The Masters of Zig and Zag

"When I first started, nobody listened," says Kenneth Ward, senior vice president of Hay den, Stone & Co., a Manhattan-based brokerage house. That was 37 years ago, when Ward was one of a hardy but much heckled band of analysts who presumed to forecast stock prices merely by reading lines on charts. Ward can hardly complain of the following that has since been won by Wall Street's chart-oriented technicians. Practically every house and mutual fund has one or more chartists in its research department, and thou sands of individual subscribers pay any where from $150 to $500 a year for the scores of weekly market advisories that they prepare. "Today," says Ward, "everybody listens."

Swinging with the Smart. The technicians practice Wall Street's most ar cane -- some are unkind enough to say inane -- art. In deciding whether to buy or sell a stock, the purists among them profess to care less about such fundamentals as a company's assets, its earnings, its management or even what it does. Instead, the chartists divine the fu ture of a stock by poring over a dis play of its past performance. The zigs and zags may ignore the fundamental "facts," but more important, technicians argue, the charts reflect what the mar ket knows (or thinks it knows) about a company. One reason the chartists can be right: corporate insiders learn in ad vance about their company's earnings or new products and sometimes trade on that information in the market be fore the news gets around.

The charts first appeared more than 80 years ago, when investors found that they could often trace -- and turn a profit from -- the operations of stock-market manipulators by keeping running graphs on the price and volume of trad ing in individual stocks. Today's chart ists have created considerable bafflegab, but they have also devised some simple patterns by which to follow the swings of the smart money (see chart) and watch for new patterns. Among the com mon signs of change :

-A ROUNDING BOTTOM indicates that after a long decline, sellers have finally sold out. The field is now being taken over by buyers, who may erase some or all of the slide or even take the stock all the way to a rounding top. Currently, some chartists say that airline stocks are in a rounding bottom.

UPSIDE BREAKOUT FROM A BOX tells technicians that a long stalemate between buyers and sellers, which has kept the stock's price in a constricted area, has ended with the shattering of the "topside resistance" line and a victory for buyers.

A HEAD AND SHOULDERS REVERSAL is a pattern that signals a nasty downturn. If the right shoulder rises higher than the head, chartists say that investors should hold on. If it does not pass the high, chartists advise them to sell --or risk a plunge below the neckline.

Chartists use all sorts of other indexes to measure general market conditions. The "confidence index," for one, is based on sales of low-grade bonds, and assumes that bond buyers are extremely sophisticated investors. If bond buyers purchase the riskier bonds, so goes the rationale, just about anything will go up. Manhattan Technician William X. Scheinman takes in $150,000 a year in subscriptions to a weekly report based on his "divergence analysis" principle. One of its indicators is the recommendations of a group of 70 market advisory services, which Scheinman has found to be "always wrong as a group at key turning points. When they reached a peak of pessimism last March, the market started to go up."

Do such signals really work? The technicians flashed the 1962 market break well in advance when the Dow-Jones industrial average went into a downturn; they reasoned that, since business was basically healthy, the decline could only have reflected a weakness in market psychology. In 1966, technicians foresaw the drop in General Motors stock long before auto sales actually began to slump. On the other hand, skeptics say, the technicians rarely agree about which market squiggles are really "significant." When they are in agreement, their forecasts of rises or declines in individual stocks can be self-fulfilling prophecies. Some Wall Street traditionalists fear the day when technicians all look up from their charts to flash a unanimous SELL signal. Right now, chartists are cautious; many think the market has already reached the bottom of the decline started in December, but few expect any great rally soon.

Not by Graphs Alone. In practice, the successful chartists are eclectic as well as eccentric; they study the companies and the economy along with their charts. Technician Eugene Peroni of McDonnell & Co. rises at 4:30 a.m. to pore over his charts, spends his day in a dimly lit, chart-lined office working at a desk that has two ticker tapes running across the top, a built-in Telequote machine and a radio tuned to an all-news station. Within easy reach are reports on 1,300 companies that he follows. He claims that 90% of his recommendations have made money.

Of course, few investors would be willing to put down hard cash on the strength of graphs alone. By itself, says Wolfe & Co. Technician John Schulz, "pattern analysis is strictly for illiterates." But charts can be useful as one factor in analysis because they show the ebb and flow of investor interest--a volatile variable that does not always follow the rise and fall of business.

This file is automatically generated by a robot program, so reader's discretion is required.