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