The Visual Investor: How to Spot Market Trends, 2nd Edition

Preface xv

Acknowledgments xix

Section One Introduction 1

What Has Changed? 1

Fund Categories 2

Global Funds 2

Investors Need to Be Better Informed 3

Benefits of Visual Investing 3

Structure of the Book 3

Chapter 1 What Is Visual Investing? 5

Why Market Analysis? 5

The Trend Is to Blend 6

What’s in a Name? 6

Why Study the Market? 7

Chartists Are Cheaters 7

It’s Always Just Supply and Demand 7

Charts Are Just Faster 8

Charts Do Look Ahead 8

Pictures Don’t Lie 9

Picture Anything You Want 9

The Market’s Always Right 9

It’s All About Trend 10

Isn’t the Past Always Prologue? 10

Timing Is Everything 13

Summary 13

Chapter 2 The Trend Is Your Friend 15

What Is a Trend? 15

Support and Resistance Levels 18

Role Reversal 18

Short Versus Long Term 25

Daily, Weekly, and Monthly Charts 28

Recent versus Distant Past 28

Trendlines 31

Channel Lines 34

Retracing Our Steps by One-Third, One-Half, and Two-Thirds 34

Weekly Reversals 38

Summary 38

Chapter 3 Pictures That Tell a Story 41

Chart Types 41

Time Choices 46

Scaling 46

Volume Analysis 50

Chart Patterns 52

Measuring Techniques 61

Even the Fed Is Charting 65

The Triangle 65

Point-and-Figure Charts 66

Chart Pattern Recognition Software 70

Section Two Indicators 73

Chapter 4 Your Best Friend in a Trend 75

Two Classes of Indicators 75

The Moving Average 76

The Simple Average 76

Weighting the Average or Smoothing It? 77

Moving Average Lengths 77

Moving Average Combinations 78

Summary 95

Chapter 5 Is It Overbought or Oversold? 97

Measuring Overbought and Oversold Conditions 97

Divergences 97

Momentum 99

Welles Wilder’s Relative Strength Index 100

The Stochastics Oscillator 110

Combine RSI and Stochastics 113

Summary 119

Chapter 6 How to Have the Best of Both Worlds 121

MACD Construction 121

MACD as Trend-Following Indicator 123

MACD as an Oscillator 123

MACD Divergences 125

How to Blend Daily and Weekly Signals 125

How to Make MACD Even Better—The Histogram 128

Be Sure to Watch Monthly Signals 130

How to Know Which Indicators to Use 130

The Average Directional Movement (ADX) Line 133

Summary 135

Section Three Linkage 137

Chapter 7 Market Linkage 139

The Asset Allocation Process 140

The Relative Strength Ratio 142

2002 Shift from Paper to Hard Assets 142

Commodity/Bond Ratio also Turned up 144

Turns in the Bond/Stock Ratio 144

2007 Ratio Shifts Back to Bonds 147

Bonds Rise as Stocks Fall 147

Falling U.S. Rates Hurt the Dollar 147

Falling Dollar Pushes Gold to Record High 150

Commodity-Related Stocks 153

Foreign Stocks Are Linked to the Dollar 153

Commodity Exporters Get Bigger Boost 156

Global Decoupling Is a Myth 156

Rising Yen Threatens Global Stocks 158

Review of 2004 Intermarket Book 159

Summary 161

Chapter 8 Market Breadth 163

Measuring Market Breadth with NYSE AD Line 163

NYSE AD Line Violates Moving Average Lines 164

Advance-Decline Shows Negative Divergence 164

Where the Negative Divergences Were Located 166

Retail Stocks Start to Underperform During 2007 169

Retailers and Homebuilders Were Linked 171

Consumers are also Squeezed by Rising Oil 173

Dow Theory 173

Transports Don’t Confirm Industrial High 175

Percent of NYSE Stocks above 200-Day Average 175

NYSE Bullish Percent Index 179

Point-and-Figure Version of BPI 181

Summary 182

Chapter 9 Relative Strength and Rotation 183

Uses of Relative Strength 183

Top-Down Analysis 186

Relative Strength versus Absolute Performance 187

Using Relative Strength between Stocks 190

Comparing Gold Stocks to Gold 190

How to Spot New Market Leaders 193

Where the Money Came from 193

Spotting Rotation Back into Large Caps 196

Trend Changes Are Easy to Spot 198

Rotation within Market Sectors 198

Chinese Stocks Lose Leadership Role 200

Summary 202

Section Four Mutual Funds and Exchange Traded Funds 205

Chapter 10 Sectors and Industry Groups 207

Difference between Sectors and Industry Groups 208

Performance Charts 209

Sector Carpets 211

Using Market Carpet to Find Stock Leaders 212

Industry Group Leader 213

Sector Trends Need to Be Monitored 214

Information on Sectors and Industry Groups 214

Spotting Natural Gas Leadership 215

Natural Gas Components 215

CBOE Volatility (VIX) Index 217

Summary 221

Chapter 11 Mutual Funds 227

What Works on Mutual Funds 227

Open- versus Closed-End Funds 228

Charting Adjustments on Open-End Funds 228

Blending Fundamental and Technical Data 229

Relative Strength Analysis 229

Traditional and Nontraditional Mutual Funds 229

Keep It Simple 230

200-Day Moving Average and Housing 230

Natural Gas Breakout 232

Consumer Discretionary Breakdown 232

Bear Crossing Sinks Chips 235

Negative ROC Hurts Technology 235

Consumer Staples Hold Up Okay 235

Retail Ratio Plunges 235

Energizing a Portfolio 240

Latin America Leads 240

Real Estate Is Global 240

Profunds Rising Rates Fund 244

Profunds Falling U.S. Dollar Fund 244

Commodity Mutual Funds 247

Inverse Stock Funds 247

Summary 250

Chapter 12 Exchange-Traded Funds 251

ETFs versus Mutual Funds 252

Using ETFs to Hedge 253

Using a Bear ETF 253

Trading the Nasdaq 100 255

Using Sector ETFs 258

Inverse Sector ETFs 260

Using Technology as a Market Indicator 260

Commodity ETFs 263

Foreign Currency ETFs 263

Bond ETFs 267

International ETFs 269

Summary 275

Conclusion 279

Why It’s Called Visual Investing 279

The Media Will Always Tell You Why Later 279

Media Views Keep Shifting 280

Visual Analysis Is More User Friendly 280

Keep It Simple 280

Visual Tools Are Universal 281

The Stock Market Leads the Economy 281

Prices Lead the Fundamentals 282

Sector Investing 282

Exchange-Traded Funds 283

A Year After the 2007 Top 283

Warning Signs were Clearly Visible 284

Appendix A Getting Started 285

Find a Good Web Site 285

Use the Readers Choice Awards 285

StockCharts.com 286

Chart School 286

Online Bookstore 287

Investor’s Business Daily 288

Stock Scans 288

Bullish Percent Indexes 289

DecisionPoint.com 294

McClellan Breadth Indicators 294

Appendix B Japanese Candlesticks 295

Candlestick Patterns 297

Bullish Engulfing Pattern 298

Stock Scan Candlestick Patterns 300

Recommended Reading 300

Appendix C Point-and-Figure Charting 301

Triple and Quadruple Signals 302

How to Vary P&F Charts for Sensitivity 304

There’s No Doubt about P&F Signals 305

Recommended Reading 306

Index 307