BASIC LECTURE NUMBER ONE

169

BASIC LECTURE NUMBER ONE

PHILOSOPHY, HISTORY AND BASIC CONCEPTS

This is Lecture One of the Stock Market Institutes Basic Series of Lectures. In the future these lectures will be referred to as The Basic Series to differentiate them from others that are part of other SMI programs.These lectures are part of your Wyckoff Course and are to some extent another way of presenting the art of speculation. The purpose of these lectures is to supplement the written course, to present later refinements and to aid you in learning and in integrating the principles into a full understanding of how the law of supply and demand relates to the stock market.In this series there will be extensive discussions of individual principles. Whenever possible we will cover only one main subject on each tape. However in some lectures there will be combinations of subjects. That simply cannot be helped. In reality the principles all relate to one another in an orderly process. It is difficult and sometimes impossible to study a principle or market phenomenon in complete isolation. In this lecture we will present some of the philosophy, history and basic concepts of the Stock Market Institute and the Wyckoff Course. Perhaps the most important concept for you to understand is our corporate purpose. SMI is a private business school teaching stock market science and technique and the art of speculation. We also function as a service bureau, offering essential data for technical stock and market analysis. We are a teaching institution and a service bureau; education and services. Education comes first and is our primary concern at this time. Lets look for a moment at how and where does the Wyckoff Course fit into the stock market. There are generally two basic methods of stock analysis, the fundamental approach and the technical approach. The fundamental approach deals with balance sheets, profit and loss statements, estimates of management, new products, etc. and attempts to relate these to current and future value of an individual stock. Fundamentals can be and are often used very satisfactorily for long term moves, often lasting many years in duration. These fundamentals are one step removed from price and the further you get away from dealing with the price of the stock itself, the more difficult your analysis problem becomes. The most serious defect of the fundamental approach is the absence of importance of timing. Timing is extremely important in the stock market. There is a good time to buy a bad stock and there is a bad time to buy what has been a very good stock and usually by the time the changed condition of either the stock or the general market has shown itself in the fundamental news and statistics, the best time to make your purchase or sale (has) already past. This is one of the reasons why people get locked into so called good stocks for many years without realizing any profit.The technical approach deals with the price of the stock itself and regards the stock as a separate commodity, subject to the laws of supply and demand. There are two main branches in technical analysis, a mechanical approach and a judgment approach. Lets deal with the mechanical approach first.The commonly accepted grandfather of the mechanical approach (is) Schabacher, who wrote a very thick volume during the 1920s after comparing thousands of mechanical chart patterns described in such descriptive terms as head and shoulders, double top, triple top, gap, pennants and so forth. He has been widely copied and many students have been exposed to this approach before becoming a Wyckoff student.Our approach to the stock market is best described by the course title, A Study of Stock Market Science and Technique and the Art of Speculation. It is a complete, thorough approach in the understanding of how to make money in the stock market; how to accumulate it and how to multiply its value. This came from the old time professional stock speculators. There is a world of difference between theory and practical experience and the Wyckoff Course is based directly upon the practical experience of an outstanding professional stock market operator, Mr. Richard D. Wyckoff.

A BRIEF HISTORY OF THE WYCKOFF COURSE

Mr. Wyckoff was experienced and qualified in every important area of the stock market: Founder and publisher of the then prestigious Magazine of Wall Street, stock market advisor to thousands, author of numerous articles, editorials and books based upon personal experience and his association with such famous speculators as Harriman, Keene and Livermore and with other leaders of finance during his era; Richard D. Wyckoff tells us in his own words: By taking the best of what forty years in Wall Street have taught me and preparing it for others so that it can be readily absorbed and applied, I will be creating something that should aid in establishing a new standard of practice in the publics stock market operations. I do not claim any monopoly of stock market knowledge, but up to this time, no one else seems willing to be so frank in offering to the public the most intimate knowledge of the inner workings of the stock market. Thus with forty years of study and personal experience, Mr. Wyckoff crystallized his knowledge into one writing and published The Richard D. Wyckoff Course in Stock Market Science and Technique. Since then, The Stock Market Institute, formerly known as Wyckoff Associates, Inc., has continuously endeavored to preserve the value of this course. As new principles have been discovered, they have been added to the time tested laws upon which the curriculum is based. The same watchfulness (is) applied to new techniques of market operation. These are being reviewed and developed as time, regulations and market conditions change. Our knowledge and educational program is in a continuous state of evolvement and has been enhanced with each management succession.When death came to Mr. Wyckoff in 1934, Mr. Robert E. Stanlaus assumed the responsibility to continue to offer the public specialized education in the stock market science and technique. He expanded the program with material (that) he and Mr. Wyckoff had written since the original printing. In 1951 Mr. Robert G. Evans began his career as the promulgator of the Wyckoff Course. Mr. Evans has made considerable contributions to the benefit of all students of market action. They are most notable in the further development of technical analysis, market psychology and philosophy. His unique talent in using analogies to explain various market phenomena and principles (has) become an inseparable part of the Wyckoff Course. Lloyd I. Andrews was selected in 1967 to continue SMIs leadership in educating the public in a true understanding and knowledge of stock speculation. Mr. Andrews placed emphasis in the development of a structured educational program to enhance and speed up the learning process. He has expanded the SMI with both experienced educators and market speculators. Today SMI proudly offers over seventy-five years of continuous study in stock speculation; a proven product, professionally prepared and presented by a uniquely competent staff of principled people. It is our experience that you will discover you have no need for anything more of any other technique than Wyckoff and should you use other techniques along with your Wyckoff Course, it can hurt you. This is a very difficult thing for many students to accept because most students, prior to their Wyckoff experience, have tried to learn about the market by picking up an idea here, picking up an idea there, trying them out and if they show reasonably good results, using them. Often these people become intellectual gimmicks collectors. Forget it! It will cost you money, much money. You have enrolled into a proven, time tested program. Please, discipline yourself to learn it (and) practice it as taught. Dont return to a trial and error approach.Actually there are many good things written in books, but often they are mixed up with other ideas and concepts which are not valid. It is a long, costly and difficult process to determine what is valid and what is not. At SMI we have already sifted out what is good and useful and after thorough testing have incorporated it in the Wyckoff Course; it has already been done for you.Actually, many things which we read or hear about simply are not reliable. For instance, occasionally you will read, the short interest is the highest in history, and this is interpreted as being very bearish. This high short interest may be perfectly natural because of the increased and increasing number of stocks which are outstanding and are traded. Again, you may read that the market went down today, but it was on less volume and therefore that is perfectly normal. In fact, there are times when it is perfectly normal for the market to go down with somewhat decreasing volume and that can still be bearish, depending upon the circumstances. You see, very often the basic assumption that is made is completely wrong and that leads to disaster. Again, you may have read that a gap is always filled. Sometimes it is many years before a gap is filled. There is still a gap on Chrysler at 25/8 which was established in 1932. Do you want to wait for it to be filled? Many are never filled. When a gap is filled, it is accidental or incidental to the movement of the stock. If a principle is to be a principle, it must work in all markets to be valid and reliable. The Wyckoff Course is based upon principle and laws. It is valid! It is reliable!SMI believes that there is a very definite distinction between short term trading compared to trading important accumulation or distribution areas for intermediate and major moves. The short move trading often requires what is essentially a tape reading technique and a special understanding of the market. Trading the major accumulation or distribution areas for a larger move is more readily understood. For most students it is more profitable and it is the method of operation which should be learned first. It is the basic method discovered and practiced by Mr. Wyckoff. This is described very well in the text in sections 9, 10, 16, and 17 and is summarized in section 21 of the Wyckoff Course. This type of operation lends itself readily to long term capital gains which under current tax laws is a vital concern to many of our students. To trade a major accumulation or distribution area, you must have a large count, a sign of strength and a last point of support. We would like to emphasize this essential strategy, that you must have a large count, a sign of strength and a last point of support! Stay out of the stock until it is on the springboard! We will emphasize this repeatedly and illustrate it in later tapes. This is the precise area where accumulation is being completed and an attempt is being initiated to begin the mark-up process. Now, just what do we teach and what can you learn at SMI? We teach the science, the technique and the art of speculating in the stock market. Lets review the definition of these three terms. 1) Science: Knowledge of facts and laws arranged in an orderly system. This is precisely our endeavor. Our study of stock market science provides a careful insight into the sociological and psychological aspects of market operations. We study the characteristics and habits of the individuals and groups participating. We probe why the varying mental attitudes of these groups have an effect upon stock prices and how the character of the market is influenced by psychological conditions. Further, we expect the student to discover the importance of his mental attitude and the effect it will have on his degree of success. Through continuous practice trading, he will learn that disciplined application of knowledge can overcome the common obstacles caused by ones hopes and fears and (by) ones timidities and obstinancies.2) Technique: Method or way of performing the mechanical details of an art or science. Our approach to the stock market requires up to date records prepared from the factual data of daily price action and volume of sales as compiled by the principle stock exchanges. Vertical line and figure charts are constructed for a) the individual stocks of particular interest; b) carefully selected indexes of leading groups and c) sensitive indexes reflecting the condition of the general market. From these we are able to make a serious and instructive study of the action of the stock together with the action of other stocks of a similar character and finally, the action of the market as a whole. Our students are schooled in the techniques we believe are essential to technical analysis.3) Speculation: Buying or selling where there is a large risk with the expectation of making a profit from future price changes. We believe speculation is an art and a science whose fine points may be readily learned by those who will apply themselves to their studies. To become successful one must operate in the style of the men who have proven their expertise. Learning the modus operandi of these astute gentlemen will assist the student in developing this professional attitude toward the stock market. Each student must learn to understand the meaning of these definitions as well as the Wyckoff principles through systematic study. Then its practice. Practice trading to test his understanding of their application and to determine how he can best operate with them. Then, when ready, he will begin to speculate with his capital.It is important that we have a common language. In Volume Two of the course we have included a glossary of terms. Whenever you are uncertain as to the exact meaning of a term, we suggest that you refer to the glossary. If you find a term that is not explained there, refer to your dictionary or ask us for our definition. Occasionally a term will be used in a special way with a special meaning of SMI. This arises out of our special usage and understanding of the market. It is often helpful for a student to relate the technical terminology, that is the language of analogies being used, down to whatever he does in his daily life. This may help in using the principles and may prevent them from being purely abstract ideas. An illustration of what we mean can apply to the term selling climax. Knowledgeable speculators understand selling climax to be the phenomenon which occurs after a stock has been going down, down, down and has reached the point where panic selling begins to set in leading to a dumping of stocks by people who bought at higher prices. This panic selling creates an expansion of the price spread and an expansion of volume. The price weakens at an increasing rate. The price characteristic is that it sharply increases at the point where they, the professionals come in and absorb this panic selling: The down move is over and the stock begins to rally. We call this action a selling climax.The Wyckoff principle of a selling climax does not always occur at the end of every decline. In other words, not all declines end with a selling climax, but when it does, when you can identify it clearly, it is a principle. We can have a common understanding that this is the principle of the selling climax and act and operate accordingly. The principles do not change. However, they may manifest themselves in many ways and where the price and volume will be different on each occasion. It is very important to realize that the Wyckoff Course is based upon sound principles. A principle has been defined as a comprehensive and fundamental law, doctrine or assumption. It is an unchanging rule. Prove your principles. Learn how the principles tie in with each other and learn to anticipate which principle is likely to occur following the current unfolding picture of market activity. Build your analysis on principles, not upon your feeling about the stock, not on your hopes, dreams and wishes. That which is built upon principle is sound and will last.The Wyckoff Course is based directly upon the law of supply and demand and the law of cause and effect. The law of supply and demand says, when demand is stronger than supply prices will rise. When supply is stronger than demand, prices will fall. The law of cause and effect says, in order to have an effect, you must first build a cause. The effect will be in direct proportion to the cause and cannot be separated from the cause. Very often the working of this law can be most easily seen in the figure chart which sometimes has been called the cause and effect chart. This is because to have a very large move, you must first build a cause of a count. A stock, in order to have a major move, a large, large move, thirty, forty, fifty percent or more usually goes through some form of accumulation or preparation. This will show up on the figure chart as a large count.We sometimes use a third law in our work and that is the law of effort versus result. It is most readily seen in the working of the Optimism - Pessimism Index and in the upthrust after distribution. The basic concept is that, if you have an effort expressed, the result should be in proportion to the effort. In the Optimism -Pessimism Index we have the phenomenon of the divergence and the inharmonious action in which an effort on the part of either the Wyckoff Wave or the O.P. Index is expressed and the other Index does not respond. Something may be wrong and wed better find out what is wrong and what to do about it.In the case of the upthrust after distribution; if a stock has been moving up with a two point spread every day with 10,000 shares and it breaks into the high ground with 20,000 shares and a 1/2 point spread for a couple of days straight, we know supply is coming in and is overcoming the demand. This is an effort which is not having a proportionate result. Bulls have been buying stock and have not been able to move the price when it should be at a critical point in the movement of the market and therefore the stock is likely to be in trouble and have a reversal in its movement.As indicated previously, we teach the science, the technique and the art of the stock market and the mechanics of the use of charts. We have found that there are some suggestions which can be quite helpful in keeping your charts. First, always keep your charts neat. Keep your charts as clean, neat and orderly as possible. Once you have them organized this way, mark all indications on the chart, such as trend lines, half-way points, climaxes, etc. We suggest that you keep your charts in black ink, either using felt or ball-point pens. Put the temporary indications in pencil and when you are completely certain of the calling and the identification of the principles, then you may wish to change them to ink. Mark the important indications in ink, but mark the relatively unimportant indications in pencil. You may wish to erase the unimportant trend lines and other things later as the action unfolds. Start your charts on the same point on the page. This is very helpful technique. Also, use the same volume and price scale for similar priced stocks whenever possible. This eliminates posting a chart that you may have on a double or quadruple scale as a single scale chart. This can be quite frustrating and lead to market losses.When analyzing, spend your time where it is most likely to pay off. If you have to search for something, usually it is not worth finding on the charts. Often the best situation will be obviously good almost at a glance. There are some situations in which you will not be able to understand what is going on. Very often no accumulation or distribution or anything of importance is going on in the stock at that time. It is simply drifting with no large interests and sponsors interested and no one preparing a campaign in it. In other stocks, you will be able to determine what is going on, however you will not be able to take a trading or investing position largely because the profit - risk ratio is not in your favor; it is simply too risky: Or at times you may wish to stay out of the market because of price or volume action which is somewhat obscure. To a large extent a student should stay out of these first two types of situations. The third type of situation is where you do understand what is going on and the move indicated is large enough to give you a good risk. Analyze it thoroughly. Time your commitment as well as you can and take your position. As soon as you have finished taking your position, review it and then follow it through until you finally close it out.It is often very helpful to write down what you think as you are analyzing or perhaps to make notes on the charts. This is a way you can check your work later and you will not lose track of your ideas. Writing down the main points of your analysis forces you to organize logically and you are less apt to miss important details. We have found it especially helpful to analyze the Wyckoff Wave in writing every week. Also, it is helpful to write out your analysis of an individual stock before taking a position in that stock. Prove to yourself (that) you are making the correct decision. Be sure before you act. Now for some comments on taking a position in a stock. If important accumulation or distribution in a stock is going on, it is very difficult to hide it. This will normally show up on the charts. When it is not clear, stay out! When indications are clear, take a position with the timing and the profit - risk ratio in your favor. Your first job is to protect your capital! Your second job is to obtain a profit when the risk is in your favor.If you are afraid to be wrong in the stock market you will have a very difficult time because each time you take a position either in a practice trade or with the bulk of your cash, you run the risk of being wrong. Very often we find that a newer student has the majority of his initial trades wrong with losses. It is better to take your losses with practice then to risk the bulk of your capital. A funny thing about being wrong or being afraid to be wrong is that our ego normally reacts to protect us from being wrong. Often we will rationalize, twist the truth and in fact would rather lose money than to admit we are wrong. Build on your profits and on the knowledge that you do have. Minimize the losses! Learn what you can from your mistakes and try not to repeat them. This is a lone wolf business. After having seen some bad experiences of students who were tempted to work with others in the market, we recommend that you learn to rely on yourself alone and when you have problems, discuss them only with an SMI staff instructor. If you know another student you may wish to discuss principles. Never, but never discuss trades! Learn to keep quiet. Very often another person will take the opposite point of view and throw you off. Unconsciously, he may do this so that he can be right and you be wrong: This is a professional malpractice which some people do unconsciously and it is especially easy to do in the stock market. Learn to make your own decisions. Discuss them with no one. Stick to your guns and follow through until the commitment is completed.We have often found that no two people trade the same. Quite by accident, a number of years ago we found that three people in our office were trading the same stock. The stock happened to be Chrysler. The first person had a capital gain of about 25 points and was attempting to obtain a much larger move. He was also attempting to obtain a long term capital gain taxwise. However, he had diagnosed that Chrysler was going to have a reaction of 10 to 12 points. He decided to ride that reaction out in order to obtain the long term capital gain. The second man diagnosed that the stock was going to go down and took a short position for about 10 points. The third man had had no previous interest in Chrysler, but as the stock moved down to the end of the reaction he bought. The principles are the same. It is the same stock, but three people operated in it differently. No two people have the same character, personality or necessarily the same objectives. You must define how you will operate through systematic practice trading and cash trading. In dealing with your broker it is often very helpful for you to have an understanding of his functions and of your functions. Essentially he performs three functions. One is to keep a record of your transactions and maintain your account, another is to execute your buy (and) sell orders promptly and as accurately as he possibly can and third, to provide you with factual information when requested. Your function is to analyze and select stocks. You will have to ask your broker to do what you want; to take your orders, to execute them, but to give you no advice or other information unless asked for. If you need stock quotations, you can arrange to get them through your brokers secretary. We have found that many students prefer to have a broker who is not located in the same town. This eliminates overly frequent contacts and the inadvertent influence of the broker on them. Again, one of the basic reasons for taking the Wyckoff Course is to learn to operate based on your own judgment. We maintain that you can operate independently and confidently with your Wyckoff principles. Ignore news, tips, rumors, etc. Often news times the market; moves and motivates the neophyte to do something: Usually it is to lose (his) own money. Often it gets you to act irrationally. The stock moves down and then the bad news comes out on it. The stock moves up, or we might say it is moved up and then the good news comes out. The time to take your position, a short position, (is) before the stock is ready to go down on the springboard and the time to take a long position is on the springboard just before an important move up. You can learn to diagnose this from market action alone.The basic method of analysis we teach at SMI is spelled out in section 9, page 1, paragraph 1. It reads as follows: After we have determined the position and probable trend of the general market and have examined the action of the various groups to see which are most likely to go with and to lead the market as a whole, we must single out those individual stocks which are in the best position for our purpose, which is to operate in harmony with the indicated trend. Restated, the three strategic principles are: 1) He determines the trend of the market; 2) Compares for strength and weakness and then; 3) Analyzes the individual stocks. Why? First you determine the trend of the market, using the Wyckoff Wave, in order to go with the market. To buck the trend of the market usually leads to extra problems or loss. Second, you compare for strength or weakness (in order) to eliminate the obvious losers and to select those stocks most likely to lead the market in the coming move. Third, you analyze an individual stock to determine if it is ready to move. It must be on the springboard. In summation, you do not need to learn and know everything about the market in order to make money. To begin to operate in the market it may be sufficient to learn one or two important techniques, but learn them well. Apply them systematically time and time again whenever the opportunity arises. You may make only a few trades in a year and still have unusual profits. How? By trading for the larger moves, keeping the profit - risk ratio well in your favor, a bare minimum of 3 - 1 and by not risking all of your funds on one stock.Few students appreciate the Wyckoff Course as they really should. Many at first think they know as much about the market as we do. This is simply not true. In learning to operate with the Wyckoff principles well, you will be operating as a professional. There are relatively few real professionals in the market. There is a somewhat larger number of reasonably good amateurs, but very few professionals. You can be among elite. We hope you will learn this knowledge systematically, apply it with diligence and discipline and begin receiving an increasing profit from your efforts. By the time you have learned to operate profitably in the market, you will have paid a rather modest price. The highest price you will have to pay is in the time, the effort and the persistent dedication to learning and to testing your knowledge. By that time you will have become a special person with a special, most unusual and unique understanding of the stock market. In succeeding tapes we will be referring to many of the refinements, analogies and principles embodied in the Wyckoff Course. We will use some classic examples and some oddball variations to drive specific points home. Perhaps the most important thought or admonition which we can possibly put on any of these tapes is this; that you regularly review your written three volume text along with these lectures. These principles soon will slip away unless you keep reviewing and renewing your knowledge. Read and re-read your text. Then practice, practice, practice and practice some more the analysis and charting exercises included throughout your course of studies. We have found the better students study it systematically, learn it, practice it, rely on it exclusively and apply it, often to their great and astonishing profit. This same success can be and should be yours.

BASIC LECTURE NUMBER TWO

TRENDS

The main subject of this tape will be trends; what trends are, what causes them, how to identify and analyze them and how to use them in speculative operations. Let us define a trend first. A trend is to have or to take a particular direction. It is the underlying or prevailing tendency of inclination of movement. In other words, a trend is a tendency to move in a particular direction. Trends are governed by the law of supply and demand. For a brief review, the law of supply and demand says that when demand is stronger than supply prices will rise, when supply is stronger than demand prices will decline. When demand and supply are in equilibrium the price will move sideways or will be unchanged. This sideways trend is called a trading range. Supply and demand must be judged by what happens to the price; price, the number of shares bought and sold; volume and how long it takes to complete the movement; time, in other words price, volume and time.Our purpose is to diagnose the direction and strength of the coming trend and to take a position in harmony with it. We aim to take that position as the trend is beginning to be established or, after a reaction within the trend has occurred, to take a position as the trend is resuming its movement. CAUTION, DO NOT BUCK TRENDS! Price changes and trends which result from these price changes are caused by an unbalanced condition of the flow of orders coming into the market. Please turn to chart number one for a very simple illustration. Suppose an order for two thousand shares comes into the market to buy a stock. The stock is selling for $50.00 per share and there are only three hundred shares to be sold at that price. The specialist could fill this order for three hundred shares and then raise the bid price until the entire order is filled. We will assume that there are no additional buying and selling orders coming in as this particular order is executed. So, three hundred shares are sold at 50, another hundred shares at 501/8, two hundred at 501/4, a hundred shares at 503/8, five hundred at 501/2, two hundred at 505/8 and these orders to sell have all been filled. At this point the specialist still has six hundred shares to be bought. There are one hundred shares at 503/4 and then at 507/8 the remaining 500 shares are bought. Thus the price has moved up 7/8ths of a point in executing the order. This is extremely simplified. In the actual market as this order would be executed, additional orders would come into the market on both the buying and the selling side to be matched and executed. The price would move back and forth depending upon whether there were more shares to be bought or to be sold at any particular moment.These trends may be portrayed in tabular form or in chart form. They may be most readily analyzed when they are in chart form. We use three types of charts primarily; a vertical line chart, a figure chart and a wave chart and in these lectures we will discuss all three. Most people think there are only two trends, however, there are three types of trends classified as to direction of movement. There is an upward trend, a downward trend and a sideways trend or trading range. There are many ways to classify trends as to types or the size of trends. Elaborate systems have been worked out to classify trends. Do not do this! It leads to extreme confusion and very often to financial disaster. At Stock Market Institute we use four classifications for simplicity; 1) the intraday, 2) the minor, 3) the intermediate and 4) the major trend. This is not a precise or mathematically absolute classification and we are not interested primarily in what you call a trend, but we are extremely interested in your understanding of it. What is extremely important is your understanding of the supply and demand relationships as the trend develops. The intraday trends are caused by very small fluctuations; those fluctuations occurring within a day and there may be several of these within one day. Intraday trends are usually a day or two in duration. Essentially, a person must have an intraday breakdown to analyze these intraday trends and it really requires a tape readers operating setup and technique. Intraday trends on the Wyckoff Wave are published on our daily stock reportMinor trends are made up, usually, of three or more intraday trends and are moves of up to approximately 10 percent of the price of the stock. Usually they last for a couple of days to a couple of weeks.The intermediate trends which are made up of three or more minor trends and are movements of around 15 to 20 percent of the (price of the) stock usually run for a couple of weeks to a couple of months.A major trend is made up of three or more intermediate trends and is a movement of over 25 percent of the price of the stock. Usually major trends will last for several months or perhaps much longer. We wish to emphasize that you should not make a precise or exact mathematical or absolute classification of strict percentages. There is a gray area between intraday to minor, the minor to intermediate, intermediate to major. The important thing is not how you classify the trend but your judgment as to the strength of supply compared to the strength of demand. To show you how these trends persist and persist and persist, on the Wyckoff Wave there was a major support trend line drawn through the low of September 1953 and the low of 1957. This support line was met on the low of the 1960 down market and the Wave turned upward. This support line was finally broken on the 1962 decline.We have found that very often we can illustrate principles best by drawing a free hand chart or a schematic diagram to illustrate the general principles, followed by a discussion of actual examples showing some classic situations and some variations. To begin this study please turn to chart number two. On this chart we have a study of supply and demand. The Wyckoff Course teaches (that) the student must first learn and understand the motives, behavior patterns and the emotions of the people who go to make up the market. For instance, it is normal for people to go to extremes. In an advancing market it is normal for greed to overcome reason resulting in a demand which pushes the stock up into an overbought position. Likewise, in a declining market it is easy for fear to cause selling which may result in lower prices causing more fear and supply which drives the price down, down, down into an oversold position. These market fluctuations are caused primarily by fear and greed. Lets take time out to discuss this for a moment. This is a good use of fear and greed. Actually everything that you and I and everyone else does is to some degree based upon the simple use of the emotions of fear and greed. At first they sound like nasty words because they are very often used in a very non-complimentary way. We mean them in a very delicate and positive way. There is nothing wrong (with) being greedy as long as it is not carried to extremes. The reason you are studying your Wyckoff Course is because you want to get ahead, you want to make money or protect your capital. Furthermore, almost all of us carry life insurance because we are fearful; we are fearful something will happen. This is a very simple use of a very important emotion. Now, everything that you and I do is based upon some use of these two emotions. We may rationalize and attempt to base our analysis and actions on reason, but this fear and greed are still there to some extent. The trouble is, in the stock market fear and greed are carried to extremes. Lets see what happens as the market begins to go down and panic selling comes in. This is usually precipitated by bad news. Usually this fear selling will snowball until it is finally stopped by superior demand coming in on a selling climax. Gradually this fear runs itself out. It goes to too much of an extreme. Similarly, the buying based on greed grows and grows on an upward move until it is finally stopped by a buying climax. As the market moves up, too much greed comes in. This process creates what we call the oversold and overbought positions or situations. In the oversold area the stock or the market can go through accumulation and in the overbought area it goes through distribution. Lets return to chart number two. Here we portray the market in a general upward slanting trend. We call it the primary growth trend. Sometimes it is a downward slanting trend. This is the general direction or rate of growth that the market, an index, a stock or you might say the economy or company is taking. Now, market prices, or the price line fluctuates widely above and below this growth trend line. If we draw a line through the center of the general price pattern as it moves up and down, we get somewhat of a curved line or cycle. It goes way down below the primary growth trend line and then fluctuates well above it and then back and forth. Again, generally the stock will go through accumulation in the oversold area and distribution in the overbought area. Now, please turn to chart number three. We can break down this cycle or wave like pattern into four phases: 1) accumulation; 2) markup; 3) distribution and 4) mark-down. We are interested primarily in what is happening to supply and demand. In the accumulation area demand is coming in to gradually overcome and absorb the supply and to support the stock at this level. In the mark-up area demand is greater than supply. In the distribution area supply overcomes the demand, stops the upward move and eventually begins the downward move. In the mark-down phase supply is greater than demand. We can also look at this in another way. Mr. Wyckoff says that each stock or each move goes through a period of preparation before the execution of the move. This would correspond to the accumulation and mark-up phases, the other preparation and execution phase being distribution and mark-down.In chart number three we have shown the oversold position as an area where the intelligent and knowledgeable investor or speculator accumulates stock. The overbought position is the area where he will distribute or sell his stock. This pattern holds true whether his speculative objectives are short term, intermediate or long term.In chart number four we have portrayed a series of minor fluctuations or intraday waves. These build up and build down and form minor moves or minor trends. Actually, every upward or downward swing in the market whether it amounts to many points, only a few points or fractions of a point, consists of numerous buying and selling waves. These have a certain duration. They run 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 small buying and selling waves which occur during every stock market session run so many minutes. These small waves are part of the larger waves which run so many days and eventually make up movements which we call short term rallies and reactions or minor moves. Our illustration shows this up and down price action which reflects the buying and selling waves caused by the shifting relationship of supply to demand. In chart number four from A to B we have a series of intraday moves of generally equal strength and in general the up moves are about the same strength as the down waves. Thus, the stock moves sideways in a narrow trading range, a very small trading range. However, from B to C we have a minor up move composed of several intraday trends in which the rallies are stronger than the reactions. Demand on the rallies is stronger than the supply which comes in on the reactions and thus we have an upward minor trend.In chart number five we have shown how these build up and build down into intermediate advances and declines. All stock movements however large or small are made up of buying and selling waves. A stock moves to a higher or lower level by a series of surges a good deal like an incoming tide with successive waves higher or lower than those preceding. As shown in chart five, the short term rallies and reactions, the minor moves, build into intermediate advances and declines. By studying the relationship between these upward and downward waves; their duration, speed and extent and comparing them to each other we are able to estimate and judge the relative strength of the bears and the bulls or better yet the supply and demand as the price movement progresses.In chart six we have a series of intermediate trends which form the long term or major trends or to express it another way, the long term bull and bear markets. From A to B we have an upward trend, a major upward trend which is composed of a number of intermediate trends in which the up trends are stronger than the reactions; demand is stronger than supply. You will be able to judge the supply and demand on the basis of the price action, volume and time. There is a widened spread and an increasing volume on the rallies. On the reaction there will be decreased volume and a comparatively narrow spread compared to the rally, indicating less selling on the reaction than there was buying on the upside. In an up trend you should not have prolonged price weakness or massive dumping of stocks on the reactions. Continuing with chart number six from B to C we have a downward trend composed of a number of intermediate trends indicating the good supply on the downside and a lack of demand on the rallies. Again, you will be able to judge this on the basis of the price action, the time and the volume. Volume should remain good on the downside, the rallies however should be relatively weak, indicating a lack of demand. There should not be wide spread or increased volume or sustained increased volume and it may take quite a bit of time on the rallies. The main point is that you have an unbalanced condition in the supply and demand with supply good on the downside and a lack of demand, weak demand on the rally.Lets spend a little time with chart number six and discuss some variations. Very often these stocks will go through a period of re-accumulation, building a complete new count such as is illustrated from E to D. Sometimes instead of going through a complete new count building process, the stock will simply come down, dry up the supply and again resume the upward trend after having made an intermediate correction. We have portrayed this at F. Often it will go through minor or intermediate distribution in the major upward trends, precipitating and causing these corrections. The same thing can occur in the down market with a rally in which a stock will build a complete new stepping stone count for the down side, or it may simply rally, run out of demand and then resume the down trend. This in brief is the basic idea behind trends; how they are formed and what causes them. Now lets go into some practical applications including how you can measure the trends and how you can trade a stock that has already begun this upward or downward trend. Please turn to chart number seven. Chart number seven is a study of two important trends in the Wyckoff Wave Index beginning in August, 1968. The first important trend is from (point) number 1 to (point) number 2. The second is a down trend from (point) number 2 to (point) number 3. The first is an intermediate trend made up of several smaller or minor moves. The first minor move is from (point) 1 to (point) 4, a reaction from (point) 4 to (point) 5 and then a long move from (point) 5 to (point) 2 with some very small reactions such as (from point) 6 to (point) 7. On an up trend there should be good demand on rallies followed by a falling off or decreasing volume and a narrowing spread on reactions compared to the prior rally. The Wednesdays closing on the New York stock exchange during the later half of 1968 caused some distortion in the normal volume pattern. This usually caused exceptionally high volume on Thursday. At SMI we use three methods of measuring trends; trend lines, thrusts and half-way points. (First) we measure the angle at which the trend is moving through the use of trend lines. Trend lines form a channel of movement similar to a frame for a picture. There are two types of trend lines; 1) the normal use and 2) the reverse use. (Second) we also measure the amount of progress that is made on each drive up and drive down. This is called the thrust. (Finally,) the third measurement is the half-way point which is an indication of comparative strength and weakness and the adequacy of the correction. When placing the trend lines, the thrust and the half-way point on your chart, you should do it with a great deal of exactness. However, do not expect the stock or the index to observe or reach them perfectly. For instance, on a reaction within an upward trend, do not expect the stock to come down to the exact trend line and turn upward. It may penetrate a little bit, or it may hold slightly above the support line or the trend line. The important thing is how it reacts, not the exact point to which it reacts. To break a support line on light or decreasing volume means relatively little and often enables the stock to resume the up trend within the same primary trend lines. To break the support lines on increased or high volume and good price spread is a different matter. It indicates a change in the supply - demand relationship and usually results in the stock establishing a new trend, perhaps a new trend in the same upward direction. Another way to analyze the breaking of a supply line is to study the possibility (that) it is creating an overbought condition. It may result in a steeper angle of trend. To summarize, the breaking of a trend line may result in establishing a slower or faster trend in the same direction or in a complete new trend. The supply - demand relationship will determine the continuing trend. It can change rapidly. So our advice is to watch it closely. We usually identify trend lines with letters such a AA, BB, CC, etc. It may be helpful for you to follow this practice and it will help us in our correspondence with you if we all use the same system of letters and numbers.At SMI we use two types of trend lines, the normal use and the reverse use. In the normal use of trend lines, in an upward trend we draw the support line first with the supply line drawn second, parallel to the support line. How do we draw these trend lines? First, locate two consecutive lines of support on a reaction and draw the support lines through those points. Examples of these are on chart seven, line AA, which was drawn through points 1 and 5, and chart nine, line AA drawn through points 1 and 3. Now, the supply line is drawn parallel to these support lines; drawn through the top of the rally which occurs between the two support points. On chart seven, line BB is the supply line drawn parallel to AA through (point) 4. In a down trend, again using the normal use of trend lines, the supply line is drawn first, through two important supply points. An example of this is line EE on chart nine which is drawn through (points) 2 and 20 with the support line FF drawn parallel to it through (point) 21.With the reverse use of trend lines, in an upward trend, we draw the supply line first, followed by a support line drawn second and parallel to it. An example of this is on chart nine. Line CC is the supply line drawn through points 7 and 8 with a support line DD drawn second through (point) 11.In a down trend using the reverse use of trend lines, the support line is drawn first through two support points and the supply line drawn parallel to it through the top of the rally occurring between those points. An example is line CC on chart eight drawn through points 4 and 5 with the supply line DD drawn parallel to it through point 7. We have never seen the reverse use of trend lines used except by SMI. You should soon discover their unique value in your technical analysis of individual stocks and of the market.On chart seven we are going to use the normal use of trend lines only. Line AA is the support line drawn through (points) number 1 and 5. The Wave meets support several times near AA on small reactions, then meets it at (point) number 7 and turns up. At (point) number 8 it breaks through AA with wide spread and increased volume indicating that AA is no longer operative. These shorter and temporary lines within the more important trend lines often are very helpful in alerting one to (a) coming change in trend, a change of character or a decisive shift in supply or demand. They may be erased later when no longer needed. The supply line BB is drawn through (point) number 4, parallel to AA and eventually it is met at (point) number 2 and the Wyckoff Wave turns downward. We could also draw another supply line, CC, parallel to AA through point number (12), when (price) failed to reach line BB at (point) number 12. This would show the failure to reach the line BB where it could or perhaps should have reachedSlowly study the price action and volume beginning with point number 1 over past point number 8. Do you see the expansion of the price spread and the increasing volume on each rally? This is evidence of good demand. Then, note the lack of supply on the reactions. The volume shrinks on the reactions at (points) 5, 9, 10, 11 and 7. However, at (point) number 8 there was a decisive change in character as supply was heavy, as shown by the wide spread and increased heavy volume on the downside.Now lets draw the thrust. The thrust measures the price progress that the stock or index makes on each wave within the trend. The thrust is the price difference between consecutive tops in up trends or between consecutive bottoms in down trends. To measure the thrust, we draw a series of horizontal lines at the level the highs and lows are reached on the drive within the trend and connect them with a vertical line. For example, we have drawn the thrust A1, B1 and C1 to measure the net progress of each subsequent drive up on the move from (point) 1 to (point) 2. A1 measures the amount of progress made from (point) 1 to (point) 4. B1 measures the progress from (point) 4 to (point) 6. There is a sizable reaction and a more prolonged reaction from (point) 6 down to (point) 7 and then C1 measures the progress from (point) 6 up to (point) 2. Note the shortening of the thrust, the lack of progress made on a move. This is an indication that you should examine the market action very carefully to determine what is happening to that trend. It may be running out of the underlying push caused by demand overcoming supply, or opposition may be coming in to stop the advance, or supply overcoming demand.There will be times when you will be in doubt as to whether you should draw the thrust through a certain point. This is a matter of individual judgment. The judgment will largely depend on the depth of the correction within the trend, the time spent in the correction, your objectives and purposes and your perspective in analyzing the trend. You will be well schooled in the basics however, as we will present many examples for you to study and use as a reference. Now for the half-way points. What is a half-way point? The half-way point is used as a measurement of relative strength on a rally or reaction. To use an example to calculate the half-way point, assume that a stock moves from 50 to 56, a distance of six points and then reacts. The half-way point would be half of that six points or at 53. Reverse the process for calculating the half-way point on a rally following a decline. For instance, suppose a stock moves down from 30 to 21, a distance of nine points. The half-way point would be at half of that distance and is 41/2 points added to 21 (which) gives a half-way point of 251/2. On a correction to a half-way point, do not expect the stock or the index to go to the exact half-way point at the exact 1/8th. It is sufficient to meet support or supply in the vicinity of that half-way point. The ability to hold above the half-way point substantially is an indication of relative strength. The overrunning of the half-way point is an indication of relative weakness. Again, on a reaction, the important thing is not that it comes down to the exact 1/8th, but how it comes down. It should react within an upward trend with a lack of supply, shortening of spread and decreasing volume. Lets turn to chart number seven for an example of determining the half-way point of a correction Calculate the exact half-way point on the reaction from (point) 1 to (point) 4 mathematically. The low point at (point) number 1 was 2750. The high at (point) number 4 was 2866 or a move of 116 points. One half of that is 58 added to 2750 gives a one half-way point of 2808. You can calculate all of your half-way points this way. Do it mathematically. Do not guess because your eyes will lead you astray. This half-way point was respected at (point) number 5. Others have been drawn. Please note how the Wave held slightly above the half-way point on the reaction to (point) 9 and over-ran it at (points) 10, 11 and 7, indicating relative weakness. Thus, we have a normal up trend from (point) 1 to (point) 2 with good demand on rallies, lack of supply on the reactions. The narrowing spread at C1 and the over-running of the half-way points warned of a possible change of trend. The supply on the downside at (point) number 8 confirmed it.After the Index reached (point) number 2 a long down trend began from (point) number 2 to (point) 3. Using the normal use of trend lines we would draw supply line DD through point 2 and point 13 with the support line EE parallel to it drawn through point 14. At (point) 15 the Wave becomes oversold when the line EE is broken and the Wave turns upward but does not reach line DD at (point) number 16. Thus we can draw a new and a steeper supply line FF through (point) number 13 and (point) number 16 with a support line GG parallel to FF through (point) number 15. Please note how the failure to reach the supply line DD at (point) number 16 put the support line EE in jeopardy at (point) number 17. When we draw a new and steeper line such as FF, it is usually best to continue the original line such as DD as it may come into play much later. Do not fail to extend major lines a long way.Now, lets measure the thrusts on the move down from (point) 2 to (point) 3. D1, E1, F1 and G1 measure the thrusts on the wave from (point) 2 to (point) 14, (point) 14 to (point) 15, (point) 15 to (point) 17 and (point) 17 to (point) 3 respectively. Again, note the shortening of the thrust at G1. It is an indication that either the Index is running out of supply or demand is coming in to stop the down move. It is a visual indication signaling you to be alert and very careful in your analysis and in your trading. The rallies to (points) number 13, 16 and 18 first overran the half-way point at (point) 13, then stopped in the same area (as the half-way point) at (point) 16 and then failed to reach the half-way point at (point) 18, showing progressive weakness. We should calculate the half-way points on the minor moves, but (only) after these minor half points have been over-run substantially. Then go back and calculate the half points on the more important moves such as from (point) number 2 to (point) number 3. This point is 2865 and is shown by the bracketed half number. This move from (point) number 2 to (point) number 3 is a normal down trend with good supply on the down side evidenced by expanding price spread and volume and a lack of demand on the rallies shown by the narrowing of spread and decreased volume.Now, please turn to the Chrysler, chart number eight, which has an example of the reverse use of trend lines. As Chrysler starts down from point number 1, the first line which we can draw is the normal use of trend lines, line AA through points number 1 and 2, with line BB drawn through (point) number 3 parallel to AA. It should be noted that in drawing trend lines, we start off with the normal use of trend lines. Later on, after additional support and supply points have been created it may be possible to switch to the reverse use of trend lines. We have drawn line CC, which is the reverse use of trend lines, through points 4 and 5. You may ask; why use reverse rather than normal? Well, the importance of the reverse use of trend lines is that it is determined by the points at which the opposition came in to stop the move. Look at (point) number 4 on Chrysler. It went down from (point) 2 to (point) 4 and volume came in. There was good supply, but there was good demand to stop it, even on a temporary basis. There was a battle going on there and Chrysler rallied slightly from that point. At (point) number 5, again the price came down and demand came in to stop it. There was increased volume and an increased amount of trading and the down move was stopped temporarily. It is important to remember (that) there are two ways to go down. Price can go down and have an increased supply met by a superior force of demand at that point or price can go down and simply drift and drift and drift until it stops and ultimately rallies. The reverse use of trend lines is drawn through where it is stopped; where the opposition came in and actively stopped the trend; to stop it and reverse it even on a temporary basis. Later on demand may come in at the same angle to stop the move. Points 4 and 5 respectively, illustrate this thought. Now, what about the supply line. We draw the first supply line, DD, through (point) number 7. It is the supply point on the rally between (points) number 4 and 5. DD is met at (point) number 8. The price fails to meet CC at (point) number 9 indicating strength. Then DD is broken at (point) number 10 indicating demand overcoming supply. We can also draw a line EE through point number 1, parallel to CC; again the reverse use of trend lines. Notice the anchor point for line EE is at point number 1 where the preceding up trend was stopped or more correctly stated, where supply overcame demand. In drawing your trend lines, you may have to experiment, trying several points and try both the reverse use and the normal use. This failure to reach one line leaves the other vulnerable to being broken. A helpful tool to use is to draw an arrow from a stopping point to the trend line (in order) to indicate the failure to reach that particular trend line. For example, see the arrow drawn between point 9 and the support line CC.Now, please turn to chart number nine, Grace. From point number 1 to point number 2, Grace is in a long up trend. The support line AA, using the normal use of trend lines, is drawn through points number 1 and number 3. The supply line BB is drawn parallel to AA through point number 4, the top at rally points between (points) number 1 and 3. At point number 5 the stock fails to meet line BB and then penetrates line AA at (point) number 6. The breaking of line AA at (point) 6 occurred on low volume, decreasing volume and a narrowing spread, indicating a lack of supply on this reaction. This lack of supply indicated that Grace was not about to have a change of trend.The stock rallied well and began a long move from (point) number 6 to (point) number 2. The reverse use of the supply line CC was drawn through (points) number 7 and 8. Note the volume that came in at both of these points. (Numbers) 71 and 81 are indications on the volume level. Supply came in to stop the advance. Line CC was respected several times around (point) number 9. At (points) number 10 and 2 the stock became overbought on the clear penetration of line CC, leaving the stock vulnerable to a reaction. The support line DD, drawn parallel to CC through (point) number 11 was then penetrated on the reaction from (point) number 2.The thrusts A1 through F1 have been drawn to indicate the amount of progress on each phase of the move up. Note the narrowing of the thrust at B1 and the prolonged and deep reaction which follows. Also the narrowing of the thrust at F1 disclosed the lack of progress at point number 2, which, as the price action shows, was the end of move. The reaction lows at (points) number 12, 3 and 6 were significantly below the half-way point, indicating relative weakness on those reactions. However, from that point on the reactions to (points) number 11, 13 and 15 held considerably above the half-way point, indicating relative strength.There are a series of supply points between (points) number 7 and 16 and two half-way points could be calculated from (point) number 6 to (point) number 7 or perhaps from (point) number 6 to (point) number 16. This is an illustration of how sometimes judgment must be used and how you may not have a clear cut situation with which to deal.Thus far we have discussed how to analyze the trends aided by trend lines, thrust and half-way points. How do you put it to practical use and how can you take a position in a stock which already has moved out of the base and has established its trend? The following is one procedure which has proven to be quite helpful and profitable to many students. In an up move, first of all determine in fact (that) the stock is in a normal up trend. It should have good demand on the up moves and a lack of supply on the reactions. Second, the stock should have plenty of count for a much higher objective. Why? Because you do not want to be buying into a trend as it is coming to an end. Third, calculate the exact half-way point and place a stop order below the preceding support area. Then as the stock continues its normal reaction your buy order may be executed. Reverse this process for a down trend. Lets see how this works out in practice in this example. An analysis of the chart action to (point) number 5 indicates that the stock is establishing a normal upward trend. It has good demand on the rallies and a lack of supply on the reactions. In applying this technique of buying around the half-way point on the corrections we calculate the half-way point on the move from (point) number 3 to (point) number 5 which is at 371/4. We can place an order to buy around this area just above the half-way point, perhaps 1/2, 3/4 or maybe a full point above the half-way point and a stop order below (point) number 3. This means that very often we will have to ride out a bit of correction as we are buying on the reaction and we rarely will buy at the exact low point on the reaction. However, if it continues the normal reaction, it should dry up the supply and resume the upward trend. This occurs at (point) number 6. By placing an order to buy ahead of time, just above the half-way point on a reaction, the order may not be executed. For example, after the rally from (point) 6 to (point) 7, as the stock did not get down to the half-way point, the reaction at point 11 held above this level. Such an order may not have been executed on the reactions to (point) number 11, (point) number 13 and (point) number 15. If your order is not executed, you can cancel the order and simply look elsewhere for other opportunities or evaluate your risk gain situation and possibly purchase the stock on the next reaction. It is important to realize there are times when you may decide to ride out a correction. Simply take the risk, follow it through and if it looks as though your stop order may be executed, you may get out before it is reached. No market technique is perfect. It will require considerable practice trading before you will be able to operate with any technique with competence and confidence. Part of your problem in buying on reactions in trends is going to be the problem of judging when the supply is drying up or when it has dried up on the reaction. You may take the speculative position in one of two ways. Either put the order in ahead of time as previously discussed or secondly, wait until the stock has completed its reaction and then buy as demand is coming in, such as after the reaction at (point) number 6, to buy at (point) number 17 as the stock is moving up. Both methods have their good points. We have generally found that it is best to buy as the stock is reacting as the risk is at a minimum. There are many false starts which can fool you and can result in your buying at the top of a minor rally such as at (point) number 18.The move from (point) 2 to (point) 19 is a perfectly normal down trend with supply on the downside and a relative lack of demand on the rallies. We have drawn in line EE, the normal use of trend lines, through points 2 and 20, with the support line FF parallel to it, drawn through the bottom of the reaction at point number 21. At (point) 22 to (point) 23 this support line is respected. The half-way points and the thrusts have been drawn. On the rally from (point) 21 to (point) 24 the stock did not get near the half-way point between (point) number 2 and (point) number 21. An order placed around the half-way point would not have been executed. However, an order to sell short placed just below the half-way point from (point) 2 to (point) 25 would have been executed at point 20 and would have resulted in rather large profits. This half-way point is at 481/4. A stop order could have been place around 511/8 or 503/8, which would be just above the prior resistance area at (point) number 26. Remember that the longer the trend is in progress and the nearer you are to the end of the trend, the more risk attends buying or selling short on the corrections around the half-way area. Your greatest profit potential and your least risk will occur when the stocks are leaving the accumulation or distribution areas or are very early in the trends. It is at this point where your profit - risk ratio will be the greatest and you will be able to use liberal stops.Chart (number) ten is of Amrep Corporation, on the American Stock Exchange. At (point) 1 around the $11.00 a share level the stock began moving up and was still in the up trend as of the end of this study. The purpose of this discussion is to analyze the trend and to discuss how a speculative position could be taken in this up trend. We must make the assumption for this purpose that there is a much larger count on the figure chart for a much higher possible objective. Beginning at (point) 1, cover up the chart to the right of point number 1 with one sheet of paper. Gradually move the paper to the right, uncovering the chart a few days or lines at a time. Note on the move from (point) 1 to (point) 2 (that) there is an expansion of price spread and volume on the rallies and a decrease in volume on the reactions along with a narrowing spread. Following (point) 2 the stock begins to react with somewhat decreasing volume. Our purpose in this illustration is to place an order to buy and have it executed as the stock reacts. The exact half-way point of the rally from (point) 1 to (point) 2 is at $17.00 per share. Suppose we decided to place an order to buy slightly above that half-way point, say 173/4. We must next place our stop order. There are two choices. We could put a floating stop order a couple or three points below the half-way point, say at 137/8 or we could place it underneath the support area bracketed at (point) 3 at around 117/8. Which stop you will use will depend directly on the amount of risk that you wish to take. The stock continues to react to (point) 4 and the order is filled. At that point a bit of volume comes in to stop the down move. It has had a lack of supply as shown by the narrow price spread on the down side and the drying up of volume. The stock goes to (point) 5. Is there good demand on this rally? Our answer has to be yes because of the wide price spread and the increased volume on the rally. Now, as it begins to react from (point) 5, calculate the half-way point from (point) 4 to (point) 5 This is $23.00. Place an order for a second position above it, say at 233/4. Next, enter a stop order below (point) 4, perhaps at 167/8. It reacts with a lack of supply, less price weakness, a narrowing spread on the downside and somewhat decreased volume on the reaction to (point) 6. The buy order is filled.Now, just because you have bought a stock does not mean (that) it is going to go up immediately: Neither can you put it away and forget about it. You must watch it carefully. On the move from (point) 6 to (point) 7 there is good demand and on the reaction to (point) 8 there is a lack of supply and a gradual drying up, a decrease in the volume. Draw support line AA through (points) 3 and 4, normal use of trend lines with the supply line BB drawn through (point) 2 parallel to AA. At (point) 8 the stock is oversold, however, look at the volume and the price action as that line is broken. It is without pressure and thus it may develop a slower trend in the same direction, but will probably not have a complete reversal of direction. This is a judgment decision you must learn to make. We could take a position on the reaction following (point) 7. However at (point) 5 and at (point) 7, it became quite overbought, indicating that it was vulnerable to a reaction. Also, an analysis of the thrust indicates that at C1 there was a very pronounced shortening of the thrust. Supply is coming in at lower levels and there may be a more pronounced reaction. Thus, calculate the half-way point and then watch it as it reacts. It is usually better to be safe and go into the stock market when you are more certain than to take unnecessary risks. The reaction at (point) 9 is with more pronounced price weakness compared to the reaction following (points) 5 and 2, thus, we simply stay out of the situation for the moment.We may calculate the half-way point from (point) 4 to (point) 7 as being $24.00 per share. This however is very close to the position already taken at (point) 6 and a new purchase would be at about the same price level. It is usually best not to do this. If capital is available, look for another opportunity. However, the reaction to (point) 8 is a normal correction within the trend. It shows a drying up of supply. The move from (point) 8 to (point) 10, again has good demand. Notice the increased volume on this rally. On the reaction following (point) 10, it began to come down with decreasing volume and decreasing spread. We calculate the half-way point as 277/8 and enter an order to buy, say at 281/2. Put a stop order below (point) 8 at 217/8 and the buy order is executed on the way down to (point) 11. At (point) 12 there is some heavy volume causing a decline, but it finally dries up at (point) 13 and the stock resumes the upward trend. We now have three positions taken on the reactions to (points) 4, 6 and 11. We aim to sell out as the stock is meeting important objectives, preferably on a buying climax. At (point) 14 the stock goes through such a buying climax at an important objective area and we sell all or part of the long positions. Let us assume that all is sold.The stock begins to react from (point) 15, which is the secondary test of the buying climax (which took place at point) 14. As it does so, there is a marked shrinkage of volume and a lack of price weakness. It is entirely possible that the major upward trend is still intact. We have seen heavy demand on the rally from (point) 13 to (point) 14 and a lack of heavy supply on the subsequent reaction. The half-way point of the move from (point) 12 to (point) 14 is at 357/8. One may place an order to buy just above that half-way point at 361/2 and a floating stop order two, three or four points below it, say at 327/8 and (then) watch the stock as it reacts. The order to buy is executed at (point) number 16. At (point) number 17 volume comes in to stop this minor reaction. The secondary test at (point) 18 confirms that the selling has dried up. The stock moves up to (point) 19 and begins to react. The half-way point is at 407/8 and an order is placed at 411/2 with a stop underneath the support level at (point) 20, say at 367/8. There is much more price weakness and volume than we would like to have on (this) reaction as our order is executed at (point) 21. However, the stock eventually moves sideways and resumes the upward trend.What could help us as we attempt to determine where it could resume the upward trend. One thing is the reverse use of trend lines CC drawn through (points) 5 and 14, where volume came in to stop the upward move. The support line DD (again reverse use) is drawn parallel to CC through (points) 12 and 13. At (point) 22 the stock meets support at DD and resumes the upward trend. On the move from (point) 22 to (point) 23 there is good demand on the rally and then it begins to react with a lack of supply. Again calculate the half-way point at 421/2, put in a buy order at 43, a stop order underneath (point) 22 at, say, 377/8 and let the order be executed as the stock reacts. It is executed. Our stop order is not touched off and we now have three positions taken on the reactions to (points) 17, 21 and 24. There is still a normal up trend action with good demand on the rallies and a lack of supply on the reactions. The stock moves from (point) 24 to (point) 25 and we could attempt to take a position again on the reaction following (point) 25. The half-way point is at 471/4. Place and order to buy just above it, say at 473/4 with a stop order underneath (point) 24 at 407/8. On the reaction to (point) 26 this buy order is executed. We now have an additional position and as of the end of this chart we have a profit in all four of these positions. Now, why dont you figure out the profits accrued on each speculative position taken. On this tape we have dealt primarily with normal trend action and a normal correction and reaction within the trend. However, there are two ways that a trend may be corrected. One is a normal correction, which we have just discussed. The other is with an ordinary shakeout. As the ordinary shakeout is very similar to a terminal shakeout, this will be discussed on the tape on terminal shakeouts and springs.Now for a word of caution. Be very careful of an action which is not normal, for instance in an up trend, when the stock runs out of demand. This would be indicated by a narrowing of the spread and a decreasing volume as it continues to move upward. Also be careful of heavy sustained supply on the downside. This is not normal for a normal correction.In a sustained down move be careful of good demand, wide spread and a long sustained volume on a rally. The running out of supply in the down trend, evidenced by decreasing volume and narrowing spread can leave it vulnerable for a rally. In taking a speculative position, you should take the position as early in the trend as possible, preferably as the trend is being established. It is especially important that you pyramid with the trend. Do not take a second position when your first position shows you a substantial loss.These are the basic concepts of trends and one method of taking a position as a trend is being established or as a trend is about to be resumed. It is not necessarily the only method of establishing a market position in a trend. However, it has been tested by many, many students and by the staff of the Stock Market Institute with excellent results. We suggest that before applying this technique with any sizable portion of your capital that you do extensive practice work with it.This has been the Basic Lecture on Trends, Thrusts and Half-way Points. We have illustrated some proven techniques in establishing a speculative position in harmony with the trend and to close out that position as the trend is ending. Listen to this tape regularly. Study the illustrations carefully. Then, practice; practice until you are competent and confident in your use of this proven technique. Then begin to profit from the knowledge and skill you have developed.

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 areasThe 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 lets 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, lets 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. Wyckoffs 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, lets 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 a