Tape Reading and Active Trading by Richard D. Wyckoff sivils STOCK MARKET INSTITUTE INC —-_ma ene ee eee eee eee eee V, i i HOW TO ACHIEVE BEST RESULTS FROM YOUR TAPE READING PROGRAM. ‘The following are included in your Tape Reading and Active Trading Program: Tape Reading and Active Trading text 10 tape recorded lectures 12 examinations Consultation Service on course materials Personalized instruction service This brief run-down on the Tape Reading and Active Trading Program will help you to get more out of your studies. Read the text all the way through before you begin study of the related course material (exams, chart studies, taped lectures, etc.). The complete Tape Reading and Active Trading Program is made up of one printed volume and 10 recorded lectures. The one volume text contains 13 study sections (sometimes called assignments or lessons) and 6 chart studies. Each study section is a short programed unit: it contains the discussion material, a summary of the important points in that section, and a short self-grading quiz. This has been planned so that you can complete almost any unit in one evening ~ a few hours — of a truly enjoyable and exciting learning experience, Follow these directions for a truly effective learning of the technique for trading the intra-day 3 to 5 point moves. Directions To master the principles which are the heart of the Active Trading program, we suggest you skim the entire text completely through the first time without interruption — Preface, Table of Contents, Important Points, Self-Quiz Tests, Chart Studies — to “get the feel of the material.” ‘Your next reading of the text should be thorough and cover all of the material — from beginning to end. Underline definitions and key sentences as you proceed. Make notes of each item you want to remember, or ask about, in the ‘Notes’ column to the right on each of the pages which cover the major principles. ‘This reading should include a very careful study of the charts, text and related cross references. It should also include a review of the Important Points, the Self-Quiz tests, practice on each of the principles, with actual charting projects and interpretation of the data compiled for the stocks included in the text. Self-Quiz In addition to the Important Points (or summary) for review of the important principles at the end of each section, we have included a Self-Quiz. ‘The Self-Quiz in each section is a short test you can complete in a matter of minutes. This is a check on your understanding of a given subject. After you select your answers you can score yourself by referring to the Answer Key in the back of the text. Personalized Instruction and Consultation Services ‘Test your ability to apply the principles you learn from this course by making a series of paper trades. Send us copies of your Records of Paper Trades for review and criticism, Please use the forms we send you to secure this additional personalized instruction. PREFACE1 1 : 1 I 1 1 1 1! 1 1 i 1 1 1 I i ' I 1 1 I i { If you have trouble applying any of the principles, or if your paper trades do not develop according to expectations, select a paper trade which illustrates your difficulty and submit it to us. Be sure to incluce a statement showing when and at what price you bought or sold; where you placed your stop; the technical position of the stock as you understood it at the time you entered the trade; and an outline of the reasoning you employed in arriving at your decision to make the trade. As you proceed in your studies, whenever you have a question to ask or are in need of supplies please use one of the Consultation Service forms included with your ‘materials. Conclusion ‘As you gain proficiency in the application of this instruction and acquire experience in the interpretation of market action, you will find a continuing review of your ‘course extremely beneficial. As your knowledge of stock market technique increases, your text will become increasingly valuable as a reference work. Do not lay it away — consult if often. It not only will refresh your memory of vital principles, but by constantly reviewing the course you will also awaken to the discovery of refinements and principles that may have escaped your notice on earlier ‘occasions. A word of caution: Be thorough. Speed is not the important objective — it is rather the development of the knowledge, the skills and the behavioral requirements for successful participation in the market. Set a realistic study schedule for yourself — make it an hour or two each session say, ‘two or three times a week — then stick to it. By following a regular program you make steady progress and you hasten the day you can get more pleasure-and profit from your Tape Reading/Active Trading training.TABLE OF CONTENTS VOLUME ONE Section 1 Section 2 Section 3 Section 3 Part II Section 4 Section 5 Introduction The Law of Supply and Demand Stop Orders The Immediate Trend General Rules ‘Tape Reading and the Longer Swings Important Points Self-Quiz Judging the Immediate Trend The Use of the Wave Chart Buying and Selling Waves Judging Turning Points ‘Tape Reading and the Intermediate Trend Selecting Market Leaders Important Points Self-Quiz Buying and Selling Waves Relationships of Waves ‘The Wave Chart Detecting Critical Points Selection of Leaders How to Construct the Wave Chart ‘Support and Pressure Price Trend Activity Volume Important Points Self-Quiz Buying and Selling Waves ‘Volume and Activity analysis Increases in Activity ‘One-Point and Three-Point Figure Charts Important Points Self-Quiz How to Coordinate the Wave Chart Selecting Market Leaders ‘The Law of Supply and Demand Important Points Self-Quiz ‘Trading Areas and How to Profit by Them Ranges of 3 to 5 Points ‘Volume on Rallies and Reactions Boundaries of Trading Ranges Establishing a Position Important Points Self-Quiz Lit1 1 c 1 1 1 ! i I t 1 1 1 1 i i 1 ! 1 I i 1 See Section 6 Section 7 Section 8 Section 9 Section 10 Section 11 Section 12 Section 13 Chart Studies - 1 Chart Studies - 2 Chart Studies - 3 Chart Studies - 4. ‘The Tape Reading Chart ‘The Tape Reading Chart Three Vital Factors Study of J. f. Case Important Points Self-Quiz How to Determine Buying and Selling Points ‘The Wave Chart and the Market’s Technical Position The Tape Reading Chart with the Wave Chart Buying and Selling ‘Anticipation of a Change Important Points Self-Quiz ‘Judging Strength or Weakness by Half-Way Points Half-Way Points “Floating Supply Reduced Disciplined Training Important Points Self-Quiz How to Keep the Percentage in One's Favor Stop Orders Risk at 1/2 to 1 Point Commissions and Overhead ‘The Law of Supply and Demand Important Points Self-Quiz ‘Trading on Initial Activity A Stock Becomes Active ‘The Tape Reading Chart Vertical Line Charts Important Points Self-Quiz Judging the Market by Tests and Responses The Composite Operator Testing Groups Activity and Latent Buying Power The Law of Supply and Demand Important Points Self-Quiz ‘The Best Stocks for Active Trading Primary Requirements Secondary Requirements Leadership Volatile Issues Important Points Self-Quiz ‘Stop Orders and Other Vital Points The Use of Stop Orders Judging Efficiency Time Limits Qualifications Trading Important Points Self-Quiz Phillip Morris Reaction Bottom May 16-18, 1973 Phillip Morris Rally Top May 22-24, 1973 Polaroid Reaction Bottom May 16-18, 1973 Waleraid Walle Ton Maw 24 107%V ‘STOCK MARKET INSTITUTE INC. SECTION 1 INTRODUCTION For the Three to Five Point Moves with Risk Limited to (One-half to One Point Those who follow the Wyckoff Method as described in the Richard D. Wyckoff Course in Stock Market Science and Technique, devote an hour a day, more or less, to studying and planning their campaigns. However, an increasing number of students desire to trade in the market continuously, either in their brokers’ offices or in private offices of their own, with direct access to stock reporting equipment and other related facilities. Stock Market Institute has received many requests from these traders for further detailed information on the Art of Tape Reading; and since the technique of active trading from the tape is different from that outlined in the previous course, the Institute is offering this program. ‘The program, Tape Reading and Active Trading, is based on judgment of the technical position of the stock market. These judgments are determined by the Law of Supply and Demand (pressure and support). No news, earnings or other corporate or fundamental statistics are considered; only those data are used which relate to the Law of Supply and Demand: Price Movement, Volume and Time. ‘The active trader who is a tape reader is concerned only with the immediate trend of the small moves in the market. This immediate trend can be detected by this method soon after the daily opening of the Stock Exchange. The immediate trend may change from bullish to bearish, or vice versa, and reverse itself from one to three or more times during each day’s session. Active traders may learn how to follow these trends, changing or reversing their positions as often as the market affords trading opportunities. In most instances trades are closed out the same day they are made, but if there are strong reasons for carrying any stock overnight, this may be done. Detailed instructions are given as to the best stocks to choose and the exact time to make commitments, based on the methods formulated and successfully employed for more than twenty years of trading and advisory work by Richard D. Wyckoff. Stop orders must be placed on every trade, fro.n one-half to one point away from the buying or selling price. These stops must beaoe See eee ee ee eee ee watched constantly and moved as quickly as the market permits in order to reduce risk, then protect profits. This form of trading disregards the long term trend of the market, as, well as the intermediate trends. Active trading takes instant advantage of the technical rallies and reactions that promise to yield a profit in the same stock market session, on either the long or the short side of the market. Tape reading is the art of determining the immediate course or trend of prices from the action of the market as it appears on the tape of the stock ticker. It aims to detect the moves that are likely to occur in the next few minutes or hours; getting in when they begin, and getting out when they culminate. This procedure requires activity and flexibility of mind; readiness to change or reverse one’s opinion quickly; it also requires nerve, poise, decision, promptness, courage and absolute independence of judgment. Its purpose is to derive an average profit from a series of trades. By trading with the risk down to a minimum and constantly striving to reduce it through the use of stop orders, a net profit over commissions, taxes and losses can be realized. All commitments are temporary — their duration is usually limited to hours. These commitments are intended to take advantage of the small, immediate price fluctuations of individual stocks. With this method, the active trader searches for opportunities and works for profit here and now — today. In most cases the trader will prefer to go home with a clean sheet — with no remaining commitments on either side of the market. Thus when trading begins the next morning, his mind is clear for new impressions; the judgment is unbiased by reason of a neutral position. At each morning's opening a swift analysis of the market is made; the trend is sensed; the best stock is selected; and, if conditions are favorable, a commitment is made by the trader. Next, the trader watches the market for a confirmation or contradiction of the correctness of this position. Also there is an anticipation for the psychological moment for moving stops, closing trades or crowding stops s0 close to the market price to leave the way open for a further profit, or be closed out on stop at a small fraction from the extreme high or low. By trading in such a manner, the trader is afforded several times as many opportunities in these small swings as he would have if he had waited for the more important swings of ten to thirty points, If a trade does not make good at once, close it out, whether it stands even or at a small loss. Never trade without a stop, for the risk must be kept down toa minimum. Never take a big loss. ‘Never be tied up. Clean house in an instant. Stay away from the ticker as often and as long as desired. 1-2‘This form of trading is entirely distinct and different from that described in the Richard D. Wyckoff Course in Stock Market Science and Technique, which aims to secure profits fiom the ten, twenty and thirty point swings. This method fulfills the requirements of ‘those who wish to trade more or less constantly. Included in this Tape Reading and Active Trading program is a plan for charting the detailed transactions in selected stocks as they appear on the tape, from which the immediate trend may be sensed; the exact points for placing stop orders may be determined and where to move them to reduce the risk when the market moves favorably. This technique shows the active trader how to close out trades the same day at the most advantageous moments, by watching these Tape Reading Chart indications and getting out near the extreme points in the advances and declines, Under this Method one might take new positions once, twice or even three times a day, depending upon the activity of the market. It is the nearest approach yet devised, so far as Stock Market Institute knows, to trading on the floor of the Stock Exchange. The most important advantage of a combination of tape reading and trading for the longer swings is that it will aid the individual in increasing profits. The active trader may apply the Tape Reading Method in making trades at the most favorable moment, and the position is then taken with a small risk of one-half to one point which may later develop into Position 2 on the long side, or Position 4 on the short side, and indicate a run of ten, twenty or thirty points in his favor. (Positions 2 and 4 are discussed in Sections 18 and 19 of the Stock Market Science and Technique program.) By trading with a fraction of a point or a point original risk and letting the profit run into many points, the tape reader will greatly widen the margin of profit. Consequently, the Tape Reading Method may be combined with the Five-Step Wyckoff Method for greater profit possibilities. Important Points 1. The purpose of this course is to learn to trade for the 3 to 5 point moves with risk limits of % to | point. 2, The techniques used by the active trader differ from the method as taught in the Richard D. Wyckoff Course in Stock Market Science and Technique. 3. The method of tape reading and active trading is based on the Law of Supply and Demand. 4. All news, earnings, and other fundamental statistics are not to be considered when trading actively 5. The active trader must learn to follow the immediate trend and reverse his position as the market provides the opportunities. 6. This method of active trading and tape reading disregards the Jong term and intermediate trends of the market. 7. Tape reading is the art of determining the immediate trend of the market from the tape. 8, Every commitment is temporary and its duration is generally limited to hours. 9. Traders may increase their profits by advantageously combining 1-3[cee ee er-Oe-e- --O nana meme meee eS ee See ee the principles taught in the Stock Market Science and Technique course with the specie! techniques in the Tape Reading and Active ‘Trading program. Self-Quiz Circle T if the statement is true or F if the statement is false. When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F Active traders never take a large loss and should always keep their risk to a minimum, 2. Stop orders should be placed on most trades and be moved as the market dictates. 3. The active trader is concerned with the intermediate trend of the market. 4. The purpose of this method of active trading is to derive an average profit from a series of trades, 5. If a trade does not make good at once, the position should be maintained until it does. 6. At cach market opening the trader analyzes the market, senses the trend, selects the best stock, and makes his commitment, if conditions are favorable. 7. The only three important factors in the analysis of the stock market are price movement, volume, and time. 8. A trader should never trade without a stop loss order.‘STOCK MARKET INSTITUTE INC. JUDGING THE IMMEDIATE TREND 4 For the purpose of judging the immediate trend of the market, the active trader uses a Wave Chart, made up of the price of five to eight of the most active leading stocks. The prices of these issues are added together, and plotted on a sheet of cross-section paper, with the time scale at ‘the bottom of the vertical lines, and the price scale at the left, corresponding with the horizontal lines. (A sample Wave Chart is included as Chart 2.1). All movements in the market are made up of alternating buying and selling waves. The strength or weakness of the market is judged by the distance in points and fractions recorded by these waves; this distance is then combined with the length of time each wave takes to run its course. The tape reader studies the distance and duration of each wave. If the buying waves are longer in duration and travel farther than the selling waves, this is an indication that the immediate trend is upward, If the selling waves exceed the buying waves in time and distance, the immediate trend is downward. Whenever the buying and selling waves seem to offset each other and no material strength ‘or weakness is indicated, the immediate trend is in doubt. The trader's position should be neutral whenever the trend is in doubt. The active trader should always trade in harmony with the immediate trend of the market. The tape reader should select the five to eight leading stocks at the opening of the- market. (These leaders may change from time to time as the market leadership rotates.) The opening price for each of these leading stocks should be added together — including the cighths. A mark is then placed at the price representing their total at the proper place on the price scale and on the 10 o'clock vertical line. Next, the tape reader watches for either an upward or downward swing to exhaust itself. When a wave appears to stop, a dot is placed on the chart at the proper time and price level. If the market then reverses its direction, this proves that the position of the dot is correct. If the market continues in the same direction, the dot is changed until the movement hesitates and shows signs of a reversal. ‘The new wave is then watched until it seems to come to an end. The trader places a corresponding dot at this point. The market will confirm or contradict the trader’s estimate of that turning point. This must continue until the tape reader is thoroughly familiar with judging and recording the start, duration and finish of each successive wave. ‘The immediate trend is indicated as soon as one buying and one selling wave have been completed. One then knows which side has the most power — the buying or-the selling side. And all the trader has to do is to go with that side. 2-1 SECTION 2-_ But, the tape reader must always be on the lookout for a change in the immediate trend. It is likely to change its direction from one to three times in a single session. A change in direction of the immediate trend can be detected relatively easily: in an uptrend, when the selling waves begin to increase in time and distance, or the ‘buying waves shorten. Either or both of these conditions will be an indication of a change in the immediate trend. The same reasoning is applicable to a downtrend. These changes must be watched closely for they tell when to buy or sell; when to go long or short; when to close the present trade or reverse a position. Remember, a tape reader has nothing to do with the other trends of the market — either the long term trend or the intermediate swings of 10 to 30 points. The latter swings are the basis of the Richard D, Wyckoff Course in Stock Market Science and Technique. Trading for such swings is an entirely different proposition, requiring less time and attention, but having as its objective larger profits for each trade = 10, 20 or 30 points — and using 2 or 3 point stops. Although the buying or the selling waves may be sufficient on certain days to carry the market in a specific direction until the close, this does not mean that it will continue in the same direction the next day. Consequently, one should not carry any trades overnight. Tomorrow's trend will define itself tomorrow. Also, it is best for one ‘not to g0 into tomorrow's session with any stocks on hand unless there is some extraordinary reason in the action of the market. For example, a reason to maintain a trade overnight may be a strong development of power near the beginning of what looks like an important bull or bear swing, indicated by increasing activity and volume in a given direction. This movement should have few, if any, points of hesitation, or raily, or reaction, as the case may be. In such instances, a long position might be allowed to run, with a frequent raising of stops, so that a trade originally made with a half to one point stop might run into several or many points and thus increase the net average of profit on all trades for the month. ‘Such a situation may be taken advantage of by those who understand the Wyckoff Method of trading for the larger swings and can forecast the probable number of points certain stocks should move. Once a trade is made on the strength of tape reading indications, and its price gets well away from the starting point, and indicates, according to the Count Guide, that it will probably develop a move of 10 to 30 points, the trader allows the profit to run. As a consequence, large profits should result. The Wave Chart teaches tape reading. After the Wave Chart has been used a while, a person may not need it. The eye and brain will see and record these happenings that are now required to be plotted on the Wave Chart. After the tape reader has gqne from the first step to the second, he will begin to develop intuition, by which the knowledge of a coming change in the immediate trend of the market will be known in an instant, just as a champion knows how to hit a golf ball without thinking of all the different motions necessary to do it correctly. The Wave Chart should not be abandoned too quickly and one should not expect intuition to come until he has had Jong experience and practice. The five to eight market leaders should always be representative of the market. At times when a leading oil has considerable effect it should be included. At other times an automotive, like Chrysler, might come to the front; it should take the place of some other leader so long as this condition lasts. Selection of these leaders may be likened to observing the pulling power of a group of horses: If one were driving such a group and noticed one horse lagging in the traces and another always tugging ahead of the rest, it would be decided 2-2nm em He em et eR EEE ee lo that the former should be replaced and that the latter is the real leader. This reasoning should be applied in keeping the leaders among the most representative of all the stocks in the market in their ability to influence the rest of the list. These must be evaluated from day to day. The tape reader must weed out poor ones, which means those that have lost their influence, or have become too inactive to be included. The Wave Chart of the previous day should be in front of the trader when the market opens so that he will have a perspective of today’s market in relation to that of yesterday. Important Points 1. All movements in the stock market are made up of buying and selling waves. 2. The immediate trend of the market is up if the buying waves are onger and move farther than the selling waves. 3, The active trader must practice judging the start, duration, and culmination of each wave in the market. 4. The tape reader is not concerned with the long term or intermediate trends of the market. 5. It is best not to carry a position overnight if one is an active trader. 6. Only if the market appears to be in an important bull or bear swing should a trade be cartied overnight. 7. The tape reader should develop intuition as to turning points in waves through continual practice with the Wave Chart. 8. The previous day’s Wave Chart should be before the tape reader at the next day’s open to gain a proper perspective. 9. The make-up of the Wave Chart should be continually reviewed so that it reflects market leadership. Self-Quiz Circle T if the statement is true or F if the statement is false. ‘When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. Strength and weakness are determined by the distance and duration of the buying and selling waves. T F 2. The immediate trend of the market is down if the buying waves are longer and move farther than the selling waves. T F 3. The leaders which compose the Wave Chart need not be representative of the market. T F 4, The Wave Chart is used to judge the intermediate trend of the market, T F 5. To detect a change in the immediate uptrend cither or both of the following may occur: a) selling waves begin to increase in time and duration; and/or b) buying waves shorten.6. The immediate trend is indicated as soon as one buying and one selling wave is completed. 7. The trader should be neutral whenever the immediate trend of the market is in doubt.‘Gaoom4 SnonnraKo wo sonny av (Ors). Ee ie abt ‘< sé 3 SROTSSAS Geom aArunoAsNOD aALA oNTANR “inom Ob anon hows ‘saprwa Urata. do MNS itt ONTAOHS ‘suaavat aaa 20 VO 3A 9 a I I 2 ame aeae ee rrr niin1 1 i 1 I 1 1 t I 1 i i ' i i 1 I 1 t i ! 1 <4 ‘STOCK MARKET INSTITUTE. INC BUYING AND SELLING WAVES PARTI ‘The Wave Chart described in this section is designed to give stock market technicians certain vital information which is essential for a clear understanding of the prevailing trend of the market. Every upward or downward swing in the market, whether it amounts to many points or only a few points, consists of numerous buying and selling waves. These waves have a certain duration; they continue just so long as they can attract a following. When this following is exhausted, for the time being, that wave comes to an end and a contrary wave sets in. The latter wave may attract more of a following than the former. By studying the relationships between these upward and downward waves and comparing them with each other, the trader can judge the relative strength of the bulls and bears at any particular moment. More than that — a tape reader can determine the local turning points and, consequently, have 2 valuable guide to short-swing trading operations. Finally, by applying the principles which are presented in the Stock Market Science and Technique program, the longer-swing trader can utilize his analysis of these buying and selling waves in judging the probable future trend of the market. He may also analyze levels of support and supply, and all the phenomena associated with accumulation or distribution. Remember: The market itself tells the active trader everything he needs to know about its probable future action. Every significant ‘change in supply or demand is registered on the tape. When the tape reader has learned to analyze the market by its own action, as recorded on the tape, he will then be proficient in the art of tape reading. ‘The experienced tape reader acts upon intuition gained by practice and persistent study. It is assumed that all active traders desire to develop this kind of intuition. That is why the Wave Chart which was designed and originated by Richard D. Wyckoff in 1916, in connection with his personal operations in the stock market, is presented in this section. ‘This Wave Chart provides the tape reader with a condensed picture of the essential developments in every stock market session. In other words, it gives a graphic representation of the day’s tape action, just as if one were watching the ticker and setting down every vital detail. SECTION 3‘The Wave Chart has three very important functions: (1) It provides an instrument through which the active trader may develop tape reading ability and intuition. (2) It sives certain essential information about the market's action by means of which one may detect and forecast the minor swings, and conduct short-swing trading operations. (3) It reflects vital information which traders may use in trading for the intermediate and major swings. As previously explained, all stock market movements, however large or small, are made up of buying and selling waves. The market does not rise or fall like the water in a tank which is being filled or emptied. It moves to a higher or lower level by a series of surges — a good deal like an incoming or outgoing tide — with successive waves higher or lower than those preceding. The small buying and selling waves described run so many minutes. They are caused largely by the restlessness of active professional traders, a good deal like the ripples produced by the wind upon the ocean. Traders must have activity; they make their livelihood by trading on fluctuations. Therefore, they engage in a ceaseless tug of war, trying to put prices up whenever the opportunity is favorable, or drive them down when they find that the bulls are weak or have overextended themselves. The small waves are part of the larger waves which run several hours or days, and eventually make up movements of 3 to about 5 points. The 10 and 20-point moves are made up of several 3 and 5-point waves, and the bull and bear markets are composed of many swings of 10 to 20 points or more. These market movements may be easily confirmed by examining any chart. It is important that every trader does this to impress upon his mind these numerous waves of various sizes. This will assist the trader in understanding the market. He will then think in waves, When a tape reader looks for an opportunity to buy, he must watch for the down waves in the stock. After a long position has been established, a number of small, medium, and good-sized waves may be sat through, until finally it is observed that it is about flood tide in that stock. Then he watches for an especially strong up-wave and gives the broker an order to sell the stock at the market. ‘The waves of the market furnish a clear insight into changes in supply and demand. By learning to judge all sizes of market waves, the active trader will gradually learn to spot the time when a rising market or a rally has halted and is about to reverse. These are the turning points. To be able to say when the turning points occur at the bottom of a bear market, or at any important rallying point on the way down to the bottom, or at the top of a bull market, or at any important reactionary point on the way up, is a mark of ability in a trader. Wave Chart Helps Detect Critical Points Of all the things that are most desirable to know about the stock market, these two are the most important: (2) First, to be able to determine the finai top of a bull 3-2I i I i I I I i I market; the top of the intermediate swings, and the top of the minor moves. (2) To be able to determine the final low in a bear market; the bottom of the intermediate swings, and the end of the minor moves. An active trader must master this branch of the subject thoroughly. Detecting turning points is vital to success in active trading, But there is one step more: The education will not be complete until ‘one can cover all shorts and go long at the bottom of a panic or a depression, or of an intermediate swing; and sell out all long stocks and go short at the top of a boom or an intermediate bull movement. This will be the result of training, practice, and experience. It requires great flexibility of mind, A trader can learn to do it if he will study and practice the Wyckoff Method. At first it is better to learn to analyze these waves from a chart. The chart teaches one how to become a sound judge of the market. By the use of the Wave Chart, one can become familiar with all the elements necessary in successful trading. The necessary elements are judging the lifting power as compared with the pressure; the speed of the advances and declines as measured by the number of minutes, or by proportional changes in activity and volume on advances and declines; and, more especially, the changes from strength to weakness and from weakness to strength. ‘A tape reader must practice with such a chart. He learns to judge the small daily movements; then applies the same method to the 3 to S-point swings and the 10 to 20-point swings; and then to the great swings that run over a period of years. In time he may become proficient in all kinds of markets. ‘As the waves of the market cannot be studied from the action of any ‘one stock, and as it takes too long to compile and strike an average of a large group of stocks, it is best to use the aggregate price of five to eight leading stocks as a basis for study of these buying and selling waves. The selection of these leaders depends upon which were the most active trading mediums over the past few weeks or months. General Electric is almost invariably one of these. Other good market leaders usually include such stocks as International Business Machines, UAL, Inc., Chrysler, du Pont, and Exxon (XON). However, this group of leaders should be adjusted from time to time to meet changing market conditions. The object is to select those which are continuously active and which indicate real leadership. The market should seldom go contrary to the trend of these leaders, because they are used by large interests to influence the market toward higher or lower levels. In most cases such movements start with those stocks. Generally, no important move starts without these leading stocks being immediately affected. Changes in this group can be made as often as desired, without affecting the barometric value of the chart, by changing the scale at the side of the chart. If this group of leaders totals 390 and a change in one of the stocks introduces a new stock which reduces the total price to 375, the whole scale can be shifted fifteen points, The picture of recent fluctuations will then bear its proper relation to those which follow.= = = How to Make a Wave Chart ‘The trader should take a sheet of paper ruled in small squares, or an ‘ordinary sheet of cross-section paper ruled 10 squares to the inch. He considers each vertical line to be a ten-minute period of time and each horizontal line one point in the price scale, which should be at the right of the chart. (See Chart 3.1 on page 3-13) At the opening of any day’s session, the fofal price of the first sales of the leaders is calculated; that is, the prices of the leaders are added together. This opening price is marked by a dot on the 10 o'clock line. Then the tape reader watches these leaders until they have a small swing upward or downward. When that swing exhausts itself, a dot is placed on the chart at the proper time ~ that is 10:10, 10:15, or whatever the time may be fo the nearest five minutes. As soon as he has done this, he adds the price of these leaders — say at the top of that swing — and then draws a diagonal line from the opening figure to the figure at which the first wave ended and at the proper place for that hour and minute on the chart. (Chart 3.1 and the explanation which follows will make this more clear.) In figuring the aggregate price of the leaders, the trader takes the last sale of each up to the time he adds up their prices (including the fractions). It may be found that only three or four of these stocks respond to an upward wave, while one declines during the same time period. This makes no difference. The total price of the last sale of all these leaders is the desired value and this is calculated at the termination of each wave, whether upward or downward, by adding the last sales of all the stocks in the wave. On Chart 3.1, if the leaders open at a total of say 380, and they swing upward to 383 (A) in a period of 20 minutes, the tape reader makes a line diagonally upward to a price of 383 at 10:20am. If at the end of that time, the leaders hesitate and react, he watches how long it takes for that reaction to run its course and how far back it goes (A to B). If this wave is only 15 minutes, he knows that the ‘buying power is greater and more sustained than the selling power. Demand is, therefore, greater than supply. Suppose the next upswing (B to C) lasts 45 minutes and carries the price of these leaders to a higher level than the first advance — say to 385; this indicates an increase in the buying power because the rise was 4 points (B to C) compared with 3 from the opening, and the buying wave (B to C) was sustained 45 minutes compared with 20 minutes (opening to A). As the next reaction (C to D), 20 minutes, is ‘only 3 minutes more than the first and amounts to only 1% points, compared with the previous reaction of 2 points, the active trader has a confirmation of the strength. Analyzing these indications, one notices that the D to E wave lasts 40 minutes and lifts the price 4% points. Next, the E to F dip lasts 30 minutes — a little longer than the previous one — and amounts to 2 points. This reaction shows a slight increase both in time and distance — 30 minutes and 2 points compared with the previous reaction of 20 minutes and 1'4 points. This warns the tape reader to be on the lookout for a change in trend. When the rally of only 1% points (F to G), begins to die out (in 10 minutes), the trader decides to act as soon as the down swing (G to H) begins, because this 10-minute rise lasts only about one-fourth as. long as the previous rise of 40 minutes. It shows that the buying power has practically exhausted itself on the previous upswing. This is a clear indication that supply is overcoming demand and the trend is turning downward.When the decline (G to H) begins on the tape, that is the cue to sell ‘out long stocks, if any, and go short all of the leaders (at X), with a stop on each about 2 points above the commitment price. It must be assumed for the sake of a clear illustration that the stocks which are traded are all of the leaders. One should seil an equal amount of each of the leaders, but for simplicity’s sake let it be assumed that it is only one of the leaders, The decline (G to H) runs $0 minutes — 20 minutes longer than the previous decline - and amounts to 3% points compared with 2 points (E to F). The short rally (H to 1) which lasts only 10 minutes emphasizes the weakness, because it amounts to only 1 point compared with 1% points (F to G) in the previous rally — the shortest so far — showing that there is practically no buying power remaining. If one did not go short, as stated above, he should do so now, immediately after the market hesitates at I and begins to decline. If one did go short, a second lot may now be sold at the point marked XX, just below the bottom marked H which occurred at 1:50 p.m. at a price of 384. The stop order is reduced on the first lot to a price fractionally above the high made at 12:20 p.m., and another stop is placed on the second lot at the same figure. The decline (I to 5) runs 20 minutes, but carries the aggregate price of these leaders down 4 points. A 15-minute rally (J to K) says, when it dies out, that the short position is safe. Then there is a 20-minute decline of 6 points more (K to L). ‘The price at the low point of the decline L which ends at 2:55 p.m, is 377. Here the shorts may be covered at the market if the analysis indicates that somewhere about this level the market should turn up again. If there is no such indication and the trader does not cover, his stops should be moved down so that most of the profit will be assured, without shutting off the possibility of more profits. ‘Thus far, the volume of trading has not been referred to because it is better, first, to learn to judge the factors of: (1) Price movement — number of points advance or decline. (2). Time elapsed in each movement — up or down, (3) Comparative support and pressure on each up or down swing. After an individual has mastered these points, he should begin to study also (4) the volumes and (5) the intensity of action (activity) in connection with the above actions, This will give added understanding and power. Volume and activity studies should be added to what the tape reader has learned from the buying and selling waves. This will provide the fourth and fifth factors, and when these are learned and used properly judgment will improve. One will then find that, whatever the market does, it will, in nearly every instance, tell him what it is going to do — and what the market is going to do is the most desirable thing to know in all Wall Street. If the market leaves the trader in doubt, he will do nothing. Support and Pressure — A very important thing which should be observed from the chart of the selected market leaders is where they meet support on the declines, These support points indicate the levels at which the strong demand in these stocks comes in. In 3-5‘trading, the value of any stock is the price at which it may be sold within one minute; hence, the price at which demand is willing to take it, combined’ with the amount which this demand appears willing to buy at that price, is a strong indication of the stock’s immediate future. When large interests are planning a campaign in a stock, they “lay the foundation”. That is, large operators accumulate a quantity according to the size of their venture and the anticipated profit to be derived from that issue. This quantity bears a relation to the estimated number of points profit. If the stock is below value, and they see a large profit ahead, they will take all they can buy at certain levels, then gradually raise their bid prices until they get all they want. They buy, preferably, on reactions until such time as they are ready to mark up the price. This is why these support points, or points of resistance (a phrase originated by Richard D. Wyckoff ‘many years ago), are so important for the trader to watch. In brief, when a tape reader sees strong resistance in a stock, with the rest of the market weak, he knows the buying is better than the selling. Consequently, good demand is probably doing the buying because they believe they can sell out later at a profit. When these indications are seen on the tape or on the charts, the active trader should follow them. That is, he selects the best of the stocks if there are many. To do this is to have the strong demand working with him and for him. The trader is then playing the game as the professionals play it. This is not a guarantee of a profit, but if his judgment is good, and he chooses the right time for action, he will find that he can realize a profit in the majority of instances. Since the average trader does not have the equipment required to secure the necessary figures for computing activity and volume, these significant data are published on the Stock Market Institute’s Daily Pulse of the Market. Chart 3.2 is an example of how this vital information is published; these data are also available daily via a recorded telephone message. 1. Price Trend — This is indicated by the central irregular line representing the up and down movements of the total or aggregate price of the leading active stocks. At this time these stocks are Chrysler (C), General Electric (GE), IBM, Anaconda (A), Exxon (KON), Union Carbide (UK), UAL Inc. (UAL), and U. S. Steel (X). The current Wyckoff Wave utilizes multipliers with these stocks. This central solid line which travels from left to right across the chart shows, according to the vertical scale to the right of the graph, the aggregate or total price of the active leaders which have been selected at any hour of the market session. The hours are indicated by the figures 10 (a.m.) to 3 (p.m.) at the top. For example, this price line leaves the left-hand vertical boundary of the graph, representing the beginning of the session, at price level corresponding to about 378-5/8 on the vertical scale, then moves up to 385-1/2, then down to 382-3/4, up to 384, down to 381-3/4, up to 383-1/4, etc. and finally to 391-7/8 at the end of the session, represented by the right-hand vertical boundary of the graph. 2. Activity — This is indicated by the two irregular lines, one above and the other below a center line, Relative activity is indicated by the vertical distance between the lines ‘rom hour to hour, and more specifically by the lengths of the vertical lines which may be drawn through the points where the central price line reverses its direction. These vertical lines extend equal distances above and below the 3-6=e ee ee turing times of the center line. These vertical distances represent in vertical scale units these relative changes in trading activity. Activity is measured in units or small figures which are proportional to the change in activity (or in pace of trading) from period to period, and are indicated by figures on the table — usually 4 to 15. The price rallies and reactions during the session are designated as periods, numbered consecutively from left to right in the order of ‘their occurrence. The vertical line at the beginning of period No. 4 has a length of four units above and four units below the activity base line, and at the end of the period it has a length of two units above and two units below the center line. This means that the trading activity decreased from four units to two units during this reactionary period, while the price was falling from 384 to 381-%. This fact is also illustrated by the spread of the activity lines at the top and bottom of the period. Likewise, in period No. 9, observe that the activity is increasing during the rally, for the activity lines have spread farther apart. Thus, when the lines are moving farther apart the activity is increasing; and when the lines are moving closer together the activity is decreasing. 3. Relation of Activity and Price Trend — As explained, the activity is indicated by the way the lines which represent the activity tend to come together or spread apart, a condition which is easy to detect. Increasing or decreasing activity, accompanying a price rally or reaction during any significant period of the day, is immediately apparent. The trader should remember: when the activity is increasing while the price is rising or the activity is decreasing while the price is declining, the interpretation is usually bullish; but, when the activity is increasing while the price is declining, or the activity is decreasing while the Price is rising, the interpretation is usually bearish. Likewise, when the volume is increasing while the price is rising or decreasing while the price is declining, the inference is usually bullish. 4, Volume — Above the price scale at the top of the chart, is the share volume as demonstrated by the Optimism-Pessimism Index. Volume is reported on the ticker tape from hour to hour. In addition, the table at the right of the graph shows the total volume of transactions accompanying each buying and selling wave. These volume figures are reported to the nearest ten thousand. This offers a third element which may be considered by the tape reader in making a forecast. Incidentally, these figures are an exclusive feature of the SMI Pulse of the Market and to the best of our knowledge, are obtainable nowhere else. The favorable or unfavorable indications of the activity changes, in conjunction with the favorable or unfavorable indications of the Price changes and volume studies, are a combination of facts which have a high degree of forecasting value. 5. Time — The Time Scale is indicated by hourly periods at the top of the chart. The vertical lines represent the time intervals of the periods of rallies and reactions during the day. By extending the vertical lines, or placing a ruler to separate the periods, and observing the Time Scale across the top of the chart, the duration of each rally ‘reaction can be closely approximated. 6. Supply and Demand — The relation between these two forces is illustrated by the continuous chart formed by clipping and pasting these daily intra-day charts side by side in a book or on «large sheet, with vertical scale in adjustment, over a period of several days or weeks. 3-77. The Table of Data at the right of the graph contains 2 complete summary of each session’s significant price, volume, and activity, together with other valuable information. These figures are presented in such a form that the market student may quickly analyze all the relationships between time, volume, activity, and net price change on each buying or selling wave. Important Points 1, Every swing in the market consists of numerous buying and selling waves. 2. The market itself tells the trader all he needs to know about its probable future action. 3. Every significant change in the relationship of supply and demand is recorded on the ticker tape. 4. The Wave Chart provides a graphic picture of the essential developments in every market session. 5. The various buying and selling waves are caused by the restlessness of active professional traders. 6. The waves of the market furnish a clear insight into the changes in supply and demand 7. The mark of ability in an active trader is being able to determine the turning points in the market. 8 A tape reader must practice with the Wave Chart to learn to judge the smail, daily movements in the market. 9. The active leaders (stocks) which comprise the Wave Chart should be those stocks which were most active during the past few weeks or months. 10. The aggregate price of the leaders in the Wave Chart (including eighths) is the price of the Wave at any particular time. 11. It is best for the active trader to learn to judge the factors of: a) price movement, b) the elapsed time, and c) the comparative support and pressure of each up or down wave. 12. Other factors which should be studied are the analysis of volume and activity (intensity of trading.) 13. Support areas are important to determine where demand may be anticipated. 14, If there is strong resistance in a stock when the market is weak, this is an indication that the buying power is greater than the selling power in that security. Self-Quiz Circle T if the statement is true or F if the statement is false. After you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. When the tape reader looks for an opportunity to buy he should wait for an up wave in his stock. T F 2. Some elements which are necessary for successful trading are the abilities to judge: a) the lifting power compared with the pressure, b) the speed of advances and declines, and c) changes from strength to weakness and ‘weakness to strength. 3-83. A trader can judge the relative strength of bulls and bears by analyzing the relationships between the buying and selling waves. 4. Generally, no important wave in the market will begin without the leading stocks being affected. 5. If the activity is increasing with rising prices and decreasing with declining prices, the interpretation is generally bearish. 6. When the tape reader recognizes indications on the Wave Chart, he should act on those indications. 7. The leaders which constitute the Wave Chart should never be changed. 8. An increase in both time and distance of selling waves during an immediate downtrend may be an indication of an impending change in that trend. 9. Three vital functions of a Wave Chart are: a) an instrument for tape readers to develop their ability and intuition, b) providing the essential facts for detecting and forecasting minor swings, and c) providing vital information necessary in trading for intermediate and long term swings. 10. An active trader should not think in terms of waves. 11. Ifa stock in the Wave Chart no longer demonstrates, market leadership, this stock should be replaced by a current active leader. 12. Ifa stock is changed in the Wave Chart, the Wave Chart’s price scale should be shifted to compensate for the price differential. 3-9I i ' [ i I I i 1 I I [ i i f i t i I i I f i a ‘STOCK MARKET INSTITUTE INC BUYING AND SELLING WAVES PART IL In Part I of this section it was demonstrated how to interpret the ‘Wave Chart from the standpoint of price movement, duration of each buying and selling wave, and comparative support or pressure. The following illustration (Chart 3.4) will show in more detail how to apply the additional factors of volume and activity to the analysis of the small waves. In this illustration (Chart 3.4), it will be seen that volume and activity both shrink to very smail proportions on the little buying and selling waves from 10 a.m. to 1:40 p.m. The day starts with a small rally which is promptly followed by a small dip. Bulls and bears are evidently well matched at point #1. After the first dip (wave 2), the bulls try to put prices up but they fail to attract a following, as shown by the failure of activity to increase. Demand “peters out" around the 11:00 a.m. top. ‘A small dip in the fourth period brings out very little stock on the downside and this encourages the bulls to try again. Once more they fail to attract a following. Note how the rally in wave 5 dies out around the two previous tops (point #2). The bears endeavor to break the deadlock by offering stock down (wave 6) until | o'clock. This maneuver meets no better success. Activity fails to increase on the downside, however, and a tentatively bullish indication is given by the evidence of support around the morning low at point #3. ‘At this point the market has come to a complete standstill. Everything now depends on the ability of one side or the other to rouse a following, either by breaking down through the support level or by pushing prices up through the morning resistance levels, When the bears fail at 1 o'clock, it is the bulls’ turn to try their strength again. This time demand is a little stronger. Prices rise a little bit above the previous highs and activity increases slightly as they advance (point #4). If the tape reader is trading for the short swings, this is a cue to prepare for action. If activity falls off on the next selling wave, he may expect the bulls to become aggressive. He does not have long to wait. Prices sag a bit in the next fifteen minutes but the activity dies ‘out completely on the dip. This is the cue that has been anticipated (point #5). It says that the supply which held the bulls back on previous rallies has been absorbed on the small earlier reactions. ‘Therefore, the active trader steps in with confidence and buys. This action is promptly rewarded by a sharp rise in wave 9. Any question as to the validity of this upward move is settled by the sharp increase in activity as prices rise through the previous tops. 3-10 SECTION 3Shortly after 2 o'clock, the bulls rest momentarily because, at this point, the average has risen to a level where stocks encountered supply on the preceding Friday and Saturday. (Not shown on this chart.) Note: This example is from a period of market action when the New York Stock Exchange was open on Saturdays. Also, the market traded from 10:00 a.m. to 3:00 p.m. on weekdays. Evidently this supply has also been disposed of, because activity promptly shrinks on another temporary sell-off. Since there is obviously no pressure yet and it appears few offerings are to be taken at this level, the trader stays Jong and waits for the bulls to push on again as they try for a higher objective. This they attain just before the close of the market for the day. In this example and the example in Part I, the Wave Chart’s usefulness has been considered primarily from the standpoint of short-swing trading operations. For analysis of the intermediate and longer term movements, it would be helpful to construct a one-point, five-point, or ten-point figure chart from the tape reading chart. ‘The additional illustrations (Charts 3.5, 3.6 and 3.7) show how to mount the daily Wave Charts to form a continuous record so they may be compared to the significant indications developing on the one-point figure chart. Important Points 1. Bulls and bears are well matched if there are small buying and selling waves with activities and volumes of small proportions. 2. If the activity fails to increase on the downside and the wave supports at the previous levels, this is a tentative builish indication. 3. A lack of pressure is indicated by decrease in volume and activity on temporary reactions. 4. Technical strength is indicated by the ability to hold above a previous support line. 3. The failure to rally completely up to a supply line indicates existing weakness and cancels previous bullish indications. Self-Quiz Circle T if the statement is true or F if the statement is false. When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. If the bulls attempt to put prices up and the activity does not increase, this demonstrates the inability to attract a following. T F 2. After slightly penetrating the previous highs on a decrease in activity and then following with an increasing activity on the reaction, this is an indication that supply has been absorbed. T F 3. Constructing figure charts of the Wave Chart provides indications which may be analyzed in terms of the principles of the Stock Market Science and Technique program. 3-11T F 4. Weakness in a zone of supply is indicated by the inability to absorb offerings under previous tops, failure to make progress on heavy volume, and diminishing activity on buying waves, T F 5. The inability to resume an advance after a normal corrective reaction indicates weakness, 3-12CHART 3.1 213 ‘STOCK MARKET INSTITUTE INC. a ( Ce ee ee ee eeTAPE READING PRICE +. 379-12 385-1/2 382-3/4 304 3813/4 383-1/4 381-14 3863/8 3843/4 303-3/8 389-1/4 391-78 tae i i i I I Exchange from the tape of the stock ticker. Peiggs g22:2 2 1 28 8 6 8 7 2 | top me Tow” I 63 OPENING... 1 10:25, 25 re 2 10:35 10 57} 3° 10:80 15 i . Yo 4 118 25 396. 5 11:35 20 I 6 1200 25 7 1:20 80 I se 8 1:40.20 a 215 36 i 10 23016 I 3 W 3:00 «30 fhoe 3 I< I fee 2 i I I I I I 3-14 CHANGE +6-7/8 - 23/4 +1 - 2 +12 -2 +518 - 1-5/8 +85/8 - 4-1/8 +25/8 CHART 3.2 A daily analysis of the buying and selling waves on the New York Stock VoL. activ. UME 000) 2n 88a OUR eoNNon ee 120 76 196 ad 51/2 58.10 87.35 57.41 58.61 87.93 60.31 59.55 63.15 61.29 64.54wave cunt OF THE PRICE oF FIVE LEADING INDUSTRIALS Tilustrating Ability to Absorb Offerings ‘Bnd Develop Further Strength Note: The “Zotal Price" scale in left sargin shove the sum of the prices of five leading industrial stocks because this scale is, { Bore convenient and senaitive than'a scale of the average price.= = = nen eam ee elem eee ee rating Inability to absorb Of1 and Development of Weakness 3-150 CHART 3.3CHART 3.4 000‘009'1 0000. te 2 5 5 W124 1 ‘STOCK MARKET INSTITUTE INC. 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AUG. 29 ooo'oo9 EE ww] o} oo0'oz 2 000'099"t Fev Oo0'oer't | — O00‘oL0't LY MON, AUG. 28 ooo'oza FE o00'0ee’e 000°062'Z Few 20 ooo'oze’t | - 4 ooo'ose’t FY FRI, AUG, 25 ooo'06s FE Illustrating zone of distribution: inability to absorb supply and development of weakness. (Compare with one point figure chart at A, page 3- 17.) o00'0EL'L o00'008"t | ev o00'0E LE LE ooo'oss FF ‘000'06z, i o00'o8s'z. 12 " 1 THU, AUG. 24 STOCK MARKET INSTITUTE INC 1420 415 410. 395,‘STOCK MARKET INSTTTUTE INC. CHART 3.7 2882282282228 22888828288 seaeeaaeaaeaaiiGiidd W271 2 Metta nat 2 ) ued 2 330 5- 5 Let 5- = 5— 5 5- 5 Wo 01 2 ieee SR eee ae W201 2 Lee MON, OCT. 30, 1933 ‘TUES. OCT. 31, 1933 WED. NOV. 1, 1933 THUR, NOV. 2, 1933 Illustrating zone of support, ability to absorb offerings and development of strength. (Compare with one point figure chart at K, page 3-19.)V STOCK MARKET INSTITUTE INC HOW TO COORDINATE THE WAVE CHART WITH THE STOCK IN WHICH YOU ARE TRADING The Wave Chart, based on the action of the five to eight leading active stocks, is complete in itself if the active trader wishes to trade in all these stocks at once and whenever a turn is indicated. However, in the beginning it is best to trade in only one security. The trader should observe which of these leaders appears to follow most closely the swings on the Wave Chart; or, perhaps, there may be some other stock not included among the leaders which, by observation and experiment, is found to be better for this purpose. This will depend upon the kind of stocks that make up the'leaders in the Wave Chart. The trader might, for example, include Chrysler, which would give the group a different character than if it were not included; or an oil like Exxon (XON) would again change the texture of the wave. When the trader finds a stock suited to his purpose, its behavior should be studied closely under all conditions. The character of its manipulation should also be watched. During the study period he makes different kinds of charts of it, such as a vertical line chart, a continuous line chart, (see Chart 4.1) and a combination of figure and volume charts, which will be described in another section. All of these charts will aid the active trader in becoming acquainted with the peculiar action of that stock so that he can trade it to better advantage. A continuous line chart is constructed by connecting the closing prices of the stock for each market session. This reflects the net result of the effort of the bears (supply) and bulls (demand). Whether for study or actual practice, the active trader should plot the stock’s moves on the Wave Chart. The price scale of this stock should be entered on the right side on the sheet; on the left the price scale of the leaders for the Wave Chart should be plotted. Now the tape reader studies the action of his one stock in combination with the changes in the immediate trend as shown on the Wave Chart. He may find that it is changing its trend exactly when the wave changes. If this continues, he will know just when to buy and sell it But, he may find it is working exactly the opposite: when the Wave Chart turns upward his stock may begin to get weak. This stock should be traded accordingly. Or, it may be observed that this stock reaches its turning points before or after the stocks in the Wave Chart. The trader does not care which condition exists so long as he can learn its habits and turn them into profits. Now that the active trader has the idea, it depends on the amount of 41 SECTION 4a a (ie study and practice he puts into it. What is seen on the Wave Chart is the working out of the Law of Supply and Demand. That chart is a moving picture of a cross section of the market, designed by Richard D. Wyckoff for this very purpose — to help traders get profits out of trading from the tape of the NYSE. Each trader should make the most of his opportunities. Important Points 1, The Wave Chart is based on the action of five to eight market leaders. 2. Different types of charts of an individual security which is to be traded should be analyzed. 3. Some types of charts which an active trader should consider are a vertical line chart, a continuous line chart, and a combination figure and volume chart (Tape Reading Chart). 4. Ifa stock is a candidate for trading, it is best to plot this stock on the same chart paper with the Wave Chart. 5. The Wave Chart is designed to assist active traders in realizing Profits by trading stocks from the tape of the NYSE. Self-Quiz Circle T if the statement is true or F if the statement is false When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. A stock should be traded according to how it responds in relationship to the action of the Wave Chart. T F 2. The Wave Chart reflects the relationships of the Law of Supply and Demand. T F 3. Initially it is recommended to trade in all of the market leaders simultaneously. T F 4. Ifa stock is suited to a trader's purposes, it is not necessary to study the behavior of that security. T F 5. It is best to observe which stocks appear to be in harmony with the movements of the Wave Chart,A VERTICAL LINE CHART AND A CONTINUOUS LINE CHART HONEYWELL (HON) 1/9/73 - 5/18/73V STOCK MARKET INSTITUTE. INC. ‘TRADING AREAS AND HOW TO PROFIT BY THEM From observation an active trader knows how often stocks get into periods of narrow ranges of 3 to 5 points. These are times of discouragement for most people who are on the wrong side, or who are looking for big profits when the market affords only small profits, There are many short swings to one long one. A tape reader must know how he can derive profits from the 3 to 5 point moves. ‘The trader should keep a vertical line chart showing the daily movements of any of the well-known averages, such as the Dow-Jones, Standard and Poor’s, New York Times — whichever is published in his local daily newspaper. He uses these to indicate when the market is in a trading area or whether it is moving to another level, upward or downward. ‘The trader does not care which way the averages go or when; but he needs those averages for a broad picture of the market — as an indication of the various currents and eddies. The currents are the small, intermediate or long trends. The eddies are the trading areas. In streams these are the quiet waters between rapids. This vertical line chart of these averages should also show the volume ‘of the day’s trading — the total sales for the day. This is very important because it aids in forming his judgment of the prevailing trend. The individual stock chart should also show the volume of the day’s trading in that stock, so that one may observe whether this volume increases or decreases on the advances and declines. Increases serve to emphasize the bullishness or bearishness. Decreases warn of @ probable reversal in direction. This point could be elaborated on ~ in fact a book could be written on the subject, but there it is in a nutshell. One should not let its brevity disguise its value. When the trader sees the averages working back and forth over a trading area, he will generally find his individual stock doing the same. (This will not always be the case, however.) All stocks do not move alike. The averages may be in a trading zone and other stocks may have small, medium, or wide swings without affecting these. This stock may not be included in the averages; whether it is or not, the trader should remember that he is trading in Ais stock and not in the averages. ‘The upper and lower boundaries of these trading swings represent the points (at the tops) where supply overcomes demand and (at the bottoms) where demand exceeds supply. Unless the action of this stock indicates that it is going out of its present trading range, the purchases should be made around the bottoms of these short swings and the sales, long or short, around the tops. This seems a simple thing, but very few people can do it. That is because they have not had the proper instruction, or because they have not studied and practiced it. SECTION 5The tape reader will see how to do this according to the Tape Reading Chart — the most perfect method that, so far as SMI knows, has ever been devised for those who trade from the tape, in an office, or on the floor of the Stock Exchange. If one is a member of the Exchange and can trade from the tape on the floor, this method will be found all the more valuabie. The method of using the Tape Reading Chart is expiained in detail in Section 6 of this text. For the moment the tape reader should consider the position of a single stock with its movements plotted on the Wave Chart, and in connection with its location in its trading area. If it is swinging between 30 and 35 he should give increasing attention to its buying opportunities as it approaches 30, and its selling as it nears 35. This does not mean that he is to buy or sell at or near those points, but that he is to watch out for chances for profit indicated by the action of this stock on the Wave Chart, and on the Tape Reading Chart referred to above. The trader never knows when a stock approaches the upper or lower levels of a trading range, whether, this time, it will go on through. Therefore, he does not take a position until he has all the facts assembled, i.e., transferred all figures from the tape to the Wave Chart and the Tape Reading Chart. Any top or bottom is a small turning point, and even a small one may develop into one that is important. Important Points 1. Each long term swing in the market consists of many short swings of 3 to 5 points. 2. The public is often discouraged when the market enters a trading range and offers only small profits. 3. Volume increases emphasize the bullishness or bearishness of any particular market move. 4. A decrease in volume is an indication of a potential reversal in the direction of the immediate trend. 5. The upper limits of a trading range are in the area where supply overcomes demand, and the lower limits are where demand overcomes supply. 6. Purchases should be made at the lower limits of a trading range; sales should be executed at the upper limits of a trading range. 7. Any small turning point has the potential of developing into an important turning point in the market action. Self-Quiz Circle T if the statement is true or F if the statement is false When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. TF 1. Increases in volume indicate bullishness of the current market move. T F 2. The tape reader must learn to profit from the 3 to 5 point moves in a stock. TF 3. Volume is not important in determining the present trend of the market.4. A position should not be established in a stock until all the facts have been assembled and analyzed. 5. A tape reader has no need to maintain a longer term vertical line chart of a leading market average. 6. Decreases in volume indicate 2 continuation of the immediate trend. 7, The active trader should be aware of the market averages but keep in mind that he is trading in a stock, and not in the averages. 5-3‘TRADING AREA op CURTISS-WRIGHT ‘DURING 1971-2, ILLUSTRATED TN V.n.C. FORM ‘SHORING. ACCUMULATION BW PREPARATION FOR AN ADVANCEV, ‘STOCK MARKET INSTITUTE INC THE TAPE READING CHART It was prior to 1910 that Richard D. Wyckoff first began to forecast the coming movements of the market from its own action, as it appeared on the tape of the stock ticker. Many memoranda were necessary at the beginning but, as he developed efficiency in this art, he gradually reduced his notes and charts to « minimum, whenever a simplification was possible. It is one thing to leatn to read the tape and to develop the necessary judgment and intuition, and another to teach other people how to do it, making everything perfectly clear and practical. Richard D. Wyckoff discovered that the most efficient way to learn tape reading was by means of the Tape Reading Chart which is described in this section. This chart combines the three essential factors: price movement, volume and time, in such a way that a trader can see at a glance just what a certain stock is doing; how it acts on the rallies and reactions; the volume of each trade; the progress of the advances and declines. Also, other factors which may be determined are the proportion of the rallies and reactions to previous swings; the lines of supply and demand; the best location for stop orders; the means of deciding when to move stops; etc. In fact, this chart combines on one page most of the indications required by the tape reader for actively trading in stocks. The Tape Reading Chart data can be kept on a sheet of cross section paper. If this is oblong. in shape, the two Wave Charts — one of the market leaders and one of a single stock — can be kept on the same sheet, so that a complete picture of the market may be seen in combination with the Tape Reading Chart of the individual stock. If several individual stocks are charted on separate sheets in this form, the Wave Chart can be recorded on a sheet of transparent paper half this size, so that it can be laid over any individual stock chart in order to see how that stock is acting in comparison with the leaders. The construction of this Tape Reading Chart may be studied from the sample chart which follows (Chart 6.1). This should be taken out of the binder and placed beside this text in order to follow and fully understand the explanations. The chart has a price scale at the left. The full points are in one column and the fractions in the next. The figures recorded in the chart are the total number of shares dealt in at each fractional price. When the price changes the volume at the new price is filled in at the proper level on the chart. When a price is skipped a cipher (zero) is entered at the fraction where there were no sales. Chart 6.1 recording the movements of J. I. Case begins at 10 a.m. with total sales of 900 shares at 40. This 900 might have been made up of several lots; so long as sales continued at that price they were added together and recorded all at once when the price changed. Not 6-1 SECTION 6I I t i i i i i I i I 1 i i I 1 I I i i i i i 1 until the price changes is it known that there will be no more sales at that price. The next sale is 100 shares at 40-1/4. As there were no sales at 40-1/8, a cipher (zero) is entered at the 40-1/8 level, and the figure 1 is entered on the 40-1/4 line to represent the 100 shares sold at that figure. Now you have three figures in the first column — 9 on the 40 level; O on the 1/8 level and | on the 1/4 level. The next sale is 40-1/8, only 100 shares; next 200 at 40. These two figures must go in the second column, as the first column is filled on those two levels; next sale 40-1/8 (100); then 200 at 40-3/8 (0 on the 40-1/4 level); then 100 at 1/2; no sales at 5/8; a total of 2100 at 40-3/4; none at 40-7/8; 200 at 41; none at 41-1/8; 200 at 41-1/4; 200 at 41-3/8. All these items were recorded in the third column because the advance continued straight up to 41-3/8 without a single fractional reaction. The next transaction is 100 at 41, so in the fourth column 0's are entered on the 41-1/4 and 41-1/8 levels. The next sale is 100 at 41-1/8. As the space above the previous sale is already occupied by a cipher this entry must be made in the next column, and when the following sale takes place at 41 it goes just below the previous sale — in the same column. With that explanation as to how to start keeping a chart of this kind, which is really a 1/8-point figure chart combining volume and price movement, the following instructions will demonstrate how this chart should be used in actual trading. ‘On January 19, 1932 Case opens at 40. The initial position is neutral. A trade may be made on either the long or the short side as soon as the stock shows a tendency to move in a particular direction. It is assumed for the purpose of this illustration that the indications on the Wave Chart soon after the opening were bullish. However, the trader should wait until the stock itself has given some sign of a definite tendency. There may be an opening bulge but this may not be its true direction, so one should wait until the indications are definite enough to promise a worthwhile swing, ‘One point should be allowed for commission and taxes, so it is best not to go into a trade that does not promise a swing of three to five points. If the background of the previous day's trading were available, the trader would know better just where this stock stands; but starting from scratch, he must wait until the stock tells him what it is probably going to do before making a commitment. In learning to read these charts, it is best to cover most of the chart with a sheet of paper, exposing one column at a time by moving the sheet to the right. In this way there is less tendency to form Judgments on the basis of what already appears on the chart. This ‘method may be followed in a study of all forms of charts, and care should be taken not to see the general formation in detail before study is begun. After the opening — 900 shares at 40 — the tape shows 100 at 40-1/4; 100 at 40-1/8; 200 at 40; 100 at 40-1/8; 200 at 40-3/8; 100 at 40-1/2; and a total of 2100 at 40-3/4, Then 200 at 41; 200 at 41-1/4; 200 at 41-3/8 — which is a rise of 1-3/8 from the opening. The reaction recorded by 100 shares selling at 41 marks, for the present, the boundary line of that trading range of 1-3/8 points for the day. One does not wish to take a position until the stock clearly indicates that it is going out of that range. To trade within that range might not provide enough room to turn around in, and pay for overhead. 6-2Next the tape records 100 at 41-1/8; 100 at 41; 300 at 41-1/ at 41; 300 at 41-1/8; 100 at 41-1/4; 200 at 41-1/8; 100 at 41-1/4. The trading range has narrowed to 1/4 of a point; the trend is still in doubt. The next sale is 1000 at 40-3/4 — a sign of weakness, because there were no sales between 41-1/4 and 40-3/4; this indicates a thin market. Next 900 at 40-5/8; 800 at 40-1/2; 500 at 40-3/8; 300 at 40-1/4. These sales total 3500 shares, all taken within the range of 40-3/4 down to 40-1/4. Here is some strength, but it may mean only temporary support. The chart must tell what the insiders are trying to do with their stock. Are they supporting it because they want to sell at higher prices, or do they really want to acquire a lot of the stock? They take 900 at 40-1/2, making 4400 around that level; then 300 at 440-5/8; 300 at 40-7/8; and 1000 at 41. That is 6000 shares on the way down to 40-1/4 and up to 41. This does not look like buying for the sake of accumulation. If they really wanted this stock they would not have bid up for it; they would have put it down. So here is the indication that the professionals are trying to sei] and not buy. The trader forms a tentatively bearish attitude and waits for the market to confirm, cancel or reverse it. The bidding up continues: 400 at 40-1/8; 600 at 41-1/4; 1400 at 41-1/2. Now the price stands at a new high for the day, which has the appearance of an artificial bulge made by the professionals in order to attract outside buying, It required 8400 shares to be taken in order to advance the stock 1-1/4 points, This is not bullish because of the way it was accomplished. It is bearish. Unless this stock goes ‘on upward and its volume increases as it advances, the trader should look for an opportunity to go short. Next the tape records 700 at 41-3/8 and 400 at 41-1/2; then 400 at 41-3/8. So far the rise is checked. The professionals (or someone) are trying to sell, for the tape says 800 at 41-1/4; then 100 at 41 and 400 at 40-7/8. This is a half-way reaction following the bulge from 40-1/4 to 41-1/2. This reaction confirms the check of the rise and narrows the trading range to 5/8 — between 40-7/8 and 41-1/2. ‘The trader should go with the stock when it goes out of that range; that is, he should sell it short on a bulge, endeavoring to get as high a price as possible in order to keep the risk down to @ minimum, Remember that the active trader is trading with a 1/2 to | point stop and it would be better to lose opportunities, because there are plenty of them, than to be so eager to trade that he takes a larger risk, There is a rally of 3/8 om a single 100 shares at 41-1/4, It looks like a mark-up by the specialist, or an odd lot house buying to even up. Another 100 at 41-1/8, then 600 at 41. The stock is heavy. One should look for a rally on which to sell. This is confirmed by the next sale of 700 at 40-3/4, which is 1/8 under the previous low; then 1000 at 40-7/8; 200 at 41; 100 at 41-1/8 — decreasing volume on the rally. Here he gives an order to sell and gets 41 for it. He put a L-point stop at 42 (indicated by an S) in the 42 space. 300 shares more are sold at that price, making it 400 at 41, followed by 100 at 40-7/8 and 800 at 40-3/4. ‘The chart now has a slab-sided downward formation, made by several lowering tops. A rally to 41-1/4 occurs on light volume, confirming the previous bearish indication. Someone else tries to sell 300 and gets 41 for it, followed by 100 at 40-7/8. The 1/4 point rally which follows at 41-1/8 is the weakest yet. Then comes 300 at 41; 200 at 40-3/4; 100 at 40-5/8 — a new fractional low on the down swing since it made 41-1/2. Little demand exists at the low level. Suddenly 6-3the stock is bid up 5/8 when 1300 shares change hands at 41-1/4. It looks artificial, particularly when a quick slump to 40-5/8 follows. ‘Now a 1/8 point rally to 40-3/4 is observed; a return to the 40-5/8 low on 100; another weak rally up to 41 (a lower top); and then the real slump begins. When the stock reaches 40-1/2 the trader reduces his stop to 41-1/2 = the risk is only 1/2 point now, to cover overhead. ‘There is only one rally of 1/8 on 100 shares at 40-3/8. Then a new low at 39-3/4; another rally of 1/8 on 400 shares to 39-7/8; then a new low at 39-1/2. It is noted that the volume increased on the downside. There were only small lots sold in the upper 40's. More substantial lots were sold around 40 and under. Adding the sales at 39-3/4 across the page horizontally it is found to total 4400 shares, But, these takings are not sufficient to absorb the supply, as proven by a dip to a new low ~ 1100 shares sold at 39-3/8. When this occurs the stop is lowered to 40-1/8. The decline continues another 3/4 point with a total of 2300 at 39, and a low level of 38-5/8; then 200 at 38-3/4; 200 at 38-7/8; 100 at 38-3/4; 600 at 38-5/8; then a 1/4 point rally to 38-7/8. The offerings are getting very thin here; that is, the volume around this level is light. When the stock again dips to 38-5/8, the stop is lowered to 39, because the trader does not want the stock to rally even 1/8 above the 38-7/8 level without taking his profit. The hour of 3 o'clock is also approaching and he must not let that profit get away if he is to go home with a clean sheet. There is a rally to 38-7/8 on 100 shares; then 100 at 38-3/4; 400 at 38-7/8 and 500 at 39. This catches the stop and the trader has his profit for the day. ‘The initial risk was 1 point, or 2 points with allowances for overhead. It was possible to reduce that risk to 1/2 point, then reduce it to nothing — the flat price (meaning the price at which it was sold); then to 40-1/8 which assured a 7/8 gross profit; then to 39, which 3/8 from the day's low, at which price the trade was closed with a net profit of | point. There is a little stock for sale on the closing rally but it provides no cue for the next day’s session; in fact, it is preferred not to carry any impressions home so that the trader may have an unbiased opinion when the market opens in the morning. Note: A number of other charts and interpretations of this kind will be found in the Chart Studies, following Section 13. Additional studies will be included in the audio-lecture series which accompanies this program. Many detailed instructions in Chart Reading are also included in the SMI/Wyckoff Stock Market Science and Technique program. Important Points 1. The best available technique to lean the art of tape reading is through the use of the Tape Reading Chart. 2. The Tape Reading Chart of a stock may be compared to the Wave Chart of market leaders for a more complete picture of the market activity. 3. If no transaction occurs at a specific price (e.g. 40-1/8) as the stock moves from 40 to 40-1/4, then a zero (0) is entered on the chart in the 40-1/8 space. 6-44 i 1 1 nom eee eel ert le lt lo le oe oe 4. At the opening of the market, the active trader’s initial position is neutral. 5. It is best not to enter a commitment unless there is a potential move of 3 to 5 points in the security. 6. If indications appear weak, then a trader should anticipate a short position, particularly if the stock does not move up on an increase in volume. 7. An active trader should trade with a risk of no more than 1/2 to 1 point. 8. As the close of the market approaches, the tape reader should crowd his stop close to the current price so that his profit does not get away. 9. The “flat price” is the price at which a commitment is entered, Self-Quiz Circle T if the statement is true or F if the statement is false. ‘When you have finished the self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. Professionals would generally drive a stock down rather than bid it up, if they actually desired to accumulate the security. T F 2. An active trader should not establish a position in a 1-point trading range unless the stock clearly indicates that it is leaving that range. T F 3. The total volume for each fractional price is recorded on the Tape Reading Chart after the stock has a price change. T F 4, Risks which are greater than 1/2 to I-point should be taken so that opportunities are not lost. T FS. The Tape Reading Chart reflects only price movement and time. T F 6. Some factors which may be determined from the Tape Reading Chart are: a) the proportions of rallies and reactions, b) the lines of supply and demand, c) the best location for stops, and d) the best time to move stops. T F 7. It is generally a good policy to maintain a trade overnight in order to sell on the opening market rally of the day following, T F 8 A trade may be entered (long or short) as soon as a tendency of movement is determined,CHART 6.1 Pewwo1puy out 38 ol4d =O 20p10 dog 40 107 = S 7 — SAYVHS 001 = SWNT0A JO LINN H solag yous 38 ewNIOA [1] {DIM @ROW 310g B/L Yo! Buy “MOUS WHO H4e4D BanB y UY Ze6L ‘6L ‘NP _aSvO IT 4O | AYVHO ONIGVAY 3dVL ‘STOCK MARKET INSTITUTE INC. a nn a on on on Se a on on oe on on on cl on GM on Gn Gn on ommmmEm eae es ss 8S se I V, STOCK MARKET INSTITUTE INC. HOW TO DETERMINE THE BUYING AND SELLING POINTS WITHIN A SMALL FRACTION Numerous examples as to how to determine the buying and selling points are found in the explanations of the Tape Reading Charts. But, there are some fine points which may be made a little more clear. ‘One of these is this: A tape reader must learn to anticipate the high and low points in the day’s moves by assembling in the mind, and from the chart, all the factors that point to a certain conclusion. If this conclusion is justified at what is believed to be the right moment, it becomes a command to trade. Thus, it will be seen that there are two important steps: making the diagnosis and acting upon it. The market is continually giving information as to its technical position. It does this through the Wave Chart, which forms the background and forecasts the immediate trend. It provides further information as to the particular stock in which one is trading, if he will plot a Wave Chart of that stock on the same sheet with the Wave Chart of the leading market stocks. In addition to the above, the trader will possess all the required data if he will keep the Tape Reading Chart of that stock on the same sheet as the two Wave Charts. With these three charts and an eye on the ticker tape, the tape reader is well equipped to day trade. Equipped with these tools, there will be no reason to buy on bulges and sell on weak spots. In this type of trading, these are not opportunities to make profits but to incur losses. If selling is accomplished on weakness with a short stop, this increases the chances of having that stop caught. But, if a bearish conclusion is reached and the trader waits for a bulge on which to take a position, the chances favor a profit, All such techniques must be taken into consideration. The trader must continually endeavor to increase the percentage in his favor. One of the most important ways of increasing potential profits is to Jearn to buy on what is called the drive down. That is, buying should ‘be executed during a selling wave and about a minute before this ‘wave ends — while the pressure is on; not when itis seen to hesitate, but a minute before that. Generaily it takes a minute for an order to get into the crowd and be executed. (If it takes more than one minute on the average, the broker is slow or he has too much business on hand to give the proper execution of orders.) Selling on the drive up is just as important. Most of the bulges in a stock are made by pools, specialists, manipulators and floor traders to induce outsiders to buy. If one learns to spot these plays, he will have all these interests working for instead of against him, ‘The tape reader should take advantage of the public’s tendency to buy on bulges and sell on weakness by doing the reverse of this. It is better to get out too soon than to overstay. The public usually overstays. Te SECTION 7‘The Wave Chart should be watched for cues. If the trader expects to buy, and the market leaders are showing an uptrend, he should wait for the selling wave. The trader should look back and see how long the previous downwave lasted; he judges by that and the action on the tape about how far this downwave will go. He also watches the Wave Chart of the individual stock he is trading, the Tape Reading Chart for volumes, comparative strength or weakness, and all the other technical considerations. An active trader must learn to combine all these various indications into a sound conclusion, and when he has made it, time the stroke; that is, the moment when he gives the order, just as he times his stroke in order to hit a golf ball correctly, f ‘The pauses that mark the end of the buying and selling waves should be studied. They indicate that the forces which produced the wave have exhausted themselves. For a moment or two, even in a fairly active market, the ticker is quiet. These are like periods at the end of paragraphs; a new phase of the tape’s story usually follows. When a stock hesitates it notifies one that it has lost its momentum in the direction in which it has been travelling. The trader should then quickly make up his mind whether it is advisable to buy or sell or move a stop order. Any halt may be the final turning point in that move. By studying the SMI/Wyckoff Stock Market Science and Technique program and knowing how to judge the distance which a stock should move, a person is well equipped. He can more easily distinguish the halting places from the probable turning points. There are more halting places than turning points. The periods of hesitation usually indicate a reversal of the temporary trend, They also often mark the beginning of anew trading area. Every new move starts at the end of a previous move. If there are indications that the coming move will be important, it should be utilized advantageously. If there are no such indications, it should be passed. ‘A tape reader should always be expecting a change, He must be constantly on guard and ready to close a trade at the first sign of danger, (See illustrations in the Tape Reading Charts.) Even when he has moved the stop close to the market price for a stock, the trader must try to do better by selling on a strong spot or buying on weakness, if the trader has decided to eliminate his position, When an upward or downward move is losing some of its momentum, it will be indicated by a shortening of the upward or downward thrusts, as shown on the Tape Reading Chart. A trader should never reach for 2 stock except in some cases where he is pyramiding and has a substantial profit on paper. Even at such times there is frequently an opportunity to buy on a reaction after a breakthrough on the upside, or a rally following a breakthrough on the downside. Important Points 1. A trader must leam to anticipate the high and low points on intra-day moves. 7-22 mRmRemReEE we eT nm eee eee mellem eee lle le 2. If a conclusion is determined to be justified, then this conclusion ‘becomes a command to trade. 3. The market continually provides information concerning its technical position. 4. A trader must try to trade with the percentages in his favor. 5. Buying should be done on the drive down; selling should be accomplished on the drive up. 6. If a stock hesitates, this is an indication that it has temporarily lost its momentum in that direction. 7. A trader must always anticipate a change of direction in the immediate trend of the market. 8. The tape reader should be prepared to close out his trade at the first sign of danger. Self-Quiz Circle T if the statement is true or F if the statement is false. When you have finished this self-quiz, check your answers with those in the Answer Key at the back of this volume. T F 1. Itis best to overstay a trade rather than close it out too soon. T F 2. A trader must sometimes reach for a stock. T F 3. Buying on bulges and selling on weakness only provides opportunities for losses. T F 4. The two important steps in active trading are the ability to make the analysis and then to act on this analysis. T F 5. A trader should allow his stop order to be caught rather than selling on strength and buying on weakness. T F 6. A shortening of the thrust is an indication that the immediate move may be losing its force. T F 7. Not all commitments should be timed with the market.

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