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TAPE READING ANDMARKET TACTICS

The Three Steps toSuccessful Stock

Trading

ByHUMPHREY B. NEILL

B. C. FORBES PUBLISHINGCOMPANY

New York, 1931

I dedicate this book to my losses, witha deep appreciation for the experi-

ence and knowledge whicheach loss has brought me.

PREFACE(February, 1931)

IN the making of this book, the tail literally haswagged the dog. The original plan was to col-lect in bound form a number of editorials writtenand published in a little magazine called if, Asand When. As I set about coordinating and edit-ing these various manuscripts, the thought pre-sented itself that every speculator has three stepsto climb before he can expect consistent marketsuccess.

These are: first, familiarizing himself with thepower and the methods of the professional specu-lative groups which operate "behind the tick-ers "; second, learning the principles whereby hemay interpret the maneuvers of those groups andthe actions of the public; and third — and mostimportant—attaining a mastery of himself: ofhis temperament, emotions, and the other vari-ables that go to make up human nature.

In conference with the publishers, it was then—V—

PREFACE

decided to make the main portion of this booka treatise on the interpretation of the ticker tape,inasmuch as there have been any number of in-quiries about, and requests for, instruction in tapereading and market tactics. Consequently thereader will find this volume divided into threeparts, the first being a brief review of stock specu-lation, the second the above-mentioned treatise,and the third a group of selections from what wasto have been the whole: the plan being thus de-signed to cover the three steps to successful stocktrading.

Candidly, I tackled the task with a fair amountof stage-fright, realizing that for many years nobook had been published on the subject of in-terpreting market movements from the action asrevealed on the ticker tape, and, also, because Ihave been told by many traders that what theylearn from the tape comes to them only after yearsof experience, which has finally given them a" second sight," or intuitive eye. I am not in-sensible to this belief; but I am convinced thatany intelligent person, with, perhaps, an extragrain or two of common sense and mental agility,

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PREFACE

can learn in a comparatively short time to tell fromthe tape what is likely to happen.

Right here, however, I should like to inject mypersonal opinion, that anyone who attempts tocatch the hourly, or even daily, fluctuations ofstock prices, is entering upon a risky, foolhardyenterprise. There may be some traders who havemade, and are making, money from these so-calledscalping operations; but I have never met onewho was successful for long, and, in talks withbrokers, I have been told again and again thatthe " in-and-out" trader, speculating " for a turn,"lasts but a few months. The reader will findarguments to substantiate this view throughoutthe following pages.

It must be recognized that there are methodsof gauging the manipulative and speculative forcesin the market other than that of reading the stockticker tape. To many, the thought of tape read-ing is sinister and reeks of gambling. These samepersons, however, will listen to tips, and will scanbrokers' letters and the financial papers, in thehope of hitting upon some commitment wherebythey will reap a fat profit.

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PREFACE

The tape records the prices at which buyersand sellers have met and agreed upon exchangesof stocks for money. This same record may beprinted upon sheets, or grouped for a day's busi-ness and published in the newspaper. It may berecorded upon charts. What are the odds? Somespeculators — and everyone who buys commonstocks with the expectation of some time sellingat higher prices is a speculator — may wish todraw their conclusions from the tape; others maynever have the time to look at a ticker and maydepend upon other forms of records. There isno quarrel here; each one must decide for himselffrom whence he secures his data.

There is this to be said against constant tapewatching: unless the trader has secure control ofhimself, there is the grave danger of his perspec-tive's becoming too confined and of his placingtoo much importance upon minor details withinthe various days' records. The middle road ap-pears, without question, to be the most profitablefor the average, conservative speculator. If hetravels this path he will turn to the tape only uponoccasions, and will retain a clear head for the

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PREFACE

broader objectives ahead, rather than have hiseyes and mind glued on the confusion of near-byobjects rushing past him.

The principles of analyzing market-action arethe same, whether employed to interpret short-term trading-trends, or followed in order to de-termine the extent of the jar safer intermediatetrends which last for anywhere from three weeksto six months.

There are any number of books publishedwhich relate to other forms of market interpreta-tion: chart reading, statistical studies, fundamen-tals, and other factors. All have their advantagesand good points. It certainly is conceded thatone cannot have too much knowledge of theforces which "make the market." Recent yearshave demonstrated that the public generallyknows little of what actually happens within therealms of common-stock speculation.

The emphasis throughout this book is uponthe human equation as it relates to market-action.I have attempted to make stand out in relief thedifficulties besetting the speculator, and to dis-cuss informally many factors of stock speculation

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PREFACE

which have been practically ignored in otherbooks. The principles are not new: in fact, Ibelieve them to be behind the accepted practice ofall successful speculators. I hope, however, thatthe presentation is helpfully different, and that itwill bring into sharper focus the important prob-lems which must be solved if we are to trade inthe market with profitable results.

In accumulating and selecting the material forthis book, I have drawn heavily upon the experi-ence of others; and I only wish that I might thankeach person individually for whatever share hehas contributed. That would be impossible with-out listing hundreds of men with whom I havehad the pleasure of discussing the market. Like-wise, I am indebted in large measure to the thou-sands of correspondents whose letters of inquiryon investment matters I have read and studied.These experiences have aided in the developmentof an understanding of the public's mind and ofhow the public acts in the market.

I owe to my associates in business more than Ishall be able to repay; but I thank them for theprivilege of absorbing much knowledge from

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PREFACE

their economic, statistical, and graphic studies.In particular, I tender thanks to Buchanan Tysonand Arnold W. Wetsel for many of the ideas ex-pressed within these pages, and for their generousaid and suggestions at all times.

To Richard W. Schabacker, Harold C. Wol-cott, and Howard M. Cool, I am also greatly in-debted, for their patient reading and constructivecriticism of the manuscript. And I wish to ac-knowledge with gratitude the work of Stanley W.Mahon in drawing the charts and of Miss Char-lotte Quasebarth in correcting and typing themanuscript.

To the reader, I acknowledge full responsibil-ity for the views and opinions expressed herein,and hand him this book with sincere humility,knowing full well the danger which lies in offer-ing any text on " how to do it." No system of fore-casting the movements of stock prices ever can beinfallible. However, there are many pitfalls inspeculation which may be avoided; and it is myhope that somewhere within these pages thereader will find hints and suggestions which willenable him to " dodge the crowd " and forever

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PREFACE

resign his membership in that great club, ThePublic, after which title there is added, in stockmarket circles, the epithet " always wrong."

HUMPHREY B. NEILL

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CHAPTER

I.

CONTENTS

PART ONESTOCK SPECULATION

STOCK SPECULATION .

PAGE

PART TWOTAPE READING

ii. THE TICKER TAPE . . . 2 9Behind the Tape: The Tape: What the

Tape Showsiii. THE PRINCIPLES OF TAPEREADING . . . . . . . . . . 4 1

Tape Interpretation: General Principlesiv. INCREASING VOLUME DURINGA N ADVANCE . . . . . . . . 4 5v. TURNING-POINTS ON HEAVYVOLUME . . . . . . . . . .

Heavy Volume But No Headway:Volume Indicating an Advance: De-tecting the Turn of a Trend: Various

Turning-Points

47

—xxiii—

CONTENTS

CHAPTER PAGEvi. TURNING-POINTS ON LIGHTVOLUME . . . . . . . . . 6 0

The Struggling Market: A SluggishTop

vii. VARIOUS TYPES OF TOP-ACTION . . . . . . . . . . 6 6

Tops More Difficult to DistinguishThan Bottoms: A Sharply Defined Top:A Broad Top: American Can's July,

1930, Topvii i . THE TAPE-STORY OF LOEW'S 78

A Day-by-Day Illustration: A PuzzlingReaction: The Action of Loew's on Sat-urday, November 15: The Action ofLoew's on Monday, November 17: TheAction of Loew's on Tuesday, Novem-

ber 18: Loew's Goes Throughix. STEEL, THE MARKET LEADER

Watch Steel: Watch for False Moves:The Action of Steel in August, 1930:A Word About the Examples in This

91

x. TIPS ARE DANGEROUS . . 103Check your Tips on the Tape: TheAction of Electric Power and Light:

So — Confirm It on the Tape—XXIV—

CONTENTS

CHAPTER PAGExi. SOME IMPORTANT OBSERVA-TIONS O N VOLUME . . . . . . 113

Variances in Volume: Important, or"Good," Buying and Selling: With-drawing Bids: Think in Dollars, Not in

Points

xii. THE EFFECT OF NEWS ONMARKET-ACTION . . . . . . . 124

xiii. RESISTANCES . . . . . 1 2 9Resistance and Support Levels: Old

Highs and Lows

X I V . SUGGESTIONS TO SPECULA-TORS . . . . . . . . . . . 142

Be a Cynic When Reading the Tape:Use Pad and Pencil: Trade Alone: DoNot Watch Every Stock: The Use ofCharts and Statistics in Conjunctionwith the Tape: Acting Contrary to thePublic: Trend-Trading: Capitalizationand Floating Supply: Patience is a Mar-

ket Virtue

xv. THE RISE AND FALL OFSTEEL DURING A NORMAL BULLMOVEMENT . . . . . . . . . 1 6 2

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CONTENTS

CHAPTER PAGEPART THREE

MARKET PHILOSOPHYxvi. FOREWORD TO PART THREE 173

The Biggest Handicap of All is Our-selves: Market Philosophy (in which isincluded " Ten Ways to Lose Money in

Wall Street")xvii. THOUGHTS ON HUMAN NA-TURE AND SPECULATION . . . . 176

Trade on the Longer-Term Trends:Market-Poise: There is No Such Thingas "Position": Reflected News: TheMarket as Its Own Best Advertiser: TheTime Element: How to Think, Market-Wise: Fundamentals versus Technical

Action: Pride of Opinionxviii. MORE THOUGHTS ON HUMANNATURE AND SPECULATION . . . 199

Greed: Look Upon Your Stock Certifi-cates as a Merchant Looks Upon HisMerchandise: Do Not Believe AnythingYou Read: The Value of the Imper-sonal Viewpoint: The Public is AlwaysFooled: Never Answer a Margin-Call:The Danger of Too Much Nerve: Av-

eraging to Satisfy Pride of Opinion—xxvi—

CONTENTSCHAPTER PAGExix. ARE CHARTS OF ANY VALUEIN FORECASTING THE MOVEMENTS OFSTOCK PRICES? . . . . . . 220xx. FROM MY NOTEBOOK 224

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LIST OF FIGURES AND CHARTSPLATE PAGE

1. SPECIMENS OF TICKER TAPE 352. UNITED STATES STEEL, August-Sep-tember, 1930 . . . . . . . . . 6 33. AMERICAN AND FOREIGN POWER, July-August, 1930 . . . . . . . . 6 94. GENERAL ELECTRIC, July-August, 1930 715 . AMERICAN CAN, July, 1930 . . . 746 . L o e w ' s , November, 1930 . . . . 7 97. TICKER TAPE SHOWING LOEW'S . . 838. TICKER TAPE SHOWING LOEW'S . . 849. LOEW'S, November 17, 1930 . . . 8710. UNITED STATES STEEL, August 12,1930 9711. UNITED STATES STEEL, August 13,1930 9912. ELECTRIC POWER AND LIGHT, Septem-ber-October, 1930 . . . . . 10413. ELECTRIC POWER AND LIGHT, Septem-ber 29-October 5, 1930, by Half-Hours . 10714. ELECTRIC POWER AND LIGHT, Octo-ber 6 , 1930 . . . . . . . . . n o

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FIGURES AND CHARTS

PLATE PAGE15. UNITED STATES STEEL, January-Febru-ary, 1930 . . . . . . . . . . 16416. UNITED STATES STEEL, M a r c h 1 -May 6 , 1930 . . . . . . . . . 166

TAPE READING ANDMARKET TACTICS

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P A R T ONESTOCK SPECULATION

STOCK SPECULATIONBEFORE we launch into our study proper, let

us first review our ABC's.What is the stock market? It is simply a

market-place for the exchange of certificates formoney, or money for certificates. In the worldof securities speculation, stock certificates holdthe same place as, say, cloaks and suits do in thecloak-and-suit trade: they are merchandise, to bebought and sold for profit. Whereas the cloak-and-suit manufacturer buys cloth from which hemakes his merchandise, the financial " manufac-turer" (called "underwriter" or "banker")seeks situations for which he may manufacturestock certificates. Many plans of refinancing havebeen initiated by the financial community whentheir shelves have been bare of merchandise.They must sell stocks or they cannot earn profits.

In addition to the manufacturers, there areothers who do no underwriting, but act solely as

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STOCK SPECULATION

distributors of stocks; and others still who limittheir business to buying and selling for their ownpurposes.

When common stocks possess certain qualifi-cations, their listing is permitted upon the NewYork Stock Exchange. In addition, there arethousands of issues listed upon the other ex-changes. I shall devote the discussions in thisbook to the New York Stock Exchange, althoughthe principles will hold good in nearly all specu-lative situations.

Who make the purchases and sales of stocks solisted? Let me group them roughly into threedivisions: —

1. Investors, seeking income.Institutions (insurance companies, indus-

trial corporations, trusts, etc.).Banks' investment affiliates.Investment trusts (those which actually

invest).2. Business-men speculators, brokerage-office

traders, and the other thousands of ama-teurs who trade in the hope of making

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STOCK SPECULATION

easy money; also, trading trusts andcorporations.

3. Professional operators, stock exchangefloor-traders, pools, investment bankers,and other intelligent speculators.

We shall here be concerned chiefly with GroupsTwo and Three, the speculators; for Group One,the investors, could not possibly buy a fractionof the stocks which are exchanged in one dayalone. For instance, during an active day's trad-ing 150,000 shares of United States Steel commonstock may be exchanged: at an average price of$200 per share, this by itself would total $30,000,-000. In order to give some idea of the magnitudeof the value of the stocks listed on the NewYork Stock Exchange, I shall remind youthat by November, 1930, nearly forty billionsof dollars had been sheared from their value asrepresented by the prices at which those stockshad been selling only a little more than a yearprevious.

I am emphasizing this because, if we are toappreciate the important place speculation holds

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STOCK SPECULATION

in our present financial set-up, we must realizethe gigantic task which the speculative elementshoulders.

The United States Steel Corporation, as of Sep-tember 30, 1930, reported that the holdings oftheir investors were 7,056,679 common shares, or81.04 per cent of the total outstanding capitaliza-tion. This compares with investors' holdings of74.75 per cent on September 30,1929, and showsan unusual gain during that year, no doubt due inlarge part to many marginal traders' taking uptheir stock in full during and after the breaks.

As of September 30, 1930, there were 1,612,599shares in the hands of brokers and speculators.This compares with 2,034,512 shares in 1929. Inother words, assuming an average price of $150per share and an average floating supply ofaround 2,000,000 shares, which was the averagefor the four years prior to 1930, you will notethat the speculators and brokers alone carriedsome $300,000,000 worth of the common stockof United States Steel Corporation.

Many corporations pointed with pride to theirincreased numbers of stockholders during 1930.

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STOCK SPECULATION

E. I. Du Pont de Nemours and Company, a con-spicuous one among them, disclosed the interest-ing fact that the number of their stockholders hadincreased from 24,134 to 32,683, as of October31, 1930. These stockholders held an average of28 shares each. No indication was given, ofcourse, that this increase also may have beencaused, as in Steel and many another corporation,by large numbers of our Group Two who duringthe decline became involuntary investors.

How many of these involuntary investors willbecome speculators again when stock prices rise?I leave this problem to you to solve definitely.However, I am certain that thousands of peoplewho say, today:" Never again; I'll own my stocksoutright after this," will very shortly forget theirdepression-year resolutions and be back for moreprofits — or punishment.

The stock market is a great cauldron of thehopes, desires, and despairs of speculators, ortraders. If it were not for the speculators, therewould be no active stock market. If it were notfor the speculators, America would not standwhere she does, as the leading industrial country

STOCK SPECULATION

in the world. We may deplore speculation, butif it were not for this outpouring of money forstocks, you and I should not enjoy a fraction ofthe comforts and luxuries which we accept asnecessities.

The speculators " carry the ball" until the goalis reached; that is to say, speculators keep stocksafloat until they sink into the strong-boxes ofinvestors.

We all know that there is a constant battlebeing waged between the professionals of GroupThree, and the amateurs of Group Two, other-wise known as" the public."

The public is the customer to whom the pro-fessional trader or the financial manufacturerhopes to sell his product. As competition is thelife of commerce, so is it the life of speculation.The speculatively-minded public hopes to makemoney by trading in stocks in a hit-or-miss man-ner, while the professional strives for his profitsthrough engineering his maneuvers so scientifi-cally that the public will take from him propertywhich he has acquired at lower prices.

Unless we who make up the public have a thor-

STOCK SPECULATION

ough knowledge of why the professional existsand how he operates, we cannot hope to win inour engagements with him.

First, let us look into Group Three more closelyand break it down, in order to differentiate be-tween the various types. The investment banker(or any banking organization that underwrites,or purchases, stocks or bonds from one who needscapital) is the manufacturer and distributor. Aswe have seen, he is the same as a cloak-and-suitmanufacturer, in that he must sell the goods hehas fabricated before he can make his profit.

The stock-and-bond manufacturer may employfrom time to time other distributors, high-pres-sure sales-managers (pool-operators), and mayappoint any number of agents to sell for himthroughout the world. He often receives aidfrom stock brokers also, and from their legionsof salesmen (customers' men). The pool-opera-tors accumulate stocks when, in their judgment,they are cheap, with the expectation of sellingthem to us, the public, later at higher prices.

Besides these members of the professional specu-lative element, there are the many important, in-

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STOCK SPECULATION

dividual traders, who buy and sell stocks for theirown accounts, depending upon their own wits,skill, and judgment to make money out of theirbuying and selling operations; to say nothing ofmany other persons performing functions notimmediately pertinent to our study. The rami-fications of the manufacturing and distributivesystem for stocks and bonds are probably moreintricate than those of any other commercialpursuit.

The professional may be called in as a specialistin any one of a number of situations. A manu-facturer of bath-room fixtures may wish to raisecapital with which to build a new plant, but be-fore issuing more stock he calls upon the financialmanufacturer. This specialist may advise himthat before he actually issues the new stock itwould be wise to arrange for a more active marketin his present stock, for then he can sell his newstock at higher prices. Therefore, the plans areworked out similarly to the plans which would becarried out if the manufacturer were planning tomarket a new line of his own merchandise, bath-room fixtures.

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STOCK SPECULATION

The professional may be called in by a groupof large stockholders of a given corporation whowish to sell their stock, but who realize that theycannot all offer their holdings for sale simultane-ously without breaking the price of the stock.The professional will undertake to sell their stockfor them to the public, and his agreement withthe stockholders will be to obtain a given averageprice.

A number of professionals may bank together— form a pool — for the purpose of acquiring aquantity of a stock which they think may bemarketed to the public at a higher price.

One company may wish to gain control of an-other company through open market acquisitionsof the stock. It may need, for example, only 50,-000 shares to gain a working-control. A profes-sional may be called in to act as the purchasingagent. In this instance his tactics will be reversed.It will be his job to buy cheaply, rather than tosell dearly. His tactics will be to depress the stockin price in order to persuade the public to sell.

There are any number of examples which Imight give to demonstrate the reasons for the ex-

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STOCK SPECULATION

istence of the professional. The thought to bearin mind is that the business of the financial com-munity is to sell stocks to the public. There is apurpose behind every operation by a professional:it may be simply an individual campaign for per-sonal profit; or, it may be a well conceived planfor the raising of capital for industry. As soon aswe appreciate that the professional element looksupon us as customers, rather than as partners, weshall begin to perceive the task we face in attempt-ing to make money by trading in stocks or, inci-dentally, even by investing in stocks.

Now let me turn back a moment in order thatwe may see the methods by which a professionalgains his ends.

Let us assume, for the sake of an example, thata number of us believe that the common stock ofthe Amalgamated Motor Car Company is cheapat prevailing prices. We are acquainted with theofficials of the company, who tell us that theirbusiness is picking up, that certain things pointto larger profits in the near future. They adviseus further, confidentially, that the directors areplanning a pleasant surprise for their stockhold-

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STOCK SPECULATION

ers, and expect to capitalize a portion of the hugesurplus which has been built up; in other words,we learn that a stock dividend is pending.

Upon investigation, we find that there are onlythree large stockholders who would be likely tosell any quantity of stock; and with these wemake arrangements whereby they give us optionson their stock at prices considerably above thecurrent market. We are now prepared to accu-mulate a line of stock, knowing that, because ofthese options, there will not be any large blocksoffered for sale the moment the stock becomesactive.

The officials of the company are interested inour plans, inasmuch as an active market for theircompany's stock is favorable to their business andto their stockholders. They, therefore, are pleasedto cooperate with us by keeping us posted as tooperations, increasing profits, and other pertinentdetails.

We call in a professional who has had a success-ful career as a pool-manager, and retain him to act,first, as our purchasing agent and, second, as oursales-manager.

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STOCK SPECULATION

His first job will be to buy as cheaply as he canthe amount of stock which we have decided toaccumulate. He may do this by publishing con-spicuously the statistics of the company's earn-ings, which during the past six months have beenpoor. He may then sell a quantity of stock" short," by which method he hopes to " bringout stock " from the public, thereby further de-pressing the price. Naturally, the time which hewill select for this purchasing-program will bewhen the market as a whole is weak technicallyand when public sentiment is pessimistic.

We having accumulated the stock, the impor-tant campaign remains. Our sales-manager planshis advertising and publicity features. He re-leases information to the effect that business forthe corporation is looking up. Statements fromthe president and treasurer are pre-arranged.Encouraging rumors are allowed to circulate.Financial statements are prepared for the pressand for market-letter writers, brokers, and cus-tomers' men. Everything is planned ahead.

The most persuasive sales-arguments, however,are rising prices for the stock. The principal

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STOCK SPECULATION

medium used in this advertising plan is the tickertape. In order to increase activity and interest,we may have to continue to buy stock for a while.Offerings from the rank and file of smaller traderswill have to be absorbed; but they should not belarge, and these sellers will return later as buyerswhen they see the stock gradually, but steadily,advance in price. If too much buying comesalong our pool-manager may sell some stock inorder to prevent a too rapid advance.

During all this time the various publicity storiesare circulated. A widespread interest grows inthe affairs of the corporation. People begin toask their friends if they have noticed XYZ. Bro-kers receive inquiries. The advertising campaignis having its effect.

Still our sales-manager has not been able to sella great amount of our stock. He has been forcedto support the stock as traders have taken profits.Some speculators, noting the advance, have soldthe stock short; and this selling is being absorbedall along; quite gladly, however, inasmuch asthose who are selling short now become potentialbuyers, can be counted upon to add their purchase-

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STOCK SPECULATION

orders later when their aid is needed. In fact,our pool-manager has been happy to lend stockto the short sellers, and has engineered severalreactionary maneuvers purposely to invite shortselling. (Occasionally pools themselves sell shortagainst balance, if they find it necessary to do soin order to control the market-action of theirstock.)

As the public becomes more and more inter-ested in our merchandise, the sales-manager's jobbecomes more difficult. He has the professionalelement to deal with, as well, now, which is moredifficult to outsmart than are the members ofGroup Two.

Rumors now are allowed more circulation; thepublic is buying greedily, believing that an extradividend, or a " melon " of some kind, is sure.The pool-manager begins selling stock in ear-nest; the increased activity causes faster rallies, andconsequently more severe reactions. Each ad-vance, however, reaches above the previous highprice; and the public soon is confident that thestock will advance another hundred points, thatthere is no limit to the possibilities.

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STOCK SPECULATION

A terrific churning of transactions is the result,as our manager sells thousands of shares, only tobuy and sell again and again. The climax is near.Nearly three-fourths of our stock is sold. It istime for the big moment.

The next morning, newspapers all over thecountry carry the welcome news that the corpora-tion's directors have declared a stock dividend.Public enthusiasm is boiling. Our sales-managerunloads all of our unsold stock, and his job isfinished!

Part of our tale remains to be told. The publicnow has the stock. Some of them sell, thenothers; there are no supporting buying-orders.Professionals, sensing that" the news is out," sellquantities of stock short. The price declinesswiftly as margins are called and more stock issold. When it has declined to a level attractiveto investors, important buying will come into themarket, short sellers will cover their previoussales, the corporation's officials may buy somestock, and the swift reaction is halted as the publicsells out.

The public loses—that is, the public specu-— 19—

STOCK SPECULATION

lators, who bought on rising prices and sold outduring the decline. Many of them in this im-aginary operation of ours doubtless followed theschedule formulated by the brokerage-office witwho advised traders to " Buy on tips, and sell ondips."

I have drawn out this illustration at length be-cause, I assure you, similar operations are beingplanned and carried out every month. Unless weunderstand the campaigns which are engineeredto interest us in buying stocks, how can we hopeto time our own speculative commitments inorder to go with the professionals and sell whenthey do?

It is said that stocks seldom rise of their ownaccord, that they will sag under their own weightunless they are pushed up. I believe this is true,for it is difficult to understand how any stock canremain active unless there is some motivatingpower behind it. One by one would traders takeprofits, or sell to get into some other commitment.Dying activity will not attract speculators. It isthe persistent buying, and selling, which createsactivity and demand. There are doubtless several

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STOCK SPECULATION

pools, and many professional operators, all in-terested at the same time in some of our mostactive stocks.

In order to make money from speculation wemust trade in the active stocks — those stocks inwhich the professionals operate. The winningcombination for us as traders is a stock in whicha pool is active, which has strong sponsorship andsupport from a bank or banks, and the earningsof which are known to be progressively on the in-crease. Then, our problem is in the timing of ourcommitments — when to buy and when to sell.

Let us reverse this picture for a moment. Wehave been looking behind the scenes. Standingout in front, and realizing the magnitude of theoperations carried on back-stage, is it any wonderthat the public usually guesses wrong? The in-dividual trader faces one of the most difficulttasks conceivable when he attempts to outguessthe keenest minds in Wall Street, who are on theinside. The trader must not lose sight of the factthat the "insiders" are usually well fortified withcapital and are able to stand losses when theirjudgment misses fire.

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STOCK SPECULATION

In liquidating markets, however, of the kindwe had during the latter half of 1930, pools, bigoperators, all, suffer — except, naturally, thoseoperators who transfer their plans to the " shortside " of the market. Operations to advance pricesare not attempted in weak, or bear, markets byshrewd professionals. Occasionally one may try" to buck the trend " for a momentary gain; but,inasmuch as operators must have someone to buytheir stocks, they almost always plan their opera-tions for a time when the general market is favor-able, technically and fundamentally.

A general in war-time envelops all of his move-ments in secrecy in order to mystify the enemy;likewise, a financial general plans his tactics sothat the public and the other operators are keptguessing. I shall have a great deal more to sayabout stock maneuvers when we get into the dis-cussion of tape reading; but it will do no harmto interject here the statement that it is utterlyuseless for us on the outside, who buy and sellcomparatively small blocks of stock, to conjectureupon what" they " are doing. We cannot knowwhat the insiders intend to do, but we can see

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their orders on the tape when they execute them.That is why my plea is for every one of us to haveno mere opinions of his own, but to allow the ac-tion of the market to tell him what is passing.We shall discuss this aspect of the subject morefully later on.

Do not be discouraged if you have lost moneyin the market. Nearly everyone did during 1929and 1930. Many big traders lost everything andhave had to start anew. Pools were forced toliquidate with losses; banks called loans rightand left, and practically demanded liquidation.

If you cannot lose cheerfully, do not trade inthe market! It is no business for the person whois easily discouraged. Countless losses must beaccepted: the problem is to limit the losses. Noone may ever hope to become so expert that henever takes a loss.

Start in a small way and be satisfied with rea-sonable profits. If you decide to experiment withthe theories and ideas discussed in this book, tradeat first in odd lots. Do not plunge or become over-extended. This is worn-out advice, I know, butmargin and capital worries warp your judgment

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STOCK SPECULATION

and hamper your trading skill. When you thinkyou have become familiar with technical actionand can interpret market movements — and cantake losses quickly! — not until then should youspeculate with larger lines of stocks. There is nodisgrace in being a small trader, and the marketwill remain open for business for a good manyyears to come.

Another thing — the views of all of us werethrown out of perspective during the severe de-pression and market strain of 1929 and 1930.Many of our mental attitudes formed in thoseyears may need adjustment in the months andyears ahead. The main principles, as you willfind them set down in this book, are, I believe,dependable; but our minds must be swung aboutto look at market conditions in a different light.We must attune our powers of perception to theperiod ahead, and not everlastingly compare everyfactor with some occurrence in the recent past.

New conditions will arise. A new tradingpublic will be born. However, the old cycle ofrallies and reactions will roll on. We shall have" over-bulled " movements and disastrous crashes.

—24—

STOCK SPECULATION

And the uninformed, unintelligent public willbuy when security prices are high and sell whenthey are low. New traders will be seen in bro-kers' offices generously buying stocks at the wrongtime from the " older heads " in Wall Street.

Manipulations and pool-operations may requiremore capital to cope with a new and larger public,but the old methods will remain.

One last request and we shall turn the page andget into the subject of tape reading. If you arenot willing to study, if you are not sufficiently in-terested to investigate and analyze the stockmarket yourself, then I beg of you to become anoutright long-pull investor, to buy good stocks,and to hold on to them; for otherwise yourchances of success as a trader will be nil.

—25—

PART TwoTAPE READING

IITHE TICKER TAPE

Behind the TapeIN Part One we have seen something of the

power behind the ticker. You will agree with me,I am sure, that it will tax our ingenuity, observa-tion, and perceptive judgment to the limit if we areto be successful in foretelling from market-actionwhen stocks will advance and when they will de-cline. (These discussions relate to the interme-diate trends and minor fluctuations of stock prices,and not to the long-term, or commonly called" long-pull," trends.)

Market-action — the buying and selling ofstocks — is recorded on the tape. To the un-initiated eye and brain the tape means little —it is simply a confusion of hieroglyphics andfigures. To the student, however, it offers op-portunities commensurate with the skill, judg-ment, study, and self-mastery employed.

TAPE READING

As the tape records money-transactions, I amgoing to ask you to forget, for the time, the word" points " when discussing stock quotations andthink instead in terms of dollars. The mentionof dollars immediately conjures up the idea ofbuying and selling. For instance, if you notice a5,000-share transaction of Steel (symbol, X) onthe tape at $170, call to your mind the fact thatthis means that $850,000 worth of common-stockcertificates of the United States Steel Corporationhave changed hands. If you then notice, somehours later, another exchange of the same quan-tity at $175, realize that this, translated, meansan increase in value of $25,000. To me suchtransactions take on a far greater significance ifspoken of in terms of dollars than they wouldif someone said: " Steel advanced five points."

Before we attempt to understand the techni-calities of tape reading, let us picture in our mindsthe scene behind the symbols. If you have nevervisited the New York Stock Exchange, I suggestyou do so at your first opportunity. In the meantime, visualize a market-place where hundreds ofmen are busily engaged in buying and selling

—30—

THE TICKER TAPE

goods. You see a little knot here in this cornerwhere one man in the center has orders from hisclients to buy, we will say, 1,000 shares of Ameri-can Can stock at $150 per share — an order total-ling a value of $150,000; quite a sizable piece ofbusiness. The other men in the group may eachhave smaller orders to sell: one is willing to sell300 shares; another, 200; and so on.

On the floor of the Exchange there are manygroups such as the one described. These menspend their entire time between ten and threeo'clock each day executing orders which they re-ceive from their offices — orders placed by youand me and the hundreds of thousands of buyersand sellers throughout the world. There are alsofloor-traders — members of the Exchange — whobuy and sell stocks for their own account. Allof these orders for millions of shares of stocks arerecorded on the tape.

In order to visualize the enormous amount ofbusiness which is transacted, let us take a daywhen a total of 4,000,000 shares was bought andsold. The average price of 300 active stocks onDecember 16, 1930, was $39.89. The volume of

TAPE READING

sales in these 300 stocks was 3,625,700 shares.This makes a total of $144,629,173 for this oneday alone! You can easily imagine what the fig-ure would have been eighteen months previous.These amounts are highly significant, as will bepointed out later, when we come to the discus-sion of the volume of transactions.

In the first part of this book I have described thevarious kinds of people comprising the purchasersand sellers of stocks. The important point to re-member here is that all of these people are humanbeings, just as you.and I are. Some are -more ex-perienced in the stock market than are we; many,less. Some are conservative; many are pure gam-blers. Nevertheless, with the exception of the fewwho purchase stocks for income only, each personis interested in the same thing as you and I are:the profit to be realized from the transaction. Weare motivated by the same desires and are affectedby the same emotions (in varying degrees, ofcourse, in accordance with our temperaments andtraining). In short, we are all human beings try-ing to make money by exercising our speculative,intuitive judgment; we are hoping to make our

—32—

THE TICKER TAPE

capital funds work for us at an exorbitant rate ofreturn.

Let us get that picture clearly in mind. Theticker tape is simply a record of human naturepassing in review. It is a record giving us theopinions and hopes of thousands of people. Wemust dismiss from our minds all other facts.Precious few know, or can hope to know, who isbuying or selling. We hear that So-and-So isbuying; he may also be selling, through anotherbroker. If he wants us to know that he is buy-ing, we should be chary. So, let us disregardhunches and wild conjectures. If he buys andsells, the record of his transactions will be onthe tape. We must make our interpretation fromthe record. So long as we continue to guess whois doing the buying and selling, we shall remainin a sea of confusion.

The person who is privileged to know who isbuying, does not need the ticker tape.

You will find more discussion in brokers' of-fices upon what " they " are doing in the marketthan you will find students who realize the futilityof conjecturing upon something about which they

—33--

TAPE READING

can Know nothing. We learn from the profes-sional traders, pool-operators, and the importantbanking groups, only what they wish to haveknown —do not forget that! Do not forget foran instant, either, that the invisible " they " aretrying to accomplish exactly the same result thatyou and I are: to make profits from their commit-ments. The solution to the whole problem ofspeculation in stocks is to judge and foresee whatthe other fellow is doing. And, there is one thingmore for us not to forget: we are pitting ourbrains against the sharpest mental equipment inthe United States.

Is it any wonder that relatively few are ableto earn money consistently from speculation?

Let me suggest one thought for your considera-tion. The insiders (see explanation in Part One)have the greatest advantage over us in the minorfluctuations. It is my opinion that there is littleuse in trying to make money consistently by trad-ing in and out of stocks hourly, or daily. Thelonger the trend, the more opportunity we haveto be right. This is why I urge always that trad-ing be confined to the intermediate trends.

—34—

THE TICKER TAPE

The letters are the symbols for the differentstocks. Under the letters are figures, some brokenby dots, or little black squares, and others by " s."The letter " s " and the dot mean the same thing:a division between the number of shares tradedand the price at which the exchange has beenmade. Wherever " ss" appears, it is a record ofan odd-lot transaction (one of less than 100shares), which is reported on the tape for pre-ferred stocks and common stocks whose unit oftrading is less than 100 shares. The last two zerosare not printed in recording the volume of shares,unless the exchange is of 5,000 shares or more.

In "strings" of stock, very often the wholenumber is left off and only the fraction printed

--35--

TAPE READING

where it is readily apparent what price is meant;for example, in the string of United Corporation,U (see Plate 1), you will note that the last transac-tion in the string is simply given as" 5 1/8," whichmeans " 500 shares at $19 1/8." Likewise, in orderto speed up the record on the tape the first figureof stocks selling over $100 is often left off whenthe price is quite familiar to traders. An exampleof this practice is to be found in the report on thestring of United States Steel, X, where the $46 3/8shown actually means $146 3/8.

Reading from left to right, the strips of tapeillustrated will read, when translated, as fol-lows:—

United Corporation:600 shares at $19 1/8

1,900 " " $19500 " " $19 1/8

Indian Refining:6,000 shares at $4

Loew's:100 shares at $54 3/4

Miami Copper:100 shares at $13

-36-

THE TICKER TAPE

Radio Corporation:100 shares at $16

Kennecott Copper:500 shares at $31 3/4

Pennsylvania Railroad:100 shares at $6o 7/8

North American:100 shares at $71 3/4

Briggs Manufacturing:500 shares at $15 3/4

Loew's:2,300 shares at $54 3/4

Atlas Powder, preferred stock:10 shares at $99

United States Steel:200 shares at $146 3/8100 " " $146 1/2300 " "$146 3/4400 " "$146 7/8

Park Utah Mines:200 shares at $2|

As you know, the unit of trading on the NewYork Stock Exchange is 100 shares, and sales of

—37—

TAPE READING

odd lots are not reported on the tape except for afew stocks whose unit of sale is 10 shares. Thisis really helpful to the tape reader, as he may basehis opinions upon the transactions of buyers andsellers who have sufficient capital to trade in 100or more shares. Of course, odd lots, grouped inlarger units, make their appearance from time totime. This is valuable information. Naturally,you cannot determine whether a transaction for,let us say, 1,200 shares is made up of odd lots, ornot; but you can see the result of the 1,200-shareexchange.

What the Tape ShowsIn all that I shall have to say, I warn you that

I see on the tape only the results of buyers* andsellers' transactions in stocks; mine are not eyesthat perceive the occult signs of movements ofJ. P. Morgan and Company or short sales executedby Jesse Livermore. Mr. Livermore may be buy-ing, or selling; but if the stock advances, and Iam " long," I shall be content. Inasmuch as Iam not well acquainted with any member ofJ. P. Morgan and Company, or with Mr. Liver-

-38-

THE TICKER TAPE

more, I am quite certain that they are not in-terested in me as an individual. However, theyare interested in me collectively. Here is what Iam driving at: the individual trader tries to findout what some important operator is doing, buthe never stops to think that that operator musttell from the action of the stock he is operating inwhat the public, of which the individual traderis a member, is doing. It strikes me as a fair ar-rangement. The pool-manager or major operatormay have several millions of dollars at stake. If heis willing to pit his judgment against that of thepublic, we should be willing to risk our capitalwithout expecting him to tell us personally whathe is doing. If we wish to attempt to make easymoney, we cannot complain of the risks.

While I agree that the movements of stocksoften respond to the " pull on the strings" inWall Street, I also know that our biggest opera-tors have been fooled many times by the public.The year of 1930 will remain in these operators'minds for a long time. We have all heard of theblocks of stocks which had to be liquidated atdisastrous prices. "They" take their losses; so

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TAPE READING

must we. The man who buys and sells from25 to 500 shares of stock, has little worry when itcomes to selling; he always has a market. But,the operator " long " of thousands of shares oftenfinds he cannot sell them.

Our problem, therefore, simmers down to this:how to judge, from the action as reported on theticker tape, the future movements of those twocomposite human beings — the buyer, made upof all buyers, and the seller, made up of all sellers— whose transactions the tape pictures for us.The price tells us what the buyer is willing to payfor a stock and what the seller is willing to takefor his shares. The volume (the number of sharesper transaction) tells how much the buyer is able,and willing, to spend in backing up his judgment,and, conversely, how many shares the seller iswilling to let go at the price offered.

—40—

iiiTHE PRINCIPLES OF TAPE READING

Tape InterpretationTAPE interpretation depends upon a considera-

tion of the action of the volume. It is not price-action, but volume — the amount of money, thesupply and the demand — which best tells thestory. You will readily agree that it makes agreat difference whether the buyer is willing topay $15,000 for 100 shares of Steel (X-150) or$150,000 for 1,000 shares (X-10.150). The de-mand is greater in the latter case, as is the supply.Do not forget that every purchase of a share ofstock means a sale also. Our job is to determinethe balance of the supply and the demand:whether the demand is greater than the supply,in which case the price advances, of course; orthe reverse. The action of the volume tells us ofthe supply and demand; price merely denotes thevalue of the volume.

—41 —

TAPE READING

Tape reading is an art, rather than a science.After experience and familiarity with varyingtypes of markets, the trader arrives at a stagewhere his intuition comes into play. He thenhas the " feel" of the tape. I cannot hope to passalong this intuitive understanding of tape read-ing; but if you understand the principles andhints herein pointed out, not many months shouldpass before you begin to get this " feel." Famili-arity with many symbols, a quick eye, concen-trated observation of important transactions, orthe lack of them, and a studied belief that thephilosophy and psychology of the tape are the all-important factors, will bring success — success ininterpreting movements of prices, although notnecessarily success in making money.

The latter will depend upon your own actionsand reactions, your emotions, your ability to actin accordance with your opinions, and the hundredand one other human factors, many of which areto be discussed in Part Three of this book.

Do not be discouraged. If it were easy, therewould not be any stock market; if it were notfor the variance of opinions, active speculation

—42—

THE PRINCIPLES OF TAPE READING

would not exist and orders would be transactedover the counter.

General PrinciplesFor the sake of simplifying our problem, I shall

here roughly define the three main types of vol-ume-activity:—First: Increasing volume during an advance,

with the intervening pauses or set-backs occurring on light volume. Thisis indicative of the underlying demand'sbeing greater than the supply, and favorsa resumption of the advance.

Second: Increased volume at the top of a rally,or of an advance, lasting for some time,with no appreciable gain in prices — anactive churning of stock transactionswithout progress. This is indicative ofa turning-point.

Third: A " tired," or struggling, advance, whenstocks creep upward on light volumeand " die " at the top. This indicatesa lack of demand (few buying-orders);and, whereas selling-orders likewise are

—43—

TAPE READING

light, this action frequently marks a" rounding-over " turn, which may befollowed by increased volume on thedown side (when the sellers see thatthey cannot hope for much higherprices at that time). These strugglingtrends are subject to sudden reversals,particularly when they have enduredfor several days.

These types of action are present, but reversedin sequence, in declining markets.

I shall try to show in various illustrations howthese principles work out. In some instances 1shall refer to the larger movements, and to themain turning-points of major trends, while inothers I shall hope to demonstrate how the sameaction, in proportionately smaller units and inshorter spaces of time, gives the same indications.Broadly examined, the principles are found to bethe same, whether employed within one day'srange for a forecasting of the subsequent minorfluctuations, or during and following an inter-mediate or a major trend.

—44—

IV

INCREASING VOLUME DURING ANADVANCE

I HAVE stated that the essence of tape readingis the interpreting of the action of the volume.The broadest example of this is when the marketrallies briskly, with the volume of transactions in-creasing—millions of dollars' worth of stockschanging hands. After a time, it will be noticed,stocks generally slow up in their advance. Rightthen is the important time to watch the volume.If the volume decreases perceptibly with thediminishing advance of prices, it is a favorablesign, indicating that, although purchasing ordershave slowed down, there is not a heavy supplyof stock offered for sale; otherwise, an immediatereaction would set in. If, following this stabiliz-ing period, prices begin to decline, watch for in-creasing volume on the downward path. If pricessag under slight pressure—that is, if the volume

—45—

TAPE READING

of transactions is dull, in hundreds of sharesrather than in large blocks—it is again a favor-able signal for the resumption of the advancelater. It is from this action that one of the oldadages of Wall Street doubtless sprung: "Neversell a dull market." I believe that this was in-tended for bull markets, for it appears just asdangerous to "buy a dull market"—during abear market.

Therefore, watch for dullness to appear on re-actions, for then you may expect a resumption ofthe advance. Conversely, small volume on rallies,after a decline, is an indication of lower priceslater. During the summer and fall of 1930, whenstock prices were declining disastrously, the rallieswere marked by an immediate lessening in thevolume of transactions: volume dried up on ral-lies. During the declines, however, volume in-creased rapidly. It simply meant that there wasa far greater amount of stock for sale than thebuyer would purchase, except at constantlycheaper prices.

-46-

TURNING-POINTS ON HEAVYVOLUME

Heavy Volume But No HeadwayHEAVY volume at the end of a move is ex-

tremely important, inasmuch as it generally in-dicates a turning-point in the market. In thissituation, on the upward side, we have volumeduring the advance with continued, increasingactivity of transactions at the top without stocks'making further headway. In other words, ourbuyer wants more stock and continues to enterorder after order; meanwhile, our seller, who pre-viously would sell only on advancing prices, nowoffers for sale great quantities of stock. For atime there is a tug of minds between buyers andsellers, but this extreme activity near and at thetop is indicative of a substantial reaction to follow.

This is true, likewise, at the bottom. You arefamiliar with some of the turning-points of the

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TAPE READING

declines in 1929 and 1930, when volume increasedtremendously. June 18, 1930, furnished an ex-ample. On that day more than 6,000,000 shareschanged hands. Late in the day a rally set in,and soon buyers were bidding for stocks, whereasjust before that all the weight was on the sideoffering stock for sale. There were many of thesevolume-days during 1929 and 1930. Septemberand October, 1929, witnessed this churning ofstocks at the top.

Lesser movements are marked by the samecharacteristics. I have mentioned these big daysbecause the illustration is clearer.

Let us run over these first two phases of volume-action and translate them into terms of humanaction.

Volume Indicating an AdvanceDuring the rally, what has been going on?

Two things: first, the buying of stocks by thosewho are covering their previous short sales; and,second, new buying by those who expect the ad-vance to continue. Both factions are spendingtheir money to purchase something; but one fac-

I

TURNING-POINTS ON HEAVY VOLUME

tion is closing out a transaction, while the otheris entering one. The man who covers his shortposition is in a greater hurry than the long buyer.The short seller will rush to cover if he believesthat the rally will endure for some time. If youare contemplating a purchase (likewise, if youconsider selling stock which you own), you areinterested in both of these opinions — the judg-ment of John Smith, who is short, and that ofJohn Jones, who is buying stock to hold for theadvance. You would like also to determinewhether there are many more Smiths than Joneses—more short-coverers than long buyers — be-cause if the rally is due mainly to short-coveringit is likely to be brief, and may be followed byfurther declines.

How can you tell which it is? Watch the vol-ume and, in this situation, the rapidity of price-changes. If you are considering purchases, youwill probably not be in a rush; and, furthermore,you will not wish to buy if you feel that an order" at the market" may be executed at two or threedollars per share more than you see on the tape.On the other hand, if you are short, and feel the

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TAPE READING

decline has spent itself, you will place your buy-ing-orders at the market, satisfied to get out withyour profits.

Let us assume that you sensed the turn at thebottom and purchased two or three stocks. Yourinterest now would be to decide whether to holdfor a sizable advance, or to throw out your stocksif you misjudged the turn in the trend. Yourproblem then resolves itself into. determiningwhether good buying comes into the market alongwith short-covering. (By "good buying" ismeant purchases made by those who are in a posi-tion to know the underlying conditions of themarket, and also the buying done by those whoare sponsors of certain issues.) You notice largeblocks of stocks taken at steadily rising prices.At intervals, the market becomes quieter, withless volume and fewer transactions; yet you noticethat coincidentally there is very little weaknessapparent, that reactions are on transactions ofonly 100 to 1,000 or 2,000 shares: there are fewhuge blocks frequently changing hands at lowerprices.

Stopping here just a moment, may I ask: What—50—


would you do if you were still short? Or whatwould be your inclination if you were consider-ing purchases?

If you were short, I believe that the fact that theprices did not sag, that the market was firm, wouldmake you think to yourself: " Here, I had betterbuy in my stocks while I still have profits," or" before my losses become larger." Likewise, ifyou wanted to purchase, but had not made upyour mind, you might hesitate somewhat longer;but at the first signs of higher prices you would belikely to jump in with your orders.

In this imaginary market, let us assume thatwe have witnessed a swift rally which lasted fortwo hours. The dullness which has followed,with prices only a dollar or two under their"highs," has lasted another two hours or so.Opinions are evenly divided. Those who expectlower prices are selling, while others are cautiouslybuying. Soon you notice a block of 3,000 or10,000 shares of your stock, or a transaction muchlarger than normal, change hands at the sameprice as that of the previous sale. Your mind be-comes alert at once; you have been watching for

—51 —

TAPE READING

just this signal. (Of course, this signal may havebeen a series of " strings" at gently advancingprices, or any unusual block.) Again, followingthe unusual transaction, there are other indi-vidual sales in your stock. At the same time, younotice volume-trades in other stocks. Likewise,Steel is gaining in momentum.

Your attention now is riveted upon the tapein order to see at once whether these larger trans-actions following the dullness are going to con-firm your expectations that the advance will beresumed. Before long you will know definitely.The market may pick up momentum, with ourguide, volume, pointing the way; and higherprices may be recorded. Then, if you have notcovered your short sales, you undoubtedly will.So will others, and another rally will be in themaking. But this time, inasmuch as it is the sec-ond step, the buying will be more courageous, andthe advance should continue for a longer period.(I might mention at this point that stocks fre-quently rally in three-day periods, and conse-quently their market-action at the ends of theseperiods should be more carefully analyzed if you

—52—


are attempting to catch the active movements ofstock prices.)

In the event that the unexpected happens, andvolume increases at lower prices, it would be wellto sell your trading-holdings at once and standaside. A further increase in volume in the down-ward direction will wipe out the rally, and we areback where we started from. In the majority ofsituations, however, dullness following the rallyindicates resumption of the advance. But do notargue with the tape. Find out whether the buyeris stronger than the seller, or the opposite, and actaccordingly. Volume will give you your answer.

Detecting the Turn of a TrendNow let us suppose that we see an active churn-

ing of stocks attended by heavy volume, but with-out appreciable price-headway made. This, aswe know, is indicative of a reversal of the trend.During this period, whose length depends uponthe importance of the turn, some stocks may soarinto new highs (or may make -new lows, if thedownward trend is about to be reversed), but themajority are simply traded in heavily without

— 53 —

TAPE READING

gaining or losing ground. This character of ac-tion is often caused by the professionals' biddingup market-leaders in order to liquidate otherstocks. It is a good plan at this juncture, if amajor turning-point is imminent, to study theaction of the second- and third-rate stocks. Theymay give you early confirmation of the reversal.For example, in 1929 the inactive stocks begantheir decline some weeks ahead of the market-leaders. At that time, public speculation was sorampant that buying-power was not dissipatedfor weeks. The high day for the market averageswas September 2, yet leading stocks did not breakinto their definite downward trend until the mid-dle of October.

Within the lesser movements of prices we havethese same characteristics. The market, in normalperiods, is continually rallying and reacting withinthe major trend. During the summer and fallof 1930, there were many rallies and reactions;the trend, however, was down. Nevertheless,the same principles which I have described holdtrue for the intervening movements.

Translated into human terms, the causes are—54—


simple enough. The prices of stocks are nothingmore than the decisions of all buyers and sellersof stocks. At turning-points, the opinions —whence come decisions — are evenly divided.Buyers and sellers, both, are busy.

Let us go back just a moment to the action pre-ceding a top turning-point. The public is at-tracted by price-changes, not by volume; that isto say, the public does not analyze the action ofvolume. It is prior to and during these finalstages of a move that the professionals and poolsunload their stocks on the inexperienced. Theunwary, having seen prices advance steadily withonly minor set-backs, misinterpret the feverishactivity and buy heavily — which is just what theprofessionals want. In fact, pool-managers op-erate upon this human weakness and engineerrapid run-ups of prices, knowing that thousandsof traders and buyers will be attracted by thisactivity. Volume increases tremendously at thesepoints, and newspapers carry front-page stories.

Not only are the final stages of a long trend,when prices do not materially advance, indicativeof a turn, but also is the rapid action of prices with

—55—

TAPE READING

heavy volume, prior to the top, a danger-signal.These periods together are referred to in WallStreet as the "distributive area," although thedistributive area, strictly speaking, consumes alonger period of time, inasmuch as pools will dis-tribute stocks during the latter part of the way upand part of the way down, after the top has beenformed.

Various Turning-PointsMany factors must be taken into consideration

when we are interpreting the volume of turningtrends. For example, the volume on June 18,1930, which marked the approximate bottom ofa severe decline, was 6,000,000 shares. At theend of the decline in August, 1930, owing to the de-crease in the number of active margin-accounts,the selling-climax came with only 3,400,000shares traded. I well remember that day, becauseI was short of the market, and was trying to de-cide whether there was sufficient volume to markthe turning-point or whether the selling was likelyto carry much farther. However, the action hadmany of the ear-marks of a " clean-out," of a tem-

-56-


porarily oversold condition. Although there wasa terrific churning of stocks, little headway wasmade for approximately three hours. Therewas no progress on heavy volume. That wasour signal.

However, when the market temporarily re-versed its trend later in the year, in November,following a decline which had continued steadilyfor fifty-one days, we did not have the big volume-day. Why? Because margin-accounts withbrokers were at the minimum; brokers' loans weredown to the lowest on record. Actual liquidationhad gone on for weeks. Liquidation from strong-boxes and necessitous selling by large interestsare not dumped upon the market as are stocksheld on margin by the public. (The speed of thecrashes in the fall of 1929 was caused by thispanicky dumping of margined stock.) There-fore it was necessary to estimate the extent ofliquidation already accomplished and to wait forthe signs of the turn.

It was a difficult period; and I admit that twiceI" felt for the bottom " with orders, only to learnsoon that I had misjudged the action. Fortu-

—57—

TAPE READING

nately, it is not often that we witness liquidatingmarkets; and we must be watchful not to trainour " tape-sense " on abnormal action.

At least a temporary turn came on November10, and the signal was reasonably clear; but thistime I found it necessary to turn almost whollyto the human side of the market for the clue. Weall know that the public usually is wrong. Notbeing able to tell from the tape whether the endof that particular period of declining prices hadcome, I visited several brokerage offices and talkedwith managers. I found that their board-roomswere suddenly crowded once more. More im-portant, I learned that nearly everyone wanted tosell short. I felt the time had come for a turn;and, surely enough, the next day the marketstarted a substantial rally. Of this informationof the public's action I found confirmation on thetape. There were signs of an oversold condition;and one more experienced than I in reading tape-action, doubtless would have seen them withoutturning to examine other factors, as I felt it neces-sary to do.

I have brought in these personal experiences-58-


only to point out the various factors present. Inthe foregoing I have discussed tape reading mostlyfrom the standpoint of the market as a whole, butlater I shall include examples dealing with in-dividual stocks.

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VI

TURNING-POINTS ON LIGHTVOLUME

The Struggling MarketTHE characteristics of a struggling market are:

a slow or irregular advance of prices, light vol-ume, and dullness in general. (Reverse the illus-tration for the turning-point after a strugglingdecline.)

If we are holding stocks for an advance, actionof this kind tries our patience — which is exactlywhat it does to the other hundreds or thousandswho are waiting for profits. No one seems will-ing to bid for stocks in any quantity; yet there arefew sellers offering blocks of stock, realizing asthey do that the demand is not sufficient to absorbthem.

What is the natural outcome? Either one oftwo results, and the action of the volume shouldtell us which it is. The buying may eventually

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TURNING-POINTS ON LIGHT VOLUME

dry up, and the selling increase, as sellers see thatthey cannot hope to dispose of their stocks at higherprices. This may bring on an abrupt downwardtrend, the indications of which will be the appear-ance of larger blocks of stock offered at continuallylower figures. (See Plate 2 and following textfor explanations.)

The second eventuality is that prices will rollover and sag under their own weight, without theincrease of selling-pressure. In other words, themarket struggles up and turns over as impatientholders take profits, or sell out in disgust. Whilethe demand dries up, the supply likewise remainslight. We then have a sagging, dull reaction, fol-lowing the tired upward movement. This maycontinue until a level is reached where there is agreater demand, which, in turn, will be indicatedby larger blocks. These dull markets may reflecta temporary indecision of the speculative powers,who await definite news from the business world.They may follow a severe upset, when publicsentiment is at a low ebb and the professionalssimply " sit tight" until the public " forgets."

These markets are difficult to follow because—61 —

TAPE READING

you can tell neither whether they will roll overon light volume nor whether they will be reversedsuddenly. The latter is the more frequent; andfor that reason the trader is doing the wise thingto step aside, or to protect himself against largeloss by placing stop-loss orders against his com-mitments.

A Sluggish TopThe action of Steel at the top of the September,

1930, rally, is a good example of the rolling-overtop, followed by a pick-up in volume on the downside.

As you will notice in Plate 2, Steel fluctuatedlistlessly for twenty days within a six-point range,and was unable to make any progress on the upside. The action on the 16th and 17th was moresignificant on the tape than I can show here onthe graph of daily closing prices; nevertheless, itwas difficult to come to a definite opinion aboutits meaning one way or the other.

Finally, on the 19th (marked " A") volumesuddenly increased to 142,000 shares, as contrastedwith an average of only about one-third that

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TAPE READING

amount in the three weeks previous. The actionon the tape was conspicuous: steady offerings ofstock in large volume, with no let-up during thedeclines. The occasional rest-periods during theday were marked by dullness. The action at" B," likewise, was significant, in that importantselling was again conspicuous, as at " A."

A study of the broad top will explain the theo-ries of struggling markets. You will notice a dis-tinct diminishing trend in the volume (repre-sented by the vertical lines at the bottom) duringthe formation of the top. In other words, in thisparticular example we witness drying-up of vol-ume at the top — indicative of a turn — and theconfirmatory action in the increased activity onthe reaction. As mentioned in the previous de-scription of struggling markets, occasionally theseperiods of dullness are followed by aimless, quietfluctuations both up and down, which, in turn,result in firm stabilization, and then are followedby further advances. However, even in these in-stances, if we await the confirmatory action fol-lowing the dullness, we shall detect our signal.The trader, meanwhile, loses little by standing

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TURNING-POINTS ON LIGHT VOLUME

aside until he satisfies himself of the outcome.The action of Steel in January and March, 1930,will illustrate this. See Chapter XV, pages 163to 167, and Plates 15 and 16.

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VII

VARIOUS TYPES OFTOP-ACTION

Tops More Difficult to Distinguish ThanBottoms

TOP-SIGNALS of the market as a whole, or ofthe market averages, are not as readily discerni-ble as bottom-signals. The reason for the differ-ence in action is that, in making for a top, allstocks do not reach their pinnacles at the sametime, because, broadly speaking, buying is always,in any market, more slowly actuated than selling;whereas, in making for a bottom, stocks gainmomentum as prices decline, and the rank andfile, becoming panicky, dump stocks withoutrhyme or reason, and thus bring on a climax.

We have many rounding-over tops of the gen-eral market, as differentiated from sharply definedbottoms. The best illustration of this is the broadtwo to three months' top in the fall of 1929, as

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VARIOUS TYPES OF TOP-ACTION

contrasted with the bottoms in the single days ofOctober 29 and November 13, 1929.

In detecting the tops of moves, therefore, wemust watch our individual stocks and not dependupon the general market for the signal to sell.However, when we notice that the market as awhole, as reflected in stock averages, slows up—becomes tired, and is apparently struggling tomake higher peaks—we then are safe in assum-ing that the demand is not sufficient to push stocksfarther without an intervening reaction. Thatis the time to analyze with particular concentra-tion the action of individual stocks, because vol-ume as a signal of the composite market is oftendeceiving, inasmuch as the top may consume sev-eral days and, therefore, each day will not bemarked by conspicuous volume.

These tired-appearing markets must be care-fully analyzed, as I have said, because in straight-away bull markets this action sometimes becomesnothing more than a rest-period (see page 165 andPlates 15 and 16), after which the advance is re-sumed. You will notice, however, from the fol-lowing examples, that when tops are formed we

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do get the signal from volume — either at thetop, followed by an immediate " turn-over " ongreatly increased volume, or with a slowly " fall-ing-over " top followed by the momentous volumea day or more later. Thus it may be broadlystated, that markedly increased volume followinga run-up in price signifies distribution.

A Sharply Defined TopIn Plate 3 is shown the July, 1930, top in Ameri-

can and Foreign Power. It hardly needs explana-tion. The three-day spurt to the top was followedby a sudden turn-over on the 30th from a high of77 3/8 to a closing price of 73, attended by heavyvolume. You will notice in this illustration thatthe high figure of the top-day exceeded that of theday previous by only $0.25 per share; yet the vol-ume at this last drive was larger. (The curve inthe chart, by the way, is formed by the high pricesof each day.) The period covered is from July14 to August 10, 1930.

This is a clear illustration of how a stock often-times rushes up accompanied by heavy volumeand turns over on a big volume-day.

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A Broad TopThe action of General Electric (Plate 4) at this

time in July was not so simple to interpret.There was no clear-cut indication of which wasthe top-day, as there was in American and ForeignPower.

From an analysis of a full day's activity, youwill see it was not until the 3Oth that we receiveda definite message that the supply exceeded thedemand and that a top had been formed.

From the tape, however, we had earlier infor-mation. On the 16th there was terrific ham-mering between 69 1/8 and 70 1/2, with supportingorders withstanding the selling-drive. Ninetythousand of the day's total of 98,000 shares wereexchanged during this tussle between buyers andsellers. At about two-thirty o'clock the selling-pressure subsided, and GL ran up to close at 71 5/8.The significance of this day's action is not dis-cernible from the chart, which shows only thehighest price for each day.

On the 18th the combat was resumed, but theoutcome was reversed. There were only 28,700

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TAPE READING

shares traded during the first four hours, but be-tween two and three o'clock the volume was60,500 shares; yet the buyers were overpowered.No substantial progress was made on the advance.It was evident from the action of the volume thatdistribution was in process — that the selling inGeneral Electric was better than the buying.

The 28th, the high day, was marked by per-sistent volume within a narrow range of one anda half points. Although General Electric hadadvanced sharply on light volume the day before,the offerings were extremely heavy on the 28th;and, while the demand was sufficient to absorb theselling-waves for a time, it was plain to see thatthe supply of stock was greater. There werelarge blocks offered repeatedly each time GL ad-vanced above 73. Finally, in the last hour, thetide definitely turned and the stock slumpedquickly from 74 1/8 to close at 73.

On the 30th, the selling was constant and per-sistent; there was no question that selling-pressurefar exceeded the demand. There was not a rallyof consequence during the whole day — volumedried up each time liquidation slackened.

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American Can's July, 1930, TopI believe that one more illustration of top-action

may be helpful. For this example, in AmericanCan, I have had a chart prepared for the fourdays of July 26 (Saturday), 28, 29, and 30,1930 (Plate 5). In order to show the action infiner detail than a day's unit, I have divided thedays roughly into half-hour periods. The verticallines at the top of the graph are the high and lowranges within these periods; the dots to the leftof the lines are opening prices, and those to theright are closing figures. The deeper verticals atthe bottom are volume-indicators, under which Ihave marked the total volume and the number oftransactions for each day.

At the first broad glance, you will at once see thevolume-day to have been the 30th, with prices de-clining steadily, and both the momentum and vol-ume picking up as still lower prices were reached.There were 220 transactions on that day, practi-cally double the number on the top-days; and thevolume likewise was nearly twice as large. Thisaction was apparent from the beginning, inas-

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much as Can opened $1.25 per share higher thanits previous closing, only to meet stock for sale andto turn down within less than an hour.

Now let us look at the previous days. Ofcourse, if we had the tape running before oureyes, and could note the individual transactionsand the strings of stock, it would be easier to putour fingers on possible important trades. How-ever, it is reasonably clear from the chart. OnSaturday, the 26th, the action was favorable forhigher prices. Volume was large on the advancesand light on the set-backs. Monday, however,told a different story. Soon after the opening,active buying sent Can across 134; and the reac-tion of about two dollars which followed was onless activity. Again it retraced its path and nearlyreached 135. This time, however, the demandwas less in evidence. After one more set-back,buying came on the tape quite conspicuously; andseveral times AC •hammered at 135, and finallywent through, but only for an instant. The actionwas significant in that the resistance at from 134 1/2to 135 was too strong, for that day, at least. Inthe appended chart (at " A "), which is drawn

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solely from transactions of 1,000 shares or more,you will see the large block of 3,300 shares whichwas offered at 135. There were several other1,000-share lots offered earlier at just under 135.

On the 29th Can opened $1.00 under the clos-ing price of the night before, which indicated thinbids — light demand. Buying soon was uncov-ered, however, and the stock advanced againabove 134 1/2, only to have the demand fall off oncemore. The. reaction which followed was, at first,not impressively heavy, although there were indi-cations of increasing volume, which became quiteevident later in the afternoon when activity pickedup appreciably. Support came into the market inlarge blocks at 132, 132 1/4, and 132 1/2; and this wassufficient to register a better closing price.

We have discussed the action of the 30th. Theselling-pressure was apparent; our volume-signalswere there. Can appeared on the tape frequently,and more than a temporary reaction was plainlyindicated.

This illustration, together with the example ofGeneral Electric and that of United States Steel(Plate 2), demonstrates that if we miss gauging

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the top-day — which is often difficult — we dosoon have definite indications that a top has beenformed. At the tape we can detect a resistance tothe advance which is not apparent from the unde-tailed action of the day or from our eveningnewspaper quotations. Inasmuch as the wisetrader will not attempt to sell at the top eighth, Ibelieve that these illustrations will give some ideaof the various types of action witnessed at tops,as well as an idea of the divers selling-signals. Notwo are ever alike; but, in the main, the chief char-acteristics prevail, and I think you will find thattops are formed by action which is recognizableunder one of the three principles listed on pages43 and 44.

These examples clearly demonstrate the neces-sity for concentrated analysis of the action of themarket, in order to differentiate between the ac-tion of volume with no progress in price (buyers'and sellers' impasse), volume during a movementof prices, and dull, drying-up action.

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V I I I

THE TAPE-STORY OF LOEW'SA Day-by-Day Illustration

A DETAILED tape-story of Loew's action duringNovember, 1930, will, I believe, be helpful, cor-roborating as it does, so completely, the principlesof tape reading.

At least this action was of peculiar interest tome at the time, for I then owned the stock and,in consequence, for a while found myself quiteuncomfortable.

In November, 1930, Loew's, Incorporated, re-ported earnings for the year ending the precedingAugust 31 of $9.65 per share, which indicateda splendid record. On Plate 6, which gives thecourse of Loew's during the period from Novem-ber 1 to December 2, you will note that this stockheld up against the drastic selling-waves commonin the market at that time.

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A Puzzling ReactionOn November 5, 6, and 7 (" A " on Plate 6), the

tape-action of Loew's was not satisfactory, and re-flected a " nigger in the woodpile." A traderwatching the tape on the 7th would have seen theactivity of volume in Loew's to be more impressiveon the declines than on the rallies. In other words,the selling was better than the buying. One at-tempting to catch the minor intermediate fluctua-tions would have immediately sold his stock.There were plenty of opportunities to sell, inas-much as the stock ran up well on light volume onseveral distinct occasions.

On November 12 (" B " on the chart), under in-creasing volume, Loew's dipped as low as 53 1/4,although it was able to close the day at 56 1/4. Thevolume of transactions on that day was 61,300shares, as contrasted with an average daily turn-over the week previous of about half that amountof stock. On November 13, Loew's opened at565, but sank steadily through the day until itreached a low of 53 3/8. The next day it openedat 54 1/4, ran up to a high for the day of 55 3/4, and then

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THE TAPE-STORY OF LOEW'S

under constant pressure of liquidation the stockfell as low as 52 5/8.

It was at this point that there were numerousstories circulated, giving the reasons why the stockshould go much lower. Three stories which weretold me as coming from " absolutely reliablesources," are instructive here as samples of marketinformation, demonstrating as they do that thenews we usually hear about a stock is already pasthistory and probably untrue. I might well havebeen interested in these stories, but tried to practisewhat I am preaching here, and watched the tapeoff and on during the day for a reflection of thetrue facts.

One man told me that owing to accountingthe earnings-report of Loew's was inaccurate; andanother, that the Shuberts were selling a largeblock of stock. The third story had to do withsome tie-up with the Fox interests, who wereforced to liquidate their Loew's holdings. If youhave been in this same predicament yourself youwill readily recall, no doubt, the effect such in-formation has had upon you. However, I real-ized that these stories appeared after the stock had

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dropped some six or eight points (against the thenrallying trend of the general market); and inwatching the action of the stock on the tape Iwas convinced that the worst had already hap-pened, because, when the stock was down to 52 5/8under swelling volume, the buying certainly ap-peared better than the selling. The stock declinedbut $0.75 per share below the figure of the previ-ous day, under the largest day's volume but one inseveral weeks. This is a particularly good ex-ample, I believe, of "heavy volume withoutprogress" marking the turn. This was con-firmed later in the same day when the stock closedat 55 1/4, a gain of $1.25 per share above the previ-ous day's closing price, and a recovery of $2.62 1/2from its low price on this turn-up day.

My reasoning in this situation was that the de-pression in the stock when the rest of the marketstarted to rally, must have been due to some tem-porary situation. I have no doubt that one of thethree stories mentioned may have had a basis infact, but the trouble is that such stories are oftencirculated in order to assist those who have some-thing to be gained. An active trader would have

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purchased Loew's on November 14 because of theaction of the volume.

Perhaps it would be interesting if I followedthrough with this particular stock to show howthe action on the following day, Saturday, furtherconfirmed the action of the 14th.

The Action of Loew's on Saturday, November 15»Loew's opened at 55 1/2. The stock was quite

inactive for the first forty minutes or so of trading,until a large block of Loew's changed hands at54 3/4. The sale was for 2,300 shares. This wassoon followed by another transaction of 100 sharesat 54 7/8, which, in turn, was followed by severalindividual transactions at 54 3/4. Sales at 55 thencame out upon the tape in increasing volume.

PLATE 7

Not long afterward, a string of Loew's appearedon the tape, as is shown in Plate 7: 100 shares at

55 1/2, 300 at 55 3/4, 700 at 55 7/8, and 100 at 56, immedi--83-

TAPE READING

ately followed by 300 more shares at 56 1/4 and 300at 56 3/8. Almost at once there was another sale at56 5/8 and one of 1,000 shares at 56 3/4.

The important thing about these transactionswas that, following upon the heels of the largeblock of 2,300 shares of Loew's at 54 3/4, the volumeincreased with the advancing prices.

Two more strings came out upon the tape, as isshown in Plate 8, one starting at 56 7/8 and running

up to 57 1/4 on 700 shares, and the other running upto 57 5/8 on a volume of 1,000 shares.

The stock then became quiet, the volume re-ceded, and there were several individual sales of100 and 200 shares between 57 5/8 and 56 1/2.

Soon, however, 1,000 shares of Loew's changedhands at 57, only to be followed by another trans-action of 100 shares at 57 1/8, which, in turn, wasfollowed by 100 shares at 57 1/4, 400 shares at 57 3/8,500 shares at 57 5/8, and 600 shares at 57 3/4. (In-cidentally, this type of action often takes place


when important interests give an order to take allofferings up to a certain limit.)

Again there was a slight set-back on small vol-ume, with a reaction to 56 3/4. Just before the closeon Saturday, at about a quarter to twelve, therewas slightly increasing volume. Then a shortstring of stocks came out with a good deal of vol-ume, starting at 400 shares at 57 1/2 and 2,100 sharesat 57 5/8. The stock closed the day strong at 57 1/4.The volume for the short two-hour session washeavy — 29,700 shares: volume during the ad-vance.

At about twelve o'clock the Dow-Jones tickerreported the following: " Loew's — sharp recov-ery partly reflected completion of liquidation ofa large speculative account in the stock," whichis a further example of the truism that news isusually published so late that it is useless market-wise.

A favorable sign concerning Loew's during themorning was its lack of activity (no great amountof stock offered for sale) following the activerun-ups.

This action of Loew's on this particular day is-85-

TAPE READING

an illustration of one principle of tape reading.It is a favorable sign for a further advance if, aftera run-up in a stock on reasonably heavy volume,the subsequent set-back occurs on light volume; inother words, if the volume dries up on the re-action.

The Action of Loew's on Monday, November 17In order to continue the story of the action of

this particular stock, I kept track of every transac-tion of Loew's on Monday, the 17th, and had achart drawn of the day's action, including vol-ume (Plate 9). You will notice that the inter-esting facts of this day's action were the increasesin volume during the advances and at the topsof the day, and the one large transaction of 1,000shares at 56 5/8. You will remember that Loew'sclosed on Saturday at 57 1/4. It opened Monday at57, and on the first three transactions of only 100shares each the stock reacted to 55 3/4. Almost im-mediately, however, a rather steady advance set inwith the volume increasing, but between 57 and58 1/4 Loew's met quite a large amount of stockwhich was for sale. The action thus far was

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favorable inasmuch as the first advance was onincreasing volume, but momentarily unfavorablein that the amount of stock offered for sale, andthe number of transactions under greater volumeon the 58 level, indicated that the stock wouldhave a temporary set-back (volume without prog-ress).

After this occurred, as you will note, the stockagain sagged to 57 1/8, while the volume diminishedperceptibly. Loew's again ran up to 58 1/4, wheremore large blocks were offered, and again reactedquickly, only to rebound to 58 1/4 a third time. Itwas quite evident that the stock would have sometrouble in getting through this 58-58 1/4 level, andafter the third attempt the stock sold off for theremainder of the day. The 1,000-share transac-tion which suddenly appeared at 56 5/8 was difficultto interpret, although it may well have been abuyer bidding for that quantity of stock whichhe had offered and sold short earlier in the dayat the 58 level.

During this particular day, the volume on topof the advances was heavier than during the de-clines, from which it was apparent that some


patience might be required before Loew's wouldbe able to puncture the evident resistance levelaround 58.

Monday's action, shown in Plate 9, favored asubsequent advance. As more and more stockwas absorbed at the 58 level, and so long as volumeactivity did not increase on the reactions, the tapereader would normally expect that the stockwould have less difficulty in getting through thislevel later, inasmuch as there would be less stockoffered for sale.

The Action of Loew's on Tuesday, November 18I shall not go into the details for November 18;

but the action was quite confirmative, the stockagain being active on advances and closing theday at 58, a gain of $1.12 1/2 (1 1/8 points) per shareover the closing price of the previous day.

Loew's Goes ThroughIn order to cut this story short I shall cover the

next few days quickly. The stock advanced ac-tively on volume on the 19th and 20th. The gen-eral market by the 21st had perceptibly slowed

TAPE READING

up in its advance, and Loew's, having regained itslost ground, also quieted down as it approachedthe 61-63 level. The volume dropped, as you willnotice on the chart (Plate 6). My personal opin-ion concerning this tired action was that Loew'sadvance from 52 5/8 to 62 3/8 in only eight days wasabout all that could be expected for a while. Ihappened, fortunately, to select Saturday, the22nd, to get out; chiefly because, as I judged fromthe tape-action, the " going was rough " on all at-tempted advances. On the 24th you will noticethe pick-up in volume on the down side (35,000shares for the day), which confirmed the lack ofactive demand during the days immediatelybefore.

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IX

STEEL, THE MARKET LEADER

Watch SteelTHERE is a saying: " As Steel goes, so goes the

market." There is no question that X is themarket-leader, its bell-wether. American Can,General Electric, Westinghouse, American Tele-phone, and a few other stocks, are also termedmarket-leaders. They are, but the market willfollow Steel when every other stock loses its leader-ship. This was particularly well illustrated, Ithink, in October, 1930, during the period of per-sistent liquidation. For days, American Can didnot break; it held like a rock. Steel, however, ledthe market in the decline, or at least sagged simul-taneously. I believe that if Steel had withstoodthe pressure, the market would have halted itsdrift likewise.

By the way, when you hear loose talk about" support-orders" in Steel, Can, and other leaders

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TAPE READING

— when you are told: " They are going to sup-port the market" — take out your pencil, addup the volume of transactions, and figure themillions " they " would need in order to supportthe market. Think in the same way when youhear stories to the effect that " they are going torun Steel up ten points." I do not imply that Steelis not ever supported, or that powerful interestsdo not push Steel forward at times — for theydo — but they do it when the market is techni-cally set for the maneuver. There are no interestsin Wall Street powerful enough to stem the tideof wholesale public liquidation (this was provedin October, 1929); nor have they enough moneyto run Steel up ten points, when they know fromthe market's position that thousands upon thou-sands of shares of Steel would be offered for saleall the way up. It is simple enough to sit arounda brokerage office and glibly spin yarns about the" big fellows." Forget it; if any of your in-formants knew them well enough to know whatthey were doing, they would not be sitting in abroker's office talking to you and me.

To return to Steel: watch Steel closely at all—92—


times. Pay the same attention to its action thatyou do to your own stock. Your stock will prob-ably rally with the market, if your selection hasbeen correct; it may follow the market, or ad-vance ahead of it; but it should not go againstthe trend. (If it does, check your positionquickly, because when the general list does notfollow Steel it is quite likely that many stocks arebeing sold under cover of strength in Steel.)Steel is a particularly helpful indicator because itis always active, thousands of shares being tradeddaily; and it never swings wildly, its market usu-ally moving by eighths of a point.

If you hold an inactive stock (which is notrecommended for short-turn trading), and forsome time there have been no transactions in thatstock, yet in the mean while Steel has reacted twoor three points, it is well to " quote " your stock(obtain the bid and offered prices from the floorthrough your order-clerk). This will give youyour "market"; otherwise, you may be disap-pointed when you finally see a transaction somedollars away from the last sale. Of course, if Steelis advancing and you are long, you need not feel

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TAPE READING

uneasy; but it is none the less a comfort to havethe "quote."

If you intend to watch the tape constantly, it isgood practice to obtain the market on Steel, thebid and offered prices, shortly after the opening.From these you can detect whether Steel is beingbid for, or whether it is offered below the bidprice. Let me explain: assume that the marketon Steel at five minutes after ten o'clock is 149 1/4bid and 149 1/2 asked. If you notice 3,000 shares ofSteel pass soon after at 149 1/4, you know at oncethat someone has " hit the bid," that in this blockof Steel the selling has been more urgent than thebuying. If it happens the other way about, withthe transaction at 149 3/4, you will know that some-one is bidding for stock and is willing to pay morethan the asked price.

Watch for False MovesOften, you will see a large block pass at a price

under the bid figure, only to be followed bysmaller transactions at prices running up abovethe offered price. Watch carefully; it may be amove to bid up the stock in order to sell another

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large block. Naturally, the seller wants to getthe best price possible, and will marshal his move-ments to " make a good trade " if he can. Con-trariwise, of course, you may notice several lots ofSteel purchased at prices under the figure at whichthe large block changed hands. Here, if the buyerwishes to accumulate more Steel, he will endeavorto make it appear that there is plenty of Steel forsale in order that he can buy in another block atnot too great an advance in price. This samemaneuver may, of course, take place in any otherstock.

If you are not in the habit of sitting over thetape constantly, you can gauge the market in thesame manner by asking for the market on Steel atthe time you happen to be at your broker's, andthen check the situation for a few minutes there-after.

I have used the word " offered " in place of themore usual " asked " of the phrase " bid andasked," because, to me, "offered" means thatstock is " wanting to be sold," not that someonewill sell if you bid his price. In other words, thewhole problem is one of solving the condition of

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TAPE READING

the supply and demand—or, of the offerings anddemand. Analyzing the volume in relation to thebid and offered prices will give you the clue tothe supply and demand.

Naturally, you can check your own stocks inthe same manner. I have dwelt at length uponSteel inasmuch as this leader will give you thesituation of the market as a whole. I am assum-ing, of course, that you will glance around theboard to see if there are any outstanding occur-rences, and that you will ask your broker if any-thing exceptional has happened in your absence.

Incidentally, Steel is perhaps the most satis-factory trading-stock on the board because it al-ways has an active market.

The Action of Steel in August, 1930In Plates 10 and 11 is shown every transaction

in Steel for the days of August 12 and 13. Thiswas the bottom of the market in August, 1930.

Steel had been declining for fourteen days,from 170 on July 28. I have marked the signifi-cant action on the 12th and 13th, " A " to " I."At " A " you will note the volume on the dips,

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with dullness on the rallies. At " B " there was adistinct drying-up of activity at the day's tops,which lasted for several hours. Near the end ofthe day another reaction set in, with more vol-ume; however, it met strong resistance between157 and 157 1/2, starting with the block of 2,100shares. Volume was heavy during the day-endtussle (" C "), and for a few minutes it looked asif Steel were starting an advance out of thedanger-zone. It " turned over " again quickly,but met an important block of 2,700 shares justbefore the close.

The following morning Steel was offeredfreely, and sank fractionally until a large orderof 3,100 shares temporarily stopped its decline.At " D" there was another rally, but volumeagain was disappointing. The volume increasedduring the subsequent sell-off as far as " E,"where important buying was again in evidence,which turned the tide finally. During the rallyat" F " there was active bidding for stock, as thevolume indicated. Although Steel did not ad-vance far (only to 157 3/4), the reactions at "G"and at " H " were marked by shrinkages, instead

TAPE READING

of increases, in volume. The confirmation of theturn came at " I," when stock was well taken onsteadily increasing prices.

Referring to the chart you will see that the realsupport came into the market on the morning ofthe 13th. The selling at " E " was important, asit was a test of the buying-strength under themarket. When very little stock was offered at" G " and " H," the trader would have steppedin with orders to buy. Of course, the wholemarket was acting similarly during this period.The market was oversold; but we did not havethe sensational climax which we had had inMay and June, and on other previous clean-outdays, owing to the fact that there was a smallernumber of the public selling, because so many hadsold out, or had been forced out, before.

A Word About the Examples in This BookI realize that the reaction of some readers to

many of the examples in this book will be: "It'seasy enough to look at a chart of market-actionafter it has passed and tell all about the signals,but it is a far different matter to foretell, as the

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action is taking place, what is going to happen."This is very true; but I believe that it will berecognized, as these illustrations are explained,that the principles do work out in practice. Ishall have some suggestions to make farther alongfor those who care to practise forecasting, but whocannot spare the time to watch every transactionon the tape.

I admit that only through practice can we ac-quire that " feel " which sends a definite signalto our brains when important action takes place.I cannot see, however, why we should expect tofind a " system " which will work in the stockmarket; surely the possibilities of profits for thestudent justify the time and effort required tolearn market interpretation. If there were a sys-tem, hundreds would have learned its secret; thenit would not work, because too many would beusing it.

Supply and demand: that is your guide; learnto recognize which is the stronger and you willmake money trading. But do not expect alwaysto judge correctly. Limit the losses caused byyour mistakes and, when you are right, let your

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profits run. By this method you do not needmany profits to offset several losses. You willreadily perceive that a ten- or twelve-point profitin, we will say, a loo-share trade, will offset sev-eral losses of two points each.

And never overtrade; maintain a margin of atleast 50 per cent.

102 —

TIPS ARE DANGEROUS

Check Your Tips on the TapeTHERE is the greatest of danger in depending

upon " contacts " and tips, as we know. Occa-sionally we receive information from someone inwhom we have implicit confidence. Are wejustified in committing ourselves blindly in themarket upon such information? I say emphati-cally " No." But we can check up on this informa-tion, if we wish, by going to the tape.

Let me give you an example which was highlyinstructive to me. I have had charts drawn(Plates 12, 13, and 14) illustrating the move-ments of this tip.

In the latter part of September, 1930, an ac-quaintance of mine received information fromthe right source that certain interests were buyingheavily in Electric Power and Light at around$63 per share. I cannot divulge further details, but

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ask you to take as true my assertion that the inter-ests who were reported buying were certainly im-portant. You will notice on the daily-range graph(Plate 12) that there were signs of accumulationin the congestion that lasted over a period ofseveral days. No one could quarrel with theaccuracy of the tip at this juncture; but, tapewise,there were evidences later that offerings were be-coming exceedingly heavy. The action of thevolume gave the signal to sell, and to sell quickly.As you will notice, before I explain in detail theaction of the stock, Electric Power and Light soondeclined precipitously. My acquaintance was in-formed later that the avalanche of selling whichhad come into the market had been simply toogreat to absorb, and that, for this reason, " they "had had to step aside. Let us not forget this, instudying future markets: the strength of the pub-lic must not be underestimated.

The Action of Electric Power and LightThe action of EL will interest you, I believe,

as it illustrates the accuracy of the principles Ihave set forth earlier. I shall discuss only the ac-

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tion during the week from Monday, September29, to Monday, October 6.

On the 29th there was a good deal of selling,most of which occurred between 6o 3/4 and 63(Plate 13, which reproduces EL's action in half-hourly periods). Although prices gave wayeasily, there were signs of support, particularlyin the manner in which the selling was absorbednear the end of the day, with the close at 61 1/4.

Tuesday, the 3Oth, was marked by muchheavier volume than the day before, with manylarge blocks changing hands. As you will no-tice (Plate 13), prices made but little headwaybelow the range of Monday. This staunch buy-ing of the tremendous offerings was indicative ofa turn, which came quickly the next day. Thisnarrow-range day was difficult to analyze defi-nitely, if considered alone; however, its significantcharacteristic was that during the entire activeday no headway was made in either direction.On the only dip below the previous day (" A ")the volume indicated strong support.

The stock opened Wednesday, October 1, $1.50higher than at the close Tuesday. Selling-orders

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were evidently withheld for the time. Fromthis action on Wednesday one was justified infeeling that a sizable advance was pending: thestock appeared to act strictly in accordance withthe tip. The following day, Thursday, the 2nd,the action was slightly disconcerting, in that pricesslid off easily although the volume dropped downto a total for the day of only 25,100 shares. Inas-much as the stock closed well above the day's lowpoint we might have expected better prices thenext day. One factor, however, was apparent,and that was that every time EL advanced to the65 level it met stock for sale.

Friday morning's opening was indicative of theamount of offerings hanging over the market.The first transaction was 3,700 shares, a $239,-575 order. Soon, another large order of 2,200shares was sold at 65, followed by several moregood-sized trades around this same price. Theday was marked by the evident danger from sell-ers whenever the 65 level was approached. Wehad at the top similar action to that which oc-curred lower down—fair volume without anyprogress. The slight rallies during Friday, the

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TIPS ARE DANGEROUS

3rd, were comparatively light in volume untilthe resistance level was reached, or punctured,when large offerings came upon the tape. I thinka trader would have been warned by this action,at least to protect his trade with a stop-loss orderat around 64, or else to sell out and stand aside forfurther definite indications.

We had those indications on Saturday, the4th. Soon after the opening there was a largetransaction of 3,100 shares at 65. Thereafter thestock sank steadily throughout the half-session, toclose at 63 1/2. There were occasional rallies, butwhenever they occurred volume dried up im-mediately.

Monday was disastrous, as you will note fromthe chart (Plate 14), which shows every transac-tion, with volume. Bids were evidently light, asthe stock opened $0.50 below the lowest pointreached Saturday, on an initial order of only 600shares. The selling during the first two hours(" A ") was persistent, although no conspicuouslylarge blocks were traded; rallies were dull, whilethe declines were in strings of quotations. Be-tween twelve and one-thirty o'clock (" B ") there

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TIPS ARE DANGEROUS

was a time of quiet before the storm which was toappear. The period starting a little after one-thirty witnessed the break, with volume duringthe last hour alone as great as it had been duringthe previous four hours. There was no let-up ofconsequence in the decline, except at greatly less-ened volume. Here we had steadily decreasingprices with attendant large transactions — indica-tive of continued progress in the same direction.

So — Confirm It on the TapeIn these illustrations we have seen volume sig-

nalling turning-points, defining resistance points,and marking substantial progress. It is particu-larly valuable, accentuating as it does the neces-sity and importance of having no opinions ofour own unless they are confirmed by market-action.

If we had purchased EL on the tip, the selling-wave at the end of the day of the 6th certainlywould have said: " Get out," if we had not takenthe hint earlier from the fact that our stock raninto trouble upon every attempted advance.

Incidentally, from the chart standpoint alone

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(Plate 12), when EL broke through the conges-tion level on heavy volume, it was a definite signalto sell long holdings and go short. However, inthis instance there were many individual signalswhich passed on the tape, but which are not dis-cernible on a chart of the days' ranges. Also, ourreliable signals came earlier on the tape.

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XI

SOME IMPORTANT OBSERVATIONSON VOLUME

Variances in VolumeI WONDER if I have made myself clear when

talking of "volume-sales." I have sometimesstressed the importance of 5,000-share transac-tions, but in other examples have dwelt upon theimportance of trades of only 1,000 shares. Thisimportance of the size of the transaction dependsupon the total activity. In other words, on somedays stocks are traded in much more activelythan on others; there may be many more "vol-ume-transactions " today than there were yester-day. I do not think, however, that that will giveyou any trouble, because you will sense immedi-ately the relative importance of the varying sizesof blocks.

Bear in mind that 5,000-share transactions areprinted in full and thus attract much more atten-

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tion than a 3,000- or a 4,000-share trade, whichis printed simply: 30.150 or 40.82 1/2, as the casemay be. Let the hangers-on notice and ejaculateabout the fully printed orders; but you watch thesales of lesser volume also. You will then be ableto attach a much more correct significance tothe 5,000-share trade, because you will knowwhether it has followed several other importantsales, or whether it is a signal which was flashedfollowing a long period of dullness and inactivity.Bear in mind, also, that professionals know howmuch attention the 5,000-share transactions at-tract, and that they employ them for that veryreason to trap the unwary.

Volume for the market as a whole is printedupon the tape at intervals during the day: at10:30 A.M. and at 12:10, 1:30, and 2:10 P.M.From these figures of the volume you can judgewhether your stock is normally or particularlyactive in comparison with previous days. Youcan also follow the market generally, and men-tally note whether the market has picked up ac-tivity on the downward side or has been quiet, andother important characteristics.

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SOME OBSERVATIONS ON VOLUME

Turning-points, too, vary in time and volume.There cannot be, of course, any set type. Ordi-narily, turning-points are distributive or accumu-lative. I am writing now of turning-points withinmajor trends, although major-cycle turning-points, also, are unquestionably distributive atthe tops. Consequently, the time the activity con-sumes, and the amount of activity which occursat distribution points, depend upon the amountof stock to be distributed, which can be judgedonly by familiarity with, and close study of, thepreceding action.

Obviously, volume which may be important instocks with small capitalization will be negligiblewhere large outstanding issues of common stockexist: for example, the significance and the effectof a 5,000-share trade in Auburn Auto, with 185,000

shares outstanding, would be far differentfrom those of a like transaction in General Motors,with 43,000,000 shares.

Another factor enters here: the number of peo-ple trading. Thousands of traders desert themarket after a severe break; others become dis-gusted and trade only occasionally. There is an-

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other large group who become involuntary in-vestors. Thereafter the number of active tradersgradually increases, which fact may be sensedfrom our contacts in offices, from our reading,from statistics, and from the increases in averagedaily volume.

During the final stages of a bear market wehear a great deal about pools' being unable toattract a public following. The important poolsand syndicates, whose objectives are large profits,are not desirous of attracting an active public fol-lowing during the period when they are accumu-lating stocks, but prefer that the public graduallyincrease in participation and enter the marketactively when prices are materially higher.

Important, or " Good" Buying and SellingYou often read that " good buying was ap-

parent on the tape today." It is my opinion thatthis phrase is used too loosely at times by financialwriters, because it is probably the most difficultconclusion to arrive at correctly from reading thetape. A definition of " good buying " is neces-sary. I understand it to mean buying by impor-

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tant interests — perhaps institutional investment-buying, or purchases made by some bankinggroup.

Also, pool accumulation would be called good,or important, buying, in that the pool would buywith the purpose of holding for a substantial ad-vance. Opposed to this good buying, are thepurchases made by the short interests in themarket, who buy to cover their previous shortsales. Likewise, speculative buying by scalpers,who take profits of one and two points, could notbe called good buying.

Broadly stated, good buying absorbs stockswhich will not be thrown upon the market at thefirst signs of a rally. Sometimes, of course, abanking group who are sponsors for a stock willsupport their stock with purchase-orders, and willexpect to sell all or a part of the stock when themarket rallies; but, having supported the stock,they would not sell the next day, as it would undothe good they had done.

Important selling, on the other hand, comprisesliquidation of important accounts, as contrastedwith marginal selling, which originates from

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overextended trading-accounts and from fear onthe part of the public.

Indications on the tape which would tell thetape reader whether the buying or selling is im-portant or not, are difficult to make out. Theimportant time to look for them is followingeither a substantial reaction or a substantial rally.What the volume alone tells us is not always adependable index; so we have to look at price-action as well. Short-covering plus speculativebuying, following a decline or reaction, causesfaster price-action than investment-buying. Therally may be started by support-buying, invest-ment-buying, short-covering, or a combinationof all three. The action at the turning-point hasbeen well covered in previous illustrations. Afterthe turn, the extent and character of the move-ment tells the tale. An exceedingly rapid recoverydenotes short-covering, or buying for a quick turn,or often both. A more gradual advance with con-stant volume of transactions, as opposed to spurtsand wide price-changes, indicates a better qualityof buying.

After the initial rally, watch the secondary—118 —


reaction, if one occurs, for the character of theprice-changes and of the volume. During thestabilization periods preparatory to a further ad-vance, you may be able to detect important blockstaken here and there. By and large, the distinc-tion is fine, except in those apparent cases wherethe market rallies in points between sales; then,of course, you know it is mostly short-covering,and that it cannot hold. Do not overstay thesesudden rallies (or fast reactions, if you are short);they have a habit of dying out suddenly.

Margin-selling, as contrasted with liquidation,has similar ear-marks. The pace is swifter, andprices drop rapidly between sales. Liquidationis more persistent than margin-selling, and isbroader. Margin-selling usually affects moreswiftly those leading stocks which are widely heldon margin.

Wild price-movements during a rally indicatea meager supply of stocks. Those who have stockfor sale quite naturally revise their selling priceswhen they see a rally start; offers are withdrawn,and buyers are forced to bid sharply for stock.Investment-buyers and other groups who wish to

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buy stocks for accumulation, are slow to bid upprices, often buying " on a scale down." Conse-quently, their orders may be noticed on reactions,when they are filled quietly at more favorableprices.

It is well to remember, too, that we must bequicker to catch rallies and reactions when thepublic is heavily in the market.

Withdrawing BidsJust as offerings are withdrawn, so are bids often

pulled from the market. You would not allowyour bid at 88 1/2 to remain in for a certain stock ifthe action of the market indicated to you that yourchoice might be available at 86.

This brings up another point which bears care-ful watching. Large bids, or offerings, are oftenplaced with the specialists, which facts are noisedabout and transmitted to brokers' offices for thesole purpose of fooling the public. In October,1930, it was widely circulated that there wereorders for 50,000 shares of Steel at 150, when Xwas selling at 151 or 152. When Steel brokethrough 150 it was on sales of only a few hundred

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shares. Whether the bids were ever placed forthe huge blocks, I do not know; but if they were,they were withdrawn.

A similar occurrence happened with StandardOil of New Jersey, in October, 1930. In 1929,you remember, the Rockefellers were reputed tohave offered $50 per share for 1,000,000 shares of" Jersey." A year later, when the stock again haddeclined to 51 or so, it was reported that therewere orders totalling 150,000 shares at 50. Thestock went through 50 without anywhere near150,000 shares being purchased. It also, about amonth later, again plunged through 50 withoutany great difficulty.

Occasionally bids of this character are bene-ficial, but many times they are harmful. Remem-ber also that support in times of distress is onlytemporary, and that stock purchased for supportpurposes comes back on the market.

Another stunt is for brokers to call out: " Whit-ney is buying Steel," or: "Meehan is buyingRadio," or: " Danforth is selling XYZ." Let usbear in mind that barring the possibility that Mr.Whitney might wish to have it known that he is

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buying Steel for the purpose of support duringa crash, none of these big floor-traders or operatorswill allow his movements to be heralded, unlesshis so doing aids his maneuvers. And why shouldhe ? Let us not forget that when Mr. Big Operatoris selling a stock publicly, and is thoughtfulenough to tell us about it, he may be buyingmore than he is selling, through several otherbrokers.

I was told recently that Jesse Livermore has noregular brokerage accounts, but drops in at thisbroker's and that, leaving orders to buy or sell.He may sell 5,000 shares of some stock one day ina Palm Beach branch office and buy the nextmorning in Miami. But, the tape will record hisorders. It is up to us to guess whether the bal-ance is on the buying side or the selling.

Think in Dollars, Not in PointsI have mentioned earlier in this part of the book

the value of thinking in terms of dollars ratherthan in points. I believe in it thoroughly, as Iknow that it brings home the incidents whichmay be reflected on the tape. The next time you

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are watching one of your stocks, notice the vol-ume, and, as the record passes before you, quicklycalculate the transactions into dollars of volume.I believe that you will get a better sense of the ac-tion of the volume if you do this.

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XII

THE EFFECT OF NEWS ONMARKET-ACTION

To SELL on good news is a broad recommenda-tion. The trouble with this lies in the difficultyof distinguishing between plain good news andthe good news. During a pool-operation therewill be plenty of news printed in the papers andover the Dow-Jones tickers in reference to thestock. I have covered this subject of stock mer-chandising in Part One of this book. What we areinterested in here is: how may we know whenthe news we read is the signal we have been wait-ing for, and what will the tape indicate?

Our dependable guide, volume, will aid usagain. Watch your volume. Note from the ac-tion of the market how your stock reacts to anynews you may read. Again you must decidewhether you are trading on the intermediatetrends or the shorter terms. The intermediate

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THE EFFECT OF NEWS

trend, naturally, will culminate upon more im-portant news than the minor movements. Per-haps the big news is a stock dividend or a gener-ous extra disbursement to stockholders which theinsiders knew would be declared. Lesser newswill have been circulated prior to the big event:information given to the press about increasedprofits, large orders, and including optimisticstatements by the president.

Note the action upon the tape. See if the ac-tivity increases appreciably. When a piece ofnews breaks which you are sure is the importantevent, check back quickly over past action; de-termine whether the stock has been run up ac-tively on increased volume. You may rest as-sured that if the news is the news upon which thepool has been operating, your tape will tell thestory. It cannot help it. If the pool wishes todistribute stock, it must attract a public follow-ing; and a following cannot be attracted withoutincreased activity. Rising prices, high volume,judicious doses of propaganda, and the big event:there is your program. (I refer you to Part One fora complete illustration of the distributive steps.)

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We can detect the success or failure of the pool'splan (and many pools fail in their operations)only by the volume of business they are able to do.Do not forget for an instant that they must sellwhat they have purchased, if they are to makeprofits. It is up to you and to me to ascertain ifthey are successful merchants.

Moreover, the general market must be right.No pool can distribute stocks profitably in atechnically weak market. They would not tryit. Therefore analyze your market, your indi-vidual stock, and judge the effect of news fromthe tape. But, when you decide to sell, sellquickly; do not wait for unnecessary confirmation.If you do, you will lose many dollars of profits.If you are not sure, sell anyway and let the otherstry for the top.

News is discounted; that is why a stock willgenerally act contrary to what is expected. Aftera long decline in its stock, for example, a corpora-tion may pass the dividend. Instead of decliningmuch farther, the stock stabilizes and later ad-vances. Naturally, the important selling, on be-half of those who were in a position to know the

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actual condition of the company's earnings, hasbeen proceeding for weeks, or maybe months.National events, increased business, world con-ditions— all of these are judged in advance byintelligent investors, bankers, and big operators.They know how the public will react; they realizethat the time to buy is when the public sells — onbad news — and that the time to sell is when thepublic buys — on good news.

A sudden, unexpected event cannot be dis-counted. I touch upon the Reserve Board warn-ings in 1929 on page 155. Wars, assassinationsof public leaders, unexpected election results,sudden catastrophes: these are a few of theoccurrences which are not discounted in themarket.

When any of these happens, stop and thinkwhat the majority will do; also estimate the seri-ousness, the extent of the effect of the incident.Then decide upon your course of action, beingcareful not to do the expected thing. If you can-not make up your mind, do nothing but watchthe tape, which will tell you what the opinionsof other buyers and sellers are. Dumping of

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stocks means that the public is selling; persistentpressure is a sign that intelligent selling is takingplace. Sell with the intelligent; and enter yourpurchase-orders when you notice intelligent, im-portant buying.

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X I I I

RESISTANCESResistance and Support Levels

DURING all movements of stocks, whether upor down, there are repeated resistance levels.There are a number of different causes for them,and, likewise, their effects are quite different.

It is difficult to find the exact reason why acertain stock should meet resistance at 52 one dayand at 56 a week later. However, if we picturethe thousands of people — perhaps millions dur-ing roaring bull markets — who are interestedactively in the market, and add the pool, pro-fessional, and banking elements, we have a largenumber of situations something like this: —

The Buying SideThose:

who are buying today,who are covering short sales.

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whose buying " stop " orders will be executed,who have orders in at lower prices,who have orders placed at higher prices,who sold lower down, and wish to buy.who sold higher and wish to buy.

The Selling SideThose:

who are selling long stock,who are selling short,whose selling " stops" will be executed,who have orders in to sell at higher prices,who bought higher up and will sell,who bought lower down and will sell.

Among these multitudes of orders there arecountless variances in decisions about where tobuy and where to sell. There are innumerablelevels at which opinions momentarily are evenlybalanced — where demand and supply will bal-ance. Possibly the resistance will be for only afew minutes, when the sellers will become morenumerous than the buyers (in quantity of orders,not in number of persons). As the stock declines,

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we will say, demand increases and a strongerresistance is set up. Conversely, as the stock ad-vances, more and more sellers offer stock for sale.In our example of Loew's (Chapter VIII) therewas quite a sizable resistance at the 58 level forseveral days, and a much more tenacious resistancewithin the broader range of 57 to 63.

A hard and fast rule cannot be laid down asto where resistances will occur. You must de-pend upon the action of the market — the actionof the volume — to indicate the resistance levels.Upon many occasions a resistance will be set up ata. point 50 per cent of the way between the limitsof the previous move. In other words, if a stockhas rallied from 40 to 60 and then reacted, it maystop at about 50. Although I have never beenable to determine satisfactorily why this so oftenhappens, I imagine it to be simply a matter ofthe law of averages working between the sellersand buyers. However, this 5O-per-cent-resistancerule fails so often that it cannot be considered re-liable. One method which may be adopted, is towatch the action of the volume at the 5O-per-centlevel. If volume dries up as it approaches this

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level, or, on the other hand, if the volume is heavyat that point but the stock fails to go through, youhave a dependable resistance.

In the day's chart of Loew's (page 87) therewas a good deal of stock offered for sale at 58 andthereabouts; several times during the day, buy-ing-orders pushed the stock up to that point onlyto meet a greater supply. There was evidentlyresistance to selling-pressure also, or, I should say,a lack of selling-pressure, when the stock re-turned to the 56-57 level. This is getting downvery fine, and is of interest only to the dailyscalper. Nevertheless, the same principles holdtrue at more important resistances.

No mechanical resistances are absolutely de-pendable. Some stocks will advance ten pointsand react only three, while others will fall backhalf-way. Of course, behind the market-actionyou have the actions of buyers and sellers, plus, inthe case of a pool-operation, the efforts of thepool. No pool-manager is going to operate astock in exactly the same manner each time; noris he going to allow the stock of its own accord torally and react in uniform movements. If he did,

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it would be too easy for you and me to learn thestock's characteristics, shut our eyes, and reap theharvest.

However — and this is highly important —each operator has certain modes of action, which,unless he is particularly shrewd, will occur andrecur. He is quite likely to employ the samemaneuvers again and again. If we can becomewell enough acquainted with his methods,through studying the stock, we may be able todetect far more accurately the various resistancelevels. When he is accumulating his stock, hewill endeavor to make it appear unattractive; con-trariwise, when he is selling, he will try to induceus to buy. Stock exchange rules concerning falsemanipulation are so strict that not many operatorsattempt unethical practices. In active stocks, allpool maneuvers will appear on the tape. Ofcourse, a pool-manager may be able to buy, orsell, a block of stock outside; but he must makethe stock active if he is to gain a public following.

If you will keep charts showing the daily highand low ranges of the stocks in which you are in-terested, plus a number of the market-leaders,

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and then study your tape-action, you doubtlesswill be able to determine resistance points. How-ever, they will vary from time to time; never de-pend upon them mechanically, remembering thathuman beings, not robots, are buying and sellingstocks. Estimate all of the resistances you wantto from your charts, but notice where the volumecomes in testing your resistances. Volume-indica-tors on daily charts will be an aid, but they willnot show you where or how within the day's rangethe volume occurred.

Congestion levels, where stocks have remainedfor periods of time, usually resist the move whenthe stock again approaches them. During thebear market, there were numbers of these con-gestion levels which acted as temporary stopping-places in the downward decline. These becomeresistances to the advance when the trend is re-versed. However, another point must be borne inmind here: resistance levels lose their power ofresistance in proportion to the time which sepa-rates them. A congestion level, for example,which is formed in July, is not particularlyefficacious six months later.

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Support levels are levels at which supportingorders come into the market, and are often wherereactions have met support before, although thefarther away in time they are, the less dependable.They are verified in the same manner as resist-ance levels. Volume is the indicator of their im-portance. Surely a support level is not dependableif a stock will penetrate it for five points undereither heavy or light volume. Its stubborn de-fense is confirmed when it holds against an as-sault; and if it breaks after holding for a longtime, the plunge may be deeper than if it hadgiven way under the first drive.

You can easily see why. If you were support-ing a stock, if you believed that you had sufficientcapital to withstand the selling-orders you judgedwould come into the market at that level, youwould attempt it. If, however, the supply ofstock for sale increased, you would undoubtedlystep aside and decide to enter your support far-ther down. This is what happened in the ElectricPower and Light situation (page 105). If, in themean time, you had misjudged the supply andhad already used a large portion of your capital

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in the unsuccessful support, you would not havethe capital to support the stock again until the sell-ing was fairly well exhausted.

How can we hope to guess these things? Howcan we learn what is going on except by watchingthe battle? In modern army tactics every maneu-ver and every skirmish is planned to accomplishan objective. Various maneuvers or skirmishesare employed to obtain information about a mostimportant factor — the strength of the enemytroops. (In stock market speculation, for ex-ample, an operator may test strength by selling alarge block of stock and, if this is readily absorbed,then switch his position and " go long.") Havingascertained the enemy's strength, the general mustknow if he has sufficient support troops (in specu-lation, sufficient buying-power) to gain his objec-tive. An army is only as strong as its supporttroops. Having worn down the enemy's resist-ance, shock troops are then employed to carry outthe objective.

Is not financial strategy exactly the same? Thetape is your scout. It prints the number of sol-diers marshalled for the combat. If the enemy

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continues to pour army after army into the breach,he will penetrate the lines. His disregard for theexpenditure of life (dollars, in our case) maycause a great difference in his maneuvers later;but we are interested in the immediate, as well asthe future, battle. A financial general advancesand retreats, sends out scouts, tests the enemy'slines of resistance, builds fake trenches, and planshis maneuvers just as cleverly and skilfully as thegeneral in war-time.

Use charts; employ every aid you can think of.But remember that your charts are records onlyof past human action. Your charts are picturesof the results of financial strategy.

I wish to give one more army illustration: thereis many a skirmish in the front lines which to theuntutored would appear to have little to do withthe bigger movement on foot. However, the gen-eral, from his vantage-point, planned that skir-mish with a knowledge of the effect it wouldhave on the bigger plans ahead. So it is with thedifficult-to-notice fluctuations on the tape, which,when accompanied by certain volume-signals,may indicate important moves pending.

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I believe that the 2,300-share transaction inLoew's on Saturday morning, November 15,which is discussed on page 83, was a skirmishindicative of something better to come. It caughtmy attention at once; and, as I had felt would bethe result, activity soon picked up at advancingprices. I feel sure that that particular transactionwas of great importance. Whether it indicateda final " mopping-up " of the necessitous liquida-tion which evidently had gone on previously, Ido not know; but I do know that, coming as itdid when the stock had been quiet and dull, itcertainly was a signal. The confirmation, thatit was intelligent buying, followed.

Retreats in the night with surprises in the morn-ing, are as common in the market as in battle.Likewise, a masterly marshalling of dollars at theclose of an active day may be counted upon tobring the enemy into combat in the morning.

I dwell upon this subject of maneuvers at lengthbecause it is of an importance which cannot beover-emphasized.

Inasmuch as I personally do not trade in andout of the market for a dollar profit here and fifty

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cents there, I do not pay a great deal of attentionto minor resistance points, except in so far as theymay represent a skirmish which is part of a majorbattle.

As I have mentioned before, I owned someshares of Loew's at the time that I kept track ofthe day's transactions in that stock. I was in-terested in its action, even at minor points, be-cause of the fact that a few days previous it hadsuddenly reversed its trend, and, although I feltit would soon resume its upward course, I wishedto check its movements and action carefully dur-ing that critical period. If it had shown signsof continued weakness, I should not have hesitatedto throw it out at once and accept the loss.

Old Highs and LowsSometimes old highs and lows are resistance

points, and often they are not. An old low meansnothing in itself. If the action of the marketindicates resistance at that level, well and good.It is the action which must give you your answer.In the fall of 1930 many people thought that thelow point established in November, 1929, would

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be a resistance point against a further decline ofthe general market. As far as I could see, therewas no apparent change in the market when itwent through those year-old lows. And whyshould there be? The conditions, fortunes, andmental reactions of the people certainly under-went tremendous changes during the year 1930,and there was no reason for assuming that the oldlevels would set up any actual resistance. Themarket also was greatly changed in that year.Many groups which make up the general averagesof the whole market, had long before declinedbelow their individual 1929 levels, whereas othergroups were still well above. The entire situationwas different in all respects, and could not becompared.

Previous lows and highs which are nearest by— that is, which have been recorded a short timebefore the action you are studying — may be ofsome importance. I say " may be " because theyhave failed so many times to mark resistance, thatI do not feel they are important, except as pointsto watch on the tape and then judge.

My belief is that all so-called mechanical points—140 —

RESISTANCES

are dangerous until they are confirmed by theaction of the stock itself. If any of the theorieswe hear about ever did work consistently, theycould not do so for long, because too many traderswould soon be acting on them, and their effective-ness would thus be ruined. Resistance is a tempo-rary balancing of power. If we all played for agiven resistance, there would not be any resist-ance left when the stock arrived at the expectedpoint, because all of us would have executed ourorders ahead of it, in order to take advantage of it.

XIV

SUGGESTIONS TO SPECULATORSBe a Cynic When Reading the Tape

WE MUST be cynics when reading the tape. Ido not mean that we should be pessimists, becausewe must have open minds always, without precon-ceived opinions. An inveterate bull, or bear, can-not hope to trade successfully. The long-pullinvestor may never be anything but a bull, and,if he hangs on long enough, will probably comeout all right. But a trader should be a cynic.Doubt all before you believe anything. Realizethat you are playing the coldest, bitterest game inthe world.

Almost anything is fair in stock trading. Thewhole idea is to outsmart the other fellow. It isa game of checkers with the big fellows playingagainst the public. Many a false move is en-gineered to catch our kings. The operators havethe advantage in that the public is generally wrong.

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SUGGESTIONS TO SPECULATORS

They are at a disadvantage in that they must putup the capital; they risk fortunes on their judg-ment of conditions. We, on the other hand, whobuy and sell in small lots, must learn to tag alongwith the insiders while they are accumulating andrunning up their stocks; but we must get outquickly when they do. We cannot hope to besuccessful unless we are willing to study andpractise — and take losses!

But you will find so much in Part Three of thisbook about taking losses, about limiting losses andallowing profits to run, that I shall not take upyour thought with the matter now.

So, say I, let us be hard-boiled cynics, believingnothing but what the action of the market tellsus. If we can determine the supply and demandwhich exists for stocks, we need not know any-thing else.

If you had 10,000 shares of some stock to sell,you would adopt tactics, maneuver false moves,throw out information, and act in a manner toindicate that you wanted to buy, rather than sell;would you not? Put yourself in the position ofthe other fellow. Think what you would do if

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TAPE READING

you were in his position. If you are contemplat-ing a purchase, stop to think whether, if you actcontrary to your inclination, you would not bedoing the wiser thing, remembering that the pub-lic is usually wrong.

Use Pad and PencilIf you wish to " see " market-action develop be-

fore your eyes, I suggest that you adopt the useof pad and pencil. Many of us find it difficultto concentrate; but I know that I have oftenmissed important action in a stock because I didnot concentrate. Try the pad-and-pencil idea;keep track of every transaction in some stock.Write down in a column the various trades andthe volume, thus: 3 — 57 1/2 (meaning 300 sharesat $57.50). When strings appear, write them asconnected sales so that you may analyze themlater. Note particularly the larger blocks. Reflectupon the result of these volume-sales; note wherethey came.

It is remarkable what this practice will do forone's perception. I find that it not only increasesgreatly my power of observation, but, more im-

— 144 —


portant still, that it also gives me, somehow, a com-manding grasp of the action which I should nototherwise have. Furthermore, I am certain thatfew persons can, without having had much prac-tice at it, remember accurately where within theaction the volume came.

If you cannot spare the time to sit over the tapefor this practice, you can arrange with your brokerto obtain the daily reports of stock sales of theNew York Stock Exchange. They are publishedfor every market-day by Francis Emory Fitch,Incorporated, New York City. Each transactionis given, with the number of shares traded and theprice. From these sheets you can make chartsof every transaction, and study where the volumeincreased or dried up, and the action whichfollowed.

I know of no better training than to practiseforecasting future movements from these chartsand then check up to see if you have judged cor-rectly. When you miss, go back over your pre-vious days' action, and see if the signals were notthere but that you misinterpreted them. It is soeasy to undervalue some very important action

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TAPE READING

that some such method is necessary. I havefound this one to give splendid training, and Iuse it constantly.

Trade AloneThis counsel may be the most important I can

suggest: trade alone. Close your mind to theopinions of others; pay no attention to outsideinfluences. Disregard reports, rumors, and idleboard-room chatter. If you are going to tradeactively, and are going to employ your own judg-ment, then, for heaven's sake, stand or fall byyour own opinions. If you wish to follow some-one else, that is all right; in that case, follow himand do not interject your own ideas. He must befree to act as he thinks best; just so must youwhen trading on your own initiative.

You may see something in the action of a stockthat some other chap does not notice. How, then,can he possibly help you if you are making a de-cision upon some occurrence which you havestudied but which he has never observed? Youwill find hundreds of people ready to give youfree advice; they will give it to you without your

—146—


asking, if you raise your eyebrow or look in theirdirection. Be a clam, an unpleasant cynic.

Have no public opinions of your own, whenasked; and ask for none. If you get into thehabit of giving opinions you are inviting an argu-ment at once. You may talk yourself out of adecision which was correct; you will becomewishy-washy in your conclusions, because youwill be afraid of giving an opinion which mayturn out wrong. Soon you will be straddling thefence in your own mind; and you cannot makemoney in trading unless you can come to a de-cision. Likewise, you cannot analyze tape-actionand at the same time listen to forty-two peoplediscussing the effects of brokers' loans, the wheatmarket, the price of silver in India, and the factthat Mr. Raskob and Mr. Durant are bullish.

Dull markets are puzzling to traders, doubt-less because it is difficult to rivet the attention onthe tape when it is inactive. If the tape bores you,leave it alone; go out and play parchesi — do any-thing but join in the idle, unintelligent gossip ina broker's board-room.

Use a pad and pencil, as I suggested. It will— 147 —

TAPE READING

occupy your mind and concentrate your atten-tion. Try it; you will not be able to chatter andkeep track of trades at the same time.

I may seem to write acidly here, but I have beenthrough it, and have been one of the worst of-fenders. It was great fun to strut my opinions, butit increased the amount of red ink in my account;I know that. The worst of it is that I uncon-sciously may have hurt someone else when I par-ticipated in board-room talk, to say nothing ofunsettling my own thinking.

Do Not Watch Every StockJust as I urged you several pages back to watch

Steel, so do I beseech you now not to try to watchtoo many stocks. It cannot be done. If you aregoing to keep accurate account, mentally, ofvolume and of the condition of supply and de-mand, you must perforce concentrate. Do not at-tempt to watch more than three stocks in additionto Steel; certainly not more than five. Many suc-cessful traders operate in only one stock; but theyknow that one.

To be successful, we must become thoroughly— 148 —


acquainted with our trading stocks; we mustlearn their peculiarities, must determine their re-sistances and so-called support levels. We mustwatch for important transactions, to note wherewithin the day's range the volume comes.

Unless we have unusual minds, it is impossiblefor us to retain, and register, the action of morethan from three to five stocks.

The Use of Charts and Statistics inConjunction with the Tape

The interest in charts is so widespread that Ibelieve some reference should be made to them.There are various kinds: daily, weekly, andmonthly. Some traders chart even hourly action.

A chart of daily action is probably the mostsatisfactory, although for tape-study I have recom-mended that charts be kept of every transactionfor practice in observation and perception. Itwould be difficult to keep any quantity of theselatter graphs, because of the time it takes to makethem.

A chart of daily action presents a clear pictureof the position and previous action of active stocks.

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TAPE READING

The chief value of charts lies in their enablingone the more easily to judge the trend. Thereare also many other indications which the chartsgive us, and which, when checked with the tape,are of value to the trader. However, many trad-ers employ them mechanically and do not seemto realize that a chart is nothing more than theday's combined opinions of buyers and sellers ofstocks. If the underlying human motives areunderstood, and if it is recognized that there isno sure-fire system which may be " played," chartsare invaluable.

In Stock Market Theory and Practice, a recentbook on the market, Schabacker discusses chartformations and their interpretative value. I re-fer you to this book; the author's explanations ofcharts and their uses, are detailed and clear-cut,and are supported by countless illustrations of thevarious movements.

I have heard traders claim that they do not needcharts because they fix in their minds a picture ofthe previous action of the stocks in which theyare interested. I seriously doubt if it is humanlypossible to retain accurately in one's mind the

— 150 —


previous action, and the present position as it iscompared to the previous action, of one stock, tosay nothing of that of fifty or a hundred stocks.

The use of statistics and a knowledge of invest-ment fundamentals are, of course, accepted asnecessary to participation in the market. So manyadequate books have been written on the econom-ics of investment that it would be presumptuousof me to attempt to cover the ground again here.Naturally, I urge the use of both by the traderon the intermediate trends. However, I doubt ifthe daily speculator can use statistics. Surely thestatistical position of a company, or of generalbusiness, can have little to do with the minorfluctuations of stock prices.

The intermediate trends, however, are oftenaffected by the quarterly earnings of corporations(which, remember, are discounted in advance oftheir publication) and by the condition of busi-ness generally. The money-market, the creditsituation, the commodity markets, and other re-lated commercial and industrial factors, all mustbe given their weight in judging and forecastingthe trends of stock prices.

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TAPE READING

Here again, however, we may turn to the tapefor the result. The market reflects all of thesefundamentals, and discounts improvements orset-backs in general conditions. Individual cor-porate situations, likewise, are reflected in advancein the action of the market.

Statistics are past history; this fact must neverbe lost sight of. The earnings of the last quarter,when published, have little to do with the market-action at the time of reading. They are of valuein estimating present and future earnings, whichthe market is discounting. Never buy and sellon the basis of past history, except when you areselling to discount the good news which is finallyreleased, or are buying when the uncertainty, orpoor report, is removed.

In bear markets prices do decline on bad news,and rally on good news. Inasmuch as 1930 isbehind us, I see little to be gained from a detaileddiscussion here of how to combat a bear market,other than the knowledge that we must watchthe volume and trade with the trend, which Ihave already elaborated upon. It is an acceptedtheory that it is safe to make investments in a

— 152 —


bear market when the market ceases to declineon bad news.

The tape-student will find it difficult at firstto correlate all of the various factors which are re-flected on the tape; but as his knowledge andstudy widens, he will learn the key point: dis-counting. Volume-activity will show him the ex-tent of the enthusiasm or pessimism of all buyersand sellers.

Acting Contrary to the PublicThe question when to act contrary to the pub-

lic, is a difficult one to answer. At importantturning-points, I believe it is safe to state, thepublic is always wrong — that is, the majority.As I stated on page 58, I adopted this theory inNovember, 1930, to detect the temporary bot-tom of the long decline. The public wanted togo short at the bottom. Prices had sagged forso long a period that it was finally consideredthat short sales were the only way to make money.However, when everyone wants to buy, or wheneveryone wants to sell, look out !

During the intervening movements, however,— 153 —

TAPE READING

it is more difficult to determine the best course topursue, whether to follow your inclinations or actcontrary to them. For example, when, afterprices have been rallying for some time, a reac-tion sets in and margin-accounts start selling, itwould not be wise to buy. First, we must de-termine the extent of the reaction; we must timeour purchases so as to buy when the selling-waveappears exhausted. Contrariwise, we should sellbefore the public on the signal of the increasedvolume- and price-activity which mark turning-points, and not wait to go in the opposite directionat the first signs that the public is selling.

I wonder if I have made this clear. Perhapsa few more examples will help to straighten thisthought out. I feel that it is very important, in-asmuch as I know that I have blindly gone con-trary to my first inclinations at times, only tolearn afterward that I should have followed myfirst thought and gone with the public for a partof the way, and then ** crossed " them later at thestrategic hour.

Do you remember the several sudden breaksduring 1929? There were a number which were

— 154 —


caused by the warnings of the Federal ReserveBoards. The Boards withheld their announce-ments until after the close of the markets. Inthose cases the wise course to pursue would havebeen to stop and ask ourselves: "What will therank and file do in the morning? Will they sellat the opening? " Then, it would have beennecessary to act in a fashion contrary to that ofthe public.

In several instances which I recall, stocksopened considerably off in the morning, but, sosoon as the selling had been absorbed, started theiradvance once more. The profitable move thenwould have been to buy upon the confirmativesigns of the heavy volume of selling-orders' beingwell taken — when the important buying ap-peared and demand overcame supply. The signswere there. We had the active churning ofstocks without further progress on the downwardside.

Over the long pull — even over the major in-termediate movements — you can safely cross thepublic and make money. The ideal situation isa result of your having timed your actions so that

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TAPE READING

you precede the public in buying — that is, buywhen stocks are being accumulated — then youcan go along with the majority during the majorportion of the advance, and can part company atdefinite signs of increased public participationwithout corresponding progress in the movementof the stock. The greatest public participation isnear and at the tops, because, as we have learned,rising prices attract a following.

Trend-TradingRoughly speaking, there are three types of

trends: the long-pull; the intermediate; and theimmediate, or short-term. Conservative tradersoperate within the intermediate trends. Theselast for anywhere from two weeks to six months.They can be gauged with profitable accuracy,whereas the minor movements are hazardous,owing to the fact that you must act so quickly inorder to get in and out. A reaction of four pointswithin an intermediate movement of fifty points,certainly is not worth playing for; yet it may ap-pear attractive on the tape.

The danger lies in the fact that our conclusions


are not usually formed instantaneously: by thetime we have been attracted to the reaction andhave decided to sell, the reaction is over. Theintermediate trends, however, allow time forthoughtful consideration. The profitable por-tion of these moves is in the middle. In an irregu-lar market, buy when the action confirms thetrend, and sell early. In a one-way bull market,sell when there have been one or two days of rapidprogress on heavy volume following an impor-tant, gradual advance. Let the other fellow havethe top and bottom.

If you intend to trade with the intermediatemoves, be careful that your constant tape watch-ing does not throw you off. A minor movementon the tape may upset your calculations. Thereis no doubt in my mind that if you are going toattempt to play for the minor fluctuations youmust sit over the tape all of the time; but I believethat you are better off to study the tape only occa-sionally, to check your position, if you are operat-ing for the intermediate trends. The bigger themovement you are maneuvering for, the less im-portant become the hourly fluctuations.

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TAPE READING

However, an occasional check-up is, of course,wise, to let yourself know of important changesand of any increase in volume-activity; it willeither confirm your judgment to stay with yourcommitment, or cause you to question your posi-tion. In the event that you notice somethingwhich does not look quite as you would like forit to, then, naturally, you will want to study theaction more closely. If you do notice action whichyou do not entirely like, do not hope. Watch,analyze, study! Sell quickly if you think some-thing unexpected has occurred. You can buy inagain any time, but you cannot bring back profitswhich have been wiped out by a sudden, unfore-seen reaction. You can wait, of course, for laterprofits; you can take a small loss and start overagain; but there is nothing so satisfying as takinga well thought-out profit.

Remember, you are trading; it should neverfor a moment unsettle you to see a stock advanceten points just after you have sold it. Try again;check your judgment; perhaps you failed to noticethe right signal. Never mind; the market willbe open tomorrow. Remember that it is the time

-158-


at which you enter your order, not the price youpay, which returns the profit.

Trade with the trend, not against it. This isso fundamental that it scarcely needs discussion,but I have seen many traders " buck " trends intheir commitments. When you have determinedin which direction lies the trend of your stock (andof the general market, for it seldom pays to tradein a stock which moves contrary to the market),place your orders. But, so soon as you think thetrend has turned, sell quickly. Hundreds oflosses have been incurred because it was hopedthat the trend had not reversed.

Capitalization and Floating SupplyStocks with large capitalization have greater

floating supplies of stock in the hands of brokersand traders than do those whose capitalization issmall. The ideal trading-stock is one of whichthere is a large floating supply, which is beingtraded in constantly, and which is shown on thetape frequently. The larger the floating quan-tity of stock, the less will the stock gyrate ab-normally. Naturally, it takes a great deal more

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TAPE READING

buying to move a stock with a floating supply of3,000,000 shares than it does one with only 100,000

Wild-swinging and mystery stocks are usu-ally those of small capitalization. Stocks whichwill advance or drop perpendicularly ten to twentypoints in one day, are dangerous trading-mediums. However, they are very profitable foryou if you are on the right side; they are very at-tractive to buy and hold when you believe thetrend is up.

My theory is to buy them outright and hold ontight for the important move. They swing sowidely that it is most difficult to catch the in-between moves. Furthermore, they will oftendestroy your appetite and cause you to lose valu-able sleep, if you misjudge the time to buy.

Let me counsel you, therefore, to seek unusualsituations among these wild stocks for outrightpurchases and limit your more active trading tothe stocks which are more stable, which do notjump several points between sales. Steel, for ex-ample, seldom moves more than an eighth betweentrades; yet it enjoys exceedingly profitable moves.There are many stocks, of course, which are good

—160 —


trading-mediums. Select two or three which areactive, stable between sales, and popular with thepublic.

Naturally, you will first satisfy yourself as tothe fundamental soundness of the stocks. If theirfuture prospects are bright, they will undoubtedlyhave the sponsorship of strong banking interestsand the steering of strong pools — a winningcombination for the trader who can read the tape-action.

Patience is a Market VirtueAs a final suggestion, may I record here my plea

for market patience? If we all would trade onlywhen the trend is definitely indicated and thenpatiently wait until the action signifies the prob-able termination of the move, how much largerour profits would be! Six to twelve successfultrades in a year, based upon the important, in-termediate trends will return far greater profitsthan countless attempts within the minor fluctua-tions, whereby a large number of losses must en-sue and where the profits will be small.

—161 —

XV

THE RISE AND FALL OF STEELDURING A NORMAL BULL

MOVEMENTTHE following discussion of a four-month

movement in Steel, exemplifies the application ofthe several tape-reading principles outlined in thisbook, and will serve as a summing-up before myjury of readers.

For the purposes of this illustration, we maycontend that the market during the period be-tween December 23, 1929, and April 15, 1930showed an average bull movement. True, it wasnot as sensational as some of the advances during1928 or 1929; but the latter part of that great bullmarket was abnormal in its intensity, and it isquite unlikely that we shall witness the like againfor some years.

I have had reproduced, in Plates 15 and 16the daily ranges of United States Steel between

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STEEL DURING A BULL MOVEMENT

December 26 and May 6. Unfortunately, it isimpossible to show in chart-form the individualtransactions within the various days' ranges, be-cause of the space this would require. Neverthe-less, the principles of the significance of volumeare clearly demonstrated in the illustrations. Thepurpose of showing this entire movement is todemonstrate in one example the different types ofvolume-activity.

I have marked off sections of the charts from" A " to " H " to facilitate the explanation, andto make it easier for the eye to travel from thevolume-indicators at the bottom, to the high-low-and-closing graph above.

Section " A " comprises the congestion, or ac-cumulation, area in Steel, following the ratherswift decline from 189 on December 10. It willbe noted that twice — on January 2 and 10 — anadvance was attempted on good volume, only tomeet resistance just above 173. After see-sawingback and forth for several days, with the volumelight, Steel pushed through the resistance andclosed, on January 23, at 175. We had thevolume-signal of this move when the number of

— 163 —


shares changing hands registered the largest totalin more than a month.

The advance was steady (" B ") until Febru-ary I, when the volume conspicuously dried upfor three days, indicating either a resumption ofthe advance following the rest, or a downwardmovement if volume increased on the decline.

February 14 ("C") witnessed another ad-vance, which, however, did not get very far, thevolume on this day not being sufficient to pene-trate above 189 1/4. Again Steel died at the top;but this time the subsequent reaction was soonmarked by a big volume-day (the 20th), andwithin three more days X touched a low of 176 3/4,$12.75 per share under the top of but a weekbefore.

The congestion for the next month was un-eventful ("D" on Plate 15 and "E" on Plate16), the extent of activity denoting either one oftwo possibilities: accumulation for a further ad-vance, or quiet liquidation. Until March 17 wecould not have been sure of the outcome. It waspossible that Steel would roll over (as it did inSeptember, 1930; Plate 2), and that a broad top

-165-


would be formed. Naturally, from the tradingstandpoint, it would Have been wise to sell outand stand aside, awaiting a definite indication ofwhat the next move would be.

The advance on the 17th, with a volume ofmore than 120,000 shares, and being firm andsteady, was a definite signal that important buy-ing had been taking place — not liquidation. In-cidentally, the action at that point illustrates theprinciple of the sudden reversal of a sagging, ortired, movement.

The action following March 17 (" F ") is in-teresting. If you will follow it day by day youwill notice the volume picking up on the dayswhen Steel forged ahead, and dropping sharplyduring the days of slight set-backs.

The April top was not particularly difficult togauge (" G "). We had three different signals,one on April 2, when X abruptly reversed its ac-tion after it had headed into a new high the daybefore. From the tape, we should have had thisindication, as a matter of fact, on the 1st, becausethere was heavy volume at the top of the day, andno further progress was made. Following this

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TAPE READING

the stock became tired, and under the pressureof average volume was unable to struggle higher.

On April 16 it looked for a time as if Steelwould duplicate its performance of March 17 andfollow the preceding eight days' sagging trendwith an advance into new territory. However,it was soon apparent that this time the action hadbeen distributive; and under extremely heavypressure from constant offerings of stock, it turneddown to close the day at the bottom of the day'srange. The following day, both buyers and sell-ers marked time, although on the tape the reac-tions were on heavier volume than the rallies.On the 21st, Monday, there was no question ofthe action. Although the day's volume did notreach 100,000 shares, sellers were offering stockall day.

The decline gathered momentum, as you willsee, with the volume heavy during the latter part("H"). Each day until May 5 the volume-signals indicated still lower prices. On the 5th,however, we received the " sold-out" indication.Volume was tremendous, over 190,000 shares;yet, after plunging into a new low, and following

_i68 —


a terrific churning of transactions, buying over-came selling, and active bidding for Steel soonsent it forward, to close the day at a price $1.50per share higher than that of the afternoon be-fore. This ended the spring cycle.

The student of the tape-reading principles out-lined in this book will be interested in a muchcloser scrutiny of Steel's action than this I havewritten. However, my short review brings outthe point that volume will give you indications ofpending moves, often when nothing else will.

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PART THREEMARKET PHILOSOPHY

X V I

FOREWORD TO PART THREE

The Biggest Handicap of All is OurselvesWHEN we have mastered the intricacies of in-

terpreting the market, we still have a long roadto travel before we can expect success. The mostdifficult problem lies in ourselves. We may havereached sound conclusions concerning certainmovements in stocks; our interpretations may beabsolutely correct. Yet, we may lose money.Why? Because most of us cannot act in accord-ance with our own opinions! Where our ownmoney is concerned, we allow personal hopes,fears, impatience, and vanity to cripple judgment.

The one thing which retards success in trading,more than any other, is the unwillingness of manyof us to accept losses, cheerfully and quickly, whenwe realize that we have misjudged the action ofthe market. We will say to ourselves:" That stockis not acting right; I believe it is going to decline.

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MARKET PHILOSOPHY

Oh, well, I'll hold on a little longer; I guess it willadvance later." We know far down inside our-selves that it is going to go against us, but our per-sonal feelings prevent us from taking action.

Market PhilosophyIn the years past I have written numbers of

financial essays, or editorials, relating to charac-teristic trading frailties. In the pages followingare collected a number of these " passing thoughtson human nature in finance," together with somereflections on other elements common to the stockmarket.

I can think of no better way of closing this in-troduction to a philosophy of stock trading thanreprinting the ten rules which were written forme during the depth of the 1930 depression byone who styles himself The Market Cynic: —

TEN WAYS TO LOSE MONEY INWALL STREET

By The Market CynicAfter many hours of toil and deep thought I have

compiled a dependable guide for stock traders: Ten-174-

FOREWORD TO PART THREE

Ways to Lose Money in Wall Street. I shall not at-tempt to explain or qualify these precepts, realizingthat my readers will doubtless follow them regardlessof any advice, from any source, to the contrary.

1. Put your trust in board-room gossip.2. Believe everything you hear, especially tips.3. If you don't know—guess.4. Follow the public.5. Be impatient.6. Greedily hang on for the top eighth.7. Trade on thin margins.8. Hold to your own opinion, right or wrong.9. Never stay out of the market.

10. Accept small profits and large losses.

175-

XVII

THOUGHTS ON HUMAN NATUREAND SPECULATION

Trade on the Longer-Term TrendsTHE average trader, because of the difficult task

of successfully controlling his emotions, tempera-ment, and characteristically human faults, has fargreater chances for success if he trades on thelonger-term movements of stock prices than ifhe attempts to trade in and out for small profits.

Trade for the larger intermediate-trend profitsand limit your losses. That is the secret, if thereis any. You will live more happily, worry less.You will gain market-poise, will be able to act inaccordance with your own dictates and will curbyour natural impatience to jump in and out oftrades thoughtlessly.

Finally: resolve, today, never, never to over-trade. Maintain, always, a margin of at least50 per cent.

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HUMAN NATURE AND SPECULATION

Market-PoiseAs I wander about in and out of brokerage

offices, I am struck with the looks on the faces ofthe traders sitting around the board-rooms. Somany of them register fear, worry, and distrustwhen the market is going against them, andgreed, lust, and superficial happiness when theyhave paper profits.

Speculation in stocks, to be successful, must in-clude judgment, common sense, and market per-ception; whereas stock gambling is nothing morethan guessing upon the tick of the quotations.

A speculator may some time acquire market-poise, the stock gambler never.

When, after thoughtful deliberation and com-mon-sense analysis, we come to the conclusionthat a certain stock is undervalued — when wefeel confident that its market-action reflects intel-ligent accumulation—and we purchase it, weshould be mentally at ease. Naturally, we shallbe watchful for signs which may indicate thatwe have erred in judgment; but, with our havingcalmly considered all known factors, there is no

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MARKET PHILOSOPHY

reason for our lacking confidence or for beingapprehensive of the outcome.

If, however, we stroll into a brokerage officeand inquire of the first man we meet: " What'sgood for a turn this morning?" and then gambleon this information, we most certainly shall beupset and unhealthily nervous concerning theoutcome.

In short, market-poise is the result of a sense ofmental well-being — confidence in the outcomeof a speculative venture which has been en-tered into calmly, thoughtfully, and deliber-ately. If it should not work out profitably, asplanned, and it is necessary to accept a small loss,this would not upset us, inasmuch as we shouldrealize that we had applied our best judgmentto the problem. We should appreciate that it isimpossible to judge every market commitmentcorrectly. Market-poise is engendered by judg-ment, rather than by guess-work; by conservatisminstead of rash chance-taking; by the willingnessto remain on the sidelines when the issue betweenbuyers and sellers is beclouded, rather than byfeverishly demanding action at any cost.

-178-


There is No Such Thing as " Position "To my mind there is no logic in a trader's talk-

ing about "losing his position" in a stock. Aninvestor who is interested only in the long-pulltrend, may be justified in considering his position,but not the trader.

I think you will agree with the statement thattrading-profits result from the accurate timing ofcommitments, and not from the prices paid. Itmakes not the slightest difference what prices youpay for your stocks when trading, if you so judgeyour purchases that you can later sell at a profit.

I have heard traders time and again justify theirdecisions to hold on to stocks which show themlosses: because, they claim, they dare not take thechance of losing their positions. I reply to thememphatically that they are in losing positions rightthen. They have already lost money because ofthe positions they are in. Why, then, continuestubbornly to stick it out?

Recently I had the valuable opportunity to ex-amine the complete records of a trader's accountfor the period between September, 1929, and Sep-

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tember, 1930. On the whole he did not farebadly, but that was not the most interesting fea-ture of his record. It was the conditions and re-sults of his losses that interested me. Of the 148instances in which his trades had gone " into thered," 110 of them were sold at losses larger thanthey would have been had he quickly limited eachloss on the first indication that his trade was notworking out as expected. Upon analysis I foundthat in nearly every case the substantial loss wascaused by an opinion that, if he held his position,he would come out all right. In other words,when a commitment started in the red, only oncein four times did it come out.

I realize that this was during a bear-marketyear, and that some readers will rise to inform methat, in a bull market, if we will hold on longenough we will not have any losses. A prettytheory, but it does not work. An examination oftrading-records will show that when small lossesbecome large the average trader is quite likely tobecome frightened and sell. Ask your broker.He will tell you of the thousands of customerswhom he has sold out because they hung on to

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their positions until the margin-clerk politely, butfirmly, removed them.

The only position I do not wish to lose is theposition in a stock which shows me a profit. ThenI shall try to hold on tight until my judgmenttells me that I should do better to turn my paperfigure into cash.

Reflected NewsWhat kinds of news and reports are absorbed

by the public and, consequently, are reflected inmarket movements?

Your average newspaper and magazine reader,first of all, does not retain what he reads. Heskims through the papers, morning and evening;yet, were you to question him upon even the out-standing events of the day, he could give you atbest only a garbled report of actual facts.

This holds true for the news on the financialpages, and for readers of financial magazines.

It seems to be a trait of human nature to remem-ber what we want to remember and to gloss overfacts which, although perhaps of greater impor-tance, do not report favorably upon the subject

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we are interested in. What I am driving at is this:let us suppose that we own fifty shares of a chain-store stock, and our morning paper prints anarticle surveying the chain-store situation. Theanalysis, if it is unbiased (which, sadly, is seldomso), will present both the favorable and the un-favorable facts.

It is a safe wager that unless we are on ourguard — unless we practise concentration (thishas become almost a lost art, has it not?) — weshall absorb only that portion of the article whichlends weight to our previous judgment, employedwhen we purchased the stock; we shall not beinterested, most probably, in the writer's un-favorable comments: Why? Because we ownthe stock, and do not wish to be told that we usedpoor judgment when we purchased it.

Psychologists tell us that a thought must berepeated again and again before the public as awhole retains it.

Likewise, the average investor had rather betold something, than dig it out of an article.

In consequence, there is little news which af-fects stock prices more than temporarily, until it

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has been repeated again and again. For example,brokers' loans are a weekly subject for conjecture;and traders speculate upon the effect brokers'loans will have on the market. (Do not miss thatpoint—the effect the loans will have. In otherwords, the news after publication is of scant value,as intelligent opinion is registered before the factsare published.)

News flashed over the tickers has more effect,I believe, than magazine or newspaper articles.Occasionally a piece of news is sufficiently sensa-tional to have an immediate effect on the market;the announcements of the Federal Reserve Boardin 1929 are examples. Watch your step whenthese sudden announcements appear. However,they often have a more temporary, than lasting,effect. The Reserve warning in August, 1929, isillustrative of this. The lowest prices were regis-tered in the first hour, and within a week or twostock prices had recorded new highs.

To my mind, news agencies owe a greater re-sponsibility to their readers than is consistent withpublishing sensational items which they mustknow are acted upon without deliberation by the

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thoughtless public. I criticize severely publicmen who, with their news agencies and propa-gandists, play upon public opinion without regardto the serious consequences which must ensue.

I should rest mighty uneasily at night if I knewthat some remark or announcement of mine,which I had issued in order to parade my intelli-gence, had caused losses of millions of dollars tothousands of people who, I knew, would act with-out thinking.

The news of the market itself — the plus andminus signs — is unquestionably the most potentmarket factor. There is danger in this, and I shalltry to point out how you may avoid certain pitfallscaused by the market's being its own best adver-tiser.

The Market as Its Own Best AdvertiserIn the foregoing I touched upon the subject of

market-news — the plus and minus signs — be-ing unquestionably the most potent factor in themarket. I discussed the kinds of news and reportswhich are absorbed by the public and, conse-quently, are reflected in market movements.

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An active, rising market, with a large volumeof sales, attracts buyers. Public participation in-creases as prices advance. Peculiar as it may ap-pear, the faster stock prices surge upward, thehungrier the public becomes for stocks.

In a declining market the same action holdstrue. As activity increases, more and more sellingsets in: increasing numbers throw stocks into thewhirlpool of liquidation. It is mob psychology:human nature reflecting its desire to follow.Schooled market operators and pool-managersrealize this fondness of the average investor to" get in on rising prices," and they use this power-ful tool in their operations.

Perhaps you have seen the chart of a stockwhen, following a sharp advance, the curve of itsdaily action makes a saw-tooth formation. Therewill be a sharp dip lasting two or three days, fol-lowed by another spurt into higher ground. An-other reaction sets in, again followed by a rally,which, however, may not reach the level of theprevious advance. The formation may look likethree cones, the middle cone higher than the oneon either side.

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What has happened? The insiders, or thosewho purchased thousands of shares of the stockat cheaper prices — perhaps pool-operators — de-cide to sell, believing that the price of the stockhas discounted reasonable future prospects. Theadvance of the stock, particularly the rapid actionin the latter stages, has attracted a public follow-ing. Nevertheless, there are thousands of sharesto be sold — distributed — and when heavy sell-ing commences, the price breaks. It is necessary,then, for the operators to cease selling, and per-haps even buy more stock, in order that the publicmay not become worried. The price moves up-ward again, usually into new high levels, follow-ing which more stock is sold. The same proce-dure continues; but, strangely enough, the stock,after turning down from the third peak, oftendeclines substantially, and there is generally along period of comparative quiet before it againbecomes active. The pool may again accumulatemore stock and go through the same process.This is what is termed " accumulation and dis-tribution." When the stock is distributed nearand at the top it is said to be " passing from strong

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to weak hands, and its technical position thus be-comes greatly weakened."

A conspicuous move in a market-leader willoften cause increased activity in a broad list ofstocks. Financial writers often state that " underthe leadership of such-and-such a stock the marketadvanced today."

You will see from the foregoing that it is wiseto take bearings when you notice that stock priceshave been advancing steadily for some days.Broadly speaking, fast action is indicative of theend of a move, as we have noted in the illustra-tions of top-action in Part Two.

The Time Element"The Time Element" applies to the move-

ments of stock prices.Do you understand what is meant by the price-

structures of active stocks? Visualize ten thou-sand people, all of whom are either owners orprospective owners of a given stock. Of theowners, some have entered selling orders withbrokers, setting a price at which each will sell.Others have entered stop-loss orders at varying

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fractions and points below the current market-price.

Of those who are interested in buying the stockat a price, some have entered buying-orders underthe market, and some above the market (because,to the latter, if a stock breaks through a givenrange, it becomes a better purchase).

Thus we see that the market is honeycombedwith buying- and selling-orders.

Now let us notice what happens followinga rapid advance. The buying-orders under themarket become of little value, unless the stockreacts to its previous level. If the stock rushesupward, there is not sufficient time to build upan underlying foundation of orders to check a de-cline, when it sets in. Conversely, of course, asudden, swift decline obliterates the price-structure also, as stop-loss orders are executed andthe many buying-orders are withdrawn pendingthe "consolidation" of the stock's movements.

Stock prices move in accordance with supplyand demand and in accordance with the time ofprevious movements. This is not mechanical inany sense, but psychological.

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The more time a stock spends in a congestionperiod—in an area of closely lapped, daily price-ranges—the more pronounced will be the trendwhich follows. But, until the stock leaves its" pivot" you cannot be certain in which directionit will go.

Let me review with you hastily the movementsof stock prices during the months of the 1929break and the period following, and you willnotice the value of the time element.

In the latter part of October, 1929, stock prices,as we well remember, declined with furious swift-ness. Reason was thrown to the winds. Mobaction, fear, and forced selling ruled the stockmarkets.

Buyers were scarce; consequently, stocks de-clined by many points between sales, instead ofby the usual fractions of a point. On October 29the first slide halted. Was that the time to rushin and buy? Not if you understood the impor-tance of time as it relates to price-structures. Youcan see that it would be impossible to build astabilizing market structure within only a fewdays after the panic.

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Human beings need time for the return of rea-son following such shocks. How long did it takeyou to get over the emotional effect of the crash?

What happened? Another severe crash en-sued; the swinging of stock prices proceeded, buteach time the swings became narrower, until, atthe end of December, 1929, and during January,1930, stock prices stabilized and moved within arestricted area for several weeks. The advancefrom January forged consistently ahead, follow-ing the congestion, in proportion to the time ofthe stabilization. You will notice, however, thatstock prices moved slowly; there were no signsof the past year's activity. Why was this? Be-cause there was not sufficient time for the publicto forget its losses and disappointments occasionedby the breaks, and to appraise the future; nor wasthere enough time to build up purchasing power.

How to Think, Market-WiseIn Novum Organum, Sir Francis Bacon estab-

lished first his doubt of all things, before proceed-ing to his consideration of knowledge: " In gen-eral, let every student . . . take this as a rule —

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that whatever his mind seizes and dwells uponwith peculiar satisfaction, is to be held in suspi-cion; and that so much the more care is to betaken, in dealing with such questions, to keep theunderstanding even and clear. . . ."

The next time you receive a " hot" tip or reada piece of news in the paper, think it through.This is what I mean: in February of 1930, whena rather drastic cut in the cost of crude oil wasannounced, thousands of investors jumped to theconclusion that oil stocks would immediately gointo a nose-dive. If they had thought throughthe problem, they would have asked themselvessuch questions as: Can the price cut be a bullishargument, in that the expected bad news is out?How much will the lower prices assist the cam-paign for curtailment of production? Will theprice-cut tend to hold production in line with con-sumption? Have leading oil stocks already de-clined as a result of over-production and its ef-fects? Has the decline in oil stocks discountedpossible lower earnings? Is it possible that the cutin crude-oil prices is an argument for rising stockprices? Will gasoline consumption increase nor-

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mally in 1930? If the cut in crude-oil prices cur-tails production, what effect will this have onstock prices? Will curtailment in productionnow pave the way for increased crude-oil priceslater?

I could continue with two or three pages ofquestions, but you will get the idea from thesefew.

As Sir Francis Bacon wrote nearly three hun-dred years ago: " Doubt all before you believeanything! Watch your idols! " No better in-vestment or trading counsel could be offered thanthis.

Fundamentals versus Technical ActionThere is a constant tug of minds between the

school of counselors who claim that fundamentalsare the only reliable barometers of future stockprices, and the so-called " technicians," who statethat the action of a stock is an accurate index ofits future movements.

Before we get into the discussion, let us quicklydefine " fundamentals." As commonly thoughtof, fundamentals are underlying factors. They

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include earnings-reports, balance-sheets, past his-tory of the company's growth, management, ac-counting methods, position in its industry, publicacceptance of its products, future earnings pros-pects, and other similar facts. In considering thegeneral market, fundamentals would includecredit and money conditions, domestic and foreignbusiness activity, the import and export situations,the relation of leading stock prices to the prospec-tive earnings of the corporations, and the like.

Can we, however, leave out the human equa-tion ? With the foregoing facts known, what basisis to be employed — what measuring-stick is to beapplied — to foretell accurately how these factsare going to affect the movements of stock prices?Shall we leave it to judgment, solely? If so, howare we to reconcile and justify the varying opinionsof the judges of fundamental conditions?

How about the action of stocks? What doesthis tell us? A skilled analyst can detect technicalfactors, such as accumulation or distribution, thedirection of the current trend, resistance levels, ex-haustion and reversal of a trend, and other char-acteristic signals.

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But wait a moment. What causes stock pricesto advance and decline? The buying and sellingof stocks, naturally. And, inasmuch as they arebought or sold by people, is not human action alsoa fundamental?

In short, is not the problem, in the final analysis,to determine what will be the public's and WallStreet's opinions of the commonly accepted fun-damentals, as they are reflected in the market?

Therefore, why should there be any argumentbetween the fundamentalists and the technicians?One supplements and complements the other.

There is still another angle to this question.The majority of the buying- and selling-orders inleading stocks do not come from investors, but arethe result of speculation. This latter includespool-operations, professional trading, and thecountless thousands of orders which are placed bythose who are trying to scalp a point here and ahalf-point there. The effect of these orders mustbe considered when we are forecasting the futurecourse of stock prices.

Therefore, it seems to me, all three factors —fundamentals, technical action, and market psy-

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chology — can, and should be, taken into ac-count in the instance of each commitment. Acomplete analysis of the fundamental situationwill tell us what should be expected, in our opin-ion. We shall thus find out what stocks appearattractive for investment.

Turning to a study of the past and of the cur-rent action of the stock under scrutiny (or thegeneral market), we learn whether the intelligentagree with our opinion. We do not have to trustto personal judgment.

Technical signals likewise will advise us whento buy and when to sell. There certainly is a com-mon meeting-ground here. One cannot knowtoo much about any investment situation. It wasdefinitely proved in the fall of 1929 that condi-tions within the market itself — technical condi-tions — had as much to do with the extent of thecrash as did fundamentals. However, from anunbiased study of both it was evident that stockprices were riding for a severe spill.

Market-action is a reflection of fundamentalsand of speculative and investment sentiment.How, then, can they be separated?

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Pride of OpinionPride of opinion accounts for as many losses in

the market as any other human factor that I canthink of. When a man puts money into a stockupon his own judgment, or " guess," it is almostuseless to attempt to show him that he has made amistake and that he would be better off were he toswitch into something else.

I suggest a solution for your consideration: thenext time you buy any stock on your own judg-ment, or anyone else's, decide at that momentwhether, if it turned down a certain number ofpoints, instead of up, you would still have con-fidence in it. If you would not, then determineabsolutely, right then and there, to sell it quickly.Do not wait until the stock has sagged before youfigure out the wise move, but decide before youbuy it exactly how you will feel if the unexpectedhappens; because, if you wait before making upyour mind you will most likely dawdle and shilly-shally around. Before you know it you will bewishing you had acted differently, for you will belooking down at the stock and seeing unneces-

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sarily large red figures, which will further upsetyou and doubtless will increase your loss.

Another point is: do not buy a stock and thenask someone what he thinks of it. If he disagreeswith your judgment, you will not pay any atten-tion to him anyway; and it is a waste of breath torun around looking solely for people who willagree with you. A friend once said to me: "Ijust bought some General Motors. What do youthink of it? " I replied, quite nastily: " Why askmy opinion? You've already bought it. If I dis-agree with you, you'll think I don't know what Iam talking about. Suppose, next time, you askbefore you buy."

Pride of opinion obtains not only in the stockmarket. Ask a man who owns a Chevrolet whathe thinks of it and he will tell you that it is thegreatest car in the world. Later, when he gradu-ates to a Buick, he will tell you that he does notknow how he ever drove that tin-can Chevrolet,because, believe him, there is no car in the universelike the Buick!

For heaven's sake, remember that there aremany good stocks. Your stock is not the only one

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which can go up and down. As a well-knownoperator has written, in Watch Your Margin, youdo not need to have a love-affair with your stockjust because you bought it. Love is sometimesfickle, you know.

Many traders, because of losses from previoustrades in a certain stock, feel that the stock " owesthem something." They will take gambling risksin order to " get even ": I should say, in order tosatisfy their pride or vanity, which, as Kelly statesin Why You Win or Lose, is one of the fourenemies to stock market success.

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X V I I I

MORE THOUGHTS ON HUMANNATURE AND SPECULATION

GreedI have watched traders in brokers' offices with

deep interest, and have tried to learn the traitsthat crippled their profits. The desire to " makea killing " — greed — has impressed me particu-larly.

Perhaps this desire to squeeze the last point outof a trade is the most difficult to fight against. Itis also the most dangerous. How often has ithappened in your own case that you have entereda commitment with a conservatively set goal,which your judgment has told you was reason-able, only to throw over your resolutions whenyour stock has reached that point, because youthought " there were four more points in themove? " The irony of it is that seemingly ninetimes out of ten (I know, for it has happened with

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me) the stock does not reach your hoped-forobjective; then — to add humiliation to lostprofits — it goes against you for another numberof points; and, like as not, you end up with noprofit at all, or a loss.

Maybe it would help you if I told you what Ihave done to keep me in my traces: I have openeda simple set of books, just as if I were operatingwith money belonging to someone else. I haveset down what would be considered a fair returnon speculative capital, and have opened an ac-count for losses as well as for gains, knowing thatthe real secret of speculative success lies in takinglosses quickly when I think my judgment hasbeen wrong. When a commitment is earningfair profits, and is acting as I had judged it shouldact, I let my profits" run." But, so soon as I thinkthat my opinion has been erroneous, I endeavorto get out quickly and not to allow my greed toforce me to hold for those ephemeral, hoped-forpoints. Nor do I allow my pride to prevent anadmission of error. I had rather, by far, acceptthe fact that I have been wrong than accept largelosses.

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Another helpful thing to do, especially whenyou feel in doubt about your position, is frequentlyto close out all commitments (except your invest-ment backlogs) and stay out of the market for atime. This clears your perspective and allowsyour judgment to " congeal." Never hold to aposition because of pride in an original conclu-sion which your later judgment whispers iswrong. If you will limit your losses quickly andallow your profits to run, you have to be right onlytwo or three times in every five to earn extraor-dinary profits.

For fear of being misunderstood, I want to ex-plain that the foregoing is not to be construed asadvising daily scalping, or in-and-out trading" for a point," as, to my mind, there is nothingbut grief to result from that in the long run.Rather, it offers suggestions for conservative specu-lation within the major or intermediate swings ofstock prices. Concentrate your trading on thesemore important, intermediate moves and concen-trate your mind on the action of the stock. Forceyourself to forget " self " in order to trade in animpersonal, business-like manner.

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Upon Your Stock Certificates as a Mer-chant Looks Upon His Merchandise

A merchant buys goods which he expects tosell at a profit.

Your speculative purchases of stock certificates,to be successful, must be consistent with the samemerchandising principle. Before you buy astock, be satisfied that you can sell it to someoneelse at a higher price. Do not forget for a momentthat for every share of stock sold there must be abuyer. I know that this sounds childish, butmany evidently forget it. You do not make apersonal sale when you sell your stock; simply,somebody somewhere buys it. It is your judg-ment, or your advisor's, which must decidewhether there is somebody who will pay morefor your merchandise than you did, plus youroverhead expenses.

Likewise, just as a merchant knows that certainstyles will not long remain in demand, so mustspeculators realize that certain stocks which arepopular now, may lack demand three monthshence. What does a merchant do when he learns

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that a certain coat which he has purchased doesnot sell readily ? He immediately marks it down,let us say, 10 per cent. Then, if after a few daysit is still on his hands, he again lowers the price,until finally he may transfer it to the " basementbargains." But he sells that coat — he does nothang on to it hoping that it will sell as originallypriced.

If you are not familiar with retail merchandis-ing, hunt up a friend of yours who is in the re-tail business — preferably women's wear — andask him to tell you the principles of buying andselling for profit. I assure you that if you will dothis and then thoughtfully consider the similarityof your market trading to retail trading, you willsee the matter from a new and more profitableangle.

The most important factor in merchandising isthe reading of the public's psychology of style, justas I claim that market, or investor, psychology isthe most essential study in forecasting. Thereis an old saying in retail merchandising that" wellbought is half sold." Is this not true of stocks?If your interpretation of market-action — as it

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MARKET PHILOSOPHY

relates to demand — is correct, then your stockis half sold at a profit the moment you buy it.

Forget stock certificates as such and considerthem as merchandise whose salability depends onfickle style. If you find that you have misjudgedyour market, offer your merchandise at cut pricesand get rid of it. Take a loss and try again. Re-member that if you limit your losses you canafford to accept many losses and still be ahead,because your correctly purchased merchandisewill earn big profits for you.

Finally, do not try to sell winter coats in thespring. Sell them all before the last snow hasgone. In other words, let your " competitors "have the last few points in a move. The surestprofits are those in the middle — at neither thetop nor the bottom.

Do Not Believe Anything You ReadHere are two headings which appeared over

two practically identical financial articles, onepublished in The Wall Street Journal, the otherin The New York Times, on Tuesday morning,July 29, 1930: —

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The Wall Street Journal:Continental Oil 2nd Quarter Off; Consoli-dated Profit $2,120,518 Against $3,842,081

Year Ago; Six Months' Income Up

The New York Times:Continental Oil's Net Profit Jumps; Quar-ter's Total Reported at $2,120,518 Against

$523,302 in First Three MonthsBig Curtailment Made; Company ForecastsEnviable Position When " Value for Prod-

ucts" is Received

It is not difficult to sense which newspaper wasinterested in publishing optimistic news. Theremainders of the two articles were very muchalike; doubtless each paper received the reportfrom the company's publicity office. The head-lines in The Times read as if they, also, were writ-ten in that office. These remarks are not madeto render an opinion on Continental Oil stockone way or the other, but the illustrations areprinted to point out that the unwary, thoughtless

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reader is at the mercy of the newspaper headlinewriter or a company's publicity man.

Actually, the only wise course to pursue in read-ing financial news, is to believe nothing! Re-member the wise counsel of Sir Francis Bacon:to " doubt all before you believe anything."

Bear in mind two important facts, facts whichmay cause your own downfall market-wise un-less you are on your guard every minute.

First, newspapers, as a rule, do not wish topublish pessimistic news. Whenever possible thebest foot is put forward in any piece of businessreporting. Ask any publicity man and he willtell you that there is little use in sending anyfinancial releases to newspapers, with the hopethat they will be printed, unless they are optimisticin tone.

Second, corporations will seldom stress any butthe best news of their operations. You constantlyread news-items about corporations, wherein newimprovements, increased sales, new products, andwhat not, are reported. These items may be pub-lished purely for the purpose of interesting thepublic in the company's stock. Probably a pool

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is operating in the stock and it is soliciting thepublic's aid through advertising—the best ad-vertising, next to rising stock prices on the tickertape, being frequent news-items.

A noted economist once told me that he triednever to believe anything he read in financial re-ports, but endeavored to place his own interpreta-tion upon the facts and statistics published, pay-ing no attention to the implied opinion of thewriter. He admitted, however, that oftentimeshe himself was carried away unwittingly by color-ful reports which he did not analyze coldly andcritically.

Referring again to the headlines at the begin-ning of this article, I wish to remark, lest youhave not noticed it, that The Times' headlinewould imply a sensational increase in business ifyou saw only the report for the two quarters of1930, although the half-year income was onlyslightly in excess of 1929 and the second quarterof 1930 was nearly two millions under the sameperiod of the previous year.

A friend once sent me a clipping from thefinancial page of The New York Herald Tribune,

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which I reprint herewith. It hardly needs com-ment, for it simply bears out what I have said inthis section:

The following two quotations, appearing in differ-ent newspapers yesterday, may, when taken together,help one understand just what went on in the stockmarket: "Operations for the rise," states one commen-tator, "which had been checked yesterday by profit-taking, were resumed with vigor on the Stock Ex-change this morning and, despite further selling torealize profits, made excellent headway during theabbreviated session in a well diversified market." Ex-hibit No. 2: " Heavy selling went ahead in the princi-pal industrial stocks in the week-end session. Uncer-tainty over the business outlook was induced by therecent bad breaks in cotton and wheat, and the declinein iron and steel prices."

I am told that many big operators scarcely everread the financial pages of newspapers, becausethey wish to draw their own conclusions andformulate their own judgments from cold statis-tics and the action of the market, realizing thatunconsciously they may be swayed by publicityreleases and financial writers' opinions, whichmay be based upon hearsay rather than facts.

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The Value of the Impersonal ViewpointIf we all had the impersonal viewpoint con-

cerning our investments and speculative commit-ments, I know that profits would be much larger,chiefly because losses would shrink. I honestlybelieve that the most important problem beforeboth the investor and the speculator, is limitationof losses. In other words, the emphasis in thehandling of all commitments should be put onthe prevention of large losses and the willingnessto accept many small losses.

We can do this only if we have the impersonalviewpoint. In your business, you doubtless nevergive a second thought to some small loss whichyour business judgment tells you to take, whereasif it were out of your own pocket you wouldhave it on your mind all day. A merchant marksdown a coat to move it quickly, but does notworry over the loss; a buyer, in a rush to get insome supplies, may find he has paid a few dollarsmore than would have been necessary if he hadhad the time to obtain several bids; a businessman will spend the company's money for a trip

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which is not actually essential, but the expensewill not worry him, although it indirectly may behis own money. In all these examples — andyou can think of many more — the minds werefocused upon the job in hand rather than uponthe money expended.

How may you obtain this same viewpoint in themarket? My only suggestion, which I have foundworks fairly well (not perfectly, I admit), is foryou to look upon your market transactions,whether they are long-pull investments or com-mitments for the shorter swings, as simply con-stituting a business in which you are interested.Open a simple set of books, setting up a stipulatedpercentage of your capital (start with 33 1/3 per cent)as a reserve against losses. Decide upon a con-servative income from your investment, whichwill not tempt you at any time to become over-extended. Open an account for surplus, and addto it each month (if you are actively trading) aspecific percentage of your profits (at least 50 percent, which, in turn, should be invested in bondsor long-term common-stock investments).

I believe that, if you will do this, you will un-—210—


consciously find your mind to be upon the opera-tion of your business, rather than upon the factthat each point means fifty or a hundred dollarsin your pocket.

To return to the matter of limitation of losses:you will find that you are willing, even entirelysatisfied, to accept a number of small losses, inas-much as your mind will be focused impersonallyon the business problem of adding to your surpluseach month and as you will realize that you havea reserve against your losses which it is perfectlygood business to use up, and because, if your per-centages are worked out soundly, your losses arean expected and normal sequence in your busi-ness operation. In other words, to earn consistentprofits you have to take losses, and many of them.

The Public is Always FooledEarly in the summer of 1930, it was generally

quoted that brokers had instructed their em-ployees to take their vacations early, because abrisk market was expected in August. The pub-lic naturally looked for a young bull market. In-stead, during the greater part of the summer we

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witnessed declining prices. I did not hear ofany broker who was not able to keep up withbusiness, and I doubt if many were forced towork their staffs overtime.

It is rather discouraging to some of us to readso many announcements apparently released tofool the public. However, I rather suspect thatsome of the " big boys " themselves were fooledthat summer, as I am certain many of them werequite positive that the inactive weeks in the latterpart of May were periods of accumulation. Still,although some were fooled, others fooled thepublic.

One thing is almost as sure as taxes, and that is:that trying to outguess " them " in daily fluctua-tions, is financial suicide for the vast majority.Some may be lucky for a few trades, but not formany more than that. Remember this: the bigoperators and pool-managers, when successful,outwit or outwait the public. The thing for youand me to do is to try to time our commitmentsso that we tag along with " them " for the trend(of maybe one week, maybe sixteen weeks) andprecede the public, both in buying and in selling.

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And this means not allowing ourselves to be" kidded " into some move, or pushed into fol-lowing the crowd.

Never Answer a Margin-CallThe Market Philosopher's advice to his class

is: never answer a margin-call. Tell your brokerto sell enough of the shares he is holding for youto meet his requirements. The margin-clerk isyour best friend: he can be depended upon to tellyou when to sell; and if you do not follow histip, he will sell anyway.

In order to check up on this theory of its beingbest never to answer a margin-call, I once inter-viewed a number of brokers. They all, withoutexception, told me that traders would fare muchmore profitably than they usually do, if they neverreplied with more money to protect their margin-accounts.

And why should they not?Your judgment is bound to be biased when your

stocks are going against you. It is impossible foryou to consider all factors calmly. When youpurchased your stocks you expected them to ad-

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vance. If the opposite movement occurs, yourjudgment was wrong. Then why, in Heaven'sname, throw good money after bad? What isthe difference, after all, between a paper loss andan actual loss? Your equity is exactly the sameon the broker's books (minus the selling com-missions) . You are no better off, holding on, thanyou are if you sell out — in fact, you are not aswell situated, because more of your capital is tiedup: thus you weaken your position, possibly to thepoint where you cannot take advantage of what-ever bargain prices there may turn up later.

The Danger of Too Much NerveI know that there are many who are opposed to

the thought I shall expand upon here — that itis dangerous to call upon your nerve to help youstay with a commitment.

Fear is probably the outstanding emotion inthe market. (In making these remarks, I havemarginal operations in mind.) Although a cer-tain small amount of fear is a wonderful safety-valve, I believe you will agree that any more thanthat much paralyzes sound reasoning, and that

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without sound reasoning we have no businessspeculating.

Let us look at it from another angle: supposeyou and I have purchased a certain stock after duedeliberation. From our study of the transactionit is our belief that the stock should advance, and,although minor reactions (of two or three points,let us say) are to be expected we nevertheless thinkthe trend is up. If, instead of advancing, thestock immediately reacts (contrary to our pre-vious opinion that reactions were expected dur-ing, but not prior to, the advance), we knowthat our calculations of the technical position werenot accurate. This beclouds the outlook; ouroriginal conclusion was erroneously arrived at.If we are confused, or afraid of the result, whatis the sensible thing to do? Sell; get out andmake a new analysis.

Why sell? Why not grit our teeth and say:" By George, I am in this thing and I'll stick itout as long as my money lasts. I've got enoughmargin to carry it down fifteen more points; I'llshow this stock it can't bluff me."

Figure it out for yourself. Perhaps my think-—215—

MARKET PHILOSOPHY

ing is askew, but until someone proves to methat it is sounder to use nerve and stick to a com-mitment which I know, if I were out of it — if Iwere sitting on the sidelines — / should not buyinto, I am going to continue to be afraid, andcan do nothing better than get out. This is aprofitable method of reasoning, is it not—toget out of a stock which you would not buy?

I have heard so many traders say, again andagain: " I wish I were not long of that stock; if Iweren't, believe me, I'd never buy that dog."When I ask them why they do not sell, I am in-formed: " Oh, I can't lose my nerve and sell now;I have a loss in it."

Well, all that I can say is that this shows youone of the many, many reasons why pool-opera-tors and professionals make money by tradingwith the public.

You may reply that, if you sell when in doubt,you may lose a good position. As you know bynow, there is, to me, no such thing as" position "in trading. You certainly cannot lose a good po-sition if the position you are in shows you a loss,Likewise, remember, the stock market is not going

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to close down soon. It will still be there next year,making money for the few who are smart andlosing money for the many who are foolish.

Remember: it is not the price you pay for astock, but the time at which you buy it, whichcounts in trading.

Averaging to Satisfy Pride of OpinionOnce, in the fall of 1930, when I was on my

way to Vermont for a week-end, I ran into anacquaintance in the parlor car. It was not longbefore our talk swung to the stock market.

He pulled out of his pocket a list of stockswhich he had purchased at 1929 near-highs. Ilistened while he told me of his plans. He said:" I am going to buy more of each of these stockspretty soon, when I think the bottom has beenreached."

I asked him if I might look at his list. I noticedsome stocks whose companies were unlikely toprosper to any great extent during the comingyear or two. I was naturally interested to learnwhat prompted his decision to buy more sharesof each present holding.

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" Well, you see, I hate to look at the prices atwhich I bought these stocks; and if I buy moreat these low levels I can average my prices, and Ishan't mind so much then. For example, I paid$75 a share for my United Corporation, and if Ibuy some more at around $20, my average pricewill only be $47.50, which doesn't look so high."

" Are you going to buy more of every stock re-gardless of the outlook for the companies? Ihave no quarrel with your decision on UnitedCorporation, but cannot quite see why you buymore of two or three of your other holdings."

"Oh, yes, I'll buy them all; they're all goodstocks."

To my mind, averaging is, in itself, wrong rea-soning; but to average simply to satisfy your prideof opinion is financial suicide. In averaging, youare buying more of something which is worth lessthan you previously thought it should be worth.When, on the other hand, you buy more of astock which has advanced above what you paidfor it, your judgment has been confirmed and yourprofits are helping you. In averaging down younever know for certain that you are buying at

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the bottom: a friend of mine averaged Chryslerfour times in 1929 and 1930, and the fourth timeit was in the eighties!

The fellow who averages at the exact bottom,will immediately rise from his seat and tell methat this theory is all wrong. Perhaps even thenit is not wrong, because until the stock has showedhim a profit he is not positive that he has notpurchased a " sleeper," one which will stay down.

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XIX

ARE CHARTS OF ANY VALUE IN FORE-CASTING THE MOVEMENTS OF

STOCK PRICES?THE interest in stock charts has grown tre-

mendously in the last few years. We find peopleeverywhere keeping them. Upon the slightestexcuse they will discuss them, and ask countlessquestions about them: " What do the charts saytoday? Does the chart of Steel say to buy it? Isee on the chart that Can is a buy; what do yousee?"

Obviously, the danger in charts, so oftendemonstrated by the careless attitude of thosewho use them, is the temptation to adopt themas a stock market" system " which may be playedin just any old lackadaisical fashion, withoutthought or reason, as one would blindly play asystem at Monte Carlo.

Charts do not say anything; rather, on them are—220—

CHARTS IN FORECASTING

traced the results of human opinions. Charts donot cause movements in stock prices, but are aidsby which trained minds may judge what will bethe effect of previous moves.

A. W. Wetsel has done a great deal of importantresearch work in chart theories. I am indebtedto him for the little I have learned about charts.He has demonstrated conclusively to me thatcharts are utterly valueless when employed me-chanically— that is, when we go to a chartexpecting to find therein an open sesame tomarket profits.

We all know that stock prices ebb and flow inaccordance with the opinions of buyers and sell-ers. We have learned that stock prices are hu-man conclusions as to values. There are trendsof thought in the stock market, exactly as thereare in art, literature, and science. These trendsof opinion concerning stock values become, inturn, the trends of stock prices. We have thelong-term, bull-market trend; the intermediatetrends, reflecting month-to-month opinions ofvalues and business conditions; and the minormovements resulting from highly speculative

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opinions of technical market conditions and fromthe manipulative forces within the market.

When we refer to charts we see pictured theprevious trends of traders' and investors' opinions.From these, the analyst, from years of experiencein judging the " market mind," is often able todetermine whether the balance of opinion is onthe buying side or the selling. In other words,he is able to gauge more intelligently the con-dition of supply and demand. At times we canfind recorded upon our charts certain dependableformations which indicate accumulation or dis-tribution of stocks. Trendless markets, which wehave when the opinions of buyers and sellers tem-porarily balance, also may be detected. Fromchart formations the analyst is able to determinethe technical structure — broadly, whether weak-ness or strength prevails.

In the last analysis, it may be stated that chartsare aids, to be used by the intelligent trader or in-vestor, along with many other important means,as guides to market sentiment.

On the other hand, charts are full of dynamiteand can cause crushing losses, if blindly followed

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CHARTS IN FORECASTING

by the inexperienced who do not realize that, inas-much as human nature is not constant, there canbe no system which is infallible.

Mechanical forecasting will never take the placeof intelligent judgment.

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XX

FROM MY NOTEBOOKPride (of opinion) goeth before a fall (in stock

prices).* * *

Do not let the old I-Tell-You-So's fool you withtheir talk that we are not in a new era, market-wise. Use your own mental equipment and thinkback only ten years. Do you not think thatmarkets in which millions of the public are in-terested, may act differently from those in whichonly two or three hundred thousand professionalsoperate?

In one, trained individuals keep their fingers onthe pulse of affairs; in the other — the presentmarket—the majority of power is in the handsof those with only a sideline interest in the market.

If you do not believe this, think for a momentof the tremendous declines in stock prices duringthe summer of 1930, when a cataract of liquida-

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FROM MY NOTEBOOK

tion literally poured stocks into the New Yorkstock market to be sold at whatever prices theywould bring. Certainly the fact that during thepast eight or ten years millions of people havebought stocks for the first time, must be con-sidered when we are trying to estimate the ebband flow of stock prices.

Never mind telling me what stocks to buy; tellme when to buy them.

I shall hazard a forecast: more attention willbe paid in the future to an interpretation of hu-man nature as it is affected by economic factorsthan to the economic factors themselves.

* * *A sale printed on the tape is a meeting of two

minds; public sentiment passes in review on thetape for him to read who is schooled in the inter-pretation of human nature as it is reflected in thestock market.

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I often wonder why it is that financial writerstry so hard to determine the exact causes behindthe action of a certain stock on a given day.Doubtless it is because their readers demand it.

The variety of their interpretations is amazing.It only shows the futility of attempting ever togauge market movements by published news.Markets pay trifling attention to news after it isout.

* * *Many were called (for margins) but it profited

few to answer.* * *

Within the short space of fifteen years the num-ber of investors in common stocks has multipliedtwenty, perhaps forty, times.

The public is rapidly becoming the owner ofindustry. Gigantic mergers and holding com-panies are welding smaller enterprises into huge,centrally managed units, the stocks of which areheld by thousands of individuals in every walk oflife from that of laborer to that of bank-president.

What will be the result? A safety-valve againstdestructive socialism and communism? Will

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FROM MY NOTEBOOK

Labor control Capital through stock ownershipof America's leading corporations? Or willLabor become more dissatisfied and demand alarger share of the profits?

Will not the management have to produce re-sults or lose its job, with the consequence thatthese corporate giants will be all the more effi-ciently managed — more fairly managed for bothstockholders and employees?

It is my thought that the recent" proxy fights"are a mere straw in the wind, that stockholdersare paying far more attention to the details ofcorporate management than some think. I be-lieve that the time is fast passing when the headsof corporations may run affairs to suit their selfishinterests. All of which points to pleasanter andmore profitable relationships between Capital andLabor. * * *

It is often a long road to the quick turn.* * *

If you would perceive the futility of gaugingthe trend of stock prices on judged valuations, trythis:

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Ask ten of your best-posted acquaintances fortheir opinion of the value of the common stockof the General Electric Company. You will, inall probability, receive ten different opinions.

Now let us suppose that you want to sell yourstock. What can you get for it? The market-price on that day, of course. Does the market-price agree with the opinions you received?Again probably not.

Therefore, is not the value of any stock theprice at which it may readily be sold? Going onestep farther, we come back again to the thoughtexpressed so often in these pages, that to determinethe trend of stock prices we must interpret themarket's opinion of values, not the judgment ofany one group of experts.

Aimless switching gathers no profits.* * *

I am frequently asked to formulate a marketplan or program. It is a very difficult thing todo, because everyone is constituted differently,

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FROM MY NOTEBOOK

and a program, to be successful, must be in tunewith one's temperament. There are many peoplewho should never buy and sell stocks on margin;there are others whose judgment is not affectedby marginal trading. Some investors never wishto sell a stock; their purchases, naturally, mustdiffer from those of the individual who has noobjection to selling out everything when decliningprices are indicated. Common stocks vary widelyin their characteristics, and should be fitted toportfolios after a careful analysis of the individ-ual's requirements. The investor or trader, there-fore, must plan his program in accordance withhis personal prejudices, emotions, desires, tem-perament, habits, and goal. Both investing andtrading are highly specialized, wherein the per-sonal element is perhaps of greater importancethan any other factor.

* * *One profit in cash is worth two on paper.

The last stages of a rally are at once the mostprofitable and the most dangerous of all the stages.

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Rapidly advancing prices, together with increas-ing volume, are indicative of the end of thatmovement, or swing. While these price-advancesare profitable if the top is detected in time to sell,it is undoubtedly more profitable generally to letthe other fellow try for the last two or three points.

It is a common trait of the amateur speculatorthat he rushes in with purchase-orders when hesees fast action. Too often, however, the marketturns over and he is faced with losses.

As one man has said to me: " Do everything inthe market opposite to your snap conclusions andcontrary to what appears logical, and you willprobably make money consistently."

* * *A trendless market is friendless to traders.

* * *Take it from the Market Philosopher: human

nature in the stock market is going to be the mostprofitable study in the next bull market. Thegreater the number of traders, the more necessarywill it be to study and to know market psychologyand have a market philosophy.

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FROM MY NOTEBOOK

Many a healthy reaction has proved fatal.

Let us occasionally put aside speculation andmarket worries. When we do get away fromthem, they become dwarfed and lose their dis-turbing aspect.

I am writing this in the shade of a hundred-and-twenty-five-year-old Vermont maple, and canlook through its massive branches to green pas-tures beyond. A delightful, century-old houseand neighborly barns somehow bring a quietingphilosophy, and a peaceful perspective upon theproblems of Wall Street. We need to get awayfrequently in order to realize that market fluctua-tions are not the all-important facts in life. If" business leaders " would desert their confer-ences, their golf clubs, Rotary Clubs, and mergermeetings, and run away from everything, deepinto the country, I am sure that they themselveswould be happier, as well as make our businesslives pleasanter and more evenly tempered. Itdoes little good to leave Wall Street for summerresorts where stock tickers and business gossip

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continue. If you do go away, get beyond thefringe of advertising billboards and chambers ofcommerce. Seek the woods and hills; visit thevillages where bread and butter are earned by thesweat of the brow, and where, evenings and Sun-days, you join in good fellowship with your neigh-bors instead of in worship of the Almighty Dollar.

* * *

Fools rush in as pools glide out

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PARTIAL TABLE OF CONTENTS

Chapter Page

PART ONE STOCK SPECULATION1. Stock Speculation 5

PART TWO TAPE READING2. The Ticker Tape 293. The Principles of Tape Reading 414. Increasing Volume During an Advance 455. Turning-Points on Heavy Volume 476. Turning-Points on Light Volume 607. Various Types of Top-Action 668. The Tape Story of Loew's 789. Steel, The Market Leader 91

10. Tips are Dangerous 10311. Some Important Observations on Volume 11312. The Effect of News on Market-Action 12413. Resistances 12914. Suggestions to Speculators : 14215. The Rise and Fall of Steel During a Normal Bull Movement 162

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