WIXLIB

High performance bullish support linesUse on high risk, speculative stocksSlope is 50% steeper than 45 degree bullish support lineHPBSL - Example 145-degree bullishsupport line - Slope 1High performancebullish support lineSlope 1.5The high performance bullish support line rises at a rate 50%faster than the 45-degree bullish support line. The steeper slope isused to require a higher measure of excess return to compensatefor stocks with higher volatility (i.e. risk).W. Clay Allen CFAPage 242/11/01

HPBSL - Example 2High performancebullish support lineCSCO has been one of the best performers in the recent bullmarket. This chart shows the effects of a stock split inreducing the historic volatility of a relative strength chart.As the stock fluctuated before the stock split the volatilitywas much greater on these charts than the current chartdepicts. It is a function of scaling.W. Clay Allen CFAPage 252/11/01

HPBSL - Example 3Note: The average length of a columnof Xs or Os is an indicator of thevolatility of this stock. The volatilitytended to pick up dramatically right atthe top and the extreme variabilitycontinued as the stock made a broadtop and completed a major reversal.The ensuing decline was dramatic.High performancebullish support lineW. Clay Allen CFAPage 262/11/01

HPBSL – example 4This long-term advance wasvery orderly and neverseriously threatened theHPBSL.High performancebullish support lineW. Clay Allen CFAPage 272/11/01

HPBSL – example 5Usually stocks with averagevolatility will consolidate forat least ten columns as theycomplete a top and reversetrend.High performancebullish support lineW. Clay Allen CFAPage 282/11/01

HPBSL – example 6False bearishsignalHigh performancebullish support lineW. Clay Allen CFAPage 292/11/01

HPBSL – example 7Very rapid reversal of trendafter a major bull moveHigh performancebullish support lineHigh performancebullish support lineW. Clay Allen CFAPage 302/11/01

HPBSL – example 8Almost no consolidationoccurred at the top forthis stockHigh performancebullish support lineW. Clay Allen CFAPage 312/11/01

HPBSL – example 9The downside penetration of aHPBSL is almost always a seriouswarning that the trend is reversingdirection.High performancebullish support lineW. Clay Allen CFAPage 322/11/01

HPBSL – example 10Triplebottom sellsignalA triple bottom sell signal wasgiven as this stock made itstop. This was the first triplebottom sell signal givenduring the bull move and itwas a good tip-off thatsomething was going wrong.High performancebullish support lineW. Clay Allen CFAPage 332/11/01

Support and resistanceResistanceSupportA study of the distribution of the returns from common stocks suggeststhat most stocks are in a trading range most of the time (i.e. 20% in thenegative tail, 20% in the positive tail and 60% in the narrow middle of thedistribution)The trending stocks are in the two tails and the balance is moving back andforth with the market.In the absence of an upside breakout the shares of most major, maturecompanies should be sold as they approach the high end of the historictrading range. This is also a good reason why the relative strength pointand figure charts need to be long-term in perspective.Trading ranges are very common on the relative strength point and figurecharts.W. Clay Allen CFAPage 342/11/01

Resistance below the bearish resistance lineBearish resistance lineResistanceThis example shows a rally back up intoan historic resistance level that was alsobelow the 45-degree bearish resistanceline. The combination of the tworesistance levels turned the stock downand the relative strength broke sharply.W. Clay Allen CFAPage 352/11/01

Trading ranges – example 1ResistanceSupportIt is usually best to wait for the stock to show signs of basing at thelower end of the trading range.In my opinion it is always much easier for a stock to breakoutdownward through trading range support than it is to breakout to theupside through resistance at the high end of the trading range.The more times the support and resistance zones are “honored’ by thestock the more important they become.W. Clay Allen CFAPage 362/11/01

Trading ranges – example 2ResistanceSupportThis is clear example of a stock that has been completelycontrolled by its historic trading range for the past twoyears.W. Clay Allen CFAPage 372/11/01

Trading ranges – example 3ResistanceSupportBullish support lineA trading range is an extended period of consolidation. Ifit occurs after a major bull market in a stock it mayactually represent a major top and reversal of trend. It istoo early to tell on this stock but that scenario couldactually prove out in this instance.W. Clay Allen CFAPage 382/11/01

Trading range – example 4ResistanceSupportThis is an example of a trading range that isextremely “tight”. Stocks like this are often usedas a safe-haven during market turbulence!W. Clay Allen CFAPage 392/11/01

ChannelsLong-term up channelsThe upper channel line isa bullish support linedrawn from a prominenthigh point on the chart.Bullish support lineThe stock broke out with a triple top buyas it moved above the bearish resistanceline. The base was about ten columnswide. The breakout column ran morethan ten Xs straight up.W. Clay Allen CFAPage 402/11/01

Long-term down channelsThe channel is constructed using twoparallel downward sloping bearishresistance lines.Bearish support lineBearish resistance lineThis is an example of along-term down channel. Ithas been in effect for overfour years. Bargainhunting in stocks like thisis usually verydangereous.W. Clay Allen CFAPage 412/11/01

Major long-term trendsMajor long-term up-trends – example 1Column with ten Xs upHigh performancebullish support lineStocks that start to move up dramatically on the relative strengthcharts like this will appear on the Market Dynamics one-month high RSscreen, the triple top buy signals screen and often on the ten box upscreen. The increasing relative strength is an indication they aremoving out into the positive tail of the distribution. They should havebroken out above almost all-historic resistance and the up trendshould be accelerating. Trend following tools work best on stocks likethis. These stocks have the potential to become big winners. They areeasily identified early in their moves with the screens supplied byMarket Dynamics.W. Clay Allen CFAPage 422/11/01

Major long-term uptrends – example 2This move ended with a majortop and a downside break ofthe HPBSL. The signs oftrouble were hard to miss onthis stock.High performancebullish support lineW. Clay Allen CFAPage 432/11/01

Major long-term uptrends – example 3Very steep naturaluptrend linesTrendlines that getsteeper and steeperare suggesting ablow-off. Thesesituations areusually best soldinto the strengthsince the top willalmost certainly givelittle warning.The rule of nine newhigh columns can beused to estimate theend of the rise.W. Clay Allen CFAPage 442/11/01

Major long-term uptrends – example 4Relative strength rankingsystems will usually rank a stocklike this in the very highest ranksat the very top of the move andeven after the stock has turneddown. The extreme nature of theupmove will still generate veryhigh relative strength ranks wellafter the top is in.In my opinion, it is far better touse relative strength trendfollowing techniques because ofthis inherent weakness of longterm relative strength rankingsystems.High performancebullish support lineW. Clay Allen CFAPage 452/11/01

Major long-term uptrends – example 5Bullish support lineThe top on this stock took quite a few columns tocomplete. The HPBSL acted as support for a fewcolumns and then the stock broke the HPBSLcompleting the reversal.W. Clay Allen CFAPage 462/11/01

Major long-term uptrends – example 6It is always easier to deal with a blow-off inhindsight!The steepening of the upward trendlinessuggested the blow-off as it occurred. It isbest to get out early on situations like this.Use the rule of nine new high columns toestimate the peak.Very steep naturaluptrend lineThis is anotherexample of thedangers inherent inlong-term relativestrength rankingsystems. The reversalis so fast that theportfolio managergets bagged beforethe ranks declineenough to indicatetrouble.In my opinion, longterm ranking systemsrequire the use of astop-loss disciplinethat most portfoliomanagers refuse touse.W. Clay Allen CFAPage 472/11/01

Major long-term uptrends – example 7Very steep naturaluptrend linesThese are examples of stocks that experience wild swings in bothdirections. Since stocks like this are almost always extremelyspeculative we must be willing to leave the party on “short notice”.The violation of an extremely steep up trend line is a “good enough”reason to step aside on a stock like this.W. Clay Allen CFAPage 482/11/01

Major long-term uptrends – example 8A triple bottom sell signalafter a big move is a verygood reason to sell.Very steep naturaluptrend lineA stock like this is like a bull rider at therodeo – if you can “stay on” for 8seconds you can really make the points.You don’t want to have to stay on thisbull one second longer than it takes towin.W. Clay Allen CFAPage 492/11/01

Major long-term uptrends – example 9Bearish resistance lineHigh performancebullish support lineW. Clay Allen CFAPage 502/11/01

Major long-term uptrends – example 10Bearish resistance lineHigh performancebullish support lineW. Clay Allen CFAPage 512/11/01

Major long-term down-trends – example 1Bearish resistance lineThe bullish support linefailed with a triple bottomsell signal at column 8.The stock never seriouslychallenged the bearishresistance line for the nexttwo years.This stock experienced repeatedfailures of short-term bullish supportlines as it declinedW. Clay Allen CFAPage 522/11/01

Major long-term down-trends – example 2Major topBearish resistance lineA triple bottom sell signalwas registered as supportfailed. The stock hadtraced out a majorcongestion zone betweenA and C for over a year.Many investors judged thisstock to be “too” cheap allthe way down!W. Clay Allen CFAPage 532/11/01

Major long-term down-trends – example 3Bearish resistance lineMajor topThis is another example of a majorcongestion zone that proved to be amajor top and then a long-termdecline. In Dollar terms this was adrop from almost 60 to 5. Duringthe topping process several bullishsupport lines failed to support thestock suggesting the approachingweakness.W. Clay Allen CFAPage 542/11/01

Natural trendlinesShould be defined by touching the RS plot at least three timesUser decides if natural trend line takes precedence over 45 degree lines.Natural upward trendlineA natural trend line is defined by the action of the stock itself. Anatural trend line is not required to be drawn at any predefinedslope. In my opinion it should touch the relative strength plot inat least three places to draw the trend line.The user can decide which is more important - a natural trendline or a 45-degree line.In my experience, an extremely steep natural trend line does notremain unbroken for very long and is usually associated with ahighly risky – volatile stock.I do not believe that it is wise to compromise performancestandards because of a shallow natural trend line.W. Clay Allen CFAPage 552/11/01

Natural trendlineDowntrendNatural downward trendlineConnecting only two points on the chart can draw atentative natural trend line.This tentative natural trendline began at (A, 1) and wasextended through (C, 5) and later through (E, 9). It was inplace for several years but it should have been classifiedas a tentative natural trend line during the first year anda half (i.e. late ’96 to late 97).In my opinion a tentative natural trend line is not asimportant and should not be given as much weight in theanalysis as a fully defined natural trend line.W. Clay Allen CFAPage 562/11/01

Major reversal patternsMajor tops – example 1MAJOR TOPW. Clay Allen CFAThis top took two years to form and showeda pattern of lower highs with a downwardtrend line. When the support at D failed thestock moved down sharply.The top essentially shows a balancebetween demand and supply. Thebreakdown shows that supply won thebattle.Experience has shown that if a stock is helduntil the deterioration in the fundamentalshas been publicly acknowledged the stockhas already completed much of its decline.In my opinion the bad news leaks into themarket and investors will act on thisanticipation ahead of the actualannouncements. The stock market alwaysacts in anticipation of expected events andnews.Page 572/11/01

Major tops – example 2Major topBearish resistance lineThis example shows a top almost 20 columns wide. The width of the top inmany ways forecasts the extent of the decline.The decline started with a triple bottom sell signal but shortly thereafter - anegative news item caused a dramatic one-day plunge in the stock.The stock has recently started to base but it remains far below the bearishresistance line.Experience indicates that the “sell” decision is more heavily weighted towardthe technical method of analysis. Invariably the tip-off is a stock withapparently great fundamentals that consistently acts poorly on the relativestrength charts. You can assume there is a good reason behind the poorperformance. Rarely is it just an accident or purely a coincidence.W. Clay Allen CFAPage 582/11/01

Major tops – example 3Major topBearish resistance lineBullish support lineNatural trendlineThis is an example of a major top in a Dow JonesIndustrial Average stock. The stock fell sharplyaway from the top. Throughout ’99 the stockappeared to be basing but this turned out to be aledge and the stock broke to new relative strengthlows. The 45-degree bearish resistance lineconfined the stock to a downtrend during theentire decline.W. Clay Allen CFAPage 592/11/01

Major bases – example 1Bearish resistance lineBullish support lineMAJOR BASEThe completion of the major base is signaled when thedownward sloping bearish resistance line is exceeded. Thewidth of the base must match the extent of the prior decline inorder to go above the 45-degree bearish resistance line. This is avery practical rule that precludes premature entry into a stockprior to the completion of a sufficient base.W. Clay Allen CFAPage 602/11/01

Major bases – example 2Bearish resistance lineMAJOR BASEThis stock has formed a major base and has broken out abovethe 45-degree bearish resistance line. It is still early in themove so we can’t know whether it will follow-through or not butthe pattern looks promising.W. Clay Allen CFAPage 612/11/01

Major bases – example 3Bearish resistance lineMAJOR BASEA major base has taken over a year to complete. The movewon’t be “for sure” until the relative strength can move abovethe recent resistance.W. Clay Allen CFAPage 622/11/01

BreakoutsBearish resistance lineNew bullish supportlineBearish support lineThis is an upside breakout above a consolidation thatwas almost 15 columns wide. The breakout clears allrecent resistance and should include breaking abovea downward bearish resistance line. A new bullishsupport line can be drawn after the breakout.W. Clay Allen CFAPage 632/11/01

Tenboxup screen #1Bearish resistance line10 Xs upMajor moves often start with a “bang”. The tenboxup screen isprovided to call attention to those stocks that have moved straightup relative to the market. In my opinion, the more attractive patternsare those that show a big move up from a broad base. Severalexamples follow.W. Clay Allen CFAPage 642/11/01

Tenboxup screen #2Bearish resistance line10 Xs upW. Clay Allen CFAPage 652/11/01

Tenboxup screen #3Bearish resistance lineThis movestarted with acolumn of Xsstraight up.10 Xs upBearish support lineW. Clay Allen CFAPage 662/11/01

Tenboxup screen #4Bearish resistance line10 Xs upBullish support lineW. Clay Allen CFAPage 672/11/01

Tenboxup screen #5Bearish resistance line10 Xs upBullish support lineW. Clay Allen CFAPage 682/11/01

Tenboxup screen #6Bearish resistance line10 Xs upHigh performancebullish support lineW. Clay Allen CFAPage 692/11/01

Tenboxup screen #7Bearish resistance line10 Xs upBullish support lineW. Clay Allen CFAPage 702/11/01

Some thoughts about how the market worksNeed to revalue assets due to changing conditions – “Creativedestruction”45-degree bearish resistance lineThe process of change results in the needto revalue assets frequently. Schumpetersaid that progress is the result of aprocess he called “creative destruction”The free market produces winners andlosers. The data from the market helpsportfolio managers to identify and avoidlosers before it is too late. This processcan be expected to continue into the futureas long as markets exist.W. Clay Allen CFAPage 712/11/01

The difficulty in interpreting current events - Current events are not history tous – We don’t know what the consequences will be.Triple bottomsell signal45-degree bullish support linesIt is very easy- now that we know what happened – to say, “sure I would have soldthat stock on that triple bottom sell signal”The problem is that when we see the signal we really can’t know whether it will followthrough or not. We don’t know what the significance of the signal will be. In thisinstance the follow-through was immediate, dramatic and down.The stock market often demonstrates “non-linear” behavior in which small causesmay produce unexpectedly large results. This is often true of sell signals.In my opinion, every major sell signal that includes the penetration of a bullishsupport line should be treated as a danger signal with potentially seriousconsequences. I am referring to sell signals on current positions in the portfolio. Inorder to ensure the avoidance of major declines - all sell signals must be honored. Itis only when the market is in a state of deep distress that sell signals

box - point and figure method of charting is designed to filter out the minor movements and concentrate attention on the long-term major movements in relative price. The long-term movements are always more important than the short-term noise and this system is designed to take advantage of that characteristic behavior.