Many fundamental securities analysts think that technical analysis means
buying those stocks with the strongest relative price strength. Others think
that technical research refers only to the buying of “high-momentum”
stocks. Both views are incorrect.
It’s not enough to just buy stocks that show the highest relative price
strength on some list of best performers. You should buy stocks that are per-
forming better than the general market just as they are beginning to emerge
from sound base-building periods. The time to sell is when the stock has
advanced rapidly, is extended materially from its base, and is showing
extremely high relative price strength. To recognize the difference, you
have to use daily or weekly charts.
What Is Overhead Supply?
A critically important concept to learn in analyzing price movements is the
principle of overhead supply. Overhead supply is when there are significant
areas of price resistance in a stock as it moves up after experiencing a
downtrend.
These areas of resistance represent prior purchases of a stock and serve
to limit and frustrate its upward movement because the investors who made
these purchases are motivated to sell when the price returns to their entry
point. (See the chart for At Home.) For example, if a stock advances from
$25 to $40, then declines back to $30, most of the people who bought it in
the upper $30s and at $40 will have a loss in the stock unless they were quick
to sell and cut their loss (which most people don’t do). If the stock later
climbs back to the high $30s or $40 area, the investors who had losses can
now get out and break even.
These are the holders who promised themselves: “If I can just get out
even, I will sell.” Human nature doesn’t change. So it’s normal for a number
of these people to sell when they see a chance to get their money back after
having been down a large amount.
Good chartists know how to recognize the price zones that represent
heavy areas of overhead supply. They will never make the fatal mistake of
buying a stock that has a large amount of recent overhead supply. This is a
serious mistake that many analysts who are concerned solely with funda-
mentals sometimes make.
A stock that’s able to fight its way through its overhead supply, however,
may be safer to buy, even though the price is a little higher. It has proved to
have sufficient demand to absorb the supply and move past its level of resis-
tance. Supply areas more than two years old create less resistance. Of
course, a stock that has just broken out into new high ground for the first
time has no overhead supply to contend with, which adds to its appeal.
Excellent Opportunities in Unfamiliar, Newer Stocks
Alert investors should have a way of keeping track of all the new stock issues that have emerged over the last 10 years. This is important because some of these newer and younger companies will be among the most stunning performers of the next year or two. Most of these issues trade on the Nasdaq market.
Some new issues move up a small amount and then retreat to new price
lows during a bear market, making a poor initial impression. But when the
next bull market begins, a few of these forgotten newcomers will sneak back
up unnoticed, form base patterns, and suddenly take off and double or triple
in price if they have earnings and sales that are good and improving.
Most investors miss these outstanding price moves because they occur in
new names that are largely unknown to most people. A charting service can
help you spot these unfamiliar, newer companies, but make sure that your
service follows a large number of stocks (not just one or two thousand).
Successful, young growth stocks tend to enjoy their fastest earnings
growth between their fifth and tenth years in business, so keep an eye on
them during their early growth periods.
A Loud Warning to the Wise about Bear Markets!!!
Let me offer one last bit of judicious guidance. If you are new to the stock mar-
ket or the historically tested and proven strategies outlined in this book, or,
more importantly, if you are reading this book for the first time near the begin-
ning or middle of a bear market, do not expect the presumed buy patterns to
work. Most of them will definitely be defective. You absolutely do not buy break-
outs during a bear market. Most of them will fail.
The price patterns will be too deep, wide, and loose in appearance com-
pared to earlier patterns. They will be third- and fourth-stage bases; have
wedging or loose, sloppy handles; have handles in the lower half of the base;
or show narrow “V” formations moving straight up from the bottom of a base
into new highs, without any handle forming. Some patterns may show laggard
stocks with declining relative strength lines and price patterns with too much
adverse volume activity or every week’s price spread wide.
It isn’t that bases, breakouts, or the method isn’t working anymore; it’s that
the timing and the stocks are simply all wrong. The price and volume patterns
are phony, faulty, and unsound. The general market is turning negative. It is
selling time. Be patient, keep studying, and be 100% prepared. Later, at the
least expected time, when all the news is terrible, winter will ultimately pass
and a great new bull market will suddenly spring to life. The practical tech-
niques and proven disciplines discussed here should work for you for many,
many future economic cycles. So get prepared and do your homework. Create
your own buy and sell rules that you will constantly use.
buying those stocks with the strongest relative price strength. Others think
that technical research refers only to the buying of “high-momentum”
stocks. Both views are incorrect.
It’s not enough to just buy stocks that show the highest relative price
strength on some list of best performers. You should buy stocks that are per-
forming better than the general market just as they are beginning to emerge
from sound base-building periods. The time to sell is when the stock has
advanced rapidly, is extended materially from its base, and is showing
extremely high relative price strength. To recognize the difference, you
have to use daily or weekly charts.
What Is Overhead Supply?
A critically important concept to learn in analyzing price movements is the
principle of overhead supply. Overhead supply is when there are significant
areas of price resistance in a stock as it moves up after experiencing a
downtrend.
These areas of resistance represent prior purchases of a stock and serve
to limit and frustrate its upward movement because the investors who made
these purchases are motivated to sell when the price returns to their entry
point. (See the chart for At Home.) For example, if a stock advances from
$25 to $40, then declines back to $30, most of the people who bought it in
the upper $30s and at $40 will have a loss in the stock unless they were quick
to sell and cut their loss (which most people don’t do). If the stock later
climbs back to the high $30s or $40 area, the investors who had losses can
now get out and break even.
These are the holders who promised themselves: “If I can just get out
even, I will sell.” Human nature doesn’t change. So it’s normal for a number
of these people to sell when they see a chance to get their money back after
having been down a large amount.
Good chartists know how to recognize the price zones that represent
heavy areas of overhead supply. They will never make the fatal mistake of
buying a stock that has a large amount of recent overhead supply. This is a
serious mistake that many analysts who are concerned solely with funda-
mentals sometimes make.
A stock that’s able to fight its way through its overhead supply, however,
may be safer to buy, even though the price is a little higher. It has proved to
have sufficient demand to absorb the supply and move past its level of resis-
tance. Supply areas more than two years old create less resistance. Of
course, a stock that has just broken out into new high ground for the first
time has no overhead supply to contend with, which adds to its appeal.
Excellent Opportunities in Unfamiliar, Newer Stocks
Alert investors should have a way of keeping track of all the new stock issues that have emerged over the last 10 years. This is important because some of these newer and younger companies will be among the most stunning performers of the next year or two. Most of these issues trade on the Nasdaq market.
Some new issues move up a small amount and then retreat to new price
lows during a bear market, making a poor initial impression. But when the
next bull market begins, a few of these forgotten newcomers will sneak back
up unnoticed, form base patterns, and suddenly take off and double or triple
in price if they have earnings and sales that are good and improving.
Most investors miss these outstanding price moves because they occur in
new names that are largely unknown to most people. A charting service can
help you spot these unfamiliar, newer companies, but make sure that your
service follows a large number of stocks (not just one or two thousand).
Successful, young growth stocks tend to enjoy their fastest earnings
growth between their fifth and tenth years in business, so keep an eye on
them during their early growth periods.
A Loud Warning to the Wise about Bear Markets!!!
Let me offer one last bit of judicious guidance. If you are new to the stock mar-
ket or the historically tested and proven strategies outlined in this book, or,
more importantly, if you are reading this book for the first time near the begin-
ning or middle of a bear market, do not expect the presumed buy patterns to
work. Most of them will definitely be defective. You absolutely do not buy break-
outs during a bear market. Most of them will fail.
The price patterns will be too deep, wide, and loose in appearance com-
pared to earlier patterns. They will be third- and fourth-stage bases; have
wedging or loose, sloppy handles; have handles in the lower half of the base;
or show narrow “V” formations moving straight up from the bottom of a base
into new highs, without any handle forming. Some patterns may show laggard
stocks with declining relative strength lines and price patterns with too much
adverse volume activity or every week’s price spread wide.
It isn’t that bases, breakouts, or the method isn’t working anymore; it’s that
the timing and the stocks are simply all wrong. The price and volume patterns
are phony, faulty, and unsound. The general market is turning negative. It is
selling time. Be patient, keep studying, and be 100% prepared. Later, at the
least expected time, when all the news is terrible, winter will ultimately pass
and a great new bull market will suddenly spring to life. The practical tech-
niques and proven disciplines discussed here should work for you for many,
many future economic cycles. So get prepared and do your homework. Create
your own buy and sell rules that you will constantly use.
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