TECHNICAL ANALYSIS of STOCK TRENDS
TENTH EDITION
W.H.C. (Charles) Bassetti
Managing Partner, john magee technical
analysis::delphic options research ltd;
edwards-magee.com

“The 9th edition also contains some ‘jewels’ developed from Magee’s work, Basing Point
analysis and risk management, as well as additional material demonstrating the power of chart
analysis in commodity trading. … I am pleased to recommend this edition to new readers and
old readers alike.”
—John Murphy, author of Technical Analysis of the Financial Markets and Intermarket Analysis
“With a focus on pragmatic portfolio theory, editor Charles Bassetti significantly contributes to
the technical analysis body of knowledge, especially related to tactics, and has created a book
worth a space on every technician’s bookshelf.”
—Mike Carr, CMT in Technically Speaking, Market Technician’s Association
“... teaches us how to profit from chart patterns regardless of what the market is doing. This
classic book on chart patterns is a must for the savvy trader.”
—David Robinson, The Bull and Bear Financial Report
“Whatever you might think of technical analysis in general, and charting in particular, this book
is the classic work on the subject.”
—Mark Hulbert, The Hulbert Financial Digest
“Completely updated with the latest information, this universally acclaimed investors’ classic is
the definitive reference on analyzing trends in stock performance through technical analysis.”
—Yale Hirsch, Stock Traders Almanac, The Hirsch Organization, Inc.
“This book is a classic—the standard of excellence against which everything in technical analysis
is measured. I am delighted to know that another generation of investors will be able to learn
from this wonderful book.”
—Ralph Acampora, Prudential Securities
“The #1 all-time classic on analysis of bar charts. Many knowledgeable technicians consider this
to be the best book on chart patterns ever written!”

—Edward Dobson, Traders Press, Inc.

TENTH EDITION

K14297
90000

9 781439 898185

Finance and Investing
Sixty-five years. Sixty-five years and
Technical Analysis of Stock Trends
still towers over the discipline of
technical analysis like a mighty redwood.
Originally published in 1948 and now
in its Tenth Edition, this book remains
the original and most important work
on this topic. The book contains more
than dry chart patterns; it passes down
accumulated experience and wisdom
from Dow to Schabacker to Edwards
to Magee and has been modernized by
W.H.C. Bassetti.
See what’s new in the Tenth Edition:
• Chapters replacing Dow Theory
• Update of Dow Theory Record
• Deletion of extraneous material on
manual charting
• New chapters on Stops and Basing
Points

• New material on moving average
systems
• New material on Ralph Vince’s
Leverage Space Model
So much has changed since the first
edition, yet so much has remained the
same. Everyone wants to know how to
play the game. The foundational work of
the discipline of technical analysis, this
book gives you more than a technical
formula for trading and investing; it gives
you the knowledge and wisdom to craft
long-term success.

TENTH EDITION
ISBN 978-1-4398-9818-5

K14297_Dustjacket_final_revised.indd 1

Edwards
Magee
Bassetti

TECHNICAL ANALYSIS
of STOCK TRENDS

Client and then student of John Magee,
W.H.C. (Charles) Bassetti has more than
fifty years of trading experience. He was a
Principal and Vice President of California’s

first licensed commodity trading advisor,
Commodity Investment Service Inc.,
CEO of Options Research Inc. founded
by Blair Hull of Hull Trading Company
of Chicago. He founded Micro Options
Research Corporation (President), which
as a joint venture partner of Standard and
Poor’s implemented the Options Monitoring
System on S&P computers with Prudential
Securities as its flagship client. He is the
editor of the second revised edition of
Magee’s General Semantics of Wall
Street, the editor/coauthor of the eighth,
ninth and tenth editions of Edwards &
Magee’s Technical Analysis of Stock
Trends, coauthor of the second edition of
Analyzing Bar Charts for Profit (2002)
(retitled The Introduction to the Magee
System of Technical Analysis). He has
published five other books available on
Kindle and at edwards-magee.com: Zen
Simple: Beat the Market with a Ruler;
StairStops; Sacred Chickens, the Holy
Grail and Dow Theory; Signals; and Ten
Trading Lessons.

Read the Reviews of Previous Editions:

TECHNICAL ANALYSIS
of STOCK TRENDS


Robert D. Edwards • John Magee
W.H.C. Bassetti
11/9/12 9:53 AM


TECHNICAL ANALYSIS
of STOCK TRENDS
TENTH EDITION


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TECHNICAL ANALYSIS
of STOCK TRENDS
TENTH EDITION
Robert D. Edwards • John Magee
W.H.C. Bassetti


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and future options contracts based on the Dow-Jones Industrial Average℠ are not sponsored, endorsed, sold, or promoted
by Dow-Jones℠, and Dow-Jones℠ makes no representation regarding the advisability of trading in such products.

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Contents
Preface to the tenth edition ..........................................................................................................xv
Preface to the ninth edition ....................................................................................................... xix
Preface to the eighth edition .................................................................................................... xxiii
In memoriam ...........................................................................................................................xxxiii
Preface to the seventh edition ................................................................................................ xxxv

Preface to the fifth edition ..................................................................................................... xxxix
Preface to the fourth edition ....................................................................................................... xli
Preface to the second edition ....................................................................................................xliii
Foreword ...................................................................................................................................... xlv

Section I: Technical theory
Chapter 1 The technical approach to trading and investing .............................................3
Definition of technical analysis..................................................................................................... 4
Chapter 2 Charts .........................................................................................................................7
Different types of scales .................................................................................................................8
Chapter 3 The Dow Theory .................................................................................................... 11
The Dow Averages ........................................................................................................................ 12
Basic tenets ..................................................................................................................................... 12
Tide, wave, and ripple .............................................................................................................. 14
Major trend phases................................................................................................................... 14
Principle of confirmation ........................................................................................................ 16
Chapter 4 The Dow Theory’s defects ...................................................................................21
The Dow Theory is too late ......................................................................................................... 21
The Dow Theory is not infallible ................................................................................................ 23
The Dow Theory frequently leaves the investor in doubt ................................................. 23
The Dow Theory does not help the Intermediate Trend investor..................................... 23
The Dow Theory in the 20th and 21st centuries ....................................................................... 24
Chapter 5 Replacing Dow Theory with John Magee’s Basing Points Procedure ........ 31
The fractal nature of the market ................................................................................................. 31
Chapter 6 Important Reversal Patterns ................................................................................41
Important Reversal Patterns ........................................................................................................42
v


vi


Contents

Time required to reverse a trend ................................................................................................43
The Head and Shoulders .........................................................................................................44
Volume is important ..................................................................................................................... 45
Breaking the neckline ................................................................................................................... 47
Variations in Head-and-Shoulders Tops .................................................................................... 49
Price action following confirmation: the measuring formula ................................................ 53
Relation of Head and Shoulders to Dow Theory ..................................................................... 55
Chapter 7 Important Reversal Patterns: continued ...........................................................57
Head-and-Shoulders (EN: or Kilroy) Bottoms.......................................................................... 57
Multiple Head-and-Shoulders Patterns ..................................................................................... 59
Tendency to symmetry ................................................................................................................. 61
A leisurely pattern.........................................................................................................................65
Rounding Tops and Bottoms ....................................................................................................... 66
How Rounding Turns affect trading activity ............................................................................ 70
The Dormant Bottom variation ................................................................................................... 73
Volume pattern at Tops ................................................................................................................ 75
Chapter 8 Important Reversal Patterns: the Triangles .....................................................77
Symmetrical Triangles .................................................................................................................. 78
Some cautions about Symmetrical Triangles ............................................................................80
How prices break out of a Symmetrical Triangle .....................................................................80
A typical Triangle development .................................................................................................. 82
Reversal or Consolidation............................................................................................................ 86
The Right-Angle Triangles ........................................................................................................... 92
A planned distribution ................................................................................................................. 92
Descending Triangles ................................................................................................................... 94
Volume characteristics same as the Symmetrical type ............................................................ 95
Measuring implications of Triangles .......................................................................................... 98

Triangles on weekly and monthly charts................................................................................... 99
Other Triangular formations ..................................................................................................... 100
Chapter 9 Important Reversal Patterns: continued .........................................................103
The Rectangles, Double and Triple Tops ................................................................................. 103
Pool operations ............................................................................................................................ 105
Relation of rectangle to Dow Line ............................................................................................ 108
Rectangles from Right-Angle Triangles ................................................................................... 109
Double and Triple Tops and Bottoms ....................................................................................... 111
Distinguishing characteristics ................................................................................................... 113
Double Bottoms ........................................................................................................................... 116
Triple Tops and Bottoms ............................................................................................................ 117
Chapter 10 Other Reversal phenomena ...............................................................................121
The Broadening Formations ...................................................................................................... 121
Volume during Broadening Formations .................................................................................. 122
A typical example........................................................................................................................ 123
The Orthodox Broadening Top ................................................................................................. 124
Why no Broadening Bottoms?................................................................................................... 126
Right-Angled Broadening Formations..................................................................................... 128


Contents

vii

The Diamond ............................................................................................................................... 129
Wedge Formations ...................................................................................................................... 130
The Falling Wedge ...................................................................................................................... 134
Wedges on weekly and monthly charts ................................................................................... 135
Rising Wedges common in Bear Market Rallies ..................................................................... 136
The One-Day Reversal................................................................................................................ 136

The Selling Climax ...................................................................................................................... 140
Short-term phenomena of potential importance .................................................................... 144
Spikes ............................................................................................................................................ 145
Runaway Days............................................................................................................................. 147
Key Reversal Days ...................................................................................................................... 148
Chapter 11 Consolidation Formations..................................................................................151
Flags and Pennants ..................................................................................................................... 151
The Pennant: a pointed Flag ...................................................................................................... 153
The measuring formula .............................................................................................................. 154
Reliability of Flags and Pennants ............................................................................................. 156
Where they may be expected .................................................................................................... 157
Flag pictures on weekly and monthly charts .......................................................................... 158
Rectangular Consolidations: an early phase phenomenon .................................................. 159
Head-and-Shoulders Consolidations ....................................................................................... 160
Scallops: repeated Saucers ......................................................................................................... 162
Modern versus old-style markets ............................................................................................. 166
Chapter 12 Gaps ........................................................................................................................171
Which gaps are significant? ....................................................................................................... 171
Closing the gap ............................................................................................................................ 171
Ex-dividend gaps ........................................................................................................................ 172
The common or area gap ....................................................................................................... 173
Breakaway gaps ...................................................................................................................... 174
Continuation or runaway gaps and the measuring rule .................................................. 177
Two or more runaway gaps .................................................................................................. 179
Exhaustion gaps ..................................................................................................................... 181
The Island Reversal ..................................................................................................................... 184
Gaps in the Averages .................................................................................................................. 186
Chapter 13 Support and Resistance ......................................................................................189
Normal trend development ....................................................................................................... 190
The explanation ........................................................................................................................... 191

Estimating Support–Resistance potential ................................................................................ 193
Locating precise levels................................................................................................................ 196
Significance of Support failure .................................................................................................. 197
Popular misconceptions ............................................................................................................. 198
The round figures ........................................................................................................................ 200
Repeating historical levels ......................................................................................................... 200
Pattern Resistance ....................................................................................................................... 202
Volume on breaks through Support ......................................................................................... 205
Support and Resistance in the Averages .................................................................................. 206


viii

Contents

Chapter 14 Trendlines and Channels ...................................................................................207
The Trendline ............................................................................................................................... 207
How Trendlines are drawn ........................................................................................................ 208
Arithmetic versus logarithmic scale ......................................................................................... 211
Tests of authority ......................................................................................................................... 211
Validity of penetration................................................................................................................ 214
Amendment of Trendlines ......................................................................................................... 216
Double Trendlines and trend ranges ........................................................................................ 216
Trend Channels............................................................................................................................ 218
Experimental Lines ..................................................................................................................... 219
Consequences of Trendline penetration: Throwbacks ........................................................... 220
Intermediate Downtrends.......................................................................................................... 221
Corrective trends: the Fan Principle .........................................................................................225
Chapter 15 Major Trendlines..................................................................................................229
Major Downtrends ...................................................................................................................... 237

Major Trend Channels ................................................................................................................ 238
Trendlines in the Averages ......................................................................................................... 244
Trading the Averages in the 21st century ................................................................................ 244
Chapter 16 Technical analysis of commodity charts .........................................................247
Technical analysis of commodity charts, part 2: A 21st-century perspective ..................... 251
Rocket scientists .......................................................................................................................... 252
Turtles?.......................................................................................................................................... 253
The application of Edwards and Magee’s methods to 21st-century futures markets.......254
Stops ......................................................................................................................................... 258
A variety of methods .................................................................................................................. 261
Everything you need to know as a chart analyst trading futures ........................................ 261
The return of the great markets of the 1970s ........................................................................... 262
Chapter 17 A summary and concluding comments...........................................................263
Technical analysis and technology in the 21st century: the computer and the
Internet: tools of the investment/information revolution .................................................... 267
The importance of computer technology ................................................................................ 269
Summary 1 .............................................................................................................................. 270
Other technological developments of importance to the technical Magee analyst
and all investors .......................................................................................................................... 270
The Internet: the eighth wonder of the modern world (EN9: Appendix B,
Resources, for the ninth edition has been enormously expanded and is of
paramount importance to modern investors.) ................................................................... 270
Marking-to-market ................................................................................................................. 271
Separating the wheat from the chaff ................................................................................... 272
Chaff ......................................................................................................................................... 272
Summary 2 .............................................................................................................................. 272
Advancements in investment technology, part 1: Developments in finance theory
and practice .................................................................................................................................. 273
Options .................................................................................................................................... 273
Quantitative analysis ............................................................................................................. 274

Options pricing models and their importance .................................................................. 275


Contents

ix

Futures on indexes ................................................................................................................. 275
Options on futures and indexes ........................................................................................... 276
Modern Portfolio Theory ..................................................................................................... 277
The wonders and joys of investment technology .............................................................. 277
Advancements in investment technology, part 2: futures and options on futures on
the Dow–Jones Industrial Index at the CBOT......................................................................... 277
Investment and hedging strategies using the CBOT® DJIASM futures contract ............ 278
Settlement of futures contracts ............................................................................................. 278
Marking-to-market ................................................................................................................. 278
Fungibility ............................................................................................................................... 278
Differences between cash and futures ................................................................................. 279
Dow Index futures ................................................................................................................. 279
Using stock index futures to control exposure to the market .......................................... 279
Investment uses of Dow Index futures ............................................................................... 281
Situation 1: Portfolio protection .................................................................................. 281
Situation 2: Increasing exposure with futures ......................................................... 282
Situation 3: Using bond and index futures for asset allocation ............................. 282
Perspective ..............................................................................................................................284
Options on Dow Index futures .............................................................................................284
Option premiums ................................................................................................................... 285
Volatility...................................................................................................................................285
Exercising the option ............................................................................................................. 286
Using futures options to participate in market movements ............................................ 286

Profits in rising markets ........................................................................................................ 286
Exploiting market reversals .................................................................................................. 287
Using puts to protect profits in an appreciated portfolio ................................................. 287
Situation 1 ...................................................................................................................... 287
Improving portfolio yields.................................................................................................... 287
Situation 2 ...................................................................................................................... 287
Using option spreads in high- or low-volatility markets ................................................. 288
Situation 3 ...................................................................................................................... 288
Situation 4 ...................................................................................................................... 289
Perspective .............................................................................................................................. 289
Recommended further study .................................................................................................... 289
Section II: Trading tactics
Midword ....................................................................................................................................... 291
Chapter 18 The tactical problem ............................................................................................ 295
Strategy and tactics for the long-term investor. What’s a speculator, what’s
an investor? .................................................................................................................................. 299
One definition of the long-term investor ................................................................................. 301
The strategy of the long-term investor..................................................................................... 301
Rhythmic investing ..................................................................................................................... 302
Summary ......................................................................................................................................304
Chapter 19: The all-important details ...................................................................................305
The simplest and most direct way to use a computer for charting analysis .....................306
Summary ...................................................................................................................................... 307


x

Contents

Chapter 20 The kind of stocks we want: the speculator’s viewpoint ............................309

The kind of stocks we want: the long-term investor’s viewpoint ....................................... 310
Changing opinions about conservative investing .............................................................310
The kinds of stocks long-term investors want: The long-term investor’s viewpoint ....... 311
Construction of the Index Shares and similar instruments .................................................. 312
An outline of instruments available for trading and investing ....................................... 313
The importance of these instruments: diversification, dampened risks, tax, and,
most important, technical regularity ........................................................................................ 314
Summary ...................................................................................................................................... 316
Chapter 21 Selection of stocks to chart ................................................................................ 317
Chapter 22 Selection of stocks to chart: continued ............................................................321
Chapter 23 Choosing and managing high-risk stocks: tulip stocks, Internet
sector, and speculative frenzies ........................................................................ 327
Managing tulipomanias and Internet frenzies ....................................................................... 328
Detailed techniques for management of the runaway issues ............................................... 330
Hope springs eternal and there is one born every second ....................................................334
Chapter 24 The probable moves of your stocks..................................................................343
Chapter 25 Two touchy questions .........................................................................................347
The use of margin........................................................................................................................ 347
Short selling .................................................................................................................................348
Chapter 26 Round lots or odd lots? .......................................................................................353
Chapter 27 Stop orders ............................................................................................................355
The progressive stop ................................................................................................................... 357
Stop systems and methods ........................................................................................................ 359
A brief survey of stop methods ................................................................................................. 360
Some other stop methods........................................................................................................... 360
Average True Range ............................................................................................................... 360
Parabolic stop and reverse .................................................................................................... 361
Target stops ............................................................................................................................. 361
A natural method used by the Turtles...................................................................................... 361
Chapter 28 What is a bottom, what is a top? .......................................................................363

Basing Points................................................................................................................................364
Basing Points: a case analyzed .................................................................................................. 366
The Basing Points paradigm...................................................................................................... 367
Key to Figure 28.2 analysis .................................................................................................. 368
A narrative of the events in the chart .................................................................................. 369
The complete Basing Points Procedure: taking into consideration the setting of
Basing Points on both wave lows and new highs .................................................................. 370
The complete Basing Points procedure .............................................................................. 371
Two charts giving a long-view perspective on the complete (Variant 2) procedure .... 372
The representative case fully analyzed using wave lows and new highs ..................... 372
A narrative of the events in the chart ....................................................................................... 373


Contents

xi

Chapter 29 Trendlines in action............................................................................................. 375
Buying stock, “going long”........................................................................................................ 376
Liquidating, or selling a long position ..................................................................................... 377
Selling stock short ....................................................................................................................... 380
Covering short sales ................................................................................................................... 381
Additional suggestions .............................................................................................................. 381
General outline of policy for trading in the Major Trend ...................................................... 382
Chapter 30 Use of Support and Resistance..........................................................................385
Chapter 31 Not all in one basket ...........................................................................................391
EN: diversification and costs ..................................................................................................... 392
Chapter 32 Measuring implications in technical chart patterns ....................................393
Chapter 33 Tactical review of chart action ..........................................................................395
The Dow Theory.......................................................................................................................... 395

Head-and-Shoulders Top ........................................................................................................... 402
Head-and-Shoulders Bottom.....................................................................................................403
Complex or multiple Head-and-Shoulders ............................................................................. 405
Rounding Tops and Bottoms .....................................................................................................405
Symmetrical Triangles ................................................................................................................408
Right-Angle Triangles................................................................................................................. 410
Broadening Tops.......................................................................................................................... 410
Rectangles..................................................................................................................................... 410
Double Tops and Bottoms .......................................................................................................... 411
Right-Angled Broadening Formations..................................................................................... 411
The Diamond ............................................................................................................................... 411
Wedges .......................................................................................................................................... 412
One-Day Reversals...................................................................................................................... 412
Flags and Pennants ..................................................................................................................... 412
Gaps .............................................................................................................................................. 413
Support and Resistance .............................................................................................................. 416
Trendlines ..................................................................................................................................... 416
Chapter 34 A quick summation of tactical methods .........................................................419
Get out of present commitments .............................................................................................. 419
Make new commitments............................................................................................................ 420
Chapter 35 Effect of technical trading on market action..................................................421
Chapter 36 Automated trendline: The Moving Average ..................................................423
Sensitizing Moving Averages .................................................................................................... 424
Crossovers and penetrations ..................................................................................................... 424
The PENTAD Moving Average system from Formula Research ......................................... 426
Chapter 37 The same old patterns .........................................................................................429
Not all the same ...........................................................................................................................430


xii


Contents

Chapter 38 Balanced and diversified ....................................................................................483
September 28, 1985: an oversold market ................................................................................. 488
Chapter 39 Trial and error.......................................................................................................489
Chapter 40 How much capital to use in trading .................................................................491
Chapter 41 Application of capital in practice......................................................................493
Put and call options .................................................................................................................... 495
Chapter 42 Portfolio risk management ................................................................................497
Overtrading: and a paradox ...................................................................................................... 498
Risk of a single stock ..................................................................................................................500
Risk of a portfolio ....................................................................................................................... 501
EN9: Risk and trend ................................................................................................................... 501
Value-at-Risk Procedure ............................................................................................................. 501
Pragmatic Portfolio Theory (and practice) ............................................................................. 502
Pragmatic portfolio risk measurement ................................................................................... 502
Determining the risk of one stock ...................................................................................... 502
Determining the risk for a portfolio ................................................................................... 503
Measuring maximum drawdown, or maximum retracement ............................................504
Pragmatic portfolio analysis: measuring the risk ..................................................................504
Portfolio Ordinary or Operational Risk ..............................................................................504
Portfolio risk over time .......................................................................................................... 505
Portfolio extraordinary or catastrophic risk ....................................................................... 505
Controlling the Risk ................................................................................................................... 505
Summary of Risk and Money Management Procedures ...................................................... 505
Infinitely more sophisticated risk and money management procedures—Ralph
Vince and optimal f ..................................................................................................................... 506
Chapter 43 Stick to your guns ................................................................................................507
Appendix A The Dow Theory in practice ............................................................................509

Five years of Dow interpretation ..............................................................................................509
The first severe test ..................................................................................................................... 510
Failure to confirm ........................................................................................................................ 512
Signs of Major Turn..................................................................................................................... 513
The Bull signal ............................................................................................................................. 515
The first correction ...................................................................................................................... 516
Bull Trend reaffirmed ................................................................................................................. 517
The Rails falter ............................................................................................................................. 518
The spring of 1946 ....................................................................................................................... 519
Final Up-Thrust ........................................................................................................................... 521
The Bear Market signal............................................................................................................... 521
Appendix B Resources .............................................................................................................525
Section 1: important and indispensable sites .......................................................................... 525
Section 2: references for further study ..................................................................................... 526
On risk ..................................................................................................................................... 526


Contents

xiii

On candlesticks ..................................................................................................................... 526
On futures .............................................................................................................................. 526
On portfolio management .................................................................................................... 526
Section 3: investment-oriented sites ......................................................................................... 526
Brokerage Houses ................................................................................................................... 528
Section 4: the Sharpe Ratio......................................................................................................... 529
Section 5: calculating volatility.................................................................................................. 529
Section 6: the essence of fundamental analysis ...................................................................... 530
The Elliott Wave Theory: perspective and comments ...................................................... 530

Section 7: software packages and Internet technical analysis sites...................................... 533
AIQ: TRADING EXPERT PRO ............................................................................................. 533
METASTOCK 9.0 .................................................................................................................... 533
Tradestation 2000i and Tradestation 8.................................................................................534
The Internet: prophet () ...................................................534
The Internet: ........................................................................534
A brief summary ....................................................................................................................534
Section 8: the Leverage Space Portfolio Model .......................................................................534
Glossary ........................................................................................................................................ 539
Bibliography ................................................................................................................................. 565
Index ............................................................................................................................................. 567


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Preface to the tenth edition
A tenth milestone
Sixty-three years. Sixty-three years and Technical Analysis of Stock Trends still towers over the discipline of technical analysis like a mighty pine. An evergreen ponderosa. And now a tenth edition. It is a propitious moment to refresh it for the new millennium, to prune its solecisms and
obsolescences, and to further develop the—sometimes—prescient work of its originators.
With this premise in mind, I have attempted to make the book shorter, simpler, and
more usable in the modern context. I know there are still manual chartists out there.
Occasionally they are ecstatic when they find that—as a profit-losing service—I still have
TEKNIPLAT™ chart paper in my attic. Like travelers in the desert finding an oasis.
But they are the 1%. Everyone else uses software, desktop or Internet, to do his charting. (See note “About Gender” in the Preface to the eighth edition.) So I have excised the
material on manual charting from the new edition. Budding manual chartists may always
turn to the eighth and ninth editions. I have also deleted Magee’s chapters on “Composite
Leverage” (Chapter 42 in the seventh edition, Appendix A in the eighth) as they are
abstruse and cumbersome in the modern context—not to mention being rooted in manual
chart analysis. I have made every attempt to summarize and replace Magee’s work, as I

believe it has intellectual validity. Primarily this is done in the present Chapter 42. I repeat:
Magee’s thinking and practical work predated much modern portfolio management and
volatility theory. And Modern Portfolio Theory has still not caught up to his work on trend
analysis and risk. All this material is available in previous editions.
I have moved perhaps the most difficult chapter in the book, Chapter 4, to Appendix
A. Edwards’ chapter on the minutiae of the operation of Dow Theory has stopped more
than one reader cold. Now it is available to the detail scholar, and the general reader is
relieved of the necessity of slogging through it.
Many critics deplored Chapter 16 from the seventh edition, which I relegated to an
appendix in the ninth edition. This chapter covered an analysis of futures and derivatives
using number-driven analysis. Critics said it was shallow. More important, it was completely extraneous to the theme of the book, which is chart analysis, not the exploration of
statistical routines and indicators, which is a different branch of technical analysis. There
are numerous books on the subject, starting with Murphy, Kirkpatrick, and Kaufman. I
have deleted it along with other material in the book that was not compatible with Edwards
and Magee’s original intent.
I quote here appropriate remarks from the preface to the eighth edition:
About apparent anachronisms
Critics with limited understanding of long-term trading success
may think that discussions of “what happened in 1929” or “charts of
xv


xvi

Preface to the tenth edition
ancient history from 1946” have no relevance to the markets of the
present millennium. They will point out that AT&T no longer exists
in that form, that the New Haven has long since ceased to exist as
a stock, that many charts are records of long-buried skeletons. This
neglects the value of the charts as metaphor. It ignores their representations of human behavior in the markets which will be replicated

tomorrow in some stock named today.com or willtheynevergetit.
com. Even more important, it ignores the significance of the past
to trading in the present. I cite here material from Jack Schwager’s
illuminating book, The New Wizards of Wall Street. Schwager, in conversation with Al Weiss: “Precisely how far back did you go in your
chart studies?” Answer: “It varied with the individual market and
the available charts. In the case of the grain markets, I was able to
go back as far as the 1840s.” “Was it really necessary to go back that
far?” Answer: “Absolutely. One of the keys in long-term chart analysis is realizing that markets behave differently in different economic
cycles. Recognizing these repeating and shifting long-term patterns
requires lots of history. Identifying where you are in an economic
cycle—say, an inflationary phase vs. a deflationary phase—is critical
to interpreting the chart patterns evolving at that time.”

Identification of original manuscript and revisions
True believers (and skeptics) will find here virtually all of the original material written
by Edwards and Magee, including their charts and observations on them. Changes and
comments introduced by editors since the fifth edition have been rearranged, and, when
appropriate, have been identified as a revision by that editor.
Maintaining this policy, where updates to the present technological context and market reality were necessary, the present editor has clearly identified them as his own work
by beginning such annotations with “EN” for Editor’s Note. (The eighth edition was the
first to use editor’s notes. Editor’s notes for the ninth edition are identified as EN9, and
notes added for the present edition are identified as EN10.)
So we have here a simpler, shorter, clearer edition of the famous book. Easier to
read, easier to understand, and easier to use. None of the considerable virtues of the
book has been affected. I have attempted to add to these virtues with my work on
Magee’s Basing Points Procedure (see Chapter 28) and portfolio control and risk (see
Chapter 42).
In spite of my remarks, I have listened to critics of the hand-drawn charts in this
book. These charts are the glory of the book and of the discipline of technical analysis.
Their application to modern markets seems ridiculously obvious to me. And I am perhaps

a dinosaur. So I have decided to take a number of examples of the manual charts and
post them at along with the same data charted by computer so that skeptics can compare the two methods. These will be found at http://www.
edwards-magee.com/manualcharts.html.
The Internet so extends one’s capabilities and is so easy to use that it would be irresponsible not to avail oneself. In Figures 9.2 and 9.3 I have printed charts that demand—
scream—to be viewed in a larger format. These will be found at ards-magee.
com/supercharts.html.


Preface to the tenth edition

xvii

The reader is urged to read the prefaces to the eighth and ninth editions. I have not
repeated here all the editorial conventions detailed in those prefaces.
W. H. C. Bassetti
San Francisco, California

Acknowledgments for the tenth edition
So many colleagues and friends contribute to a book like this that one is in danger of
getting into the Academy Awards syndrome—endless thank-yous and acknowledgments
until they bring out the hook and pull you off stage. So I will not thank my parents and
aunts and uncles and wife and family, although they should be and by this mention are
thanked.
More particularly, acknowledgments are due to my editorial and research assistant,
Carlos Bassetti.
My colleagues at Golden Gate University (GGU) are an invaluable source of advice, wisdom, and support, particularly Professor Henry Pruden. It is no mystery why he is internationally known and respected—besides being a world authority on Wyckoff. GGU has
also furnished me with an unending supply of bright, formidable graduate students who
have made major contributions to my work and to my thinking. Nehemiah Brown does his
best to keep me semiorganized as to spreadsheets. Matt Mullens and Brian Brooker have
assisted me with many of the Basing Point studies herein. Stergios Marinopoulos has stimulated and challenged me in my systems work. All these people are members in the local

technical analysis fraternity and our much valued organization, the Technical Securities
Analysts Association of San Francisco.
More remote colleagues have also assisted me in many invaluable ways—Jack
Schannep with Dow Theory data, Robert Colby also with Dow data, Tim Knight with
Prophet data (now part of , ),
Chip Anderson at , and Scott Brown of Metastock for support
with charting software.
I am indebted to Ralph Vince and Nelson Freeburg for material found herein that
increases the value of this book.
And finally, amigo Français and fellow chart enthusiast Chris Glon, http://www.
publicharts.com, for his charts, assistance, and friendship. He has supplied some of the
most interesting charts in this book.


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Preface to the ninth edition
Warp speed universe. Warp speed financial markets. The eighth edition of this classic
book appeared when it seemed that the millennium and paradise had been achieved and
that, like McKay’s tulipomania, the price of stocks would rise forever and men would
rush from the world over and pay whatever price was asked for what-was-its-name.com,
Internet.groceries, or ihype.com or icon.com or gotcha.com. And, feature this, Dow 36,000.
The bubble was just in the process of bursting, of course. Before it burst, fabulous fortunes
were made by roller blader and scooter tycoons and by young geeks with nothing but
chutzpah and a laptop. One of my favorite stories is of the young entrepreneur who said,
“Why don’t I deserve it (the $100 million he made in the IPO)? I’ve devoted three years of
my life to this project.” (Now dead.)
Now, many of those people are in prison and the hangover lingers on. Lying, cheating,
and stealing on all sides. From Enron to Arthur Andersen. Billions, if not trillions, into a

black hole. As all this developed I warned of the impending collapse in the John Magee
Investment Letters on the Web. There was nothing magic or brilliant about seeing what
was going on. Perspective and perception came from applying the lessons taught in this
book by Edwards and Magee. Like Benedict XVI (in a different area) I am a humble worker
in their vineyard.
I press on, attempting to modernize (where necessary) and extend their work, fit
it to the modern situation, and make it even more useful to current day traders and
investors.
In this ongoing labor of love I have been immeasurably assisted by my graduate students and colleagues at Golden Gate University in San Francisco. In constant interaction
with them I have been stimulated to see important aspects of Edwards and Magee’s work
and develop and emphasize these elements in my teaching and in this new edition.
Specifically, both long-term and short-term traders will fi nd important new material in this edition. In my graduate seminars I have seen the power of what Magee
called the “Basing Points Procedure” and so have extended the treatment of this material. My interest in and respect for Dow Theory have recently increased as the result of
a paper done with Brian Brooker for the Market Technicians Association (“Dissecting
Dow Theory”). Material from that paper will be found in this edition. Short-term traders and futures speculators will appreciate extensive new material on commodity trading. These traders have been entirely too influenced by mechanical number-driven
systems of recent years and need to restore perspective by mastering the material of
this book.
It was never the intent of this book to forecast or analyze current markets. Rather its
purpose was, and is, to learn from history and the past so as to be better able to deal with
the present and the future. Current markets are analyzed (and forecast?) at the John Magee
website. Nonetheless, the very process of keeping current involves picturing issues and
xix


xx

Preface to the ninth edition

instruments in play. The major indexes themselves in 2005 are in play, as are gold, silver,
and oil. We don’t know how they will pan out. But we can make an analysis with the data

we have. For this is the situation the analyst is faced with every day. He doesn’t know how
it will turn out. But by following the methods and principles taught in this book, he can
put himself on the right side of the probabilities.
This is no idle remark. The power and effectiveness of classical chart analysis can
be seen by examining how it performed in the past at critical times. At the John Magee
Technical Analysis website the following comment was made in January 2000:
Dow: The Dow can expect to find support at 10000 and is buyable,
but in small commitments or portions of a portfolio or additions
thereto. We expect to see it in a very large see saw from 9-12000 for
some time and would hedge at the high end and increase commitments and lift hedges on oversold conditions at the low end.
In November 2000 the following comment was made:
November 18, 2000
There is really only one chart pattern of significance in these
markets, and that is the big one, more than 12 months long now,
and the pattern is a big serpent, whipping back and forth, and as
Shakespeare said, signifying nothing. Nothing that is but more of
the same. How will we know when it signifies something? Well we
won’t really know till we know, but we’ll let you know when we
know. So we would continue to pick likely shorts and employ short
term trading strategies for traders, and hedge at interim tops and lift
the hedges at bottoms. Based on the chart picture and last week’s
anemic behavior we would not trade for bounces in the NASDAQ. If
anything it is a short, but a risky one.
These past letters dramatically illustrating the effectiveness of the methods of this
book may be found online through links at the address specified below. Your editor, personally, is not a genius for having made these analyses. It is the method which is to credit,
and any number of my graduate students can make the same analyses, as can any alert
chart analyst.
The reader should not skip the prefatory material to the eighth edition. The same practices outlined there have been followed in this edition. Magee said the reader should not
skim through this book and put it on his library shelf. Instead it should be read and reread
and constantly referred to. And so the reader should, yes, so he should.

Richard Russell, the dean of Dow Theory Analysts, has reportedly said that the price
of the Dow and the price of gold will cross in coming years. He has also remarked that
the S&P appears to evince a 10-year head-and-shoulders pattern. Robert Prechter believes
we are at the crest of the tidal wave and the tsunami cometh.
Dow 36,000. Dow 3,000. This book contains the best tools to cope with whatever the
future holds.
W. H. C. Bassetti
San Francisco, California
May 1, 2005


Preface to the ninth edition

xxi

A special note concerning resources on the Web
In the age of instant and easy (and free) access to information on the Internet, it would be
foolish to ignore the opportunities available to interact with the material of this book. So
the reader will find free materials that augment the book at ards-magee.
com. For example, when the reader learns in Chapter 28 of the Basing Points Procedure,
he will be able to go to the website and print out a PDF of material that he can place beside
Figure 28.2 for instant and easy cross-reference, instead of having to turn pages constantly
back and forth from the chart to the keys and commentary, or having to bend the book
into pretzels at a copy machine. In general, wherever references are made in the text to the
website, it is for this purpose, to give the reader easy and flexible usage of the material.
And, likewise, at this address the reader will find links to past letters that show how the
method functioned in real time in real markets.

A special note about Dow Theory
Senator Everett Dirkson said one time that trying to get U.S. senators herded together and

moving in one direction was like trying to transport bullfrogs in a wheelbarrow. Trying
to synchronize the signals of the various Dow Theory analysts is a similarly challenging
proposition. No Ayatollah exists to issue the final fatwa as to whether the signal is valid.
Always one to abhor a vacuum, I have organized a committee at Golden Gate University
to evaluate pronouncements of signals and opine as to whether the signals are valid. This
committee died an unnatural death, unfortunately, for lack of demand as to its expertise.

Acknowledgments for the ninth edition
For professional assistance: Jack Schannep, Robert W. Colby, Curtis Faith, Greg Morris,
John Murphy, Tim Knight, and Chi Huang.
For assistance at Taylor & Francis: Richard O’Hanley, Raymond O’Connell, Pat
Roberson, Andrea Demby, and Roy Barnhill.
For research assistance and manuscript preparation: Brian Brooker and Grace Ryan,
my fearsomely bright and efficient teaching and research assistants. And my inimitable
technical assistant, Samuel W. D. Bassetti.
At Golden Gate University for ongoing support and assistance: Professor Henry Pruden,
Barbara Karlin, Janice Carter, Tracy Weed, and Cassandra Dilosa.
Special appreciation goes to makers of software packages and their supportive executives for software used in the preparation of this and previous editions.
John Slauson
Adaptick
1082 East 8175 South
Sandy, UT 84094

Steven Hill
AIQ Systems
P.O. Box 7530
Incline Village, NV 89452
702-831-2999




xxii
Alan McNichol
Metastock
Equis International, Inc.
3950 S. 700 East, Suite 100
Salt Lake City, UT 84107


Preface to the ninth edition


Preface to the eighth edition
Here is a strange event. A book written in the mid-20th century retains its relevancy and
importance to the present day. In fact, Technical Analysis of Stock Trends remains the definitive book on the subject of analyzing the stock market with charts. Knockoffs, look-alikes,
pale imitations have proliferated in its wake like seagulls after a productive fishing boat.
But the truth is they have added nothing new to the body of knowledge Edwards and
Magee originally produced and Magee refined up to the fifth edition.
What accounts for this rare occasion of a book’s passing to be a classic? To be more, in
fact, than a classic, to be the manual or handbook for current usage?
To answer this question we must ask another. What are chart formations? Chart formations identified and analyzed by the authors are graphic representations of unchanging
human behavior in complex multivariate situations.
They are the depiction of multifarious human actions bearing on a single variable
(price). On price converges a galaxy of influences: fear, greed, desire, cunning, malice, deceit,
naiveté, earnings estimates, broker need for income, gullibility, professional money managers’ need for performance and job security, supply and demand of stocks, monetary liquidity
and money flow, self-destructiveness, passivity, trap setting, manipulation, blind arrogance,
conspiracy and fraud and double dealing, phases of the moon and sunspots, economic cycles
and beliefs about them, public mood, and the indomitable human need to be right.
Chart formations are the language of the market, telling us that this stock is in its death
throes; that stock is on a rocket to the moon; that a life and death battle is being waged in

this issue; and in that other, the buyers have defeated the sellers and are breaking away.
They are, in short, the inerasable fingerprints of human nature made graphic in the
greatest struggle, next to war, in human experience.
As Freud mapped the human psyche, so have Edwards and Magee mapped the human
mind and emotions as expressed in the financial markets. Not only did they produce a
definitive map, they also produced a methodology for interpreting and profiting from the
behavior of men and markets. It is difficult to imagine further progress in this area until
the science of artificial intelligence, aided by yet unimaginable computer hardware, makes
new breakthroughs.

If it is definitive, why offer a new edition?
Unlike Nostradamus and Jules Verne (and many current investment advisors), the authors
did not have a crystal ball or a time machine. Magee did not foresee the electronic calculator and made do with a slide rule. And while he knew of the computer, he did not anticipate
that every housewife and investor would have 1,000 times the power of a Whirlwind or
Univac I on his (her) desk (see “About Gender”). In short, the March of Time. The Progress
of Science. The Inexorable Advance of Technology.
xxiii


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Preface to the eighth edition

Amazingly, the great majority of this book needed no update or actualization. Who is
to improve on the descriptions of chart formations and their significance?
But insofar as updates are necessary to reflect the changes in technology and in the
character and composition of the markets, that is another story. Human character may not
change, but in the new millennium, there is nothing but change in the character and composition of the markets. And while regulatory forces might not be completely in agreement,
the majority of these changes have been positive for the investor and the commercial user.
Of course, Barings Bank and some others are less than ecstatic with these developments.


An outline of the most important additions made to this book
to reflect changes in the times, technology, and markets
Generally speaking, these additions, annotations, and updates are intended to inform the
general reader of conditions of which he must be aware for investing success. In most cases,
because of the enormous amount of material, no attempt is made to be absolutely exhaustive in the treatment of these developments. Rather the effort is made to put changes and
new conditions in perspective and furnish the investor with the resources and proper
guide to pursue subjects at greater length if desired. In fact, an appendix has been provided, titled “Resources” (EN10: now Appendix B), to which the reader may turn when he
has mastered the material of the book proper.
The stubborn individualist may realize investment success with the use of this book alone
[and paper, pencil, ruler, and chart paper (see the section on TEKNIPLAT™ chart paper)].

Technology
In order to equip this book to serve as a handbook and guide for the markets of the new
millennium, certain material has been added to the text of the fifth and seventh editions.
Clearly the astounding advances in technology must be dealt with and put in the context
of the analytical methods and material of the original. To achieve success in the new, brave
world, an investor must be aware of and utilize electronic markets, the Internet, the microcomputer, wireless communications, and new exchanges offering every kind of exotica
imaginable.
The advanced investor should also be aware of and understand some of the developments in finance and investment theory and technology—the Black–Scholes Model,
Modern Portfolio Theory, Quantitative Analysis. Fortunately, all these will not be dealt
with here, because in truth one intelligent investor with a piece of chart paper and a pencil
and a quote source can deal with the markets, but that is another story we will explore
later in the book. Some of these germane subjects will be discussed sufficiently to put them
in perspective for the technical analyst, and then guides and resources will be pointed
out for continued study. My opinion is that the mastery of all these subjects is not wholly
necessary for effective investing at the private level. What need does the general investor
have for an understanding of the Cox–Ross–Rubinstein (CRR) options analysis model to
recognize trends? The Edwards–Magee model knows things about the market the CRR
model does not.


Trading and investment instruments
The new universe of available trading and investment instruments must be taken into
account. The authors would have been in paradise at the profusion of alternatives. In this