J. J. Murphy

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TECHNICAL ANALYSIS ~~E FINANCIAL MARKETS
A COMPREHENSIVE GUIDE TO TRADING METHODS AND APPLICATIONS

1ECHNICAL ANALYSIS ~~ FINANCIAL MARKETS
A COMPREHENSIVE GUIDE TO TRADING METHODS AND APPLICATIONS

JOHN

J.

MURPHY

NEW YORK INSTITUTE OF FINANCE

Library of Congress Cataloging in Publication Data Murphy, John J., [date] Technical analysis of the financial markets I John J. Murphy. p. em. Rev. ed. of: Technical analysis of the futures markets. c1986. Includes bibliographical references and index. ISBN 0-7352-0066-1 1. Futures market. 2. Commodity exchanges. I. Murphy, John J. Technical analysis of the futures markets. II. Title. HG6046.M87 1999 332.64'~c21 98-38531 CIP © 1999 by John J. Murphy

All rights reserved. No parts of this book may be reproduced in any form or by any means, without permission in writing from the publisher. Portions of this book were previously published as Technical Analysis of the Futures Markets (New York Institute of Finance, 1985). Printed in the United States of America 10 9 8 7 6 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. -From the Declaration of Principles ;ointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

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ISBN 0-7352-0066-1
NEW YORK INSTITUTE OF FINANCE Paramus, NJ 07652

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To my parents,
Timothy and Margaret and To Patty, Clare, and Brian

Contents

About the Author

xxiii xxv

About the Contributors Introduction

xxvii
xxxi

Acknowledgments

Philosophy of Technical Analysis
Introduction 1 2 5 6

1

Philosophy or Rationale Analysis versus Timing

Technical versus Fundamental Forecasting

vii

v;;;
Flexibility and Adaptability of Technical Analysis 7 Technical Analysis Applied to Different Trading Mediums 8 Technical Analysis Applied to Different Time Dimensions 9 Economic Forecasting Technician or Chartist? 10 10

Contents
\

A Brief Comparison of Technical Analysis in Stocks and Futures 12 Less Reliance on Market Averages and Indicators Some Criticisms of the Technical Approach Random Walk Theory Universal Principles 19 21 15 14

Dow Theory
Introduction Basic Tenets 23 24

23

The Use of Closing Prices and the Presence of 30 Lines Some Criticisms of Dow Theory Stocks as Economic Indicators Conclusion 33 31 32 32

Dow Theory Applied to Futures Trading

Contents

ix

Chart Construction
Introduction Candlesticks 35
36

35

Types of Charts Available 37

Arithmetic versus Logarithmic Scale Construction of the Daily Bar Chart Volume 41 42 45 Futures Open Interest Conclusion 46

39
40

Weekly and Monthly Bar Charts

Basic Concepts of Trend
Definition of Trend 49 51 52 55 Trend Has Three Directions Trend Has Three Classifications Support and Resistance Trendlines 65 74 76 76 The Fan Principle

49

The Importance of the Number Three The Relative Steepness of the Trendline The Channel Line 80

Percentage Retracements

85

x
Speed Resistance Lines Internal Trendlines Reversal Days Price Gaps Conclusion 94 90 90

Contents

87
90

Gann and Fibonacci Fan Lines

98

4:~;

Major Reversal Patterns
Introduction Price Patterns 99 100...
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