Page 267 - How to Make Money in Stocks Trilogy

146 A WINNING SYSTEM

half of its cup-with-handle pattern. Finally, when the chart pattern and the
general market were right, PeopleSoft skyrocketed starting in August 1994.
In the first week of January 1999, San Diego–based Qualcomm followed
PeopleSoft’s three-phased precedent. In October 1997, Qualcomm charged
into new-high ground straight up from a loose, faulty base with too much of
its base in its lower half. It then built a second faulty base, broke out of a
handle in the lower part, and failed. The third base was the charm: a prop-
erly formed cup with handle that worked in the first week in January 1999.
Qualcomm went straight through the roof from a split-adjusted $7.50 to
$200 in only one year. Maybe you should spend more time studying histori-
cal precedents. What do you think? If you had invested $7,500 in Qual-
comm, a year later it would have been worth $200,000.

Detecting Faulty Price Patterns and Base Structures
Unfortunately, no original or thorough research on price pattern analysis
has been done in the last 78 years. In 1930, Richard Schabacker, a financial
editor of Forbes, wrote a book, Stock Market Theory and Practice. In it he
discussed many patterns, including triangles, coils, and pennants. Our
detailed model building and investigations of price structure over the years
have shown these patterns to be unreliable and risky. They probably worked
in the latter part of the “Roaring ’20s,” when most stocks ran up in a wild,
climactic frenzy. Something similar happened in 1999 and the first quarter
of 2000, when many loose, faulty patterns at first seemed to work, but then
failed. These periods were just like the Dutch tulip bulb craze of the seven-
teenth century, during which rampant speculation caused varieties of tulip
bulbs to skyrocket to astronomical prices and then crash.
Our studies show that, with the exception of high, tight flags, which are
extremely rare and hard to interpret, flat bases of five or six weeks, and the
square box of four to seven weeks, the most reliable base patterns must have
a minimum of seven to eight weeks of price consolidation. Most coils, trian-
gles, and pennants are simply weak foundations without sufficient time or
price correction to become proper bases. One-, two-, and three-week bases
are risky. In almost all cases, they should be avoided.
In 1948, John McGee and Robert D. Edwards wrote Technical Analysis
of Stock Trends, a book that discusses many of the same faulty patterns pre-
sented in Schabacker’s earlier work.
In 1962, William Jiler wrote an easy-to-read book, How Charts Can Help
You in the Stock Market, that explains many of the correct principles behind
technical analysis. However, it too seems to have continued the display and
discussion of certain failure-prone patterns of the pre-Depression era.