BASIC LECTURE NUMBER THREE

ACCUMULATION

The subject of this Basic Lecture will be accumulation areas. The lecture
will have several objectives. They are 1) to describe the process of accumulation;
2) to indicate the specific principles which are usually part of accumulation; 3)
to tie these principles together into an orderly, understandable, workable analysis
and to indicate a number of methods of taking a speculative position in these areas
The lecture will deal with major accumulation primarily, that is,
accumulation for large moves. The same process takes place on an intraday, minor,
intermediate and major basis and the same principles will come into operation
regardless of the size of the area of accumulation. The lecture will also deal
with a number of examples of re-accumulation in stepping stone count bases. Our
primary concern (in) this lecture is to aid you in organizing your understanding of
accumulation and of the various principles which may appear in accumulation.
A number of principles mentioned (in) this lecture will be defined, but will
not necessarily be discussed in detail. Among these will be the principles of
preliminary support, selling climax, secondary test, the spring and terminal
shakeout, preliminary supply and the upthrust after distribution. We do use
several analogies in our work to help explain market phenomena. One of these
analogies is the crossing of the creek story. We have found these to be quite
helpful to our students in their learning process, especially as it relates to the
subject of accumulation.
To begin, let us define accumulation. Accumulation refers to the process of
establishing an investment or speculative position by professional interests in
anticipation of an advance in price. This may be done in order to secure a large
block of the security before the market rises. The motive is a long term profit
rather than a show of strength to support the market or quick small trading
profits. In the accumulation area, professional investors or speculators are
buying stock from people who for many reasons no longer have an interest. It may
be (that) the stock is very inactive. It may be that the stock has gone through a
selling climax and people have sold out because of fear. There are two main
phenomena which cause the public to panic. One is in the area of the selling
climax and the other is through a terminal shakeout or spring situation. The best
illustration of this occurs in major base accumulation areas where the public is
panicked by a selling climax. This is followed by a long period of waiting them
out and then the stock goes through a terminal shakeout or spring. This is more
clearly understood through an analysis of charts so let’s move right into several
chart studies.
Our first two charts are illustrative drawings. They are, you might say,
theoretical models which we have found to be quite helpful to grasp the basic
concepts. Every stock goes through a cyclical process very similar to the chart
number one. This cycle can be broken down into four phases; 1) accumulation; 2)
mark-up or a sustained upward move; 3) distribution and 4) mark-down or a sustained
downward move, with these four phases repeated until finally the stock goes out of
existence as a medium of trading. These four phases come in all shapes and sizes.
Now, please turn to chart (number) two. This chart has been marked off in
several sections, A, B, C, D (and) E. It is a sample drawing of a large
accumulation area. The same process occurs on a major, intermediate, minor and an
intraday basis. In section A, there is a down move which is stopped with panic
selling. Certain principles usually come into operation when panic selling occurs.
They are 1) preliminary support; 2) selling climax; 3) automatic rally and 4) a
secondary test. On the secondary test there should be less selling then on the
selling climax, evidenced by the decreased price weakness, the narrowing of the
spread and especially by decreased volume. At that point the down move has been
stopped. The stock may go through redistribution, accumulation or perhaps a
trading range in which nothing of importance is going on: No large interests are
attempting to move the stock or are preparing to move it.
On chart (number) two, the preliminary support occurred at (point) 1, the
selling climax at (point) 2, the automatic rally at (point) 3 and the secondary
test at (point) 4. There may be repeated secondary tests, depending upon the
ability of the professionals to absorb the supply and the continued existence of
that supply. Thus there may be additional secondary tests such as (at point) 5 and
the more important later secondary test such as at (point) 7.
The stock then goes into a trading range such as in section B. Generally in
the first part of the trading range the price swings are rather wide. Then in the
later part of the trading range the price usually begins to narrow down: The stock
gets dull. What happens to the volume or the general level of trading? Well,
usually in the early part of this range there is rather high volume, sometimes
rather erratic volume; both the price and volume action may be somewhat erratic and
very difficult to analyze. Then in the latter part, the closer you get to the end
of the trading range or leaving the trading range the volume begins to dry up. As
the floating supply or the flow of orders coming into the market begins to
decrease, the general level of the daily volume should decrease.
Now, let’s take a few minutes to discuss trading ranges. We have drawn line
AA, BB, CC and DD to define the limits of the trading range. AA is drawn through
the selling climax at (point) 2 and is the first point at which we can begin to
define the limits of the trading range. As soon as (point) number 3 has been
determined we can draw line BB and the stock is entitled to fluctuate between those
limits indefinitely until it attempts to come out of that trading range. Line BB
helps to show the penetration of point 3 (by the price action to point) 6 and the
failure to continue upward. We draw CC through (point) 6 to indicate the widening
of the limits of the trading range. Then at (point) 7 on the penetration of AA, we
draw a new line, DD. This line is eventually broken at (point) 8 and it helps to
define the spring or terminal shakeout and to call attention to it.
Whether you will draw these horizontal trend lines or not will largely depend
on your normal method of analysis, what you are trying to determine and the price
and volume action in the situation you are analyzing. These horizontal trend lines
are helpful in drawing your attention to the penetration or the failure to
penetrate a support or supply area. We suggest you do considerable experimenting
and practicing with them.
Now, in section C the stock goes through a testing process. What we are
showing is one of two alternatives. Let us outline these two alternatives first.
The stock could begin to come out of the trading range on the upside with higher
tops and bottoms. The second alternative is that it could try to go through the
bottom with a terminal shakeout. What we are showing on the chart is the second
alternative, the terminal shakeout or spring, which is probably the most desirable
situation analytically. Why? Because the purpose of a terminal shakeout is to
clean up the remaining supply, force all of the weak holders to sell and to create
a completely false impression as to the direction of the ultimate move. It is
necessary to give a brief outline of the spring and the terminal shakeout before
moving forward with the analysis of the chart examples.
A spring is a refinement of Mr. Wyckoff’s concept of a terminal shakeout and
grew out of that concept. A spring is a penetration below a previous support area
which enables one to judge the quality and quantity of that supply on that
penetration. The main difference between the spring and the terminal shakeout is
how far it penetrates into new low ground. Say on a $50.00 stock, if the drive
into new low ground is four or five points and then it turns around, we would call
that a terminal shakeout. However, if it reacted or penetrated three quarters of a
point or (one) point , a point or a point and a half, in other words a much shorter
penetration, we would call this a spring. It is primarily a matter of terminology.
The basic understanding and the basic concept is the same. As the stock goes into
new low ground one of two things will happen. Either overwhelming supply will come
in or no supply. Overwhelming supply is a one spring. It is evidenced by a wide
open break in price action and very heavy volume. A three spring is with no
significant price weakness and low volume on the penetration into new low ground.
There is a very large area between these two extremes. We call these number two
springs and a two spring is very similar to a terminal shakeout in that both have
supply and both must be tested by a secondary test.
Following this terminal shakeout or spring situation at (point) 8, there is a
rally to (point) 9, then a secondary test of the spring or terminal shakeout at
(point) 10. At that point, should supply be completely absorbed, the professionals
know (that) they cannot move the stock on the down side, that the buyers (demand)
are in control of the situation and it is relatively safe to move the stock up.
The professionals may attempt to drive the stock out of the trading range on the
upside and begin establishing an upward trend or the mark-up phase. This process
occurs in section D. The stock moves up to (point) 11, which is a sign of strength
which we label SOS, backs off to (point) 12 which is an LPS, the last point of
support, moves up to (point) 13 for a more important sign of strength and backs off
to (point) 14, a more important LPS or last point of support.
On this move up, we use the analogous term and say “the stock has jumped the
creek.” Now very briefly the creek story is an analogy similar to a parable, which
relates to the flow of supply across the top of the trading range. The creek
itself is a wiggly, sqwiggly trend line drawn free hand through the tops of the
rallies within that trading range and on the move to (point) 11 it jumps this
wiggly trend line which we call a creek. This (particular) example illustrates a
minor creek. On the reaction to (point) 12, it “backs up to the edge of this
creek.” The move from (point) 12 to (point) 13 “jumps” what we will classify as “a
major creek,” with the reaction to (point) 14 being the “back-up to the edge of
that major creek.” Now, when this is accomplished, the stock is in a position to
leave the trading range and work out the force of accumulation which has been built
up in this area; in other words to work out its figure chart count. More on this
subject will come later.
For now, let’s look at what happens to the supply - demand relationship in
this accumulation area. In the area A, supply is in control; supply is stronger
than demand and at the bottom of that area around (points) 1 and 2 there is an
attempt to absorb the supply and stop the down move. In (areas) B and C demand and
supply on a major basis are pretty much in equilibrium. There is no decisive
trend. However, the supply steadily becomes weaker and the demand becomes
stronger; the professionals are buying or absorbing the supply.
In section C, beginning with (points) 8 and 10 as the stock begins to
establish its upward trend and enters the mark-up phase, demand is consistently
stronger than the supply on balance. This supply and demand is created by people
as they do their buying and selling. What happens to the people in the
accumulation area? In general weak holders are motivated to sell the stock, which
they bought earlier, to the professionals, who recognize the high profit, low risk
level of prices. The professionals, on balance, are buying and they continue
buying the stock until they eventually begin to sell out in the distribution area.
How do you take a speculative position in this type of base? First of all,
we are teaching stock market speculation aiming for a larger move or more simply
stated the expectation of making a profit on the price fluctuation of stocks listed
on the various stock exchanges. We aim to take our position in the right hand side
of the trading range as the stock is going to leave the trading range on the upside
and work out the force of accumulation and the count built up in the accumulation
area. We want to take our position if the stock is establishing its upward trend.
Thus, on chart (number) two you can buy in the area of (points) 8 to 10 and at
(points) 12 and 14. You can continue to buy on any normal correction thereafter as
discussed in Basic Lecture Number Two.
Let us narrow this down to the specific principles. If you have a number
three spring, you can take a position on that number three spring immediately. If
you have a number two spring, you can take a position on the number two spring or
wait to buy on the secondary test of the number two spring. If the action can be
identified as a terminal shakeout, you can buy on the terminal shakeout itself or
on the secondary test of the terminal shakeout. We have found that establishing
the first position on the test is usually better than taking it on the number two
spring or the terminal shakeout itself. The second position may be established on
the “back-up to the edge of the creek,” which is the last point of support. This
way you are pyramiding with the market instead of bucking the market. You do not
take a second position until the first shows you a profit.
For those few students who are going to be in and out traders, a person may
buy on a selling climax such as at point 2 and sell out on the automatic rally at
(point) 3, scalping a few points, then go short at (point) 3 and cover at (point) 4
on the secondary test, go long at (point) 4 or (point) 5 and sell out at (point) 6.
Again, you can buy on the secondary test at (point) 7 and sell out towards the top
of the trading range. There will be few students who will be able to do this well.
We are not advocating this process. It essentially requires a tape readers
technique and a very fine understanding of the market. We suggest very strongly
that you confine your buying to this area over at (points) 8 to 10 and at (points)
12 to 14 on the LPS or the “backup to the creek,” as the stock is establishing its
upward trend. It is in these areas that the profit - risk ratio can be greatest in
your favor.
Due to the nature of this lecture, which is to cover the accumulating area,
on a number of the charts, we will only hit the highlights of the many principles
without going into great detail. There may be indications such as trend lines,
half-way points etc., marked on the charts which are simply not discussed.
Remember, the purpose of this tape is to help you to organize your understanding of
the basic process of accumulation.
Now, please turn to chart number three. It is the Wyckoff Wave Index
illustrating the major area of accumulation which took place in the summer of 1966.
We use the Wyckoff Wave to indicate the position and the (probable) future trend of
the general market. The Wyckoff Wave itself moved from the 2800 level to (the)
2200 level, a major, sustained decline. The prices on many individual stocks were
badly smashed. The (Wyckoff) Wave did an excellent job of indicating the turning
points, the shift of control from supply to demand and was beautiful in defining
the turning points. Let us analyze it briefly.
From (point) 1 to (point) 2 there is a sustained downward move; a bear
market. How did the trend come to an end? At (point) number 3 there is
preliminary support. Look at the volume which came in at (point) 3 to stop it. It
is a form of selling climax. It was immediately followed by the selling climax at
(point) 2, the automatic rally at (point) 31 and the secondary test at (point) 4.
These principles will be outlined in greater detail elsewhere. The Wave went into
a trading range with the upper limits being at (point) 31 and the lower limits at
(point) 2. At (point) 5 it attempted to leave that trading range, failed to do so
and then began to move down. At (point) 6 the Wave went into new low ground for a
number two spring This was followed by an immediate rally and then the secondary
test of the number two spring at (point) 7. (Point) 8 is the “crossing of the
minor creek” and a sign of strength and (point) 9 is the “backup to the edge of the
creek,” which is the last point of support. The “jump across the creek” is
normally a sign of strength and the “backup to the edge of the creek” is normally
the LPS or last point of support.
Before listening to the discussion of any of the future charts in the Basic
Lectures, we urge you to analyze the charts yourself before listening to our
discussion of them. You will gain most from lectures if you will follow this
procedure as it enables you to check your understanding of the principles. You
will see things that we will not discuss and we may perhaps discuss some things
which you will not identify: But this you will soon learn is an excellent way to
learn.
Chart number four is “Boeing,” 1962 - 63. It is a classic illustration of an
accumulation area. The stock moved down in early 1962 from $56.00 a share to 351/8
at (point) number 1, which was the selling climax. The preliminary support was at
(point) 2. Following the selling climax at (point) 1, there was an automatic rally
at (point) 3 and a secondary test at (point) 4. At (point) 4 the stock had stopped
the major down move. There was not sufficient supply to resume the major down
trend. It then went into a long trading range to (point) 5. Note that in the
trading range there was generally good demand on the rallies, as evidenced by an
expanding price action and expanding volume with a decreased volume and a general
narrowing of the price spread on the reactions. At (point) number 6 there is a
number two spring, but the demand that came in following it was not sufficient to
enable the stock to leave the trading range on the upside. At (point) 5a on the
volume level there was a pronounced decrease in the general level of trading; the
stock was getting scarce. Lines AA and BB, the ordinary use of trend lines,
indicate the angle at which supply was coming in during this trading range.
Support line CC is drawn through (point) 1 to indicate the bottom of the trading
range and helps to define the penetration of the support on the terminal shakeout
down to (point) 7. It also draws our attention to the apex at (point) 5. Until
the stock goes through the testing process we cannot be certain that the trading
range is accumulation and therefore we do not take a speculative position for a
large move until it has shown strong evidence of leaving the range permanently.
“Boeing” continued in the trading range until it went through the previous
supports for a terminal shakeout down to (point) 7. Following (point) 7, there was
a rally to (point) 8 and then a secondary test of the terminal shakeout at (point)
9. On the reaction to (point) 9, there was less price weakness and less volume
compared to the move from (point) 5 to (point) 7. This indicated that the supply
which was present on the move down to (point) 7 was no longer present. The move up
to (point) 10 is a sign of strength and a “crossing of the minor creek” and the
reaction down to (point) 11 is the last point of support and also the “back up to
the edge of the minor creek.” The move from (point) 11 to (point) 12 had an
expanding price action and an increased volume indicating good demand and the
reaction to (point) 13 was with lack of supply. (Point) 12 was a major sign of
strength and (point) 13 the major last point of support.
Now, please turn to chart five, the one point figure chart of “Boeing.” We
have drawn the numbers for the major indications on it and (have) indicated a
logical count from the major last point of support, (point 13) and (also point 11).
The stock moved from 301/2 at (point) 7 to over 100, reacted, went through re-
accumulation and finally reached $182.00 per share in 1966.
Now, where were the best places at which to establish a speculative position.
They are on the terminal shakeout at (point) 7 and the secondary test at (point) 9.
Additionally, at (point) 11 and also a later position in the area from (point) 14
to (point) 13. In order to take a position at the right hand side of the trading
range as the area of accumulation is being completed and as the stock is entering
the mark-up phase, the following essential conditions must be present: 1) It (the
stock) must have a substantial figure chart count. 2) It must have some form of a
sign of strength. 3) It must have a last point of support. Why is it necessary to
have a large count? Because we must always have the profit - risk ratio in our
favor. If the figure chart shows that the most count you can have is 4 points and
the stop order is three points below the purchase price, the risk is approximately
1 -1: These are not good profit - risk ratios. It should be a minimum of 3 - 1.
However, should the figure chart indicate a possible move of twenty points with a
three point stop, adding approximately one point for commissions gives a cost of
four points if one is stopped out. The profit - risk ratio is then 5 - 1. This is
excellent. We are at least in the ballpark.
Now, why must there be a sign of strength? Simply because a stock can
continue to move sideways in the trading range indefinitely until it has a sign of
weakness or a sign of strength. Why must there be a last point of support? Simply
to confirm that the sign of strength is in fact a sign of strength. Let us define
the sign of strength. The sign of strength is an action which shows that demand is
in control. The sign of strength should have good demand on the up move; a wide
spread (and) increasing volume on the upside. The last point of support should
have a lack of supply, indicated by a relative narrowing of the spread and a
decrease in volume. The comparison is between the up move, constituting the SOS,
or sign of strength, and the reaction following it, the LPS or last point of
support. What if the stock has a possible sign of strength indicated by a widening
spread and an increasing volume on the move up and is then followed by good supply
on the possible LPS, indicated by wide spread and high volume on the reaction?
This cancels the probability of the first action being a sign of strength and the
stock will probably continue in the trading range for additional testing.
Let’s get back to charts. Chart number six is “Control Data,” 1965 and 1966.
The stock had gone through major distribution in the area from $55.00 to $65.00 and
then in June 1965 began a major decline from (point) 1 down to (point) 2 which is
the preliminary support and finally to the selling climax at (point) 3. (Point) 4
is the automatic rally and (point) 5 is a secondary test. Compare the volume at
(point) 3 and (point) 5. At (point) 5 the supply was much less than at (point) 3.
It then began a long trading range with some very wide price swings, a trading
range that consisted of three large phases; from (point) 5 to (point) 6; from
(point) 7 to (point) 8 and from (point) 9 to (point) 10. There was, in general,
good demand on the rallies and a drying up of volume, a comparative lack of supply
on the reaction compared to the preceding up moves, however, it was not until the
area of (point) 9 to (point) 11 that the general level of trading, comparatively,
as shown by the volume, began to dry up or decrease substantially. There was one
attempt to leave this trading range at (point) 12 and then the stock went through a
terminal shakeout to (point) 13, the rally to (point) 14 and a secondary test of
the terminal shakeout at (point) 15. Look at the figure chart count on chart
number seven. The possible count is massive. The move from (point) 15 to (point)
16 is a minor sign of strength and the “crossing of the creek,” followed by a last
point of support at (point) 10, which is the “backup to the edge of the creek.”
(Point) 17 is the “crossing of the major creek” and sign of strength and (point) 18
the “backup to the edge of that major creek,” the last point of support. Supply
line AA, normal use of trend lines, is the angle that the supply came in during
this trading range. (Lines) BB and CC are horizontal support lines which
delineated the penetration at (point) 7 and then the final terminal shakeout at
(point) 13.
Now where could a speculative position be taken (in) this situation for the
major move? The first position could have been established at the terminal
shakeout at (point) 13 or the secondary test at (point) 15. Another position could
have been taken on the reaction to (point) 10 and another one on the reaction to
the major LPS at (point) 18. These positions would have meant an average cost of
around $30.00 per share. In June 1968 the stock reached $174.00 per share.
The large counts have been marked on the figure chart of “Control Data,” on
chart seven. Is it a realistic expectation that you could have caught all of the
move from 30 to 174? The answer is this: If the base area of accumulation is
diagnosable so that you can determine the supply - demand relationships and you
have a logical place to take a position and the upward trend is normal, you can
play for all or a very substantial portion of the major up move. This move on
“Control Data” was diagnosable; the major indications were there; there were
logical places at which to take a position and the up trend was normal. A large
part of our problem is that sometimes we simply do not believe the potential count
in the accumulation area. At other times we get scared out prematurely during the
mark-up phase. You do not have to play for the entire base count. You can however
attempt to get the next intermediate drive up and then sell out before a
substantial reaction occurs. Where you will sell out in the up trend will largely
depend upon the purpose in taking the speculative position, the amount of risk you
are willing to assume and the estimate of the depth and likelihood of possible
reactions.
Now for re-accumulation. What is re-accumulation and how can you identify it
and take a speculative position in the re-accumulation area? Re-accumulation takes
place within a sizable upward trend when a stock goes into a trading range and in
the process builds a count for a higher objective, usually confirming a prior base
count. It goes into a resting stage as the professionals continue to absorb the
supply. The basic process of re-accumulation is very similar to that of chart
number two with one major variation. Usually it will have been preceded by an up
trend instead of a down trend as in area A.
Chart number eight of “Beckman Instruments,” of 1969, contains many of the
same indications and (these) are marked on both the vertical and the figure chart.
The action from (point) 3 to (point) 4 is the area of original accumulation.
(Point) 5 is a terminal shakeout and the move to (point) 6 is a sign of strength,
followed by the last point of support at (point) 4. The stock then moved up to
(point) 7, went through a minor distribution with a sign of weakness shown on the
chart as “SOW” at the 511/2 level and the last point of supply or LPSY along the 54
line. The down count was 7 points. With this as background let us examine
together the re-accumulation area from (point) 1 to (point) 2.
The minor selling climax at (point) 1 was in the vicinity of the major 1/2
correction. Note that the reaction from (point) 7 to (point) 1 had less volume then
on the move from (point) 5 to (point) 7. It had a price climax at (point) 1, a
secondary test at (point) 8, a minor spring at (point) 9 with a secondary test at
(point) 10. It then began to have higher tops and higher bottoms rather than a
terminal shakeout. It did however have a number 3 spring at (point) number 2 on
the penetration of (point) 11. There was no supply. The move from (point) 2 to
(point) 12 is a minor sign of strength and the reaction to (point) 13 is an LPS,
the last point of support. The larger figure chart counts have been marked.
Now, how do you take a speculative position in this situation? One can be
taken at (point) 9 or 10 on the first minor spring. A second logical position can
be taken at (point) 2, (the) number three spring and a third position on the
reaction to around (point) 13. It should be noted that the reaction to (point) 13
was very brief and it would be difficult to get a position there. However, that is
the stock market; it is seldom easy. Be very wary when it is.
Chart number nine of “Mack Truck” has a stepping stone confirming count, an
area of re-accumulation which is a bit different than “Beckman...” in that it did
not react down to the major (half-way) point, but simply stopped going up, moved
sideways, went through re-accumulation and then continued the major upward trend.
The stock moved up from $28.00 a share to 483/8 at (point) number 1, which is a
buying climax, stopping the up move, at least for awhile. (Point) number 2 is the
automatic reaction, (point) 3, the secondary test, indicating a lack of demand.
Volume was much less than at (point) 1. However, the reaction down to (point) 4
did not have a great deal of supply on it and was followed immediately by a good
rally to (point) 5, (then) another reaction to (point) 6, which, (again), did not
have a great deal of volume on it. The rally to (point) 7 had good demand
evidenced by the spread and especially the volume; they (both) expanded. The
reaction down to (point) 8 had a lack of supply. Examine very carefully the sharp
drop off in volume. The spread on the downside was (relatively) narrow. It did
not have price weakness and then the rally to (point) 9 was reasonably good with a
low volume reaction following it to (point) 10. Note, it has higher supports.
Then, the move from (point) 10 to (point) 11 is on increased, but still relatively
light volume compared to (points) 1, 3, 5 and 7. It is buoyant. It is a sign of
strength and a “crossing of the creek” all in one action. The reaction to (point)
12 is the last point of support and a “backup to the edge of the creek.”
Where could a speculative position be taken? Preferably on the lower edge of
the trading range on the reaction to (point ) 8 as it approached (points) 4 and 6
and especially around (point) 10. The second position should be taken on the
reaction to the LPS at (point) 12. A stop order should be placed at around 417/8,
below the previous support at (points) 4, 6, 8 and 10. Assuming that a buying
order is executed at 47, the risk is approximately 6 points should the stop order
be caught. The potential count is 28 points which means a profit - risk ratio
greater than 4 - 1. The count is marked on the figure chart, chart ten. It should
be pointed out that should the stock continue to react and threaten to take out the
stop order, as students, we should attempt to get out before that stop order is
executed. These are very, very favorable odds and an excellent risk. The stock
resumed its upward trend and within about three months reached $72.00 per share.
Do not expect the charts of the stocks or indices to follow the exact pattern
outlined in the theoretical model of chart two rigidly. The basic elements,
however, usually will be present in each area of the accumulation. The essential
elements are, again, that you have a large count, a sign of strength and an LPS.
A stock may come down and not go through panicky liquidation on a selling
climax with preliminary support, selling climax, automatic rally and secondary
test. It may simply saucer out without going through massive liquidation. Should
it do so, however, the people who have bought at higher prices have not been forced
out of the stock and therefore, usually the stock will stay in the trading range
longer. And the longer it stays in this trading range, the more likely it is to be
subjected to a shakeout or perhaps repeated shakeouts. Excellent examples of this
type of situation are “Brunswick” and “High Voltage Engineering.” Due to their
length, these charts will not be enclosed with the charts accompanying this
lecture.
For a brief description, “Brunswick” went through major distribution in early
1961 with a high of 747/8. By the end of December 1963, it had reached a new low
of 101/8. It never really climaxed on the down side. There were repeated
outbreaks of liquidation, but it never went through anything approaching a
classical selling climax to stop this down move. As a result, the stock, in early
1969, five years later was still around $20.00 a share. It had gone through a
major shakeout at around $6.00 a share in 1966.
“High Voltage Engineering” went through distribution in 1963 with a high of
$55.00 a share. Eventually it reached $15.00 in 1965 without having gone through a
good selling climax. Since then the stock has fluctuated as high as the low $40’s
with early 1969 prices around the 30 area. This is much better than a price of
$15.00. However, that is nowhere near the old high of $55.00, reflecting the lack
of strong major accumulation. Just because a stock does go through a selling
climax, a near classic selling climax, does not mean that the trading range is
accumulation. It may be accumulation, re-distribution or nothing. However, the
presence of the selling climax does strengthen the total situation.
Chart number eleven of “Bendix Corporation” in early 1968 had a sizable
accumulation area with some variations from the pattern outlined in chart two. The
main variations are that the preliminary support is not apparent on the vertical
line chart and that the terminal shakeout does not carry the stock into new low
ground, below the selling climax and secondary test. Briefly, the stock moved down
from (point) 1 to (point) 2. The selling climax is at (point) 2, the automatic
rally at (point) 3, the secondary test at (point) 4. There’s a complete lack of
liquidation at (point) 5.
Now, where is the preliminary support and how can you identify it? It is not
apparent on the drive down to (point) 2 from an examination of the vertical line
chart. We must identify it from an examination of the figure chart. At (point) 6
on the figure chart, chart twelve, the stock reached $37.00 per share and then
rallied 3 points to $40.00. This is the preliminary support.
To continue with the vertical line chart at (point) 5, the supply has dried
up on the downside and the stock begins a rather wide swinging trading range. In
general, there is good demand on the rallies and there is a tendency to dry up the
volume toward the bottom of the reactions to (points) 8, 10 and 12. At (point) 14
there is wide spread and price weakness which precipitates the shakeout down to
(point) 15. At (point) 15 there is no important dumping of stock: No-one panics.
It is however a terminal shakeout. The rally to (point) 16 is with good demand and
the one day reaction to (point) 17 is on light volume. (Point) 16 is a minor sign
of strength and (point) 17 is a minor LPS. Now, what do we have? We have good
stopping action from (point) 2 to (point) 5, a sizable trading range and then a
terminal shakeout with a sign of strength and an LPS. An examination of the figure
chart shows a potential count of 17 points
Where is it the most advantageous to buy and establish a speculative
position? The first purchase can be made at (point) 15 between $37.00 and $36.00 a
share as it (the stock) broke below (points) 10 and 8. The second position may be
taken on the reaction on the reaction to (point) 17 with a stop at, say, 337/8.
The profit - risk ratio is greatly favorable. The move from (point) 17 to (point)
18 is a “jumping of the major creek” and is a possible more important sign of
strength. The reaction to (point) 19 is a “backup to that creek” and a possible
more important last point of support. It is the point at which we would take a
higher count should one be necessary. It is also a point at which an additional
purchase could be made.
Now, let’s hit the highlights only of the next three charts. They cover the
same market period. Chart thirteen is “Allied Chemical” of 1962. The stock was in
a down trend from (point) 1 until the selling climax at (point) 2. Preliminary
support came in at (point) 3 to stop the down move temporarily. The automatic
rally and secondary test occurred at (points) 4 and 5 respectively. Note that the
major supply line AA was penetrated several times and then finally decisively
broken at (point) 4. The stock moved sideways in (a) rather tight trading range
from (point) 5 to (point) 6. It then drove into new low ground for a terminal
shakeout or number two spring at (point) 7 and the secondary test at (point) 9.
The move from (point) 9 to (point) 10 is a sign of strength and a “crossing of the
creek.” The reaction to (point) 11 is a last point of support and the “back-up to
the edge of the creek.”
“American Cyanamid” of 1962, chart fourteen, has another interesting
variation. There is no preliminary support apparent on the vertical line chart.
The selling climax occurred at (point) 1, automatic rally at (point) 2 and the
secondary test at (point) 3. The stock went into a trading range from (point) 3 to
(point) 4 and then broke through the supports and shook out of the trading range on
the move to (point) 5. Due to the short depth of penetration below (point) 6, we
would call this a number two spring with a secondary test at (point) 7. (Point) 8
was the “jumping of the major creek” and the sign of strength. The “backup (to the
edge of the creek”) and the more important LPS is at (point) 9.
“Jones Laughlin,” chart fifteen, shows another very interesting variation.
Beginning at (point) number 1 the stock completes re-distribution and resumes a
major downtrend. At (point) 2 preliminary support comes in followed by a selling
climax at (point) 3, automatic rally at (point) 4 and the secondary test at (point)
5. The move to (point) 6 decisively broke the supply line CC, normal use of trend
lines. The trading range from (point) 7 to (point) 8 was considerably above the
secondary test at (point) 5 and then the stock broke for a terminal shakeout down
to (point) 9 with a rally at (point) 10 and a secondary test with a complete drying
up of supply at (point) 11. (Point) 12 is a “crossing of the minor creek” and a
sign of strength and (point) 13 is the “backup to the edge of the creek” and an
LPS. The move to (point) 14 is the “crossing of the major creek” and a more
important sign of strength and the reaction to the area at (point) 15 is the more
important last point of support and the “backing up to the edge of the major
creek.” Note the good demand on the move from (point) 9 to (point) 14 and the lack
of supply on the reaction down to (point) 15.
Where could speculative positions be taken on the stock? First of all in the
area around 16 and the area of the terminal shakeout, preferably on the reaction
down to (point) 11, which is the secondary test of the terminal shakeout. A second
position (could be taken) on the reaction to (point) 13 and a third position in the
area of (point) 15. Again, this is pyramiding with the trend as it develops.
Let us now review briefly some of the main concepts in this lecture on
accumulation. We have described the process of accumulation, how it fits into the
cyclical process and discussed the specific Wyckoff principles which are often part
of accumulation. We have described the supply - demand relationship and what
happens to the people operating in the market in an area of accumulation. In
taking a speculative position by buying in the area of accumulation, the aim is to
diagnose the area as accumulation and then attempt to take a position as the stock
is leaving the trading range at the most advantageous point; to pyramid with the
market and to attempt to obtain a larger move than would be provided by short in
and out trading. This, like all stock market operations, requires considerable
experience and practice. Do not in any manner attempt to short circuit or limit
the practice trading which is necessary to sharpen your skills. When you do have
questions and problems discuss them with us. Our purpose is always to help you to
protect your capital and to make more profits; safer, surer, faster profits.