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A stock chart may conceivably be so simple a thing as the picture of the closing price of one stock issue on the last trading day of each year for only five or ten years. The picture would not mean a great deal, yet technically it would fit into our definition. It would be a pictorial record of the trading history of this stock. It would be a stock chart. It would differ only in degree from the most complete, most detailed and painstaking stock chart that we might construct.

We are not interested, for example, in the company behind the stock which we are studying. We do not care, for our immediate purpose, whether the corporation manufactures mousetraps, tin cans, locomotives or aluminum toothpicks. We are not particular as to whether it is an industrial, a railroad, a utility or a what-not. Technically the company behind the stock might even be in receivership, with its plant shut down entirely and making nothing at all. For our primary purpose of charting that stock it would make no difference, so long as the stock itself continued to enjoy fairly active trading in some orderly and well regulated open market security exchange.

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The trading in any stock is largely the result of the influence these fundamental factors have had on each buyer and seller of each share of stock. The stock chart is a pictorial record of such trading, so that it, in itself, is a reflection of all those other factors and, from a purely technical standpoint, need therefore concern itself no further with such fundamental considerations.

And, incidentally, since a stock chart is merely a record of trading, it follows that any stock is eligible for charting which enjoys a trading market. Any stock, and for that matter any article or service, which is bought and sold for a publicly listed price, can be charted. For practical purposes, we shall see later that in order to be a valuable subject for study a stock should have a free and open market, and an active market, but the fact remains that any traded stock can be pictorialized in a stock chart.

And this thought brings us naturally to by far the greatest practical advantage of the stock chart. Because it makes the groundwork of fundamental co-ordination of facts so easy, so simple, so readily grasped, it leads naturally into a more detailed study of the phenomena which it pictorializes; the actual results of the trading history presented, the patterns, the rules, the characteristics of behavior. In short, it leads to a new science, the science of technical chart action.

Technical market action is that aspect of analysis which is based upon phenomena arising out of the market itself, to the exclusion of fundamental and all other factors. In fact, technical action may also be explained as merely the antithesis of the fundamental considerations. The fundamental aspect of market analysis lays special stress upon such factors as the corporation behind the stock, its business, its prospects, its past, present and future earnings, its balance sheet, its financial strength, the quality of its management and so on. Fundamental factors include the dividend rate of the stock in question, its capitalization, its yield, its distribution and countless other factors which may have direct or indirect bearing upon the intrinsic worth of the stock, upon its theoretical price, upon what the individual may think it should sell for, or upon the true value of the issue in question.

Such fundamental factors are highly important and must be taken into careful consideration by the investor or trader. But they are not the technical factors which we are about to study. The technical factors are what might be termed the residuum of the total sum of all aspects bearing upon the probable market value of the stock, after the more apparent and fundamental factors are eliminated.

When we have finished our fundamental analysis of earnings, financial strength and all the rest, there is still something left to be considered with regard to the future price at which any particular stock may sell. That final consideration has to do with technical market action.

Ours not to reason why there was more stock offered than the demand could sustain. Ours merely to detect the technical fact that there were more sellers than buyers. That was the important point, for it meant the stock was going down, all fundamental factors to the contrary notwithstanding.

Such considerations form the basis for our statement at the beginning of this chapter that stock charts, and thus also technical action, take no consideration of fundamental factors like earnings, management, balance sheets and so forth, in their primary analysis. We shall see later that fundamentals are highly important adjuncts to the study of technical action and are, in many cases, more important for the long pull than are the temporary technical aspects. But in our introduction to the subject and for our basic understanding of stock charts we must realize that in themselves they completely ignore fundamentals. In fact they completely ignore everything except technical market action, the balance between buyers and sellers, the balance between supply and demand for any stock or group of stocks; in short the phenomena arising out of actual trading, per se, in a free and open market.

Perhaps it is too mysterious and suggestive of legerdemain to intimate that we need not question why a stock suddenly declines on weak technical action just when its fundamental aspects appear the strongest. There are many possible reasons, but they arise, like the technical action itself, primarily out of the market.

Speculators may have bought the stock months ago in anticipation of the development of these favorable fundamentals, and as they appear the speculators sell out and take their profits. Perhaps a group of powerful insiders, or officials of the company, have loaded up too heavily with the stock. Perhaps they realize that the fundamental situation is not as strong as the news makes it appear. There are any number of reasons why the technical position may be the opposite of the fundamental position.

Although through the medium of stock charts we can get a better judgment on the technical position of the market at the moment, that technical position is constantly changing and is subject to very rapid and substantial swings from very strong to very weak in a few days or even, at rare intervals, in a few hours. It takes practically no time at all for a huge lot of buying or selling to come into the market and such events are reflected in technical action and lend themselves to chart analysis.

Through the medium of stock charts we may arrive at a better understanding of the phenomena which attend the gradual but constantly shifting balance of power between supply and demand in the stock market.

We are most definitely a firm believer in the usefulness of stock charts and their high value in delineating the technical position of individual stocks and the general market. Stock charts are, in our opinion, the most important single aid in forecasting future price movements and we constantly stand on the reiterated premise that they are an absolute necessity for successful stock trading.

The reader may be certain that all of the principles educed in the following study of stock charts and technical action are considered valuable or important, or they would not have been included. But the reader may also be just as certain that none of those principles are guaranteed to be 100 per cent infallible. We have been able to find, though sometimes with difficulty, exceptions to practically every formation, to practically every rule. Furthermore, we know of no practical rule of stock charts or stock trading which may not, under certain conditions and at certain times, have such exceptions.

We have endeavored to suggest methods for attaining this happy state but, in the last analysis, it comes generally from long study, from long experience and from long foresight; and the greatest of these is the attitude which we are attempting to foster in these paragraphs, that of a healthy skepticism toward all rules, a scholarly spirit of conservatism and humility in the face of a great and valuable science and a conservative habit of action in all practical market trading.

Magazines have been a little slower in keeping abreast of public interest in stock charts but there are a number which carry regular charts on market averages. The Magazine of Wall Street, published bi-weekly, is perhaps the best-known and carries not only its own average chart, in which the prices of 295 common stocks are averaged, but a variety of other financial charts as well. Forbes Magazine publishes regularly a long-term chart of weekly ranges on the New York Times, or Annalist, average, showing for the past four or five years the course of the three Times series, the groups including 25 industrials, 25 rails and the 50 industrials and rails combined in a single index.

Such average charts are useful in gauging the trend of the general market but for the sincere student who wants to make real progress in chart analysis for himself it is mandatory to have at hand charts on individual stock issues, for they are the fundamental basis of all stock chart science.

Although daily, weekly and monthly charts are, when considered together, very valuable tools in the study of technical action, those who prefer may obtain separate single books of daily, weekly or monthly charts on either of two standard lists of 50 stocks each.

A supply of these ready-made charts can get the student off to a running start for they give him immediately the background of past action necessary for the proper analysis of the current picture as it develops. From then on, however, we advise the student to construct his own charts. He may continue to purchase ready-made charts if he chooses, perhaps as a means of keeping in touch with the weekly or monthly picture on a larger number of stocks than he can conveniently chart for himself each day, but to rely entirely on ready-made charts encourages a superficial attitude toward the entire subject. The method is too easy. This may sound like the philosophy of an enemy of progress but the statement is true, nevertheless. e24fc04721