Litchfield Ryan - Candlestick charting explained: timeless techniques for trading stocks and futures

CANDLESTICK CHARTING EXPLAINED

Timeless Techniques for Trading Stocks and Futures

Third Edition

Gregory L. Morris

with Ryan Litchfield

Copyright 1992, 1995, 2006 by Gregory L. Morris. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-163217-1

MHID: 0-07-163217-4

The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-146154-2, MHID: 0-07-146154-X.

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, futures/securities trading, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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To Dusti, Grant, Derek, and Kane

I am a collector of first editions of books. My specialties include astronomy texts written before 1900, such as Percival Lowells classic Mars, the first published speculations about the possibility of life on the red planet (which inspired Jules Verne to write The War of the Worlds), and a strange little tome from 1852 that claims astronomer William Hershel spotted sheep on the Moon with his telescope.

My collection also includes about 200 business books written by authors I have interviewed through the years. My inscribed copy of Ivan Boeskys Merger Mania, for example was appraised a few years ago at $200.

But my sentimental favorite is a beat-up old chart book of the Dow Jones Industrials and Transportation Averages going back to December 18, 1896, the day the modern Dow Jones averages were born. (Trivia question: Where did the Dow Industrials close after its very first day of trading? Answer: 38.59). Back then, the Industrials only had 12 components, and the Transports, with 20 issues, were known as the Rails.

A 90-year-old FNN viewer from Virginia offered it to me in the fall of 1985.

I have been interested in, but not too active in, the market since the early 20s he wrote, and lived through the 29 break and the great depression which was a tempering influence against excessive enthusiasm.

At age 90 my activities are confined to growth stocks and safe investments. I am no longer interested in speculation. So he wondered if I would be interested in his chart book.

Indeed, I was. I gladly accepted in exchange for a signed copy of one of Joe Granvilles books.

The book was published in 1931 by Robert Rhea, the famed disciple of Charles Dow and of the oldest form of technical analysis, the Dow Theory. It covers the years 18961948, with each page devoted to one years trading of both averages.

It is one big, faded green rectangle, measuring 11 inches high and 18 inches across. Its heavy cardboard covers are held together by a couple of rusty screws.

I browse through it once in awhile, marveling at its simplicity. Each days closing value is designated by a single horizontal hash mark meticulously notched on the graph paper.

Nothing fancy. No intraday highs and lows, no trendlines, no points or figures, just a simple daily record of the debits and credits of civilization.

There is the market panic in December of 1899, when the Industrials plunged from 76 to 58 in just 13 trading days.

There is the period from July to December of 1914, when, incredibly, the market was closed on account of World War I. Eerily, half the page devoted to that year is blank.

And, of course, there is 1929, when the Industrial peaked on September 3 at 381.17 and hit a bottom, three pages later, in July of 1932 at 41.22.

The book means a lot to me. Between its covers there is a bit of history, some mathematics, a dose of economics, and a dash of psychology. It has taught me much about a discipline that I once considered voodoo.

Good journalists are supposed to maintain an open mind about the stories they cover. Political reporters, for example, should be neither Republican nor Democrat. And successful financial reporters should avoid being either bullish or bearish. And they should also be familiar with both fundamental and technical analysis.

I remember the first time I interviewed a technical market analyst in the fall of 1981, when I was still cutting my teeth on business news. This analyst spoke of 34-day and 54-week market cycles and head-and-shoulder bottoms and wedge formations. I thought it was so much mumbo-jumbo until the summer of 1982 when the bull market was launched, and the fundamental analysts were still bemoaning the depths of the recession that gripped the economy at the time. That was when I realized the technicians may have something there.