StairStops. Using Basing Points to Ratchet Stops in Bull and Bear Markets (John Magee Investment Series Book 4)

Crucial Questions: Is Man Directly Descended from Geese? Is There a Better Way to Beat the Market?
YES


A Description of StairStops and its Importance to Investors and Traders
Roughly speaking about as much time energy and money have been spent trying to beat the stock market as have been spent on nuclear energy, or on walking on the moon. If not more.
I have often compared it to the Dark Ages search for the Philosopher’s Stone.
Of course there is no fool proof method or system for beating the market over the long term. Witness the mortgage backed securities debacle –the Long Term Capital Management debacle, the Portfolio Insurance debacle…. Etc., etc, etc.
But as frequently occurs underneath the noses of seachers there are simple and elegant methods for dealing with the market that are too commensensical for Nobel Laureates and too simple for “experts”. I am fond of saying that the refusal of “professionals” to recognize these methods proves that man is directly descended from geese.
One of these methods is Dow Theory. I have demonstrated at some length (in my book Sacred Chickens, the Holy Grail and Dow Theory) the effectiveness of Dow Theory to deal with long term currents in the markets.
But perhaps the most powerful of these methods is the Basing Points Procedure. The Procedure was described by John Magee in Technical Analysis of Stock Trends in the 1950s. This procedure operates very much as Dow Theory does, using wave highs and wave lows to determine when to enter and exit the market.
In Sacred Chickens, the Holy Grail and Dow Theory I have demonstrated that the method, which I have called StairStops, is the equal or better of Dow Theory. Back studies are, of course, always successful. So to demonstrate the real effectiveness of the market I used it to short the market in January 2008, remaining short through the entire bear market.

Organization of this Book
In order that Magee be allowed to speak for himself, and that the reader be allowed the benefit of his wide and deep experience, the first chapter is devoted to Magee’s exposition of the method from Technical Analysis of Stock Trends. Chapter 2 is devoted to my effort, primarily from the 9th Edition, to clarify Magee’s work and clear up some of the anomalies of his presentation. In the 9th Edition I clarified the setting of Basing Points set on wave lows. I believe that this is an inherently conservative way to use the method.

But there is another part of the procedure that is important and definitely worth use by the more skilled technician. That is, the setting of Basing Points according to the establishment of new highs as well as wave lows. I have called these two approaches Variant 1 and Variant 2. Variant 2 being the entire procedure. In Chapter 3 I lay out the entire Variant 2 procedure with instructions and illustrations. In Chapter 4 I address the question of filter calculation, citing both Magee’s work on the subject and some pragmatic observations. In Chapter 5 the detailed day by day use of the procedure is illustrated. This step by step, day by day exposition should clear up confusion as to how the Basing Point is found. Chapter 6 documents how I used the procedure to exit and short the market in January 2008. It quotes letters written on the web as the great bear market was beginning. In the Appendix I offer the reader a drill, or exercise which will give some practice in using the method. Included here are blank charts which the reader may practice his marking of Basing Points. In my seminars I start with the drill rather than the exposition of the method. The surprises students experience are often enlightening...in many senses. The reader might want to consider reading the book back to front. That is, starting with the exercise and then turning to the front of the book.