Technicall Analysis : The Book Method

George Douglas Taylor's contribution to technical analysis cannot be underestimated. He believed in measuring both market rallies and declines, and then averaging the numbers to arrive at some approximation of what should occur on the next trading day. He called this the "Book Method." I later incorporated these numbers into my LSS 3-Day Cycle Method, adding an additional formula that I called the Trend Reaction Numbers. These same numbers were later called the LSS Pivot Buy and Sell Numbers. Leaving aside this additional formula, let's first look at Taylor's original four key numbers-the rally, the decline, the buying high, and the buying under.

Questions
1 What is the rally number and what does it measure?
2. What is the decline number and what does it measure?
3. What is the buying high number and what does it measure?
4. What is the buying under number and what does it measure?

Answers

1. The rally number measures how far the market rallies from one day to another. It is the difference between today's high (the last completed day's high) and the previous day's low. Accordingly, if today's high is 1274.00 and the previous day's low is 1231.00, the difference of 43.00 points is the rally number. If one is trading U.S. Treasury bonds and today's high (after the close) is 105-18 and the prior day's low is 104-30, the rally would be the difference, or 2°h2T. his number tells us that on this particular two-day period, the market rallied 2°h2in price. We might use this information to determine how far above today's low price the bond market might rally tomorrow. Hence, assuming we are going to use the 2%2 number, with a low today of, let's say, 104-19, we can estimate a rally of approximately 2°h2o, r a high of 105-07 (10419/3+2 2°h2= 1057h2).
2. The decline number measures how far on average the market tends to decline from a prior day's high to today's low. If yesterday's high was 1294.00 and today's low is 1286.00, the decline is 8.00 points. Let's say today's high is 1323.00. Given an 8.00-point average decline, what can we expect for tomorrow's low? The answer is 1315.00, or 8 points lower, based on just one day's reading. In an actual example, we would average several declines. Let's say you are trading bonds and you arrive at a decline of 1-17. You would then subtract this number from a previous day's high to arrive at a possible low or support on
   the following day. Let's assume the prior day's high was 10517h2. By subtracting the decline number, you would arrive at an answer of 104-00.
3. The buying high number measures how far above the prior day's high the market traded today (the day just finished). In a rising market, you will have positive buying high numbers. In a declining market (with lower tops), you will have negative numbers. The formula for buying high is today's high minus yesterday's high. So if today's high is 1249.00 and yesterday's high was 1243.00, the difference is 6.00 points, the buying high number. If we want to assume the same buying high number will prevail tomorrow, we simply add on the buying high to today's high. This will give us a target of 1255.00 (1249.00 today's high + 6.00 buying high = 1255.00). Let's say you are trading the u.s. Treasury bonds. Today's high is 103-11 and yesterday's high was 102-17. Obviously, the market has been rising rapidly, as reflected in a buying high of 26h2I.f the market continues to rise at this rate tomorrow, the buying high would give us a target top of 104-05 (103-11 today's high +
   26h=2 104-05).
4. The buying under number measures how far today's low traded under yesterday's low. Hence, for a positive number to occur in the buying under, you must have a lower low today, since the calculation is yesterday's low minus today's low. A rising market will give you a negative number for the buying under. Let's say yesterday's low was 1260.00 and today's low was 1267.00. The market has been rising. This will give you a negative number of -6.00 for the buying under. When you go to subtract this number from today's low of 1267.00, you will arrive at a higher number-namely 1274.00-since two negatives added together result in an addition. An easier example is when yesterday's low was, let's say, 1077.00, and today's low is 1075.00. The difference is 2.00 points. Using the buying under to generate a new low tomorrow will result in 1073.00 as the target low (1075.00 today's low -2.00 buying under = 1073.00).