WIXLIB

www.mta.orgTe c h n i c a l l yS p e a k i n gJOHN MAGEEBy George A. Schade, Jr., CMTThis article was originally published in“Technically Speaking” in April 2005 and isbeing reprinted this month as part of our focus onEdwards & Magee.John Magee is one of the most well knownnames in the field of technical analysis and isviewed as the leading authority on classicalcharting. All chart readers know the phrase“Edwards and Magee,” and John Magee isrightfully famous as the coauthor of TechnicalAnalysis of Stock Trends, originally published in1948.Magee graduated from MIT in 1923 and workedin a variety of sales and marketing jobs, includinga position as a Fuller Brush salesman, until hemet Robert D. Edwards in 1942. Edwards was thebrother-in-law of Richard W. Schabacker, a Forbesfinancial editor in the 1920’s and later a New YorkTimes financial columnist. When Schabackerdied in 1935, Edwards took over Schabacker’spapers and the operation of the SchabackerInstitute. In 1941, Edwards moved to Springfield,Massachusetts, where Magee joined him the nextyear.Schabacker was the first to apply chartingmethods to individual stocks and not just themarket indexes. Schabacker was Edwards’ andMagee’s intellectual mentor. Between 1930 and1934, Schabacker had written three books. The1930 classic, Stock Market Theory and Practice, devoted 250 out of nearly 800 pages tocharting. The book was so highly regarded thatGraham and Dodd in their 1934 Security Analysisreferred readers to Schabacker’s 1930 book for anexplanation of charting, even though they saw novalue in “chart reading.”4Robert Edwardsstock on the NYSE and AMEX. He said, “Chartsare the working tools of the technical analyst.” But,he understood the limits of his craft, “A chart isnot a perfect tool. It does not give all the answersquickly, easily and positively.” His understandingof the imperfect nature of charting could haveresulted from his personal trading experience:“Frankly, I haven’t done as well with my owninvestments, over the long haul, as I have with myrecommendations to clients, but that’s because ofa shaky beginning.”In the early 1940’s, he had lost 25,000 in themarket.Magee’s work focused on four basic and usefultypes of chart analysis:1. Area patterns or formations of pricefluctuations that indicate consolidation ofstrength or an impending reversal of theprice trend. Formations give “get in” and“get out” signals.2. Trend and trendline studies whichsupplement analysis of area patterns orformations because stock prices tend tomove in trends and once established, trendscontinue in force.John MageeEdwards and Magee added to Schabacker’smaterials and greatly expanded that work,leading to the 1948 book, today recognized as thedefinitive book on charting. Edwards’ andMagee’s book has two parts. Part I, TechnicalTheory, is based on Schabacker’s charting work,but Part II, Trading Tactics, is based on Magee’sstudies and personal trading experience. Part I isEdwards’ work. Part II is truly Magee’s work. Thispartnership lasted less than a decade beforeEdwards left in 1951 to become a high schoolscience teacher in South Carolina.Magee maintained daily charts on almost everyMay 20073. Support and resistance levels which showwhere a move is likely to slow down orend.4. Broad market studies such as DowTheory.Magee defined technical analysis as follows:“Technical analysis is the science ofrecording, usually in graphic form, the actualhistory of trading (price changes, volume oftransactions, etc.) in a certain stock or in thecontinued on page 5

Te c h n i c a l l yJohn Mageecontinued from page 4averages and then deducting from that picturehistory the probable future trend .[t]he real valueof a share of [a stock] is determined at any giventime solely, definitely and inexorably by supplyand demand, which are accurately reflected in thetransactions consummated on the floor of the NewYork Stock Exchange.”In Magee’s opinion, supply and demand, andnothing else, moved the market. His philosophywas, “I will not be swayed or panicked by newsflashes, rumors, tips or well-meant advice.” In1958, Magee told market historian John Brooks:“Before I came to work here, I was on myown, making my charts and operating in themarket out of an office where I had nothing buta table, a chair, a telephone, a ticker and an airconditioning machine. I sealed up the windowswith boards and putty, so there would be nooutside sights and sounds to distract me. I had nofundamental information at my disposal whatever,which left me free to make up my mind solely onthe basis of my charts.”He felt that the successful analyst should beconcerned with interpreting supply and demand,as shown in these two insightful quotes: “The technical analyst’s task is to interpretthe action of the market - the flux in supplyand demand mirrored in the market. In thiswork, it doesn’t in the least matter whatcreates the supply and demand. The fact oftheir existence and the balance betweenthem are all that count.” “What does this action really mean in termsof supply and demand?”Magee had a wall sign which read: “MY MINDIS MADE UP. DON’T CONFUSE ME WITH THEFACTS.” The facts were the “daily outpouring” offinancial news and announcements. Except for thedaily quotes, he only read two-week old Wall StreetJournals. When TV arrived, his motto became, “WeFollow the Tape Not the Tube.”In later editions of his books, Magee pointed outthat “the inherent nature of a competitive marketdoes not change very much over the years, and that‘the same old patterns’ of human behavior continueto produce much the same types of market trendsand fluctuations.”Magee enjoyed writing and teaching. Hewrote two other books, The General Semanticsof Wall Street and Wall Street - Main Street - AndYou. These books presented his market wisdomin a lighter, but educational, writing style. As forteaching, for eight years, Magee taught aninvestment course in the Springfieldadult-education program titled “The Semantics ofWall Street.”In December 1984, Magee attended the MTA’smonthly meeting.S p e a k i n gMagee’s contributions to the study of technicalanalysis were formally recognized by the MTAin 1978 when he was named the recipient of theprestigious Annual Award. He died in 1987, at theage of 86.This article is based upon research done byGeorge A. Schade, Jr., CMT. He can be reachedat aljschade@aol.comW. H. C. Bassettiwww.mta.orgloss points, since pattern failure points are easilyidentified.In early April, the charts of the US stock marketwere bullish. The market had easily overcomewhat Charles termed the “China Syndrome” at theend of February and were moving higher. Chartsreflect fundamentals, and he thinks many marketanalysts are ignoring the solid fundamentals inthe economy, noting that in addition to normalspending, the US government has been spending anadditional 10 billion per month to support the waron terror. At that time, stocks were trading belowthe highs of earlier this year, and above their lows- a breakout from that range would determine hisnext directional bias.By Mike Carr, CMTBefore reading the ninth edition of TechnicalAnalysis of Stock Trends, I asked myself what typeof person would take on the task of updating thebible of technical analysis? This daunting task wasaccepted by Charles Bassetti, a highly qualifiedtechnician who considered it an honor when thepublisher asked him if he would update the workof his mentor and friend, John Magee.Charles began trading in 1960. In his ownwords, he did ‘some stupid things’ in the market,before a colleague introduced him to the workof Edwards and Magee. By 1963, he became ofa client of Magee’s advisory service, and wasfortunate enough to be able to spend many hoursdiscussing chart patterns and trading tactics withMagee. Charles benefited from the expertise ofMagee even after Magee retired in the late 1970s,as their friendship continued until Magee’s deathin 1987.As a professional, Charles began tradingcommodity futures with computerized systemsin 1972 and has worked with many of thelargest firms in the industry. As President of OptionsResearch Inc., Charles had the opportunity to workwith Market Wizard Blair Hull. ORI was the firstcompany to computerize the analysis of optionsand futures. In 1997, he began editing the secondedition of Magee’s book, General Semantics ofWall Street for John Magee Inc. He was the editor/reviser/coauthor of the eighth edition of Edwards& Magee’s Technical Analysis of Stock Trends andnow the ninth edition. Charles was an instructorin the Finance Department at the University ofCalifornia Berkeley Extension School from 19962001, teaching Technical Analysis and Value atRisk analysis. Since 1999, he has also taughttechnical analysis as an Adjunct Professor ofFinance and Economics at Golden GateUniversity.When approaching the markets, Charlesfollows the charts and trades the markets, not hisopinion. He has seen that mechanical systems canbe very effective, but they can also “grind capital tohamburger.” Charts provide him with well-definedbuy and sell signals, or they tell him to do nothingand wait for a clear signal. As a skilled chart reader,each signal is always accompanied by clear stopMay 2007Charles believes that Magee’s concept ofbasing points is worth a great deal ofadditional study. This is one of the most significantcontributions he makes to the new edition,updating this section in the tactics to ensure that alltraders understand this method of stop placement.His example is clear, and the reader can instantlyimplement this technique, which Charles thinks ofas one of the most valuable in the book.Author Charles Bassetti demonstrating thedanger of betting against a bull market.At this time, he is completing an ebook onbasing points, which he calls Stair Stops andwhich should be available on his web site, www.edwards-magee.com/stairstops.html. He willthen add material to that work and publish it as atraditional book, confident that traders willappreciate how much this concept can add to theirprofits. He is also working on a book, Zen Simple:Beat the Market with a Ruler which should bepublished this summer.Readers of Technically Speaking can receive thebook free with a six-month subscription to Charles’newsletter which provides current examples of thepatterns described in the book. Details of this offerare at www.edwards-magee.com.5

www.mta.orgMeet the MTA StaffWhen you call the MTAHeadquarters in New YorkCity, chances are the firstperson who will answer thephone is Cassandra Townes.Cassandra joined us inJanuary 2003, and,along with handling ourreceptionist and office services matters, sheis primarily responsible for the following keyfunctions:Cassandra assists our Affiliates with theimportant accreditation process to become afull time Member of the MTA. As part of thatprocess she directs applicants to the requiredapplication documents, assists in the gatheringof required sponsorship recommendations andassists our Admissions Committee and theBoard in the administration of this process.She is also responsible for fulfilling allrequests for the MTA products, whether quizcards, practice exams or our collection ofDVDs. All materials are shipped immediatelyupon request.Cassandra is responsible for the oversightof the MTA library (now over 4,000 books intotal) which includes the cataloging of all bookspurchased/donated, and the fulfilling of allbooks ordered by our Members and Affiliates.Cassandra views the library as her own, andprotects it as if they were her children, whichis a good thing for us all.If you have any questions regarding theaccreditation process, our library assets, or ourproducts/services, please fee free to contactCassandra. She can be reached at 646-6523300 or by e-mail at Cassandra@mta.org.ExcelTradingModels.comOnline Courses and Tools toModel, Analyze, and Trade themarkets using Excel.Institutional and groupdiscounts available! ContactSales@ExcelTradingModels.com6Te c h n i c a l l yS p e a k i n gHOW THEY DO ITWILLIAM O’DONNELLTechnical AnalystUBS US Interest Rates Strategy GroupBy Molly SchillingUBS built their USA Headquarters inStamford, Connecticut – just 45 minutes bytrain out of New York City. The architecture isstunning – a contemporary design with huge 5 storywindows across the façade of the building, and aninterior stairscape that leads up to the fifth storyall in one sweep – landings on each floor. Abovethe fifth story of executive offices, you come up (byelevator and through intense security) to what lookslike an airplane hanger of wide open space witha four-story high ceiling complex of beautifullyinterwoven lighting and air-circulating equipment.This gigantic trading floor is built without columnsor interior supports – there is no interference witha view to every periphery of the room twinklingwith multicolored numbers and symbols. I met withBill O’Donnell at his computer in this very excitingenvironment William O’Donnell [WOD]: I’m WilliamO’Donnell -- I run the US Interest Rates StrategyGroup here in Stamford for UBS. In the beginningyears of my career, from 1980 to 1984 I helped tostart up a company called Technical Data, whichwas ultimately bought by Thomson Financials.They published a commentary that I contributedto during ‘82, ‘83 and ‘84 – a technical write-up– and that’s where I learned a lot about technicalanalysis. I carried those lessons into my career asa Strategist. I work with a wonderful team at UBSin the US Economics Department run by two senioreconomists.I’ve always felt that trends are driven byfundamentals, and that technicals are critical atturning points in the market. That’s why I love usinga blend of the two -- of technical and fundamentalanalysis -- to synthesize a market view. That’s whatwe do here in Strategy.Fundamental trends don’t change thatquickly -- technical trends do. Technicals –looking at support resistance levels, looking atmomentum, looking at position sentiment,over-bought and over-sold conditions -- helpus to read the “weather systems” that evolvecontinuously over a fundamental landscape.MS: What tools do you use mostfrequently?WOD: That’s an excellent question. If weremove ourselves from the fundamentals for amoment, what we use in technical analysis area couple of different things And I would startby saying that my training goes back to patternrecognition. And when I say pattern recognition useMay 2007two forms in particular: First, there is the “Edwardsand Magee pattern recognition” that goes back tothat great book, The Technical Analysis of StockTrends. I look for patterns such as rising wedges,ascending and descending wedges, and roundingbottoms and tops. I also look for formations suchas pendants and flags in the context of marketsand trends.Patterns and formations help me to identifywhere a consolidation is occurring, and whenmomentum gets overdone. Are we goingsideways in a flag? Do we correct slightly downwardin a bull trend, in a pendant? Is it a continuationpattern? They help me to know when the next legof a move is coming.The second form of pattern recognition Iuse is candlestick charts – I’m relatively new tocandlesticks. I’ve been watching them now forthe past five or six years. I trained with StevenNison’s well-known books on candlesticks,and I have found candlestick observation to beexcellent at turning points. I look for dark cloudcovers, evening stars, morning stars, hammers,among other patterns, to help identify changes andturning points.MS: What kind of charts do you look at?WOD: I typically look at daily charts, becauseI have to comment every day – or we commentevery day as a Strategy Team here at UBS. Myexperience has shown that traders, people on ourtrading desk, tend to use short term charts such as30 and 60 minute charts. They’re trying to definewhere the next few ticks are coming up. We tryto look at the bigger picture. We try to look in thecontext of the next week or two. And daily chartsseem to be the best fit for that. We like to know whatseason we’re in (in the market) – is it winter, is itsummer, is it spring? So we use the weekly charts totry to take a look at even a further step back – kindof like getting a feeling for the weather.MS: Could you explain your weatheranalogy?WOD: Absolutely. This is an analogy that Iuse with born and bred fundamentalists -- thosewho think technical analysts are shamans – it’s theanalogy of the fur trapper in northern climates. Thefur trapper has to know the fundamentals of his job.He has to know where his quarry lives. What theidiosyncrasies of his quarry are. In others words,where to set the trap, when to set the trap, what theylike to eat, and so on. That’s what I would call thefundamentals of fur trapping.But at the same time, the technicals of themarket are something like a weather system –whatis the weather out there – which way are the windsare blowing. What is the temperature, and how isit going to affect his production or yield – as wellas his own well-being. Is a storm coming? Basedon that, how much food do you take when you’recontinued on page 7

Te c h n i c a l l yHow They Do Itcontinued from page 6going out to set your traps, or to recover yourgame? What kind of protection, clothing -- thewhole thing. That’s where technical analysis Ithink has its fit.In the context of the fundamental nature of themarket, it helps to know which way the winds areblowing in the short term. It helps to discover howand when to enter and exit.For example, learning what today’s NonfarmPayroll number is (Friday, April 6) is not goingto tell you where to get in or out of the market-- technical analysis will. Today’s NonfarmPayroll number will not tell you how over-bought orover-sold the market is or which way people areleaning with respect to positions or sentiment.We’re talking about tools that I use – and on thatnote – about positions and sentiment -- part of ouranalysis is to look at positions or sentiment proxiesalong with forecasts for a given number. We keepa weather-eye out to the JP Morgan Survey, theStone and McCarthy Duration Survey.MS: A weather-eye?WOD: We keep a weather-eye out forposition proxies, well-known ones, the JP MorganSurvey which comes out on Tuesday; the Stoneand McCarthy Duration Survey of portfolios thatcomes out on Wednesday; the CFTC data whichis free, and defines speculative futures positions.We take the CFTC data and aggregate net specpositions in all the financial futures contracts. Theaggregated CFTC data has been an outstandingtool to help indicate potential turning points in themarket in past years. And it’s been a very, verygood tool at turning points – not all of them -- butmany of them.People tend to be too long at highs -- thereforeover-extrapolating economic weakness into thefuture. And at the same time, the crowd tends tobe too short and defensive at market lows. TheCFTC data along with other position proxies tendsto highlight this phenomenon.MS: Can you give me an examp

become an even stronger proponent of technical analysis in modern markets. About the authors: Robert D. Edwards and John Magee wrote the original edition of Technical Analysis of Stock Trends. Magee is considered the "father of technical analysis," while Edwards was a pioneer in pattern formation and trend analysis. W. H.