Encyclopedia Of Chart Patterns
On March 24, 2000, the financial world changed. No, that was not the date this book first hit the store shelves, but the beginning of a bear market that lasted 21⁄2 years.
Finally, I had bear market data to use for finding chart patterns! After spending nearly 5 years recovering from the work needed to complete the first edition, I decided to undertake an update.
I changed the editorial content of the book in small ways, but made substantial improvements in others. Here is the list of the important changes:
Bull and bear market statistics for complete coverage. Expanded statistics, all in a similar format: Results Snapshot, at the start of each chapter shows the most important numbers and surprises.
General statistics, including the average rise or decline, busted pattern performance, and benchmark performance. Failure rates, a list of ten breakpoints to show how often a pattern fails.
Breakout and post-breakout statistics, showing performance over the yearly price range, pullback rates, and performance after a gap. Frequency distribution of days to the ultimate high or low, showing when the trend is likely to end. Size statistics, describing how performance varies for pattern height, width, and combinations of both…
Introduction
Jim is struggling. He is the owner of JCB Superstores and his competitor across town is beating him up; there is blood all over Jim’s ledger. He decides it is time to take off the gloves: JCB goes public.
He uses the money from the initial public offering to buy his competitor and add a few more stores around town. With a growing sales base, Jim’s clout allows him to negotiate lower prices for the office supplies he is retailing.
He passes on part of the savings to his customers, while watching his margins widen, and plows the profits back into building more stores.
Jim calls his friend, Tom, and tells him of his plans to expand the operation
statewide. They chat for a while and exchange business tactics on how best
to manage the expansion.
When Tom gets off the phone, he decides to conduct his own research on JCB. He visits several stores and sees the same thing: packed parking lots, people bustling around with full shopping carts, and lines at the checkout counters.
He questions a few customers to get a sense of the demographics. At a few stores, he even chats with suppliers as they unload their wares. Back at the office, he does a thorough analysis of the financials and looks at the competition. Everything checks out so he orders his trading partners to buy the stock at no higher than 10.
When news of the expansion plan hits the wires, the Street panics. It is,
after all, a soft economy and expanding willy-nilly when a recession looms is daft, maybe even criminal, according to the pundits.
The stock drops below 10 and Tom’s crew makes its move. They buy as much as they can without raising suspicion. The stock rises anyway. It goes back up to 11, then 12, and rounds over at 13 before heading back down.
Several months go by and the economic outlook is as bleak as ever. The
stock eases down to 9. After Tom checks in with Jim for the latest public news, Tom’s team buys more.
It is an easy score because investors are willing to dump the stock, especially as year-end tax selling approaches. Six weeks later the company releases the sales numbers for JCB; they are better than expected.
The stock rises 15% in minutes and closes at 10.75. And that is just for starters. Six months later, it’s clear the economy was never in danger of entering a recession and everyone sees boom times ahead.
The stock hits 20. Years go by, the stock splits a few times, and the holiday season looms. Tom interviews a handful of customers leaving JCB Superstores and discovers that they are all complaining about the same thing: The advertised goods are not on the shelves.
Tom investigates further and discovers a massive distribution problem, right at the height of the selling season. JCB has overextended itself; the infrastructure is simply not there to support the addition of one new
store each week.
Tom realizes it is time to sell. He tells his trading department to dump
the stock immediately but for no less than 28.25. They liquidate about a third of their large holdings before driving the stock down below the minimum.
Since it is the holidays, everyone seems to be in a buying mood. Novice
investors jump in at what they consider a bargain price. The major brokerage houses climb aboard and tout the stock, but Tom knows better.
When the stock recovers to its old high, his trading partners sell the remainder of their holdings. The stock tops out and rounds over.
During the next month and a half, the stock drifts down, slowly, casually. There does not appear to be a rush for the exits—just a slow trickle as the smart money quietly folds up shop.
Then news of poor holiday sales leaks out. There is a rumor about distribution problems, merchandising mistakes, and cash flow problems. Brokerage firms that only weeks before were touting the stock now advise their clients to sell. The stock plummets 39% overnight.
One or two analysts say the stock is oversold; it is a bargain and investors should add to their positions. Many bottom fishers follow their brokers’ recommendation and buy the stock. Big mistake.
The buying enthusiasm pushes the price up briefly before a new round of selling takes hold. Each day the stock drops a bit lower, nibbling away like waves washing against a castle of sand.
In 2 months’ time, the stock is down another 30%. The following quarter JCB Superstores announces that earnings will likely come in well below consensus estimates.
The stock drops another 15%. The company is trying to correct the distribution problem, but it is not something easily fixed. It decides to stop expanding and to concentrate on the profitability of its existing store base.
Two years later, Tom pulls up the stock chart. The dog has been flat for so long it looks as if its heartbeat has stopped. He calls Jim and chats about the outlook for JCB Superstores.
Jim gushes enthusiastically about a new retailing concept called the Internet. He is excited about the opportunity to sell office supplies online without the need for bricks and mortar.
There is some risk because the online community is in its infancy, but Jim predicts it will expand quickly. Tom is impressed, so he starts doing his homework and is soon buying the stock again…
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