (gap up) → black bar closing below midpoint of day 1 | Bearish top reversal |
| Morning Star | Black bar → small body (gap down) → white bar closing above midpoint of day 1 | Bullish bottom reversal |
| Three Black Crows | Three consecutive long black bodies | Bearish |
| Three White Soldiers | Three consecutive long white bodies | Bullish |

### Continuation Patterns
| Pattern | Structure | Signal |
|---------|-----------|--------|
| Rising Three Methods | Long white → 3 small down reactions (within range of day 1) → long white at new high | Bullish continuation |
| Falling Three Methods | Long black → 3 small up reactions → long black at new low | Bearish continuation |

### Filter Rules (Greg Morris)
- Only consider bearish patterns when stochastics %D is in **overbought zone (>80)**
- Only consider bullish patterns when stochastics %D is in **oversold zone (<20)**
- Also works with RSI, CCI, Williams %R

**Key Rule**: Candlestick patterns require a **prior trend** to reverse.

---

## Elliott Wave Theory

### Basic Structure
- Full cycle = **8 waves**: 5 impulse + 3 corrective
- Impulse: waves 1, 3, 5 advance; waves 2, 4 correct
- Corrective: a-b-c structure
- Wave hierarchy: 2 → 8 → 34 → 144 waves (all Fibonacci numbers)

### 9 Degrees of Trend
Grand Supercycle (200 yrs) → Supercycle (40-70 yrs) → Cycle (1-3 yrs) → Primary (several months-yrs) → Intermediate (weeks-months) → Minor (weeks) → Minute → Minuette → Subminuette

### Key Rules
- Wave 2 **never** falls below the beginning of Wave 1
- Wave 3 is **never** the shortest impulse wave
- Wave 4 **never** overlaps Wave 1's price territory (in stocks; less strict in futures)
- A correction **can never** take place in five waves
- **Rule of Alternation**: if Wave 2 is simple, Wave 4 will be complex (and vice versa)

### Corrective Wave Types
| Type | Structure | Notes |
|------|-----------|-------|
| Zig-Zag | 5-3-5 | B falls short of A start; C exceeds A end |
| Flat (Normal) | 3-3-5 | B reaches top of A; C terminates near bottom of A |
| Flat (Irregular) | 3-3-5 | B exceeds top of A; C violates bottom of A |
| Flat (Inverted Irregular) | 3-3-5 | B reaches A top; C fails to reach A bottom = strength |
| Triangle | 5 waves each with 3 subdivisions | 4 types: ascending, descending, symmetrical, expanding; usually in wave 4 or wave B |

### Channeling
- Draw initial channel under waves 1 & 2, parallel across top of wave 1
- Redraw channel connecting tops of waves 1 & 3, bottoms of waves 2 & 4 (final channel)
- Wave 5 often ends at or near the upper channel line

### Fibonacci Ratios in Elliott Wave
Fibonacci sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...
- Ratio of consecutive numbers → **0.618** (the Golden Ratio)
- Ratio to next lower → **1.618**
- Alternate numbers → **2.618** or **0.382**

**Wave Targets:**
| Calculation | Formula |
|------------|---------|
| Wave 3 target (upward) | Length of Wave 1 × 1.618 + bottom of Wave 2 |
| Wave 5 target | Length of Wave 1 × 3.236 (= 2 × 1.618) + bottom of Wave 1 |
| Zig-Zag Wave C | Often equals Wave A |
| Flat with B exceeding A | C = A × 1.618 |
| Symmetrical triangle | Each successive wave ≈ previous × 0.618 |

**Fibonacci Retracements:** 38.2%, 50%, 61.8%

**Fibonacci Time Targets:** Count trading days forward from a turning point — expect turns at the **13th, 21st, 34th, 55th, or 89th** trading day.

**Stocks vs Commodities:** Wave 3 extends in stocks; Wave 5 extends in commodity futures.

---

## Time Cycles

### Basic Cycle Properties
- **Amplitude**: height of cycle (price range)
- **Period**: trough-to-trough time (measure troughs, not peaks — more reliable)
- **Phase**: timing/location of the trough

### Six Cyclic Principles
1. **Summation**: price = sum of all active cycles
2. **Harmonicity**: neighboring cycles related by factor of 2 (e.g., 20-day and 40-day)
3. **Synchronicity**: different-length cycles tend to bottom at the same time
4. **Proportionality**: longer cycles have wider amplitude
5. **Variation**: principles are tendencies, not rigid rules
6. **Nominality**: a nominal set of cycles applies to all markets

### Nominal Cycle Model
```
18 years → 9 years → 54 months → 18 months → 40 weeks → 20 weeks
→ 80 days → 40 days → 20 days → 10 days → 5 days
```
Note: 54-month to 18-month relationship is 1/3, not 1/2 (exception to harmonicity).

These numbers explain popular MA lengths: 5, 10, 20-day MAs correspond to 5, 10, 20-day cycles; the 4-week rule corresponds to the 20-day trading cycle.

### Classification of Cycles
| Category | Period | Use |
|----------|--------|-----|
| Long-term | 2+ years | Macro direction |
| Seasonal | 1 year | Annual tendency |
| Primary/Intermediate | 9–26 weeks | Major trading cycle |
| Trading cycle | ~4 weeks | Primary entry/exit timing |
| Alpha/Beta | ~2 weeks each | Fine-tuning entries |

### Kondratieff Wave
~54-year economic "supercycle" (Nikolai Kondratieff); observed in interest rates, commodity prices, and stock markets.

### Left/Right Translation
- **Right translation** (crest right of midpoint) = bullish environment
- **Left translation** (crest left of midpoint) = bearish environment

### Oscillator Periods and Cycles
- Set oscillator period to **half the dominant cycle length**
- Example: 20-day dominant cycle → 10-day RSI or stochastic

### Seasonal Patterns
| Market | Seasonal Pattern |
|--------|-----------------|
| Soybeans | Peaks Apr–Jun; bottoms Aug–Oct |
| Copper | Strong Jan–Feb; peaks Mar–Apr |
| Gold | Tends to bottom in August |
| Crude Oil | Peaks in October |
| US Dollar | Bottoms in January |
| Treasury Bonds | Peaks in January; weak H1, strong H2 |
| Stock Market | Strongest: Nov–Jan and Jul; weakest: September |

**January Barometer**: "As January goes, so goes the year" (Yale Hirsch).

**Presidential Cycle (4-year):**
- Election year: strongest (+224%)
- Post-election year: weak (+72%)
- Mid-term year: weak (+63%)
- Pre-election year: strongest (+217%)

### MESA (Maximum Entropy Spectral Analysis)
- John Ehlers' approach; determines whether market is in **trend mode** or **cycle mode**
- In trend mode: use trend-following indicators (MAs, MACD)
- In cycle mode: use oscillators

---

## Computer Trading Systems

### Parabolic SAR (Welles Wilder)
- Stop-and-reverse system; always in market (long or short)
- Trailing stops accelerate as trend progresses (parabolic curve)
- Excellent in **trending markets**; produces whipsaws in sideways markets

### ADX (Average Directional Movement Index)
- Scale: 0–100; measures **trend strength**, not direction
- **Rising ADX** = trending environment (use trend-following systems)
- **Falling ADX** = non-trending (use oscillators)
- ADX drops from **above 40**: trend is exhausting
- ADX rises from **below 20**: new trend may be starting

### DMI (+DI and −DI Lines)
- **Buy**: +DI crosses above −DI
- **Sell**: +DI crosses below −DI
- Use DMI as a filter on Parabolic signals

### Pros/Cons of Mechanical Systems
**Pros:** Eliminates emotion; enforces discipline; always trades with trend; lets profits run; cuts losses short.

**Cons:** Trend-following fails ~70% of time (markets sideways most of the time); cannot anticipate reversals; can only trade what already happened.

**Practical use:** Use computer trend direction as a discipline filter — don't take trades against the computer trend. Also useful as market screening tool.

---

## Intermarket Analysis

All financial markets are linked. The fundamental intermarket chain:

```
US Dollar → Commodities → Bonds → Stocks
```

### Core Intermarket Relationships
| Relationship | Direction | Notes |
|-------------|-----------|-------|
| Dollar ↑ | Commodities ↓ | Dollar rising = disinflationary |
| Commodities ↑ | Bonds ↓ | Commodities = leading inflation indicator |
| Bonds ↑ | Stocks ↑ | Rising bond prices (falling yields) = positive for stocks |
| Gold ↑ | Other commodities ↑ | Gold leads other commodities |
| Utilities ↑ | T-Bonds ↑ | Utilities lead bonds as early indicator |
| Gold Mining Stocks ↑ | Gold ↑ | Mining shares lead gold prices |
| Oil ↑ | Energy stocks ↑, Airlines ↓ | |

### Deflationary Exception
In **deflation**: bond prices rise while stock prices fall (bonds and stocks decouple). The normal positive correlation breaks down.

### Sector Rotation Based on Intermarket Environment
| Environment | Outperforming Sectors | Underperforming Sectors |
|------------|----------------------|------------------------|
| Bonds strong, commodities weak | Utilities, financials, consumer staples | Energy, gold, cyclicals |
| Commodities strong, bonds weak | Energy, gold, materials, cyclicals | Utilities, financials |
| Strong dollar | Small caps (Russell 2000) | Large multinationals (Dow) |
| Weak dollar | Large multinationals | Domestic small caps |

### Relative Strength (RS) Analysis
- Plot: Market A price / Market B price = ratio line
- **Rising ratio line** = numerator outperforming denominator
- **Falling ratio line** = denominator outperforming
- Apply trendlines and MAs to ratio lines for buy/sell signals

**Top-Down Approach:**
1. Analyze overall market direction (major averages)
2. Identify market sectors with strongest RS vs S&P 500
3. Within strongest sectors, identify individual stocks with strongest RS
4. Buy RS breakouts; avoid stocks with declining RS lines

### Program Trading (S&P 500 Specific)
- S&P 500 futures normally trade at a **premium** to the cash index
- The fair value of that premium is computed daily
- Futures premium **above fair value** → program buying (buy stocks, sell futures)
- Futures premium **below fair value** → program selling (sell stocks, buy futures)
- Sudden S&P 500 futures moves are often triggered by bond market moves

### Intermarket Correlation
- Measure degree of correlation between two markets
- High positive correlation (+): place more weight on that intermarket relationship
- Near zero: little connection
- High negative correlation (−): inversely related

---

## Stock Market Breadth Indicators

Market breadth measures whether the broad market is confirming the major averages (Dow, S&P 500).

### Advance-Decline (AD) Line
- **Calculation**: cumulative sum of (daily advances − daily declines)
- In healthy market: AD line and Dow both trend upward together
- **AD divergence** (bearish): Dow makes new high, AD line fails to confirm = "bad market breadth"
- AD line typically peaks well before market averages
- **Daily AD**: short to intermediate comparisons
- **Weekly AD** (Barron's): long-term multi-year comparisons (more reliable)

### McClellan Oscillator (Sherman McClellan)
- **Formula**: 19-day EMA of net AD − 39-day EMA of net AD
- Range: approximately +150 to −150
- Above **+100** = overbought stock market
- Below **−100** = oversold stock market
- **Zero-line crossings** = short to intermediate buy/sell signals

### McClellan Summation Index
- Cumulative sum of daily McClellan Oscillator readings
- Used for **major market turning points** (longer range than oscillator)
- Crossings below zero = bearish; above zero = bullish

### New Highs vs New Lows
- Track 52-week new highs and new lows daily
- Smooth with **10-day moving averages**
- Strong market: new highs >> new lows
- **New High-New Low Index**: difference between the two lines
  - Alexander Elder: "probably the best leading indicator of the stock market"
  - Crossings above/below zero line = bullish/bearish market psychology shifts
  - Divergences from market averages = early warning signals

### Upside/Downside Volume
- NYSE reports volume in advancing and declining issues separately
- **Upside volume > downside volume** = strong market; downside dominant = weak
- Can be shown as two lines or one difference line

### Arms Index (TRIN) — Richard Arms
**Formula:**
```
TRIN = (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)
```
- **Below 1.0**: more volume in rising stocks = **bullish**
- **Above 1.0**: more volume in falling stocks = **bearish**
- Contrary indicator: trends **opposite** to the market
- **10-day MA above 1.20** = oversold (buy signal)
- **10-day MA below 0.70** = overbought (sell signal)
- Arms prefers 21-day and 55-day (Fibonacci) averages

### TICK Indicator
- Stocks trading on an uptick minus stocks on a downtick
- Intraday minute-by-minute version of the AD line
- **Rising TICK + falling TRIN** = bullish; falling TICK + rising TRIN = bearish

### Equivolume Charting (Richard Arms)
- Each price bar is a rectangle
- **Height** = daily high-low range (price range)
- **Width** = volume for that day
- Wide rectangles = heavy volume; narrow = light volume
- Bullish breakout should have **noticeably wide rectangle**

### Comparing Market Averages
| Index | Stocks | Character |
|-------|--------|-----------|
| Dow Industrials | 30 | Large cap bellwether |
| S&P 500 | 500 | Broad large cap |
| NYSE Composite | All NYSE | Broadest NYSE measure |
| Nasdaq Composite | ~5,000 | Tech-heavy |
| Russell 2000 | 2,000 small caps | Small cap breadth |

- **Key signals**: Nasdaq/S&P ratio rising = tech leading (bullish); Russell 2000/S&P ratio falling = small caps lagging (breadth weakening)
- Dow breakouts should be **confirmed** by S&P 500 and NYSE Composite

---

## Money Management

### Three Elements of Successful Trading
1. **Price forecasting** → tells you *what* to do (buy or sell direction)
2. **Trading tactics/timing** → tells you *when* to do it
3. **Money management** → tells you *how much* to commit

### Position Sizing Guidelines (Futures)
| Rule | Limit |
|------|-------|
| Total invested funds | Max 50% of total capital (rest in T-Bills) |
| Commitment per market | Max 10–15% of total equity |
| Risk (loss) per trade | Max 5% of total equity |
| Total margin in any market group | Max 20–25% of total equity |

Example ($100,000 account): max $10,000–$15,000 per market; max $5,000 loss per trade.

### Reward-to-Risk Ratios
- Best futures traders make money on only **40% of trades**
- Winning trades must be **larger in dollar amount** than losing trades
- Minimum required ratio: **3:1 reward-to-risk**
- "Let profits run, cut losses short" — oldest maxim in trading

### Diversification
- True diversification requires negative or low correlation between positions
- Holding 4 long foreign currency positions = poor diversification (all vs USD)
- Tradeoff: too many markets dilutes profits from big winners

### Protective Stops
- Always use protective stops — they are not optional
- Stop placement combines **technical factors** (support/resistance) with **money management** (max loss amount)
- Stop too close = whipsawed by noise; stop too far = excessive losses
- Never move a stop in the **wrong** direction (never widen a loss)

### Trading Multiple Positions
- Divide positions into **trending units** (held for long term, loose stops) and **trading units** (short-term profits)
- Allows locking in partial profits without abandoning the whole position

### After Adversity and Success
- After equity **declines**: resist becoming overly conservative (makes recovery harder); don't dramatically change trading approach
- After equity **increases**: resist doubling up aggressively (gives back gains rapidly)
- Increase commitments **after equity dips**, not after peaks (like buying a dip on a price chart)

### Pyramiding (Adding to Winning Positions)
- Add successively **smaller** quantities (not equal or larger)
- Add **only to winning positions** (never to losing ones)
- Adjust protective stops toward breakeven as you add
- Never meet a margin call — exit the losing position instead

### Trading Tactics (Timing)
**5 tools for entry/exit timing:**
1. **Breakouts**: Anticipate, react on breakout, or wait for pullback — or all three with multiple units
2. **Trendline breaks**: Breaking a tight trendline = early entry/exit signal
3. **Support and resistance**: Most effective; place protective stop just beyond S/R
4. **Percentage retracements**: 40–60% pullbacks provide buying opportunities in uptrends
5. **Price gaps**: Buy dip to upper end of gap in uptrend; use gap as stop reference

### Order Types
| Order | Description | Best Use |
|-------|-------------|----------|
| Market | Execute at current price | Guaranteed fill; fast markets |
| Limit | Execute at specified price or better | Better price; risk of not filling |
| Stop | Becomes market when stop price hit | Limit losses; enter on breakout |
| Stop Limit | Stop trigger + limit price | Controls fill price; can miss market |
| Market-if-Touched (MIT) | Becomes market when limit touched | Buy dips without missing the market |

### Multi-Timeframe Analysis
Start with monthly/weekly → daily → intraday (microscopic refinement)

**Intraday Pivot Points (7 price levels × 4 time periods):**
- Seven price levels: previous day H, L, Close + current day O, H, L, Close
- Four time periods: open, 30 min after open, midday (12:30 NY), 35 min before close
- Later in day = stronger signal

### 20 Rules Summary
1. Trade in direction of intermediate trend
2. Buy dips in uptrends; sell bounces in downtrends
3. Let profits run; cut losses short
4. Use protective stops
5. Don't trade impulsively; have a plan
6. Plan your work and work your plan
7. Apply money management principles
8. Diversify, but don't overdo it
9. Use minimum 3:1 reward-to-risk ratio
10. When pyramiding: smaller layers; add only to winners; never add to losers; move stops to breakeven
11. Never meet a margin call
12. Close losing positions before winning ones
13. Make decisions away from the market (when markets are closed)
14. Work from long term to short term
15. Use intraday charts to fine-tune entry and exit
16. Master interday trading before attempting intraday
17. Ignore conventional wisdom; question financial media
18. Be comfortable being in the minority (right trades are contrarian)
19. Technical analysis improves with experience; always keep learning
20. Keep it simple — complicated isn't always better

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## Technical Checklist (Pre-Trade)

Before entering any trade, work through these questions:

### Market Analysis (23 Questions)
1. What is the direction of the **overall market**?
2. What is the direction of the **market sectors**?
3. What are the **weekly and monthly** charts showing?
4. Are the major, intermediate, and minor **trends** up, down, or sideways?
5. Where are the important **support and resistance** levels?
6. Where are the important **trendlines or channels**?
7. Is **volume and open interest** confirming the price action?
8. Where are the **33%, 50%, and 66% retracements**?
9. Are there any **price gaps** and what type?
10. Are there any major **reversal patterns** visible?
11. Are there any **continuation patterns** visible?
12. What are the **price objectives** from those patterns?
13. Which way are the **moving averages** pointing?
14. Are the **oscillators** overbought or oversold?
15. Are any **divergences** apparent on the oscillators?
16. Are **contrary opinion** numbers showing extremes?
17. What is the **Elliott Wave** pattern showing?
18. Are there obvious **3 or 5 wave** patterns?
19. What about **Fibonacci** retracements or projections?
20. Are any **cycle tops or bottoms** due?
21. Is the market showing **right or left translation**?
22. Which way is the **computer trend** moving?
23. What are **point and figure or candlestick** charts showing?

### Trade Decision Questions
1. Market trend over next several months?
2. Buy or sell?
3. How many units to trade?
4. How much am I prepared to risk if wrong?
5. What is my profit objective?
6. Where will I enter the market?
7. What type of order will I use?
8. Where will I place my protective stop?

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## Coordinating Technical and Fundamental Analysis

- Technical factors **lead** known fundamentals; fundamentals explain price moves after the fact
- Technician uses fundamentals as context: "What would have to happen fundamentally to justify this chart move?"
- Fundamentalist uses technical tools as filters: use trend-following system to avoid fighting an existing trend
- Market reactions to news are highly informative: bullish news in downtrend = sign of weakness

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## Key References and Further Reading

- Murphy, John J. — *Intermarket Technical Analysis* (1991)
- Murphy, John J. — *The Visual Investor*
- Wilder, Welles J. — *New Concepts in Technical Trading Systems* (RSI, ADX, Parabolic SAR)
- Lane, George — Developer of Stochastics
- Appel, Gerald — Developer of MACD
- Elliott, R.N. — *The Wave Principle* (1938)
- Frost & Prechter — *Elliott Wave Principle* (1978)
- Hurst, J.M. — *The Profit Magic of Stock Transaction Timing* (1970)
- Arms, Richard — *Volume Cycles in the Stock Market* (1983); *The Arms Index (TRIN)*
- Nison, Steve — *Japanese Candlestick Charting Techniques*
- Morris, Greg — *Candlestick Charting Explained* (1992)
- Elder, Alexander — *Trading for a Living*
- Gann, W.D. — Gann angles and fan lines

**Professional Certification:** Chartered Market Technician (CMT) — issued by the Market Technicians Association (MTA)