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THE INTRODUCTION TO THE
MAGEE
SYSTEM
OF TECHNICAL
A N A LY S I S
SL302X FM frame Page ii Wednesday, January 16, 2002 10:36 AM
THE INTRODUCTION TO THE
MAGEE
SYSTEM
OF TECHNICAL
A N A LY S I S
JOHN MAGEE
in a new edition by W.H.C. Bassetti
St. Lucie Press

Boca Raton London New York Washington, D.C.
A MACOM
American Management Association
New York • Atlanta • Boston • Kansas City • San Francisco
Washington, D.C. • Brussels • Mexico City • Tokyo • Toronto
SL302X FM frame Page iv Wednesday, January 16, 2002 10:36 AM
Library of Congress Cataloging-in-Publication Data
Catalog record is available from the Library of Congress
This book contains information obtained from authentic and highly regarded sources. Reprinted material
is quoted with permission, and sources are indicated. A wide variety of references are listed. Reasonable
efforts have been made to publish reliable data and information, but the author and the publisher cannot
assume responsibility for the validity of all materials or for the consequences of their use.
Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic
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Visit the CRC Press Web site at www.crcpress.com
© 2002 by CRC Press LLC

St. Lucie Press is an imprint of CRC Press LLC
No claim to original U.S. Government works

International Standard Book Number 1-57444-302-X
Printed in the United States of America 1 2 3 4 5 6 7 8 9 0
Printed on acid-free paper
SL302X FM frame Page v Wednesday, January 16, 2002 10:36 AM
AUTHORS
John Magee (1901–1987), a graduate of MIT and a leading expert on

technical analysis, was the founder of the well-known charting and advi-
sory firm of John Magee, Inc. Magee pioneered the concept of analyzing
the stock market from an engineering point of view and became known
as the Father of Technical Analysis. With Robert Edwards, he coauthored
the best selling book, Technical Analysis of Stock Trends. Now in its 8th
edition, it is considered the definitive work in the field and has more than
one million copies in print.
W. H. C. Bassetti, editor and co-author of this book and the 8th edition
of Technical Analysis of Stock Trends, is an honors graduate of Harvard.
His experience spans the modern history of the markets, beginning as a
student and client of John Magee in the 1960s through the electronic
markets of the present. He was formerly a principal in California’s first
licensed commodity advisor, CEO of Blair Hull’s Options Research, Inc.,
managing partner of a market maker, and president of an options arbitrage
manager. He is presently Adjunct Professor of Finance and Economics at
Golden Gate University, where he teaches technical analysis of stock
trends.
v
SL302X FM frame Page vi Wednesday, January 16, 2002 10:36 AM
SL302X FM frame Page vii Wednesday, January 16, 2002 10:36 AM
A SPECIAL
ACKNOWLEDGMENT
Anyone who has engaged in research on issues long dead knows what
a nightmare it is to pursue data on the New Haven, or astoundingly(!)
IBM before 1968. In fact, if IBM has digital data on its stock prices prior
to 1968, I was unable to find it within that corporation (or anywhere else).
On the other hand a veritable treasure trove of old data is kept at M.C.
Horsey and Company Inc., P.O. Box 2597, Salisbury, MD 21802. On hand-
kept ledger cards. M.C. Horsey publishes this data on very long-ter m
monthly charts in “The Stock Picture.” I am most indebted to them for
use of their IBM data and recommend them to seekers after wisdom and
truth who can’t find it in real time data.
Special appreciation goes to makers of software packages utilized in
preparation of this and previous editions:
AIQ Systems Metastock

P.O. Box 7530 Equis International, Inc.
Incline Village, NV 89452 3950 S. 700 East, Suite 100
702-831-2999 Salt Lake City, UT 84107
www.AIQ.com 800-882-3040
www.equis.com
TradeStation
Omega Research
14257 SW 119th Avenue
Miami, FL 33186
305-485-7599
www.tradestation.com
vii
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SL302X FM frame Page ix Wednesday, January 16, 2002 10:36 AM
ACKNOWLEDGMENTS
First of all, to that irrepressible Maine–iac and distinguished technical

analyst Richard McDermott; surfer of the markets, sometime president of
John Magee Inc., editor of the first edition of this book and delightful
raconteur.
To my invaluable research and editorial assistants, Don Carlos Bassetti y
Doyle and Don Pancho Samuelito Bassetti y Doyle who have contributed
significantly to this edition. Thanks for the Peaches. Also, the fish.
To my publisher at CRC Press, Drew Gierman and his production staff,
especially Pat Roberson, whose professionalism is exemplary, and Michele
Berman, who is an excellent, close reader.
To Blair Hull and his staff for generous and helpful support.
To Professor Hank Pruden of Golden Gate University for many favors
and kindnesses in the preparation of this and other books.
Members of the Market Technicians Association, especially Shelley, Ed
Polokoff, and Jon Knotts at Prophetfinance.com.
And as always, to that modest gentleman, tireless teacher, and master
of the craft, John Magee.
ix
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SL302X FM frame Page xi Wednesday, January 16, 2002 10:36 AM
FOREWORD
To the uninitiated the field of technical analysis presents an aspect of

scientific (or perhaps, pseudo scientific) complexity. If it is not stochastics,
it is Bollinger Bands or RSIs or ADXRs or some other jar gon-ridden
description. Either this is intimidating or it leads the neophyte to expect
that if he masters this mélange of tools he will magically, or scientifically,
achieve investment success. I regret to inform the reader immediately that
there is no Philosopher’s Stone.
In reality mathematical or statistical sophistication is not necessary to
practice technical analysis in the markets. Any number of little old ladies
with a ruler and chart have outperformed any number of Nobel Laureates.
This book is for those just beginning the study of technical analysis, or
those conducting a concise review. Its purpose is to initiate the newcomer
to technical analysis, to furnish him with sufficient background and knowl-
edge to practice as a beginning and moderately competent technical inves-
tor/trader. In addition, it lays out a clear methodology and “system” for
trading for the general mid- to long-term investor, and it also lays out a
plan of study and self-education for the initiated neophyte who wants a
more thorough and detailed mastery of advanced techniques and concepts.
Make no mistake — the intelligent application of technical analysis
cannot help but lead to long-term success in investing. But be warned:
success involves more than the static use of cookie-cutter principles. It
requires, in addition to an intelligent methodology and technique, the
ability to see markets clearly and accept immediate realities, and the
character and maturity to formulate a plan and then to stick with it when
it would appear doomed. Thus, there is not just a rational or consciously
intelligent side to investing and trading, there is also, perhaps more
important, a psychological, mental side. The best systems in the world
are of no use to the investor without the patience to see them through
and the discipline to implement them.
xi
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xii The Introduction to the Magee System of Technical Analysis
WHAT THIS BOOK DOES NOT DO

This book is not a blueprint to riches or infallible investment success.
Speaking in general, and speaking specifically, this book does not explain
in laborious detail statistical and number-driven systems. Nor does it go
into great detail on systems and methods of interest to short-term traders
(e.g., day trading methods). Options and futures are introduced but not
explored in detail. Background and perspective are offered on all of these
subjects and indications are given for more advanced study.
What this book will do is give the newcomer a thorough grasp of
chart-oriented technical analysis and the basics of investing following
technical methods. And it also offers basic perspective on other important
areas of technical analysis (e.g., number-driven techniques) if not advanced
detail. With this foundation, readers should be able to manage a general
investment portfolio with some confidence and competence. And they
should also be able to proceed to further study if they want to continue
to develop their capabilities and activities.
THE PLAN OF THE BOOK

This book opens with a concise statement of the principles and basics of
technical analysis by the most important master of the craft, John Magee.
He expounds on the history of technical analysis, on its most important
concepts, such as support/resistance and trends and the patterns that
occur over and over in all charts. Then the editor/co-author summarizes
and abstracts Magee’s work to prepare the reader for the continued study
of concepts and tools developed in large part after Magee practiced.
Included is material on Magee’s methods for managing portfolios and
controlling risk, including a description of his stop systems. To my knowl-
edge there are no better stop systems extant.
Then this book presents a brief survey of number-driven technical
methods, along with descriptions of Candlestick charting and Point and
Figure charting. Magee follows with a semantical discussion of his method,
calculated to give readers a rational confidence in the process.
PURPOSE OF THE BOOK

My intention is that the conscientious reader should emerge from the
book with a well-rounded grasp of Magee-type analysis and be able
profitably to manage a mid- to long-term investment portfolio — without,
of course, attempting anything fancy or clever.
Not to discriminate against the fancy and clever (that being my history),
racy traders will find here the indispensable perspective and foundation
SL302X FM frame Page xiii Wednesday, January 16, 2002 10:36 AM
Foreword xiii
on which to rest further studies. And the direction these studies should
take will be pointed out to them. Traders need to know the same thing
investors need to know. They also must know other things which the
investor will profit from knowing. Some of this is presented here.
To this end, this book includes appendices on Directed Further Study
as well as on Resources for all types of investors. Included also is material
on suggested trading plans for all different types of investors — plungers
to the somnolent.
EDITORIAL METHODS AND ORGANIZATION

OF THE BOOK
The basic material of this book was written by John Magee, some was
written by the redoubtable and distinguished technician Richard McDer-
mott, and the modernized parts were written by myself as Magee’s diligent
student. I consider my thought and methods to be essentially extensions
of what I learned from Magee, supplemented by experience with many
developments in statistics, markets, and technology. I have called these
various ideas about risk, portfolio, and trading systems Pragmatic Portfolio
Theory, as it seems to me that Magee was the essence of pragmatic. These
ideas are introduced and briefly covered here and should be sufficient
for the average general investor. The theory is more fully discussed in the
8th edition of Edwards and Magee’s classic work on the subject, Technical
Analysis of Stock Trends.
In view of the fact that this volume is a relaxed and informal presen-
tation of ideas more fully expressed in Edwards and Magee’s classic, I
have not been overly rigorous academically in the changes and additions
I have made to this book. Readers will, in general, readily distinguish my
work from Magee’s. I have used italics where I have directly intruded on
his text. I have also made moderate changes in the organization of Magee’s
text to fit a pedagogical plan I have found effective in teaching technical
analysis seminars at Golden Gate University and the University of Califor-
nia, Berkeley, Extension.
ABOUT GENDER
Female readers will note that the usage of “her system,” “she will,” and
so on does not appear in this book and perhaps think Magee and me
chauvinist pigs. Quite the contrary. I quote here from my foreword to the
2nd edition of Magee’s General Semantics of Wall Street (charmingly
renamed according to the current fashions, Winning the Mental Game on
Wall Street):
SL302X FM frame Page xiv Wednesday, January 16, 2002 10:36 AM
xiv The Introduction to the Magee System of Technical Analysis
“About Gender in Grammar
“Ich bin ein feminist. How could any modern man, son of a beloved
woman, husband of an adored woman and father of a joyful and
delightful daughter not be? I am also a traditionalist and purist in
matters of usage, grammar and style. So where does that leave me
and my cogenerationalists, enlightened literary (sigh) men (and
women) with regards to the use of the masculine pronoun when
used in the general sense to apply to the neuter situation?
“In Dictionary of Modern American Usage, Garner notes: ‘English

has a number of common-sex general words, such as person, anyone,
everyone, and no one, but it has no common-sex singular personal
pronouns. Instead we have he, she, and it. The traditional approach
has been to use the masculine pronouns he and him to cover all
persons, male and female alike. …The inadequacy of the English
language in this respect becomes apparent in many sentences in
which the generic masculine pronoun sits uneasily.’
“Inadequate or not it is preferable to s/he/it and other bastardizations

of the English language. (Is it not interesting that ‘bastard’ in common
usage is never used of a woman, even when she is illegitimate?) As
for the legitimacy of the usage of the masculine (actually neuter)
pronoun in the generic, I prefer to lean on Fowler, who says, ‘There
are three makeshifts: first as anybody can see for himself or herself;
second, as anybody can see for themselves; and third, as anybody
can see for himself. No one who can help it chooses the first; it is
correct, and is sometimes necessary, but it is so clumsy as to be
ridiculous except when explicitness is urgent, and it usually sounds
like a bit of pedantic humor. The second is the popular solution; it
sets the literary man’s (!) teeth on edge, and he exerts himself to
give the same meaning in some entirely different way if he is not
prepared to risk the third, which is here recommended. It involves
the convention (statutory in the interpretation of documents) that
where the matter of sex is not conspicuous or important the mas-
culine form shall be allowed to represent a person instead of a man,
or say a man (homo) instead of a man (vir).’
“Politically correct fanatics may rail, but so are my teeth set on edge;
thus I have generally preserved the authors’ usage of the masculine
for the generic case. This grammatical scourge will pass and be
forgotten and weak willed myn (by which I intend to indicate men
and women) who pander to grammatical terrorists will in the future
SL302X FM frame Page xv Wednesday, January 16, 2002 10:36 AM
Foreword xv
be seen to be stuck with malformed style and sentences no womyn

will buy. What would Jane Austen have done, after all?
“About Gender in Investors
“And, as long as we are on the subject of gender, we might as well

discuss, unscientifically, gender in investors. Within my wide expe-
rience as a trading advisor, teacher, and counselor it strikes me that
the women investors I have known have possessed certain innate
advantages over the men. I know there are women gamblers. I have
seen some. But I have never seen in the markets a woman plunger
(shooter, pyramider, pie eyed gambler). And I have known many
men who fit this description (and in fact have done some of it
myself). I have also noted among my students and clients that as a
group women seem to have more patience than men as a group. I
refer specifically to the patience that a wise investor must have to
allow the markets to do what they are going to do.”
I have found the previous edition of this marvelously concise little

book an ideal beginning textbook, a perfect first step to further study in
the bigger more complete, more complex Technical Analysis of Stock
Trends. The rearrangements I have made of the material fall naturally into
the teaching plan I use in seminars.
W.H.C. Bassetti
San Francisco
SL302X FM frame Page xvi Wednesday, January 16, 2002 10:36 AM
SL302X FM frame Page xvii Wednesday, January 16, 2002 10:36 AM
CONTENTS
SECTION I: A BRIEF HISTORY OF DOW THEORY AND

THE FOUNDATIONS OF TECHNICAL ANALYSIS
Magee summarizes the basics of technical analysis, its origins in
Dow Theory, something of its philosophy, and the use of its primary
tool, the bar chart.
1 Basic Tenets of Technical Analysis as Evolved from
Dow-Jones Theory and the Bar Chart, Tool of Technical
Analysis .........................................................................................3
SECTION II: THE CENTRAL CONCEPTS AND

VOCABULARY OF TECHNICAL ANALYSIS
Magee concisely recounts the central concepts of technical
analysis — support/resistance and trends — and discusses some of
the important patterns that recur in normal market activity. Patterns
of both long-term and short-term importance are covered. In addi-
tion to the explanation of this basic market vocabulary, the Magee
system of stops is explained.
2 Important Practical Concepts: Support and Resistance .........19
3 The Central Concept: The Importance of Trends and
Trend Channels ..........................................................................27
4 Other Important Patterns of Short-Term Import: Gaps,
Spikes, Reversals ........................................................................61
5 When to Buy, When to Sell: Stops, Hair-Trigger Stops,
Progressive Stops .......................................................................73
xvii
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xviii The Introduction to the Magee System of Technical Analysis
SECTION III: MAGEE’S METHODOLOGY: RISK

MANAGEMENT, PORTFOLIO MANAGEMENT, AND
RHYTHMIC TRADING. PRAGMATIC PORTFOLIO
THEORY FROM BASSETTI
The Magee method is briefly summarized, and Bassetti develops and
articulates Magee’s ideas of rhythmic investing, portfolio manage-
ment, and risk management and control.
6 The Magee Method .....................................................................81
7 Further Developments to the Magee Method: Portfolio
Management, Risk Control, Including Rhythmic Trading
and Pragmatic Portfolio Theory ...............................................83
SECTION IV: OTHER TECHNICAL ANALYSIS TOOLS:

NUMBER-DRIVEN TECHNIQUES, CANDLESTICKS, AND
POINT-AND-FIGURE-CHARTING — ALGORITHMIC
TRADING
Charting is the original form of technical analysis, the basic disci-
pline. With the development of the computer, other forms of technical
analysis have evolved — number-driven (or statistical) analysis,
candlesticks, and point-and-figure analysis.
8 Other Important Technical Analysis Methods ........................91
1. Number-Driven Methods
2. Moving Averages
3. Candlesticks
4. Point-and-Figure Charting
SECTION V: CONSIDERATIONS FOR TRADERS/

INVESTORS OF WHATEVER STRIPE — DAY TRADERS
TO LONG-TERM INVESTORS
Implications of technical analysis are put in context for various
kinds of traders/investors, from short-term traders to long-term inves-
tors: What kind of analysis is appropriate for whom. Sample trading
plans for these various categories of traders are discussed.
9 Considerations for Short-Term Traders, Speculators, and
Mid- and Long-Term Investors................................................117
10 Some Hypothetical General Trading Plans ............................121
SL302X FM frame Page xix Wednesday, January 16, 2002 10:36 AM
Contents xix
SECTION VI: TRADING IS ONLY HALF SYSTEMS AND

METHODS — THE OTHER 90% IS MENTAL
Magee explores the philosophical and psychological aspects of stock
market trading and investing.
11 The Mental Side and the Philosophical Foundations ...........129
SECTION VII: APPENDICES

Market wisdom. After basic training and drill the army enters the
battle. How well does the theory and method hold up in the heat of
combat? Also, the necessities of manual Tekniplat charting. Indica-
tions for further study and resources for traders/investors.
Appendix A Some Selected John Magee Letters.........................143
Appendix B Tekniplat Charting...................................................199
Appendix C Continuing Study Plan ............................................211
Appendix D Resources..................................................................213
Glossary .............................................................................................217
Glossary of Patterns .........................................................................237
List of Diagrams................................................................................246
List of Charts.....................................................................................247
Index..................................................................................................249
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SL302Xch01 frame Page 1 Thursday, December 13, 2001 9:56 PM
I
A BRIEF HISTORY
OF DOW THEORY AND
THE FOUNDATIONS OF
TECHNICAL ANALYSIS
Magee summarizes the basics of technical analysis, its origins

in Dow Theory, something of its philosophy, and a brief dis-
cussion of its primary tool, the bar chart.
Dow Theory, deriving from original editorials in the Wall Street

Journal by Charles Dow, stated that the near future of the
economy — and of the stock market in general, could be
forecast by observing the average behavior of 30 industrial
stocks and 20 transportation stocks. When these averages
advanced in concert a Bull Market was in effect and, conversely,
when they declined in concert a Bear Market was in effect.
Signals cast off by these two averages may be used as buy-
and-sell indicators and have been for 100 years. Buying and
selling on Dow signals would have netted $362,212.98 in 103 years
on an initial $100 investment as opposed to $39,685.03 realized
from a buy-and-hold plan.
1
2 The Introduction to the Magee System of Technical Analysis
Dow Theory is wholly a technical method. Technical analysts

saw that principles of Dow Theory could be applied to indi-
vidual stocks and, using bar charts, developed the theory and
have applied it productively for more than half a century. The
definitive statement of chart-based technical analysis is Edwards &
Magee’s Technical Analysis of Stock Trends (1st ed., 1948; 8th ed.,
2001). Contrary to the beliefs of academic random walkers,
trends occur in the markets and the most productive investment
methodology identifies and profits from these trends, using bar
charting as its basic tool.
1
BASIC TENETS OF TECHNICAL
ANALYSIS AS EVOLVED
FROM DOW-JONES THEORY
AND THE BAR CHART, TOOL
OF TECHNICAL ANALYSIS
John Magee’s Inc.’s objective has always been to forecast individual stock
prices — not the “overall” stock market. Investors buy individual stocks,
not the “market” — their profits (or losses) reflect how well those stocks
do. (Magee, of course, wrote this statement and practiced before it was
possible for the general investor to “buy the market” by purchasing ishares
or DJIA futures, instruments which effectively allow the investor to “buy
the market.” These instruments are explored later. The purposes and meth-
ods Magee discusses remain valid not only for individual stocks but also
for the averages themselves.) Although it is often the case that the vast
majority of stocks move in the same direction as the market, it is not
always so. Certain groups may lead a market move whereas others may
lag or not participate at all. And, even within a group of stocks such as
airlines or steel, for example, certain stocks may move ahead of, with, or
actually lag behind their own group.
The basic tenets of technical analysis were first put forth by Charles
Dow, editor of the Wall Street Journal and creator of the Dow-Jones
averages. By analyzing the behavior of the industrial and rail averages,
Dow developed a theory — the famous Dow Theory — by which he
sought to forecast the major direction of the stock market from the price
behavior of these indices.
3
THEORIES AND ASSUMPTIONS

The foundations for modern technical analysis of stock trends were laid
by Charles Henry Dow, a founder and the first editor of the Wall Street
Journal. During his tenure as editor, from July 8, 1889, until his death on
December 4, 1902, Dow published his observations on the market and
its likely future direction based on the interactions between the industrial
and railroad averages. These editorials constitute the solid core of present-
day Dow Theory. The industrials represent the strongest and biggest
companies, called “blue chips” or primary issues. These companies are
in goods and services. The transports are secondary issues that move
goods and people such as rails, trucks, barges, and airlines. The two basic
assumptions of Dow Theory technical analysis are as follows:
1. The averages, in their day-to-day fluctuations, discount everything

known, everything foreseeable, and every condition that can affect
the supply of or the demand for corporate securities; and
2. The market moves in trends, upward or downward, over time.
The fundamental premise of technical analysis is that it is possible to

identify and predict the continuations and turning points in market trends,
to evaluate relative strength or weakness in the market, and to profit from
the application of that analysis.
The central method of Dow Theory involves examining the co-move-
ments of two averages, such as the Dow-Jones industrials and the Dow-
Jones transportations, for “confirmations.” One average is usually regarded
as the primary one and the other as the confirming index. Confirmation
occurs when, for instance, the industrials reach a high above their previous
high, and the transportations do likewise around the same time. The trend
in the averages is held far more likely to continue when confirmation is
present than when it is absent.
In addition, technicians have used the Dow-Jones transportation aver-
age as a confirming indicator to the industrials since the days of Charles H.
Dow. (Confirmation — in other words if one average is going up, or
down, the other should be going in the same direction to confirm.) At
that time, the junior average consisted only of railroad stocks. The indus-
trials were considered an index of productive activity and the rails one
of distributive activity. Both of these should be sound in order to have a
healthy economy and, hence, a healthy stock market. Although the rails
do not “move the nation” now as they did then, today’s transportation
index still provides a supplementary barometer of speculation in the
market and, therefore, continues to be useful.
Basic Tenets of Technical Analysis 5
12000 INDU LAST-Daily 11/30/2000 TRAN LAST-Daily 11/30/2000 12000

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Created with Trade Station

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Chart 1. Dow-Jones Averages Chart Showing Divergences and Confirmations of

Industries by Transportation. In May and June the industrials and the transportations
part ways, that is diverge — an ominous sign for the Dow, and also for the entire
market. The industrials continue merrily along waiting until the fateful month of
October to confirm the transportation move. Both averages react and the Dow
goes to its all-time high with the transportations once again diverging in November
and the joint downtrend reaching mutual confirmation in March 2000. The conse-
quences and reflections of this action in the averages may be seen in Chart 4.
The technician’s assumption is that if confirmation occurs between the

industrials and either of these supplementary indicators (or more strongly,
both), a trend under way would be likely to continue. If confirmation were
not present, the averages would be said to be “out of gear” (or divergent),
and the trend in the industrials would be less likely to continue. The
usefulness of this, if it were true, would not be confined to the narrow
Dow-Jones averages alone. Correlation among all the major averages is of
a high degree and well established historically. The technician’s assumption
about confirmations and trends appeared to us to be easy enough to test.
Confirmations are visible on charts, as are subsequent movements in the
averages. Robert D. Edwards and I, therefore, set out to test (in Technical
Analysis of Stock Trends) whether any statistically valid, identifiable connec-
tion exists between confirmations and subsequent continuations of trends.
Several of the basic principles of technical analysis extended from Dow
Theory of overall stock market behavior and applied to individual stocks,
however, deserve attention. These principles are, in brief, the foundations

of technical analysis, as explained below. Dow Theory, although not com-
pletely objective (i.e., reducible to an uncontested algorithm), shows con-
siderable power in practice. An investor following the long-term trading
signals of the Dow, from its inception in 1897 up to 2000, would have
realized $362,212.98 on an initial investment of $100, whereas an investor
who bought $100 of the average at its inception and held it to its high in
1999 would have realized $39,685.03.
BASIC TENETS OF TECHNICAL ANALYSIS

The first major principle of technical analysis is that the market action of
an individual stock reflects all the known factors affecting that stock’s
future. Among the factors, and expressed in its chart, are the general
market conditions which influence all stocks to a greater or lesser degree,
as well as the particular conditions applying to the particular stock,
including the trading of insiders. A basic tenet of the Dow Theory is that
the averages discount everything (except “Acts of God” — and Alan
Greenspan). In technical analysis, price and volume are the great “data
reducers of the stock market” — for individual stocks as well as for the
averages. By concentrating on the interpretation of price and volume
patterns only, and by disregarding the never-ending stream of corporate
information, advisors’ opinions, rumors, and tips and hunches from well-
meaning friends, the technical analyst approaches common stock selection
in a systematic manner, ideally suited for fast-moving markets in which
timely judgment and decisive action invariably spell the difference between
success and failure.
The second basic principle or premise is that stocks move in trends.
The third basic principle is that volume goes with the trend. In an
uptrend, volume rises as prices rise and declines as prices decline. Contrary
behavior by a stock in an uptrend may signal an important topping out,
or reversal, in the near future. For those who think this is obvious, we
would point out that it is frequently not the case. Price peaks and valleys
often occur during periods of low trading activity. This provides the
technician with a clear signal that buying or selling pressure is abating
and a new price trend is forming.
The fourth, and last, basic premise of technical analysis is that a trend,
once established, tends to continue. Until such time as its reversal has
been signaled, a trend is assumed to continue in effect. This proposition
is essentially stating an important probability — the likelihood that the
next move in a stock will be in the same direction as the previous one.
STOCK IN UPTREND
An uptrend is considered to be in force as long as each successive rally
reaches a higher price than the one before it, and each successive reaction
stops at a higher level than the previous reaction. A similar (reversed or
mirror image) definition holds for a downtrend.
We divide a trend into three subcategories:
1. The major trend usually lasts a year or more and results in appre-
ciation or depreciation of 20% or more.
2. The intermediate trend operates in the opposite direction of the
major trend, usually retracing one half or less of the prior movement
in the direction of the major trend. It is often referred to as an
intermediate reaction.
3. Minor trends consist of day-to-day fluctuations which are unim-
portant except as they combine to form larger trends.
For our purposes, it is more instructive to discuss some of the basic

assumptions a technician makes in interpreting a chart. This discussion
must begin with the relationship of volume and stock price. The rule of
thumb is that when stock price and volume rise together, there is sufficient
buying pressure to indicate an uptrend. Conversely, although not as
directly proportional, price declines will be accompanied by increasing
volume if there is sufficient selling pressure to indicate a downtrend. It
is, however, not necessary that volume increase on declines to definitively
indicate a downtrend. Price alone can indicate this.
Here are three charts of stocks (charts 2, 3, and 4) in normal trends,
such as those seen every day in the markets. One is an uptrend, one a
downtrend, and one a sideways trend.
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Chart 2. The Dow Industrials Uptrend. Here is the greatest uptrend in the history
of the U.S. markets — the Great Clinton–Gore bull market. A complex of factors
combined to produce the most important market in U.S. history. The benefits of
computer technology, the rush to the Internet, the incredible prosperity of the
people as a whole, and not least the fiscal responsibility of the Clinton–Gore
administration, which for the first time since the 1950s balanced the budget and
began to pay down the enervating debt produced in the Reagan years. Technicians
generally turn a deaf ear to analyses of this kind. And usually for the immediate
moment and for the short-term purposes of investing and trading they should.
But secular factors of this kind are worth noting, if not trading on. Trading and
investing takes place for most investors in a much more limited time frame.
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Chart 3. Xerox, in a Downtrend. Bull trends require labor and time and blood
sweat and tears. Bear trends are effortless and fall to earth, in many cases, like a
punctured hot-air balloon. Often it was hot air which created the bull trend. But
virtually always an important trend line is broken before the bear trend begins.
This is a common downtrend — after all a downtrend must begin from up. And
almost always will be ragged rather than regular, especially in modern markets
where investors are so quick to flee the least sign of weakness.
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Chart 4. Dow-Jones Industrials in a Sideways Trend, with a moving average line.

At the turn of the millennium as the great bull market topped, the Dow produced
a constellation of formations which all added up to the same thing — sideways
trend. A long-term moving average vividly illustrates the nature of a sideways
trend — the price see-saws back and forth across it effectively destroying any
trend following system which does not know to quit trading in sideways trends.
In these situations traders can make money shorting the top of the trading range,
covering and buying the bottom — as long as they know when to quit this tactic,
because eventually the price will fall out or break out and bite a trader who
overuses this tactic.
HOW TECHNICIANS USE BAR CHARTS

TO STUDY THE MARKETS
The purpose of this discussion is to explain the nature of the bar chart,
something of the history and development of the use of charts in the
evaluation of securities, and the philosophy and rationale of charting. In
later chapters we discuss some of the technical patterns seen on charts
and their use and interpretation, methods and details of application and
use, and comments and suggestions as to the setting up and maintaining
of daily charts.
What Is A Bar Chart?

A bar chart is one of the many methods of representing information in
graphic form. It consists of a rectilinear grid on which two variables can be
plotted. Thus, the vertical axis might be scaled to represent “miles per hour”
of a moving automobile and the horizontal axis, the “rate of gasoline
consumption.” The vertical axis might be “total number of employees” in
various industries and the horizontal axis “average wage of employees.” In
many kinds of engineering, sociological, and economic problems, the hori-
zontal axis represents time (hours, days, months, etc.), and the vertical axis
measures the magnitude of a second variable such as population, net income,
pressure, or whatever data are under examination. In the study of securities,
bar charts are widely used to show the record of price trends and fluctuations
over time. These charts can be adapted to any type of financial market:
stocks, bonds, warrants, debentures, commodities, etc. They can be used for
long periods, perhaps covering many years, or they may be focused down
to short-term trends on a daily or even hourly basis. (With today’s technology,
charts may be computer-generated on every tick of the market in real time.)
In charting security prices, the high and low prices for the day (if it
is a daily chart that is being run) are plotted on the line that represents
the particular day, and the high and low are connected by a vertical line.
Usually, the closing or last price for the day is shown as a cross-line on
this vertical range. It is also possible to show both the opening price and
the closing price, using a short line to the left of the vertical range for
the opening, and a short line to the right to indicate the close. The volume
of trading may be shown on a separate scale near the bottom of the sheet,
directly under the vertical lines showing the daily price range. For weekly
charts or monthly charts, the procedure is exactly the same except that
each horizontal interval represents a week or a month instead of a day.
Because the horizontal scale on the chart provides a “calendar,” it is
possible to enter any other data directly on the chart. This includes, of
course, dividend or ex-distribution dates, the dates of stock splits, any data
that might seem important as to earnings, mergers, and announcements of
new products, and so on. By noting on the proper date the purchase or
sale of a stock and the price paid or received, a record of these transactions
will be right on the chart — which will make it easy to check the status
of a transaction and the profit or loss on it. Moreover, this record will serve
as a valuable study later as to the degree of success of decisions.
The Uses and Applications of Charts

Before anyone can use any method in business, finance, science, or any
other field, and before he can judge properly the usefulness of the method,
he should have some background of theory and the goals he hopes to

reach. At this point we want to consider some of this important background.
We have already spoken of the use of charts simply as a record of
stock prices and trading volume — in other words, the market action of
the stock — and also of the convenience of recording other data on the
chart itself rather than in separate notebooks or tables. A more important
use of the chart is in backchecking the results of one’s judgment, building
up a body of firsthand experience in a form that can be consulted and
analyzed later, and in acquiring better perception — learning from both
one’s past successes and failures.
To many people, the stock market is a confusing and confused melee
in which prices move helter-skelter without rhyme or reason. But this
confusion is, to some extent, a confusion in their own minds, because
they do not understand the complicated forces and the detail of procedure
that actually cause stock prices to advance or decline. They might feel
the same sense of meaningless movement that a visitor to a textile mill
might feel the first time he saw the operation of an automatic loom. He
might not understand at first sight that the strange shifts of the jacquard
mechanism were not meaningless but were directed toward the orderly
creation of a definite pattern in the cloth which would have meaning to
anyone when he saw the finished product.
Groups of students in technical analysis of stock trends are often
skeptical as to the meaning or orderliness of the market at the first or
second lectures in a course. When they discover, as they do, that the
long-term trends of stocks, covering a period of a number of years, show
definite trends which often appear as straight-line channels on semiloga-
rithmic charting paper, they are likely to be overcome with enthusiasm.
Sometimes it is necessary to warn them that the existence of trends, though
true, is not the entire key to success in the stock market but merely one
of a number of important facts that appear in the study of charts. In this
field, “a little” knowledge can be a dangerous thing indeed.
The question, at this point, is, of course, whether the charts have
predictive value — whether they can be of help in planning the purchase
or sale of stocks with respect to the future movement of stock prices. As
to this we have a definite opinion that they do. But anyone planning to
use charts in his own financial planning should understand as thoroughly
as possible their theory and application. He should learn some of the
characteristic behaviors of charted stocks, check and verify what he has
read and heard by his own current observations, and have some idea of
what may be abstracted or surmised from a chart, and with what degree
of dependability.
THE BLOODLESS VERDICT OF THE MARKETPLACE

Following the line of reasoning in the preceding sections, especially that
part that touches on the difficulty of knowing all about a corporation or
about the market as a whole, we realize that the most dependable criterion
of value in the practical sense of what one must pay, or what one can
get for something (whether it should be shares of stock, bushels of wheat,
land, houses, automobiles, or whatever), is the free speculative auction
in which the bids and offers of prospective buyers and sellers determine
the price. Whether the reasons behind these bids and offers are sound,
reasonable, or wise has nothing to do with the fact that the price is
determined by them, and any investor is at liberty to take it or leave it.
There is an implication here that men who are putting their own hard-
earned cash on the line to support their opinions are likely to have serious
reasons for doing so; there is at least a presumption that the composite
of these opinions, the consensus as represented by the price at a given
moment, may be the most realistic expression of value we can hope to get.
Therefore, following this line of reasoning, we must assume that the
current price of the stock represents all that is known, or believed, or
hoped, or feared, in connection with the present value or future probable
value of that stock.
THE CHARTS SIMPLY REFLECT HUMAN EVALUATION

The question is sometimes raised as to whether a stock chart will reflect
unreasoning emotional states of mind on the part of investors. That is
surely true at times. There have been “crazy” booms in stocks, and there
have been equally “crazy” collapses and panics. But, the fact that these
market actions cannot always be supported by factual reports and statistics
does not make them any less important. When the price of a stock starts
to climb or when the bottom falls out of it, it is best to take appropriate
action, recognizing that an important move is taking place, rather than
trying to hold back the tide because it does not seem to make any sense.
In a surprising number of cases, the move eventually does prove to make
sense; the collective judgment of the market is extremely sensitive and
perceptive as to probable changes in production, earnings, dividends, and
other matters affecting the affairs of a company.
If a market move turns out to be premature or false, if the expected,
or hoped for, or feared, developments do not come about, it is still true
that one cannot argue with the tape. It is best, we feel, to accept the facts
regardless of the reasons, assuming that in most cases the reasoning behind
the move is sound.
One other question remains which we feel has always been given
more weight than it deserves, especially by those who have not studied
too long or too deeply. The question is whether the movement may
represent merely the manipulative operations of dishonest traders, or
whether, through false rumors or merely through the fact that something
seems to be happening, the movement snowballs and accelerates on its
own momentum.
As far as dishonest manipulation is concerned, this has never been an
entirely safe or easy thing, even in the “bad old days” when no punches
were barred. Today, with the various regulatory laws and the rules of
procedure in the important Exchanges, plus the self-protective, self-regu-
lation of the reputable brokerage houses, it is more difficult. Still, as the
various insider trading trials prove, there will always be a dishonest
element in the market.
Nor do we believe that the important market moves are merely the
result of rumor, collective hysteria, and emotional confusion. There are
too many hardheaded men, both individuals and traders for institutions,
who are prepared to check and counterbalance an entirely capricious or
irrational move. We would question whether the recommendations of
brokers or investment advisory services, or the statements of newspaper
writers or radio and TV analysts, or the self-reflexive action of technical
factors are major elements in important market moves. In all this, in all
the changes shown in the charts (which are a picture of what is actually
happening in the market and which are indirectly a portrayal of what the
collective investing public is perceiving), we are dealing with speculation.
In this connection, we are using the word in the particular sense in which
Webster’s Ninth New International Dictionary defines it, in the first defi-
nition of the word as in current use: “The faculty, act, or process of
intellectual examination or investigation.” This is the proper and legitimate
function of a market and in no way implies any dishonorable or unfair
practice. The word, as Webster here defines it, is merely synonymous with
evaluation, and it is in this sense that we use it in this treatise.
THE TECHNICAL PICTURE

We have spoken of the chart as a “picture,” a picture of the composite
evaluations going on in the minds of many people. We have spoken of the
chart as “a tool.” In spite of the possible effect of buying or selling by some
technicians who use charts, we do not believe that “the chart makes the
market go.” On the contrary, we believe that the market makes its own
complex evaluation, and the chart reflects this continually changing appraisal.
In general, as Charles H. Dow discovered before the turn of the century,
the market tends to anticipate expected conditions. Therefore (with Dow),
Another Random Document on
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From His Excellency the Viceroy and Governor-General of
India to His Highness the Amir of Afghanistan, G.C.B.,
G.C.S.I., dated Simla, September 6, 1897.
(After compliments.)
“I have already, in my letter to your Highness of the 30th
August, acknowledged your Highness’s letter of the 18th
Rabi-ul-Awal, 1315 H., corresponding to the 18th August
1897, to the Commissioner of Peshawar, in which your
Highness has denied any complicity with the disturbances on
the frontier of India. I have now to acknowledge the receipt of
your Highness’s further friendly letter on the same subject,
dated the 19th Rabi-ul-Awal, 1315 H., corresponding to the
19th August 1897, which was sent by way of Quetta in
Baluchistan.
“With this letter, your Highness has sent me a copy of the
proclamation issued by the Mullah of Adda to the people of
Ningrahar. I thank your Highness for taking so much trouble to
send me this information. I had already seen this
proclamation, and I was informed that the person from whom
my copy was obtained had himself received the Mullah’s
proclamation from your Highness’s Sartip of Dakka.
“I cordially agree with what your Highness writes that ‘the
false utterances and fabricated reports of self-interested
persons’ should be investigated in a friendly manner, and with
a view to forestalling any such report which might be made to
your Highness, I write this letter to inform you that my troops
are about to enter the Mohmand country in order to search
out the Mullah of Adda and his lashkar, and to disperse and
destroy them. In the letter written by your Highness on the
18th Rabi-ul-Awal to the commissioner of Peshawar, your
Highness has stated that Mullah Najm-ud-din ‘has now taken
up his abode in a country which is independent of Kabul and
in the neighbourhood of Peshawar.’
“Your Highness has also written, ‘what more can I add in
this matter to the foregoing arguments, having regard to the
proximity to you of these Mullahs who are close to your
country and have now, according to the boundary
demarcation, fallen within the limits of the British
Government.’
“It is, no doubt, true that the Mullah has committed hostile
acts within the territory which it has been agreed falls within
the limits of the British Government, and if my troops meet
him there his punishment will be speedily accomplished. But I
am informed that the Mullah has established his abode in the
village of Jarobi, and though, as your Highness is aware, the
country is wild and unsurveyed, and no permanent boundary
pillars have been erected, it is understood that this village
probably lies within the territory which, according to the
arrangement proposed in my letter of the 12th November
1896, would fall within the limits of Afghanistan. Your
Highness will agree with me that this man, who has given so
much trouble to your Highness’s Government as well as to
the British Government, must not escape the punishment for
his misdeeds, and if the Mullah retires before my troops to
Jarobi, or to any place similarly situated, my troops will be
authorised to follow him up and destroy him and his
habitation. I do not wish your Highness to regard any such
action on the part of my troops as indicating an intention to
vary or depart from what we have agreed upon as the
dividing-line in the Mohmand country. I have no intention that
my troops should stay in that country, and they will certainly
not go further into it than is necessary in order to carry out the
object with which they are being despatched. On the other
hand, if the Mullah should take flight across the mountains
into the Kunar Valley, my troops have orders not to follow him
beyond the watershed, but I shall look to your Highness to
give orders to your officers to deal with him as he deserves,
and to restrain him from exciting the foolish tribesmen to
further acts of hostility.
“I have always endeavoured in my correspondence with
your Highness to write frankly and openly so that
misunderstandings may be avoided. Your Highness will, I
hope, recognise that this is my object on this occasion.”
From the Amir of Afghanistan to the address of His Excellency
the Viceroy, dated September 12, 1897.
“I beg to inform your Excellency that I have received your
friendly letter of the 6th instant. The Mullah will not come to
this country of mine, because he has acted wrongly, and,
should he still come, I will expel him from my country, so that
he may go towards Arabia, because he is a very wicked
person. Your Excellency’s troops, however, should not
advance too far (lit. should not make a great advance), lest
some confusion arise within the limits of Kunar or among the
troops which are in Kunar. The Mullah is a great knave. He
should not be allowed to (lit. let it not be that he might) excite
the people and troops of Ningrahar. Precaution is necessary,
so that the Army of the Sublime Government may not raise
commotion and tumult in the neighbourhood, and the Mullah
excite the people and be the source of disturbances.
“As regards the remaining portion of the undemarcated
boundary of that district, your Excellency states that Jarobi is
possibly within Afghan limits. As up to this time no decision
has been come to in regard to those places, it will,
undoubtedly, be as your Excellency has written.”
From His Excellency the Viceroy and Governor-General of
India to His Highness the Amir of Afghanistan, G.C.B.,
G.C.S.I., dated Simla, October 7, 1897.
“Your Highness has probably already heard of the result of
the advance of my troops against the Adda Mullah, which in
my letter of the 6th September 1897, corresponding to the 8th
Rabi-us-Sani, 1315 H., I told your Highness was about to be
undertaken. The Mullah’s gathering has been dispersed: my
troops followed him to his home at Jarobi, but he had already
fled across the boundary into your Highness’s territory, and, in
accordance with my promise, my troops did not pursue him
further. It is now for your Highness to fulfil the part which your
Highness in your letter of the 12th September 1897,
announced the intention of taking, in the event of the Mullah
entering Afghanistan. I look to your Highness to prevent him
from concocting further mischief from Afghan territory.
“As an instance of the mischief which the Adda Mullah has
been guilty of, I enclose in original a letter, dated the 2nd
September 1897, from Najm-ud-din to the Mian Guls of Swat.
The Mullah writes: ‘I had written to his Highness the Amir, Zia-
ul-millat-wad-din, on the subject of jehad. His Highness
replied that we should wait: that his Highness would consult
all the military officers, Khans and Maliks of his Highness’s
territory and then write again in reply, telling me the
arrangements and preparations for jehad.’
“Further on, he adds: ‘Please God, his Highness the Amir
will make arrangements for the jehad and issue a notification
to that effect.’
“In this way, Najm-ud-din has tried to make mischief
between your Highness and the Government of India, and it is
not to be wondered at if, under such circumstances, people
believe that they will not incur your Highness’s displeasure by
acting in a hostile manner towards the British Government.
“In my letter of the 30th August 1897, equivalent to the 1st
Rabi-us-Sani, 1315 H., I informed your Highness of the
misdeeds of the Afridis, and of my intention to deal with them
in a manner to make clear the supremacy of the British
Government.
“I now have the honour to inform your Highness that a
punitive force under the command of General Sir William
Lockhart, K.C.B., K.C.S.I., will shortly start to march through
the country of the Orakzais and Afridis, and to compel both
tribes to submit to such terms as I decide to impose upon
them.
“I have received a letter from my Agent at Kabul, enclosing
copy of one sent to him by your Highness on the 25th Rabi-
us-Sani, 1315 H., corresponding to the 23rd September 1897.
From this letter I learn that your Highness has refused to
receive or encourage, and has turned back, the Afridis whose
representatives were on their way to Kabul. I thank your
Highness for this friendly act, which is exactly in accordance
with what I had proposed to ask your Highness to do.
“It is probable that, when the British troops advance, the
tribesmen will follow the example of the Adda Mullah’s
lashkar, and take flight into Afghan territory. I have, indeed,
been informed that they are already sending their women and
property into Ningrahar.
“Your Highness is aware that in December 1895 and in
May last I caused the Kaffir refugees to be disarmed, and
took measures to prevent their causing your Highness
annoyance.
“I now ask your Highness to take similar action in regard to
the Orakzais and Afridis, by ordering your local officers to
disarm those who enter your limits and to prevent them from
making Afghan territory a base for attacks upon my forces.”
From His Highness the Amir of Afghanistan and its
Dependencies to the address of His Excellency the Viceroy,
dated the 16th Jamadi-ul-Awal, 1315 H., corresponding to the 13th
October 1897 (received on October 20, 1897).
“I have received your Excellency’s friendly letter, dated the
7th October 1897, enclosing a letter from Mullah Najm-ud-din,
the Fakir of Hadda, to the Mian Guls, which I have perused. I
have also understood the contents of your Excellency’s letter.
“As to the escape of Mullah Hadda from his house before
the British troops reached it, and as to my promise that I
would turn him out from this side of the boundary if he should
enter my territory, I have now to inform your Excellency that I
have issued orders to search for the said Mullah by day and
night in view to arrest him. The news-reporters appointed for
the purpose report that the Mullah has concealed himself and
is secretly moving about. I have also ordered that his
whereabouts should be found out and a report made. Please
God, the said Mullah’s mischief will be stopped, if he be within
the limits of my territory; but if this mischievous man move
about in tracts which have not been divided yet between the
British and Afghan Governments, the British officials should
instruct the Maliks of such tracts to make arrangements about
the said mischievous man. This man does not pass a single
night at one place. He is in motion like mercury: during night
he is at one place, and during day at another. Such are the
reports made by news-reporters. Notwithstanding this, I am
engaged in endeavouring to arrest him. Your Excellency may
rest assured that, if I succeed in arresting him, I will turn him
out from my territory.
“I have perused the letter which Mullah Najm-ud-din wrote
to the Mian Guls of Swat, and which your Excellency sent to
me. I write to say that whatever the Mullah has written, he has
done so with the object of deceiving the tribesmen. His object
is to excite people to rebel. Some years ago he became
hostile towards me, and excited all his disciples to rise against
me, and made them fight with my troops. Now in this way he
is making the distant people fight with the British Government.
He is mischievous; he says what is advisable and beneficial in
his own interests. If I had given him the said promise, he was
not distant from my country, and at the outside my troops at
Jelalabad were only two stages away from his residence.
Your Excellency can see from the date of his letter what a lie
he has told. Liars tell lies, but wise persons should distinguish
(between truth and falsehood). I have known these Mullahs
well for years. They are like the priests of the time of Peter the
Great, who created great mischief in Russia. These Mullahs
pretend before the people that Paradise and Hell are within
their power and authority.
“I have understood what your Excellency kindly wrote for
my information about sending British troops for the
chastisement of the Orakzais and Afridis. I have also learnt
about the decision which the high officials of the British
Government have come to in regard to punishing the said
tribesmen and bringing them to obedience.
“I have further understood what your Excellency wrote
about the report which Maulavi Ghafur Khan made to your
Excellency regarding the arrival of the Afridi jirga at Jelalabad,
and my sending them back to their country from that place;
and your Excellency expressing thanks to me for my action.
As the people are seeking their own interests, their
statements cannot be relied upon.
“Your Excellency writes that, if at the time of the British
troops advancing against the Orakzais and Afridis these
tribesmen, being obliged to flee, should enter my territory,
they should be disarmed and prevented from making any
attack on British territory. My dear friend, I will not, please
God, to the best of my power, allow my subjects to join the
tribesmen who have rebelled, in view to help them in their
fights. But when they bring their families to the houses of their
own relatives I will take no notice of the circumstance,
because these people are mutually related to one another.
They have given thousands of their daughters in marriage to
one another. If I were to prohibit this mutual intercourse and
prevent them from bringing their families to Jelalabad, the
tribesmen would become hostile to me, in the same way that
they have become hostile to the British Government. Their
hostility to the British Government cannot be of much
account, because the British Government is a Great
Government. They have appointed troops for their
punishment, composed of English soldiers, Sikhs, and
Hindus. But all my troops consist of these tribesmen. They will
never agree to the destruction of their own kith and kin; and
they will again, under the orders of the mischievous Mullahs,
issue improper edicts against me.
“It would be better if peace be made between the Tirah
people, Afridis and Orakzais, and the British Government. But
if not, and fight ensues, and these tribesmen should flee and
come to the district of Ningrahar, your Excellency may rest
assured that they will not be able any more to attack or
interfere with your Excellency’s country; and until they have
consented to become subjects of the illustrious British
Government, I will never allow them to make any interference
with British territory. But if they continue to remain in their own
mountains, they will be beyond my power and control. If they
come to my country, like Umra Khan, they will not behave
improperly, and I will not allow them to do so.
Treaty signed at Kabul on March 21, 1905, between Mr. (afterwards
Sir) Louis Dane, C.S.I., and Habib Ullah, Amir of Afghanistan.
His Majesty Siraj-ul-millat-wa-ud-din Amir Habib Ulla Khan,
Independent King of the State of Afghanistan and its
dependencies, on the one part, and the Honourable Mr. Louis
William Dane, C.S.I., Foreign Secretary of the Mighty
Government of India and Representative of the Exalted British
Government, on the other part.
His said Majesty does hereby agree to this, that in the
principles and in the matters of subsidiary importance of the
Treaty regarding internal and external affairs, and of the
engagements which his Highness, my late father, that is, Kia-
ul-millat-wa-ud-din, who has found mercy, may God enlighten
his tomb! concluded and acted upon with the Exalted British
Government, I also have acted, am acting, and will act upon
the same agreement and compact, and I will not contravene
them in any dealing or in any promise.
The said Honourable Mr. Louis William Dane does hereby
agree to this, that as to the very agreement and engagement
which the Exalted British Government concluded and acted
upon with the noble father of his Majesty Siraj-ul-millat-wa-ud-
din, that is, his Highness Zia-ul-millat-wa-ud-din, who has
found mercy, regarding internal and external affairs and
matters of principle or of subsidiary importance, I confirm
them and write that they (the British Government) will not act
contrary to those agreements and engagements in any way or
at any time.
Made on Tuesday, the fourteenth day of Muharram-ul-
haram of the year thirteen hundred and twenty-three Hijri,
corresponding to the twenty-first day of March of the year
nineteen hundred and five a.d.
Amir Habib Ulla.
Louis W. Dane.
Circular Despatch addressed by Prince Gortchakow to Russian
Representatives abroad: dated November 21, 1864.
St. Petersburg,
November 21, 1864.
The Russian newspapers have given an account of the last
military operations executed by a detachment of our troops, in
the regions of Central Asia, with remarkable success and
important results. It was to be foreseen that these events
would the more attract the attention of the foreign public that
their scene was laid in scarcely known countries.
Our august Master has commanded me to state to you
briefly, but with clearness and precision, the position in which
we find ourselves in Central Asia, the interests which inspire
us in those countries, and the end which we have in view.
The position of Russia in Central Asia is that of all civilised
States which are brought into contact with half-savage,
nomad populations, possessing no fixed social organisation.
In such cases it always happens that the more civilised
State is forced, in the interest of the security of its frontier and
its commercial relations, to exercise a certain ascendency
over those whom their turbulent and unsettled character make
most undesirable neighbours.
First, there are raids and acts of pillage to be put down. To
put a stop to them, the tribes on the frontier have to be
reduced to a state of more or less perfect submission. This
result once attained, these tribes take to more peaceful
habits, but are in their turn exposed to the attacks of the more
distant tribes.
The State is bound to defend them against these
depredations, and to punish those who commit them. Hence
the necessity of distant, costly, and periodically recurring
expeditions against an enemy whom his social organisation
makes it impossible to seize. If, the robbers once punished,
the expedition is withdrawn, the lesson is soon forgotten; its
withdrawal is put down to weakness. It is a peculiarity of
Asiatics to respect nothing but visible and palpable force: the
moral force of reason and of the interests of civilisation has as
yet no hold upon them. The work has then always to be done
over again from the beginning.
In order to put a stop to this state of permanent disorder,
fortified posts are established in the midst of these hostile
tribes, and an influence is brought to bear upon them which
reduces them by degrees to a state of more or less forced
submission. But soon beyond this second line other still more
distant tribes come in their turn to threaten the same dangers
and necessitate the same measures of repression. The State
thus finds itself forced to choose one of two alternatives,
either to give up this endless labour and to abandon its
frontier to perpetual disturbance, rendering all prosperity, all
security, all civilisation an impossibility, or, on the other hand,
to plunge deeper and deeper into barbarous countries, where
the difficulties and expenses increase with every step in
advance.
Such has been the fate of every country which has found
itself in a similar position. The United States in America,
France in Algeria, Holland in her colonies, England in India—
all have been irresistibly forced, less by ambition than by
imperious necessity, into this onward march, where the
greatest difficulty is to know when to stop.
Such, too, have been the reasons which have led the
Imperial Government to take up at first a position resting on
one side on the Syr Daria, on the other on the Lake Issik-Kul,
and to strengthen these two lines by advanced forts, which,
little by little, have crept on into the heart of those distant
regions, without, however, succeeding in establishing on the
other side of our frontiers that tranquillity which is
indispensable for their security.
The explanation of this unsettled state of things is to be
found, first, in the fact that, between the extreme points of this
double line, there is an immense unoccupied space, where all
attempts at colonisation or caravan trade are paralysed by the
inroads of the robber-tribes; and, in the second place, in the
perpetual fluctuations of the political condition of those
countries, where Turkestan and Khokand, sometimes united,
sometimes at variance, always at war, either with one another
or with Bokhara, presented no chance of settled relations or
of any regular transactions whatever.
The Imperial Government thus found itself, in spite of all its
efforts, in the dilemma we have above alluded to, that is to
say, compelled either to permit the continuance of a state of
permanent disorder, paralysing to all security and progress, or
to condemn itself to costly and distant expeditions, leading to
no practical result, and with the work always to be done anew;
or, lastly, to enter upon the undefined path of conquest and
annexation which has given to England the empire of India,
by attempting the subjugation by armed force, one after
another, of the small independent states whose habits of
pillage and turbulence and whose perpetual revolts leave their
neighbours neither peace nor repose.
Neither of these alternative courses was in accordance
with the object of our august Master’s policy, which consists,
not in extending beyond all reasonable bounds the regions
under his sceptre, but in giving a solid basis to his rule, in
guaranteeing their security, and in developing their social
organisation, their commerce, their wellbeing, and their
civilisation.
Our task was, therefore, to discover a system adapted to
the attainment of this threefold object.
The following principles have, in consequence, been laid
down:
(1) It has been judged to be indispensable that our two fortified
frontier lines—one extending from China to the lake Issik-Kul, the
other from the Sea of Aral along the Syr-Daria—should be united
by fortified points, so that all our posts should be in a position of
mutual support, leaving no gap through which the nomad tribes
might make with impunity their inroads and depredations.
(2) It was essential that the line of our advanced forts thus
completed should be situated in a country fertile enough, not only
to insure their supplies, but also to facilitate the regular
colonisation, which alone can prepare a future of stability and
prosperity for the occupied country, by gaining over the
neighbouring populations to civilised life.
(3) And lastly. It was urgent to lay down this line definitely, so as
to escape the danger of being carried away, as is almost
inevitable, by a series of repressive measures and reprisals, into
an unlimited extension of territory.
To attain this end a system had to be established which
should depend not only on reason, which may be elastic, but
on geographical and political conditions, which are fixed and
permanent.
This system was suggested to us by a very simple fact, the
result of long experience, namely, that the nomad tribes,
which can neither be seized nor punished, nor effectually kept
in order, are our most inconvenient neighbours; while, on the
other hand, agricultural and commercial populations attached
to the soil, and possessing a more advanced social
organisation, offer us every chance of gaining neighbours with
whom there is a possibility of entering into relations.
Consequently, our frontier line ought to swallow up the
former and stop short at the limit of the latter.
These three principles supply a clear, natural, and logical
explanation of our last military operations in Central Asia. In
fact our original frontier line, extending along the Syr-Daria to
Fort Perovski on one side, and on the other to the Lake Issik-
Kul, had the drawback of being almost on the verge of the
desert. It was broken by a wide gap between the two extreme
points; it did not offer sufficient resources to our troops, and
left unsettled tribes over the border with which any settled
arrangement became impossible.
In spite of our unwillingness to extend our frontier, these
motives had been powerful enough to induce the Imperial
Government to establish this line between Lake Issik-Kul and
the Syr-Daria by fortifying the town of Chimkent, lately
occupied by us. By the adoption of this line we obtain a
double result. In the first place, the country it takes in is fertile,
well wooded, and watered by numerous watercourses; it is
partly inhabited by various Kirghiz tribes, which have already
accepted our rule; it consequently offers favourable conditions
for colonisation and the supply of provisions to our garrisons.
In the second place, it puts us in the immediate
neighbourhood of the agricultural and commercial populations
of Khokand. We find ourselves in presence of a more solid
and compact, less unsettled, and better organised social
state; fixing for us with geographical precision the limit up to
which we are bound to advance, and at which we must halt;
because, while, on the one hand, any further extension of our
rule, meeting, as it would, no longer with unstable
communities, such as the nomad tribes, but with more
regularly constituted states, would entail considerable
exertions, and would draw us on from annexation to
annexation with unforeseen complications. On the other, with
such states for our future neighbours, their backward
civilisation and the instability of their political condition do not
shut us out from the hope that the day may come when
regular relations may, to the advantage of both parties, take
the place of the permanent troubles which have up to the
present moment paralysed all progress in those countries.
Such, Sir, are the interests which inspire the policy of our
august Master in Central Asia; such is the object, by his
Imperial Majesty’s orders, of the action of his Cabinet.
You are requested to take these arguments as your guide
in any explanations you may give to the Government to which
you are accredited, in case questions are asked or you may
see credence given to erroneous ideas as to our action in
these distant parts.
It is needless for me to lay stress upon the interest, which
Russia evidently has, not to increase her territory, and, above
all, to avoid raising complications on her frontiers which can
but delay and paralyse her domestic development.
The programme which I have just traced is in accordance
with these views.
Very frequently of late years the civilisation of these
countries, which are her neighbours on the continent of Asia,
has been assigned to Russia as her special mission.
No agent has been found more apt for the progress of
civilisation than commercial relations. Their development
requires everywhere order and stability; but in Asia it
demands a complete transformation of the habits of the
people. The first thing to be taught to the populations of Asia
is that they will gain more in favouring and protecting the
caravan trade than in robbing it. These elementary ideas can
only be accepted by the public where one exists; that is to
say, where there is some organised form of society and a
government to direct and represent it.
We are accomplishing the first part of our task in carrying
our frontier to the limit where the indispensable conditions are
to be found.
The second we shall accomplish in making every effort
henceforward to prove to our neighbouring states, by a
system of firmness in the repression of their misdeeds,
combined with moderation and justice in the use of our
strength, and respect for their independence, that Russia is
not their enemy, that she entertains towards them no ideas of
conquest, and that peaceful and commercial relations with her
are more profitable than disorder, pillage, reprisals, and a
permanent state of war.
The Imperial Cabinet, in assuming this task, takes as its
guide the interests of Russia. But it believes that, at the same
time, it is promoting the interests of humanity and civilisation.
It has a right to expect that the line of conduct it pursues and
the principles which guide it will meet with a just and candid
appreciation.
(Signed) Gortchakow.
TREATY BETWEEN RUSSIA AND BOKHARA (1873)
Concluded between General Aide-de-Camp Kauffman,
Governor-General of Turkestan, and Seid Mozaffur, Amir
of Bokhara.
(1) The frontier between the dominions of his Imperial
Majesty the Emperor of All the Russias and his Highness the
Amir of Bokhara remains unchanged.
The Khivan territory on the right bank of the Amu Daria
having been incorporated in the Russian Empire, the former
frontier between Khiva and Bokhara, from the oasis of
Khelata to Gugertli, is abolished. The territory between the
former Bokharo-Khivan frontier on the right bank of the Amu
Daria from Gugertli to Meschekli, and from Meschekli to the
point of junction of the former Bokharo-Khivan frontier with the
frontier of the Russian Empire, is incorporated in the
dominions of the Amir of Bokhara.
(2) The right bank of the Amu Daria being severed from the
Khanate of Khiva, the caravan routes leading north from
Bokhara into the Russian dominions traverse exclusively the
territories of Bokhara and Russia. The Governments of
Russia and Bokhara, each within its own territory, shall watch
over the safety of these caravan routes and of the trade
thereupon.
(3) Russian steamers, and other Russian vessels, whether
belonging to the Government or to private individuals, shall
have the right of free navigation on that portion of the Amu
Daria which belongs to the Amir of Bokhara.
(4) The Russians shall have the right to establish piers and
warehouses in such places upon the Bokharan banks of the
Amu Daria as may be judged necessary and convenient for
that purpose. The Bokharan Government shall be responsible
for the safety of these erections. The final and definite
selection of localities shall rest with the supreme Russian
authorities in Central Asia.
(5) All the towns and villages of the Khanate of Bokhara
shall be open to Russian trade. Russian traders and caravans
shall have free passage throughout the Khanate, and shall
enjoy the special protection of the local authorities. The
Bokharan Government shall be responsible for the safety of
Russian caravans on Bokharan territory.
(6) All merchandise belonging to Russian traders, whether
imported from Russia to Bokhara or exported from Bokhara to
Russia, shall be subject to an ad valorem duty of 2½ per
cent., in the same manner as an ad valorem duty of ⅟40 is
charged in the Russian province of Turkestan. No other tax,
duty, or impost whatsoever shall be imposed thereupon.
(7) Russian traders shall have the right to transport their
merchandise through Bokhara free of transit dues.
(8) Russian traders shall have the right to establish
caravanserais for the storage of merchandise in all Bokharan
towns. The same right is accorded to Bokharan traders in the
towns of the Russian province of Turkestan.
(9) Russian traders shall have the right to keep commercial
agents in all the towns of Bokhara, in order to watch over the
progress of trade and the levying of duties, and to enter into
communications with the local authorities thereupon. The
same right is accorded to Bokharan traders in the towns of
the Russian province of Turkestan.
(10) All commercial engagements between Russians and
Bokharans shall be held sacred, and shall be faithfully carried
out by both parties. The Bokharan Government shall
undertake to keep watch over the honest fulfilment of all such
engagements, and over the fair and honourable conduct of
commercial affairs in general.
(11) Russian subjects shall have the right, in common with
the subjects of Bokhara, to carry on all branches of industry

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No claim to original U.S. Government works

John Magee (1901–1987), a graduate of MIT and a leading expert on

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xii The Introduction to the Magee System of Technical Analysis

WHAT THIS BOOK DOES NOT DO

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EDITORIAL METHODS AND ORGANIZATION

xiv The Introduction to the Magee System of Technical Analysis

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SECTION I: A BRIEF HISTORY OF DOW THEORY AND

SECTION II: THE CENTRAL CONCEPTS AND

xviii The Introduction to the Magee System of Technical Analysis

SECTION III: MAGEE’S METHODOLOGY: RISK

SECTION IV: OTHER TECHNICAL ANALYSIS TOOLS:

SECTION V: CONSIDERATIONS FOR TRADERS/

SECTION VI: TRADING IS ONLY HALF SYSTEMS AND

SECTION VII: APPENDICES

Magee summarizes the basics of technical analysis, its origins

Dow Theory, deriving from original editorials in the Wall Street

2 The Introduction to the Magee System of Technical Analysis

Dow Theory is wholly a technical method. Technical analysts

4 The Introduction to the Magee System of Technical Analysis

THEORIES AND ASSUMPTIONS

1. The averages, in their day-to-day fluctuations, discount everything

The fundamental premise of technical analysis is that it is possible to

Basic Tenets of Technical Analysis 5

12000 INDU LAST-Daily 11/30/2000 TRAN LAST-Daily 11/30/2000 12000

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Chart 1. Dow-Jones Averages Chart Showing Divergences and Confirmations of

The technician’s assumption is that if confirmation occurs between the

6 The Introduction to the Magee System of Technical Analysis

however, deserve attention. These principles are, in brief, the foundations

BASIC TENETS OF TECHNICAL ANALYSIS

Basic Tenets of Technical Analysis 7