A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Price-Volume Systems
Price-volume systems suggest that when a stock (or the
general market) rises on large or increasing volume, there is an
unsatisfied excess of buying interest and the stock will
continue its rise. Conversely, when a stock drops on large
volume, selling pressure is indicated and a sell signal is given.
Again, the investor following such a system is likely to be
disappointed in the results. The buy and sell signals generated
by the strategy contain no information useful for predicting
future price movements. As with all technical strategies,
however, the investor is obliged to do a great deal of in-and-
out trading, and thus his transactions costs and taxes are far in
excess of those necessitated in a buy-and-hold strategy. After
accounting for these costs, the investor does worse than he
would by simply buying and holding a diversified group of
stocks.
Reading Chart Patterns

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Perhaps some of the more complicated chart patterns,
such as those described in the preceding chapter, are able to
reveal the future course of stock prices. For example, is the
downward penetration of a head-and-shoulders formation a
reliable bearish omen? As one of the gospels of charting,
Technical Analysis
, puts it, “One does not bring instantly to a
stop a heavy car moving at seventy miles per hour and, all
within the same split second, turn it around and get it moving
back down the road in the opposite direction.” Before the
stock turns around, its price movements are supposed to
form one of a number of extensive reversal patterns as the
smart-money traders slowly “distribute” their shares to the
“public.” Of course, we know some stocks do reverse
directions in quite a hurry (this is called an “unfortunate V
formation”), but perhaps some chart configurations can, like
the Roman soothsayers, accurately foretell the future. Alas,
the computer has even tested more arcane charting
techniques, and the technician’s tool has again betrayed him.
In one elaborate study, the computer was programmed to
draw charts for 548 stocks traded on the New York Stock
Exchange over a five-year period. It was instructed to scan all
the charts and identify any one of thirty-two of the most

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popularly followed chart patterns. The computer was told to
be on the lookout for heads and shoulders, triple tops and
bottoms, channels, wedges, diamonds, and so forth. Because
the machine is a very thorough (though rather dull) worker,
we can be sure that it did not miss any significant chart
patterns.
When the machine found that one of the bearish chart
patterns such as a head and shoulders was followed by a
downward move through the neckline toward décolletage (a
most bearish omen), it recorded a sell signal. If, on the other
hand, a triple bottom was followed by an upside breakout (a
most favorable augury), a buy signal was recorded. The
computer then followed the performance of the stocks for
which buy and sell signals were given and compared them
with the performance record of the general market.
Again, there seemed to be no relationship between the
technical signal and subsequent performance. If you had
bought only those stocks with buy signals, and sold on a sell
signal, your performance after transactions costs would have
been no better than that achieved with a buy-and-hold
strategy.

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