This is the 3rd book I’ve read written by Nicolas Darvas. Readers should read the earlier review on Darvas’ first two books here: The Darvas Box Trading System by Nicolas Darvas before reading this post.
This book, You Can Still Make It In the Market, was written by Nicolas Darvas after his experiences in 1975, when he applied his Darvas box method again when the stock market was recovering from its crash from its peak around Jan 1973 to its bottom around Oct 1974 (S&P500 dropped ~50%).
Darvas first developed and applied his methods very successfully in the 1950s when the stock market had a good bull run from 1950 to 1960 (tripled). The question then was of course whether Darvas was successful simply due to the bull market or was it because his system works.
As the market recovered, Darvas highlighted that there were a few stocks that rose quickly without forming boxes, which cause him to question whether his system still worked. Nonetheless he waited and his patience bore fruit when he found target stocks that formed boxes and he made his money.
The conclusion from the book is basically that the Darvas method still works, with some tweaks below:
- Change in the entry rule to look for 2 penetrations of the same box top
- Change in the initial stop loss rule, where previously it was set to 1/8 below the breakout level, now it is set to 10% below the breakout level
- Relaxation of the all-time highs rule
With the help of a graphic designer, Darvas created a visual tool called the Dar-Card, that basically shows the Darvas boxes on a chart, and a shaded danger area at the bottom of each box (i.e. the area is shaded from the bottom of the box till 5% below the bottom of the box).
Here are the Dar-Card Construction Rules
- When the price of a rapidly rising stock reaches a resistance point which it does not surpass for 3 or more consecutive days, that point represents the top of the box.
- If, after falling from the upper limit, the stock reaches a downward resistance point which it does not penetrate for 3 or more consecutive days, that level represents tha bottom of the box.
- The shaded danger level is indicated when the price falls 5% below the bottom of the box.
And here are the Dar-Card Usage Rules
- A stock is in a rising trend when it is in its topmost box. As long as it remains there its price fluctuations should be ignored and the stock is a HOLD.
- If the price of the stock moves above the top of this topmost box the stock becomes a BUY. A 10% stop-loss should be set on the 1st breakout.
- Having formed a new higher box, if the price falls below the bottom into the shaded area of this box the stock is SELL.
- There is no reason to HOLD or BUY a stock that is not in its topmost box.
Change to the Automatic Buying Rule
- A penetration above the top of the box is often immediately followed by heavy selling which drops the stock a couple of points and drives it back into its previous box again. A purchase on a first penetration can therefore lead to a considerable loss.
- The reason for this behavior may be that astute professionals and floor traders know that a penetration above a resistance level is a signal for chartists to rush in and buy, so the professional traders take this opportunity to unload stock and thus make a point or two.
- In view of this, I now wait for a second penetration before buying, i.e. a penetration above the top of the topmost box, a downward reaction, and then a further rise to a new high above the first penetration’s high. [note that this is not exactly the same as penetrating the next box, since the stock can rise above the first penetration's high without forming the next box]
- If the price does not drop back after the first penetration but goes on rising I leave the stock alone; I never chase a rising stock because I never know when it will turn around and drop back again.
- Avoid “widows and orphans” stocks, i.e. institutional favorites that are large and established with huge share float, which makes it difficult for their share price to double.
- Stock: Look for stocks with a promising future in new and developing industries (i.e. companies whose growth and earnings prospects look highly promising), or stocks related to some new craze.
- Industry Group: The stock should belong to a strong industry group, i.e. a group that is performing well in the market relative to other groups.
- Overall Market: The overall market should be a bull market.
- Look for
- Sudden rises in price and volume
- Out of the ordinary relative strength
- Movement against the general market trend
Relaxation of the All-Time High Rule After a Bear Market
- Previously Darvas would only buy stocks making all-time highs. After the 1974 bear market, Darvas reasoned that the bear market had been so severe that all the weak holders of the stock would have abandoned it by now, hence it is fine to not wait for all-time highs.
- Essentially the whole purpose of looking for all-time highs is to ensure that there is little to no overhang preventing the stock from moving up (e.g. people holding the stock and selling at break-even as the stock moves up).
- A severe bear market will indeed kick out many of the weak holders, but I think there would still be a decent number left that are holding on and not wanting to realize the losses. Nonetheless I agree that waiting for all-time high is too high a bar after a severe bear market.
Supplement the System Rules with Tape Reading
- Case #1: National Semiconductor
- Darvas wrote about his observations on the movements of National Semiconductor which struggled to recover after a reaction. He decided to stay out of the stock because of this struggling action.
- That turned out to be a good call when the price dropped later and news came out on problems with their Bangkok plant.
- Case #2: Houston Oil
- Houston oil trebled in value, then did nothing for months.
- Darvas felt that the stock was not a strong mover, and would try to trick him into entering too soon. Hence even though the stock penetrated the top of the box, Darvas held back from entering and waited for a more positive penetration.
- He turned out to be right and the stock dropped quickly after the penetration.
- Darvas concluded that you must know the personality of the stock you are buying, its idiosyncrasies, its moods, its mode of behaviour.
- In both cases, Darvas did not simply follow the rules of the system mechanically but did better by reading the market action.
- Darvas was supposed to have re-read Humphrey B Neill’s Tape Reading & Market Tactics book every week. I think the personality of a stock can be gleaned by read from the tape of the stock for a period of time.
Set a Stop Loss, Minimally 20% below Highest Price
- When you buy a stock keep in the forefront of your mind, not the great killing you are going to make, but the possibility that your stock could drop 50% in value very quickly. Never ever let this happen to you. Set a stop-loss, even if only a mental one, such that you sell out any stock that has dropped 20% below its highest price.
Darvas System can be Adapted to Short Selling
- Turn the Dar-Card / Darvas System upside-down.
- Stop-loss on the top of the boxes.
Sit on the Sidelines until a Stock Satisfying Your Criteria is Available
- I have often remained liquid for as long as two years if I could find no stocks worth buying.
- I never buy a stock unless it seems likely to at least double in price in 6 to 12 months. If no such stocks come to my attention I prefer to be out of the market altogether.
- On Page 27, Darvas mentioned putting in a buy order for National Semiconductor at 17.5 with a stop-loss at 14.5. The stop-loss level is not 10% below the breakout level (as specified in the Dar-Card rules), nor is it 1/8 of a point below the breakout level (as specified in his earlier books). The most likely explanation is that it is the bottom of the box.