Some Basics Of Technical Theory!

I am putting forth some basic tenets of Technical Theory. These are principles, which R.W.Schabacker had outlined. One of his most avid followers is Linda Raschke (I like her!). She presented the following in one of her workshops.

Theory Of Cycles: Markets fluctuate in extremes and to measure these extremes, one needs to have historical ranges. It also pays to look into business cycles, the tendency of bonds prices to reverse before stocks prices and stock market to reverse before the fundamentals.

Trends: Price movement progresses in certain trends, which are more likely to continue, than to reverse, over the bulk of any time interval. Once the market has started in a direction, it is assumed that the direction will continue rather than reversing immediately. Trends can be defined as Up Trend (higher highs and higher lows) and Down Trend (lower highs and lower lows).

Theory Of Action-Reaction: In normal trading, bulk of the transactions is done by the traders and not investors. An advance in the market implies, traders have been buying and will eventually sell off to square their transactions. Therefore the rapid up move will be followed by partial reaction. The extent of these reactions then indicates Technical Strength/Weakness in the market.

Intermediate Reaction: Growing irregularity and volume indicate an Intermediate Reaction. It shouldn’t retrace more than 50% of the previous move. Intermediate Reaction does not indicate reversal of a major trend, but can last for a few weeks.

Secondary Reactions: Smaller reactions follow Intermediate Reactions. These primarily test the support and resistance of the Intermediate Reaction. After the secondary reaction, there often follows a period of calm. There does not always have to be a secondary reaction.

Resistance/Support Levels: S/R levels take the worry out of trading. Use them to monitor risk. The longer it takes to form the stronger is the indication that the next major move will be in the opposite direction, from that on which, the support and resistance was encountered.

Accumulation/Distribution: These reveal themselves in chart formations. The most common reversal formations are Rounding Tops/Bottoms, Head and Shoulders and Multiple Tops and Bottoms.

Closing Prices: Continuation of any movement is probable, if the movement is not too fast, if most of the days gain is held at close and if the volume of the day is not too large. Closing prices are more useful when determining a shakeout from the S/R levels.

Volume: High volume at the beginning of the move, shortly after the price has broken out of consolidation signals a confirmation of a strong Trend. Similarly high volume after a long trend signals that the trend is loosing steam and its time to reverse.

Gaps: Gaps are the most reliable signals. Look for break away gaps out of chart formations. If not covered during a day or two, then assume it’s a beginning of a potential strong and reliable move.

Schabacker’s Principles Of Trading

• Build a campaign or a policy, before you take the trade. Take losses philosophically even though they maybe exasperating.
• Follow the crowds in group movements (Relative Strength).
• Cross the crowd when the movement is sharper and abnormal.
• Movements from one stage to another occur without a dividing line. Scale in and scale out, never enter your whole line at one go.
• Short Swing Trading capitalizes on quick technical factors.
• Long Swing Trading capitalizes on fundamentals and cyclical fluctuations.

R.W. Schabcaker’s main works:

• Stock Market Theory And Practice. 1930
• Technical Analysis And Market Profits. 1932
• Stock Market Profits. 1934