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BASIC LECTURE NUMBER ONE PHILOSOPHY, HISTORY AND BASIC CONCEPTS

This is Lecture One of the Stock Market Institute’s Institute’s Basic Series of Lectures. Lectures. In the future these lectures will be referred to as “The Basic Series” to differentiate them from others that are  part of other SMI prorams. These lectures are part of !our "!ckoff #ourse and are to some e$tent another wa! of   presentin the art of speculation. The purpose of these lectures is to supplement the written course% to present later refinements and to aid !ou in learnin and in interatin the principles into a full understandin of how the law of suppl! and demand relates to the stock market. In this series series there will be e$tensi&e e$tensi&e discussions discussions of indi&idual indi&idual principles. principles. "hene&er  "hene&er   possible we will co&er co& er onl! one main sub'ect on each tape. (owe&er in some lectures there will  be combinations of sub'ects. That simpl! cannot be helped. In realit! the principles all relate to one another in an orderl! process. It is difficult and sometimes impossible to stud! stud! a principle or  market phenomenon in complete isolation. In this lecture we will present some of the philosoph!% histor! and basic concepts of the Stock Market Institute and the "!ckoff "!ckoff #ourse. )erhaps the most important concept for !ou to understand understand is our corporate corporate purpose. SMI is a pri&ate business business school teachin teachin stock market science and techni*ue and the art of speculation. "e also function function as a ser&ice bureau% offerin offerin essential data for technical stock and market anal!sis. "e are a teachin institution and a ser&ice  bureau+ education and ser&ices. ,ducation comes first and is our primar! concern at this time. time. Let’s look for a moment at how and where does the "!ckoff #ourse fit into the stock  market. There are enerall! two basic methods methods of stock anal!sis% the fundamental fundamental approach and the technical technical approach. The fundamental fundamental approach approach deals with balance sheets% sheets% profit and loss statements statements%% estimates estimates of manaement% manaement% new products% products% etc. and attempts to relate relate these to current current and and futu future re &alu &aluee of an indi indi&i &idua duall stoc stock. k. -unda -undame ment ntal alss can can be and and are are ofte often n used used &er! &er! satisfactoril! for lon term mo&es% often lastin man! !ears in duration. These fundamentals are one step remo&ed from price and the further !ou et awa! from dealin with the price of the stock itself% itself% the more difficult difficult !our anal!sis problem becomes. The most serious defect of the fundamental approach is the absence of “importance of timin.” Timin is e$tremel! important in the stock stock market. There is a ood time to to bu! a bad stock and there is a bad time to bu! what has been a &er! ood stock and usuall! usuall! b! the time the chaned condition of either the stock or the eneral market has shown itself in the fundamental news and statistic statistics% s% the best time to make !our purchase purchase or sale has/ alread! alread! past. past. This is one of the reasons wh! people et locked into so called ood stocks for man! !ears without reali0in an!  profit. The technical approach deals with the price of the stock itself and reards the stock as a separate commodit!% commodit!% sub'ect to the laws laws of suppl! and demand. There are two main branches in in techni technical cal anal!s anal!sis% is% a mechani mechanical cal approac approach h and a 'udme 'udment nt approac approach. h. Let’ Let’s deal with with the mechanical approach first. The commonl! accepted randfather of the mechanical approach is/ Schabacher% who wrote a &er! thick &olume durin the 1234’s after comparin thousands of mechanical chart  patterns described in such descripti&e terms as head and shoulders% double top% triple top% ap%  pennants and so forth. (e has been widel! copied and man! students ha&e been e$posed to this approach before becomin b ecomin a "!ckoff student. Our approach to the stock market is best described b! the course title% “5 Stud! of Stock  Market Science and Techni*ue Techni*ue and the 5rt of Speculation.” Speculation.” It is a complete% thorouh thorouh approach in the understandin understandin of how to make mone! in the stock market+ how to accumulate accumulate it and how to multipl! multipl! its &alue. &alue. This came came from the old time time professi professional onal stock stock speculators. speculators. There is is a world of difference between theor! and practical e$perience and the "!ckoff #ourse is based directl! upon the practical e$perience of an outstandin professional stock market operator% Mr. 6ichard 7. "!ckoff.

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5 B6I,- (ISTO68 O- T(, "8#9O-- #O:6S, Mr. "!ckoff was e$perienced and *ualified in e&er! important area of the stock market; -ounder and publisher pu blisher of the then prestiious “Maa0ine of "all "all Street%” stock market ad&isor to thousands% author of numerous articles% editorials and books based upon personal e$perience and his association with such famous speculators as (arriman% 9eene and Li&ermore and with other  leaders of finance durin his era+ 6ichard 7. "!ckoff tells us in his own words; “B! takin the  best of what fort! !ears in "all "all Street ha&e tauht me and preparin it for others so that it can be readil! absorbed and applied% I will be creatin somethin that should aid in establishin a new standard standard of practice in the public’s public’s stock stock market operatio operations. ns. I do not claim an! monopol! of  stock market knowlede% but up to this time% no one else seems willin to be so frank in offerin to the public the most intimate knowlede of the inner inner workins of the stock market.” Thus with fort! !ears of stud! and personal e$perience% Mr. "!ckoff cr!stalli0ed his knowlede into one writ writin in  and and pub publi lish shed ed “The “The 6ich 6ichar ard d 7. "!ckoff ckoff #our #ourse se in Stoc Stock k Mark Market et Scien Science ce and Techni*ue.” Since then% The Stock Market Institute% formerl! known as "!ckoff 5ssociates% Inc.% has continuousl! continuousl! endea&ored endea&ored to preser&e preser&e the &alue of this course. course. 5s new principles principles ha&e been disco&ered% the! ha&e been added to the time tested laws upon which the curriculum is based. The same watchfulness is/ applied to new techni*ues of market operation. These are bein re&iewed and de&eloped as time% time% reulations and market conditions chane. Our knowlede and educational proram is in a continuous state of e&ol&ement and has been enhanced with each manaement succession. "hen "hen deat death h came came to Mr. Mr. "!ckoff ckoff in 12<=% 12<=% Mr. Mr. 6obe 6obert rt ,. Stanl Stanlau auss assu assume med d the the responsibilit! to continue to offer the public speciali0ed education in the stock market science and techni*ue. (e e$panded the proram with material that/ that/ he and Mr. "!ckoff "!ckoff had written since the oriinal printin. In 12>1 Mr. 6obert ?. ,&ans bean his career as the promulator of the "!ckoff #ourse. Mr. ,&ans has made considerable contributions to the benefit of all students of market action. The! are most notable in the further de&elopment of technical anal!sis% market ps!cholo! and  philosoph!. (is uni*ue talent in usin analoies to e$plain &arious market phenomena and  principles has/ become an inseparable part of the "!ckoff "!ckoff #ourse. #ourse. Llo!d I. 5ndrews was selected in 12@A to continue SMI’s leadership in educatin the  public in a true understandin and knowlede of stock speculation. Mr. 5ndrews placed emphasis in the de&elopment of a structured educational proram to enhance and speed up the learni learnin n process. process. (e has e$pande e$panded d the SMI with both e$perien e$perienced ced educators educators and market market speculators speculators.. To Toda! da! SMI proudl! offers offers o&er se&ent!fi&e se&ent!fi&e !ears of continuous continuous stud! in stock  speculation+ a pro&en product% professionall! prepared and presented b! a uni*uel! competent staff of principled people. It is our e$perience that !ou will disco&er !ou ha&e no need for an!thin more of an! other techni*ue than "!ckoff and should !ou use other techni*ues alon with !our "!ckoff  #ourse% it can hurt !ou. !ou. This is a &er! difficult thin thin for man! students to accept because most most students% prior to their "!ckoff e$perience% ha&e tried to learn about the market b! pickin up an idea here% pickin up an idea there% tr!in them out and if the! show reasonabl! ood results% usin them. them. Often these these people become intellectual immicks collectors. -oret itC It will will cost !ou mone!% mone!% much mone!. mone!. 8ou ha&e ha&e enrolled enrolled into into a pro&en% pro&en% time tested tested proram. proram. )lease )lease%% discip disciplin linee !ou !ourse rself lf to learn learn it and/ and/ practice practice it as tauht tauht.. 7on’t 7on’t return return to a trial trial and error  error  approach. 5ctuall! there are man! ood thins written in books% but often the! are mi$ed up with other other ideas and concepts concepts which which are not &alid. &alid. It is a lon% lon% costl! costl! and diffi difficul cultt process process to determine determine what is &alid and what is not. not. 5t SMI we ha&e alread! alread! sifted sifted out what is ood and useful and after thorouh testin ha&e incorporated it in the "!ckoff #ourse+ it has alread! been done for !ou. 5ctuall!% man! thins which we read or hear about simpl! are not reliable. reliable. -or instance% occasionall! !ou will read% “the short interest is the hihest in histor!%” and this is interpreted as  bein &er! bearish. This hih short interest ma! be perfectl! natural because of the increased and increasin number of stocks which are outstandin and are traded. traded. 5ain% !ou ma! read that that “the market went down toda!% but it was on less &olume and therefore that is perfectl! normal.”

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In fact% there are times when it is perfectl! normal for the market to o down with somewhat decreasin decreasin &olume and that can still still be bearish% bearish% dependin upon the circumstances. circumstances. 8ou see% &er! often the basic assumption that is made is completel! wron and that leads to disaster. 5ain% !ou ma! ha&e read that “a ap is alwa!s filled.” Sometimes it is man! !ears before a ap is filled. There is still a ap on “#hr!sler” at 3>DE which was established established in 12<3. 7o !ou want to to wait for it to be filledF Man! are ne&er filled. "hen a ap is filled% filled% it is accidental or incidental incidental to the mo&ement of the stock. If a principle is to be a principle% it must work work in all markets to be &alid and and reliable. reliable. The The "!ckoff "!ckoff #ourse #ourse is is based upon upon principle principle and laws. laws. It is &alidC &alidC It is reliableC SMI belie&es that there is a &er! definite distinction between short term tradin compared to tradin tradin important important accumulation accumulation or distributi distribution on areas for intermediat intermediatee and ma'or mo&es. The short mo&e tradin often re*uires what is essentiall! a tape readin techni*ue and a special understandi understandin n of the market. Tradin Tradin the ma'or accumulation accumulation or distribution distribution areas for a larer  larer  mo&e is more readil! understood. -or most students it is more profitable and it is is the method of  operation which should be learned first. first. It is the basic basic method disco&ered and practiced b! Mr. Mr. "!ckoff. "!ckoff. This is described described &er! well in the te$t in sections 2% 14% 1@% and 1A and is summari0ed in section 31 of the "!ckoff "!ckoff #ourse. #ourse. This t!pe t!pe of operation operation lends itself itself readil! to lon term capital ains which under current ta$ laws is a &ital concern to man! of our students. To trade a ma'or accumulation or distribution area% !ou must ha&e a lare count% a sin of  strenth and a last point of support. "e would like to emphasi0e this essential strate!% strate!% that !ou must ha&e a lare count% a sin of strenth and a last point of supportC Sta! out of the stock until it is on the sprinboardC sprinboardC "e will emphasi0e this repeatedl! and illustrate it it in later tapes. This is the precise area where accumulation is bein completed and an attempt is bein initiated to bein the markup process.  Gow% 'ust what do we teach and what can !ou learn at SMIF "e teach the science% the techni*ue techni*ue and the art of speculatin speculatin in the stock market. market. Let’s Let’s re&iew re&iew the definition definition of these three terms. 1/ Science; Knowledge of fac! and law! a""anged #n an o"de"l$ !$!e%& This is  precisel! our endea&or. Our stud! of stock market science pro&ides a careful insiht into the socioloical socioloical and ps!choloical ps!choloical aspects of market operations. operations. "e stud! the characterist characteristics ics and habits of the indi&iduals and roups participatin. "e probe wh! the &ar!in mental attitudes of  these roups ha&e an effect upon stock prices and how the character of the market is influenced  b! ps!choloical conditions. -urther% we e$pect the student to disco&er the importance of his mental attitude and the effect it it will ha&e on his deree of success. Throuh continuous practice tradin% he will learn that disciplined application of knowlede can o&ercome the common obstacles caused b! one’s hopes and fears and b!/ one’s timidities and obstinancies. 3/ Techni*ue' Me(od Me(od o" wa$ of )e"fo"%#n )e"fo"%#ng g (e %ec(an#ca %ec(an#call dea#l! dea#l! of an a" o" re*uires up to date records prepared from the factual !c#ence& Our approach to the stock market re*uires data of dail! price action and &olume of sales as compiled b! the principle stock e$chanes. Hertical Hertical line and fiure charts are constructed for a/ the indi&idual stocks of particular interest+ b/ carefull! selected inde$es of leadin roups and c/ sensiti&e inde$es reflectin the condition of  the eneral market. -rom these we are able to make a serious and instructi&e instructi&e stud! of the action of the stock toether with the action of other stocks of a similar character and finall!% the action of the market as a whole. Our students are schooled in the techni*ues we belie&e are essential to technical anal!sis.
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 bein used% down to whate&er he does in his dail! life. This ma! help in usin the principles and ma! pre&ent them from bein purel! abstract ideas. 5n illustration of what we mean can appl! to the term “sellin clima$.” 9nowledeable speculators understand “sellin clima$” to be the  phenomenon which occurs after a stock has been oin down% down% down and has reached the  point where panic sellin beins to set in leadin to a dumpin of stocks b! people who bouht at hiher prices. This panic sellin creates an e$pansion of the price spread and an e$pansion of  &olume. The price weakens at an increasin rate. The price characteristic is that it sharpl! increases at the point where “the!%” the professionals come in and absorb this panic sellin; The down mo&e is o&er and the stock beins to rall!. "e call this action a “sellin clima$.” The "!ckoff principle of a sellin clima$ does not alwa!s occur at the end of e&er! decline. In other words% not all declines end with a sellin clima$% but when it does% when !ou can identif! it clearl!% it is a principle. "e can ha&e a common understandin that this is the  principle of the sellin clima$ and act and operate accordinl!. The principles do not chane. (owe&er% the! ma! manifest themsel&es in man! wa!s and where the price and &olume will be different on each occasion. It is &er! important to reali0e that the "!ckoff #ourse is based upon sound principles. A )"#nc#)le (a! .een def#ned a! a co%)"e(en!#/e and f*nda%enal law, doc"#ne o" a!!*%)#on& I #! an *nc(ang#ng "*le . )ro&e !our principles. Learn how the principles tie in with each other and learn to anticipate which principle is likel! to occur followin the current unfoldin picture of market acti&it!. Build !our anal!sis on principles% not upon !our feelin about the stock% not on !our hopes% dreams and wishes. That which is built upon principle is sound and will last. The "!ckoff #ourse is based directl! upon the law of suppl! and demand and the law of  cause and effect. T(e law of !*))l$ and de%and !a$!, w(en de%and #! !"onge" (an !*))l$ )"#ce! w#ll "#!e& 0(en !*))l$ #! !"onge" (an de%and, )"#ce! w#ll fall . T(e law of ca*!e and effec !a$!, #n o"de" o (a/e an effec, $o* %*! f#"! .*#ld a ca*!e& T(e effec w#ll .e #n d#"ec )"o)o"#on o (e ca*!e and canno .e !e)a"aed f"o% (e ca*!e. Her! often the workin of this law can be most easil! seen in the fiure chart which sometimes has been called the cause and effect chart. This is because to ha&e a &er! lare mo&e% !ou must first build a cause of a count. 5 stock% in order to ha&e a ma'or mo&e% a lare% lare mo&e% thirt!% fort!% fift!  percent or more usuall! oes throuh some form of accumulation or preparation. This will show up on the fiure chart as a lare count. 0e !o%e#%e! *!e a (#"d law #n o*" wo"+ and (a #! (e law of effo" /e"!*! "e!*l. It is most readil! seen in the workin of the Optimism  )essimism Inde$ and in the upthrust after distribution. T(e .a!#c conce) #! (a, #f $o* (a/e an effo" e)"e!!ed, (e "e!*l !(o*ld .e #n )"o)o"#on o (e effo" . In the Optimism )essimism Inde$ we ha&e the  phenomenon of the di&erence and the inharmonious action in which an effort on the part of  either the "!ckoff "a&e or the O.). Inde$ is e$pressed and the other Inde$ does not respond. Somethin ma! be wron and we’d better find out what is wron and what to do about it. In the case of the upthrust after distribution+ if a stock has been mo&in up with a two  point spread e&er! da! with 14%444 shares and it breaks into the hih round with 34%444 shares and a 1D3 point spread for a couple of da!s straiht% we know suppl! is comin in and is o&ercomin the demand. This is an effort which is not ha&in a proportionate result. Bulls ha&e  been bu!in stock and ha&e not been able to mo&e the price when it should be at a critical point in the mo&ement of the market and therefore the stock is likel! to be in trouble and ha&e a re&ersal in its mo&ement. 5s indicated pre&iousl!% we teach the science% the techni*ue and the art of the stock  market and the mechanics of the use of charts. "e ha&e found that there are some suestions which can be *uite helpful in keepin !our charts. -irst% alwa!s keep !our charts neat. 9eep !our charts as clean% neat and orderl! as possible. Once !ou ha&e them orani0ed this wa!% mark  all indications on the chart% such as trend lines% halfwa! points% clima$es% etc. "e suest that !ou keep !our charts in black ink% either usin felt or ballpoint pens. )ut the temporar! indications in pencil and when !ou are completel! certain of the callin and the identification of  the principles% then !ou ma! wish to chane them to ink. Mark the important indications in ink%  but mark the relati&el! unimportant indications in pencil. 8ou ma! wish to erase the unimportant trend lines and other thins later as the action unfolds. Start !our charts on the same point on the pae. This is &er! helpful techni*ue. 5lso% use the same &olume and price scale for similar priced stocks whene&er possible. This eliminates  postin a chart that !ou ma! ha&e on a double or *uadruple scale as a sinle scale chart. This can be *uite frustratin and lead to market losses.

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"hen anal!0in% spend !our time where it is most likel! to pa! off. If !ou ha&e to search for somethin% usuall! it is not worth findin on the charts. Often the best situation will be ob&iousl! ood almost at a lance. There are some situations in which !ou will not be able to understand what is oin on. Her! often no accumulation or distribution or an!thin of  importance is oin on in the stock at that time. It is simpl! driftin with no lare interests and sponsors interested and no one preparin a campain in it. In other stocks% !ou will be able to determine what is oin on% howe&er !ou will not be able to take a tradin or in&estin position larel! because the profit  risk ratio is not in !our fa&or+ it is simpl! too risk!; Or at times !ou ma! wish to sta! out of the market because of price or &olume action which is somewhat obscure. To a lare e$tent a student should sta! out of these first two t!pes of situations. The third t!pe of situation is where !ou do understand what is oin on and the mo&e indicated is lare enouh to i&e !ou a ood risk. 5nal!0e it thorouhl!. Time !our commitment as well as !ou can and take !our position. 5s soon as !ou ha&e finished takin !our position% re&iew it and then follow it throuh until !ou finall! close it out. It is often &er! helpful to write down what !ou think as !ou are anal!0in or perhaps to make notes on the charts. This is a wa! !ou can check !our work later and !ou will not lose track of !our ideas. "ritin down the main points of !our anal!sis forces !ou to orani0e loicall! and !ou are less apt to miss important details. 0e (a/e fo*nd # e!)ec#all$ (el)f*l o anal$e (e 0$c+off 0a/e #n w"##ng e/e"$ wee+& Al!o, # #! (el)f*l o w"#e o* $o*" anal$!#! of an #nd#/#d*al !oc+ .efo"e a+#ng a )o!##on #n (a !oc+  . )ro&e to !ourself that/ !ou are makin the correct decision. Be sure before !ou act.  Gow for some comments on takin a position in a stock. If important accumulation or  distribution in a stock is oin on% it is &er! difficult to hide it. This will normall! show up on the charts. "hen it is not clear% sta! outC "hen indications are clear% take a position with the timin and the profit  risk ratio in !our fa&or. Yo*" f#"! 3o. #! o )"oec $o*" ca)#al4 Yo*" !econd 3o. #! o o.a#n a )"of# w(en (e "#!+ #! #n $o*" fa/o"& If !ou are afraid to be wron in the stock market !ou will ha&e a &er! difficult time  because each time !ou take a position either in a practice trade or with the bulk of !our cash% !ou run the risk of bein wron. Her! often we find that a newer student has the ma'orit! of his initial trades wron with losses. It is better to take !our losses with practice then to risk the bulk  of !our capital. 5 funn! thin about bein wron or bein afraid to be wron is that our eo normall! reacts to protect us from bein wron. Often we will rationali0e% twist the truth and in fact would rather lose mone! than to admit we are wron. Build on !our profits and on the knowlede that !ou do ha&e. Minimi0e the lossesC Learn what !ou can from !our mistakes and tr! not to repeat them. T(#! #! a lone wolf .*!#ne!!& 5fter ha&in seen some bad e$periences of students who were tempted to work with others in the market% we recommend that !ou learn to rel! on !ourself alone and when !ou ha&e problems% discuss them onl! with an SMI staff instructor. If !ou know another student !ou ma! wish to discuss principles. Ne/e", .* ne/e" d#!c*!! "ade!4 Lea"n o +ee) 5*#e& Her! often another   person will take the opposite point of &iew and throw !ou off. :nconsciousl!% he ma! do this so that he can be riht and !ou be wron; This is a professional malpractice which some people do unconsciousl! and it is especiall! eas! to do in the stock market. Learn to make !our own decisions. 7iscuss them with no one. Stick to !our uns and follow throuh until the commitment is completed. "e ha&e often found that no two people trade the same. uite b! accident% a number of  !ears ao we found that three people in our office were tradin the same stock. The stock  happened to be “#hr!sler.” The first person had a capital ain of about 3> points and was attemptin to obtain a much larer mo&e. (e was also attemptin to obtain a lon term capital ain ta$wise. (owe&er% he had dianosed that “#hr!sler” was oin to ha&e a reaction of 14 to 13 points. (e decided to ride that reaction out in order to obtain the lon term capital ain. The second man dianosed that the stock was oin to o down and took a short position for about 14  points. The third man had had no pre&ious interest in “#hr!sler%” but as the stock mo&ed down to the end of the reaction he bouht. The principles are the same. It is the same stock% but three  people operated in it differentl!. Go two people ha&e the same character% personalit! or  necessaril! the same ob'ecti&es. 8ou must define how !ou will operate throuh s!stematic  practice tradin and cash tradin. In dealin with !our broker it is often &er! helpful for !ou to ha&e an understandin of  his functions and of !our functions. ,ssentiall! he performs three functions. One is to keep a record of !our transactions and maintain !our account% another is to e$ecute !our bu! and/ sell orders promptl! and as accuratel! as he possibl! can and third% to pro&ide !ou with factual

7

information when re*uested. 8our function is to anal!0e and select stocks. 8ou will ha&e to ask  !our broker to do what !ou want+ to take !our orders% to e$ecute them% but to i&e !ou no ad&ice or other information unless asked for. If !ou need stock *uotations% !ou can arrane to et them throuh !our broker’s secretar!. "e ha&e found that man! students prefer to ha&e a broker who is not located in the same town. This eliminates o&erl! fre*uent contacts and the inad&ertent influence of the broker on them. 5ain% one of the basic reasons for takin the "!ckoff #ourse is to learn to operate based on !our own 'udment. "e maintain that !ou can operate independentl! and confidentl! with !our "!ckoff principles. Igno"e new!, #)!, "*%o"!, ec& Often news times the market+ mo&es and moti&ates the neoph!te to do somethin; :suall! it is to lose his/ own mone!. Often it ets !ou to act irrationall!. The stock mo&es down and then the  bad news comes out on it. The stock mo&es up% or we miht sa! it is mo&ed up and then the ood news comes out. The time to take !our position% a short position% is/ before the stock is read! to o down on the sprinboard and the time to take a lon position is on the sprinboard  'ust before an important mo&e up. 8ou can learn to dianose this from market action alone. The basic method of anal!sis we teach at SMI is spelled out in section 2% pae 1%  pararaph 1. It reads as follows; “5fter we ha&e determined the position and probable trend of  the eneral market and ha&e e$amined the action of the &arious roups to see which are most likel! to o with and to lead the market as a whole% we must sinle out those indi&idual stocks which are in the best position for our purpose% which is to operate in harmon! with the indicated trend.” 6estated% the three strateic principles are; 1/ (e determines the trend of the market+ 3/ #ompares for strenth and weakness and then+
8

BASIC LECTURE NUMBER T0O TRENDS

The main sub'ect of this tape will be trends+ what trends are% what causes them% how to identif! and anal!0e them and how to use them in speculati&e operations. Let us define a trend first. 5 trend is to ha&e or to take a particular direction. It is the underl!in or pre&ailin tendenc! of inclination of mo&ement. In other words% a trend is a tendenc! to mo&e in a particular direction. Trends are o&erned b! the law of suppl! and demand. -or a brief re&iew% the law of suppl! and demand sa!s that when demand is stroner  than suppl! prices will rise% when suppl! is stroner than demand prices will decline. "hen demand and suppl! are in e*uilibrium the price will mo&e sidewa!s or will be unchaned. This sidewa!s trend is called a tradin rane. Suppl! and demand must be 'uded b! what happens to the price+ price% the number of shares bouht and sold+ &olume and how lon it takes to complete the mo&ement+ time% in other words price% &olume and time. Our purpose is to dianose the direction and strenth of the comin trend and to take a  position in harmon! with it. "e aim to take that position as the trend is beinnin to be established or% after a reaction within the trend has occurred% to take a position as the trend is resumin its mo&ement. #5:TIOG% 7O GOT B:#9 T6,G7SC )rice chanes and trends which result from these price chanes are caused b! an unbalanced condition of the flow of orders comin into the market. )lease turn to chart number  one for a &er! simple illustration. Suppose an order for two thousand shares comes into the market to bu! a stock. The stock is sellin for J>4.44 per share and there are onl! three hundred shares to be sold at that price. The specialist could fill this order for three hundred shares and then raise the bid price until the entire order is filled. "e will assume that there are no additional  bu!in and sellin orders comin in as this particular order is e$ecuted. So% three hundred shares are sold at >4% another hundred shares at >41DE% two hundred at >41D=% a hundred shares at >441D3% two hundred at >4>DE and these orders to sell ha&e all been filled. 5t this  point the specialist still has si$ hundred shares to be bouht. There are one hundred shares at >44ADE the remainin >44 shares are bouht. Thus the price has mo&ed up ADEths of  a point in e$ecutin the order. This is e$tremel! simplified. In the actual market as this order  would be e$ecuted% additional orders would come into the market on both the bu!in and the sellin side to be matched and e$ecuted. The price would mo&e back and forth dependin upon whether there were more shares to be bouht or to be sold at an! particular moment. These trends ma! be portra!ed in tabular form or in chart form. The! ma! be most readil! anal!0ed when the! are in chart form. "e use three t!pes of charts primaril!+ a &ertical line chart% a fiure chart and a wa&e chart and in these lectures we will discuss all three. Most people think there are onl! two trends% howe&er% there are three t!pes of trends classified as to direction of mo&ement. There is an upward trend% a downward trend and a sidewa!s trend or tradin rane. There are man! wa!s to classif! trends as to t!pes or the si0e of  trends. ,laborate s!stems ha&e been worked out to classif! trends. 7o not do thisC It leads to e$treme confusion and &er! often to financial disaster. 5t Stock Market Institute we use four  classifications for simplicit!+ 1/ the intrada!% 3/ the minor%
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The intermediate trends which are made up of three or more minor trends and are mo&ements of around 1> to 34 percent of the price of the/ stock usuall! run for a couple of  weeks to a couple of months. 5 ma'or trend is made up of three or more intermediate trends and is a mo&ement of o&er  3> percent of the price of the stock. :suall! ma'or trends will last for se&eral months or perhaps much loner. "e wish to emphasi0e that !ou should not make a precise or e$act mathematical or  absolute classification of strict percentaes. There is a ra! area between intrada! to minor% the minor to intermediate% intermediate to ma'or. The important thin is not how !ou classif! the trend but !our 'udment as to the strenth of suppl! compared to the strenth of demand. To show !ou how these trends persist and persist and persist% on the "!ckoff "a&e there was a ma'or support trend line drawn throuh the low of September 12>< and the low of 12>A. This support line was met on the low of the 12@4 down market and the "a&e turned upward. This support line was finall! broken on the 12@3 decline. "e ha&e found that &er! often we can illustrate principles best b! drawin a free hand chart or a schematic diaram to illustrate the eneral principles% followed b! a discussion of  actual e$amples showin some classic situations and some &ariations. To bein this stud! please turn to chart number two. On this chart we ha&e a stud! of suppl! and demand. T(e 0$c+off  Co*"!e eac(e! 9(a: (e !*den %*! f#"! lea"n and *nde"!and (e %o#/e!, .e(a/#o" )ae"n! and (e e%o#on! of (e )eo)le w(o go o %a+e *) (e %a"+e& -or instance% it is normal for people to o to e$tremes. In an ad&ancin market it is normal for reed to o&ercome reason resultin in a demand which pushes the stock up into an o&erbouht position. Likewise% in a declinin market it is eas! for fear to cause sellin which ma! result in lower prices causin more fear and suppl! which dri&es the price down% down% down into an o&ersold position. These market fluctuations are caused primaril! b! fear and reed. Let’s take time out to discuss this for a moment. This is a ood use of fear and reed. 5ctuall! e&er!thin that !ou and I and e&er!one else does is to some deree based upon the simple use of the emotions of fear  and reed. 5t first the! sound like nast! words because the! are &er! often used in a &er! non complimentar! wa!. "e mean them in a &er! delicate and positi&e wa!. There is nothin wron with/ bein reed! as lon as it is not carried to e$tremes. The reason !ou are stud!in !our  "!ckoff #ourse is because !ou want to et ahead% !ou want to make mone! or protect !our  capital. -urthermore% almost all of us carr! life insurance because we are fearful+ we are fearful somethin will happen. This is a &er! simple use of a &er! important emotion. Gow% e&er!thin that !ou and I do is based upon some use of these two emotions. "e ma! rationali0e and attempt to base our anal!sis and actions on reason% but this fear and reed are still there to some e$tent. The trouble is% in the stock market fear and reed a"e carried to e$tremes. Let’s see what happens as the market beins to o down and panic sellin comes in. This is usuall! precipitated  b! bad news. :suall! this fear sellin will snowball until it is finall! stopped b! superior  demand comin in on a sellin clima$. ?raduall! this fear runs itself out. It oes to too much of  an e$treme. Similarl!% the bu!in based on reed rows and rows on an upward mo&e until it is finall! stopped b! a bu!in clima$. 5s the market mo&es up% too much reed comes in. This  process creates what we call the o&ersold and o&erbouht positions or situations. In the o&ersold area the stock or the market can o throuh accumulation and in the o&erbouht area it oes throuh distribution. Let’s return to chart number two. (ere we portra! the market in a eneral upward slantin trend. "e call it the primar! rowth trend. Sometimes it is a downward slantin trend. This is the eneral direction or rate of rowth that the market% an inde$% a stock or !ou miht sa! the econom! or compan! is takin. Gow% market prices% or the price line fluctuates widel! abo&e and below this rowth trend line. If we draw a line throuh the center of the eneral price  pattern as it mo&es up and down% we et somewhat of a cur&ed line or c!cle. It oes wa! down  below the primar! rowth trend line and then fluctuates well abo&e it and then back and forth. 5ain% enerall! the stock will o throuh accumulation in the o&ersold area and distribution in the o&erbouht area.  Gow% please turn to chart number three. "e can break down this c!cle or wa&e like  pattern into four phases; 1/ accumulation+ 3/ markup+
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Mr. "!ckoff sa!s that each stock or each mo&e oes throuh a period of preparation before the e$ecution of the mo&e. This would correspond to the accumulation and markup phases% the other preparation and e$ecution phase bein distribution and markdown. In chart number three we ha&e shown the o&ersold position as an area where the intellient and knowledeable in&estor or speculator accumulates stock. The o&erbouht  position is the area where he will distribute or sell his stock. This pattern holds true whether his speculati&e ob'ecti&es are short term% intermediate or lon term. In chart number four we ha&e portra!ed a series of minor fluctuations or intrada! wa&es. These build up and build down and form minor mo&es or minor trends. 5ctuall!% e&er! upward or downward swin in the market whether it amounts to man! points% onl! a few points or  fractions of a point% consists of numerous bu!in and sellin wa&es. These ha&e a certain duration. The! run 'ust so lon as the! can attract a followin. "hen this followin is e$hausted for the time bein% that wa&e comes to an end and a contrar! wa&e sets in. The small bu!in and sellin wa&es which occur durin e&er! stock market session run so man! minutes. These small wa&es are part of the larer wa&es which run so man! da!s and e&entuall! make up mo&ements which we call short term rallies and reactions or minor mo&es. Our illustration shows this up and down price action which reflects the bu!in and sellin wa&es caused b! the shiftin relationship of suppl! to demand. In chart number four from 5 to B we ha&e a series of intrada! mo&es of enerall! e*ual strenth and in eneral the up mo&es are about the same strenth as the down wa&es. Thus% the stock mo&es sidewa!s in a narrow tradin rane% a &er! small tradin rane. (owe&er% from B to # we ha&e a minor up mo&e composed of se&eral intrada! trends in which the rallies are stroner  than the reactions. 7emand on the rallies is stroner than the suppl! which comes in on the reactions and thus we ha&e an upward minor trend. In chart number fi&e we ha&e shown how these build up and build down into intermediate ad&ances and declines. 5ll stock mo&ements howe&er lare or small are made up of bu!in and sellin wa&es. 5 stock mo&es to a hiher or lower le&el b! a series of sures a ood deal like an incomin tide with successi&e wa&es hiher or lower than those precedin. 5s shown in chart fi&e% the short term rallies and reactions% the minor mo&es% build into intermediate ad&ances and declines. B! stud!in the relationship between these upward and downward wa&es+ their  duration% speed and e$tent and comparin them to each other we are able to estimate and 'ude the relati&e strenth of the bears and the bulls or better !et the suppl! and demand as the price mo&ement proresses. In chart si$ we ha&e a series of intermediate trends which form the lon term or ma'or  trends or to e$press it another wa!% the lon term bull and bear markets. -rom 5 to B we ha&e an upward trend% a ma'or upward trend which is composed of a number of intermediate trends in which the up trends are stroner than the reactions+ demand is stroner than suppl!. Yo* w#ll .e a.le o 3*dge (e !*))l$ and de%and on (e .a!#! of (e )"#ce ac#on, /ol*%e and #%e& There is a widened spread and an increasin &olume on the rallies. On the reaction there will be decreased &olume and a comparati&el! narrow spread compared to the rall!% indicatin less sellin on the reaction than there was bu!in on the upside. In an up trend !ou should not ha&e  proloned price weakness or massi&e dumpin of stocks on the reactions. #ontinuin with chart number si$ from B to # we ha&e a downward trend composed of a number of intermediate trends indicatin the ood suppl! on the downside and a lack of demand on the rallies. 5ain% !ou will be able to 'ude this on the basis of the price action% the time and the &olume. Holume should remain ood on the downside% the rallies howe&er should be relati&el! weak% indicatin a lack of demand. There should not be wide spread or increased &olume or sustained increased &olume and it ma! take *uite a bit of time on the rallies. The main point is that !ou ha&e an unbalanced condition in the suppl! and demand with suppl! ood on the downside and a lack of demand% weak demand on the rall!. Let’s spend a little time with chart number si$ and discuss some &ariations. Her! often these stocks will o throuh a period of reaccumulation% buildin a complete new count such as is illustrated from , to 7. Sometimes instead of oin throuh a complete new count buildin  process% the stock will simpl! come down% dr! up the suppl! and aain resume the upward trend after ha&in made an intermediate correction. "e ha&e portra!ed this at -. Often it will o throuh minor or intermediate distribution in the ma'or upward trends% precipitatin and causin these corrections. The same thin can occur in the down market with a rall! in which a stock  will build a complete new steppin stone count for the down side% or it ma! simpl! rall!% run out of demand and then resume the down trend. This in brief is the basic idea behind trends+ how the! are formed and what causes them.

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 Gow let’s o into some practical applications includin how !ou can measure the trends and how !ou can trade a stock that has alread! beun this upward or downward trend. )lease turn to chart number se&en. #hart number se&en is a stud! of two important trends in the "!ckoff "a&e Inde$ beinnin in 5uust% 12@E. The first important trend is from point/ number 1 to point/ number 3. The second is a down trend from point/ number 3 to point/ number <. The first is an intermediate trend made up of se&eral smaller or minor mo&es. The first minor mo&e is from point/ 1 to point/ =% a reaction from point/ = to point/ > and then a lon mo&e from point/ > to point/ 3 with some &er! small reactions such as from point/ @ to point/ A. On an up trend there should be ood demand on rallies followed b! a fallin off or  decreasin &olume and a narrowin spread on reactions compared to the prior rall!. The "ednesda!’s closin on the Gew 8ork stock e$chane durin the later half of 12@E caused some distortion in the normal &olume pattern. This usuall! caused e$ceptionall! hih &olume on Thursda!. A SMI we *!e ("ee %e(od! of %ea!*"#ng "end!= "end l#ne!, ("*!! and (alf>wa$ )o#n!& -irst/ we measure the anle at which the trend is mo&in throuh the use of trend lines. Trend lines form a channel of mo&ement similar to a frame for a picture. There are two t!pes of  trend lines+ 1/ the normal use and 3/ the re&erse use. Second/ we also measure the amount of   proress that is made on each dri&e up and dri&e down. This is called the thrust. -inall!%/ the third measurement is the halfwa! point which is an indication of comparati&e strenth and weakness and the ade*uac! of the correction. "hen placin the trend lines% the thrust and the halfwa! point on !our chart% !ou should do it with a reat deal of e$actness. (owe&er% do not e$pect the stock or the inde$ to obser&e or  reach them perfectl!. -or instance% on a reaction within an upward trend% do not e$pect the stock  to come down to the e$act trend line and turn upward. It ma! penetrate a little bit% or it ma! hold slihtl! abo&e the support line or the trend line. The important thin is (ow it reacts% not the e$act point to which it reacts. To break a support line on liht or decreasin &olume means relati&el! little and often enables the stock to resume the up trend within the same primar! trend lines. To break the support lines on increased or hih &olume and ood price spread is a different matter. It indicates a chane in the suppl!  demand relationship and usuall! results in the stock  establishin a new trend% perhaps a new trend in the same upward direction. 5nother wa! to anal!0e the breakin of a suppl! line is to stud! the possibilit! that/ it is creatin an o&erbouht condition. It ma! result in a steeper anle of trend. To summari0e% the breakin of a trend line ma! result in establishin a slower or faster trend in the same direction or in a complete new trend. The suppl!  demand relationship will determine the continuin trend. It can chane rapidl!. So our ad&ice is to watch it closel!. "e usuall! identif! trend lines with letters such a 55% BB% ##% etc. It ma! be helpful for !ou to follow this practice and it will help us in our  correspondence with !ou if we all use the same s!stem of letters and numbers. 5t SMI we use two t!pes of trend lines% the normal use and the re&erse use. In (e no"%al *!e of "end l#ne!, #n an *)wa"d "end we d"aw (e !*))o" l#ne f#"! w#( (e !*))l$ l#ne d"awn !econd, )a"allel o (e !*))o" l#ne& (ow do we draw these trend linesF -irst% locate two consecuti&e lines of support on a reaction and draw the support lines throuh those points. ,$amples of these are on chart se&en% line 55% which was drawn throuh points 1 and >% and chart nine% line 55 drawn throuh points 1 and <. Gow% the suppl! line is drawn  parallel to these support lines+ drawn throuh the top of the rall! which occurs between the two support points. On chart se&en% line BB is the suppl! line drawn parallel to 55 throuh point/ =. In a down trend% aain usin the normal use of trend lines% the suppl! line is drawn first% throuh two important suppl! points. 5n e$ample of this is line ,, on chart nine which is drawn throuh points/ 3 and 34 with the support line -- drawn parallel to it throuh point/ 31. 0#( (e "e/e"!e *!e of "end l#ne!, #n an *)wa"d "end, we d"aw (e !*))l$ l#ne f#"!, followed .$ a !*))o" l#ne d"awn !econd and )a"allel o #& 5n e$ample of this is on chart nine. Line ## is the suppl! line drawn throuh points A and E with a support line 77 drawn second throuh point/ 11. In a down "end *!#ng (e "e/e"!e *!e of "end l#ne!, (e !*))o" l#ne #! d"awn f#"! ("o*g( wo !*))o" )o#n! and (e !*))l$ l#ne d"awn )a"allel o # ("o*g( (e o) of (e "all$ occ*""#ng .eween (o!e )o#n!& 5n e$ample is line ## on chart eiht drawn throuh  points = and > with the suppl! line 77 drawn parallel to it throuh point A. "e ha&e ne&er seen the re&erse use of trend lines used e$cept b! SMI. 8ou should soon disco&er their uni*ue &alue in !our technical anal!sis of indi&idual stocks and of the market.

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On chart se&en we are oin to use the normal use of trend lines onl!. Line 55 is the support line drawn throuh points/ number 1 and >. The "a&e meets support se&eral times near  55 on small reactions% then meets it at point/ number A and turns up. 5t point/ number E it  breaks throuh 55 with wide spread and increased &olume indicatin that 55 is no loner  operati&e. These shorter and temporar! lines within the more important trend lines often are &er! helpful in alertin one to a/ comin chane in trend% a chane of character or a decisi&e shift in suppl! or demand. The! ma! be erased later when no loner needed. The suppl! line BB is drawn throuh point/ number =% parallel to 55 and e&entuall! it is met at point/ number  3 and the "!ckoff "a&e turns downward. "e could also draw another suppl! line% ##% parallel to 55 throuh point number 13/% when price/ failed to reach line BB at point/ number 13. This would show the failure to reach the line BB where it could or perhaps should ha&e reached Slowl! stud! the price action and &olume beinnin with point number 1 o&er past point number E. 7o !ou see the e$pansion of the price spread and the increasin &olume on each rall!F This is e&idence of ood demand. Then% note the lack of suppl! on the reactions. The &olume shrinks on the reactions at points/ >% 2% 14% 11 and A. (owe&er% at point/ number E there was a decisi&e chane in character as suppl! was hea&!% as shown b! the wide spread and increased hea&! &olume on the downside.  Gow let’s draw the thrust. The thrust measures the price proress that the stock or inde$ makes on each wa&e within the trend. T(e ("*! #! (e )"#ce d#ffe"ence .eween con!ec*#/e o)! #n *) "end! o" .eween con!ec*#/e .oo%! #n down "end!& To measure the thrust% we draw a series of hori0ontal lines at the le&el the hihs and lows are reached on the dri&e within the trend and connect them with a &ertical line. -or e$ample% we ha&e drawn the thrust 51% B1 and #1 to measure the net proress of each subse*uent dri&e up on the mo&e from point/ 1 to point/ 3. 51 measures the amount of proress made from point/ 1 to point/ =. B1 measures the  proress from point/ = to point/ @. There is a si0able reaction and a more proloned reaction from point/ @ down to point/ A and then #1 measures the proress from point/ @ up to point/ 3. Gote the shortenin of the thrust% the lack of proress made on a mo&e. This is an indication that !ou should e$amine the market action &er! carefull! to determine what is happenin to that trend. It ma! be runnin out of the underl!in push caused b! demand o&ercomin suppl!% or  opposition ma! be comin in to stop the ad&ance% or suppl! o&ercomin demand. There will be times when !ou will be in doubt as to whether !ou should draw the thrust throuh a certain point. This is a matter of indi&idual 'udment. T(e 3*dg%en w#ll la"gel$ de)end on (e de)( of (e co""ec#on w#(#n (e "end, (e #%e !)en #n (e co""ec#on, $o*" o.3ec#/e! and )*")o!e! and $o*" )e"!)ec#/e #n anal$#ng (e "end& 8ou will be well schooled in the basics howe&er% as we will present man! e$amples for !ou to stud! and use as a reference.  Gow for the halfwa! points. "hat is a halfwa! pointF T(e (alf>wa$ )o#n #! *!ed a! a %ea!*"e%en of "ela#/e !"eng( on a "all$ o" "eac#on& To use an e$ample to calculate the halfwa! point% assume that a stock mo&es from >4 to >@% a distance of si$ points and then reacts. The halfwa! point would be half of that si$ points or at ><. 6e&erse the process for calculatin the halfwa! point on a rall! followin a decline. -or instance% suppose a stock mo&es down from <4 to 31% a distance of nine points. The halfwa! point would be at half of that distance and is = 1D3 points added to 31 which/ i&es a halfwa! point of 3>1D3. On a correction to a halfwa!  point% do not e$pect the stock or the inde$ to o to the e$act halfwa! point at the e$act 1DEth. It is sufficient to meet support or suppl! in the &icinit! of that halfwa! point. The abilit! to hold abo&e the halfwa! point substantiall! is an indication of relati&e strenth. The o&errunnin of  the halfwa! point is an indication of relati&e weakness. 5ain% on a reaction% the important thin is not that it comes down to the e$act 1DE th% but how it comes down. It should react within an upward trend with a lack of suppl!% shortenin of spread and decreasin &olume. Let’s turn to chart number se&en for an e$ample of determinin the halfwa! point of a correction #alculate the e$act halfwa! point on the reaction from point/ 1 to point/ = mathematicall!. The low point at point/ number 1 was 3A>4. The hih at point/ number = was 3E@@ or a mo&e of 11@ points. One half of that is >E added to 3A>4 i&es a one halfwa! point of  3E4E. 8ou can calculate all of !our halfwa! points this wa!. 7o it mathematicall!. 7o not uess because !our e!es will lead !ou astra!. This halfwa! point was respected at point/ number >. Others ha&e been drawn. )lease note how the "a&e held slihtl! abo&e the halfwa!  point on the reaction to point/ 2 and o&erran it at points/ 14% 11 and A% indicatin relati&e weakness. Thus% we ha&e a normal up trend from point/ 1 to point/ 3 with ood demand on rallies% lack of suppl! on the reactions. The narrowin spread at #1 and the o&errunnin of the

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halfwa! points warned of a possible chane of trend. The suppl! on the downside at point/ number E confirmed it. 5fter the Inde$ reached point/ number 3 a lon down trend bean from point/ number 3 to point/ <. :sin the normal use of trend lines we would draw suppl! line 77 throuh point 3 and point 1< with the support line ,, parallel to it drawn throuh point 1=. A 9)o#n: ?6 (e 0a/e .eco%e! o/e"!old w(en (e l#ne EE #! ."o+en and (e 0a/e *"n! *)wa"d .* doe! no "eac( l#ne DD a 9)o#n: n*%.e" ?7& T(*! we can d"aw a new and a !ee)e" !*))l$ l#ne  ("o*g( 9)o#n: n*%.e" ?- and 9)o#n: n*%.e" ?7 w#( a !*))o" l#ne  )a"allel o  ("o*g( 9)o#n: n*%.e" ?6& )lease note how the failure to reach the suppl! line 77 at point/ number 1@ put the support line ,, in 'eopard! at point/ number 1A. "hen we draw a new and steeper line such as --% it is usuall! best to continue the oriinal line such as 77 as it ma! come into pla! much later. 7o not fail to e$tend ma'or lines a lon wa!.  Gow% let’s measure the thrusts on the mo&e down from point/ 3 to point/ <. 71% ,1% - 1 and ?1 measure the thrusts on the wa&e from point/ 3 to point/ 1=% point/ 1= to point/ 1>% point/ 1> to point/ 1A and point/ 1A to point/ < respecti&el!. 5ain% note the shortenin of the thrust at ?1. It is an indication that either the Inde$ is runnin out of suppl! or demand is comin in to stop the down mo&e. It is a &isual indication sinalin !ou to be alert and &er! careful in !our anal!sis and in !our tradin. The rallies to points/ number 1<% 1@ and 1E first o&erran the halfwa! point at point/ 1<% then stopped in the same area as the halfwa! point/ at point/ 1@ and then failed to reach the halfwa! point at point/ 1E% showin proressi&e weakness. 0e !(o*ld calc*lae (e (alf>wa$ )o#n! on (e %#no" %o/e!, .* 9onl$: afe" (e!e %#no" (alf  )o#n! (a/e .een o/e">"*n !*.!an#all$& Then o back and calculate the half points on the more important mo&es such as from point/ number 3 to point/ number <. This point is 3E@> and is shown b! the bracketed half number. This mo&e from point/ number 3 to point/ number < is a normal down trend with ood suppl! on the down side e&idenced b! e$pandin price spread and &olume and a lack of  demand on the rallies shown b! the narrowin of spread and decreased &olume.  Gow% please turn to the “#hr!sler%” chart number eiht% which has an e$ample of the re&erse use of trend lines. 5s “#hr!sler” starts down from point number 1% the first line which we can draw is the normal use of trend lines% line 55 throuh points number 1 and 3% with line BB drawn throuh point/ number < parallel to 55. I !(o*ld .e noed (a #n d"aw#ng "end l#ne!, we !a" off w#( (e no"%al *!e of "end l#ne!& Lae" on, afe" add##onal !*))o" and !*))l$ )o#n! (a/e .een c"eaed # %a$ .e )o!!#.le o !w#c( o (e "e/e"!e *!e of "end l#ne!& "e ha&e drawn line ##% which is the re&erse use of trend lines% throuh points = and >. 8ou ma! ask+ wh! use re&erse rather than normalF "ell% (e #%)o"ance of (e "e/e"!e *!e of  "end l#ne! #! (a # #! dee"%#ned .$ (e )o#n! a w(#c( (e o))o!##on ca%e #n o !o) (e %o/e& Look at point/ number = on “#hr!sler.” It went down from point/ 3 to point/ = and &olume came in. There was ood suppl!% but there was ood demand to stop it% e&en on a temporar! basis. There was a battle oin on there and “#hr!sler” rallied slihtl! from that  point. 5t point/ number >% aain the price came down and demand came in to stop it. There was increased &olume and an increased amount of tradin and the down mo&e was stopped temporaril!. It is important to remember that/ there are two wa!s to o down. )rice can o down and ha&e an increased suppl! met b! a superior force of demand at that point or price can o down and simpl! drift and drift and drift until it stops and ultimatel! rallies. T(e "e/e"!e *!e of "end l#ne! #! d"awn ("o*g( w(e"e # #! !o))ed= w(e"e (e o))o!##on ca%e #n and ac#/el$ !o))ed (e "end= o !o) # and "e/e"!e # e/en on a e%)o"a"$ .a!#!& Lae" on de%and %a$ co%e #n a (e !a%e angle o !o) (e %o/e& Po#n! 1 and 6 "e!)ec#/el$, #ll*!"ae (#! (o*g( . Gow% what about the suppl! line. "e draw the first suppl! line% 77% throuh point/ number A. It is the suppl! point on the rall! between points/ number = and >. 77 is met at point/ number E. The price fails to meet ## at point/ number 2 indicatin strenth. Then 77 is broken at point/ number 14 indicatin demand o&ercomin suppl!. "e can also draw a line ,, throuh point number 1% parallel to ##+ aain the re&erse use of trend lines& No#ce (e anc(o" )o#n fo" l#ne EE #! a )o#n n*%.e" ? w(e"e (e )"eced#ng *) "end wa! !o))ed o" %o"e co""ecl$ !aed, w(e"e !*))l$ o/e"ca%e de%and& In drawin !our trend lines% !ou ma! ha&e to e$periment% tr!in se&eral points and tr!  both the re&erse use and the normal use. This failure to reach one line lea&es the other  &ulnerable to bein broken& A (el)f*l ool o *!e #! o d"aw an a""ow f"o% a !o))#ng )o#n o (e "end l#ne 9#n o"de": o #nd#cae (e fa#l*"e o "eac( (a )a"#c*la" "end l#ne& -or  e$ample% see the arrow drawn between point 2 and the support line ##.

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 Gow% please turn to chart number nine% “?race.” -rom point number 1 to point number 3% “?race” is in a lon up trend. The support line 55% usin the normal use of trend lines% is drawn throuh points number 1 and number <. The suppl! line BB is drawn parallel to 55 throuh  point number =% the top at rall! points between points/ number 1 and <. 5t point number > the stock fails to meet line BB and then penetrates line 55 at point/ number @. The breakin of line 55 at point/ @ occurred on low &olume% decreasin &olume and a narrowin spread% indicatin a lack of suppl! on this reaction. T(#! lac+ of !*))l$ #nd#caed (a "ace wa! no a.o* o (a/e a c(ange of "end& The stock rallied well and bean a lon mo&e from point/ number @ to point/ number 3 & T(e "e/e"!e *!e of (e !*))l$ l#ne CC wa! d"awn ("o*g( 9)o#n!: n*%.e" 8 and ;& Noe (e /ol*%e (a ca%e #n a .o( of (e!e )o#n!& Gumbers/ A1 and E1 are indications on the &olume le&el. Suppl! came in to stop the ad&ance. Line ## was respected se&eral times around point/ number 2. 5t points/ number 14 and 3 the stock became o&erbouht on the clear   penetration of line ##% lea&in the stock &ulnerable to a reaction. The support line 77% drawn  parallel to ## throuh point/ number 11 was then penetrated on the reaction from point/ number 3. The thrusts 51 throuh -1 ha&e been drawn to indicate the amount of proress on each  phase of the mo&e up. Gote the narrowin of the thrust at B1 and the proloned and deep reaction which follows. 5lso the narrowin of the thrust at -1 disclosed the lack of proress at  point number 3% which% as the price action shows% was the end of mo&e. The reaction lows at points/ number 13% < and @ were sinificantl! below the halfwa! point% indicatin relati&e weakness on those reactions. (owe&er% from that point on the reactions to points/ number 11% 1< and 1> held considerabl! abo&e the halfwa! point% indicatin relati&e strenth. There are a series of suppl! points between points/ number A and 1@ and two halfwa!  points could be calculated from point/ number @ to point/ number A or perhaps from point/ number @ to point/ number 1@. This is an illustration of how sometimes 'udment must be used and how !ou ma! not ha&e a clear cut situation with which to deal. Thus far we ha&e discussed how to anal!0e the trends aided b! trend lines% thrust and halfwa! points. (ow do !ou put it to practical use and how can !ou take a position in a stock  which alread! has mo&ed out of the base and has established its trendF The followin is one  procedure which has pro&en to be *uite helpful and profitable to man! students. In an up mo&e% first of all determine in fact that/ the stock is in a normal up trend. It should ha&e ood demand on the up mo&es and a lack of suppl! on the reactions. Second% the stock should ha&e plent! of  count for a much hiher ob'ecti&e. "h!F Because !ou do not want to be bu!in into a trend as it is comin to an end. Third% calculate the e$act halfwa! point and place a stop order below the  precedin support area. Then as the stock continues its normal reaction !our bu! order ma! be e$ecuted. 6e&erse this process for a down trend. Let’s see how this works out in practice in this e$ample. 5n anal!sis of the chart action to point/ number > indicates that the stock is establishin a normal upward trend. It has ood demand on the rallies and a lack of suppl! on the reactions. In appl!in this techni*ue of bu!in around the halfwa! point on the corrections we calculate the halfwa! point on the mo&e from point/ number < to point/ number > which is at . If !our order is not e$ecuted% !ou can cancel the order and simpl! look  elsewhere for other opportunities or e&aluate !our risk ain situation and possibl! purchase the stock on the ne$t reaction. It is important to reali0e there are times when !ou ma! decide to ride out a correction. Simpl! take the risk% follow it throuh and if it looks as thouh !our stop order  ma! be e$ecuted% !ou ma! et out before it is reached. Go market techni*ue is perfect. It will re*uire considerable practice tradin before !ou will be able to operate with an! techni*ue with competence and confidence. )art of !our problem in bu!in on reactions in trends is oin to be the problem of   'udin when the suppl! is dr!in up or when it has dried up on the reaction. 8ou ma! take the

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speculati&e position in one of two wa!s. ,ither put the order in ahead of time as pre&iousl! discussed or secondl!% wait until the stock has completed its reaction and then bu! as demand is comin in% such as after the reaction at point/ number @% to bu! at point/ number 1A as the stock  is mo&in up. Both methods ha&e their ood points. "e ha&e enerall! found that it is best to  bu! as the stock is reactin as the risk is at a minimum. There are man! false starts which can fool !ou and can result in !our bu!in at the top of a minor rall! such as at point/ number 1E. The mo&e from point/ 3 to point/ 12 is a perfectl! normal down trend with suppl! on the downside and a relati&e lack of demand on the rallies. "e ha&e drawn in line ,,% the normal use of trend lines% throuh points 3 and 34% with the support line -- parallel to it% drawn throuh the bottom of the reaction at point number 31. 5t point/ 33 to point/ 3< this support line is respected. The halfwa! points and the thrusts ha&e been drawn. On the rall! from point/ 31 to point/ 3= the stock did not et near the halfwa! point between point/ number 3 and point/ number 31. 5n order placed around the halfwa! point would not ha&e been e$ecuted. (owe&er% an order to sell short placed 'ust below the halfwa! point from point/ 3 to point/ 3> would ha&e been e$ecuted at point 34 and would ha&e resulted in rather lare profits. This halfwa!  point is at =E1D=. 5 stop order could ha&e been place around >11DE or >4. Is there ood demand on this rall!F Our answer has to be !es because of the wide price spread and the increased &olume on the rall!. Gow% as it beins to react from point/ >% calculate the halfwa!  point from point/ = to point/ > This is J3<.44. )lace an order for a second position abo&e it% sa! at 3< and at point/ A% it became *uite o&erbouht% indicatin that it was &ulnerable to a reaction. 5lso% an anal!sis of the thrust indicates that at #1 there was a &er!  pronounced shortenin of the thrust. Suppl! is comin in at lower le&els and there ma! be a

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more pronounced reaction. Thus% calculate the halfwa! point and then watch it as it reacts. It is usuall! better to be safe and o into the stock market when !ou are more certain than to take unnecessar! risks. The reaction at point/ 2 is with more pronounced price weakness compared to the reaction followin points/ > and 3% thus% we simpl! sta! out of the situation for the moment. "e ma! calculate the halfwa! point from point/ = to point/ A as bein J3=.44 per  share. This howe&er is &er! close to the position alread! taken at point/ @ and a new purchase would be at about the same price le&el. It is usuall! best not to do this. If capital is a&ailable% look for another opportunit!. (owe&er% the reaction to point/ E is a normal correction within the trend. It shows a dr!in up of suppl!. The mo&e from point/ E to point/ 14% aain has ood demand. Gotice the increased &olume on this rall!. On the reaction followin point/ 14% it  bean to come down with decreasin &olume and decreasin spread. "e calculate the halfwa!  point as 3AADE and enter an order to bu!% sa! at 3E1D3. )ut a stop order below point/ E at 31ADE and the bu! order is e$ecuted on the wa! down to point/ 11. 5t point/ 13 there is some hea&! &olume causin a decline% but it finall! dries up at point/ 1< and the stock resumes the upward trend. "e now ha&e three positions taken on the reactions to points/ =% @ and 11. "e aim to sell out as the stock is meetin important ob'ecti&es% preferabl! on a bu!in clima$. 5t point/ 1= the stock oes throuh such a bu!in clima$ at an important ob'ecti&e area and we sell all or part of  the lon positions. Let us assume that all is sold. The stock beins to react from point/ 1>% which is the secondar! test of the bu!in clima$ which took place at point/ 1=. 5s it does so% there is a marked shrinkae of &olume and a lack of price weakness. It is entirel! possible that the ma'or upward trend is still intact. "e ha&e seen hea&! demand on the rall! from point/ 1< to point/ 1= and a lack of hea&! suppl! on the subse*uent reaction. The halfwa! point of the mo&e from point/ 13 to point/ 1= is at <>ADE. One ma! place an order to bu! 'ust abo&e that halfwa! point at <@ 1D3 and a floatin stop order  two% three or four points below it% sa! at <3ADE and then/ watch the stock as it reacts. The order to  bu! is e$ecuted at point/ number 1@. 5t point/ number 1A &olume comes in to stop this minor  reaction. The secondar! test at point/ 1E confirms that the sellin has dried up. The stock  mo&es up to point/ 12 and beins to react. The halfwa! point is at =4ADE and an order is placed at =11D3 with a stop underneath the support le&el at point/ 34% sa! at <@ADE. There is much more  price weakness and &olume than we would like to ha&e on this/ reaction as our order is e$ecuted at point/ 31. (owe&er% the stock e&entuall! mo&es sidewa!s and resumes the upward trend. 0(a co*ld (el) *! a! we ae%) o dee"%#ne w(e"e # co*ld "e!*%e (e *)wa"d "end& One (#ng #! (e "e/e"!e *!e of "end l#ne! CC d"awn ("o*g( 9)o#n!: 6 and ?1, w(e"e /ol*%e ca%e #n o !o) (e *)wa"d %o/e& The support line 77 aain re&erse use/ is drawn parallel to ## throuh points/ 13 and 1<. 5t point/ 33 the stock meets support at 77 and resumes the upward trend. On the mo&e from point/ 33 to point/ 3< there is ood demand on the rall! and then it beins to react with a lack of suppl!. 5ain calculate the halfwa! point at =31D3% put in a bu! order at =<% a stop order underneath point/ 33 at% sa!% and we could attempt to take a position aain on the reaction followin point/ 3>. The halfwa! point is at =A1D=. )lace and order to bu! 'ust abo&e it% sa! at =A
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!)ec* !)ec*la la#/e #/e )o!# )o!##on #on,, $o* $o* !(o*l !(o*ld d a+e a+e (e )o!# )o!##o #on n a! ea"l$ ea"l$ #n (e "en "end d a! )o!!# )o!!#.le .le,, )"efe"a.l$ a! (e "end #! .e#ng e!a.l#!(ed& I #! e!)ec#all$ #%)o"an (a $o* )$"a%#d w#( (e "end& Do no a+e a !econd )o!##on w(en $o*" f#"! )o!##on !(ow! $o* a !*.!an#al lo!!& These are the basic concepts of trends and one method of takin a position as a trend is  bein established or as a trend is about to be resumed. It is not necessaril! the onl! method of  establishi establishin n a market position position in a trend. trend. (owe&er% (owe&er% it has been tested b! man!% man! man! students and b! the staff staff of the Stock Market Market Institute Institute with e$cellent results results.. "e suest suest that before appl!in this techni*ue with an! si0able portion of !our capital that !ou do e$tensi&e practice work with it. This This has been the Basic Basic Lectur Lecturee on Trends% Trends% Thrust Thrustss and (alfwa! (alfwa! )oints. )oints. "e ha&e illustrated some pro&en techni*ues in establishin a speculati&e position in harmon! with the trend and to close out that position as the trend is endin. Listen to this this tape reularl!. reularl!. Stud! the illustrations carefull!. carefull!. Then% practice+ practice until !ou are competent and confident confident in !our use of this pro&en techni*ue. Then bein to profit from from the knowlede and skill !ou !ou ha&e de&eloped.

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BASIC LECTURE NUMBER THREE

ACCUMULATION

The sub'ect of this this Basic Lecture Lecture will be accumulation accumulation areas. The lecture lecture will ha&e se&era se&erall ob'ect ob'ecti&e i&es. s. The! The! are 1/ to describe describe the proces processs of accumulat accumulation ion++ 3/ to indica indicate te the specific principles which are usuall! part of accumulation+
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and the continued e$istence of that suppl!. Thus there ma! be additional secondar! tests such as at point/ > and the more important later secondar! test such as at point/ A. The stock then oes into a tradin rane such as in section B. ?enerall! in the first part of the tradin rane the price swins are rather wide. T(en #n (e lae" )a" of (e "ad#ng "ange (e )"#ce *!*all$ .eg#n! o na""ow down' T(e !oc+ ge! d*ll& "hat happens to the &olume or the eneral le&el of tradinF "ell% "ell% usuall! in the earl! part of this this rane there is rather  hih hih &olume% &olume% sometime sometimess rather rather errati erraticc &olume &olume++ both both the price and &olume &olume action action ma! be somewhat erratic and &er! difficult to anal!0e. T(en #n (e lae" )a", (e clo!e" $o* ge o (e end of (e "ad#ng "ange o" lea/#ng (e "ad#ng "ange (e /ol*%e .eg#n! o d"$ *)& 5s the floatin suppl! or the flow of orders comin into the market beins to decrease% the eneral le&el of the dail! &olume should decrease.  Gow% let’s let’s take take a few minutes to discuss tradin ranes. "e ha&e drawn line 55% BB% ## and 77 to define the limits of the tradin rane & AA #! d"awn ("o*g( ("o*g( (e !ell#ng !ell#ng cl#%a a 9)o#n: 2 and #! (e f#"! )o#n a w(#c( we can .eg#n o def#ne (e l#%#! of (e "ad#ng "ange& A! !oon a! 9)o#n: n*%.e" - (a! .een dee"%#ned we can d"aw l#ne BB and (e !oc+ #! en#led o fl*c*ae .eween (o!e l#%#! #ndef#n#el$ *n#l # ae%)! o co%e o* price action to of (a "ad#ng "ange& Line BB helps to show the penetration of point < b! the price  point/ @ and the failure to continue upward. 0e d"aw CC ("o*g( 9)o#n: 7 o #nd#cae (e point/ A on the penetratio penetration n of 55% 55% we w#den#ng of (e l#%#! of (e "ad#ng "ange& Then at point/ draw a new line% 77. This line is e&entuall! broken at point/ E and it it helps to define the sprin sprin or terminal shakeout and to call attention to it. "hether !ou will draw these hori0ontal trend lines or not will larel! depend on !our  normal method of anal!sis% what !ou are tr!in to determine and the price and &olume action in the situati situation on !ou are anal!0 anal!0in in.. These These hori0ont hori0ontal al trend trend lines are helpful helpful in drawin drawin !ou !our  r  attention to the penetration or the failure to penetrate a support or suppl! area. "e suest !ou do considerable e$perimentin and practicin with them.  Gow% in section # the stock oes throuh a testin process. "hat we are showin is one of two alternati&e alternati&es. s. Let us outline outline these two alternati alternati&es &es first. first. The stock could could bein to come out of the tradin rane rane on the upside with hiher tops tops and bottoms. bottoms. The second alternati alternati&e &e is that it could tr! to o throuh the bottom with a terminal terminal shakeout. "hat we are showin on the chart is the second alternati&e% the terminal shakeout or sprin% which is probabl! the most desirable situation anal!ticall!. "h!F Because (e )*")o!e of a e"%#nal !(a+eo* #! o clean *) (e "e%a#n#ng !*))l$, fo"ce all of (e wea+ (olde"! o !ell and o c"eae a co%)leel$ brief outline fal!e #%)"e!!#on a! o (e d#"ec#on of (e *l#%ae %o/e& It is necessar! to i&e a brief of the sprin and the terminal shakeout before mo&in forward with the anal!sis of the chart e$amples. 5 sprin is a refinement of Mr. "!ckoff’s "!ckoff’s concept of a terminal shakeout and rew out of  that concept. A !)"#ng !)"#ng #! a )ene"a#on .elow a )"e/#o*! )"e/#o*! !*))o" a"ea w(#c( ena.le! one o difference  3*dge (e 5*al#$ and 5*an#$ 5*an#$ of (a !*))l$ on (a )ene"a#on& )ene"a#on& The main difference  between the sprin and the terminal shakeout shake out is how far it penetrates into new low round. Sa! on a J>4.44 stock% if the dri&e into new low round is four or fi&e points and then it turns around% we would call that a terminal shakeout. (owe&er% if if it reacted or penetrated three *uarters of a  point or one/ point p oint % a point or a point and a half% in other words a much shorter penetration% we would call this a sprin. It is primaril! a matter of terminolo!. terminolo!. The basic understandin and the  basic concept is the same. 5s the stock oes into new low round one of two thins will happen. ,ither o&erwhelmin suppl! suppl! will come in or no suppl!. suppl!. O&erwhelmin suppl! is a one sprin. It is e&idenced b! a wide open break in price action and &er! hea&! &olume. 5 three sprin is with with no sinificant price weakness and low &olume on the penetration into new low round. There is a &er! lare area between between these two e$tremes. e$tremes. "e call these number number two sprins and a two sprin is &er! similar to a terminal shakeout in that both ha&e suppl! and both must be tested b! a secondar! test. -ollowin this terminal shakeout or sprin situation at point/ E% there is a rall! to point/ 2% then a secondar! secondar! test of the sprin sprin or terminal terminal shakeout at point/ 14. A (a )o#n, !(o*ld !*))l$ .e co%)leel$ a.!o".ed, (e )"ofe!!#onal! +now 9(a: (e$ canno %o/e (e !oc+  on (e down !#de, (a (e .*$e"! 9de%and: a"e #n con"ol of (e !#*a#on and # #! "ela#/el$ tradin !afe o %o/e (e !oc+ *)& The professionals ma! attempt to dri&e the stock out of the tradin rane on the upside and bein establishin establishin an upward trend or the the markup phase. This process occurs in section 7. The stock mo&es up to point/ 11% which is a sin sin of strenth which we label SOS% backs off to point/ 13 which is an L)S% the last point of support% mo&es up to point/ 1<

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for a more important sin of strenth and backs off to point/ 1=% a more important L)S or last  point of support. On this mo&e up% we use the analoous term and sa! “the stock has 'umped the creek.”  Gow &er! briefl! the creek stor! is an analo! similar to a parable% which relates to the flow of  suppl! across the top of the tradin rane. The creek itself is a wil!% s*wil! trend line d"awn f"ee (and ("o*g( (e o)! of (e "all#e! w#(#n (a "ad#ng "ange  and on the mo&e to point/ 11 it 'umps this wil! trend line which we call a creek. This particular/ e$ample illustrates a minor creek. On the reaction to point/ 13% it “backs up to the ede of this creek.” The mo&e from point/ 13 to point/ 1< “'umps” what we will classif! as “a ma'or creek%” with the reaction to point/ 1= bein the “backup to the ede of that ma'or creek.” Gow% when this is accomplished% the stock is in a position to lea&e the tradin rane and work out the force of  accumulation which has been built up in this area+ in other words to work out its fiure chart count. More on this sub'ect will come later. -or now% let’s look at what happens to the suppl!  demand relationship in this accumulation area. In the area 5% suppl! is in control+ suppl! is stroner than demand and at the  bottom of that area around points/ 1 and 3 there is an attempt to absorb the suppl! and stop the down mo&e. In areas/ B and # demand and suppl! on a ma'or basis are prett! much in e*uilibrium. There is no decisi&e trend. (owe&er% the suppl! steadil! becomes weaker and the demand becomes stroner+ the professionals are bu!in or absorbin the suppl!. In section #% beinnin with points/ E and 14 as the stock beins to establish its upward trend and enters the markup phase% demand is consistentl! stroner than the suppl! on balance. This suppl! and demand is created b! people as the! do their bu!in and sellin. "hat happens to the people in the accumulation areaF In eneral weak holders are moti&ated to sell the stock% which the! bouht earlier% to the professionals% who reconi0e the hih profit% low risk le&el of   prices. The professionals% on balance% are bu!in and the! continue bu!in the stock until the! e&entuall! bein to sell out in the distribution area. (ow do !ou take a speculati&e position in this t!pe of baseF -irst of all% we are teachin stock market speculation aimin for a larer mo&e or more simpl! stated the e$pectation of  makin a profit on the price fluctuation of stocks listed on the &arious stock e$chanes. "e aim to take our position in the riht hand side of the tradin rane as the stock is oin to lea&e the tradin rane on the upside and work out the force of accumulation and the count built up in the accumulation area. "e want to take our position if the stock is establishin its upward trend. Thus% on chart number/ two !ou can bu! in the area of points/ E to 14 and at points/ 13 and 1=. 8ou can continue to bu! on an! normal correction thereafter as discussed in Basic Lecture  Gumber Two. Let us narrow this down to the specific principles. If !ou ha&e a number three sprin% !ou can take a position on that number three sprin immediatel!. If !ou ha&e a number two sprin% !ou can take a position on the number two sprin or wait to bu! on the secondar! test of  the number two sprin. If the action can be identified as a terminal shakeout% !ou can bu! on the terminal shakeout itself or on the secondar! test of the terminal shakeout. "e ha&e found that establishin the first position on the test is usuall! better than takin it on the number two sprin or the terminal shakeout itself. The second position ma! be established on the “backup to the ede of the creek%” which is the last point of support. This wa! !ou are p!ramidin with the market instead of buckin the market. Yo* do no a+e a !econd )o!##on *n#l (e f#"! !(ow! $o* a )"of#& -or those few students who are oin to be in and out traders% a person ma! bu! on a sellin clima$ such as at point 3 and sell out on the automatic rall! at point/ <% scalpin a few  points% then o short at point/ < and co&er at point/ = on the secondar! test% o lon at point/ = or point/ > and sell out at point/ @. 5ain% !ou can bu! on the secondar! test at point/ A and sell out towards the top of the tradin rane. There will be few students who will be able to do this well. "e are not ad&ocatin this process. It essentiall! re*uires a tape readers techni*ue and a &er! fine understandin of the market. "e suest &er! stronl! that !ou confine !our bu!in to this area o&er at points/ E to 14 and at points/ 13 to 1= on the L)S or the “backup to the creek%” as the stock is establishin its upward trend. It is in these areas that the profit  risk ratio can be reatest in !our fa&or. 7ue to the nature of this lecture% which is to co&er the accumulatin area% on a number of  the charts% we will onl! hit the hihlihts of the man! principles without oin into reat detail. There ma! be indications such as trend lines% halfwa! points etc.% marked on the charts which are simpl! not discussed. 6emember% the purpose of this tape is to help !ou to orani0e !our  understandin of the basic process of accumulation.

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 Gow% please turn to chart number three. It is the "!ckoff "a&e Inde$ illustratin the ma'or area of accumulation which took place in the summer of 12@@. "e use the "!ckoff "a&e to indicate the position and the probable/ future trend of the eneral market. The "!ckoff "a&e itself mo&ed from the 3E44 le&el to the/ 3344 le&el% a ma'or% sustained decline. The prices on man! indi&idual stocks were badl! smashed. The "!ckoff/ "a&e did an e$cellent 'ob of  indicatin the turnin points% the shift of control from suppl! to demand and was beautiful in definin the turnin points. Let us anal!0e it briefl!. -rom point/ 1 to point/ 3 there is a sustained downward mo&e+ a bear market. (ow did the trend come to an endF 5t point/ number < there is preliminar! support. Look at the &olume which came in at point/ < to stop it. It is a form of sellin clima$. It was immediatel! followed  b! the sellin clima$ at point/ 3% the automatic rall! at point/ <1 and the secondar! test at point/ =. These principles will be outlined in reater detail elsewhere. The "a&e went into a tradin rane with the upper limits bein at point/ <1 and the lower limits at point/ 3. 5t point/ > it attempted to lea&e that tradin rane% failed to do so and then bean to mo&e down. 5t point/ @ the "a&e went into new low round for a number two sprin This was followed b! an immediate rall! and then the secondar! test of the number two sprin at point/ A. )oint/ E is the “crossin of the minor creek” and a sin of strenth and point/ 2 is the “backup to the ede of the creek%” which is the last point of support. The “'ump across the creek” is normall! a sin of strenth and the “backup to the ede of the creek” is normall! the L)S or last point of support. Before listenin to the discussion of an! of the future charts in the Basic Lectures% we ure !ou to anal!0e the charts !ourself before listenin to our discussion of them. 8ou will ain most from lectures if !ou will follow this procedure as it enables !ou to check !our  understandin of the principles. 8ou will see thins that we will not discuss and we ma! perhaps discuss some thins which !ou will not identif!; But this !ou will soon learn is an e$cellent wa! to learn. #hart number four is “Boein%” 12@3  @<. It is a classic illustration of an accumulation area. The stock mo&ed down in earl! 12@3 from J>@.44 a share to <>1DE at point/ number 1% which was the sellin clima$. The preliminar! support was at point/ 3. -ollowin the sellin clima$ at point/ 1% there was an automatic rall! at point/ < and a secondar! test at point/ =. 5t point/ = the stock had stopped the ma'or down mo&e. There was not sufficient suppl! to resume the ma'or down trend. It then went into a lon tradin rane to point/ >. Gote that in the tradin rane there was enerall! ood demand on the rallies% as e&idenced b! an e$pandin price action and e$pandin &olume with a decreased &olume and a eneral narrowin of the price spread on the reactions. 5t point/ number @ there is a number two sprin% but the demand that came in followin it was not sufficient to enable the stock to lea&e the tradin rane on the upside. A 9)o#n: 6a on (e /ol*%e le/el (e"e wa! a )"ono*nced dec"ea!e #n (e gene"al le/el of  "ad#ng= (e !oc+ wa! ge#ng !ca"ce& Lines 55 and BB% the ordinar! use of trend lines% indicate the anle at which suppl! was comin in durin this tradin rane. Support line ## is drawn throuh point/ 1 to indicate the bottom of the tradin rane and helps to define the  penetration of the support on the terminal shakeout down to point/ A. It also draws our attention to the ape$ at point/ >. Un#l (e !oc+ goe! ("o*g( (e e!#ng )"oce!! we canno .e ce"a#n (a (e "ad#ng "ange #! acc*%*la#on and (e"efo"e we do no a+e a !)ec*la#/e )o!##on fo" a la"ge %o/e *n#l # (a! !(own !"ong e/#dence of lea/#ng (e "ange )e"%anenl$& “Boein” continued in the tradin rane until it went throuh the pre&ious supports for a terminal shakeout down to point/ A. -ollowin point/ A% there was a rall! to point/ E and then a secondar! test of the terminal shakeout at point/ 2. On the reaction to point/ 2% there was less  price weakness and less &olume compared to the mo&e from point/ > to point/ A. This indicated that the suppl! which was present on the mo&e down to point/ A was no loner   present. The mo&e up to point/ 14 is a sin of strenth and a “crossin of the minor creek” and the reaction down to point/ 11 is the last point of support and also the “back up to the ede of  the minor creek.” The mo&e from point/ 11 to point/ 13 had an e$pandin price action and an increased &olume indicatin ood demand and the reaction to point/ 1< was with lack of suppl!. )oint/ 13 was a ma'or sin of strenth and point/ 1< the ma'or last point of support.  Gow% please turn to chart fi&e% the one point fiure chart of “Boein.” "e ha&e drawn the numbers for the ma'or indications on it and ha&e/ indicated a loical count from the ma'or last  point of support% point 1
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the riht hand side of the tradin rane as the area of accumulation is bein completed and as the stock is enterin the markup phase% the followin essential conditions must be present; 1/ It the stock/ must ha&e a substantial fiure chart count. 3/ It must ha&e some form of a sin of  strenth.  1. This is e$cellent. "e are at least in the ballpark.  Gow% wh! must there be a sin of strenthF Simpl! because a !oc+ can con#n*e o %o/e !#dewa$! #n (e "ad#ng "ange #ndef#n#el$ *n#l # (a! a !#gn of wea+ne!! o" a !#gn of  !"eng(& "h! must there be a last point of supportF Simpl! to confirm that the sin of strenth is in fact a sin of strenth. Let us define the sin of strenth. The sin of strenth is an action which shows that demand is in control. T(e !#gn of !"eng( !(o*ld (a/e good de%and on (e *) %o/e= a w#de !)"ead 9and: #nc"ea!#ng /ol*%e on (e *)!#de& T(e la! )o#n of !*))o" !(o*ld (a/e a lac+ of !*))l$, #nd#caed .$ a "ela#/e na""ow#ng of  (e !)"ead and a dec"ea!e #n /ol*%e& The comparison is between the up mo&e% constitutin the SOS% or sin of strenth% and the reaction followin it% the L)S or last point of support. "hat if the stock has a possible sin of strenth indicated b! a widenin spread and an increasin &olume on the mo&e up and is then followed b! ood suppl! on the possible L)S% indicated b! wide spread and hih &olume on the reactionF This cancels the probabilit! of the first action bein a sin of strenth and the stock  will probabl! continue in the tradin rane for additional testin. Let’s et back to charts. #hart number si$ is “#ontrol 7ata%” 12@> and 12@@. The stock  had one throuh ma'or distribution in the area from J>>.44 to J@>.44 and then in Kune 12@>  bean a ma'or decline from point/ 1 down to point/ 3 which is the preliminar! support and finall! to the sellin clima$ at point/ <. )oint/ = is the automatic rall! and point/ > is a secondar! test. #ompare the &olume at point/ < and point/ >. 5t point/ > the suppl! was much less than at point/ <. It then bean a lon tradin rane with some &er! wide price swins% a tradin rane that consisted of three lare phases+ from point/ > to point/ @+ from point/ A to point/ E and from point/ 2 to point/ 14. There was% in eneral% ood demand on the rallies and a dr!in up of &olume% a comparati&e lack of suppl! on the reaction compared to the precedin up mo&es% howe&er% # wa! no *n#l (e a"ea of 9)o#n: < o 9)o#n: ?? (a (e gene"al le/el of "ad#ng, co%)a"a#/el$, a! !(own .$ (e /ol*%e, .egan o d"$ *) o" dec"ea!e !*.!an#all$& There was one attempt to lea&e this tradin rane at point/ 13 and then the stock went throuh a terminal shakeout to point/ 1<% the rall! to point/ 1= and a secondar! test of the terminal shakeout at point/ 1>. Look at the fiure chart count on chart number se&en. The possible count is massi&e. The mo&e from point/ 1> to point/ 1@ is a minor sin of  strenth and the “crossin of the creek%” followed b! a last point of support at point/ 14% which is the “backup to the ede of the creek.” )oint/ 1A is the “crossin of the ma'or creek” and sin of strenth and point/ 1E the “backup to the ede of that ma'or creek%” the last point of support. Suppl! line 55% normal use of trend lines% is the anle that the suppl! came in durin this tradin rane. Lines/ BB and ## are hori0ontal support lines which delineated the penetration at point/ A and then the final terminal shakeout at point/ 1<.  Gow where could a speculati&e position be taken in/ this situation for the ma'or mo&eF The first position could ha&e been established at the terminal shakeout at point/ 1< or the secondar! test at point/ 1>. 5nother position could ha&e been taken on the reaction to point/ 14 and another one on the reaction to the ma'or L)S at point/ 1E. These positions would ha&e meant an a&erae cost of around J<4.44 per share. In Kune 12@E the stock reached J1A=.44 per  share. The lare counts ha&e been marked on the fiure chart of “#ontrol 7ata%” on chart se&en. Is it a realistic e$pectation that !ou could ha&e cauht all of the mo&e from <4 to 1A=F The answer is this; If the base area of accumulation is dianosable so that !ou can determine the suppl!  demand relationships and !ou ha&e a loical place to take a position and the upward trend is normal% !ou can pla! for all or a &er! substantial portion of the ma'or up mo&e. This mo&e on “#ontrol 7ata” was dianosable+ the ma'or indications were there+ there were loical  places at which to take a position and the up trend was normal. 5 lare part of our problem is that sometimes we simpl! do not belie&e the potential count in the accumulation area. 5t other  times we et scared out prematurel! durin the markup phase. 8ou do not ha&e to pla! for the

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entire base count. 8ou can howe&er attempt to et the ne$t intermediate dri&e up and then sell out before a substantial reaction occurs. "here !ou will sell out in the up trend will larel! depend upon the purpose in takin the speculati&e position% the amount of risk !ou are willin to assume and the estimate of the depth and likelihood of possible reactions.  Gow for reaccumulation. "hat is reaccumulation and how can !ou identif! it and take a speculati&e position in the reaccumulation areaF 6eaccumulation takes place within a si0able upward trend when a stock oes into a tradin rane and in the process builds a count for a hiher ob'ecti&e% usuall! confirmin a prior base count. It oes into a restin stae as the  professionals continue to absorb the suppl!. The basic process of reaccumulation is &er! similar  to that of chart number two with one ma'or &ariation. :suall! it will ha&e been preceded b! an up trend instead of a down trend as in area 5. #hart number eiht of “Beckman Instruments%” of 12@2% contains man! of the same indications and these/ are marked on both the &ertical and the fiure chart. The action from point/ < to point/ = is the area of oriinal accumulation. )oint/ > is a terminal shakeout and the mo&e to point/ @ is a sin of strenth% followed b! the last point of support at point/ =. The stock then mo&ed up to point/ A% went throuh a minor distribution with a sin of weakness shown on the chart as “SO"” at the >1 1D3 le&el and the last point of suppl! or L)S8 alon the >= line. The down count was A points. "ith this as backround let us e$amine toether the re accumulation area from point/ 1 to point/ 3. The minor sellin clima$ at point/ 1 was in the &icinit! of the ma'or 1D3 correction. Noe (a (e "eac#on f"o% 9)o#n: 8 o 9)o#n: ? (ad le!! /ol*%e (en on (e %o/e f"o% 9)o#n: 6 o 9)o#n: 8& It had a price clima$ at point/ 1% a secondar! test at point/ E% a minor sprin at point/ 2 with a secondar! test at point/ 14. It then bean to ha&e hiher tops and hiher   bottoms rather than a terminal shakeout. It did howe&er ha&e a number < sprin at point/ number 3 on the penetration of point/ 11. There was no suppl!. The mo&e from point/ 3 to point/ 13 is a minor sin of strenth and the reaction to point/ 1< is an L)S% the last point of  support. The larer fiure chart counts ha&e been marked.  Gow% how do !ou take a speculati&e position in this situationF One can be taken at point/ 2 or 14 on the first minor sprin. 5 second loical position can be taken at point/ 3% the/ number three sprin and a third position on the reaction to around point/ 1<. It should be noted that the reaction to point/ 1< was &er! brief and it would be difficult to et a position there. (owe&er% that is the stock market+ it is seldom eas!. Be &er! war! when it is. #hart number nine of “Mack Truck” has a steppin stone confirmin count% an area of re accumulation which is a bit different than “Beckman...” in that it did not react down to the ma'or  halfwa!/ point% but simpl! stopped oin up% mo&ed sidewa!s% went throuh reaccumulation and then continued the ma'or upward trend. The stock mo&ed up from J3E.44 a share to =E% then/ another reaction to point/ @% which% aain/% did not ha&e a reat deal of &olume on it. The rall! to point/ A had ood demand e&idenced b! the spread and especiall! the &olume+ the! both/ e$panded. The reaction down to point/ E had a lack of suppl!. Ea%#ne /e"$ ca"ef*ll$ (e !(a") d"o) off  #n /ol*%e& T(e !)"ead on (e down!#de wa! 9"ela#/el$: na""ow& It did not ha&e price weakness and then the rall! to point/ 2 was reasonabl! ood with a low &olume reaction followin it to point/ 14. Noe, # (a! (#g(e" !*))o"!& Then% the mo&e from point/ 14 to point/ 11 is on increased% but still relati&el! liht &olume compared to points/ 1% <% > and A. It is buo!ant. It is a sin of strenth and a “crossin of the creek” all in one action. The reaction to point/ 13 is the last point of support and a “backup to the ede of the creek.” "here could a speculati&e position be takenF )referabl! on the lower ede of the tradin rane on the reaction to point / E as it approached points/ = and @ and especiall! around point/ 14. The second position should be taken on the reaction to the L)S at point/ 13. 5 stop order  should be placed at around =1ADE% below the pre&ious support at points/ =% @% E and 14. 5ssumin that a bu!in order is e$ecuted at =A% the risk is appro$imatel! @ points should the stop order be cauht. The potential count is 3E points which means a profit  risk ratio reater than =  1. The count is marked on the fiure chart% chart ten. I !(o*ld .e )o#ned o* (a !(o*ld (e !oc+  con#n*e o "eac and ("eaen o a+e o* (e !o) o"de", a! !*den!, we !(o*ld ae%) o ge o* .efo"e (a !o) o"de" #! eec*ed& These are &er!% &er! fa&orable odds and an e$cellent risk. The stock resumed its upward trend and within about three months reached JA3.44 per share.

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7o not e$pect the charts of the stocks or indices to follow the e$act pattern outlined in the theoretical model of chart two riidl!. The basic elements% howe&er% usuall! will be present in each area of the accumulation. T(e e!!en#al ele%en! a"e, aga#n, (a $o* (a/e a la"ge co*n, a !#gn of !"eng( and an LPS& 5 stock ma! come down and not o throuh panick! li*uidation on a sellin clima$ with  preliminar! support% sellin clima$% automatic rall! and secondar! test. It ma! simpl! saucer out without oin throuh massi&e li*uidation. Should it do so% howe&er% the people who ha&e  bouht at hiher prices ha&e not been forced out of the stock and therefore% usuall! the stock will sta! in the tradin rane loner. And (e longe" # !a$! #n (#! "ad#ng "ange, (e %o"e l#+el$ # #! o .e !*.3eced o a !(a+eo* o" )e"(a)! "e)eaed !(a+eo*!& ,$cellent e$amples of this t!pe of situation are “Brunswick” and “(ih Holtae ,nineerin.” 7ue to their lenth% these charts will not be enclosed with the charts accompan!in this lecture. -or a brief description% “Brunswick” went throuh ma'or distribution in earl! 12@1 with a hih of A=ADE. B! the end of 7ecember 12@<% it had reached a new low of 141DE. It ne&er reall! clima$ed on the down side. There were repeated outbreaks of li*uidation% but it ne&er went throuh an!thin approachin a classical sellin clima$ to stop this down mo&e. 5s a result% the stock% in earl! 12@2% fi&e !ears later was still around J34.44 a share. It had one throuh a ma'or  shakeout at around [email protected] a share in 12@@. “(ih Holtae ,nineerin” went throuh distribution in 12@< with a hih of J>>.44 a share. ,&entuall! it reached J1>.44 in 12@> without ha&in one throuh a ood sellin clima$. Since then the stock has fluctuated as hih as the low J=4’s with earl! 12@2 prices around the <4 area. This is much better than a price of J1>.44. (owe&er% that is nowhere near the old hih of  J>>.44% reflectin the lack of stron ma'or accumulation. Kust because a stock does o throuh a sellin clima$% a near classic sellin clima$% does not mean that the tradin rane is accumulation. It ma! be accumulation% redistribution or nothin. (owe&er% the presence of the sellin clima$ does strenthen the total situation. #hart number ele&en of “Bendi$ #orporation” in earl! 12@E had a si0able accumulation area with some &ariations from the pattern outlined in chart two. The main &ariations are that the  preliminar! support is not apparent on the &ertical line chart and that the terminal shakeout does not carr! the stock into new low round% below the sellin clima$ and secondar! test. Briefl!% the stock mo&ed down from point/ 1 to point/ 3. The sellin clima$ is at point/ 3% the automatic rall! at point/ <% the secondar! test at point/ =. There’s a complete lack of li*uidation at point/ >.  Gow% where is the preliminar! support and how can !ou identif! itF It is not apparent on the dri&e down to point/ 3 from an e$amination of the &ertical line chart. "e must identif! it from an e$amination of the fiure chart. 5t point/ @ on the fiure chart% chart twel&e% the stock  reached J% the suppl! has dried up on the downside and the stock beins a rather wide swinin tradin rane. In eneral% there is ood demand on the rallies and there is a tendenc! to dr! up the &olume toward the bottom of the reactions to points/ E% 14 and 13. 5t point/ 1= there is wide spread and price weakness which  precipitates the shakeout down to point/ 1>. 5t point/ 1> there is no important dumpin of  stock; Goone panics. It is howe&er a terminal shakeout. The rall! to point/ 1@ is with ood demand and the one da! reaction to point/ 1A is on liht &olume. )oint/ 1@ is a minor sin of  strenth and point/ 1A is a minor L)S. Gow% what do we ha&eF 0e (a/e good !o))#ng ac#on f"o% 9)o#n: 2 o 9)o#n: 6 % a si0able tradin rane and then a terminal shakeout with a sin of  strenth and an L)S. 5n e$amination of the fiure chart shows a potential count of 1A points "here is it the most ad&antaeous to bu! and establish a speculati&e positionF The first  purchase can be made at point/ 1> between J respecti&el!. Gote that the ma'or suppl! line 55 was penetrated se&eral times and then finall!

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decisi&el! broken at point/ =. The stock mo&ed sidewa!s in a/ rather tiht tradin rane from point/ > to point/ @. It then dro&e into new low round for a terminal shakeout or number two sprin at point/ A and the secondar! test at point/ 2. The mo&e from point/ 2 to point/ 14 is a sin of strenth and a “crossin of the creek.” The reaction to point/ 11 is a last point of support and the “backup to the ede of the creek.” “5merican #!anamid” of 12@3% chart fourteen% has another interestin &ariation. There is no preliminar! support apparent on the &ertical line chart. The sellin clima$ occurred at point/ 1% automatic rall! at point/ 3 and the secondar! test at point/ <. The stock went into a tradin rane from point/ < to point/ = and then broke throuh the supports and shook out of the tradin rane on the mo&e to point/ >. 7ue to the short depth of penetration below point/ @% we would call this a number two sprin with a secondar! test at point/ A. )oint/ E was the “'umpin of the ma'or creek” and the sin of strenth. The “backup to the ede of the creek”/ and the more important L)S is at point/ 2. “Kones Lauhlin%” chart fifteen% shows another &er! interestin &ariation. Beinnin at point/ number 1 the stock completes redistribution and resumes a ma'or downtrend. 5t point/ 3 preliminar! support comes in followed b! a sellin clima$ at point/ <% automatic rall! at point/ = and the secondar! test at point/ >. The mo&e to point/ @ decisi&el! broke the suppl! line ##% normal use of trend lines. The tradin rane from point/ A to point/ E was considerabl! abo&e the secondar! test at point/ > and then the stock broke for a terminal shakeout down to point/ 2 with a rall! at point/ 14 and a secondar! test with a complete dr!in up of suppl! at point/ 11. )oint/ 13 is a “crossin of the minor creek” and a sin of strenth and point/ 1< is the “backup to the ede of the creek” and an L)S. The mo&e to point/ 1= is the “crossin of the ma'or creek” and a more important sin of strenth and the reaction to the area at point/ 1> is the more important last point of support and the “backin up to the ede of the ma'or creek.” Gote the ood demand on the mo&e from point/ 2 to point/ 1= and the lack of  suppl! on the reaction down to point/ 1>. "here could speculati&e positions be taken on the stockF -irst of all in the area around 1@ and the area of the terminal shakeout% preferabl! on the reaction down to point/ 11% which is the secondar! test of the terminal shakeout. 5 second position could be taken/ on the reaction to point/ 1< and a third position in the area of point/ 1>. 5ain% this is p!ramidin with the trend as it de&elops. Let us now re&iew briefl! some of the main concepts in this lecture on accumulation. "e ha&e described the process of accumulation% how it fits into the c!clical process and discussed the specific "!ckoff principles which are often part of accumulation. "e ha&e described the suppl!  demand relationship and what happens to the people operatin in the market in an area of accumulation. In takin a speculati&e position b! bu!in in the area of accumulation% the aim is to dianose the area as accumulation and then attempt to take a position as the stock is lea&in the tradin rane at the most ad&antaeous point+ to p!ramid with the market and to attempt to obtain a larer mo&e than would be pro&ided b! short in and out tradin. This% like all stock  market operations% re*uires considerable e$perience and practice. 7o not in an! manner attempt to short circuit or limit the practice tradin which is necessar! to sharpen !our skills. "hen !ou do ha&e *uestions and problems discuss them with us. Our purpose is alwa!s to help !ou to  protect !our capital and to make more profits+ safer% surer% faster profits.

BASIC LECTURE NUMBER OUR  CLIMAES AND SECONDARY TESTS

The main sub'ects of this lecture are clima$es and secondar! tests. The purpose of this lecture is to discuss with !ou what clima$es and secondar! tests are% what the! do and how !ou can use them in speculati&e stock market operations. Before oin further% let us define a clima$. Our dictionar! defines clima$ as the peak% the e$treme or the end of somethin and as the point of hihest dramatic tension or a ma'or turnin point in the action. Some s!non!ms of  clima$ are% top% pinnacle% heiht% ma$imum% consummation% culmination or turn of the tide. This is our understandin of the clima$ because this is e$actl! what happens on a clima$ in the stock  market. "hat does a clima$ doF 5 clima$ stops a trend either temporaril! or permanentl!% dependin on the subse*uent action.

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5 clima$ is preceded b! some sort of a trend. Gow% what is a trendF 5 trend is the tendenc! for the price to mo&e in a specific direction; It is the line of least resistance. The trend ma! be a ma'or% minor% intermediate or intrada! trend and it ma! be an upward trend or a downward trend. The t!pe or &iolence of the/ clima$ enerall! should be in keepin with the t!pe or speed of the trend. In other words% !ou would e$pect a much reater widenin of spread and hea&ier &olume on a clima$ stoppin a swift mo&in ma'or trend than on one stoppin a leisurel! mo&in minor trend. 5ctuall!% an! trend ma! be stopped b! a clima$ or b! runnin out of the force which is creatin the trend. Gow let us deal with the latter for a moment. 5n! down trend is caused b! sellin bein dominant o&er the bu!in+ suppl! reater than demand and that sellin ma! decrease and decrease until it has e$hausted itself on the downside; The stock saucers out and beins to mo&e sidewise without an! abilit! to continue the trend. 7emand has the opportunit! then to come in and create some sort of an up trend. This e$haustion of the sellin on the down mo&e would be indicated b! a narrowin of spread and a decreasin of &olume as the stock mo&ed downward. 5n e$ample of this is on “5ddressoraph Multiraph%” chart one at the area marked 1. This is not a sellin clima$. It is demand e*ualin and then o&ercomin suppl!. Similarl!% an up trend can end b! runnin out of the basic underl!in demand. This would be indicated b! a narrowin spread and a decreased &olume. ,$amples of these are on “9ennicott%” chart two at points/ 1 and 3. Gow% these are not bu!in clima$es. Such a condition lea&es the stock &ulnerable to suppl! comin in and creatin some sort of down mo&e. "hen a trend is stopped in this manner% it is often onl! temporar!. The stock ma! ha&e a correction and then resume the trend which has been in proress. This is due to the &er! stron tendenc! of all trends to o to e$cess and clima$. 8ou will often see this t!pe of action midwa! in a trend.  Gow% let’s remember that/ all stock market action is caused b! people% the people who are operatin in the market. The! do not alwa!s act rationall! or loicall!. )eople% e&en the  professionals are stronl! influenced b! the emotions of fear and reed. This is not a nast!% &ular use of these terms. This is a &er! delicate% constructi&e% but accurate use of these emotions. Trainin% anal!sis and e$perience can help in controllin the effect of these emotions%  but the best of the professionals ha&e their problems in operatin loicall! at critical times and on the basis of a cold% hard anal!sis of the situation. 5lriht% let’s deal with down trends and look at what happens to the people when a stock  or inde$ oes down. )lease turn to chart number three. This is the ma'or down mo&e of the "!ckoff "a&e in 12@@. "hat happens to the untrained person who bu!s when the news is ood% for e$ample at point/ number 1. The "a&e oes to point/ number 3 and he’s happ!+ he has a nice profit; 5nd then it comes smashin down to point/ < and he has a minor loss. (e beins to et a little worried% but not enouh reall! to et out. 5s the market 0ips up to point/ number =% he’s happ! aain% but it hesitates there for a few da!s and then comes down to point/ number >. It’s a little bit like bein on a roller coaster+ he’s had a lot of action and it’s one nowhere+ but the news is ood% ma!be with a little uncertaint!% but the countr! is in ood shape% the market writers are i&in ood reports on companies and the countr!% makin most people happ!. Most of us ha&e e$perienced this happenin. It the stock/ rallies somewhat feebl! to point/ number @ and he sa!s% if it i&es him a decent profit% he’s oin to et out; But% what happensF It drops riht down to point/ number A where he ma! be able to et out e&en; But if he pulls out in here% he’s lost two months of action now and ma! not be able to co&er his commissions% so he decides to wait. It oes riht down to point/ number E and he’s beinnin to et a little bit sick; (e has a little loss. 5ctuall! at this point he ma! bein to rationali0e that there is no reason for it to be down there. The news is still ood and usuall! is/ and if it ets up to the point where he can et out e&en% he will. So% it rallies up to the pre&ious support area at point/ 2 and then heads for the cellar+ it doesn’t i&e him a chance to et out e&en. 5s a matter of fact% it ma! not i&e an!thin more than a brief rall!. This is usuall! the wa! the market acts in a sustained down mo&e or a  bear market+ it doesn’t i&e !ou a chance to et out. If !ou’re wron in the market% do not e$pect much s!mpath!; #ertainl!% do not e$pect an!one to i&e !ou a chance to et !our mone! back% it  'ust doesn’t happen. The price oes on down to point/ 14 and b! that time he is beinnin to wonder what is reall! wron. (e has a substantial loss+ he can’t possibl! et out. Besides the news is beinnin now% finall!% to turn somewhat mi$ed and he knows for sure that/ if it rallies% a half decent rall! of 'ust a few points% he’s oin to et out. So% it rallies/ up to point/ 11 and hope sprins eternal. It ot abo&e point/ E. It was a decent rall! and he thinks% “I’ll 'ust han on and see if I can s*uee0e a few more points out+ I hate to take this kind of a loss.” So% down it oes to point/ 13 and he is sick. (e oes home at niht% he can’t eat riht% he can’t sleep riht% he can’t be part

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of the famil!% he’s 'ust miserable; But after some rationali0ation% he finall! decides he’ll stick it out. This is how commitments that start out as short term% *uick trades% become lon term in&estments. "hen a stock or a market oes throuh distribution for a ma'or down mo&e it often is man!% man! !ears before it ets back up to that same price and sometimes it ne&er does. So% the stock beins to plummet and the bad new beins to come out. ,arnins are down% orders for new e*uipment are off% orders are canceled. There is e$treme uncertaint!. There ma!  be a mone! crisis or an! one of a thousand different rationali0ations which the newspaper  financial reporters can use for a plausible e$planation for what is oin on. 5nd the "a&e drops riht down/ to point/ 1= and he is scared and he sa!s “now% if it rallies at all% I’m oin to et out.” It rallies so briefl! to point/ 1>% that he doesn’t ha&e a chance to et out+ he can’t mo&e or  think that fast and then it comes crunchin down to point/ 1@; The bottom has dropped out of  the market+ prices are bein smashed and &olume is comin in and the worst news finall! hits and at point/ 1@ he simpl! sells his stock for whate&er he ets for it. (e’s so relie&ed to et out of it that he 'ust dumps it and this creates the sellin that takes place on the sellin clima$. This is the place where the momentum builds into a clima$ that ends the downward mo&e. 5nd all of  us% the trained and the untrained can be forced into a similar situation unless we are careful and  protect oursel&es. "e must learn to o&ern our actions% actin not on emotions of fear% but on  principles of knowlede. Incidentall!% the sellin that has taken place on the mo&e down from point/ 3 to point/ 1@ does not mean that e&er! sinle share of stock in the market has been sold. "hat it means is that durin this mo&e the sellin was dominant o&er the bu!in on balance+ that the sellin dri&es were stroner than the rallies until finall! it washed itself out in a panick! situation.  Gow% what about the professionalsF "here did the bu!in come fromF "ell% some of the  professionals who anticipate lower prices simpl! o short in the hiher areas+ the! take short  positions and when the! bu! on the sellin clima$% the! ha&e double bu!in power. The! ha&e to co&er their short positions and then o lon should the! wish to do so. This means the! bu! twice. Other professionals simpl! et out of all or part of their positions at hiher le&els and sta! on the sidelines until the! see that the down trend is comin to an end. Then the! step in and  bu!. These are the two larest sources of the bu!in power that comes in on a sellin clima$. The bu!in comes from informed% trained professional operators who bu! either to support the market temporaril! or bein to establish &er! substantial positions b! bu!in steadil! o&er the ne$t number of weeks or months.  Gow% look at the mo&e from point/ 3 to point/ 1@. Stand awa! from the chart. The down dri&es are stroner than the rallies. The mo&es down are enerall! with widenin spread and the &olume remains hih or increases. The rallies ha&e a tendenc! toward decreasin spread and &olume compared to the mo&es down. -inall!% in the area of the sellin clima$ there is an e$treme widenin of spread and hih &olume. This action ma! occur o&er one da! or it ma! be o&er se&eral da!s% .* (e !ell#ng cl#%a (a! a w#den#ng !)"ead and #nc"ea!#ng /ol*%e& If it does not ha&e this it is not a sellin clima$. "e know that the down trend does not stop all at once. There are often a number of attempts to stop the down mo&e before the last one is successful. It is &er! similar to dri&in !our car and then tr!in to stop. "hat would happen if  !ou were oin A4 mph in !our car and !ou slammed on the brakesF 8ou’d skid all o&er the  place and *uite possibl! ha&e a wreck. If !ou’re dri&in a semitrailer it would undoubtedl!  'ackknife for a ma'or wreck. So instead of slammin !our brakes on all at once% !ou would put on !our brakes% release them% put on !our brakes% release them% pump the brakes se&eral times and raduall! slow down the car. This is &er! often what happens in the market where the  professionals tr! to stop the mo&e temporaril! and it rallies. If their purpose is to simpl! i&e the stock a bit of temporar! support% the! will sell out on the rall!. (owe&er% if their purpose is to  bein accumulation on this price le&el% the! will hold that stock and not throw it on the market immediatel! and add to their positions as the stock continues to o down. The! bu! all throuh the base. This stoppin and holdin temporaril! creates the principle of preliminar! support. )reliminar! support is an action in which important demand comes in to stop the down mo&e% e&en temporaril!. T(e !#gn#f#cance of (e )"el#%#na"$ !*))o" #! (a #f (e en#"e .a!e #! acc*%*la#on, (e acc*%*la#on %a$ (a/e .eg*n a )"el#%#na"$ !*))o" and con#n*ed ("o*g(o* (e .a!e& )reliminar! support and the last point of support often occur at the same  price le&el. The preliminar! support is sometimes obscured due to the &iolence of the price action and sometimes it is &irtuall! missin% but usuall! on accumulation% some form of   preliminar! support is present. Of the wa!s in which a down trend can come to an end% probabl! the most desirable is where the followin se*uence of e&ents or se*uence of principles is present; 1/ )reliminar!

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support+ 3/ Sellin clima$+ to point/ 1@% indicatin that the stock had stopped oin down and the hea&! sellin at point/ 1@ is no loner present. Should there be some hea&! sellin on the secondar! test% but not sufficient to resume the down trend% it would still be a secondar! test. (owe&er% it would be what is referred to as a secondar! test with &olume and we would e$pect further secondar! tests until there is a secondar! test without sinificant &olume. The secondar! test without sinificant &olume indicates that the sellin which was present on the sellin clima$ and on the prior secondar! test is no loner present and the li*uidation% the panick! sellin% has now stopped and the down trend has stopped. 5nother wa! to think of this principle is to reconi0e that/ the purpose of the secondar! test is to test the sellin clima$. In the process% it re&eals how much suppl! is still present on the attempt to continue the last pre&ailin trend. 5n e$ample of this is on chart four of “#ollins 6adio%” 12@@. The sellin clima$ was at point/ 1% the automatic rall! at point/ 3% and the first secondar! test was at point/ <. This secondar! test% howe&er% still had hea&! &olume. Li*uidation% panick! sellin% was still present% but not reater than on the sellin clima$. 5t point/ < it could not continue the down trend and it rallied to point/ =. It e&entuall! drifted down to point/ > with the narrowin spread and a steadil! decreasin &olume% indicatin a lack  of hea&! sellin. )oint/ > is a secondar! test without &olume. "e ha&e de&eloped no distincti&e terminolo! for a secondar! test with &olume and a secondar! test which occurs without &olume as none reall! is needed. "hen we refer to a secondar! test we mean a secondar! test without li*uidation unless otherwise specified. 5ll the sellin clima$ and the secondar! test show is that the down mo&e has been stopped. "hat can follow the secondar! testF :suall! what follows is some form of a tradin rane or a cause buildin process. There is no cause to o down. There is no e$tensi&e cause to o up and therefore the stock usuall! mo&es up and down in a tradin rane. That tradin rane ma! be accumulation% distribution or an area where no one is accumulatin or distributin; 5nd the tradin rane ma! be redistribution. Occasionall! in minor accumulation and much more rarel! in intermediate accumulation% the secondar! test is followed b! an immediate sin of  strenth and a last point of support. In ma'or accumulation% howe&er% due to the necessit! of   buildin a larer count% the stock normall! oes into a more e$tensi&e tradin rane before ha&in a sin of strenth and the last point of support. On chart three% followin the secondar!

2;

test at point/ 1E% the stock mo&ed in a wide swinin tradin rane for about a month. The sin of strenth is the mo&e from point/ 12 to point/ 34 and the last point of support is the reaction down to point/ 31. On chart four% the sin of strenth was the mo&e from point/ > to point/ @ and the last point of support was the reaction at point/ A. This sin of strenth followed the secondar! test immediatel!. (owe&er% the stock had alread! built an e$tensi&e count from point/ 1 to point/ >. Turn now to chart fi&e% “Mohawk 7ata Sciences.” The stock established a ma'or down trend followin point/ 1% which was finall! stopped b! the sellin clima$ at point/ 3. Look at the price action and the &olume at point/ 3. The &olume is e$tremel! hea&! and the price spread is e$tremel! wide% almost fourteen points in one da!% on what is% rouhl!% a JA4.44 stock at that  point. This is panic sellin with a smashin of prices. It is a potential sellin clima$. Gow% wh! call it a potential sellin clima$F An$ cl#%a %*! alwa$! .e "ega"ded a! a )oen#al o" a )o!!#.le !ell#ng cl#%a *n#l # #! )"o/en .$ (e !econda"$ e!& "h!F Because it is not certain that the sellin has been stopped until it is pro&en b! the secondar! test. )oint/ 3 must  be rearded as a potential sellin clima$ on that da! because it could ha&e continued for man! more points on the downside on/ the ne$t da! and the ne$t da! and the ne$t da!% until% finall!% the sellin was o&ercome b! a superior force of demand% or until the sellin e$hausted itself. Look at point/ < on this chart. On that da! the spread was wide% the &olume was e$tremel! hea&! and it could ha&e been rearded as a possible sellin clima$ to be pro&en or  dispro&en b! the subse*uent action. Of course% if we had an intrada! break down% we could find that there was in fact a minor sellin clima$ at point/ <% a minor automatic rall! at point/ = and the secondar! test occurred at point/ >. (owe&er% lookin at it from the standpoint of the larer  mo&e from point/ 1 to point/ 3% point/ number < was not a sellin clima$. The &olume and more li*uidation came in and the price continued to mo&e down  Gow% let’s o back to point/ 3% chart number fi&e. -ollowin point/ 3% there was the automatic rall! to point/ @ and a secondar! test at point/ A. That secondar! test% howe&er% still had &er! hea&! &olume on it. It was followed b! a rall! to point/ E and then another secondar! test at point/ 2. Holume was much less and the spread was narrow compared to point/ 3. The sellin on the downside is steadil! decreasin compared to that which took place at point/ 3. There is another rall! to point/ 14 and then a secondar! test at point/ 11. Look at the &olumeC The &olume% the sellin% the li*uidation% the dumpin of the stock% had finall! dried up on the downside. This means that/ the stock has probabl! stopped oin down for the time bein. It ma! o into a tradin rane which could be accumulation% redistribution or nothin. It could simpl! rall! and e$haust the count and the force of demand built up in this area from point/ 3 to point/ 11 b! workin out the count and then resume the down trend+ or it could rall! and then o throuh redistribution aain. 5ll !ou know on the secondar! test at point/ 11 is that/ this stock  has stopped oin down at this time. "hat it will do later will depend larel! on the action which follows point/ 11.  Gow% where is the preliminar! supportF Look at the mo&e from point/ 13 to point/ 1<. It the stock/ rallied about ele&en point in two da!s and &olume came in on the upside+ ood demand came in in this area and this is the possible preliminar! support.  Gow wh! is it necessar! to *ualif! our thinkin b! usin such words as “possible”  preliminar! support or a “potential” sellin clima$+ “possible” and “potentialF” "h! not sa! definitel!% “it is a specific principle and can be nothin elseF” "ell% the main reason is that we are not the persons who are runnin the stock% who are controllin the situations. Often no one  person or roup is in control of the stock. Go one is lare enouh or influential enouh to control the action of a stock. "e are pla!in% essentiall!% the role of a detecti&e% tr!in to find out what is oin on in the market b! an anal!sis of some clues. These clues are larel! the price action% the &olume and the time that it takes to complete the mo&ement. Sometimes these clues are reasonabl! clear% other times the! are obscure and other times the! are completel! absent. Ano(e" "ea!on #! (a *!*all$ one )"#nc#)le %*! .e )"o/en .$ ano(e" )"#nc#)le& -or  e$ample% on the preliminar! support% usuall! there is some form of a sellin clima$. This is not the final sellin clima$ in the trend and ma! be onl! a temporar! hesitation. If it is preliminar! support it will be pro&en so b! the ne$t dri&e down% which ma! be the final sellin clima$. The sellin clima$ is pro&en b! the secondar! test. 5 sin of strenth is onl! a potential or a possible sin of strenth and ma! be canceled or confirmed b! its test. If confirmed% then we are able to correctl! call it the last point of support. The action ma! be a potential sin of strenth% but if it is not pro&en b! the last point of support% then it is not a sin of strenth. In other words% the reaction to what should be the last point of support will either confirm% den! or lea&e in doubt the sin of strenth.

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The stock market is an unfoldin picture in which the e&idence will build up and build up and build up until !ou can definitel! sa! !ou ha&e accumulation or distribution and !ou can finall! take a speculati&e position or the action and the clues ma! be so obscured as to warrant not takin a position. In that case% !ou must simpl! sta! out of the situation. To establish a speculati&e position where the e&idence and the principles are not clear is to in&ite disaster.  Gow% mo&e on to chart si$. “#omputer Sciences” in earl! 12@E mo&ed down to the sellin clima$ at point/ 1 and had an automatic rall! at point/ 3. On the secondar! test at point/ < it immediatel! dried up the sellin. The spread was narrow% the &olume was reatl! decreased compared to the sellin clima$; There was no suppl! at point/ <. The stock% at least temporaril!% stopped oin down. Gow% where is the preliminar! supportF "ell% the preliminar! support is in the area circled at =. There was some sellin on the mo&e from point/ > to point/ = and then there was ood demand on the rall! to point/ @+ e&idence of the ood demand attemptin to re&erse the down trend. The ne$t chart% chart se&en% is “5tlantic 6ichfield%” 12@2. The stock mo&ed from J1<4.44 down to J2=.44 per share and had a sellin clima$ at point/ 1. )rice spread was wide% &olume e$panded. The automatic rall! was at point/ 3 and the secondar! test at point/ <. On the secondar! test there was a lack of suppl! as shown b! the narrow spread and decreased &olume. The preliminar! support was in the area circled at =. There was fair demand on the rall! from point/ = to point/ > as shown b! the wide spread. In chart number eiht of “Sanders 5ssociates%” 12@2% the stock went throuh distribution and established a ma'or down trend from point/ 1 to point/ 3. The sellin clima$ was at point/ 3. Gow% where is the preliminar! supportF Look at the J==.44 per share le&el at point/ <. The stock had hih &olume and wide spread at point/ < and then rallied about two points. This is the  preliminar! support and the area has been circled on the chart. -ollowin the sellin clima$ there was a brief automatic rall! to point/ =% a *uick secondar! test to point/ > and then a/ further rall! to point/ @ and more important secondar! tests at points/ A and E.  Gow% one of the most difficult thins to teach is perspecti&e. 8ou can anal!0e the chart on a minute basis% on a broad basis or on the basis of what has happened o&er man! !ears% in other  words% intrada!% minor% intermediate and ma'or. Let us e$amine this area briefl! from a larer   perspecti&e. This area could also be &iewed as ha&in preliminar! support at point/ <% a sellin clima$ at point/ 3 and the mo&e from point/ 3 to point/ @ as an automatic rall! and from point/ @ to point/ E as a secondar! test. It’s a different perspecti&e% but the principle is the same. )reliminar! support is followed b! a sellin clima$% followed b! an automatic rall! and then a secondar! test. 6emember this &er! important lesson. Let’s o on. Gow% thus far we ha&e had secondar! tests which ha&e held abo&e% at the same le&el and ha&e held below the point reached on the sellin clima$. There has been less  price weakness and less &olume on the secondar! test then on the sellin clima$. #hart number  nine of “#omputer Sciences%” 12@2% has two e$amples of the sellin clima$. The first is on the mo&e down to point/ 1. )oint/ 1 is the sellin clima$; The automatic rall! is at point/ 3 and the secondar! test at point/ < with possible preliminar! support at point/ = )oint/ with  preliminar! support at point/ @% the sellin clima$ at point/ A% the automatic rall! at point/ E and the secondar! test at point/ 2. Gow% look at the spread and &olume at point/ 2 compared to the sellin clima$ at point/ A. 5t point/ 2 there’s still considerable price weakness and considerable &olume+ suppl! is still present and as a result the stock rallied to point/ 14% but needed to test suppl! aain at another secondar! test at point/ 11. "as &olume still comin in at point/ 11F "as the hea&! sellin still presentF The answer is no. 5s a result the stock bean to rall!. #hart ten of “5#- Industries%” has a sellin clima$ at point/ 1% an automatic rall! at point/ 3 and then; "hat is point/ . On that da! the stock tried

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to o up; It tried to o down and it closed% off the low% with a hea&! increase in &olume. In this t!pe of situation those operatin in the stock ma! ha&e attempted to et a mo&e oin on the upside and failed or a lare block of stock% sa! =>%444 or >4%444 shares could ha&e e$chaned hands in one transaction and been included in the total &olume for that da!. If the latter is the case% that lare block can probabl! be e$cluded from the normal suppl!  demand stud! for that da! in anal!0in that stock. That lare &olume will still ha&e its effect% but% it ma! be rearded as much less serious than it would be otherwise. In actual fact% there was one lare block of % howe&er% note that the secondar! test still had hea&! &olume on it% e&idence that ood demand was still there. There was another reaction to point/ @ and demand was less on the rall! to point/ A. )oint/ A is another secondar! test. (ere the stock bean to break. Kust as a down trend does not come to an end all at once% neither does and up trend. There ma! be a number of attempts to stop the upward trend% creatin preliminar! suppl!. P"el#%#na"$ !*))l$ #! (e f#"! #%)o"an !ell#ng w(#c( #! )a" of (e d#!"#.*#on a"ea and w(#c( co%e! #n o !o) (e *)wa"d "end e%)o"a"#l$& :suall! there is some form of a bu!in clima$ which stops the mo&e and that is followed b! a reaction which has pronounced weakness or &olume or   preferabl! both. The bu!in clima$ which is part of the preliminar! suppl! normall! has less &olume than that on the final bu!in clima$. The price reached on the last point of suppl! after a sin of weakness &er! often is in the same area reached on the preliminar! suppl!. 5nal!ticall!% the sinificance of the preliminar! suppl! is that if the entire area is distribution% that distribution ma! ha&e beun in the area of the preliminar! suppl!. On chart ele&en the preliminar! suppl! is at point/ E. )oint/ 2 was also possible preliminar! suppl! which could come into operation as  part of a larer area of distribution. -ollowin a bu!in clima$ one of two thins can occur% either an automatic reaction or a lateral mo&e. This in turn is followed b! one of two thins% either a continuation of the up trend or a secondar! test. If the suppl! is too weak to dri&e the stock down or demand too stron to allow it to o down% instead of ha&in the automatic reaction% the stock will ha&e the lateral

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mo&e. :suall!% howe&er% it will ha&e some form of an automatic reaction. That automatic reaction ma! ha&e increased &olume% hea&! &olume or no &olume. It ma! ha&e wide price spread or relati&el! narrow spread. If there is a hea&! &olume on the automatic reaction it is an indication that the sellin that came in to stop the upward trend is continuin to press on the market. The more &iolent the bu!in clima$% usuall! the more &iolent the automatic reaction will  be.  Gow% the action followin the automatic reaction is either a continuation of the old mo&e or a secondar! test. In order for the stock to continue the old mo&e it must ha&e reater demand or less suppl! on the rall! than was in e&idence on the bu!in clima$. This would be indicated  b! a widenin spread and increased &olume compared to the bu!in clima$+ e&idence that demand is stroner than on the bu!in clima$. (owe&er% should demand be less on this test than on the bu!in clima$% it is a secondar! test. T(e !econda"$ e! #! #nd#caed .$ dec"ea!ed !)"ead and dec"ea!ed /ol*%e on (e "all$ o e! (e .*$#ng cl#%a& That secondar! test ma! end abo&e% below or at the same price le&el as the bu!in clima$. It is not particularl! important where it comes to an end. "hat is important is how it comes to an end. The demand should be less. If there is still ood demand on the first secondar! test% !ou ma! e$pect another test of that area which will either succeed or fail. "e will co&er the ne$t se&eral charts *uickl!. #hart twel&e is of “IBM%” 12@E. 5fter the split it mo&ed *uickl! up to the bu!in clima$ at point/ 1. The automatic reaction was at point/ 3 and the secondar! test at point/ <. -rom this &ertical line chart it is not possible to identif! the  preliminar! suppl!. #hart thirteen has a bu!in clima$ at point/ 1% the reaction from point/ 1 to point/ 3 is an automatic reaction and the secondar! test is at point/ <. Gow% where is the preliminar! suppl!F 5ain% it is difficult or impossible to determine the preliminar! suppl! from the &ertical line chart. ?o to the fiure chart. 5t point = the stock reached J=>.44 per share and then durin the da! reacted one point. This is likel! to be the preliminar! suppl!. The bu!in clima$ at point/ 1 on chart fourteen occurred in an area of redistribution. The stock had rallied from the J=4.44 le&el and met preliminar! suppl! at point/ 3. Look at the tremendous &olume. It had a bu!in clima$ at point/ 1% an automatic reaction at point/ < and a secondar! test at point/ =. In this case% the &olume on the preliminar! suppl! was much reater  than that on the bu!in clima$. It occurred as the stock was runnin into an old suppl! le&el. )oint/ number 1% ne&ertheless% was still the bu!in clima$. On the secondar! test at point/ = there was a lack of demand shown b! the decreased spread and &olume compared to the bu!in clima$ at point/ 1. This action stopped the up mo&e. On all the e$amples the amount of the price spread and the amount of the &olume which came in on the preliminar! suppl!% bu!in clima$% automatic reaction and the secondar! test ha&e all been different% howe&er on each e$ample each principle could be identified with common characteristics. The preliminar! suppl! has some sort of &olume and &er! often some suppl! on the reaction which is part of the preliminar! suppl!. The bu!in clima$ has widenin spread and increasin &olume and it is automaticall! followed b! the automatic reaction which is stron or weak on the downside with or without sinificant &olume. The secondar! test has a narrower spread and less &olume than on the bu!in clima$. The action which follows the secondar! test of a bu!in clima$ ma! be accumulation% reaccumulation% distribution or nothin and it ma! be a simple stoppin of the up mo&e temporaril!.  Gow% let’s re&iew a few of these important aspects of &olume. "hat is the difference  between clima$ &olume and that which is known as breakout &olume or absorption &olumeF Both enerall! ha&e a widenin spread and increased &olume% howe&er% the clima$ &olume is stoppin a trend which is out in open territor! and has been in proress. A.!o")#on /ol*%e, (owe/e", occ*"! w#( a w#den#ng !)"ead and #nc"ea!ed /ol*%e a! (e !oc+ #! ."ea+#ng ("o*g( a )"e/#o*! !*))l$ a"ea and #! !#%)l$ a.!o".#ng all of (e !ell#ng (a a+e! )lace a! # %o/e! *) o new (#g( g"o*nd& This process also occurs in re&erse on the downside. To illustrate this further% let’s pla! football. There are two sides+ we will call one suppl!% the other  demand. The center snaps the ball% the *uarterback takes it% spins% hands off to a charin fullback who hits the line of scrimmae and tries to burst throuh into the defensi&e backfield. -or him to keep oin he must make proress price action/ and he must ha&e push behind him &olume/. (e must be able to keep dri&in forward. If he fails to make proress or runs out of  the push behind him% he’s stopped. Similarl!% if a stock% mo&in up% runs out of demand &olume/ or fails to make price proress% it can be stopped. -or the fullback to burst throuh the line re*uires a positi&e push throuh the opposition. The same thin happens to stocks and we call that push the absorption &olume. 5n e$ample of this absorption &olume is on chart ten of 

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Basic Lecture Two at point 3>. Gow% suppose he bursts into the backfield and keeps on oin and is racin toward the oal and then somebod! stops him cold. "ell% that is his bu!in clima$.  (ow can !ou use climactic action to close out or to establish a speculati&e positionF (ow !ou will use it depends on !our moti&es and !our purpose in makin the commitment and whether !ou are an in and out or short mo&e trader or whether !ou operate for larer mo&es. Those students who trade for a few points and are in a situation for a few da!s or at most a few weeks at a time ma! bu! on the sellin clima$% et out on the automatic rall!% attempt to o short there% co&er on the secondar! test and o lon and trade the up and down mo&es within the tradin rane. It should be noted that the loner the tradin rane continues% the more danerous this procedure becomes and !ou must be in constant contact with the market to operate in this e$tremel! speculati&e manner. "e caution all who attempt it. #hart fifteen illustrates wh! !ou must et out *uickl! on the automatic rall! if !ou bu! on a sellin clima$. If !ou bu! on a sellin clima$% !ou cannot hold it for a lon time safel!. Suppose !ou had bouht at J@=.44 per share on a sellin clima$ at point/ 1. The stock  immediatel! rallies to point/ 3. In ettin out somewhere on that rall!% !ou will not et the e$act top. Suppose !ou had otten out at JA1.44. The profit is se&en points minus one point for  commissions. "ith a three point stop% the profit  risk ratio is about 3  1+ not ood. )oint/ < is a secondar! test of the clima$ at point/ 1. )oint/ = is another sellin clima$. The automatic rall! was brief and the stock continued on down. This illustrates wh! !ou cannot simpl! bu! on a sellin clima$ and secondar! test and e$pect to hold for lon without serious risk of loss. Most students are and should be intermediate to ma'or mo&e speculators. Therefore the! will use a sellin clima$ of a ma'or down trend to co&er short positions on the sellin clima$. :suall! there will be a number of other indications t!in in with the sellin clima$. Some of  these are% the reachin of an ob'ecti&e area% the pre&ious appearance of preliminar! support% an o&ersold condition on trend lines and perhaps a shortenin of thrust. Some or all of these corroboratin indications ma! be present. Incidentall!% occasionall! it ma! be ad&antaeous to let the trend run as far as it can and if necessar! to et out on the secondar! test% but at most times it is far better to et out of a short position on the preliminar! support or the sellin clima$. The ps!cholo! of tr!in to pla! for the last 1DEth can be deadl!. 8ou will rarel! et the e$act top or the e$act bottom in either establishin positions or closin them out. Man! students who ha&e not closed out their positions on the clima$ ha&e not otten out on the secondar! test either and then the! ha&e raduall! seen their profits erode and finall! &anish. Those students who are oin to operate for the larer mo&e will not bu! on either the clima$ or the secondar! test terminatin a ma'or down trend. "h!F "hen the! bu! on a sellin clima$ the! are buckin the ma'or trend and this is hihl! danerous. 5lso% as there is no cause% one has to form. If the! bu! here% the! ma! be shaken out on a terminal shakeout or ha&e the  price o drasticall! aainst them. These students will use the preliminar! support% the sellin clima$% automatic rall! and the secondar! test primaril! as an anal!tical tool% but will not use them to establish tradin positions. Instead% the! will establish their tradin positions as the tradin rane comes to an end% which occurs after accumulation has taken place. To summari0e% trends do not alwa!s end with a clima$% but when the! do and ha&e been tested b! a secondar! test% !ou know that the trend definitel! has been stopped. "hat it does thereafter depends upon the action followin the secondar! test. The clima$ has wide spread and increasin &olume. The secondar! test should ha&e narrowin spread and decreasin &olume compared to that of the clima$. Memori0e this se*uence of principles+ 1/ )reliminar! suppl!+ 3/ Bu!in clima$+
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BASIC LECTURE NUMBER IFE SPRINS AND TERMINAL SHAKEOUTS

The sub'ect of this lecture is sprins and terminal shakeouts. The purpose of this lecture is to discuss with !ou the phenomena of a terminal shakeout and/ a sprin% where the! fit into accumulation% how !ou can use them% how !ou can take a position on the sprin or the terminal shakeout and how to trade for ma$imum potential profit with a minimum of risk. -irst% let us define a terminal shakeout. 5 terminal shakeout is a sharp downward thrust throuh a pre&ious support area. It is e$ecuted for the purpose of bu!in all the stock possible from weak or &ulnerable holders. It is preceded b! a tradin rane or a support le&el. It is followed b! an attempt to bein the markup phase of the c!cle. The terminal shakeout is a dri&e down throuh the support le&el for the purpose of shakin out all of the people who can be scared out or forced out of the market and forced to sell. Gow% wh! start this lecture with the terminal shakeoutF Simpl! because that was the term and the concept and the understandin that/ the old time professional stock operators used. It is the understandin and terminolo! which Mr. "!ckoff passed on to all of us. Gow what happens to the people on the terminal shakeout; In other words% who does what to whomF It is larel! the untrained people% the public% who sell on the terminal shakeout. These are people who ha&e bouht at hiher prices and now see the stock o into new low round% which some people think is the worst thin that can happen. The! look at what the stock is doin% not how it is doin it. "hen a stock is dri&en into new low round it often looks disastrous. It ma! look as thouh it is oin to resume a downward trend or start a downward trend when it makes a new low+ that it is oin to continue to o down% down% down. If these untrained people are doin the sellin% who is doin the  bu!inF The professionals are bu!in. The pros or shall we sa! the composite operators% who ha&e been absorbin the stock% bu!in the stock% now are attemptin to see if the! can control the stock so that the! can bein mo&in it up. T(e c"##cal (#ng (a #! !(own .$ (e e"%#nal !(a+eo* #! (e a%o*n of !*))l$ (a co%e! o* on (a !(a+eo* and w(e(e" o" no (a !*))l$ #! a.!o".ed& 6emember this &ital point% it is important. 5 number of !ears after Mr. "!ckoff’s passin a refinement of the terminal shakeout was de&eloped b! Mr. 6obert ?. ,&ans% former president of our firm. This refinement is the sprin. The sprin came out of our understandin of the terminal shakeout and is similar to it. (owe&er% at the Institute we use both terms and both understandins. "e use the term/ sprin to refer to a short% sharp downward thrust throuh a pre&ious support area for the same purpose of bu!in all the stock possible from weak or &ulnerable holders. "e now use the term/ terminal shakeout to refer to a loner or a larer sharp downward thrust throuh a pre&ious support area. The main difference between the sprin and the terminal shakeout is how far below the support area the dri&e down oes and the difference is larel! a matter of depth of penetration into new low round+ the! both accomplish the same thin; The! enable professionals to bu! up all the cheap stock that/ the! can% to put people on the sidelines so that the! do not bu! in the earl! staes of  an up mo&e and the sprin and the terminal shakeout i&e a completel! false impression as to the direction of the ultimate mo&e. Aga#n, (e#" )*")o!e #! o dee"%#ne (e a%o*n of !*))l$ (a co%e! o* on (e d"#/e o new low g"o*nd and (ow well (a !*))l$ #! a.!o".ed& Most of this lecture will be de&oted to the sprin of which there are three t!pes+ a number  one sprin% a number two sprin and a number three sprin. The! the numbers/ are used to define the deree of suppl! that comes in on the dri&e to new low round. Gow% what can happen as the stock oes into new low roundF It can ha&e o&erwhelmin suppl! and if it does% we call this a number one sprin. This is e&idenced b! a &er! hea&!% o&erwhelmin% sudden increase in &olume and the price spread is wide+ &olume is massi&e% people are dumpin stocks. There is an e$treme price weakness and the stock oes down% down% down and down until the downward trend can finall! be halted. The second alternati&e is that no suppl! is dumped on the market% no increase in suppl! can come out on the dri&e into new low round. "e call this a number three sprin. The number  three sprin is e&idenced b! a lack of an increase in the eneral le&el of tradin. 5n! increase in &olume% if at all% is &er!% &er! minor and there is a lack of important price weakness as it oes into new low round and the spread does not materiall! widen.

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 Gow% there is a &er! lare area between the number one and number three sprin in which there is some suppl!. "e call this a number two sprin. The suppl! on the number two sprin is e&idenced b! some increase in price weakness+ in other words% some increase in the widenin of  the price/ spread as it oes into new low round and some increase in the &olume o&er the eneral le&el of tradin Suppl! is not absent% on the other hand/ it is not o&erwhelminl! abundant. That suppl! will either be absorbed% in which case it will be a number two plus sprin% or it will not be absorbed and suppl! will persist and persist and persist% dri&in the price down and will/ ha&e the same effect as a number one sprin. This alternati&e we call a number two minus sprin. The number two minus sprin has the same effect as the number one sprin in that the suppl! persists and persists and persists and dri&es the price of the stock down% down% down until it is finall! halted and has to start a new support le&el all o&er aain.  Gow% please turn to chart number one which is “Beckman Instruments%” 12@>. The stock  had beun an up trend in 12@= startin at J=A.>4 a share and mo&ed up to around E41D3 at point number 1. It then bean a lon tradin rane with supports at points/ 3% <% =% >% @ and then at point/ A broke throuh all of those supports with a wide spread and a considerable increase in &olume. It penetrated deepl! below the supports. The penetration was about A points below points/ =% >% and @ and about > points below the supports at points/ 3 and <. Should the price hold at that point and should the suppl! be absorbed% it would be called a possible terminal shakeout. If the price broke riht on down as a result of not bein able to absorb the suppl!% it then would ha&e been a number one sprin. The ne$t da!’s spread was ood on the upside and &olume was increased. This was e&idence that the professionals had taken all the suppl! that had been thrown on the market and were in the process of absorbin the suppl! and mo&in the stock up. "e call this &olume% /ol*%e off (e .oo%& I *!*all$ #nd#cae! a *"na"o*nd #n (e %a"+e& Gow% in our  e$ample% the stock rallies at point number 2 and then settles back to point/ 14 &er! briefl!. There’s no suppl! on the reaction to point/ 14% thus point/ A is a terminal shakeout and point/ 14 is a secondar! test of that terminal shakeout. Since some suppl! was present% the stock had to  be tested at point/ 14 with a secondar! test before resumin its ad&ance. Should a position be taken at an! time durin the tradin rane from point/ 1 to point/ @ with a reasonabl! close stop order% somewhere in the &icinit! of A1ADE% 'ust a few points below the support at point/ <% on the dri&e down to point/ A% that stop order would ha&e been e$ecuted. It would be difficult to bu! aain &er! shortl! after ha&in sustained such a loss% but let’s anal!0e this situation because it’s oin to happen to !ou and !ou should be prepared to react to the e&ent. If !ou had made a purchase in the tradin rane between points/ 1 and @ without a stop order% on the dri&e down to point/ A% the e$treme price weakness and the &olume comin in would ha&e left a student in doubt as to whether or not the stock was lea&in the tradin rane  permanentl! for a sustained downward mo&e. It was *uite likel! that he would sell near the  bottom at point/ A% sustainin an e&en larer loss. Likewise% if he had been stopped out of the stock% this would put him on the sideline 'ust before a <@ point rise. Thus% it becomes e$tremel! important that either no purchases be made in a stock in a tradin rane% e&en near the bottom of  the tradin rane% or should one be made% that a close stop order be used in order to eliminate lare losses and to hold losses to a bare minimum. 7ue to the depth of the penetration below the support le&el% we would call this a terminal shakeout rather than a number two sprin. (ad “Beckman...” penetrated at point/ A onl! a couple of points% it would ha&e been called a number two sprin instead of a terminal shakeout. -or other e$amples of terminal shakeouts% see Basic Lecture Three% chart four at point/ number  A and Basic Lecture Three% chart si$ at point/ number 1< and Basic Lecture Three% chart fifteen at point/ number 2. These we ha&e seen earlier and it is a ood idea to write down these e$amples so !ou can use them for further reference. The ne$t chart% chart number two% is the &ertical line and fiure chart of “Outboard Marine%” 12@2. 5 brief e$amination of the fiure chart shows that/ the stock had mo&ed up in a ma'or up trend from point/ 1 to point/ 3. Our &ertical line chart shows the last staes of this mo&e% or from point/ 1a to point/ number 3. On the &ertical chart we see the stock hesitated at point/ < and then had a short% sharp reaction from point/ < to point/ =. Now, (#! #! a wonde"f*l ea%)le of an o"d#na"$ !(a+eo*& T(e d#ffe"ence .eween a e"%#nal !(a+eo* and an o"d#na"$ !(a+eo* #! (a (e e"%#nal !(a+eo* occ*"! a (e end of (e acc*%*la#on a"ea and a (e end of a "ad#ng "ange, w(#le (e o"d#na"$ !(a+eo* occ*"! #n an *)wa"d "end& An o"d#na"$ !(a+eo* %a$ .e def#ned a! a !(a") downwa"d ("*! occ*""#ng #n an *)wa"d "end w#(o* een!#/e )"e/#o*! )"e)a"a#on& It is e$ecuted for the  purpose of bu!in all the stock possible from weak or &ulnerable holders. It is preceded b! an

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upward mo&e. The ordinar! shakeout is characteri0ed b! price weakness and usuall! increased &olume+ in other words% wide spread and some increase in &olume. (owe&er% the &olume ma! be hih% medium or low. 0(en (e"e #! !*))l$ on (e !(a+eo* #!elf, # %*! .e e!ed .$ a !econda"$ e!& The secondar! test should ha&e a narrow spread and a decreased &olume compared to that of the ordinar! shakeout. Gow% this indicates that there was less suppl! on the secondar! test than there was on the shakeout and the bu!ers then know that/ the stock is aain  prepared to mo&e up with relati&e safet!. In our e$ample on chart number two% the sharp reaction to point/ = had wide spread and a moderate amount of &olume. "e would thereb! call it an ordinar! shakeout. "hat we could e$pect follows+ an automatic rall! at point/ > and a secondar! test at point/ @. If !ou could obtain an intrada! wa&e chart of a shakeout% !ou would find that/ there is usuall! a minor sellin clima$ on the low of the shakeout which is then followed b! the automatic rall! and the secondar! test. Inc#denall$, (#! ac#on a 9)o#n: 1 wo*ld no .e con!#de"ed a no"%al co""ec#on w#(#n (e *)wa"d "end d*e o (e /e"$ la"ge w#den#ng of  !)"ead& Had (e !)"ead .een na""ow along w#( (e low /ol*%e, # co*ld (a/e .een "ega"ded a! a no"%al co""ec#on, .* # 9wa!nG: and (*! we co""ecl$ d#agno!e # a! an o"d#na"$ !(a+eo*&  Gow% this stock mo&ed from point/ 3 down to point/ A for a ma'or 1D3 correction of that mo&e from point/ 1 to point/ 3. 5s it declined% the preliminar! support came in at point/ E% followed b! the sellin clima$ at point/ A. The automatic rall! was at point/ 2 and the secondar! test at point/ 14. Then the stock mo&ed sidewa!s in a tradin rane. "ith this as  backround let us bein to stud! the tradin rane. 5s it mo&es sidewa!s% it will attempt to come out of this tradin rane either on the upside or the downside and if it attempts to break throuh the supports% it could create a sprin% either a number one sprin% a number two sprin or a number three sprin. Thus% we must train oursel&es to anticipate what could result from the present action. In this case we should watch for a potential sprin. Gow% the sprin is an analo! and a refinement of the terminal shakeout.  Gow% !ou know what happens when !ou push down on a sprin and !ou release the pressure. It sprins up. Gow% better !et% stop listenin to this for a moment and o et a sprin% put it down on the table and push down on it; GO% 7O ITC 5lriht% now% release the pressure with a snap. It should sprin riht across the room. It will 'ump into the air% pop across the room and !ou ma! ha&e trouble findin it if there is enouh sprin in it. Gow% somethin similar happens in a ood sprin situation in the market. "hen the stock breaks a support le&el% the bu!ers can see if  demand has control of the stock and if so% there is a ood chance that/ this demand will mo&e the stock up% perhaps completel! out of the tradin rane. If the suppl! has been absorbed and it is read! to o% it’s almost like blowin the lid off of/ a pressure cooker+ up it oes and it sprins. It is much like sprinin off of/ a di&in board. Gow% !ou know what happens on a di&in  board in a swimmin pool. If !ou bounce up and down on it without a reat deal of push% !ou don’t o &er! hih in the air% but if !ou come out on the sprin board and come smashin down% the bounce back is stron. "ell% aain% the same thin happens when a stock sprins successfull!.  Gow% in order to illustrate and et this concept in !our mind better% take a celluloid ruler  and place an ede across the J<=.44 le&el of “Outboard Marine%” chart number two. This is in the area where it was supported repeatedl!% rouhl! the midpoint of points/ E% 14% 13% 1= and 1>. Gow% hold the ruler with !our left hand and place !our left thumb one inch awa! from the riht hand ede of the ruler and place the mark for one inch awa! from the riht hand ede at  point 1>. The end of the ruler should be e$actl! on the da! at number 34. This means that !our  left thumb is 'ust abo&e point/ 1> and the onl! portion of the ruler which can be forced to bend toward !ou is that one inch co&erin the area from point/ 1> to point/ 34. Gow% with !our riht hand% pull toward !our bod! the riht ede of the ruler. Bend the ruler backward toward point/ 1E. )lease don’t 'ust sit here and listen to this% 7O ITC Otherwise !ou’ll miss what we’re tr!in to teach. Gow% force it back; (old it. Gow% what is oin to happenF If !ou pull backward more and more and the pressure continues to build up% it will e&entuall! break the ruler. The same thin happens to stocks. (owe&er% if !ou take awa! that pressure suddenl!% the ruler will snap back and if there was an!thin in its path% it would sprin it forward+ it sprins and this is what we mean b! “the sprin.” Gow% remo&e the ruler and let us continue. The stock met support repeatedl! at points/ E% A% 14% 13% 1= and 1> and support line 55 can be drawn throuh points/ A and 1=. It met suppl! at points/ 2% 11% 1< and/ 1@ and a suppl! line BB can be drawn throuh points/ 11 and 1<. 5t point/ 1A these two lines 55 and BB con&ere for an ape$. There has been a radual narrowin of the price swins and this cannot

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lon continue. The suppl!  demand condition is increasinl! in balance+ it will ha&e to mo&e up or down. The closer it ets to the narrow point of the ape$% the more likel! it is to attempt to come out of this narrowin rane. Gow% please note that the tradin rane from point/ 2 to point/ 1A is a narrow% compact one. This enerall! is the better t!pe. T(e %o"e co%)ac (e "ad#ng "ange #!, (e %o"e l#+el$ (e !oc+ #! o .e *nde" con"ol .$ (e )"ofe!!#onal! and (e g"eae" (e )o!!#.#l#$ of a !w#f e)lo!#/e %o/e *)wa"d follow#ng a !)"#ng o" a !(a+eo*' 0ac( fo" (e%4  Gow% look at the &olume. Gote that the farther the stock mo&ed to the riht in the tradin rane from point/ 2 to point/ 1A% the smaller the eneral le&el of tradin became% #nd#ca#ng (e le!!en#ng of (e !ell#ng o" (e g"ad*al a.!o")#on of (e !*))l$& In the area marked 1Aa% the relati&el! liht &olume indicated a scarcit! of offerins. Gow% what about the sprin at point/ 1EF "as there suppl! on the dip down to point/ 1EF "as an!one dumpin stocksF The answer  is no. There was no wholesale dumpin of stocks. T(e"e wa! no la"ge #nc"ea!e #n !*))l$ and (#! #! all (e )"ofe!!#onal! (a/e o +now& It is a number three sprin. The stock immediatel! rallied to point/ 12 sharpl!% had a minor reaction to point/ 34 and then it mo&ed up to point/ 31 &er! rapidl!+ a classic e$ample of a number three sprin. The lenth or si0e of the mo&e followin a sprin will depend directl! on the si0e of the fiure chart count. The larer the count% the larer the possible mo&e% the smaller the count% the smaller the possible ultimate mo&e. "here could !ou take a speculati&e position on this stock or in this situationF The best  place is to take a position on the reaction to point/ 1E as it breaks throuh the pre&ious supports. This would be between J<=.44 and <<1DE. If $o* do no a+e $o*" )o!##on a! # #! go#ng down, /e"$ ofen $o* w#ll no .e a.le o a+e (e )o!##on a all o" a an ad/anageo*! )"#ce& One  position could be taken on the mo&e down to point/ 1E% a second position on the minor reaction at point/ 34. In this instance the reaction to point/ 34 was &er! brief and in actual practice could ha&e been missed easil!.  Gow% refer aain to chart number one. "hat is point/ 11F Look at the price action and the &olume. 7id suppl! come out on the reaction below the support at points/ =% > and @F 8es. Some suppl! was present at point/ 11. )oint/ 11 is a number two sprin. It the stock/ rallied to point/ 13 and then reacted to point/ 1<. On the reaction at point/1< there was price weakness% a widenin of the spread on the downside and some &olume. Suppl! was still present on the test of the number two sprin at point/ 11. "hen this occurs% be &er! carefulC The result of the failure to absorb the suppl! at point/ 1< was that it the stock/ continued to mo&e on down to point/ A. He"e #! an ea%)le w(e"e $o* (a/e a %#no" !)"#ng w(#c( fa#led and de/elo)ed #no a %o"e #%)o"an e"%#nal !(a+eo*& #hart number three is of “#ommercial Sol&ents%” 12@>. The stock was in a lon term upward trend beinnin in 12@3. Then from point/ 1 to point/ 3 it/ reacted within that lon up trend without clima$in% without oin throuh a pronounced classic &olume sellin clima$ at point/ 3. It then went sidewa!s with supports enerall! around the <4 area at points/ <% =% > and @. 5ain% please put a celluloid ruler on ede alon the J<4.44 per share line with !our left thumb about one inch from the riht hand side of the ruler at point/ @ and then bein to bend the ede of the ruler toward !ou. "hat happensF 5s the ruler beins to bend down at points/ A and E% it breaks throuh all the support le&els. Onl! a &er! small amount of &olume comes out at point/ E. )oint/ E is a number two sprin which is tested with less &olume and price weakness on the secondar! test at point/ 2. The stock then holds in this area for a few da!s and e$plodes up to point/ 14. The result from point/ E to point/ 14 is &er! rare% but this actuall! happened in the market as a result of the sprin phenomenon at point/ E. The time to take a position was on the sprin. The loical place to put a stop order was at 3@ADE which would be 'ust below the lower  support le&el at point/ 3. The ne$t chart under discussion is the chart of “Beckman Instruments%” chart three 5. 8ou’ll remember this is the same as chart eiht of Basic Lecture Gumber Three. Gote% the stock  was supported repeatedl! around the J=E.44 le&el and there is support at point/ number 11. Sometimes the pre&ious support which is broken on the sprin consists of a &er! e$tensi&e le&el. So%e#%e! (e le/el con!#!! of onl$ one )o#n& On the sprin at point/ 3% it onl! broke one  point. (owe&er% due to the proressi&e de&elopment of the area of accumulation% that one point was *uite important. 5s the price broke throuh point/ 11 at number 3% was stock dumped on the marketF The answer to this has to be an un*ualified no. The spread was relati&el! narrow and the &olume remained low. This is a number three sprin and a number three sprin does not need to be tested because the professionals and trained knowledeable people alread! know as a result of the number three sprin that no one is dumpin stocks% no one is scared and that the sellers are not in control as of that moment. It i&es the bu!ers a chance to bein mo&in the

-8

stock up. Bu!in will be stron or it ma! be weak. If it is weak% it ma! simpl! throw the stock   back into the tradin rane for a continued sidewa!s mo&e and further testin. If% howe&er% demand is stron% it ma! be sufficientl! stron to dri&e the stock throuh the top of the tradin rane and into an upward trend. This is what !ou should plan for. An#c#)ae w(a co*ld (a))en and .e )"e)a"ed o ac dec#!#/el$ and 5*#c+l$& Let us mo&e on to an e$ample of the number one sprin. The number one sprin has o&erwhelmin suppl! which is indicated b! an e$treme price weakness and hea&! sellin. The  price and &olume characteristics are that there is a wide spread and a hea&! increase in &olume. This is e&idence of an abundance of suppl!. The stock oes throuh the tradin rane on the downside and continues down until the down trend can finall! be halted. If the stock has been under accumulation% usuall! it will re*uire e$tensi&e further preparation before the stock is read! to mo&e out of the accumulation area. U!*all$, (owe/e", (e n*%.e" one !)"#ng #! )"eceded .$ a lea! %#no" d#!"#.*#on and ofen #ne"%ed#ae o" %a3o" d#!"#.*#on& T(e n*%.e" one !)"#ng #! fa" %o"e l#+el$ o occ*" #n !oc+! w(#c( a"e #n %a3o" and !*!a#ned down "end! (an (e$ a"e o occ*" #n *) "end!& Our first e$ample is chart four of “9or&ette%” 12@>. The stock rallied in earl! 12@> to 1D3 >4 at point/ number 1. It then went down to point/ 3 and bean to mo&e sidewa!s in a slihtl! upward slantin tradin rane. There were supports established at points/ 3% <% >% @% E and 14. Gow% watch what happens as the stock reacts from point/ 11. The da! marked 13 has wide spread and hih &olume on the downside. 5t point/ 1< it breaks throuh the support at points/ 14 and E with e$tremel! hea&! &olume and &er! wide spread+ suppl! is o&erwhelmin; It is a number one sprin and the rall! from point/ 1< to point/ 1= has a comparati&e lack of  demand on it+ the rall! is weak% the spread is narrow and the &olume is considerabl! decreased compared to point/ 1<. The stock oes on down to the area labeled/ 1>. Thus% on the mo&e from point/ 11 to point/ 1< suppl! was &er! hea&!+ it was o&erwhelmin. )oint/ 1< was a number one sprin.  Gow% how does one take a speculati&e position on a number one sprinF 5s the sprin occurs% !ou should be able to dianose that suppl! is o&erwhelmin. Do no .*$4 -or the stock  to o up% that suppl! must be absorbed. The stock would normall! ha&e to be tested in such a manner as to indicate that the suppl! is no loner present. Since suppl! is o&erwhelmin% do not  bu! on the number one sprin. (owe&er% !ou can use it for a wa! of determinin the possibilit! of takin a short position on the rall! followin the number one sprin. If (a "all$ #! wea+, $o* %a$ *!e # o a+e a !(o" )o!##on o )la$ fo" (e co%#ng decl#ne& 5s “9or&ette” bean to mo&e down from point/ 1=% hea&! suppl! was still present at area/ 1> The sellin was not as hea&! as at point/ 1<% but suppl! was still present and still had not been absorbed. There was a complete absence of ood rall! power and of ood demand on the rall! to point/ 1@. 5s a result the stock continued in its down trend until it reached point/ 1A. The ne$t chart% chart fi&e is of “Montomer! "ard%” 12@@% which shows another number  one sprin. The stock had been in a more e$tensi&e tradin rane prior to the point 1 on our  chart. It mo&ed to point/ 3 and then built an addition to the tradin rane with supports at points/ <% =% >% @ and A. It had an upthrust at point/ E and immediatel! bean to react. On the da! marked with the arrow at point/ 2% the stock broke throuh the supports at points/ <% =% > and @. The spread was *uite wide. Look at the &olume howe&er. The &olume was not o&erwhelmin. The stock was not fallin so much because of the massi&e pressure of the hea&! sellin of stocks at that point% but because demand was not there to stop it where it should stop the decline if the stock was oin to o up immediatel!. 9Po#n: < wa! a n*%.e" one !)"#ng, %a#nl$ on )"#ce wea+ne!! "a(e" (an on (ea/$ !ell#ng )"e!!*"e, (*! (e !oc+ con#n*ed on down o ?<&6@ )e" !(a"e a 9)o#n: ?@& The ne$t e$ample% chart si$% is of “)apert% 9oeni% Lois%” 12@2% on the 5merican Stock  ,$chane. The stock mo&ed from point/ 1 to point/ 3 with preliminar! suppl! at point/ <% a  bu!in clima$ at point/ =% automatic reaction at point/ > and the secondar! test at point/ 3. 5t point/ 3 the stock had definitel! stopped the upward trend. The reaction to point/ @ had hea&! suppl! and was a possible sin of weakness with the rall! first to point/ A and then to point/ E  bein a possible last point of suppl!. Gow look at the support at points/ @% 2% 14% and 11. The stock was e$tensi&el! supported in the J33.44 to J3<.44 area and then at point/ 13 it broke throuh this support area for a number one sprin. Suppl! was o&erwhelmin the demand as it  broke the supports. There was a hea&! increase in &olume and the price broke b! > points. On a J3<.44 stock this is about 34 percent in one da!. )oint/ 13 is a number one sprin% but less clear  cut than on charts four and fi&e. The rall! to point/ 1< was with decreasin demand compared to the suppl! to point/ 13. The rall! was weak. Then additional suppl! came in on the mo&e

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down to point/ 1=. There was a more e$tensi&e rall! to point/ 1> which met suppl! and stopped in the pre&ious support area of points/ @% 2 14 and 11 and then the stock mo&ed down to point/ 1@.  Gow% let us mo&e on to the ne$t chart. The chart number/ se&en is of “-amous 5rtists Schools” with a number one sprin in Go&ember 12@E. The stock mo&ed from point/ 1 to point/ 3 with a bu!in clima$ at point/ 3 and stopped the up trend. It then bean a tradin rane with supports at points/ <% =% >% and @% went into new hih round at point/ A for an upthrust and reacted to point/ E% where the stock had enerall! been supported around the J>3.44 le&el. On the da! marked 2% the stock opened down and closed at the low% breakin all the supports in the tradin rane. The decline was 144 per share in 5pril 12@2.  Gow% let us summari0e what we know about number one sprins. T(e n*%.e" one !)"#ng "e/eal! (a !*))l$ #! #n con"ol of (e !#*a#on on (e !)"#ng& 7emand is not in control on the number one sprin. "hether the stock will collapse and immediatel! mo&e downward e$tensi&el! as in charts four and fi&e will depend upon the continued outpourin of  sellin on the market and the failure of the bu!ers to stop the mo&e. On a number one sprin the stock mo&es down and e&entuall! has to build a complete new area of accumulation before a substantial up mo&e can occur. 7o not bu! on the number one sprinC Instead look for a  possible short sale on the subse*uent rall!. So far we ha&e discussed the number three sprin and the number one sprin; Gow for  the number two sprin. 5 number two sprin has some suppl! on it. It is somewhat midwa!  between the number one sprin which has o&erwhelmin suppl! and the number three sprin which has no suppl!. A n*%.e" wo !)"#ng #! a "ela#/el$ %#no" )ene"a#on .elow a )"e/#o*! !*))o" le/el on w(#c( !o%e !*))l$ #! )"e!en& The price and &olume characteristics are that there ma! be some widenin of spread and some increase in &olume. Since there is suppl! on the penetration into new low round below the supports% the stock must be tested b! a secondar! test on which there is a decreased spread and &olume compared to the sprin itself. The sprin does not necessaril! ha&e to o into new low round or into all time new low round for the mo&e. I #! !*ff#c#en o ."ea+ an #%)o"an !*))o" a"ea& The number two sprin occurrin in the accumulation area is &er! similar to a terminal shakeout e$cept that it penetrates onl! a short distance below the support area.  Gow wh! does a number two sprin ha&e to be testedF The answer to that is wrapped up in the process of accumulation and in the principle of the sellin clima$. :suall! accumulation in an oriinal base area takes place after a si0able down mo&e. The stock stops oin down and then oes into a tradin rane and the untrained people% the public% raduall! sell their stock% on  balance% and the professionals bu! on balance. 5s the professionals continue to accumulate% e&entuall! the stock ma! be allowed to drift below a support area or it ma! be dri&en below that support area b! the composite operator in order/ to test the le&el. Man! !ears ao these tests were deliberatel! enineered. Gowada!s the! are far more likel! to be a direct result of the simple withdrawal of the bids and the resultant lack of bu!in orders on the part of the  professionals. The! the professionals/ must know how much suppl! will come out on the market before the! can safel! bein to mo&e the stock up. "h!F If the! bein mo&in the stock  up without knowin this% someone% perhaps a fund manaer% ma! sell 144%444 to 344%444 shares at a &er! awkward time and at much hiher prices. B! allowin the stock to o into a sprin situation% the! ma! pre&ent this. That 144%444 to 344%444 shares ma! be sold in the accumulation area before the real mo&e starts. The other part of the answer to this *uestion has to do with the principle of the sellin clima$. :suall! on the mo&e down to the number two sprin% which lasts onl! a few da!s or at most a few weeks% the stock reacts on relati&el! moderate &olume and as it breaks into new low round below the supports there is an increase in &olume and somewhat of a widenin of the spread. If !ou look onl! at this mo&e itself and ha&e an intrada! breakdown on it% !ou will find that usuall! on the break into new low round there is a minor sellin clima$ followed b! an automatic rall! and then a secondar! test. This is e$actl! what !ou would e$pect to happen as an! important trend mo&ement comes to an end. 8ou would e$pect it to end with a sellin clima$ and a secondar! test. Be /e"$ wa"$ and ca"ef*l #f $o* (a/e a n*%.e" wo !)"#ng w(#c( (a! no .een e!ed& I %a$ .e e!ed lae", !e/e"al da$! lae"&  Gow% before oin further% I want to illustrate in a different wa! what happens on a sprin. This is an analo! in which I will act as the suppl! and !ou can pla! the role of demand.

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 Gow please stand up. ?o across the room and turn !our back towards me. Bend !our knees and crouch down and be read! to sprin up because I am oin to 'ump on !our shoulders. 5lriht% I come across the room% I take a 'ump and 'ump riht% smack on !our shoulders. Gow% tr! to sprin. 8ou can’t sprin% can !ouF "h!F Because I am the suppl! and I am hea&! and !ou cannot possibl! sprin. Gow% let’s carr! this a step further because we know that within/ the sprin principle one of three thins can happen. Suppose that !ou% the demand% weih >4 lbs. and I% the suppl!% weih 344 lbs.. 8ou bend down% et read!+ I run across the room% 'ump up and come smashin down on !our shoulders. "hat’s oin to happenF "ell% !ou’re s*uashed like a  bu% !ou collapse and this is e$actl! what happens on a number one sprin.  Gow% suppose we re&erse this and !ou% the demand% weih 344 lbs. and I% the suppl!% weih >4 lbs.. I come runnin across the room and 'ump on !our shoulders. 8ou can sprin up with ease% I hope. 5nd now the third alternati&e is basicall! somewhere in between and aain we ha&e used somewhat the process of elimination+ we ha&e one to both e$tremes% hea&! suppl! and small demand+ a number one sprin+ small suppl! and hea&! demand+ a number three sprin.  Gow% suppose the suppl! and demand are larel! in balance. Suppose !ou% the demand% weih 13> lbs. and I% the suppl!% weih 1<> lbs. or 1=4 lbs.+ now% what happensF I 'ump on !our  shoulders% !ou staer around for a little bit% et !our balance% stead! !ourself and hold. 8ou ma! almost fall down% but e&entuall! !ou hold and then !ou sprin up. This is what happens on a number two plus sprin where !ou ha&e suppl! on the number two sprin itself and then a lack  of suppl! on the secondar! test. Let’s carr! this another step further. Suppose I 'ump on !our shoulders and as !ou are tr!in to ain !our balance I 'ump off. This is what happens &er! often in the stock market  because as the sprin occurs the bu!ers are tr!in to absorb the sellin and if the sellers find that the! cannot continue to dri&e the stock down% down% down% the! will turn around% stop sellin and re&erse their positions and up it the stock/ oes.  Gow% let’s do this aain. 8ou% the demand weih 13> lbs. and I% the suppl!% weih 1=4 lbs. . Suppose I 'ump on !our back. 8ou staer around and then somebod! hands me a 3> lb. weiht. 8ou tr! to shift that% !ou almost o down and e&entual somebod! hands me another 1> lb. weiht and !ou collapse. This is what happens on a number two minus sprin. The weiht of  suppl! has increased and increased until the demand simpl! cannot handle it. The stock oes on down. Sometimes it is fortunate that there is a floor there. That floor in the stock market ma! be a sellin clima$ which stops the down mo&e or it ma! be a pre&ious area of support. Thus% on the number two sprin the stock oes below the pre&ious supports% stops% then rallies and then comes down to test this new support area. If suppl! increases on the test% the stock ma! o down. "e call this a number two minus sprin or a twent!one sprin. 5nd the stock will continue on down until demand is finall! able to stop the down mo&e. The second alternati&e on the secondar! test of the number two sprin is that there will be a lack of suppl! compared to the number two sprin. This is indicated b! the narrowin of the spread and a decrease in &olume compared to the number two sprin itself. There is a lack of  suppl! at that point. This is called a number two plus sprin or a twent!three sprin. It is &er! important to understand that there is no clear cut line of demarcation between a number one sprin and a number two sprin% a number two sprin and a number three sprin. The critical factor is not the terminolo!. T(e c"##cal faco" #! $o*" *nde"!and#ng of (e "ela#on!(#) of  !*))l$ o de%and #n (e .a!e a"ea and on (e !)"#ng& 5fter a successful test of the number two sprin% demand ma! be stron or it ma! be weak. If the demand which comes in on the subse*uent rall! is weak% the stock will probabl! continue in the tradin rane for further tests. If howe&er the demand is persistent and stron% it ma! be sufficientl! stron to establish a ma'or upward trend% lea&e the tradin rane on the upside and bein to work out the count and the force of the accumulation which took place in the accumulation area. Incidentall!% the price and &olume indications on a number two sprin are less likel! to be clear cut than on a number one sprin or a number three sprin. The classic illustrations are few and far between. This is wh! it is necessar! to stud! man! e$amples and ha&e e$amples from different periods of market histor!. Let us illustrate this with a classic number two sprin% chart number eiht of “Gatomas #o.%” 12@E. The stock mo&ed up from about J14.44 a share in October 12@@ to 3<>DE at point/ 1% reacted down to point/ 3 which is about a ma'or 1D3 correction and then went throuh re accumulation. There was a support area established at points/ 3% <% =% > and @. Gow% stop for a moment and co&er up all the area on the chart to the riht of point/ @. GO"% 7O ITC 7o not continue listenin to this without co&erin up the area to the riht of point/ @. Gow% what do !ou ha&eF; 5 lon tradin rane lastin from Go&ember to March with% actuall!% two areas of 

1@

support. Gow% what about the area at point/ > to to point/ @F It is compact% it is tiht% it is narrow narrow and the eneral le&el of tradin as indicated b! >a has fallen off considerabl! compared to the  pre&ious &olume action. Gow% unco&er the area to the riht of point/ @. Look at the three da!s marked A+ at the price action action and the &olume. This a phenomenon phenomenon that is described described as “tried to o up% tried to o down% closed in the middle middle on an increase in &olume.” This one occurred o&er  three da!s. da!s. "hen this hih% hih% low and close in the/ middle on increased increased &olume occurs% occurs% usuall! the mo&e will start start soon% in onl! a few da!s; 8ou 8ou are about to et some answers. answers. The stock   beins to react down to point/ E and 9)o#n: ; ac*all$ co*ld (a/e .een a n*%.e" ("ee !)"#ng, (owe/e" # d#d no !)"#ng and ge *!ed o (#!, (e$ wonG alwa$! !)"#ng w(en $o* rall! from point point// E to point/ point/ 2 was &er! weak and then it broke broke wo*ld l#+e (e% o& The rall! throuh throuh all the precedin precedin supports% supports% all the wa! back to point point 3/. Look at the price and look look at the &olume especiall!. There was some suppl! at point/ 14% there there was a rall! to point/ 11 and then a secondar! test test of the number two sprin at point/ point/ 13. There was still still a bit of suppl! at point/ 13. The stock rallied up to point/ point/ 1< and then on the reaction to point/ point/ 1= continued to ha&e a lack of suppl!. suppl!. The stock mo&ed mo&ed up and worked out the count built up in this this area and went throuh repeated reaccumulation until it went abo&e 144 in earl! 12@2% about one !ear  later. (ow could a speculati&e position ha&e been taken as this stock was oin throuh the testin process in the area of the sprin% which was also terminatin the area of reaccumulationF It is well to keep in mind that in attemptin to establish a position% a student should be &er! careful careful as to his timin timin and that he not take e$cessi&e e$cessi&e risks. Often the timin timin of a purchase purchase or  short sale should be coordinated with the action a ction on the "!ckoff "a&e "a&e as the "a&e "a&e ma! indicate that the current reaction on the the part of the eneral market has not ended. If so% it ma! ma! be wise to hold off purchases in the indi&idual stocks e&en thouh the! appear to be read!. "e cannot i&e !ou an ironclad eneral rule on this which !ou can then appl! at all times and in all situations. 8ou 8ou must de&elop and use !our own 'udment. If the "a&e "a&e is mo&in up and the stock itself is is oin throuh sprin action with a number two sprin or a number three sprin% !ou know !ou are oin to ha&e the help of the eneral market in makin !our purchases and in beinnin the markup phase of the mo&e. "ith "ith this in mind there are se&eral places at which a student could establish speculati&e positions on this stock. The first occurred on the number three sprin at point/ E in the area bracketed as 1>. This was a perfectl! loical place at which to take take a position. (ad one been taken% a stop order  ADE ADE could ha&e been placed at 1>  or 1=  i&in a loical minimum minimum risk. 5s the stock stock broke below J1A.44 per share on the number two sprin at point/ point/ 14% it created another loical loical place to bu! with a stop order aain in in the same area. 5nother loical purchase could could ha&e been made on the reaction to point/ 1=. Gow% suppose !ou had missed bu!in at point/ point/ 13 or prior to point/ point/ 13. 5ll of the important indications are present in the chart that the stock is read! to o up and !ou could ha&e bouht on the rall! followin point/ 13 up to point/ 1< or e&en the rall! followin point/ 1=% preferabl! bu!in on a reaction. 5 student with a lare amount of capital% capital% re*uirin that the position be established o&er man! da!s or weeks could ha&e bouht steadil! each da! all throuh this area of the sprin and in the earl! staes of the the markup phase. This is marked as a cur&ed arrow 1@. 5 &er! substantial speculati&e position position can be taken this wa!. wa!. To bu! after the occurrence of a number three sprin or a number two plus sprin as the stock is beinnin to mo&ee up is not what we call chasin mo& chasin after after a stock. stock. This This is oin oin with it as it is lea&in lea&in the accumulation area. #hasin after a stock refers to bu!in it without ha&in sufficient sufficient anal!tical indications indications that it is oin to mo&e substantiall! substantiall!.. #hasin #hasin after a stock is bu!in it because because of  emotions% that !ou want the stock and ha&e to ha&e it now% now% without thinkin thinkin it throuh. 5nal!0e the situation carefull! and if it is in the earl! staes of the trend% then !ou ma! ma ! o with it. Let’s co&er chart nine of “Occidental )etroleum.” )etroleum.” Briefl!% it has another classic classic number  two sprin. sprin. The support support area is at points/ points/ 1% 3% <% = and > and note that the support area area is not th e$actl! at the same 1DE % but it is at/ the same eneral eneral price le&el. le&el. :suall! :suall! the support% support% the reactions within the tradin rane% will stop at enerall! the same le&el% but not at the e$act same  price. The number nu mber two sprin occurred at point/ @. There was some increase of &olume. &o lume. The ne$t da! ood demand came in on the upside and look at the &olume. 0e call (#! )(eno%enon /ol*%e off (e .oo%& Fol*%e Fol*%e off  (e .oo% #! ca*!ed .$ (e )"ofe!!#onal %an !#%)l$ a.!o".#ng all of (e !*))l$ ("own off (e %a"+e and %o/#ng (e !oc+ *)& I *!*all$ point/ A and the secondar! test of the number two #nd#cae! a *"na"o*nd& The stock rallied to point/ sprin was at point/ E. There are se&eral methods of indicatin the suppl! le&el which could be broken on the sprin or shakeout. One method is to draw a free hand% wil! line throuh throuh the points at which

1?

the stock was supported in the tradin rane. This is shown on chart one. 5nother method method is to draw a hori0ontal arrow indicatin the support le&el as on chart three. 5 &er! similar method is to draw a hori0ontal trend line such as 55 on chart fi&e. These lines ma! he drawn prior to the sprin and when penetrated will ser&e to draw d raw !our attention to the sprin. In bu!in on sprins% there are are some cautions !ou should obser&e. obser&e. If !ou are oin to use the sprin as one of !our prime tools in the stock market% !ou ma! ha&e a &er! stron tendenc! to see sprins e&er! hour on the hour. 8ou ma! think think that e&er! chart should show !ou a sprin; It won’t. won’t. The! don’t don’t occur occur that wa!. wa!. (owe&er% (owe&er% when when the! do occur% occur% !ou ha&e a wonderfu wonderfull market tool. :nless !ou absolutel! know that !ou ha&e an e$ample of the sprin stor!% do not tr! to use it. If the sprin is not reasonabl! clear% do nothinC There are man! times when it is best to do nothin. nothin. Sometimes Sometimes !our !our best best in&estment in&estment is cash. cash. Sta! on the sidelin sidelines. es. Be free free of the the emotional pressure of makin a decision and be read! to o in when a ood opportunit! arises. 5nother caution is to be &er! &er ! careful about bu!in sprins in stocks which ha&e ha& e ma'or downward trends or when the market itself is in a ma'or downward trend or when there is much suppl! on the sprin itself. itself. :se the sprin as a tool to think with. U!e # o ell $o* (ow (ea/$ (e !*))l$ 6emember% it is not not that onl! onl! one thin thin will occur occur on the the sprin; sprin; It is that that one of three three #!& 6emember%  possible thins can occur% a number one sprin% a number two sprin or o r a number three sprin; O&erwhelmin suppl!% some suppl! or no suppl!. If !ou ha&e o&erwhelmin suppl!% do not bu!. bu!. Look for a possibilit! of oin short on the subse*uent rall!. If !ou ha&e a number two sprin% !ou can bu! on the sprin itself itself or better better !et on the secondar! secondar! test. If there is a number number three sprin% !ou can take !our position immediatel!. immediatel!. 5lwa!s use a stop stop order and &er! often a close stop order to protect !our capital and to keep the possible profit  risk ratio reatl! in !our fa&or. If !ou do bu! and the stock does not mo&e% then et out and look elsewhere. In summar!% do not use the sprin as a mechanical immick. U!e # a! a %ean! of  e!#%a#ng (e a%o*n of !*))l$ (a co%e! #n on (e d#) #no new low g"o*nd and a wa$ of   3*dg#ng (e !"eng( !"eng( of (e de%and on (e "all$ follow#ng (e !)"#ng #!elf& The suppl! ma!  be hea&!+ it ma! be liht. The demand ma! be stron+ it ma! be weak. Kude it and then act. If  !ou wait until !ou can detect an area of accumulation terminatin with a sprin% do not bu! in the tradin tradin rane. 8ou will a&oid ha&in !our mone! tied tied up in stocks which which are not read! to mo&e and a&oid bein dri&en out of a stock when a sprin or shakeout occurs b! ha&in a stop order cauht. cauht. It i&es !ou the means of takin takin a speculati&e speculati&e position position 'ust before the stock stock is read! to mo&e. 8ou are either riht or !ou are not riht. 8our 8our timin is riht or it is not riht. riht. It either mo&es or it it doesn’t mo&e. mo&e. "ith "ith the sprin !ou bu! and et an immediate answer. answer. It is a  beautiful timin tool. Learn sprins. )ractice with them and profit from them.

12

BASIC LECTURE NUMBER SI UMP ACROSS THE CREEK 

The main sub'ect of Basic Lecture Si$ will be the “'ump across the creek” stor!. stor!. The  purpose of this lecture will be too discuss with with !ou the analo! of the “'ump across the creek%” where it fits into accumulation% how !ou can anal!0e it and use it to take a speculati&e position for potential profit with a minimum of risk. risk. The “'ump across the creek” stor! is an analo! used to illustrate illustrate what can happen as a stock tries tries to lea&e the tradin rane rane on the upside. It i&es !ou a means of thinkin about the market. "e use an analo! to illustrate a principle and to i&e us an insiht into the operation of the stock stock market. The “'ump across the creek” is usuall! a sin of strenth and the “backup to the ede of the creek” is usuall! a last point of  support. The! are actuall! two different different wa!s of lookin at the same action. In/ this lecture we will deal with the “'umpin across the creek” stor! first and then later on with the sin of  strenth. 9eep in mind that the “'ump across the creek” primaril! has to do with the suppl! that is present in the tradin rane and as the stock tries to lea&e that tradin rane. One of the ma'or contributions of Mr. 6obert ?. ,&ans% former )resident of our firm% is his e$cellent use of analoies to illustrate illustrate market principles. The “'ump across the the creek” is one of these analoie analoiess which he de&elo de&eloped. ped. Student Studentss ha&e found found it to be especia especiall! ll! helpful helpful in learnin this phase of their market stud!. stud!. Man! students will use the “'ump across the the creek” as their their primar primar! ! market market tool in establ establish ishin in speculati speculati&e &e pos positi itions ons.. The! The! will will make make their their first first  purchase on the “backup to the ede of the creek” and the! ma! add to their position on later  reactions. The “'ump across the creek” can also be used &er! well in con'unction with the sprin. -ollowin -ollowin that procedure% procedure% the first speculati&e speculati&e position position is taken in the area of the sprin. sprin. The second position would be taken on the “backup to the ede of the creek.” Later positions could  be established at hiher le&els on later reactions; This is p!ramidin with the trend. 5 second  position would not be established unless the first has alread! shown/ a profit and later positions would not be established unless those taken pre&iousl! alread! showed a profit. In order to understand and use the “'ump across the creek%” we are oin to use our  imaination imaination and &isuali0e &isuali0e a/ bo! scout on an outin. "e are oin to use this/ bo! scout scout to illust illustrat ratee the market market princi principle pless which which will will help help us to a&oid a&oid bein bein drawn drawn into into the market  prematurel! and which will help us to do our bu!in at the moment that the th e risk is the least. The risk is is alwa!s alwa!s least the the da! before before the market market mo&es up. That is the the perfect perfect time to bu!. bu!. In actual practice we will not often bu! one da! and see the stock bein to mo&e up the ne$t da! and keep on oin% but we can aim for this and/ the “'ump across the creek” stor! will help us to do that.  Gow% will !ou please turn to chart number one% which is a &er! homespun% hand drawn chart. It is the e$act chart that Mr. ,&ans oriinall! used to illustrate this principle. "e start start with our scout at the letter  and he is oin o in to o to the letter 8% 8% which which is his ob'ecti&e. It is actuall! *uite a distance and to o there he will ha&e to cross some broad% open fields% o/ throuh some woods and cross a few creeks. So% he oes up to point/ number 1 and at that point encounters a stream. stream. The stream stream is too wide wide to 'ump 'ump across and and too swift swift to swim swim across. across. Gow% Gow% as a bo! scout% what is he oin to doF The answer reall! is is in the stor! itself. 5s a bo! scout scout the loical thin to do would be to mo&e alon the ede of the creek hopin to find a spot which is not *uite so wide so that he could could attempt to 'ump 'ump across it. it. If he finds such such a point% he has a chance of  oin across without ettin wet. Gow% remember that a stream ne&er% or &er! rarel! rarel! e&er runs in a straiht line+ it meanders all o&er the the place. -urthermore% the scout probabl! would would not be able to walk alon the ede of the water. There ma! be swamp! spots% trees% rocks or other obstacles in his wa!. wa!. (e would probabl! probabl! ha&e to walk alon the ede of the bank% mo&e mo&e awa! from the  bank and make fre*uent trips down to the waters ede to inspect the situation. So% here he is at point/ 1 and he has the problem of ettin across the stream. (e beins to mo&e downstream. downstream. The path that he takes is a broken line which which is drawn alon the ede of  the creek creek and as !ou !ou can see% he he oes up to to the creek creek se&eral se&eral times. times. (e finds finds the creek creek is too too wide to 'ump across and too swift swift to swim across across until he finall! ets o&er to point/ <. (e has made a number of trips to the ede of the creek% attemptin to find a spot which is not *uite so wide and not *uite so swift and at point/ < he finds that that spot. Gow% what does our bo! scout doF

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7oes he stand on the bank to 'ump across or does he back up a wa!s to et a ood runnin start start to 'ump across the the creekF Gow% Gow% ma!be !ou ha&e done this !ourself !ourself at one time+ if not tr! it sometime. sometime. If !ou do not et a ood run% run% !ou are almost almost sure sure to end up in the the water. water. So% our  scout at point/ < sa!s to himself; “"ell% I belie&e if I back up and make a run for it% I think I can  'ump across the creek.” (e backs up to point/ = and he runs and where we ha&e drawn the arrow is where he 'umps across the the creek. Gow% what happens as the bo!’s feet land on the other  side of the the creekF 7oes he stop stop riht there% there% dead in his his tracksF tracksF Go% the momentum momentum itself itself will will carr! him a ood wa! be!ond the ede of the the creek. This is the momentum momentum made up of the run% the 'ump and the landin. (e made it so far. far. (e is now on the other side of the creek% but is he safeF "ell% not necessaril!. necessaril!. "hat has happenedF In the first place% the backup% the run and the the “'ump across the creek” ha&e/ burned up most of the bo!’s ener!. ener!. It is loical for him to rest a bit before he continues and thus% the normal thin to to do is/ for him to simpl! sit down and rela$. "hereF (e mo&es alon the ede of the creek until until he finds a restful restful place% ma!be ma!be under a shad! tree. )erhaps )erhaps he takes off his shoes and ma!be danles danles his feet in the water. (e cools off% rests rests and attempts attempts to reain his strenth before continuin his mo&e on toward his ob'ecti&e ob'ecti&e at point/ 8. 8. 5lon the wa! from point/ 1 to point/ = our scout encountered alot of thins which were unpleasant and frustratin. If he decided to mo&e on immediatel! toward 8% he ma! find himself in trouble further on down the road before he ets to 8% so it is onl! loical for him to make sure he is still able to o on to point/ 8 before he beins his 'ourne!.  Gow% let’s tie this into the action of the stock market. (ow man! times do we ha&e reactions. reactions. Sometimes Sometimes a reaction of onl! one da! is all that is necessar! to determine determine that it is safe to o ahead with the mo&e. 5t other other times it is necessar! necessar! to “back up to the ede of the creek.” creek.” -or the sake of our discussion discussion%% we are oin to back up to point/ @ at the ede of the creek and we will anal!0e how our strenth is% how much power we ha&e and what the ne$t mo&e is. Gow% if it was necessar! necessar! to make onl! a minor hesitatio hesitation n or% marketwise marketwise%% a one da! reaction% we could e$pect to resume our mo&e up to point/ 8 and ha&e a rather stron% free and eas! time of it and reach our destination rather rather *uickl!. (owe&er% suppose we found found it necessar! to o all the the back to point/ point/ @. "hat would would make !ou !ou o back thereF thereF "ell% ell% !ou miht miht ha&e sprained an ankle% thrown !our back out of place% otten hot and tired and so !ou “back up to the ede of the creek%” sit down and rela$. Gow% be careful% careful% because !ou don’t want to fall back into the creek. creek. If !ou do% !ou !ou are in trouble. trouble. 8ou ma! ma! ha&e to return return to the beinnin beinnin and start start all o&er aain. 5s our bo! starts to mo&e on% one of two thins will happen. ,ither he will be able to resume a mo&e from point/ @ up to 8 or he will find that as he starts to mo&e awa! from the ede of the creek he is not able to do so and he will fall back into the creek. 5t point/ @ he starts to mo&e mo&e awa! and he oes up to point/ A. In order to et to point/ A he must be stron+ he must keep pushin forward. Incidentall!% at point/ A he has one well  be!ond point/ > and he h e is on his wa! toward 8. On the other hand% suppose he started out and  bean to falter+ he wasn’t able to keep oin. "e ha&e drawn this t!pe of action at point/ E. )erhaps his ankle is hurtin or his back is hurtin; (e runs into other troubles% a different set of  circumstances is in operation and he falls back into the creek.  Gow% let’s let’s aain carr! this concept into the stock market. -irst of all let us define a creek  as it will help us to understand how the “'ump across the creek” stor! ties in with the stock  market. A c"ee+ #! (e flow of !*))l$ ac"o!! (e o) of a "ad#ng "ange& It is is drawn drawn with with a wil!% freehand trend line% drawn throuh or across the top of the rallies within the tradin rane. The “'ump across across the creek” is the action action in which the price 'umps across across this creek creek of  suppl!. The “'ump across the creek” creek” is normall! followed b! a back up to the ede of the creek. 5ain% the “'ump across the creek” is normall! a potential sin of strenth and the “back up to the ede of the creek” is normall! a potential last point of support. Suppose a stock is oin to tr! to o from  to 8; It oes up to number one and then  beins to mo&e sidewa!s in a tradin rane. "h!F Because the stock has run into too much suppl! and that suppl! is what we call the creek. T(e c"ee+ #! (e flow of !*))l$ ac"o!! (e o) of (e "ad#ng "ad#ng "ange& "ange& I #! def#ned def#ned .$ (e "all#e! w#(#n w#(#n (e "ad#ng "ad#ng "ange "ange and a! (o!e (o!e "all#e! do no all !o) a (e !a%e )"#ce, (e c"ee+ w#nd!, 3*! l#+e a !"ea% wo*ld&   Gow% from point/ 1 all the wa! o&er to point/ < there is too much suppl! and at point/ < there is a rall! to the top of the tradin rane and finall! we find that there is much less suppl! in e&idence and thus there is a backup to point/ =% then a stron effort to o throuh all of that suppl!% followed b! a reaction and then an attempt to mo&e on to the final destination at 8. 8. Incidentall!% on the backup to point/ =% we ma! back up far enouh to create a sprin or a terminal shakeout.

11

The mo&e from point/ = to point/ > is a sin of strenth and the reaction to point/ @ is the last point of support. support. In this process the the stock is attemptin to to establish an upward trend and !ou would e$pect to ha&e normal up trend action with ood demand on the rallies rallies and a lack of  suppl! on the reactions. Be that as it ma!% suppose that/ followin point/ =% the stock starts starts to mo&e up and fails to 'ump the creek and lands riht% smack in the middle of the creek; Or on the/ backup to point/ @ or on the reaction to point/ E% it could fall back into the creek and find itsel itselff unabl unablee to cont contin inue ue on up. up. T(#! ac#on :pthrusts will be ac#on can c"e c"eae ae an *)( *)("*! "*!&& :pthrusts discussed discussed in more detail in/ in/ a later lecture. lecture. 5s we mo&e up from point/ point/ = we are actuall! actuall! attemptin to bein an up trend. Gow% what is the t!pe of price and &olume action that we would e$pect to ha&e in an up trendF "e would e$pect ood demand on the rallies with a widenin spread and an increase in &olume% followed b! a lack of suppl! or a narrowin spread and a decreas decreased ed &olume &olume on the reacti reactions ons.. Thus% Thus% from point/ point/ = to point/ point/ > we would would e$pect e$pect a widenin spread% an increase in &olume and on the reaction from point/ > to point/ @% a narrowin spread and a decrease in &olume. Let’s Let’s take a look at an actual e$ample. )lease turn turn to chart number two of “Gatomas “Gatomas #ompan!.” #ompan!.” It has a classic classic crossin of the creek. This is the the same chart picture as chart eiht of  Basic Lecture Lecture -i&e; The numbers numbers will be somewhat somewhat different. different. The stock went up to point/ point/ 1% stopped and then bean to mo&e sidewa!s in a tradin rane; There was too much suppl! at points/ 3% <% and =. But at point/ =% the bo! scout sa!s+ “"ell% “"ell% I belie&e belie&e if I back up and et a run for it% I belie&e I can make it.” So% he backs up all the wa! to to point/ > and finall! to point/ @ and he dis in and he starts to make his run and on the mo&e from point/ @ to point/ A he  'umps the creek and then/ backs up to the ede of the creek at point/ E.  Gow% where is the creekF 5fter much searchin for the answer to this *uestion% Mr. ,&ans finall! finall! reached the conclusion conclusion that the creek is where the bo! 'umped. 'umped. 5ppl!in 5ppl!in this to the market% (e c"ee+ #! w(e"e (e /ol*%e 9co%e!: #n,  where the effort% the push% the power  comes/ in. If !ou look at the da! marked 2% there is somewhat of an increase in &olume and the  price action was ood+ it 'umped on that da!. "e know that a stream or a ri&er or a creek of  suppl! is not a hori0ontal area+ it winds all o&er the place and we know that &er! often there is more than one branch of the creek% so we ha&e what we sometimes refer to as an upper branch and a lower branch or sometimes sometimes as the ma'or creek and the minor creek. The minor creek &er! often occurs in the lower or the middle part of the tradin rane% but is still somewhere in the tradin rane. The “'ump of the ma'or creek” is a larer mo&e and it &er! often carries the stock abo&e the old suppl! le&els in the tradin tradin rane% often into new hih round. On chart number two% the lower branch has been labeled 5% the upper branch branch labeled B. -ollowin the reaction to point/ E% the stock “'umps the creek” at point/ 14 with a “backup...” takin place/ the the ne$t da!. Gow% look at where effort effort and &olume came in at point/ 14. Then it continues on up to point/ point/ 11 and finall!/ finall!/ backs up to point/ point/ 13. )oint/ )oint/ 13 was a one da! reaction reaction and those operatin operatin in the stock found that it was safe to continue to mo&e it up.  Gow% let us take a different perspecti&e and &iew this chart on a much broader basis  because we ha&e an old suppl! area at point/ 1% another one at point/ = and the stock has the  problem of bein able to absorb ab sorb the suppl! as it attempts to et throuh those areas. "hen we &iew the chart broadl! this wa!% we can then draw another branch% branch #% which is reall! a creek drawn throuh points/ 1% 3% <% = and then then to the riht. Gow% where was this ma'or creek   'umpedF Look at the &olume. The &olume came into the stock o&er two da!s at the area marked/ 1<. There was an immediate “backup to the ede of the creek” at point/ 1=. It started on at point/ 1> and then ran into too much suppl! and it “backed up...” aain% back to the cool shade of the tree near the creek and rested. rested. Look at the &olume dr! up at point/ 1@; There There was no suppl! on that reaction. reaction. It e&entuall! e&entuall! went all the wa! up to point/ 1A and then came down to point/ 1E for a “backup to the ede of the ma'or creek.” Noe (a (e /ol*%e "e%a#ned "ela#/el$ low *n#l # go o (e da$ %a"+ed ?;, cl#%a#ng (a "eac#on& 5t point/ 1A the &olume was much less% indicatin that it the stock/ was runnin out of o f demand as it attempted to mo&e up. 5ppl!in this to to the “'ump/ across the creek stor!% stor!%”” we could sa! that the bo! scout tried to mo&e on toward his destination% but found that he did not ha&e the push and so had to “back up” aain “to the ede of creek” at point/ 1E. )lease )lease turn to chart number number three% “6ee&es Broadcasti Broadcastin%” n%” earl! 12@E. "e ha&e drawn the creek for the small tradin rane which was a part of a much larer one encompassin the area/ from point/ 1 to point/ 3. Let us e$amine this area from point/ 1 to point/ 3. There are se&eral se&eral places where the stock stock ran into suppl! on a rall!. It did so at point/ <% backed off and then at points/ = and > aain ran into suppl!. suppl!. -ollowin point/ > the stock reacted to point/ @

16

and suppl! was still present. It finall! dried up at point/ A and then% on the rall! from point/ A to point/ 3% the &olume failed to come in and so it backed up to point/ E% du in and “'umped the lower branch of the creek” at point/ point/ 2. Gow% where was this lower branch 'umpedF Look at the &olume that came came in at point/ point/ 2 There was a pronounced pronounced e$pansion e$pansion of &olume alon with ood price action and so the stock reacted back toward that branch of the creek for the “back up...” at point/ point/ 14. It attempted attempted to continue continue the mo&e up to point/ point/ 11 and ran into too much suppl! and so it “backed up aain toward the ede of the creek” at point/ 13. There was a lack  of suppl! on that reaction as shown b! the relati&el! low &olume and the continued narrowin of  the spread. Gote that at point/ point/ 13 the stock mo&ed back into the eneral area where the oriinal  'ump occurred at point/ 2. -ollowin this% the stock attempted to come out of the tradin rane aain b! “'umpin the creek” of suppl! all the wa! back in this tradin tradin rane. It did this on the mo&e from point/ 13 to point/ 1<. Look at the hea&! &olume &olume that came in at point/ 1=. This is where the “'ump...” occurred% where the demand o&ercame the suppl!. suppl!. The stock continued on and then “backed up...” at point/ 1> toward the area where the &olume &olume came in. 5s there was was no sinificant sinificant suppl! suppl! at point/ point/ 1>% it did not continue to mo&e on down. It did not ha&e a deep correction and did not ha&e to ha&e one since there was little suppl! on this reaction; It was a one da! reaction.  Gow% the mo&e from point/ E to point/ 11 is a minor sin of strenth. The reaction down to point/ 13 is a minor L)S last point of support/ and the mo&e from point/ 13 to point/ 1< is a more important important sin of strenth. strenth. The reaction reaction to point/ 1> is a more important L)S which could come into operation operation after the count from point/ 13 to point/ point/ 1@ had been worked worked out  Gow% re&iewin this+ where e$actl! is the creekF "here did the stock “'ump the creekF” The creek was actuall! at the point where the bo! scout or stock/ stock/ 'umped. 5ppl!in this to to the market market%% (e c"ee+ #! (e )o#n w(e"e de%and o/e"co%e! !*))l$& U!*all$ # #! w(e"e (e /ol*%e co%e! #n and a.!o".! all of (e !*))l$ and (e !oc+ #! a.le o %o/e well& Gow% note that in mo&in from point/ 13 to point/ 1< there was ood demand on the rall! and a lack of  suppl! on the reaction to to point/ 1>. The demand is shown b! the widenin spread and increased &olume. The lack of suppl! was indicated b! the liht &olume. This is normal action e$pected in an up trend.  Gow% where could a speculati&e position ha&e been takenF 5n!where in the area from point/ 14 to point/ 13 on the reaction back toward the ede of the creek and on the reaction down toward the upper branch at point/ point/ 1>. ,ither !ou can wait until the stock ets down to the ede of the creek and then o in and bu! or !ou can enter restin orders or bids underneath the market and wait until the stock reacts toward the ede of the creek and see if these orders are filled. filled. If !ou enter bids underneath underneath the market% market% some of these will be e$ecuted and some will not. Both of these these methods of bu!in bu!in in on the “backup to the ede of the creek” creek” ha&e been used with e*ual success. success. 8ou ma! find it ad&antaeous to use one method in one situation situation or  stock and the other method of enterin orders in a different different stock or market situation. situation. Gow% we suest that !ou practice trade with both and see which !ou prefer. #hart number number four contains contains a small creek% lastin lastin onl! a few weeks. The stock mo&ed from point/ point/ 1 to point/ 3 and then bean to react. "e can draw a creek across the rall! rall! tops.  Gow% where wh ere was the creek 'umpedF Look at the spread and look at the &olume. The spread  bean to widen and the &olume bean to increase on the two da!s marked <. This is where the stock “'umped “'umped the creek.” creek.” It continued continued to point/ point/ = and then reacted reacted at point/ point/ > for a one da! reaction. Holume was low on the reaction at point/ point/ > indicatin a lack of suppl!. suppl!. The stock did not back up deepl! and was not in daner of fallin fallin into the creek; There was no suppl! on that reaction. Gote that before the stock bean to tr! to cross the creek% creek% it had a number three sprin at point/ point/ @. 6e&iewin 6e&iewin this+ we know that that a purchase could could ha&e been made on the number  three sprin at point/ @ and a later purchase made on the “backup to the ede of the creek” at point/ >.  Gow% let’s o on to chart number fi&e% “?eneral 7e&elopment%” 12@2. The stock had  been in a ma'or up trend and at point/ 1 bean to react within that up trend. There was a minor  sellin clima$ at point/ 3 which stopped the down trend for some time and we can bein drawin the creek from point/ < to point/ =. The bo! scout sa!s% “If I back up a wa!s and et a run for it% it% I think think I miht be able able to make it.” it.” So he backs up to to point/ point/ > and dis in. in. 5s he starts to make his 'ump% there is increased &olume at the area marked/ @ o&er se&eral da!s and he runs into trouble at point/ A; There is a lack of push there% at point/ A+ the &olume is low. So he backs up aain to point/ E and then “'umps the creek” creek” at point/ 2. Look at the &olume and the price action action at point/ 2. The &olume shows shows e$actl! where he did 'ump. In doin so it the

17

stock/ took out all of the suppl! between the J3E.44  J32.44 le&el and then% followin that% “backs up to the ede of the creek” at point/ 14. There is a lack of suppl! until it ot down to the last da! at point/ 14. Gow% watch how it pushes off at point/ 11. It has strenth% it has push and it is able to mo&e on toward the oal. In the indi&idual stocks and in the inde$es this is what !ou can look for and pla! for. #hart number si$ is of “Milo.” The stock reacted to point/ 1 and then bean a tradin rane. 5t point/ 3 the suppl! was too wide and too deep to o across and so it simpl! backs up until at point/ < it sa!s% “I think that if I back up and et a run for it% I think I can make it.”  Gow% look at the lack of suppl! at point/ <+ there’s not a reat deal of &olume on it the stock/ and so it backs up to point/ = 'umps at point/ > and look at the strenth of the 'ump at point/ >. There is a one da! reaction at point/ @% which incidentall! had hea&! &olume. 5s this occurred% !ou would ha&e had some doubt as to how deep of a reaction back to the ede of the creek would take place. (owe&er% there was no follow throuh on the reaction. The stock mo&ed on up to point/ A and then had a one da! reaction to point/ E with considerabl! decreased suppl!. 8ou can see the results of the absorption of the suppl! and the strenth of the 'ump. It is apparent that the 'ump is stron and that the stock has no need for a proloned “backup to the ede of the creek.” The resultin mo&e toward the ob'ecti&e is likel! to be stroner than where this strenth does not occur. The ne$t chart% chart number se&en of “)apert% 9oeni% Lois%” will be &iewed on the  broadest of/ terms onl!. The stock had been in a tradin rane and ran into suppl! at point/ 1.  Gow% let us draw a creek% beinnin with the area at point/ 1% all the wa! o&er to point/ 3 where it ran into a place where the flow of suppl! is too stron% too wide and/ too deep to 'ump across. 5nd so it reacts to point/ < and tries aain. 5t point/ = the ri&er% the creek of suppl! is still too stron to o throuh and so it backs up all the wa! to point/ > and mo&es sidewa!s until finall! it backs up to point/ @ and has reall! du in. It sa!s% “I ma! ha&e backed up far enouh% if I tr!% I ma! be able to make it.” So it raduall! beins to mo&e up to the ede of the creek and at point/ A the &olume beins to come in and at point/ E it “'umps the creek%” continuin on to point/ 2 and is in open territor! and new hih round for this tradin rane. There is too much &olume to continue; The bo! scout is out in the hot sun all tuckered out and so it the stock/  backs up to point/ 14. On “the backup...” it did not ha&e to backup all the wa! down to JE.44  per share. It simpl! had to “back up towards the ede of the creek” and show that the suppl! that was present at points/ E and 2 was no loner pressin on the market. The stock mo&ed up stronl! from here. Sometimes the creeks are somewhat difficult to see and are not too ob&ious and chart number eiht is one of these. The stock reacted to point/ 1 and then rallied to point/ 3. "e can draw the creek throuh points/ 3 and <. Gote the bouncin action of the price and the &olume which came in the area circled at number/ =. The stock is slammed down and bounces up and then down aain. Then at point/ > there is no suppl! on the downside. Our scout sa!s; “I think  if I tr!% I can 'ump the creek.” So he mo&es up from point/ > to point/ @; )roress is ood+ and where did the stock 'ump the creekF Look at where the &olume came in o&er the two da!s marked A. This is where the &olume% the push% the effort came in to boost the stock throuh this creek of suppl! and note that it came in o&er a price rane% not at one specific price onl!. The stock found that it did not ha&e to mo&e toward the ede of the creek. It simpl! mo&ed sidewa!s and the &olume dried up at point/ E and it continued on up towards the ob'ecti&e. The ne$t chart% chart number nine is the same as the earl! part of chart number nine of  Basic Lecture Gumber Two. 8ou ma! wish to transfer the creek to that chart. The stock came down to point/ 1% stopped oin down and then mo&ed into a tradin rane. Gow% co&er up all of the action to the riht of the &ertical arrow marked/ 3 so that the onl! chart action !ou are e$aminin is from point/ 1 to point/ 3% thus !ou ha&e a small perspecti&e. The stock met suppl! at points/ <% = and > and reacted. There was a sprin at point/ @. The sprin indicated that there was a lack of o&erwhelmin suppl!. There was some &olume% but suppl! was not in control and therefore it a&e demand an opportunit! to come in. That demand would either be stron or weak and it could be sufficientl! stron to attempt to cross the creek. The stock rallied to point/ A on ood &olume. There was suppl! at point/ E% which immediatel! dried up the ne$t da! and then it “'umped the creek” on the da! marked 2. Gow% unco&er the rest of this chart. 5t point/ 14 there was a one da! reaction and then/ it the stock/ continued on up to point/ 11 and e&entuall! backed down into this area at point/ 13 and aain at point/ 1<. "h! would it do thisF There ma! be se&eral reasons includin the action of the eneral market itself. The stock  ma! be read!% but the eneral market ma! be simpl! reactin and usuall! a stock will not buck  the eneral market mo&e for too lon. 7o not under estimate the effect of the eneral market%

18

usin the "!ckoff "a&e on the indi&idual stocks. More about that later. 5lso% the stock ma! not  be sufficientl! stron to lea&e the tradin rane permanentl!. It is like the bo! scout; ,&er! time he pokes his head out into the open field% our bo! scout ets hot% sweat!% tired and simpl! backs up aain for some more rest% rela$ation and recuperation.  Gow% beinnin at point/ 11% we can draw another creek throuh points/ 11% 1=% and 1> .eca*!e (e !oc+ (a! e!a.l#!(ed a new !*))l$ a"ea& Throuhout this area from point/ 11 to point/ 1> there is% in eneral% ood demand on the rallies and comparati&el! less spread and &olume on the reactions. 5t point/ 1> he the bo! scout/ sa!s% “I think% if I back up% I ma! be able to make it.” 5nd so he backs up to point/ 1@ and the price action from point/ 1@ to point/ 1A is ood+ he’s makin proress and look at the &olume+ it has push and the &olume came in in the area of J and 1A to 12. It the stock/ still must do this if it is oin to continue the up trend and it will either succeed or fail. ,ssentiall!% it is oin to be that clear cut. The price and &olume action ma! be difficult to interpret as it occurs% but the end result will be that it will either “'ump across the creek” or it will not. 5t point/ 34 the stock  “'umps this upper branch of the creek” and then settles back toward the ede of the creek. "as there hea&! suppl! on the reaction to point/ 31F Go. )oint/ 31 is the “backup to the ede of  the creek” and the stock continues on toward its ob'ecti&e.  Gow% where could a speculati&e position ha&e been taken on this stockF -irst of all% one could ha&e been taken in the area of the sprin at point/ @. 5 later position could ha&e been taken on the “back up to the ede of the creek” at points/ 14% 13% 1<% or e&en point/ 1@. In  bu!in on the bottoms of the reactions from points/ 14 to 1@ it miht ha&e been e$pedient or  necessar! to et out on the rallies due to the inabilit! of the stock to continue its up trend. ?ettin out on the rallies would a&oid the possibilit! of ridin the stock on down throuh !our   purchase point. 5 new purchase could ha&e been made on a later reaction. 5dditional purchases could ha&e been made on the “back up to the ede of the creek” at point/ 1E and point/ 31. These are all loical areas at/ which to establish a first market position or to add to !our line. #hart number ten is of a steppin stone count. The stock had mo&ed up to point/ 1 where it ran into suppl! and bean a tradin rane with suppl! bein met at points/ 3 and < and finall! at point/ = the bo! scout sa!s; “There’s much less suppl! flow/ here then o&er there/ at points/ 1 and 3 and I think if I back up and et a ood run for it% I miht be able to make it.” So he backs up all the wa! to point/ >% dis in and what happensF (e 'umps. "here did he 'umpF "here did the &olume come inF The &olume came in on both da!s marked @ and it “'umped the creek” and then backed up to point/ A. There was ood demand on the “'ump of the creek” and there was/ a narrowin of the spread and a decrease in &olume% sinif!in a lack of suppl!% on the reaction at point/ A; There is no sellin pressure forcin it the stock/ back into the creek. It holds and then mo&es on up. "e will not draw a hiher creek+ !ou ma! do that (owe&er% look  at the action that took place on the da! marked E. The stock 'umped throuh all of the suppl! in the J12.44 to J34.44 area. That is also a “'ump across the creek” and the one da! reaction at point/ 2 is a “backup to the ede of that creek.” #hart ele&en contains an up trend with a creek of suppl! startin at point/ 1 throuh points/ 3 and < and finall! point/ =. 5t point/ = it sa!s; “There is too much suppl! here% but if  I back off% I ma! be able to di in far enouh and tr! to make it throuh this suppl!.” So it backs up all the wa! down to the sprin at point/ >. 5 first purchase could ha&e been made on the sprin at point/ > with a stop order at% sa!% 12 ADE. Gow% the demand followin that sprin is either oin to be stron or weak and it will either 'ump the creek or it will not. "hat does it doF "here does the &olume come inF The hea&! &olume came in at point/ @ on the dri&e up to point/ A. It ran into too much suppl! at point/ A and backed off all the wa! down to the ede of  the creek at point/ E Occasionall! a stock will back down farther than !ou would hope it would. "hen that happens% !ou either sta! in or !ou et out. 8ou must decide as it occurs. 5t an! rate% it is not eas!. Now, co%)a"e (e )"#ce ac#on f"o% 9)o#n: 6 o 9)o#n: 8 w#( (e ac#on f"o% 9)o#n: 8 o 9)o#n: ;& Co%)a"e (e /ol*%e on (o!e wo %o/e!& On the mo&e from point/ > to point/ A the price spread and the &olume are both stroner than on the reaction to the area at point/ E. It should be noted that the stock sta!ed in the area of the creek for at least two weeks  before finall! attemptin to resume the up trend. Is it possible that there is a lower branch of the creek in this areaF Look at the &olume that came in at point/ >a and the reaction to point/ >b.

1;

It is entirel! possible that >b is a “backup to the ede of that branch of the creek%” which !ou ma! draw. I #! #%)o"an o "ecogn#e (a (e"e #! no one eac wa$ of d"aw#ng (e!e c"ee+!& 7o some e$perimentin with them. 8ou ma! wish to draw the creek lihtl! in pencil on !our  chart and continue the creek as lon as it is useful+ then later% either erase the creek or a branch of  the creek or perhaps remo&e it from !our chart altoether. (owe&er% lea&e the important creeks on !our chart as the! can be e$tremel! helpful in drawin !our attention to the meetin of suppl! in a tradin rane and in assistin in definin the probable e$tent of the reaction% that is the “backup...%” which is likel! to occur after a possible “crossin of the creek.” It will be especiall! helpful in drawin !our attention to situations where a stock falls back into the the creek because e&er! so often it does that and e&er! so often that little old bo! scout sort of  drowns and our problem% &er! often% is not to drown with him. 5lriht% let’s mo&e on to point/ 2 where the stock finall! stopped oin up and then  bean a tradin rane throuh points/ 14% 11 and 13. It backed off to point/ 1<% du in and then “'umped the creek.” Or did itF "ell% at least it tried. The &olume came in hea&il! o&er three da!s marked 1=. It stopped at point/ 1> and then “backed up to the creek.” Look what happened to the &olume at point/ 1@ on the back up. The &olume came in on the down side% suppl! came in% pushin downward. Then when it tried to rall! at point/ 1A there was not enouh demand to continue the mo&e as shown b! the price action and the &olume; So it fell  back into the creek. "hat would ha&e happened had !ou bouht in the area circled at/ 1EF If  !ou had put in a 3 or < point stop order% !ou would ha&e been stopped out. This occasionall! will happen. It is% howe&er% better than oin in without a stop order because b! the time it ot down to point/ 12 !ou would ha&e had a lare loss and ma! ha&e been forced to take that loss either due to finances or emotions. 6emember that man! of our operational problems are emotional. 5t times we ma! know what to do correctl! and still do e$actl! the opposite because of emotional pressures. Let’s e$amine the ne$t se&eral charts *uickl! and briefl!. #hart number twel&e has a suppl! area from point/ 1 all the wa! o&er to point/ 3. The stock backs up to point/ < and then  'umps from point/ < to point/ =. The “'ump...” took place in one da! and the “backup...” occurred within the ne$t da! at point/ >. The “'ump across the creek” was with wide spread% increased &olume and the reaction at point/ > had a narrow spread and decreased &olume compared to the up mo&e at point/ =. #hart number thirteen is ne$t with a creek from point/ 1 to point/ 3 and be!ond. The “'ump across the creek” was the mo&e from point/ < to point/ =. The &olume came in at point/ > and the stock reacted into the area in/ which this &olume occurs. The “backup to the ede of  the creek” was at point/ @. The suppl! dried up and it the stock/ mo&ed on upward from there. #hart fourteen has a creek which winds all o&er the place until finall! at point/ 1 the  price action is ood; There is a bouncin% a stretchin of price and some &olume comes in on the upside% indicatin that the bo! scout sa!s; “I think I’ll tr!.” It backs off to point/ 3 and on the mo&e from point/ 3 to point/ < it 'umps the creek and immediatel! backs up to point/ =. Noe (e low /ol*%e a 9)o#n: 1= no (ea/$ !*))l$ on (e down!#de& Then at point/ >% the ne$t da!% we ha&e an e$ample where it the stock/ tried to o up% tried to o down and closed in the middle on an increase in &olume. The stock is oin to tr! to mo&e and soon; 5nd it didC #hart fifteen will be &iewed on the basis of a lare tradin rane. The stock met suppl! at point/ 1% in the area at point/ 3 and aain at points/ <% = and > and finall! reacted to point/ @ for a number three sprin. It broke throuh the entire support area bracketed at number/ A and then bean to mo&e up. Gow% where did it “'ump across/ the ma'or creekF” It is so ob&ious that when !ou do ha&e this kind of a situation% that often all !ou ha&e to do is wait for the “'umpin of the ma'or creek.” 5nd this “'ump...” occurred at point/ E. It o&ercame all of the suppl! at point/ E% mo&ed on to point/ 2 and then at point/ 14 “backed up toward the ede of the creek.” The mo&e up to point/ 2 was with wide spread and hea&! &olume% e$cellent demand and there was a lack of suppl! as indicated b! the narrowin of the spread and the decrease in &olume on the reaction to point/ 14. Incidentall!% within this broad tradin rane there were a couple of  minor crossins of the creeks. One of them was at point/ 11% the “backup...” bein at point/ 13. 5nother occurred at point/ 1< with the “backup to the ede of the creek” at point/ 1=. #hart si$teen is the same as chart si$ of Basic Lecture Three. The stock met suppl! throuhout the tradin rane% finall! backed off to a terminal shakeout at point/ 1<% “'umped the creek” on the mo&e from point/ 1> to point/ 1@ and “backed up to the ede of the minor creek” at point/ 14. It “'umped another branch of the creek” at point/ 1A% “backed up/ to that branch

1<

of the creek” at point/ 1E and finall! “'umped the ma'or creek” at point/ 12 with a “backup...” at point/ 34.  Gow% let us deal briefl! with the sin of strenth. The sin of strenth and the crossin of  the creek often are two wa!s of lookin at the same action and the “backup to the ede of the creek” &er! often is the last point of support. This sin of strenth is usuall! preceded b! a tradin rane and a stock can continue in a tradin rane until it either has a sin of weakness or  a sin of strenth. T(e !#gn of !"eng( !(ow! (a de%and #! #n con"ol& T(e )"#ce and /ol*%e c(a"ace"#!#c! a"e (a # (a! a w#den#ng !)"ead and an #nc"ea!e #n /ol*%e= e/#dence of (e good de%and& T(#! #! )"o/en and followed .$ (e "eac#on o (e la! )o#n of !*))o" o" LPS& T(a LPS !(o*ld (a/e a na""ow#ng !)"ead and a dec"ea!ed /ol*%e co%)a"ed o (e !#gn of !"eng(, #nd#ca#ng (e lac+ of !*))l$ on (e "eac#on& Turn to chart number si$teen. The mo&e from point/ 1> to point/ 1@ had widened spread and increasin &olume% e&idence of ood demand and it was followed b! a reaction to point/ 14 with a lack of suppl!. 5s the up mo&e proressed and the fiure chart count taken from point 14 was e$ceeded% we would be forced to reard the mo&e from point/ 1> to point/ 1A as a more important sin of strenth and the reaction to point/ 1E as a more important L)S.  Gote that the mo&e from point/ 1> to point/ 1A aain had wide spread% e$cellent price action and ood &olume; 5nd the reaction to point/ 1E had a decreased spread and &olume compared to the mo&e up+ ood demand on the rall! and a lack of suppl! on the reaction+ a sin of strenth and an L)S. Turn to chart number three. The mo&e from point/ E to point/ 11 was a sin of strenth with wide spread and increasin &olume and the reaction to point/ 13 was not onl! a “backup to the lower branch of the creek%” but it was an L)S. Gote the lack of suppl!% the narrowin spread and the decrease in &olume on the reaction to point/ 13. On chart number four the sin of strenth was a mo&e from point/ @ to point/ = and the “backup to the ede of the creek” at point/ > was also the L)S. On chart number se&en the mo&e to point/ 2 is a ma'or sin of strenth and the backup to point/ 14 is the ma'or L)S. On chart number nine the mo&e from point/ 1@ to point/ 1A is a sin of strenth and the reaction to point/ 1E is the L)S.  Gow% on chart number ten the mo&e from point/ > to point/ @a is an e$cellent e$ample of a sin of strenth% wide spread and the increased &olume% e&idence of the ood demand. Then on the reaction to point/ A there was a comparati&e lack of suppl!% e&idenced b! the narrowin spread and the decreased &olume. "h! don’t !ou e$amine the rest of these “'umps across the creek” from the standpoint of  the sin of strenthF 8ou will find that the! had ood price action and increased &olume on the upside and this was followed b! the reaction+ “the back up to the creek%” the last point of support% which also had a decreased &olume and a narrowin of spread. If (e"e #! /ol*%e on (e LPS, (a %*! .e d"#ed *) o" e!ed .$ a !econda"$ e!& Occasionall! in interpretin a chart% !ou will be in doubt. 8ou will not et man! classic situations. 0(en a !oc+ 3*%)! (e c"ee+ and (a! a .ac+>*) o (e edge of (e c"ee+, # #! #n (e )"oce!! of e!a.l#!(#ng o" "e!*%#ng an *)wa"d "end& 5n upward trend should ha&e a widenin spread and an increase in &olume on the rallies and a lack of suppl! on the reaction. -or e$ample% turn to chart number thirteen. The mo&e from point/ < to point/ = which was a sin of strenth and a/ “'ump across the creek” had ood demand on it and the reaction to point/ @% the L)S% dried up the suppl!. This is normal action for an up trend and support line 55 can be drawn throuh points/ < and @ with suppl! line BB drawn parallel to that support line. The same line of reasonin can be applied to all of these e$amples. 5nd now for a brief summar! of the “'ump across the creek.” The “'ump across the creek” stor! is an analo! which we use to describe what can happen as a stock tries to o throuh the suppl! area of a tradin rane. The creek is the flow of suppl! across the top of the tradin rane and is drawn b! wil! trend line. T(e 3*%) #! #nd#caed %a#nl$ .$ an #nc"ea!e #n /ol*%e w(e"e (e effo" co%e! #n o o/e"co%e (e !*))l$& The 'ump is followed b! the “backup to the ede of the creek.” The “'ump across the creek” is usuall! a sin of strenth and the “backup to the ede of the creek” is an L)S% last point of support. The “'ump across the creek” has wide spread and &olume. The “backup to the ede of the creek” has narrow spread and decreased &olume compared to the 'ump. This is normal action for an up trend. 8ou ma!  bu! on the “backup to the ede of the creek%” the L)S.  Gow% to mo&e on to somethin else. I think if I push m! chair back% keep in mind m! ob'ecti&e% di in% et a run for it and 'ump% I 'ust miht make it. 5nd !ou can too.

6@

6?

BASIC LECTURE NUMBER SEFEN DISTRIBUTION AND THE UPTHRUST ATER DISTRIBUTION

The main sub'ect of this Basic/ Lecture will be distribution. It will also co&er the  principle of the upthrust after distribution. The purpose of this Basic/ Lecture will be to discuss with !ou the process of distribution% where it fits into the c!clical process% how to anal!0e areas of distribution and how !ou can take a position as the distribution is endin in order to profit from the resultin down trend. 7ue to the scope of the sub'ect% some thins will be co&ered onl! as hihlihts. The lecture will deal primaril!/ with distribution for lare mo&es. The same  process% howe&er% takes place on an intrada!% minor% intermediate as well as a ma'or basis. These same principles come into operation reardless of the si0e of the area of distribution. The lecture will also deal with se&eral e$amples of redistribution for a further down mo&e% as well as a number of methods of establishin a speculati&e short position. Our main concern in this lecture is to aid !ou in orani0in !our understandin of distribution and of the &arious principles which ma! appear in the distribution area. 5 number of principles mentioned in/ this lecture will be defined% but will not necessaril! be discussed in detail. 5mon these  principles are preliminar! suppl!% bu!in clima$% automatic reaction and/ secondar! test.  Gow first% let us define distribution. 7istribution refers to the elimination of a lon in&estment or speculati&e position and often in&ol&es establishin a speculati&e short position b!  professional interests in anticipation of a decline in price. In the distribution area% the  professional in&estors or speculators that pre&iousl! had bouht stock% sell their stock to the  public. The public bu!s and it enerall! bu!s because of ood news of &arious sorts+ ood news on the compan!% its product% the econom! or an! news which will entice untrained people to rationali0e their bu!in decision. The best news of all is the ad&ancin of the price of a stock. Often the main reason untrained people bu! is that/ the! do not want to miss out on the anticipated profits that/ the! think the! are oin to et as the stock continues to mo&e up% or  the! ma! bu! because the stock has reacted a few points from the top and the! think that/ the! are ettin a barain. 5fter ha&in sold their lon stock% professionals ha&e no reason to support the stock on reactions and so the! cancel their bids under the market. The! ma! not onl! cancel the bids% but the! ma! establish short positions in anticipation of a lare decline in price. The first fi&e charts of this Basic Lecture are illustrati&e drawins% theoretical models% which we ha&e found to be *uite helpful in raspin the basic concepts. ,&er! stock oes throuh a c!clical process similar to chart number one. This c!cle can be broken down into four   phases; 1/ accumulation+ 3/ markup or a sustained upward mo&e+
62

In section 5 there is a lare up mo&e which is stopped b! a bu!in clima$. :suall!% certain principles come into operation when this stoppin occurs. These are preliminar! suppl!%  bu!in clima$% automatic reaction and a secondar! test. The old up mo&e can end b! simpl! roundin o&er and runnin out of demand% e&idenced b! a decreasin &olume and a narrowin spread. -or clear cut distribution% the climactic action is preferred. )reliminar! suppl! is% b! definition% the first important hea&! or persistent sellin on the part of the professional in&estors and speculators as the! bein to li*uidate their ma'or lon positions. The preliminar! suppl! usuall! has some form of a bu!in clima$. :suall! the reaction followin that bu!in clima$ is  part of the preliminar! suppl!. That reaction ma! ha&e wide spread on the down side or hea&! &olume or persistent &olume; Or e&en better% it ma! ha&e both wide spread and hea&! &olume on the reaction. This is e&idence of hea&!% persistent sellin. This preliminar! suppl! has been circled on chart number four at point 1. )reliminar! suppl! stops the up mo&e temporaril! and if  the entire area is distribution% it is *uite likel! that the distribution beins/ at the point of   preliminar! suppl!. Often the last point of suppl! and the preliminar! suppl! will come in the same eneral price le&el. The preliminar! suppl! is followed b! the dri&e up to the final bu!in clima$ which simpl! stops the up mo&e. In actual fact% the bu!in clima$ ma! be followed b! either an automatic reaction or a lateral mo&e. That action is then followed b! a secondar! test or a resumption of the up mo&e. "e are portra!in the most desirable situation where the bu!in clima$ is followed b! the automatic reaction and then the secondar! test. On chart four the preliminar! suppl! is at point/ 1% the bu!in clima$ at point/ 3% the automatic reaction at point/ < and the secondar! test at point/ =. 5t that point the up mo&e has  been stopped. Incidentall!% there ma! be repeated secondar! tests% such as points/ > and A% dependin larel! upon the continued e$istence of ood demand for the stock at those points. In section B the stock is in a tradin rane. ?enerall!% in the first part of the tradin rane the price swins are rather wide. Then in the latter part of the tradin rane the price action beins to narrow down; The stock enerall! has hih &olume% &er! often erratic &olume. Sometimes in a tradin rane% in the distribution area% the spread will be wide and the &olume will increase on the dri&es down and these will be followed b! decreasin &olume and narrowin of the spread on the rallies. This is e&idence of hea&! and continued sellin of lare *uantities of  stock b! professionals on the reactions and also/ that demand is not ood when it does ha&e the opportunit! to be dominant temporaril!. 5ctuall!% !ou do not know for certain that the tradin rane is distribution until it oes throuh the testin process as in area #. The tradin rane ma!  be accumulation% distribution or nothin+ nothin bein an area in which no one is preparin for  a lare mo&e. Thus% a stock ma! remain in the rane indefinitel!% until it has a sin of strenth% followed b! a last point of support% indicatin an upward mo&e or a sin of weakness% followed  b! a last point of suppl!% indicatin a downward mo&e. -urthermore% the earl! part of the tradin rane ma! be nothin and onl! the later part distribution. This is wh! it is e$tremel! important that !ou not establish a lon or a short position in the tradin rane unless the stock has clear  indications of lea&in the tradin rane and beinnin a new trend. In section # the stock oes throuh a testin process. In this testin process it ma! attempt to lea&e the tradin rane on the up side or the down side. "hat we are showin is the former% where the stock oes into new hih round and attempts to lea&e the tradin rane on the upside and fails due to the pressure of suppl! or due to the lack of demand at the point where demand should be &er! stron and dominant. This creates the upthrust. The upthrust occurrin at this point e$hausts the remainin demand% forces premature short sellers to co&er their   positions and creates a completel! false impression as to the ultimate mo&e. The upthrust itself  is the sin of weakness and the last point of suppl! all in the same action. It is normall! followed b! a more important sin of weakness and a last point of suppl!. The upthrust is at point/ 11. The upthrust breaks throuh the pre&ious suppl! le&el% perhaps abo&e all the suppl!  points in the tradin rane% althouh it does not need to do so. The reaction to point/ 13 carries the stock below the pre&ious suppl! area and it is immediatel! followed b! a rall! to the test at point/ 1<. This test is in the nature of a secondar! test in that it has less demand on it than at point/ 11. In section 7 the stock reacts down toward or throuh the bottom of the tradin rane and the supports located/ at points/ @% E and 14 with a sin of weakness at point/ 1= and a last  point of suppl! at point/ 1>. It continues on down to point/ 1@ and then rallies to point/ 1A. 5 down trend has been established and then in section ,% the stock simpl! continues with that down trend and is definitel! in the mark down phase of the c!cle. #hart fi&e shows a distribution area in/ which the stock does not o throuh an upthrust or an upthrust after distribution% but instead% simpl! has a sin of weakness and a last point of 

6-

suppl! with% perhaps% lower tops and lower bottoms. Section 5 and B are the same as in chart four. In section # of chart fi&e howe&er% the stock has a sin of weakness at point/ 14 and a last  point of suppl! at point/ 11 indicatin that suppl! is in control of the situation and the stock is now oin to attempt to lea&e the tradin rane on the downside. It does this in section 7%  breakin all the support areas with a possible more important sin of weakness at point/ 13 and a more important L)S8 at point/ 1<. It continues the down trend in section ,.  Gow% how do !ou operate in the distribution areaF "here do !ou make a commitment to  bu! or sellF -or the *uick in and out traders there are a number of places at which to take a lon or a short position. The! ma! sell short on the bu!in clima$% co&er and o lon on the automatic reaction% sell out on the secondar! test and o short for the subse*uent reaction and repeat this process as lon as the! can. It should be noted that the loner the stock sta!s in the tradin rane% the more danerous this becomes. "e are not ad&ocatin that !ou do this *uick in and out tradin and most of the students do not do well at it. The aim is to dianose possible lare distribution and to take a speculati&e position as the distribution is comin to an end and as the stock is beinnin to establish a sustained down trend. Thus% do not take a speculati&e  position until !ou see an upthrust or an upthrust after distribution or a last point of suppl! followin a sin of weakness. 5im to p!ramid with the comin trend.  Gow look at chart four. The first position could be taken on the upthrust at point/ number 11. 5n additional position ma! be established on the rall! at point/ 1< and !ou could add to !our position on the rallies to points/ 1> and 1A and on an! later normal correction of the down trend. On chart fi&e% where there is no upthrust% the first place to take a position is on the last point of suppl! after the sin of weakness at point/ number 11 and additional positions could be established at point/ 1< and on an! subse*uent rall! within the down trend. 5t this time we would now like to introduce !ou to another analo!+ that of the ice stor!. It’s a stor! introduced b! Mr. 6obert ,&ans and has become an inseparable part of the distribution messae. 8ou ha&e often seen how a former support area can become a suppl! area. The ice stor! concerns this process. T(e #ce #! (e fo"%e" !*))o" a"ea a (e .oo% of (e "ad#ng "ange w(#c( .eco%e! a !*))l$ a"ea& The ice is shown b! drawin% a wil! trend line across the &arious support points at the bottom of the rane+ in a manner similar to the creek  which is drawn throuh the suppl! points at the tops of the rallies in the tradin rane. The analo! of the ice stor! is as follows; 5 bo! is walkin alon the ice on a fro0en ri&er in the middle of winter. It supports him well. 6emember% we liken the ice to the supports in a tradin rane. 5ll of a sudden he falls throuh the ice. Gow stop and picture it. "hat can happenF (e must et back abo&e the ice or  he will drown; 1/ (e could fall throuh the ice and then *uickl! come up throuh the same hole and be safe+ 3/ (owe&er% the current could carr! him down stream. If it does% as he comes up% he could find a spot where the ice is weak enouh so that he could break throuh and aain% et abo&e the ice and not drown+ with wide spread and the &olume remained hea&!+ there is continued sellin. The price action from point/ > to point/ @ started out with ood price spread then decreased alon with the &olume as the stock continued to mo&e up+ demand is d!in out. More suppl! came in/ at point/ A+ look at the increased &olume on the

61

downside. T(e %o/e f"o% 9)o#n: 7 o 9)o#n: ; (ad w#de !)"ead and (ea/$ /ol*%e, #nd#ca#ng (e )"e!ence of (ea/$ !*))l$& I #! a )oen#al !#gn of wea+ne!! w(#c( w#ll .e )"o/en o" d#!)"o/en o" .e lef #n do*. .$ (e !*.!e5*en "all$& )oint/ 2 is the last point of  suppl!. Gote that the spread was wider and the &olume was hea&ier on the mo&e from point/ @ to point/ E than it was on the mo&e from point/ E to point/ 2. The mo&e from point/ @ to point/ E showed relati&el! hea&ier suppl! than the demand which came in on the mo&e to point/ 2. 5lso% the action from point/ @ to point/ E took place in appro$imatel! two weeks; (owe&er from point/ E to point/ 2 was appro$imatel! four weeks. Thus% the comparati&e lack  of demand on the mo&e to point/ 2 confirmed that the reaction to point/ E was the sin of  weakness. "ell% followin point/ 2% the stock broke downward. The preliminar! support at point/ 14 and the sellin clima$ at point/ 11 stopped the down trend. The automatic rall! was at point/ 13 and the secondar! test at point/ 1< with another at point/ 1=. 5ll that the secondar! test of the sellin clima$ does is stop the down mo&e. The subse*uent action ma! be accumulation% distribution or nothin. The stock rallied% Npoint/ 1>% reacted to point/ 1@ and then at point/ 1A had an upthrust.  Gow% before oin further% let us define an upthrust. An *)("*! #! a !(a") )"#ce %o/e%en a.o/e a )"#o" !*))l$ le/el w(#c( doe! no (old, .* #%%ed#ael$ "eac! .elow (a )"e/#o*! le/el& :suall! on the upthrust the spread will be narrow and the &olume will be increased. This is e&idence of the suppl! o&ercomin demand. Suppose a stock mo&es up from >4 to >1 and it takes 14%444 shares to do it and then mo&es to >3 and it takes 34%444 shares to do it. The &olume the suppl!/ has increased in strenth relati&e to demand. If the &olume doubles% the price proress should be double and when it does not% the inference ma! be drawn that the suppl! is o&ercomin the demand. Gow% suppose a stock mo&es up one point on 14%444 shares and mo&es up 1D3 point on 34%444 shares. (ere the narrowin of the spread and the suppl! comin in to o&ercome the demand is much more emphatic. This usuall! is what occurs on an upthrust. T(e conf#"%a#on (a # #! an *)("*! #! #n (e )"o%)ne!! and #n (e %anne" #n w(#c( # "eac!& It should react promptl! to show that the attempt to lea&e the tradin rane on the upside has failed and enerall! it will react with either a lack of demand or with the pressure of suppl! comin in on the downside. The reaction at point/ 1E is prompt and with wide spread; The &olume is low% but the spread is wide. (ad demand been ood there% the price would not ha&e cracked on that low &olume. T(e"e #! a lac+ of  de%and a (e )o#n w(e"e (e"e !(o*ld .e good de%and& There are times in the market when/!ou can sa! that the stock has to o and keep oin GO" or it is in trouble; )oint/ 1A is one of those situations. The stock stabili0es and then at point/ 12 attempts to mo&e up aain; This also fails. The stock mo&es down% suppl! comin in hea&il! on the downside at point/ 34 and it finall! reaches the ob'ecti&e of this re distribution on the mo&e down to point/ 31. "here could a loical short position be taken in this stockF In the oriinal distribution area one could be taken in the area circled around point/ 2 with a stop abo&e points/ @ and 1%  perhaps at @= 1DE per share; This is on the L)S8 last point of suppl!/ after the sin of weakness. In the redistribution area a short position could ha&e been taken on the upthrust at point/ 1A or  on the rall! followin point/ 1E at point/ 12 with a stop% perhaps at =2 1DE or an!where in the area circled. Gow% please memori0e thisC In a distribution area !ou take a short position onl!+ 1/ on the upthrust or upthrust after distribution or+ 3/ on the last point of suppl! after a sin of  weakness. #hart se&en of “IBM%” beins with a two for one split. The stock had been in an up trend and had mo&ed up to point/ 1% a bu!in clima$. The automatic reaction was at point/ 3% the secondar! test at point/ <. Then% immediatel!% the stock had a sin of weakness from point/ < to point/ =. Noe (e )"#ce wea+ne!!= (e w#de !)"ead on (e down!#de and (e (ea/#l$ #nc"ea!ed /ol*%e a! # .egan o %o/e down& T(#! #! (ea/$ !*))l$ co%#ng #n on (e down!#de and # #! (e )oen#al !#gn of wea+ne!! w(#c( wo*ld .e conf#"%ed, den#ed o" lef #n do*. .$ (e !*.!e5*en "all$& It rallied from point/ = to point/ > and then immediatel! came down to point/ @ with price weakness. 5 stron stock should not react as it did at point/ @; 5nd then the stock mo&ed up to point/ A. Co%)a"e (e )"#ce ac#on and (e /ol*%e of (e !#gn of wea+ne!! f"o% 9)o#n: - o 9)o#n: 1 w#( (e "all$ f"o% 9)o#n: 7 o 9)o#n: 8& T(e !*))l$ #! !"onge" (an (e de%and a! !(own .$ (e g"eae" )"#ce wea+ne!! and (e g"eae" /ol*%e on (e %o/e o 9)o#n: 1& I wa! %o"e d#ff#c*l fo" (e !oc+ o %o/e *) (an # wa! o %o/e down& Thus point/ A is a last point of suppl! after the sin of weakness and a loical count ma! be taken from that point to i&e the possible ob'ecti&e that the stock could reach on the down side.

66

7istribution is usuall! accomplished in a relati&el! short time% whereas accumulation usuall! takes much loner% sometimes o&er man! !ears. Ma3o" d#!"#.*#on occ*"! #n onl$ a few wee+! o" )e"(a)! a few %on(!, /e"$ "a"el$ o/e" a !e/e"al $ea" )e"#od& 7istribution is usuall! characteri0ed b! wide price mo&ements and hea&! &olume and reat acti&it!. In earl! 12@E% “Scientific 6esources%” chart eiht% bean mo&in up from around J14.44 and finall! reached J. It did so with widened spread% price weakness and hea&! sustained &olume. This is hea&! sellin as the stock mo&es down. Gow% compare the spread and &olume on the rall! to point/ @ with the reaction to point/ >. There is less demand on the rall! to the L)S8 at point/ @ than there was suppl! on the dri&e down to point/ >. This is shown b! the comparati&e lack of   price proress% the comparati&e narrowin of the spread and especiall! the decreased &olume and it/ took a loner time. The L)S8 came in the &icinit! of the halfwa! point. I #! no )a"#c*la"l$ #%)o"an w(e"e (e LPSY !o)! on (e "all$, (owe/e" # /e"$ ofen *"n! #n (e /#c#n#$ of  (a (alf>wa$ )o#n& The stock reacted down to point/ A with a ood clima$% rallied to point/ E and went throuh redistribution. It ran into suppl! at point/ E and had a lack  of sellin pressure at point/ 2. The da! marked 14 had ood demand as e&idenced b! the wide spread and the hea&! &olume% howe&er% the spread the ne$t da! narrowed and &olume was slihtl! increased. T(#! #! e/#dence of !*))l$ o/e"co%#ng (e de%and a a )o#n w(e"e # !(o*ld no !o) (e %o/e& There are times in the market when !ou can sa! that the stock should o and o now if it’s oin to be ood and at point/ 11% instead of the spread bein wide% it narrows. 5t point/ 11% a point where the stock should continue to make proress% it does not. 5s a result% it reacts to point/ 13 for a sin of weakness and a last point of suppl! at point/ 1< and continues on down. The lack of demand at point/ 1< is shown b! the narrowin spread and decreased &olume and is confirmation and proof that point/ 13 is a sin of weakness. #hart nine had a &er! compact area of distribution. The stock met preliminar! suppl! at point/ 1 and had/ a bu!in clima$ at point/ 3. The automatic reaction was at point/ < and the secondar! test at point/ =. 5ll that the comparati&e lack of demand on the secondar! test at point/ = showed was that the stock had stopped oin up. 5t that point it could continue mo&in sidewa!s in a tradin rane and o throuh accumulation% distribution or nothin. Instead% it immediatel! reacted down to point/ > with a widenin of spread and an increase in &olume. )oint/ > is a potential sin of weakness and the rall! to point/ @ is the L)S8 last  point of suppl!/ confirmin the sin of weakness. 5 short position could ha&e been taken on the rall! to point/ @ and followin point/ @ the stock reacted with ood spread down to point/ A into new low round below point/ >. 7emand simpl! died out on the rall! to point/ E. The mo&e down to point/ A is a more important sin of weakness and the rall! to point/ E is a more important last point of suppl!. The ne$t da!% followin point/ E% the stock immediatel! started down with &er! wide spread and hea&! &olume% e&idence of suppl!+ sellin comin in on the downside. Thus% a first position could ha&e been taken on the rall! to point/ @ and a second  position on the rall! to point/ E. There is no one e$act point at which to take a position. 8ou must 'ude the last point of  suppl! as it occurs and attempt to establish a short position as close to the turnin point as  possible. Often !ou can tie this in with other principles% such as the meetin of the suppl! line% the pre&ious suppl! or support area and the halfwa! point. Her! often the last point of suppl! will come at the same area as either the preliminar! suppl! or the bu!in clima$. #hart ten% “Sunshine Minin%” was in a lon up trend. It met preliminar! suppl! at point/ 1 and had/ a bu!in clima$ at point/ 3. Gote the hea&! suppl!% the &olume comin in on the downside as well as the widenin of spread on the automatic reaction to point/ <. The sellin continued. Then the secondar! test was at point/ =. The stock immediatel! reacted down to the sin of weakness at point/ > and then/ bean a lon rall! to the last point of suppl! at point/ @. Noe (a on (a la! )o#n of !*))l$ # wen a.o/e (e a"ea 8 fo" an *)("*!& The hea&! &olume at point/ @ occurred as the stock was tr!in to penetrate throuh the area A and then the sellin continued on the downside where it closed on the low. Gow% compare the  price action% the &olume and the time on the mo&e from point/ = to point/ > with the mo&e from point/ > to point/ @. The sin of weakness to point/ > took less time% had wider spread% reater   price weakness and more &olume than on the mo&e from point/ > to point/ @. Suppl! was stroner than demand. It was a sin of weakness% confirmed and pro&en to be one b! the last  point of suppl! at point/ @. The stock immediatel! went down to point/ E% but did not clima$

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the down mo&e as e&idenced b! the failure of &olume to increase substantiall!. Then it rallied to o throuh redistribution. This &er! often happens to a stock. It had preliminar! suppl! at point/ 2% a bu!in clima$ at point/ 14 and an immediate secondar! test at point/ 11 and then reacted to point/ 13 and had another test of the clima$ at point/ 1<. Gote where this distribution is comin in. It is comin in 'ust below the old suppl! area at points/ A and @. The sin of weakness occurred at point/ 1=. It lost all the ain and broke throuh the support at points/ 13 and 1>% but more important was how it did it. It came down with a widenin spread% increased price weakness and increased &olume+ e&idence of increased and hea&! sellin. This is  bearish. The rall! to point/ 1@ is a last point of suppl!. The ne$t da!% point/ 1A% the suppl! o&erpowered the demand and the stock bean immediatel! to o down for a mo&e of about 34  points. So far we ha&e been mainl! discussin distribution in which the stock stops the ma'or up trend with a bu!in clima$ and a secondar! test. It is important to reconi0e that all up trends do not end with a classic &olume bu!in clima$. It ma! simpl! run out of demand with a radual narrowin of the spread and a decreasin &olume. Should this occur% it lea&es the stock  &ulnerable for suppl! to come in and the distribution ma! be shown mainl! b! the suppl! which comes in on the reactions. 8ou will be able to 'ude that b! the spread and &olume. #hart ele&en is 'ust such a situation. The stock’s mo&e did not end with a classic &olume  bu!in clima$ at point/ 1. There was a stead! decrease in &olume% marked b! the arrow% and a narrowin of the spread at point/ 1. Then stron suppl! came in on the downside+ on the reaction to point/ 3. The spread was wide and &olume increased + e&idence of suppl!. Be &er! careful when suppl! such as this comes in on the downside. That suppl! must be absorbed or the stock is *uite likel! to be in trouble. 6eardless% the suppl! cannot fail to ha&e its effect. 7emand decreased on the rall! to point/ <+ narrowin spread and decreasin &olume. The stock  was supported at point/ = and met suppl! at point/ > and then bean mo&in down. Gote how it mo&es down with lower tops and lower bottoms and thus far the suppl! is stroner than the demand. Gow the stock mo&es on down to point/ @ with a widened spread and hea&! &olume. Po#n: 7 #! a )oen#al !#gn of wea+ne!! w(#c( w#ll .e conf#"%ed o" den#ed .$ (e lae" ac#on, (e "all$& T(e c"##cal (#ng #! no (ow fa" (e !oc+ "all#e!& T(e c"##cal (#ng #! (ow # "all#e! and (e"e # "all#e! w#( a g"ad*all$ dec"ea!ed de%and, e/#denced .$ a na""ow#ng !)"ead and a dec"ea!ed /ol*%e& The suppl! to point/ @ is stroner than the demand to point/ A and thus point/ A is a last point of suppl! after a sin of weakness and the stock continued in the down trend. It is entirel! possible that as the stock mo&ed down to point/ = it could ha&e been rearded as a potential sin of weakness. (owe&er% aain% an! possible or potential sin of  weakness must be confirmed% denied or left in doubt b! the subse*uent rall!. If the rall! has a relati&e lack of demand on it% enerall! e&idenced b! a decreased spread and decreased &olume% this would be confirmation and a last point of suppl!. (owe&er% should demand still be stron on that rall!% as e&idenced b! ood or increased &olume as well as wide or widenin spread% it is usuall! best to reard such action as a denial of the sin of weakness and such action ma! well lea&e the interpretation of a sin of weakness and the last point of suppl! in doubt. "hen this occurs% do not take a short position. It is better to miss a mo&e than to run a reat risk of bein wron. Thus point/ = could ha&e been rearded as a possible sin of weakness as it occurred. )oint/ > would ha&e left this in doubt. Look at the spread especiall!. There is increased &olume as well as widenin spread; There is still ood demand. (owe&er% there should be no such doubt as the stock rallied toward point/ A to the L)S8 after the potential sin of weakness at point/ @.  Gow% how do !ou take a short position. 8ou must time !our commitment with the eneral market action. #"! of all, do no go aga#n! (e %a3o" "end& #alculate the halfwa!  point and in this case there are two halfwa! points to consider+ the one from point/ > to point/ @ and the other from point/ 1 to point/ @. The halfwa! point from point/ 1 to point/ @ is b! far the more important. 5nother e$cellent indication is the reachin of down trend lines such as suppl! line 55. Both of these indications are in operation as the stock rallies toward point/ A and an order to sell short could ha&e been entered 'ust below J% sa! at =11DE. The profit  risk ratio would ha&e been about =  1% a perfectl! loical speculati&e risk. Let’s o on to the upthrust after distribution. The upthrust after distribution is a special t!pe of distribution in which the stock oes up% stops oin up% builds a cause and then tries to lea&e that tradin rane on the upside% fails and then beins the down trend. In appl!in the rules !ou must use some 'udment and some fle$ibilit!. The upthrust after distribution is a special market phenomenon or a principle which Mr. ,&ans defined throuh his "!ckoff studies.

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)erhaps the most important problem that !ou will ha&e with the upthrust after distribution is that !ou must a&oid lookin for e$amples or e$pectin e$amples of the upthrust after distribution to occur all the time. The! simpl! do not. (owe&er% when the! do occur% the upthrust after  distribution can be an e$tremel! helpful and profitable tool. Let us read the rule itself. It sa!s this; “5fter a stock inde$ or a commodit! has mo&ed up% has clima$ed% has then mo&ed laterall! and built a potential cause and has then mo&ed into new hih round on an increase in &olume and a relati&e narrowin of the spread% to then return to the a&erae le&el of closes would indicate that the entire lateral le&el was not accumulation but was distribution instead.” Me%o"#e (#! "*le& In Mr. ,&ans’ oriinal rules% he stated that “it mo&es sidewa!s for a period of four to twel&e weeks.” (owe&er% to put these constraints on the rule has pro&ed to limit the understandin of this e$cellent rule. Therefore% we ha&e modified the rule and ha&e used the “buildin of a potential cause.” The onl! other chane in the rules is that we now sa! that it has/ mo&ed into new hih round on a “relati&e narrowin of the spread.” "e ha&e added this word “relati&e” because a widenin or a narrowin of the spread is relati&e to the &olume and the spread must be compared to the &olume. ,&er! word in the rules for the upthrust after  distribution has/ been desined for a purpose. Gow% as we appl! them to chart twel&e and as we o alon% we/ brin in the “wh!” of the rules as well as what happens to the people in&ol&ed. The stock has been mo&in up and it clima$es at point/ 1. "h!F "h! should we want it to clima$F Simpl! because if it clima$es% we know that it has/ stopped the up trend. This means that there should be a bu!in clima$% an automatic reaction and a secondar! test% so that we know it has stopped oin up. The bu!in clima$ is at point/ 1% the automatic reaction is at point/ 3 and the secondar! test is at point/ <. It then mo&es laterall!. It mo&es/ laterall! to point/ = and builds/ a potential cause. It then mo&es into new hih round on an increase in &olume+ it does/ that at point/ >. It mo&es/ into new hih round abo&e the tradin rane and in actual fact it would not ha&e to mo&e into all time new hih round abo&e point/ 1. It is sufficient to o abo&e a suppl! le&el. To continue with the rule; “On a relati&e narrowin of  spread... ;” "ell% it did that. The spread is narrowin and the &olume is increased+ e&idence of  suppl! comin in to stop the mo&e up. Gow% let’s stop here for a moment. Suppose a stock has  been mo&in up. It mo&es up two points on >4%444 shares and then it mo&es up another two  points on E4%444 shares. It is not makin the proress that it should make consistent with the &olume. There has been a relati&e narrowin of the spread. Gow% let’s do this aain. Suppose it mo&es up the first da!% two points on >4%444 shares and the ne$t da! the spread is one and a *uarter points on E4%444 shares. 7raw it. 7raw it on one of the charts% so that !ou can see it. This makes the relati&e narrowin of the spread emphatic. (owe&er% the first is 'ust as &alidl! narrowin% relati&e to the &olume as the second is. Gow% the ne$t section of the rule is; “To then return to the a&erae le&el of closes... .” Gow% what does that meanF "hat is the a&erae le&el of closesF 7o not be too e$act in this. The close at point/ number 1 was J>4.44 per share. The close at point/ @ was =>>DE. These are the limits of the closes in the tradin rane. The a&erae le&el of closes would be somewhere in the midpoint between these two e$tremes or around =AADE. T(e #nen of (#! )"o/#!#on of (e "*le #! (a (e !oc+ !(o*ld co%e .ac+ #no (e cene" of  (e "ad#ng "ange& If # doe! no "eac( (e eac ?J; (, # doe! no %ean (a (e "*le doe! no a))l$& Let us reason a bit as to the “wh!” of this pro&ision. It has to do with how people operate in a tradin rane. 8ou be the professional and I will be the public% the untrained people.  Gow% I want to be certain before I bu! and usuall! the wa! to be certain is to make sure it the stock/ is oin into new hih round. Man! people bu! on new hihs% but I’&e become smarter. "h!F "hene&er I bu! in new hih round% on new hihs% I usuall! et hurt. "h!F Because it is usuall! followed b! a reaction% sometimes a &er!% &er! deep reaction. In the tradin rane I’m  pulled and hauled back and forth. The stock bounces up a few points and then comes down a few points and I’m uncertain+ I’m waitin. 5nd finall!% here at point/ > it punches into new hih round and its on its wa!% so I know which direction it is oin; It is oin upC I now ha&e the emotional courae to bu!. 5ll the reasonin that I ha&e ma! sa! no% but the emotions sa! !es. But% I’&e been burnt before b! bu!in on these new hihs% so% what I’ll do is wait for a reaction.  Gow% I’m oin to ask !ou a *uestion. 5s an untrained person who has not paid the price to learn how the market operates% do I deser&e to bu! so that I can make a profitF The answer is ob&iousl! no. I want to bu! it the stock/ with a little bit of a price barain. I want to be a little  bit smarter% so I bu! as a stock reacts.  Gow% there is another person who is oin to o in and bu! as it reacts+ that is the  professional man% who has taken a premature short position. (e has sold short up here% around points/ 3% = and on the other rallies within the tradin rane and now it punches into new hih round and he is in trouble. (e has a loss and he is afraid that it is oin to be a bi one if he

6;

doesn’t et out. Thus% he knows that the trend is oin to be upward% so he’s oin to bu! to co&er his shorts and that means he bu!s aain to establish his lon position. So% there are three  parts of the bu!in power that comes in as a stock oes into new hih round or reacts. The main point is that the people who are doin the bu!in are bu!in at the wron time for the wron reason.  Gow% who is oin to sellF The sellers are the larer interests who ha&e been sellin throuhout the tradin rane and are li*uidatin their lare% lon positions and are oin short and continue to o short as the stock de&elops the down trend. Gow% as I bu! on the reaction after it oes into new hih round% to ha&e the stock come down deepl! so that I can et a price  barain 'ust does not make sense. This is wh!; If the stock reacts into the a&erae le&el of closes% the indication is that this action was distribution. The rest of the rule sa!s; “That to do so would indicate that the entire lateral le&el was not accumulation but was distribution instead.” 5t point/ A the stock had come back into the eneral a&erae le&el of closes% to around =E and at that point the inference is that this area was distribution. "here do !ou sell the stock shortF The place to take !our short position is on the upthrust itself% as it breaks throuh the suppl! le&el with a relati&e narrowin of the spread and the hih &olume+ where suppl! is comin in to o&ercome whate&er demand that is there. If !ou do not take !our position there% !ou can take !our first position or add to an oriinal position on an! normal rall! thereafter% as lon as the stock is continuin to i&e indications of either  establishin or continuin a down trend. Thus% on chart twel&e% the first place to establish a short  position would be at point/ >. Her! often !ou will find a test of the upthrust itself% such as at point/ E% another place to sell short. Gote the lack of demand% the narrow spread and the decreased &olume at point/ E. This ne$t point/ is important. T(e *)("*! afe" d#!"#.*#on #!elf #! .o( a !#gn of wea+ne!! and a la! )o#n of !*))l$ and !o $o*" f#"! co*n !(o*ld .e %ade f"o% (a )o#n& Incidentall!% &er! often this is followed b! a more important sin of  weakness and more important last point of suppl!. #hart thirteen% “Twentieth #entur! -o$%” has another e$ample of the upthrust after  distribution. The preliminar! suppl! came at point/ 1 and the bu!in clima$ is at point/ 3% the automatic reaction is at point/ < and the secondar! test at point/ =. So far the stock has mo&ed up and has clima$ed and stopped oin up. It has then mo&ed laterall! to build a potential cause. 5s it mo&es laterall!% !ou can look at the fiure chart to determine the e$tent of the probable cause. In eneral it is best that the lateral mo&e be relati&el! narrow% relati&el! tiht% howe&er% it does not ha&e to be so. The stock mo&es sidewa!s with supports at points/ > and @ and at point/ A had a number two sprin with a secondar! test at point/ E. Then it mo&es up. It mo&es into new hih round on an increase in &olume. Look at the &olume at point/ 2+ it is &er! hih and the spread is relati&el! narrow. There is onl! one thin which can cause this condition and that is hea&! suppl! comin in% attemptin to stop the up trend and attemptin to stop it from continuin on up and workin out the count built up in the lateral mo&e on the upside. Gow% where is the a&erae le&el of closesF It is midwa! between point/ 3 and the low reached at point/ E% sa! at >= 1DE. -ollowin point/ 2% the stock breaks badl! at point/ 14. A !"ong !oc+  !#%)l$ doe! no do (#!& There is suppl! on the down side; Holume is hea&! and it persists and the stock reacts on down throuh the tradin rane to point/ 11. To react into the area circled at 14 would be sufficient to indicate that the entire lateral le&el was not accumulation% but was distribution. -ollowin this the stock mo&ed sidewa!s for further redistribution and had an upthrust at point/ 13. Gote aain the &er! hea&! &olume and the relati&e narrow spread as it went abo&e the suppl! area at point/ 13. I d#d no %a+e )"#ce )"og"e!! co%)a"a.le o (e e)an!#on of /ol*%e& "hen the stock mo&es up as the &olume e$pands% the price proress should e$pand with it in proportion. (ere% too much suppl! came into the stock% stopped it and it immediatel! reacted. Gote the price weakness as it came down to point/ 1=. The reaction was too deep and then the stock failed to rall! well at point/ 1>. There was narrowin spread and/ decreasin &olume compared to the rall! up to point/ 13. The da! marked 1@ is another  e$ample of% “it tried to o up% tried to o down and closed in the middle on an increase in &olume.” "e are oin to et some answers &er! shortl! and we did. T(e .ea*#f*l )a" a.o* (e *)("*! afe" d#!"#.*#on #! (a w(en $o* !ee # co%e .ac+ #no (e a/e"age le/el of clo!e!, $o* (a/e $o*" an!we"& :suall! !ou ha&e the answer in  plent! of time before the main mo&e starts. 5ll !ou need is one da! or so before it mo&es down and the upthrust after distribution often i&es !ou that ad&antae. 5ain% we caution !ou; 7o not misuse the upthrust after distribution rules. :se them onl! when the situation de&elops accordin to the rule. The necessar! elements must be there; 1/ It must mo&e up+ 3/ it must clima$ with a secondar! test+
6<

it should mo&e in a reasonabl! narrow rane+ >/ the stock must then mo&e abo&e a suppl! le&el with a relati&e narrowin of the spread compared to the increased &olume. If it does that and then @/ mo&es down into the middle of the tradin rane% the inference is that the entire le&el was distribution.  Gow% where is the best place to take a short positionF Sell short on the upthrust itself as it  breaks throuh the suppl! le&el. On chart thirteen it is at point/ 2 and on chart twel&e it is at point/ >. 8ou ma! also sell short or add to !our short position on an! rall! thereafter. "hen !ou do take that short position% put in a close stop% perhaps two or three points 'ust abo&e !our   price. In establishin positions% !ou ma! ha&e restin orders in the area where a possible upthrust could occur or !ou can wait until it ets there and then 'ude it and act accordinl!. "hich !ou will do in actual practice will depend directl! upon !our own e$perience and !our  own preference. "e suest that/ !ou practice with both.  Gow let’s o on to chart fourteen% “Transcontinental In&estin.” The stock did mo&e up% clima$ed at point/ 1 with a secondar! test at point/ 3 and then mo&ed sidewa!s and built a cause% but the distribution should be a concentrated area of sellin. This was the reason for the oriinal “four to twel&e weeks” in the rules and the stock has one sidewa!s for fi&e months or  more. Therefore it is hihl! *uestionable whether that would appl!. 5lso% it is a &er! wide swinin rane. In the upthrust after distribution% the stock is mo&ed up+ it is held up there while concentrated sellin oes on and it/ tries to o out of the rane/ on the upside% fails and then oes on down. 5nd this pro&es that/ the entire le&el is distribution% not 'ust a part of it. This is not likel! to be the case here. “Transcontinental In&estin”/ mo&ed sidewa!s for far/ too lon a  period and in too wide a rane. Therefore% althouh at point/ < there is without a *uestion an upthrust% this must be rearded as an ordinar! upthrust and not as an application of the rules for  the upthrust after distribution. "h! is it/ an ordinar! upthrustF Because as the stock mo&ed into new hih round there was a relati&e narrowin of the spread compared to the &olume. The &olume was e$tremel! hih% indicatin the presence of &er!% &er! hea&! suppl! and on the da! marked =% there was suppl! increasin on the downside% then as the stock rallied to point/ >% there was a comparati&e lack of demand as shown b! the &olume compared to point/ <. It is entirel! possible that the onl! area which is distribution would be o&er to point/ A where suppl! stopped the up mo&e. #hart fifteen has an ordinar! upthrust at point/ =. The stock had been in a down trend% failed to clima$ at point/ 1 and built a suppl! le&el at points/ 3 and < alon the J12.44 le&el. 5t point/ = it went abo&e that le&el with a lare increase in &olume and the failure of the spread to widen in keepin with the &olume. Suppl! was comin in to o&ercome the demand. 5lso% if the stock was oin to o up from this point it should ha&e kept on oin. Instead% it promptl! turned downward with suppl! comin in on the reaction to point/ >% which was into the middle of the tradin rane. I "eaced oo dee)l$ and # "eaced w#( !*))l$& The rall! to point/ @ was weak with less demand as shown b! decreased spread and decreased &olume compared with/ the rall! to point/ =. Gow% where could !ou establish a position or add to oneF 5t point/ = between J12.44 and 12ADE as it went abo&e the suppl! area of points/ 3 and < and in the area circled at @. #hart si$teen has an area of redistribution. It rallied% stopped oin up at point/ 1 and then mo&ed sidewa!s all the wa! o&er to point/ 3. Then on the reaction down to point/ < the  price cracked with &olume comin in on the downside. This is a sin of weakness and note how the &olume and the price action died out at the area marked/ = on the rall! to the ice. There was a lack of demand where it was necessar! for demand to come in if the stock was oin to mo&e up; )oint/ = is the last point of suppl!. Let’s hit the hihlihts onl! of chart se&enteen. The oriinal area of distribution had a  bu!in clima$ at point/ 1% the automatic reaction at point/ 3 and the secondar! test at point/ <. The stock then went into a tradin rane with limits at points/ = and 1. The action from point/ > to point/ @ is a sin of weakness and the rall! to point/ A is the last point of suppl!. The stock  then went down to point/ E% did not clima$ and bean to rall!. It then went throuh re distribution beinnin with a preliminar! suppl! at point/ 2 and the bu!in clima$ at point/ 14% the automatic reaction at point/ 11 and the secondar! test at point/ 13. Gote the hea&! suppl! that came in at point/ 1< on the wa! down to point/ 1=. The mo&e from point/ 13 to point/ 1= is the sin of weakness and the rall! to point/ 1>% the last point of suppl!% died out with a comparati&e lack of demand. This is shown b! the narrowin spread and the decreased &olume as point/ 1> is reached. The stock reacted to point/ 1@% rallied to point/ 1A and then broke downward.

7@

 Gow for a brief summar!. "e ha&e outlined the process of distribution and of re distribution% discussed the main principles which occur in these areas% what precedes it% what follows it and discussed a special t!pe of distribution with some special rules+ the upthrust after  distribution. "e ha&e also indicated how to take a speculati&e position for a lare down mo&e+ that positions are established in the riht hand side of the tradin rane on either the upthrust itself or on the last point of suppl! after the sin of weakness. It is important that !ou sta! out of  the tradin rane until the stock i&es the indication that it is oin to work out the force of the distribution now. This indication is i&en b! the upthrust or the last point of suppl! after the sin of weakness. This will force !ou to et out of !our lon positions preparator! to oin short so that !ou are far less likel! to see !our profits slip awa! and will reatl! aid !ou in protectin !our capital and in ma$imi0in profits. "e suest !ou practice dilientl! and s!stematicall! until !ou can dianose distribution and sell short as well and as easil! as !ou can dianose accumulation and o lon. Then !ou will be able to operate in all kinds of markets.

7?

BASIC LECTURE NUMBER EIHT IURE CHARTS  IURE CHART COUNTS AND THE COUNT UIDE

The main sub'ects/ of Basic Lecture Gumber ,iht are/ fiure charts% fiure chart counts and the count uide. The lecture will ha&e se&eral ob'ecti&es. The! are to outline the use of fiure charts and the count uide and to discuss the coordination of &ertical charts with fiure charts. In workin with the charts for Basic Lecture ,iht% we ma! refer !ou to &ertical line charts and to a much lesser e$tent fiure charts discussed in prior lectures. )lease% do not fail to stud! those charts as it is e$tremel! important to coordinate the &ertical line and the fiure chart. "e use three basic laws in our market operations. The! are 1/ the law of suppl! and demand% which is primaril! portra!ed on the &ertical line chart+ 3/ The second law is the law of  cause and effect% which can be most readil! seen on the fiure chart. The fiure chart is sometimes referred to as a “cause and effect chart.”
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8ou ha&e studied the mechanical process of postin and the construction of fiure charts earlier in !our "!ckoff studies% thus% we will not o into that in/ this lecture. "e will therefore concentrate on the t!pes of fiure charts we use in anal!sis of stocks% mainl! the one point and the three point fiure charts. This lecture will deal e$clusi&el! with these. (owe&er% the same  basic principles appl! to an! other fiure chart% such as the fi&e% ten or twent!fi&e point fiure chart of the "!ckoff "a&e or the 1DEth  point fiure chart used b! our tape readers in the construction of the intrada! wa&e. The main indications which we want to draw from fiure charts are the counts+ the power of the cause. 8es% there are man! additional indications which ma! be deri&ed from a stud! of mass formations such as/ pre&ious areas of resistance and support% trends and the man! other uses described in the te$t. But% in this lecture we will concentrate on determinin the count  Gow% wh! do counts workF "ell% truthfull!% we don’t know. "e do belie&e there is a &er! complicated theoretical mathematical e$planation for this. SMI will in time do e$tensi&e research in this stud!. But for now% we must relate the analo! Mr. "!ckoff used and which has  been accepted b! students for man! !ears. Gow% suppose !ou walked outdoors one mornin and saw three or four men workin in a &acant lot across the street diin a foundation. 5fter the! had du down about eiht feet or so and had poured some concrete% an enineer could come alon and tell !ou e$actl! how bi a house could be put on that foundation. Gow% likewise% a la!man could probabl! also/ tell !ou rouhl!% within a reasonable limit% how bi a house would  probabl! o on that foundation. Suppose% howe&er% !ou/ walked out the door and saw a couple of steam sho&els and some derricks diin a foundation fort!% fift! or/ si$t! feet deep and men  puttin in a foundation eiht feet thick. 5n enineer could then determine mathematicall! how lare a buildin a sk!scraper/ could be built on that foundation. Mr. "!ckoff said that each rall! and reaction in the base as the stock mo&ed sidewa!s in the tradin rane was like one of  those dis down b! the power sho&el. The more diin and the larer the foundation% the larer  the possible buildin that could be put up. Similarl!% pro&ided accumulation or distribution is in  proress% the larer and more numerous the fluctuations in the base on the fiure chart% the larer  the possible mo&e which ma! result.  Gow% suppose the people put in a foundation capable of supportin/ a si$t! stor!  buildin and the! start to erect the buildin. The foundation is all laid and the! bein to build the sk!scraper and the! et up twent! stories and run into labor problems% run out of mone! or  somethin else and the! put a roof on. The other fort! stories ma! ne&er be built. In other  words% the foundation and the count are/ a potential. It does not sa! that the! absolutel! will put up the si$t! stor! buildin% but the! can. Similarl!% it is up to us to watch the stock as it mo&es up in order/ to see if e&er!thin is normal% de&elopin well and to determine what problems are comin into the picture. Gow% suppose the! et up twent! stories% run into labor problems and finall! sell out and a new roup comes in and takes o&er and the! ma! mo&e it up another fifteen or twent! stories% run into problems% et out of the situation and later on another roup comes in and bu!s and finall! finishes this si$t! stor! sk!scraper.  Gow% let’s see if we can help !ou see how this applies to the stock market. 8ou ma! ha&e a si$t! point count down in the base. The stock ad&ances and mo&es up fifteen to twent! points%  builds a steppin stone confirmin count for another twent! points% mo&es up and oes throuh the same process aain/% which will finall! take !ou to the full si$t! point ob'ecti&e. Gow% let’s consider another alternati&e because an! base ma! be accumulation% distribution or nothin. It is entirel! possible that onl! a portion% the latter portion of the base is accumulation and that no accumulation occurred in the earl! part of the base. It is because of this that the count must be  broken down into phases. 5lso% there are some thins in stock market anal!sis or stock market action that we do not know e$actl! wh! the! occur or we wish we had a better e$planation. Sometimes !ou% as a student% must make a leap on faith alone. The use of fiure charts re*uires somewhat of this attitude% but the more !ou work with them% the reater confidence !ou will ha&e and the more !ou will rel! upon them. To determine the counts and ob'ecti&es on the fiure charts effecti&el! we need a  procedure. That procedure is contained in the count uide. The purpose of the count uide is to  pro&ide a &alid step b! step procedure for breakin down the lare le&els in a base and for  computin the loical count ob'ecti&es. "e ha&e a simple% one sentence count uide which is as follows; Afe" (a/#ng !een a !#gn of !"eng( locae (e la! )o#n of !*))o" on a "eac#on and co*n f"o% "#g( o lef& This count uide applies to up counts. The count uide which applies to down counts is as follows; Afe" (a/#ng !een a !#gn of wea+ne!! locae (e la! )o#n of !*))l$ on a "all$ and co*n f"o% "#g( o lef& "e ask !ou to memori0e both of these count uides. The! are each/ a one sentence% easil! remembered uide to takin counts and

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need considerable amplification. Much amplification is in the detailed count uide which has  been written for up counts and for down counts. "e suest that/ !ou stop listenin now and read the detailed count uide in its entiret!. -or best results% please read this out loud% slowl!% until !ou ha&e a workin understandin. 5lriht% we will assume that/ !ou ha&e done this and now we will o ahead with an anal!sis of the count uide and some chart illustrations. "e will deal with accumulation and up counts first. The same process applies to distribution and down counts% which will be co&ered later in this lecture. Gow% please turn to chart one which is a theoretical model and we will discuss the basic idea of counts. In brief% the procedure is as follows; -irst% locate the sin of  strenth and then the last point of support on a reaction. The mo&e from point/ 1 to point/ 3 is the sin of strenth and the reaction to point/ < is the last point of support. Gow% count from riht to left. To do this we must break the count down into phases. The rall! to point/ = clearl! marks or separates phases 5 and B% therefore we start countin from riht to left from point/ < o&er to point/ > first. This is a count of thirt!two points which is added to the low and the line itself% i&in an ob'ecti&e area of @4 to @<. Gow% after that count has been fulfilled% !ou ma! then add phase B to this count. The new count would be from point/ < to point/ @ or si$t!eiht  points added to twent!eiht and thirt!one for an ob'ecti&e of 2@ to 22. )hase B ma! then be marked with a broken line. #hart two shows a similar diaram illustratin the takin of a count in an area of distribution. Gow% stud! this e$ample for a few minutes before !ou continue. "e’ll come back to it in a few minutes. #hart three is a 3> point modified chart of the "!ckoff "a&e. The count uide sa!s that after ha&in seen a sin of strenth% locate the last point of support on a reaction and count from riht to left. The first thin we must do is locate the sin of strenth. To properl! identif! a sin of strenth and last point of support we need the price spread and &olume. Spread and &olume are on the &ertical chart not the fiure chart. B! lookin at the fiure chart onl! !ou can often make a correct assumption that an action is a sin of strenth% but !ou cannot be certain. The first pararaph of the detailed count uide sa!s that after ha&in identified the sin of strenth on the &ertical line chart% locate the last point at which support was met on a reaction% the L)S. Locate that e$act point on the fiure chart. "e identif! the sin of strenth and the last point of  support from the &ertical line chart. #hart four which was first discussed in Basic Lecture Three% chart three% has the &ertical line chart that oes alon with this fiure chart and the mo&e from point/ @ to point/ E is the sin of strenth and the reaction to point/ 2 is the last point of support. "e will locate these e$act points on the fiure chart. This last point of support is around the 33A> line. It sa!s; “#ount from riht to left takin !our most conser&ati&e count first and mo&in further to the left as the mo&e proresses.” Let us o throuh the illustration and the detailed count uide and  brin in some of the reasonin behind it as we o alon. Gow% we mo&e from riht to left in takin the count because onl! the riht hand portion of the tradin rane ma! be accumulation. There are times when a portion% the earl! portion of the count and of the base% does not ha&e an! important accumulation oin on% therefore% that portion of the possible count will not be used. Man! times ma$imum counts do not work out for this reason. If we started our count from left to riht there would be a stron tendenc! to immediatel! take the ma$imum count from the  beinnin and fre*uentl! we would be in trouble% so we count from riht to left% takin our most conser&ati&e count first. In other words% we take a portion of the base at a time and pro'ect it to i&e us the ob'ecti&e.  Gow% the ne$t section of this statement is that we mo&e further to the left as the mo&e  proresses. Suppose the ob'ecti&e of our first portion of the base/ has been reached and the stock continues upward. "e then ha&e the problem of determinin where the ne$t ob'ecti&e is so that we can determine when the stock is likel! to run into either hesitation or opposition in the mo&e. So% we would then mo&e to the left and take another section of the base. Our method of  doin that is indicated b! the second pararaph of the detailed count uide. In mo&in to the left turn to the &ertical line chart and di&ide the area of accumulation into phases addin one complete phase at a time. Gow% what is a phase and how do we identif! itF "ell% a phase b! definition is a stae or an/ inter&al in a de&elopment or c!cle or a part under consideration or a homoenous% ph!sicall! distinct and mechanicall! separate portion of matter. Gow% we use the term phase to refer to a portion of the base or a portion of market mo&ement. "e identif! it b!  price action and b! &olume. T(e .eg#nn#ng and (e end of (e )(a!e #! gene"all$ %a"+ed .$ /ol*%e' T(#! #! an #nc"ea!e #n (e /ol*%e& So%e#%e! (e #nc"ea!e #n /ol*%e #! a.!en and (e )(a!e %*! .e #den#f#ed .$ )"#ce ac#on onl$& On chart four the two lare phases ha&e  been marked as 5 and B. The! are di&ided b! the rall! at point/ >. That rall! actuall! did not

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ha&e a reat deal of &olume on it. (owe&er% the rall! itself di&ided the base into two distinct  portions or phases and so we would take the count in phase 5 first and pro'ect it upward before addin an! of the count in phase B in computin an! possible hiher ob'ecti&e. Her! often a  phase is an action and its test. -or e$ample% a sellin clima$ and the secondar! test or a sin of  strenth and its test which is the last point of support or a bu!in clima$ and its secondar! test. )hase B could also be broken down into two phases% # and 7. )hase # is the sellin clima$ and 7 the secondar! test. Howe/e", #n dee"%#n#ng o.3ec#/e! fo" (e la"ge" %o/e! and la"ge" "end! # #! .ee" )"ac#ce o a+e #no acco*n onl$ (e la"ge" )(a!e! *!#ng a .#gge" )e"!)ec#/e o(e"w#!e $o* %a$ end *) w#( %a!! conf*!#on& Once !ou ha&e identified the  phase% do not add onl! a portion of that phase to the count. 5lwa!s add the entire phase. 8ou ma! do this on the assumption that if an! portion of that phase is accumulation% the entire area is  probabl! accumulation. This is wh! it is so important to identif! the limits of phases. Let us calculate and determine the count in phase 5 on chart three. The last point of  support is at point/ 2 and that phase bean on the dri&e down from point/ >. Thus% we count the number of s*uares from point/ 2 o&er to that mo&e down. This is 1< points and since this is a 3> point/ modified chart% each small s*uare represents 3> points. "e multipl! 1< b! 3> which is <3> points. "e then add that <3> points to 33A>% the line itself and ha&e an ob'ecti&e of 3@44. "e pro'ect that count upward and mark it 5.  Gow pararaph three of the detailed count uide sa!s that as the mo&e proresses !ou will often see a lateral mo&e formin at a hiher le&el. Her! often such a mo&e will become a steppin stone% confirmin count of the oriinal count. The lateral mo&e from point/ 13 to point/ 1< is such a steppin stone confirmin count. Gow% how did that come aboutF 5fter the stock went into the 3@44 area and reached the ob'ecti&e of phase 5% it then mo&ed sidewa!s in reaccumulation for a steppin stone count from point/ 13 to point/ 1< for 13 s*uares% multiplied b! 3> or a total of/ <44 points. "e add that count from the line itself and ha&e an ob'ecti&e of 3EA>. "e know that if the "a&e mo&es upward it will reach a hiher ob'ecti&e. "e must then o back to the oriinal base and add phase B to phase 5 to determine the ne$t ob'ecti&e. "e bein countin from point/ 2 all the wa! o&er to the preliminar! support at point/ <. This i&es a count of 3< points times 3> or a mo&e of >A> points added to the line itself for an ob'ecti&e of 3E>4. So% the count from point/ 13 to point/ 1< with an ob'ecti&e of  3EA> substantiall! confirms the count from point/ 2 to point/ < in the oriinal base area. )araraph four sa!s that for loner term counts one should add the count to the e$act low or a point about one half wa! between the low and the count line. This wa! !ou will be certain that the most conser&ati&e count is bein used. In other words% !ou should add the count of >A>  points to 31>4 for an ob'ecti&e of 3A3> and to the line itself% which is 33A>% for an ob'ecti&e of  3E>4. Gow% to pin this count down better% !ou should add the count to a point about halfwa!  between or the 333> line i&in an ob'ecti&e of 3E44. 8ou will often find that this will i&e !ou a workable count from the oriinal base% which is still remarkabl! accurate and !ou will be able to pinpoint the counts better with the steppin stone% confirmin count. 8ou ha&e a rane which% when reached% !ou can e$pect the stock to run into suppl!% hesitation or stoppin of some sort.  Gow% as that steppin stone count de&elops to the point where it confirms the count in the oriinal base area it fre*uentl! will indicate b! its own action that the steppin stone% confirmin count is comin to an end and the stock is read! to mo&e aain. It ma! do this b! ha&in a sprin or a “backup to the ede of the creek.” It is &er! important to reconi0e that counts are  possible ob'ecti&es as measured b! the e$tent of the battle between/ suppl! and demand at the  base area. These ob'ecti&es ma! be stop% look and listen points. The! should ne&er be looked upon as e$act points where the stock will stop and turn. 8ou cannot pro'ect the count upward and sa!% “reardless of what happens% the stock will o there.” It ma! or it ma! not. Market conditions ma! not let it. 5lso% the phase !ou ma! be addin to the possible count actuall! ma! not be accumulation. 5n! one of man! thins can happen in the markup phase of the c!cle. The important thin is that the count enables !ou to determine the probable e$tent of the possible mo&e% a point where the stock ma! run into trouble% opposition% hesitation or bein a proloned reaction. 8ou should watch the &ertical line chart to e&aluate the action as these ob'ecti&e areas are approached. 8ou determine from the &ertical line chart what !ou should do+ whether !ou should et out or maintain !our position. 5 re&iew of the &ertical line chart of the "!ckoff "a&e would show the mo&e from point/ 1< to point/ 1= was triered b! a sprin at point/ 1<. 5t point/ 1= fiure chart/ the "a&e fulfilled the count in the oriinal base and the reaccumulation or steppin stone count from point/ 1< to point/ 13. 5fter it reached point/ 1= it mo&ed sidewa!s in a new area of re accumulation. The mo&e from point/ 1> to point/ 1@ is the sin of strenth and the reaction to

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point/ 1A is the last point of support. "e would determine these points from the &ertical line chart. The count from point/ 1A to point/ 1E is fifteen s*uares% multiplied b! twent!fi&e% e*uals points which is then added to the low of point/ 1> and the count line itself for  ob'ecti&es of <4>4 and <13>. "e should also o back to the oriinal accumulation area to see if  there is a loical count to a hiher ob'ecti&e. "e would reard the mo&e from point/ @ to point/ 12 as a more important sin of strenth and the reaction to point/ 11 as a more important last  point of support. Locate the e$act point on the fiure chart and draw in the c ount from point/ 11 to point/ <. Gow that count should actuall! be taken from the low of point/ @ and from the count line at point/ 11 itself and to pinpoint it% from a point halfwa! in between. Yo* al"ead$ +now (a )(a!e A and )(a!e B a"e acc*%*la#on .eca*!e (e co*n #n (e!e 9wo: )(a!e! wo"+ed o* on (e %o/e o 9)o#n: ?1& T(e onl$ #!!*e (en #! w(e(e" o" no (e"e #! a )(a!e o (e lef and o (e "#g( of (e!e wo )(a!e! w(#c( co*ld .e added and co*ned, )e"(a)! f"o% a (#g(e" le/el& Therefore% essentiall!% we then add phase , to the count and in most cases ma! take the count from the line itself to i&e the ne$t important ob'ecti&e area. "e ma! do that simpl! because we alread! know that phases 5 and B are accumulation. 5ctuall!% each time !ou mo&e to the hiher le&el !ou should add the count to the low% to a point halfwa! between or to the line itself. Howe/e", once (e o"#g#nal o" (e f#"! co*n (a! .een def#ned, *!*all$, (e %o! !#gn#f#can lae" one! w#ll .e f"o% (e l#ne #!elf& So% the count from point/ 1A to point/ 1E substantiall! confirms the count from point/ 11 to point/ < in the oriinal base area. 5t point/ 34 that count worked out. Gow we can reconi0e that there is an additional hiher   possible count down in the oriinal accumulation area. This would be determined b! reardin the mo&e from point/ @ to point/ 31 as a more important sin of strenth and the reaction to point/ 33 as a more important last point of support. That would i&e a count of << s*uares times 3> or E3> points from the low and the midpoint i&in an ob'ecti&e of 32A> and <4A>. This count was fulfilled at point/ 34. The count from the line itself i&es a possible ob'ecti&e of  <344. "e should mark this ob'ecti&e on the chart. (owe&er% we would not e$pect it to be reached until the "a&e a&e stron indications in the area of point/ 34 to point/ 3< or later on of mo&in to <344. )lease o back and re&iew our method of markin the counts on the chart. There are man! methods of flain or markin counts. "e suest that/ !ou simpl! adopt ours for the sake of uniformit!. In flain the count from the low point/ we use an open trianle% from the midpoint a s*uare and from the line itself a solid dot. Later phases will be added to the count b! a broken line such as appears/ on chart si$. In determinin what is likel! to be the loner term count% !ou should identif! the  preliminar! support. "h!F Because if the entire base is accumulation% it is likel! that the accumulation bean with the preliminar! support and the count will be from the last point of  support at the riht hand side of the base o&er to the preliminar! support on the left hand side of  the base. 5fter the sin of strenth and last point of support ha&e been defined and identified !ou ma! determine what ma! be the lon term count for the entire possible mo&e. But% !ou must still break the count down into phases and use the procedure outlined in the count uide as man! thins ma! o wron durin the mo&e which ma!/ pre&ent the full count ob'ecti&e from/ bein reached.  Gow% please turn to charts fi&e and si$. These ha&e the same action and man! of the same numbers as Basic Lecture Three% charts si$ and se&en. -irst% we must identif! the sin of  strenth. There is a terminal shakeout at point/ 1< and a secondar! test of it at point/ 1>. T(e dea#led co*n g*#de !a$! (a a n*%.e" ("ee !)"#ng o" (e !econda"$ e! of a n*%.e" wo !)"#ng 5*#e ofen con!#*e! a !#gn of !"eng( and (e la! )o#n of !*))o" #n (e !a%e ac#on, w(#c( #! "eac(ed a (e !a%e )o#n and a (e !a%e #%e& T(#! a))l#e! al!o o (e !econda"$ e! of a e"%#nal !(a+eo*& So% we must reard the action at point/ 1> as the sin of strenth and last point of support and the point from which we will take our first count. Before takin the count let us locate the possible preliminar! support in order to determine what ma! be the loner term count; That action is at all the wa! o&er to point/ o&er to point/ 2. This i&es us a count of 32 points added to the J3>.44 le&el or an ob'ecti&e of >=. Gow% if it went to >=% what would be the sinificance of 

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thatF It would carr! the stock abo&e% substantiall! abo&e% the suppl! areas at points/ 12% 34 and 31 and put it in position to ha&e a ma'or upward trend and to work out the accumulation and the count in the base It went there and continued on upward. Now, (e dea#led co*n g*#de !a$! (a *!*all$ a !)"#ng w#ll .e followed .$ a %o"e #%)o"an !#gn of !"eng( and (e "eac#on follow#ng (a !#gn of !"eng( #! al!o a /al#d la! )o#n of !*))o"& The mo&e from point/ 1> to point/ 1@ is a sin of strenth and the reaction to point/ 14 is the last point of support. The count is alon the 32 line from point 14 for  an ob'ecti&e of from/ >A to @3. 5fter the [email protected] le&el had been reached and the stock continued to mo&e up it would ha&e been possible to take a count from point 1E o&er to point/ 2 for a hiher ob'ecti&e. -or the sake of a&oidin confusion% instead% let us bein to add the count in  phase B to phase 5. The first count is from point/ 1> to point/ A or @2 points from the J3>.44 le&el for an ob'ecti&e of J2=.44. 5fter that had been reached and the stock continued to mo&e up% we would take the count from point/ 14 o&er to point/ A or A= points from the 3> and 32 le&els/ for an ob'ecti&e of J22.44 to J14<.44.  Gow% after that count had been e$ceeded% aain it is possible to take a count from point/ 1E o&er to point/ A. (owe&er% let us aain drop down to 1> and add the ne$t ma'or phase% phase # oin all the wa! o&er to the preliminar! support at o&er to 1.44 to J1>@.44. To pin that down further !ou could add it from halfwa! between the low and the line itself for an ob'ecti&e of J1>=.44. The count from point/ 1E to E.44 to J1@@.44. To pinpoint the ob'ecti&e better !ou could take the count from the 3E le&el for an ob'ecti&e of [email protected]. The stock actuall! went slihtl! hiher to J1@<.44 and then bean a lon wide swinin tradin rane. It should be reconi0ed that these ob'ecti&es are stop% look and listen points. The! are  points where !ou should watch !our &ertical line chart to see if the stock is/ in fact oin to turn near the ob'ecti&e or perhaps e&en o throuh a si0able correction or distribution. "e’&e taken the most conser&ati&e count first and added the phases% step b! step% to each count. ,&en thouh the last point of support comes in the area of the oriinal support and as soon as the entire base has been formed% !ou ma! calculate the lon term ob'ecti&e% !ou must still follow the count uide% break it down into phases and first work with the shorter term counts. "h!F "ell% the stock ma! work out part of the count onl! and then o throuh complete distribution or re distribution. 8ou cannot sa! cateoricall! that the stock will fulfill the ma$imum count 'ust  because !ou ha&e a hiher ob'ecti&e. Man! thins ma! happen. The! ma! put a roof on it part wa! up+ the stock ma! o throuh a ma'or correction or the market% as indicated b! the "!ckoff  "a&e% ma! bein a ma'or decline takin the stock at least part wa! with it. "hen a count is tiht and compact% it ma! be &er! difficult to break the count down into loical phases. In that case% it is simpl! best to take the entire count; 7o not break it down into  phases and be sure to/ watch the &ertical line chart carefull! as the mo&e continues. 5n e$ample of a compact count is in Basic Lecture Three% chart ten. #hart se&en of “Gatomas” is the fiure chart showin/ the steppin stone count of Basic Lecture Si$% chart two. The base has two phases% 5 and B and also a/ phase # which ma! or  ma! not be minor distribution. 5t point/ 1 there was a sprin. This first count of three points was immediatel! e$ceeded. The mo&e from point/ 1 to point/ 3 is a sin of strenth and the reaction to point/ < is the last point of support. So% we o to point/ < for a count of fi&e points with an ob'ecti&e of J3=.44% which was e$ceeded at point/ =. The stock continued to mo&e up and therefore we combine phases 5 and B from point/ 1 to point/ >. This i&es a count of 13  points% added to J1A.44 or an ob'ecti&e of J32.44. 5s the stock reached J32.44 we would watch the &ertical line chart to see whether or not it was oin to hesitate or continue. It went to J<4.44  backed off to J32.44 and continued upward on the mo&e from point/ @ to point/ A. 5s soon as it o&erran the J32.44 ob'ecti&e substantiall! and indicated that it was oin to o hiher% we immediatel! take the count from point/ < to point/ > for an ob'ecti&e of from/ J<1.44 to J<<.44. 5t point/ A that ob'ecti&e was met% howe&er% the stock continued to mo&e up and in doin so it brouht in the possibilit! of oin all the wa! o&er to point/ E for the count% addin  phase #& If 9)o#n: < #! (e la! )o#n of !*))l$ (e down co*n wo*ld .e ; )o#n! fo" an o.3ec#/e of ?7&@@ o ?1&@@ and (a co*n wa! no f*lf#lled& T(e"efo"e onl$ )a" of (a )(a!e %a$ .e d#!"#.*#on and (e"efo"e # #! en#"el$ )o!!#.le (a )(a!e C co*ld .e added o A and B& -rom point/ < to point/ E is 33 points added to the J1A.44 low and the J12.44 line itself% i&es ob'ecti&es of J<2.44 to J=1.44. The stock reached this ob'ecti&e at point/ 14.

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5fter “Gatomas” fulfilled the count from point/ < to point/ E at point/ 14 it reacted to the halfwa! point at point/ 11 and aain went throuh reaccumulation. The sin of strenth was at point/ 13 and the last point of support was at point/ 1<. The reaccumulation and the count are/ from point/ 1< to point/ 11% howe&er% it must be broken down into two phases separated b! the action at point/ 1=. The first count is A points added to J<1.44 or an ob'ecti&e of J. The stock continued to mo&e up and so the ne$t count is 1= points from point/ 1< to point/ 11 added to the low of J32.44 and the line itself of J<1.44. This i&es ob'ecti&es of J=<.44 to J=>.44. That count was fulfilled. The stock  went throuh new reaccumulation and continued to mo&e up. The procedure for the determination of a count and its ob'ecti&e in an area of distribution or redistribution is &er! similar to that of accumulation. )lease turn to the count uide for down counts. It sa!s; “5fter ha&in seen a sin of weakness% locate the last point of suppl! on a rall! and count from riht to left.” Gow% please turn to chart two which is a theoretical model of a fiure chart of distribution. The area of distribution has been broken down into two phases%  phase 5 and phase B. The sin of weakness is the mo&e from point/ 1 to point/ 3 and the rall! to point/ < is the last point of suppl!. The count is made from the JE=.44 le&el% the count line. The count in phase 5 is 3= points from point/ < to point/ =% subtracted from the hih and the line itself% i&es ob'ecti&es of J@<.44 to [email protected]. That count is fulfilled at point/ >. It then oes throuh redistribution and starts downward. "e then add phase B to phase 5. This count is from point/ < to point/ @ or >< points subtracted from JEA.44 and JE=.44 i&in an ob'ecti&e of  J<=.44 to J<1.44. The area of redistribution followin the low point at point/ > has a sin of  weakness at point/ A and a last point of suppl! at point/ E. The count is <@ points from point/ E to point/ 2. This <@ points is subtracted from JA=.44 and [email protected] for an ob'ecti&e of J.44 and J2.44. To pinpoint this count  better% it should be deducted from a point halfwa! between J.44 line for an ob'ecti&e of J13.44. In late Kul! 12@2 this was reached.  Gow% let us use the detailed count uide for down counts. It sa!s; “5fter ha&in identified a sin of weakness on the &ertical line chart% locate the last point at which suppl! was met on a rall!% the last point of suppl!.” 5lriht% we’&e done this. “Locate this point on the fiure chart also and count from riht to left.” Gow% ha&e we di&ided the area of distribution into  phasesF The answer% actuall!% is no. The reaction at point/ < is preliminar! suppl! and the action at point/ = is the bu!in clima$ and both are part of the initial distribution. In dee"%#n#ng (e la"ge" )(a!e!, *!*all$, (e )"el#%#na"$ !*))l$, .*$#ng cl#%a, a*o%a#c "eac#on and !econda"$ e! a"e all )a" of (e !a%e la"ge )(a!e& The minimum count in this oriinal area of distribution was fulfilled at point/ >. On the wa! down a number of steppin stone counts were formed. The first is a minor count from point/ @ to point/ A of @ points subtracted from J3E.44 i&es an ob'ecti&e of J33.44. This was o&errun and the count from point/ E to point/ 2 came into operation. It i&es a count of 2 points from J32.44 and J3A.44 or  ob'ecti&es of J34.44 and J1E.44. This count was fulfilled at point/ 14. The stock aain went throuh redistribution with a count from point/ 11 to point/ 13. This is a count of 14 points or  an ob'ecti&e of J1=.44. The stock went to 1=. There was no sellin clima$ at point/ >% instead the stock rallied% went throuh redistribution and in late Kul! 12@2 reached 14
7;

#hart nine has another area of distribution with &ertical and fiure charts shown. The &ertical chart was discussed in Basic Lecture Se&en% chart nine. The first minor sin of weakness was the reaction to point/ > and the last point of suppl! was at point/ @. This is a count of E  points which could be taken from the hih at point/ 3 and the line itself i&in an ob'ecti&e of  JA>.44 to JA<.44. That count was fulfilled on the reaction down to point/ A. (owe&er% b! oin to point/ A the stock went into new low round with suppl! comin in. )oint/ A is a more important sin of weakness and point/ E a more important last point of suppl!. "e ma! take the ne$t count from point/ E o&er to point/ 1. Gow% what ha&e we doneF "e identified the sin of  weakness and the last point of suppl! on the &ertical chart first% then located those points on the fiure chart and counted from riht to left. Gow% o to pararaph si$ of the detailed count uide. It sa!s this; “In the case of a loner term count often the last point of suppl! L)S8/ comes at the oriinal le&el of clima$. This le&el should be looked at first in stud!in the loner term counts. The clima$ itself indicated a re&ersal and the subse*uent action is the formation of the cause for  the ne$t effect. -or the last point of suppl! to come at such a le&el of clima$ usuall! makes it a more &alid count... the last point of suppl! often occurs at the same le&el as the preliminar! suppl!.” Gow% the last point of suppl! is at point/ E and the preliminar! suppl! is at point/ 1. In calculatin this loner term count the L)S8 and the preliminar! suppl! are t!in in. The count is 34 points and what does our count uide sa! about thatF )araraph four sa!s to subtract the count from the e$act hih% JE<.44 at point/ 3% i&in an ob'ecti&e of J@<.44. It can also be taken from a point halfwa! in between JE4.44 or JE1.44. This i&es an ob'ecti&e of  appro$imatel! [email protected]. The count can be taken from the line itself% so JAE.44 minus 34 points is an ob'ecti&e of J>E.44. "hat did the stock doF 5t point/ 14 it reached J>A.44 and fulfilled the ma$imum ob'ecti&e. I #! #%)o"an o "ecogn#e (a /e"$ ofen (e )"el#%#na"$ !*))o" co%e! #n a! (e co*n a+en f"o% (e (#g( #! "eac(ed& -or e$ample on the count from point/ 1 to point/ E% as the J@<.44 le&el is reached% we would be on the alert for indications of possible preliminar! support. It is also common that should that happen that the final sellin clima$ occurs as the count taken from the count line itself is reached. 5ain% usin the count from point/ 1 to point/ E% should we see such preliminar! support% we would be on the alert for a possible sellin clima$ as the J>E.44 le&el is reached. To illustrate this point further% please% return to chart three. This time the count from point/ 3= to point/ 3> illustrates this phenomenon in operation on the "!ckoff "a&e. The mo&e down to point/ 3@ is the sin of weakness and the rall! to point/ 3= is the last point of  suppl!. These would be identified from the &ertical line chart. The first lare phase in this lon tradin rane is identified as phase -. The count from point/ 3= to point/ 3> is 12 s*uares times 3> points per s*uare or =A> points deducted from the 3E44 and 3A44 le&els i&es ob'ecti&es of  3<3> and 333>. The preliminar! support at point/ < occurred in the ob'ecti&e area of the count taken from the 3E44 le&el and the final sellin clima$ occurred as the count taken from the 3A44 line was reached. Gote% in reard to this count it included onl! phase - of this lon tradin rane. (ad !ou immediatel! taken phase - and phase ? or perhaps added phase (% !ou would ha&e had a lon% lon wait as that count was ne&er reached. 5lso% phase - can be broken down into three phases% I% K and 9. #harts ten% ele&en% twel&e and thirteen are theoretical models illustratin some concepts. #hart ten has two lare areas of accumulation% phases 5 and # separated b! another lare area which is/ distribution% phase B. "hen this occurs it is relati&el! difficult to combine phase 5 with phase #. "h!F The accumulation which took place in phase # was larel! e$pended or  e$pressed or used up on the mo&e up to phase B. 5lso% there is *uite likel! to be much time elapsed between the end of phase # and the beinnin of phase 5. To add phase # to phase 5 is not addin 'ust an additional 34 points. It ma! be addin =4 or >4 points instead of onl! 34. 5n additional reason is that these are lare phases of almost e*ual si0e and the mo&ements resultin from them are *uite likel! to be complete within themsel&es. The entire 34 points of  accumulation in phase # is e$pended on the mo&e up to phase B and the 1> points of/ distribution in phase B is e$pended on the dri&e down to phase 5. Thus% it is *uite likel! that the onl! count that will work out will be that of phase 5. In chart ele&en we show this same process for distribution. 8ou should follow the same line of reasonin in dealin with it. Two phases of accumulation separated b! onl! minor distribution are much more likel! to be combined than when separated b! ma'or distribution. That situation is portra!ed in chart twel&e. (ere phase 5 and phase # are lare areas of accumulation separated b! onl! a small mo&e from phase # to phase B. )hase B is onl! a minor area of distribution. The count in  phases 5 and # are much more likel! to be combined in chart twel&e than the! are in chart ten.

7<

On c(a" wel/e all of (e acc*%*la#on (a oo+ )lace #n )(a!e C wa! no e)ended on (e %o/e *) o )(a!e B& The two areas of accumulation are separated b! onl! a relati&el! short  period of time and b! minor distribution. I #! #%)o"an (a (e"e no .e %a!!#/e /ol*%e #n )(a!e B w(#c( wo*ld #nd#cae (a (e long e"% (olde"! w(o .o*g( #n )(a!e C a"e ge#ng o*& The stock mo&es up to phase B and simpl! oes throuh minor distribution% reacts and oes throuh another lare area of accumulation. #hart thirteen has two lare areas of distribution separated b! a minor area of accumulation. Her! similarl!% the phases in this t!pe of count are much more readil! combined than the phases in chart ele&en.  Gow% turn to chart fourteen. )hases 5 and # ha&e 13 points and @ points of accumulation respecti&el!% separated b! the minor rall! to the distribution of > points in phase B. The &ertical line chart will disclose a lack of massi&e sustained &olume o&er a number of da!s on the mo&e to  phase B. These two areas of accumulation ma! be rather readil! combined due to the lack of  sustained sellin% the small amount of time and the relati&el!/ minor amount of distribution separatin them. On chart fifteen the entire count in the distribution area is from point/ 1 to point/ 3. There are two areas of distribution% phase 5 with 2 points and phase # with 13 points. The! are separated b! phase B% a possible area of accumulation of > points. The &ertical chart shows that onl! a week of accumulation could ha&e taken place+ that it was relati&el! minor in nature and so it is relati&el! eas! to combine phases 5 and # from the beinnin in determinin the probable count. (owe&er% !ou should still break the count down into phases and add one complete phase at a time #hart si$teen is a three point chart of the “#ontrol 7ata” base discussed in charts fi&e and si$. 5 three point chart condenses a lare count into a smaller% perhaps more manaeable count  b!% perhaps% eliminatin the minor fluctuations in the base. 5 three point chart takes into account re&ersals of onl! < points or more. It is used primaril! for loner term counts% counts for the ma'or mo&es. 7o not use a three point chart for minor mo&es. It shows the mass formations of  chart action in a base+ lon term trend lines% halfwa! points% the shortenin of thrusts on a ma'or   basis and pre&ious lare areas of support and suppl!. 7o not alwa!s e$pect the three point and one point counts to coincide. If (e ("ee )o#n co*n #! g"eae" (an (e one )o#n, a! (e %o/e )"og"e!!e!, add##onal !e))#ng !one co*n! a"e ofen .*#l on (e one )o#n 9c(a":, w(#c( w#ll conf#"% (e ("ee )o#n 9c(a"G!: o.3ec#/e& Sometimes the one point count will be much larer than the three point. 8ou must watch the &ertical line chart as the three point ob'ecti&e is reached and if the &ertical line chart/ indicates that the stock is oin to o hiher  and continue the mo&e% then use the count on the one point chart for the most likel! ob'ecti&e. 6emember% in dealin with three point fiure/ charts !ou are usin them for loner term counts. "hat does the detailed count uide sa! about loner term countsF -irst of all !ou should look at the preliminar! support because if the entire base is accumulation% the accumulation ma! ha&e started with the preliminar! support and the ultimate count will be from the last point of support o&er to the preliminar! support. 8ou must still break this count down into phases in accordance with the count uide. 5dd the count to the e$act low% to the count line itself and to the point half wa! in between and fre*uentl! !our lon term counts are confirmed b! subse*uent minor counts as the markup phase proresses. 0ac( a! (e!e !e))#ng !one co*n! de/elo) .eca*!e w(en (e n*%.e" of )o#n! #n (e !e))#ng !one co*n .eg#n o conf#"% (e longe" e"% co*n #n (e o"#g#nal .a!e # ofen #nd#cae! (a a %o/e #! a.o* o .e "e!*%ed& 8ou should then watch the &ertical line chart &er! carefull! for a sprin% a “backup to the ede of the creek%” a dr!in up of suppl! on the reaction and so forth.  Gow% on chart si$teen we ha&e man! of the indications of chart si$. "e ha&e broken it down into phases and calculated the count. "ith this chart is a tabulation of these counts with the point on the chart where the count bean and ended% the number of points in the count and the ob'ecti&e. The first count is from point/ 14 to point/ 2. There are 11 s*uares times < or <<  points and it is added to the J3=.44 line and the J32.44 line. This i&es and ob'ecti&e or J>A.44 to [email protected]. Gow% the midpoint could be either [email protected] or J3A.44. "e happened to use [email protected] and the! are showin those ob'ecti&es. (ere is a case where the count on the one point chart/ e$ceeded the three point chart’s/ count. (owe&er% the ma'or mo&e did not bein until a count had been formed on the three point chart/ to take it far abo&e the pre&ious hihs and later  additional counts de&eloped in the markup phase. #harts se&enteen% eihteen and nineteen co&er the “:nited 5irlines%” 12@@% accumulation area and the resultin up trend. Our purpose is to briefl! re&iew the principles co&ered in this lecture and to coordinate the &ertical line% the one point and the three point charts. The count uide sa!s that “after ha&in seen a sin of strenth% locate the last point at which support was

8@

met on a reaction+ the L)S and count from riht to left.” "e determine the sin of strenth from the &ertical line chart; It is the mo&e from point/ 1 to point/ 3. The reaction down to point/ < could be the last point of support. It is also an ordinar! shakeout. Most of the time !ou do not need the &ertical line chart in order to identif! the last point of support. In this case it is &ital  because the e$act last point of support is at point/ =% which is also a test of the shakeout at point/ <. So (e co*n #! on (e 6?&@@ l#ne and f"o% 9)o#n: 1 and no (e 6@&@@ l#ne f"o% 9)o#n: -& The base is then broken down into two phases% phases 5 and B.  Gow% let’s look at the fiure chart. The first count is from point/ = to point/ @% 34  points% for an ob'ecti&e of J@>.44 to JA1.44. 5t point/ E the minimum count was reached and at point/ 13 the ma$imum was fulfilled. -ollowin point/ E the stock mo&ed sidewa!s and built a 14 point count from point/ 14 to point/ 2 with ob'ecti&es of [email protected] to JA1.44 confirmin that ma$imum count in phase 5. )oint/ 11 was a sin of strenth and point/ 14 the last point of  support. 5t point/ 13 that count was reached and the stock then bean a tradin rane. Gow% what is the lon term countF On the one point fiure/ chart let’s add phase B. This i&es an ob'ecti&e of JE3.44 to JEE.44 )inpointin it from a point halfwa! between i&es an ob'ecti&e of  JE>.44. Gow% let’s o to the three point fiure chart/ on chart eihteen. The lon term count is from point/ = to point/ A. This is 1< s*uares multiplied b!/ < or <2 points for a lon term ob'ecti&e of JE=.44 to J24.44 and taken from the J=E.44 le&el i&es an ob'ecti&e of JEA.44.  Gow% o back to chart se&enteen. -ollowin point/ 13 the stock mo&ed sidewa!s  between the J@>.44 and JA1.44 le&el. To reach% sa!% JE>.44% it would ha&e to build a 1> to 34  point count and the closer it came to the end of buildin that count% the more likel! it would be to ha&e a sprin% a “backup to the ede of the creek” or some other action which would indicate that it is read! to bein the ne$t dri&e up. In actual practice !ou can anticipate this t!pe of  action. The count is from the last point of support at point/ 1< o&er to point/ 1=% a count of 1@  points for an ob'ecti&e of JE1.44 to JE3.44. The stock went to JE1.44 at point/ 1>. It mo&ed sidewa!s and built another minor area of reaccumulation from point/ 1@ to point/ 1A. The count from point/ 1A to point/ 1@ is 14 points and as that count formed and was completed !ou could ha&e anticipated that an action would occur on the &ertical line chart indicatin that it is oin to resume the upward trend. Incidentall!% the count from point/ 1< to point/ 1E is &alid and confirms the hiher count on the one and three point fiure/ charts. These counts were all fulfilled in the area at point/ 12. The stock went throuh distribution subse*uentl!. To summari0e% before takin action !ou must ha&e the answers to three *uestions; 1/ "hat is the probable direction of the comin mo&eF 3/ "hen is it likel! to beinF
8?

BASIC LECTURE NUMBER NINE SPECULATIN TAKIN A POSITION

The main sub'ect of this Basic/ Lecture is the art of speculation% the takin of a speculati&e position. The purpose of the Basic/ Lecture is to show !ou techni*ues used in establishin a speculati&e position. "e will re&iew the basic approach% discuss enterin and  placin orders to bu! and sell% protectin !our capital with stop orders and di&ersification%  practice tradin and some troublesome market action. -irst of all% let us re&iew two approaches which !ou ma! use. The first method in&ol&es three steps. -irst% determine the trend of the eneral market throuh an anal!sis of a market inde$ such as the "!ckoff "a&e Inde$. Secondl!% classif! the indi&idual stocks as to comparati&e strenth and weakness. Thirdl!% anal!0e those indi&idual stocks and the roups which are likel! to lead the market in the ne$t trend in order/ to determine% in fact% whether or not the! are desirable risks and are likel! to mo&e with the market. The second method is the same% but adds an important dimension. It pro&ides additional data which helps to more factuall! determine the market trend as well as sereatin indi&idual stocks into &arious classifications. This method is to anal!0e a lare number of stocks% determine their technical position and record their positions on the position sheet% then calculate the summar! totals to determine the probable trend of the eneral market as indicated b! the indi&idual stocks. Those totals should enable one to better determine the position and trend of  the market+ whether it is in an up trend% a down trend or in a neutral position. Then% suitable stocks ma! be selected from those on the position sheet. This method is co&ered in the written te$t. Should !ou ha&e sufficient time a&ailable% we suest that !ou do use the position sheet to aid in selectin those stocks to bu! and sell% as a check on the first/ method. :sin the position sheet we anal!0e the indi&idual stocks to better determine the trend of the market. In the first method we anal!0e from the eneral market to the indi&idual stocks% not takin this intermediate step. The first method is the one upon which/ we will concentrate now% howe&er% both should be learned% as the use of the position sheet i&es an e$cellent check on the approach discussed in this Basic Lecture. Most "!ckoff students determine the trend of the market usin our market inde$% the "!ckoff "a&e% for a &er! simple reason. "e want to o with the market and not fiht the influence of the eneral market. It is difficult for most stocks to ha&e a ma'or up mo&e in a bear  market. 8ou want the help of the eneral market in !our campain. #ompare the indi&idual stocks with the "!ckoff "a&e in order/ to determine which stocks are ob&iousl! stroner than the "a&e% ob&iousl! weaker than the "a&e or are mo&in at about the same speed as the "a&e. Ma+e a /#!*al co%)a"#!on *!#ng )"e/#o*! !*))o" and !*))l$ )o#n!& To illustrate this concept we will use chart one% the "!ckoff "a&e% as our inde$. "e will make the assumption that we ha&e anal!0ed the "a&e and concluded that/ the "a&e at point/ number < is in a down trend% rall!in within the down trend. The ne$t important mo&e is downward and it should bein soon. Therefore% we are oin to look for stocks which are weaker than the "!ckoff "a&e% eliminatin from consideration those which are stroner than the "a&e or mo&in about the same speed as the "a&e. Our search is for indi&idual stocks which ha&e one down more than the "!ckoff "a&e from point/ 1 to point/ 3 and are weaker than the "a&e on the rall! from point/ 3 to point/ <. Gow compare these points on chart two of  “Bethlehem Steel.” 5ctuall! the hih was reached at point/ 1a and the mo&e down to point/ 3 held stroner than the "a&e. There was less price weakness and it was holdin at a hiher   bottom compared to point =. "e could eliminate it from consideration on this basis alone% howe&er% look at the mo&e from point/ 3 to point/ < on “Bethlehem Steel.” It is pronouncedl! stroner than the "a&e% therefore this stock is eliminated from consideration as a possible short sale candidate. Gow% compare chart three% “Gorthwest Industries%” at these points. “Gorthwest...” had been in a down trend and on the mo&e from point/ 1 to point/ 3 it was considerabl! weaker  than the "a&e. Then% from point/ 3 to point/ < showed &er! earl! strenth and then lost that strenth. Therefore% it is a candidate for a possible short sale. "e would la! this aside for later  complete anal!sis. #hart four% “?eneral 5merican Transportation%” is pronouncedl! weaker than

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the "!ckoff "a&e from point/ 1 to point/ 3 and is aain weaker than the "a&e from point/ 3 to point/ <. It is a possible candidate which then must be anal!0ed. #hart fi&e of “(one!well” is mo&in rouhl! about the same speed or in the same eneral pattern as the "a&e. It is perhaps somewhat weaker than the "a&e on the mo&e down from point/ 1 to point/ 3 and it is somewhat stroner than the "a&e from point/ 3 to point/ <% therefore% since it is not  pronouncedl! weaker than the "a&e% we eliminate it from consideration.  Gow% what do we ha&eF Our two candidates are “Gorthwest Industries” and “?eneral 5merican Transportation.” These must then be anal!0ed to determine if in fact the! are read! to  be sold short. "e are not sa!in in this lecture that those stocks should ha&e been sold short riht at this point. The! must be anal!0ed thorouhl! to determine if the! were either in distribution or in a down trend. 5 short position should not be taken until a/ stock shows b! its own action that/ it is oin to o down and soon and that the profit  risk ratio is fa&orable. 5s Mr. "!ckoff e$pressed it; “It should be on the sprin board.” "e ha&e since refined and re/defined our techni*ues of dianosin and takin a position on the sprinboard. It is important to reconi0e that there is no one best or riht wa! or e$act wa! to establish a speculati&e position. ,ach person must learn the principles% stud! indi&idual charts% anal!0e them to the best of his abilit! and determine the answers to the followin *uestions; 1/ "hich direction is a stock oin to mo&eF 3/ (ow soon is it likel! to mo&eF  1. The minimum ratio

8-

acceptable is appro$imatel! <  1. Ge&er put !ourself in a position where !our profit  risk ratio is as low as 3  1 or 1  1. There is no such thin as a sure thin in the market and no matter how ood the situation looks% do not o in if the ratio is less than <  1. Our purpose is not to ha&e !ou learn how to scalp a couple of points here and there in the market. That re*uires% essentiall!% a tape readerPs techni*ue and operational setup. 8our purpose and our purpose is to obtain lare  profits with small risk. It is usuall! best to spread !our capital o&er se&eral stocks rather than puttin !our capital into onl! one situation. "h!F Got all stocks will participate well in each si0able trend mo&ement in the "!ckoff "a&e or in/ the market. Some will actuall! o aainst the trend. Should all of !our capital be in one stock which does not mo&e with the market or shows !ou a loss% !ou will miss participatin in that particular mo&e with an attendant loss of confidence% a loss of opportunit!% perhaps cash losses and much frustration. If !ou are out of tune in one mo&e% !ou are much more likel! to miss the ne$t mo&e or to mispla! it; Thus% spread !our  mone! o&er se&eral situations.  Gow% there are se&eral wa!s of doin this. 5 number of !ears ao Mr. ,&ans de&ised the 1D<% 1D<% 1D< rule to limit the possibilit! of all of a personPs capital bein committed to one stock  or at one point% so the capital is committed in staes. The 1D<% 1D<% 1D< rule pro&ides that in establishin speculati&e positions% !ou di&ide !our capital into thirds and commit it 1D< at a time. "e suest that/ !ou modif! this to suit !our own purposes. 8ou ma! make a 1D=% 1D=% 1D=% 1D= rule or di&ide !our capital into si$ths or tenths. To illustrate this+ suppose !ou are able to locate three ood stocks under accumulation; 8ou ha&e anal!0ed them and now are faced with the problem of establishin a speculati&e  position in them. 8ou di&ide !our mone! into si$ths% intendin to put two of those units into each stock which we will call stocks 5% B and #. 5ssume !our capital is J@444. 8ou are oin to put J1444 into each stock. Stock 5 has a number three sprin% so !ou bu! J1444 worth. Stock B has and number two sprin with a secondar! test and !ou bu! J1444 worth of it. Stock  # does not o throuh a sprin or shakeout% but instead is on the “backup to the ede of the creek” and so !ou bu! J1444 of stock #. 8ou are now usin >4 percent of !our capital. 5s the situation de&elops stock 5 and B ha&e/ a “crossin of the creek” and a “backup to the ede of  the creek” and !ou bu! J1444 of each. Then stock # has mo&ed up and reacts and !ou bu! J1444 on this correction. Onl! now is !our capital full! committed in the market. 5lso% the second lot of each stock has not been bouht until the first has shown !ou a profit. In actual practice% !ou should take this basic idea and modif! it to !our own use. 9eep in mind that it is well to ha&e a reser&e of capital and not be full! committed in the market at an! one time. 8ou ma! di&ide !our capital into tenths and/ hold 3% < or = of those tenths in reser&e much of the time. To be full! committed puts a considerable strain on !our emotions. 8ou should operate loicall! on a step b! step basis and not o for broke. Once !ou ha&e decided what stocks to bu! or sell short !ou must then enter the orders with !our broker so that/ the! ma! be e$ecuted. There are two main t!pes of orders% a market order and a limit order. 5 market order is an order to bu! or sell at the best price a&ailable at the time the order is recei&ed at the appropriate tradin post on the floor of the e$chane. It is usuall! e$ecuted within seconds or a few minutes of bein placed with a broker. In relati&el! inacti&e stocks the e$ecution ma! take a bit loner% but the specialist who e$ecutes the order does not ha&e to wait for a specific price and will simpl! obtain the best price that he can. Most orders should be entered at the market as market orders. The other t!pe of order is a limit order  which is an order to bu! or sell onl! at a specified price or one more fa&orable than the specified  price. Often these orders are placed da!s% weeks and months prior to e$ecution so that should the stock mo&e to a specific price% the order is e$ecuted. "e suest that/ !ou practice with  both the market order and the limit order+ both ha&e their place and can be used to !our  ad&antae. The limit order is especiall! useful in takin a position on a normal correction within a trend. 8ou determine that the stock is ha&in a normal correction+ determine the halfwa! point and place a limit order. To illustrate this% assume that a stock is in an up trend and that the last mo&e up was from J>4.44 to J>E.44 per share and it is now reactin to J>@.44 with the suppl! dr!in up on the reaction. 8ou can determine the e$act halfwa! point as bein J>=.44 per share and place a limit order at% for instance% J>=.>4 and then watch the stock as it reacts. Should the stock bein to show too much suppl! !ou can cancel !our order. Should e&er!thin continue normall!/ howe&er% !ou can let this order be filled. Then% follow throuh as the situation de&elops. Limit orders ma! be used to bein and to/ close out market positions usin other market principles such as sprins% upthrusts% clima$es and the “backup to the ede of the creek.” "e would

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suest that !ou practice with both t!pes of order. 8ou ma! find that !ou prefer one rather than the other or that !ou will ad'ust the t!pe of order used with !our normal method of operatin in the market and with the situation currentl! pre&ailin. The concepts of the profit  risk ratio% the 1D<% 1D<% 1D< rule% the process of enterin orders and the placement of stop orders are the same for  orders to bu! lon positions/ and orders to sell short short positions/. 5t the time the oriinal order to bu! is e$ecuted !ou should place a stop order to protect !our capital. 5 stop order is an order to bu! or sell% which becomes a market order when/ the  price of the stock reaches or sells throuh the specified price. Gow% what does that meanF Suppose !ou enter an order to bu! at >=1D3 and !ou enter a sell stop order at the same time at =2 ADE. Should the stock decline to or throuh =2ADE% !our stop order to sell would immediatel! become a market order and would be sold in its turn. The basic rule on stop orders is to alwa$! *!e a !o) o"de". :se it to protect !our capital and to protect profits. There are times when stop orders are prohibited on the e$chane. #urrentl!% on the 5merican Stock ,$chane% all stop orders for one hundred shares or more are prohibited. These are stop orders which would immediatel! become market orders when the stop price is reached. Stop limit orders ma! be used. (owe&er% the stock ma! o throuh !our stop limit price and !our order ma! not be e$ecuted. "e suest that !ou check with !our broker when !ou establish a position in order/ to determine whether or not/ a proper stop order ma! be used to protect !our capital. So) o"de"! !(o*ld alwa$! .e )laced a (e !a%e #%e a! (e o"de" o .*$ o" !ell (e !ec*"#$& If the stop orders are prohibited% we suest that !ou use some form of the followin plan. 5fter !ou ha&e placed the order with !our broker and established !our position% determine e$actl! where a stop order should be placed. Should that stop price be reached or  e$ceeded% immediatel! call up !our broker and issue the order to take !ou out of the market. There will be those who are listenin to this who will sa! that the! cannot rel! on a mental stop. The! will sa! that/ mental stops are one of the thins in the market which sound/ ood in theor! and all too often pro&e disastrous in practice. The trouble all to often is that/ the student% e&en an e$perienced student% will mo&e his mental stop or reall! foret about it. ?raduall!% he becomes a &ictim of his hopes and his dreams and his fears and reater and reater  losses occur/ until finall! financial disaster o&ertakes him. If he is one sub'ect to this weakness% he must de&elop another plan% such as ha&in his broker disciplined to call him when a stop le&el is &iolated. To illustrate the use of stop orders% please% turn to chart si$ which is a theoretical model. The stock is in a tradin rane from point/ 1 to point/ 3 and then has a sprin at point/ < and !ou bu! on the sprin or the secondar! test in the area circled at <. Gow% there ma! not be a  pre&ious area of support under which !ou can loicall! put a stop% so% !ou ha&e to put in a floatin stop order% one that is out in open territor!% sa!% of 3 or < points. )erhaps !ou bu! at 3>1D3 and we will call it unit 1 and put a stop order at 33 ADE. It is enerall! better to place a stop order   'ust below the full dollar fiure. -or short sales place a stop 'ust abo&e the full dollar fiure; So% !ou ha&e a stop at 33ADE& Yo* do no %o/e (a !o) o a (#g(e" le/el *n#l (e !oc+ (a! %o/ed *), "eaced and gone a.o/e (e )"#o" "e!#!ance a"ea and #nd#caed (a # #! go#ng o con#n*e on go#ng NO0& "hat does this meanF The stock oes from point/ < to point/ = and reacts to point/ > which is the “back up to the ede of the creek.” 8ou bu! a second unit% sa!% at 3E1D= and !ou place a stop order on that unit too% at% sa!% 3> >DE at B. One techni*ue is not to mo&e the stop on unit 1 until the stock oes abo&e 321D3 at # and indicates that it is oin to continue on mo&in up. 5t that point !ou can mo&e the stop on the first unit up to the same le&el as B at 3>>DE. -ollowin the same techni*ue of mo&in !our stops with the unfoldin of the market% !ou lea&e the stops on both units at that point until the stock oes up to point/ @% reacts to point/ A and then rallies throuh the @ le&el at point/ E and indicates that it is oin to continue on mo&in up GO". Then !ou mo&e the stops/ on both units to under the reaction low at point/ A% sa! at 3EADE at 7. "e will assume that ne$t a bu!in clima$ occurred at point/ 2 indicatin that the stock was oin to stop ad&ancin for *uite a lon time. Should it do this it is better practice to simpl! sell out both units and cancel the stop orders. Later on% if the stock oes throuh re accumulation% !ou ma! reestablish !our position. So% !ou sell out completel! and cancel !our  stop orders.  Gow assume that the stock oes throuh reaccumulation from point/ 2 to point/ 14. Then% at point/ 14 the stock is on a sprinboard and has a sprin or a shakeout. So% !ou bu! in the area circled% sa!% at J<=.44 per share and put in a two or three point stop at <4 ADE at ,. Lea&e it there until the stock oes up from point/ 14 to point/ 11% backs off to point/ 13 and oes throuh the hih reached at point/ 11% so as to indicate that it is oin to continue oin up  GO". This is in the area marked/ 1<. 5s soon as it has done that% then !ou ma! raise !our stop

86

to < and oes abo&e the hih reached at point/ 1= in the area marked/ 1@. 5t that point !ou ma! raise the stop to appro$imatel! . This  process should be followed until finall! the position is closed out% preferabl! on a preliminar! suppl! or the bu!in clima$ as ob'ecti&es are reached  Gow% let’s o back to point 14 on this chart. 5ssume that !ou ha&e bouht in this area at J<=.44% puttin in a stop at <4ADE. The stock continues to o down to <<+ to <31D3 then/ to <31DE and continues on down. It is !our dut! to et out before that stop is reached if at all possible. The purpose of usin a stop order is to protect us in case of disaster or chaos or in case of a wide open break such as in “Sanders 5ssociates%” chart si$ of Basic Lecture Se&en on the drop from point/ 2 to point/ 14. Should this t!pe of action occur !ou are out automaticall! with the bulk  of !our capital. #hart se&en co&ers most of the chart action of chart ten% Basic Lecture Two. "e will use man! of the same numbers% prices for purchases and the stop orders as were on that chart. Our   purpose here is to discuss the placement and the chanin of the stop orders. 5ssume that we had bouht in the area of point/ 1. 5 stop order could ha&e been entered at appro$imatel! AADE. "e would not mo&e that stop up until the stock had mo&ed up% reacted and had one abo&e the  prior resistance and indicated that it was oin to continue upward and continue mo&in GO". On the reaction to point/ = a purchase was made at 1A% reacts to point/ @ and fills the order at 3< and reacts and we place our ne$t order at =A
87

There is no e$act percentae or number of points which !ou should use in determinin how far awa! the stop should be from the purchase or sale price. 8ou must ad'ust !our stop order accordin to the purpose of !our commitment and the amount of risk !ou are willin to assume. :suall! the difference between the commitment price and the stop order price will rane widel!. 0(ene/e" $o* c"owd a !o) o"de" $o* w#ll lea/e # /*lne"a.le o 9.e#ng: ca*g(& Yo* !(o*ld ge o* on $o*" +nowledge and no on (e eec*#on of $o*" !o)& "e now raise the stops on the pre&ious commitments to at area/ 3>a% we raise the stops+ we raise the stops on all trades to ==ADE  which is 'ust below the pre&ious support at point/ number 3@. 5t point/ number 3A the stock has narrowin spread and hih &olume. This is e&idence of stron suppl! comin in to o&ercome the demand. 5 fiure chart would show an ob'ecti&e of >2 to @<+ we ha&e hit the ob'ecti&e. 5s it would be loical to e$pect a lon hesitation or a lare correction to at least the halfwa! point of the mo&e from point/ number 33 to point/ number 3A% we sell out. Man! people are &er! e$cellent bu!ers% but &er! poor sellers. It is important to be &ersatile at both takin a position and ettin out of the position. It will do !ou little ood in the market to establish an e$cellent position% see it mo&e in !our fa&or i&in !ou a si0able profit and then% watch the profit melt awa!. 5lso% !ou should not pla! for the last 1DEth  of a point. To do so usuall! results in not ettin out at all or ettin out finall! in e$asperation at much lower  le&els. 5im to et out of/ a lon position in the ob'ecti&e area as the important trend mo&ement is endin. :suall! this will be on a bu!in clima$. To tr! to et out of one position and to o short in either the same stock or a different stock on the same da! is &er! difficult to do. "h!F In the first place to do so re*uires a shiftin of mental ears and usuall! !our attention is di&ided. It is usuall! better to concentrate on the ettin out of an established lon position first and then et set to o short. 5lso% if the market is oin throuh si0able distribution% aim to et out of pre&iousl! established lon positions in the left hand portion of the distribution area and to o short in the riht hand side of that area. It is also important to reconi0e that in most cases !ou will not be sellin out on a lon position and oin short immediatel! in the same stock. "h!F 8ou should be lon a stock that is  pronouncedl! stroner than the market and !ou should aim to o short a stock which is weaker  than the market. It usuall! takes considerable time for an indi&idual stock to shift from this  pronounced strenth to pronounced weakness and to build a si0able cause or count. "e will use chart eiht% the same picture as chart ten of Basic Lecture Se&en% as our  &ehicle for discussin stop orders in a down mo&e. 5fter the mo&e to point/ > had been identified as a probable sin of weakness a limit order could ha&e been entered to sell short around =11D3% which is around the halfwa! point% with a stop abo&e point/ = at =@1DE. On the mo&e to point/ Aa that order would ha&e been e$ecuted. 5nother short sale could ha&e been made at @a with a similar stop order. "hen the stock reached point/ 1A% these stop orders could ha&e been lowered to =31DE% 'ust abo&e point/ 1E and as the stock continued on down at 12% aain% the stop orders could ha&e been lowered to about a point abo&e point/ 34% sa! at DE. )oint/ 31 showed ood demand and as the stock rallied up toward the stop price% we should prepare to et out around the J<=.44 le&el at point/ 33. In the redistribution area the sin of weakness was point/ 1= and the last point of suppl! at point/ 1@. 5ssume a short sale is made on the rall! to the last point of suppl! at point/ 1@ at number 3< around J at/ about
88

capital. "e used to call practice tradin paper tradin because for man! students who had &er! small amounts of capital it meant tradin with fictitious mone!% monopol! mone! or on paper% howe&er% that was still deadl! serious% practice tradin. The practice tradin must be planned and conducted as !ou would a cash transaction with mone! on the line. If at all possible% !ou should do !our practice tradin with 14 shares% 3> shares% perhaps e&en 144 shares% but under no circumstances should !ou read the te$t% listen to the lectures and immediatel! bein to operate in the market in order to obtain profits with the  bulk of !our capital. Her! earl! !ou will be able to operate defensi&el! to protect !our capital from loss throuh placement of stop orders and b! ettin out of positions when !ou see action endanerin !our holdins. (owe&er% do not operate in the market to obtain profits until !ou ha&e thorouhl! prepared !ourself. Most students are not read! to cash trade until at least si$ of  the last ten practice trades are profitable. 8ou should test !our understandin of the application of the principles thorouhl! first and !ou should reard the practice tradin as the preparation for  cash tradin. If the practice tradin does not o well% do not simpl! walk awa! from it and start o&er; 5ssess what has happened; 7etermine what !ou should do ne$t and operate accordinl!. "hen !ou need assistance call upon the Stock Market Institute for aid; That is what we are here for. "e want to help !ou to be successful. Much of !our rowth and knowlede will come about throuh practice tradin and e&en after !ou are well into cash tradin !ou should still continue to  practice trade. 7o not e&er limit !our rowth in knowlede b! the amount of mone! !ou happen to ha&e at an! one time. If !ou are oin to operate with fictitious mone!% bein practicin with fi&e to ten times the amount of !our present capital so that !ou can et used to operatin with that amount of capital. 7o not attempt to short circuit the practice phase and then rush into cash tradin simpl!  because !ou are afraid !ou are oin to lose possible profits or opportunities. It is too eas! to lose mone! if !ou are wron and &er! difficult to ain it back once the capital is lost. 8ou must alwa!s act so as to protect !our capital; "ithout it !ou are out of the market. One e$cellent method of practice tradin is to bein to concentrate on learnin one  particular principle such as the sprin or “backup to the ede of the creek.” Learn it thorouhl!C 7o &er! e$tensi&e practice tradin with that particular principle and then !ou can bein operatin in the market with cash with that specific principle whene&er the opportunit! arises. ?raduall! add other principles to the thorouhl! tested tools which !ou can use. Then% once the! ha&e been mastered% make sure that the ease and the fine abilit! which !ou ha&e ac*uired in their use does not slip awa!. 7o this b! practicin% practicin and more practicin. It is often 'ust as important to know what situations to a&oid and are likel! to cause trouble as it is to know the situations in which to take a position. If !ou et in wron it will lead to loss of mone!% loss of time% loss of opportunit! and usuall! considerable emotional turmoil. -re*uentl! a loss in one situation which is not remedied rather promptl! leads to losses in others. 5 student ma! ha&e profits in three stocks and a loss in one. )ast e$perience has shown that he will concentrate his attention% efforts and time on the one in which he has the loss. Her! often he will inore daner sinals in those stocks in which he has profits. -or some specific e$amples+ w(en a !oc+ #! #n a "ad#ng "ange and "all#e! o o" ("o*g( (e o) of (e "ange and (en enco*ne"! (ea/$, %a!!#/e, !*!a#ned /ol*%e o/e" fo*", f#/e o" !# o" %o"e da$! w#( l#le )"og"e!!, (#! #! e/#dence of (ea/$, !*!a#ned !ell#ng .$ la"ge #ne"e!! and (e #nfe"ence #! (a %an$ of (e longe" e"% (olde"! #n (#! !#*a#on a"e ge#ng o*& "h!F :suall! because the! see that the! are unable to do what the! oriinall! intended to do. :suall! this hea&!% sustained sellin will stop the mo&e for a lon time% an!where from se&eral weeks to se&eral months or more. -re*uentl! it will force the stock back  towards the bottom of the tradin rane as a minimum. 5n e$ample of this t!pe of sellin is in chart nine% “Twentieth #entur! -o$.” The stock  had been in a lon tradin rane and had repeatedl! met suppl! at points/ 1% 3% <% =% > and @ and then at point/ A it/ bean to mo&e up with hea&! sustained &olume until finall! the stock went abo&e the suppl! area for an upthrust. -or how man! da!s did this hea&! suppl! come inF 8ou count them. There were eiht da!s as it mo&ed up. T(#! a%o*n of !*))l$ can onl$ co%e f"o% )eo)le w(o (a/e la"ge )o!##on! #n (e !oc+ and a"e now ge#ng o*& -or this stock to continue to mo&e up at point/ E in the area marked as 2% it had to keep oin and oin and oin and it did not do so. It went into new hih round% had too much suppl! and turned downward. A! # "eaced o 9)o#n: ?@ (e"e wa! (ea/$ /ol*%e on (e down!#de, f*"(e" e/#dence of (#! con#n*ed %a!!#/e !ell#ng& The rall! to point/ 11 had a comparati&e lack of 

8;

demand compared to the dri&e up to point/ A as shown b! the narrowin of the spread and the decreased &olume and so the stock went on down. ,&entuall! it broke throuh all of the supports in the tradin rane. Turn to chart ten% “-ederal 6esources.” It had met suppl! at &arious points includin points/ 1 and 3 and finall! at point/ < went abo&e them. 5t point/ < the narrowin of the spread and the hea&!% sustained &olume for 1% 3% <% = da!s indicated hea&! sellin% includin sellin on the downside. Aga#n, (#! (ea/$, !*!a#ned !ell#ng fo" al%o! a wee+ o" a wee+ and a (alf, )e"(a)! e/en a! long a! wo wee+!, can onl$ co%e f"o% la"ge #ne"e!! w(o a"e ge#ng o* of .#g )o!##on! #n (e !oc+& The usual effect of this t!pe of action is that it will  pre&ent the stock from lea&in the tradin rane for a substantial mo&e for *uite a lon time% an!where from a few weeks to se&eral months or loner. The third e$ample of this t!pe of action is “Brunswick%” chart ele&en. “Brunswick” mo&ed up in earl! 12@A to the bu!in clima$ at point/ 1. There was a secondar! test at point/ 3 and then at point/ < the stock had &er! hea&! &olume o&er four da!s. T(#! #! (ea/$ concen"aed !ell#ng& The effect of that sellin was that the stock had an e$tensi&e reaction and mo&ed sidewa!s for si$ months. Then at point/ = it aain mo&ed up abo&e the pre&ious suppl! le&el to J1A.>4. (ea&! sellin came in o&er a two week period. The effect of that sellin was that it took a little o&er a !ear before the stock reached J31.44 per share. Suppl! aain came in hea&il! at point/ >. It should be reconi0ed that this t!pe of condition can occur in lon rane accumulation or lon term accumulation. (owe&er% (e #%%ed#ae effec of !*c( (ea/$ concen"aed !ell#ng *!*all$ #! o !o) (e %o/e and o c"eae a !#dewa$! %o/e%en fo" !e/e"al wee+! o !e/e"al o" %o"e %on(! and ofen a "a(e" !#a.le "eac#on&  Gow turn to chart twel&e of “Spartans.” The stock had been in a lon tradin rane as shown b! the fiure chart and at point/ 1 had wide spread and hea&! &olume. This t!pe of  action in a supposed ma'or accumulation area is not ood. "h!F To understand wh! we must o back to the process whereb! a stock is raduall! mo&ed up. It is not that the professionals et toether and sa!% “"ell% we’ll bu! in here in the 34’s and mo&e it up to >4.” Go% it is that  professional people understand and dianose that the stock has the characteristics to mo&e up and therefore the! take a position% a lare position% perhaps se&eral hundred thousands or in some cases more than a million shares. Gow% the! cannot bu! this stock all in one da!% therefore% the!  bu! o&er man! da!s% weeks% months and sometimes o&er se&eral !ears. The! ma! bu! throuh market orders or b! placin bids ahead of time% fre*uentl! on a down scale so that if the market reacts to a certain le&el the! can bu!. Let us illustrate the mechanics of this. On chart twel&e this stock went up from point/ 3% met support in the area of points/ <% =% >% and @. Bids to bu! stock would be placed below the supports at point/ @. -or e$ample% in order to bu! a couple of thousand shares at 3A 1DE% another  similar order would be placed/% sa!% at 3@ 4%444 shares at around [email protected] per share or   perhaps se&eral orders. 8ou et the basic idea of bu!in on a scale down. The same process is used in bu!in on a scale up. T(*!, #n a good, !"ong !#*a#on (e"e #! *!*all$ a concen"a#on of o"de"! *nde"nea( (e %a"+e o" )eo)le !and#ng on (e !#del#ne! w#ll#ng o !e) #n a a %o%en! no#ce and .*$ (e !oc+ on (e "eac#on!& Gow% what happens at point/ 1F The stock beins to o down and there is no support. It cracks another 1D3 point and still/ no support+ down another point and it oes down% down and down. The best t!pe of  situation will not ha&e this t!pe of air pocket.  Gow a word of caution about this. This will ha&e its effect% howe&er% the presence of this action does not mean that !ou can ne&er bu! into a situation where this t!pe of action occurs. 8ou must 'ude the total situation and especiall! the subse*uent action. 7espite this% the entire area could be accumulation. This is somethin to be cautious about. Should the subse*uent rall!  be stron% that can repair much of the damae. B! all means do not han all of the law on the  profits on this one action. It is% howe&er% e&idence that the ood% stron demand that should ha&e  been there was not there and the *uestion is wh! and what is the future effect on the stock. In this particular case the stock rallied to point/ A. The spread and &olume were decreased compared to the pre&ious up mo&e and the dri&e down to point/ 1+ e&idence that the suppl! was/ much stroner than the demand. 5s a result% the stock went on down toward the bottom of  the tradin rane. 5nother e$ample of this is “:.S. Smeltin%” chart thirteen at point/ 1. The hea&! &olume and wide spread on the downside was not ood. I #! e/#dence (a (e !oc+ wa! no .e#ng !*))o"ed a! # (ad .een on (e "eac#on, ."ac+eed a 9)o#n!: 2, -, and 1& )rior to

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this the stock had been eased down in the reaction and here it cracked wide open. "h!F 5nd what is the future effectF 5nother e$ample of this is at point/ > 8ou can see the effect of the relati&el! weaker rallies at points/ @ and A. The stock declined to =41D=. #hart fourteen of “?eneral Instruments%” is ne$t. The stock had been mo&in up and then at point/ 1 it broke with &er! wide spread and hea&! &olume. 5ain% this is hea&! suppl! on the down side with much price weakness. #o&er up all of the action to the riht of point/ 1. o" (a !oc+ o "e%a#n !"ong # !(o*ld "all$ f"o% (e"e and (a/e a !econda"$ e! of (e low of  9)o#n: ?& In o(e" wo"d!, (#! ac#on co*ld .e a !(a+eo* and a !econda"$ e! o" # co*ld .e (e !a" of a !#a.le down %o/e= (a #! (e #!!*e& Gow% how do !ou operate with this situationF If !ou are waitin on the sidelines to take a position% $o* do no .*$ *n#l # "all#e! and (en 9/ol*%e: d"#e! *) on (e !econda"$ e! of (#! a"ea& So% !ou do not immediatel! rush in and bu!. 8ou attempt to bu! on the secondar! test. If !ou are alread! in the situation% holdin a lon position% !ou ha&e a different problem. It is &er! important to know whether or  not there is a count in a hiher le&el such as at point/ 3 on the fiure chart for a much lower  ob'ecti&e% or in the immediate le&el% such as point/ <. If the immediate count is not fulfilled% !ou know that it is possible or probable that that count will be reached and that this is likel! to be the beinnin of a further mo&e. An o"d#na"$ !(a+eo* w#( an *)wa"d "end *!*all$ doe! no (a/e %*c( co*n #n f"on of #& The stock simpl! oes up% breaks or beins to react and then breaks. So% if !ou can dianose that it has a possible or probable lower ob'ecti&e or is not a shakeout% usuall! the best thin to do is simpl! et out of the lon position immediatel!% &irtuall! reardless of price. There are instances in which the stock will rall!% but there are too man! times that it continues on down such as in this case.  Gow% let’s follow this throuh. "hat happens if !ou don’t et outF The stock oes on down to point/ = and rallies% but this is a weak rall!% nowhere near the halfwa! area and so% there is no reall! ood place to et out on the rall! to point/ >. The bi problem in not li*uidatin riht awa! is that !ou will hope and hope and hope and hope until finall! the situation becomes completel! hopeless and then !ou finall! sell. 5lriht% the stock oes down to point/ @ and then rallies% but the rall! to point/ A is stron. Look how it pops up% almost >  points in two da!s. This is strenth and !ou are *uite liable to sa! “Oh% I’m oin to han on and see if I can et out in the J>=.44% J>@.44% J>A.44 area%” bracketed at <. So% !ou are *uite likel! not to et out. "atch what happens. The stock oes on down% down% down and down and down and somewhere !ou are *uite likel! to sell% probabl! where the bad news beins to come out in the area circled at/ E or 2 or perhaps later. Or% !ou ma! hold for man! !ears before the stock  finall! ets back up into these hiher prices.  Gow% let’s o back to point/ 1. "hat is the relati&e risk of ettin out as the stock  reached >11D=F "ell% if it rallies% where could !ou e$pect the rall! to endF "here would an! rall! meet suppl!F One place is in the former support area at point/ 14 in the J><.44% J>=.44 le&el+ this is the ice; Or% perhaps clear up to J>>.44 per/ share in the middle of the rane. So% !ou could e$pect a 3 to = point rall! if !ou han on. Gow% what is the risk of lossF 8ou fiure it out  please. Stop listenin and fiure it out. )lease% do not 'ust pass this o&er. In actual practice the downside risk ma! be &er! uncertain and difficult to determine. This is all the more reason to consider ettin out and to/ wait until the situation clarifies. Yo*" f#"! d*$ #! o )"oec $o*" ca)#al& Gow% the count in area number two is <1 points% subtracted from @< or >2 i&in an ob'ecti&e of <3 to 3E% so at point/ number 1 !ou could e$pect a 3 to = point rall!% if it rallied and should it decline it would be loical to o down another 34 or more points. In pla!in for the rall!% the risk is not oodC "hat should !ou do about itF Simpl! et out reardless of price. Let’s summari0e now. In/ Basic Lecture Gine we ha&e passed on to !ou some ideas% concepts and principles desined to help !ou to establish a speculati&e position. "e ha&e re&iewed the basic process% discussed the placement of orders to bu! and sell and the protection of !our capital throuh a fa&orable profit  risk ratio% stop orders and the 1D<% 1D<% 1D<% rule. "e ha&e outlined some market phenomena which can cause !ou some difficulties. These are mainl! the hea&!% sustained suppl! which can come in to stop a mo&e and the lack of demand at the  point where demand should be present if a situation is to remain fa&orable for !ou. It is important to remember that the establishment of a speculati&e position is an art and not a completel! mathematicall! e$act science. It is an art and like in an! art some students and  practitioners will be outstandin% some will do well and some will essentiall! fail. 8ou will find that the reat artists in paintin% music% literature or in an! other field must constantl! practice and practice and practice to sharpen their skills. 8ou must do that too. 8ou must practice and  practice and practice some more+ dilientl! and s!stematicall!. 5lwa!s continue to practiceC

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BASIC LECTURE NUMBER TEN 0YCKO 0AFE AND OPTIMISM > PESSIMISM INDE

The main sub'ects/ of Basic Lecture Ten are/ the "!ckoff "a&e Inde$ and the Optimism  )essimism Inde$. The purpose of this lecture is to discuss with !ou the oriin% construction and the use of the "!ckoff "a&e Inde$+ to introduce the Optimism  )essimism Inde$ to !ou and to discuss the coordination of the "!ckoff "a&e and the Optimism  )essimism Inde$es. The principles reardin the anal!sis of a &ertical chart and a fiure chart discussed in/ prior Basic Lectures also appl! to an anal!sis of the &ertical chart and the/ fiure chart of the "!ckoff "a&e. 5s these ha&e alread! been discussed rather e$tensi&el!% the! will not be discussed here in detail. Our main concern will be with the intrada! wa&es% the co ordination of the intrada! wa&es with the dail! &ertical chart of the "!ckoff/ "a&e and how !ou ma! coordinate the charts which are used in the anal!sis of the "!ckoff "a&e and the Optimism  )essimism Inde$. In .eg#nn#ng an$ anal$!#! we f#"! dee"%#ne (e "end of (e %a"+e& "e use the "!ckoff "a&e Inde$ for this purpose. "e then compare the indi&idual stock with the "!ckoff  "a&e to determine which stocks are stroner or weaker than the "a&e and then anal!0e those indi&idual stocks which are likel! to lead the "a&e in its ne$t mo&ement. "e bein our anal!sis with the "!ckoff "a&e to determine the trend of the "a&e. The "!ckoff "a&e Inde$ is desined to show the line of least resistance or the trend of stocks enerall!. Mr. "!ckoff points out that the market mo&es to hiher or lower le&els b! a series of sures% much like an incomin or outoin tide with successi&e wa&es hiher or lower than the precedin wa&es. 5ll stock  market mo&ements whether the! are lare or small are made up of bu!in and sellin wa&es. These wa&es build upward and build downward% but all lare market mo&ements bein with the &er! smallest wa&es. The "!ckoff "a&e Inde$ is desined to show these small wa&elike mo&ements and to measure their strenth. "e can then combine a number of these small wa&es to obtain a larer perspecti&e and to construct &ertical and fiure charts from the "!ckoff/ "a&e data.  Gow% let’s think about a wa&e in the ocean for a moment% sa!% a twent! foot wa&e which  breaks and rolls up on the beach.. There is some spra! 'ust ahead of the leadin ede of the wa&e+ then there is the leadin ede itself and then the bulk of the wa&e which could be di&ided into the forward part% the middle and the back part of the wa&e. The water which is pushed the farthest up on the beach is the water which is in the spra!% the leadin ede and the most forward  part of the wa&e. Gow% &er! similarl!% on an! si0able dri&e up in the stock market there are a few &er! earl! leaders or a few stocks which mo&e contrar! to the market on the precedin reaction. These can be likened to the spra! ahead of the ocean wa&e. Then% a da! or so before the upward dri&e beins% some earl! market leaders bein their up mo&es. These ma! be likened to the leadin ede. Then% as the market turns and beins to mo&e upward% there are usuall! a lare number of stocks that bein to turn at about the same time and these mo&e upward stronl! until finall! the! crest and bein a new reaction. These stocks ma! be likened to the forward part of  the wa&e. The! are followed b! stocks which turn upward later. These stocks are likened to the  back part of the wa&e+ that portion of the water or wa&e farthest from the beach. These laards usuall! ha&e relati&el! weak mo&es and usuall! stop mo&in up before the stron stocks finish their trends. In other words% there is a tendenc! for the stronest stocks to turn up relati&el! earl!% to be stroner and to mo&e farther up than those stocks which were late in completin their  reaction and in beinnin the mo&e up. The same process occurs on the down mo&es.  Gow% in order for a stock or a market to mo&e upward% so much stock must be bouht; This is &olume. It will mo&e a certain distance; This is price or price chane. 5nd the mo&ement will last for a certain amount of time; This is time. The same process takes place on a downward mo&e. In other words% we can and do measure the duration% the amount of price chane and the &olume of each wa&e and when each wa&e bean and ended for both the up wa&es and the down wa&es. "e call it the "!ckoff "a&e Inde$. This information is compiled b! our staff of tape

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readers and then published each da! in our dail! report as the “)ulse of the Market.” The data  pertainin to the "!ckoff "a&e% published for Monda!% 5uust 3>% 12@2% is on chart number one of this Basic Lecture.  Gow% before discussin what the "!ckoff "a&e is% it is important to know what it is not. The "!ckoff "a&e is not desined to be a market a&erae% nor is it desined to enable !ou to calculate the percentae distance that all or a bulk of the stocks in the market ha&e mo&ed in an! trend mo&ement. 5n a&erae would be too slow mo&in% relati&el! insensiti&e and would not i&e !ou time to establish !our position as the market is turnin. B! the time a re&ersal would be reflected in an a&erae% the stronest and the best opportunities would alread! ha&e turned and be well awa! from the best bu!in or sellin point. 5lso% the "!ckoff "a&e is not composed of  stocks which ma! be dormant for man! !ears and suddenl! are whirled upward or smashed downward for two or three months and then aain become dormant for man! more !ears. It is not composed of stocks which mo&e contrar! to the eneral market for lon periods of time or  for si0able distances% nor is it composed of habitual laards. 5n inde$ with these t!pes of  stocks could be &er! misleadin.  Gow% what is the "!ckoff "a&e Inde$ and what is it desined to doF The "!ckoff "a&e is an inde$ desined to measure the wa&elike mo&ements of the market and to reflect market leadership. There are four parts to this statement. The name of the inde$% that it is an inde$% that it measures the wa&es and that it reflects market leadership; 5ll are important. The "!ckoff  "a&e is named after its in&entor% Mr. 6ichard 7. "!ckoff. (e desined and used it as a tape readin tool so that he could better pinpoint the turnin points and the relati&e strenth of the successi&e wa&es in the market. It is an inde$ and a !oc+ %a"+e #nde #! co%)"#!ed of a n*%.e" of !oc+! de!#gned o "e)"e!en !o%e(#ng, *!*all$ a la"ge" g"o*) of !oc+! o" a $)e of %a"+e %o/e%en& 5n inde$ ser&es as an indicator% pointer or uide. T(e 0$c+off  0a/e Inde #! de!#gned o "eflec %a"+e leade"!(#), (a #!, (e %o"e )e"%anen leade"!(#) of (e %a"+e& "h!F "ell% enerall! these leaders chane direction before the bulk  of the stocks in the market re&erse themsel&es% therefore% the! ha&e forecastin or barometric &alue. Man! of these stocks are used to influence man! other stocks in their respecti&e/ industr! roups/ or the entire market% as the market tra&els from one le&el to another. The stocks selected for the "!ckoff "a&e come from this t!pe of acti&e% leadin stocks. ,$amples of these stocks are “:S Steel%” “IBM%” “#hr!sler%” “Sears%” and/ “:nion #arbide.” -or man! !ears we ha&e used the "!ckoff "a&e for a dual purpose% as a tape readin tool to measure the intrada! wa&es and as a market inde$ desined to enable one to anal!0e the loner term trends% the intermediate and ma'or mo&es. This de&elopment and dual purpose arose out of the needs of  Mr. "!ckoff and the students and out of our de&elopin knowlede. Her! briefl!% that de&elopment occurred in this manner. Mr. "!ckoff in&ented the "a&e as a tape readin tool to aid him in dianosin the turnin points and the small fluctuations which occur durin the da!. (e oriinall! used fi&e stocks in computin the "a&e. (e used the  Gew 8ork Times 5&erae% which is reall! an inde$% to determine the lon term trend of the market% that is the minor% intermediate and ma'or mo&es. (owe&er% he used the "!ckoff "a&e for dianosin the shiftin of strenth between suppl! and demand at the turnin points. It was found that the Gew 8ork Times 5&erae and the other non  "!ckoff a&eraes and inde$es were not sufficientl! sensiti&e to enable the student to take his position before the mo&e was well under wa!. So% a &ertical line chart of the "!ckoff "a&e was constructed and e&entuall! introduced in our work in place of the Gew 8ork Times 5&erae. It was an e$cellent step forward. "e now use a dail! &ertical chart of the "!ckoff "a&e to portra! this loner term  picture. 5nd aain% it was somewhat after that% that we bean to use fiure charts of the "!ckoff  "a&e. 5t present we are usin the followin t!pes of charts for these purposes; 1/ a dail! &ertical chart of the "!ckoff "a&e to determine the direction and timin of the minor% intermediate and ma'or mo&es+ 3/ the intrada! wa&e chart to anal!0e the intrada! wa&es+ point chart% a modified 14 point chart and a modified 3> point chart. "e use the >  point chart for the smaller fluctuations% the 14 point chart for the minor and intermediate mo&es and the 3> point chart for the ma'or mo&es without makin a clear or riid distinction between minor% intermediate and ma'or. 8ou must ad'ust the t!pe of chart !ou are usin accordin to the t!pe and si0e of mo&e that !ou are e$aminin. "e anticipate that should the price of the inde$ reach much hiher le&els we ma! ha&e to use a modified 34 point chart/ for the minor mo&es and perhaps a modified >4 point chart for the ma'or mo&es. The use of the dail! &ertical chart

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and the 3> point modified charts ha&e been co&ered on prior Basic Lectures and will not be discussed in detail here. 5s the "!ckoff "a&e is made up of market leaders% !ou will often find that it will turn a da! or two prior to the eneral market or a da! or two before such a turn becomes apparent in the other market inde$es and a&eraes. 7ue to its construction it has an e$treme sensiti&it! at turnin points. It pro&ides a break down measure of the "a&e. It works out its counts and there is price continuit! which is &er! important. -or the Inde$ to function efficientl! to dianose the loner term mo&es% price continuit! is maintained and the stocks makin up the Inde$ are chaned relati&el! infre*uentl!% onl!/ when market leadership is lost. ,ach time a stock  substitution is made in the Inde$% it chanes the character of the Inde$ slihtl!. This is done% enerall!% at inter&als of se&eral !ears onl!. Students are notified of an! substitutions and chanes in the composition of the Inde$. Incidentall!% we ha&e maintained price continuit! in the price of the "!ckoff "a&e since 12=@% but occasionall! ha&e chaned the stocks used in the Inde$. Oriinall! Mr. "!ckoff used fi&e stocks in computin the "a&e and our present "a&e oriinall! started with fi&e stocks. (owe&er% o&er the !ears% due to splits and the rotation of  market leadership we ha&e chaned the number of stocks in the inde$ and ha&e added the multiplication factors of each stock to reflect some splits and stock di&idends% etc. "e ha&e not tried to ha&e all of the ma'or industries nor the larest firms in each industr! represented in the Inde$. 5ctuall!% the stock of the larest firm in the industr! ma! not ha&e the most market leadership or barometric &alue in reflectin chanes in the fortunes of that industr!. The stocks makin up the "!ckoff "a&e Inde$ and their multiplication factors as of Kul! <1% 12@2% are shown in chart two. This is published monthl! on the report of the last market da! of the month.  Gow for a brief word on how the "a&e is compiled and calculated. "e still follow the  basic principles in its calculation and construction as laid down b! Mr. "!ckoff. (owe&er% we ha&e modified them to reflect the chanin price le&el of the Inde$ and the introduction of  modern% hih speed computers. Gow% &er! briefl!% all of our fiures still come directl! from our  own stock e$chane ticker. It enerall! takes a !ear and a half to two !ears to full! train a tape reader. The tape reader reads the ticker tape and constructs a 1D= point chart of all the stocks in the "!ckoff "a&e% reflectin the multiplication factors in its construction to aid him in the callin of the wa&es. 5s he sees the "a&e turn from downward to upward he determines when each wa&e came to an end and then calculates the measurements of each wa&e durin the da!. This is published as the “)ulse of the Market%” a sample of which is in chart one. The prices used to make up the Inde$ come directl! from the ticker tape of our own stock e$chane ticker. If an! *uotation is *uestionable% we check it with a computer. 5t one time we had to determine the &olume for each wa&e b! countin the number of shares printed on the ticker tape. "e now et this throuh the computer instead and this in brief is our present techni*ue. It is not necessar! for !ou to know the detailed process which our tape reader oes throuh. It is sufficient for !ou to know the eneral process% the purpose of the "a&e% its ad&antaes and how to use it. 8our 'ob is to use it to make mone!. "ith this as backround% let’s e$amine chart one of the "!ckoff "a&e for Monda!% 5uust 3>% 12@2% onl! from the standpoint of the information on the "!ckoff "a&e which is  published on the report% not from the standpoint of its interpretation. 8ou will be sent other  instructional material on the technical makeup of the "!ckoff "a&e and the Optimism  )essimism Inde$ and on the information published on our dail! report. On the riht hand side of  the pae is a section of the &ertical chart of the "!ckoff "a&e and the Optimism  )essimism Inde$ oin back se&eral months. This is printed so that those students who are pressed for time and are temporaril! unable to post their charts for a few da!s can still keep up to date in their  interpretation of the &ertical chart of the "!ckoff "a&e and Optimism  )essimism Inde$. In the lower left hand portion of the pae is printed the non Stock Market Institute a&eraes for the  pre&ious da!. The! will not be discussed here. 5bo&e them is printed the table of data reardin the wa&es which occurred durin the da!. This table of data lists the number of wa&es% the times at which each wa&e ended% the duration of the wa&es% the price reached durin that particular  wa&e% the price chane% the &olume% the acti&it! and the indi&idual Optimism  )essimism measurement for each wa&e. It also lists the openin price of the "!ckoff "a&e and the total &olume of all stocks traded on the e$chane for that da! and the number of periods or wa&es in which the tape was late. 7irectl! abo&e this table of data a short% up to date sement of the 1  point fiure chart of the O.). Inde$ or the modified 14 point fiure chart of the "!ckoff "a&e is  published on alternate da!s. On 5uust 3>% the 1 point fiure chart of the O.). inde$ was  published. The intrada! wa&e chart is published in the upper left hand corner. It consists of  three sections. Beinnin from the top% there is the intrada! breakdown on the O.). Inde$ b!

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wa&es. The middle portion of the chart contains the intrada! wa&e chart of the "!ckoff "a&e and on the bottom of the chart is a raphic portra!al of the acti&it!. Kust to the riht of the intrada! wa&e chart is printed the fiure chanes for the "!ckoff "a&e for the modified > point% the 14 point and the 3> point fiure charts. Kust below those are printed the 1D3 point fiure chanes for the Optimism  )essimism Inde$. In comparin the strenth and the weakness of the wa&es in the intrada! wa&e% co%)a"e one wa/e w#( (e !*cceed#ng wa/e and al!o co%)a"e wa/e! #n (e !a%e d#"ec#on& -or  e$ample% co%)a"e an *) wa/e w#( (e ne wa/e w(#c( w#ll .e a down wa/e and co%)a"e (a *) wa/e w#( (e )"#o" *) wa/e& 8ou will find it helpful to co%)a"e (e wa/e! w(#c( occ*" a (e !a%e gene"al )"#ce le/el, !*c( a! a cl#%a wa/e and a !econda"$ e! wa/e& Got all wa&es are important and certainl! not of e*ual importance. P"o.a.l$ (e wo %o! #%)o"an faco"! *!ed #n (e wa/e co%)a"#!on! 9a"e: (e 9)"#ce: c(ange and (e /ol*%e& The chane pertains to the price chane on each wa&e of the "!ckoff "a&e. The &olume fiure is that of the total &olume of all stocks on the e$chane. 5s !ou work with the "!ckoff "a&e% !our 'udment of the relati&e importance and the relati&e strenth of the wa&es will sharpen.  Gow% let’s deal briefl! with the acti&it!. T(e ac#/#$ #! a "eflec#on of (e n*%.e" of  "an!ac#on! and we calc*lae # .$ %ea!*"#ng (e n*%.e" of $a"d! of a)e d*"#ng eac( wa/e& T(e ac#/#$ #! a %ea!*"e%en of (e #nen!#$ of "ad#ng& 7ue to the bunchin of  orders at the beinnin of tradin the acti&it! is usuall! hih on the first wa&e and then tapers of  durin the da! until 'ust at the end of the da! there is a bunchin of orders aain. The acti&it! is most useful for those few students who will be in and out traders% *uick traders and floor traders. Those students operatin in the market for intermediate and ma'or mo&es ma!% for the most part% simpl! inore the acti&it! e$cept when there is a sudden sure of acti&it! or a sudden sharp drop in acti&it! durin the da!. This t!pe of chane in acti&it! is sinificant.  Gow for some interpretation. It is important to reconi0e that all stock market mo&ements are o&erned b! the loner term trend+ that the shorter mo&es% the intermediate and minor mo&es aainst the ma'or trend are onl! temporar! and fit into the conte$t of the ma'or  trend. The same thin applies to intrada! wa&es. Therefore% (e !a"#ng )o#n fo" anal$#ng (e 0$c+off 0a/e #! alwa$! o anal$e (e long e"% )#c*"e= o dee"%#ne #f (e %a3o" "end #! *) o" down o" #f # #! #n a "ad#ng "ange . Turn to chart four+ the &ertical chart of the "!ckoff "a&e and the O.). Inde$ from Kanuar! 1% 12@E% throuh September >% 12@2. 5n e$amination of the mo&e down from point/ 1 to point/ 3 shows that it is a ma'or mo&e which had some form of clima$ at point/ 3% but not a classic &olume sellin clima$. There is a rall! to point/ <% a secondar! test at point/ = and (en a 9)o#n: 6, (e wa/e )ene"ae! 3*! a.o/e (e !*))l$ a"ea a 9)o#n: - on %ode"ae !)"ead and %ode"ae /ol*%e and clo!e! on (e (#g(& I w#ll e#(e" con#n*e %o/#ng *) o" # w#ll no& I #! a c"##cal *"n#ng )o#n! l#+e (e!e w(e"e (e #n"ada$ ."ea+down f#g*"e! a"e wo"( (e#" we#g( #n gold& These fiures on the intrada! wa&es are not obtainable throuh an! other source.  Gow% the ne$t da! is point/ @. Instead of continuin upward% the "!ckoff "a&e turned downward. Let’s anal!0e how this turn de&eloped. )lease turn to chart three which contains the  breakdown fiures for 5uust 33 and 3> and the intrada! wa&e charts for those da!s. On 5uust 33 the last wa&e closed at 3>=AADE. If (e 0$c+off 0a/e #! go#ng o con#n*e *)wa"d, # !(o*ld con#n*e o (a/e de%and !"onge" (an !*))l$ and # !(o*ld con#n*e o %o/e *)wa"d NO0& On Monda!% 5uust 3>% the "a&e opened at 3>==1D=% down almost = points. The first wa&e lasted 34 minutes% lost 14>DE points on &olume of 1%314%444 shares/ and the acti&it! is 11. It lost almost all of the price ain abo&e point/ < chart four/ and almost all of the ain made in the last wa&e on the 33nd of 5uust/. Holume is hea&ier comparati&el! and this suppl! spells trouble. I wo*ld (a/e o .e o/e"co%e 5*#c+l$ and #n o"de" o con#n*e *)wa"d %*! (a/e good de%and on (e "all#e! and a co%)a"a#/e lac+ of !*))l$ on (e "eac#on!& Gow% what happened.F The second wa&e carries to/ 3>=E with a new price chane of Q14=E. (owe&er% what actuall! happened in wa&e number threeF There was increased suppl!+ the wa&e lasted 1> minutes% it lost 3A points with a &olume of >>4%444 shares+ the acti&it! was E.

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The price broke and the &olume increased on the downside at the point where it should not do so if the wa&e is oin to continue upward. In period four in the fourth wa&e both &olume and duration are slihtl! increased and the net chane is considerabl! less than the precedin wa&e; There is relati&e weakness. Yo* %a$ %a+e a co%)a"#!on .eween (e d*"a#on and (e /ol*%e o dee"%#ne (e a%o*n of /ol*%e )e" %#n*e #n )e"#od fo*"& The &olume per  minute is somewhat less than in period/ three. Gow% in period fi&e there is an important chane. The price chane is onl! a minor 1> >DE and the wa&e lasts slihtl! loner% 3> minutes% but the &olume is almost double of that of period four. The *uantit! of suppl! has increased considerabl!+ there is a much reater number of shares bein dumped on the market. Yo* %a$ %a+e a co%)a"#!on .eween (e ac#/#$ and (e /ol*%e o dee"%#ne w(e(e" (e !#e of (e o"de" (a! #nc"ea!ed o" dec"ea!ed& 6emember% the acti&it! is an inde$ of the number of transactions per minute. 5s an illustration% if there are ten transactions in each of two wa&es and the first wa&e has a &olume of 144%444 shares/ and the second wa&e has a &olume of 344%444 shares/% the si0e of the a&erae transaction in the first wa&e is 14%444 shares and in the second wa&e it is 34%444 shares. In other words% the intrada! fiures in the fifth wa&e re&eal that althouh the wa&e did not show the price weakness that it had had% suppl! was increased and the a&erae number of transactions increased. This is bearish. This relati&e weakness continued in wa&e si$. The shorter duration% less price chane and decreased &olume all show that there was less demand on this wa&e than on wa&e four and that the demand on this wa&e was weaker than the suppl! which occurred on wa&e fi&e. This weakness continued in wa&es se&en% eiht and nine and then in wa&es ten% ele&en and twel&e reached a relati&e balance. In wa&es thirteen and fourteen the weakness continued. Gow% please re&iew this for a moment. B! the time wa&e four had been defined% the dominance of suppl! was *uite apparent. This is an illustration of how !ou can use the intrada! wa&es to aid !ou in anal!0in the shift from demand to suppl! and back aain at critical points and to 'ude the &arious tests of support and suppl! le&els and the abilit! of the "a&e and the market to continue its trend. Let’s o to another &er! important turnin point which occurred in a downward trend. It is the action at point 3 on chart four. 5t point 3 the "a&e reached an important ob'ecti&e. The intrada! wa&e breakdown from Kul! 3= throuh 5uust 1 is in chart fi&e with a table of data for  the most important da!s in chart si$. The wa&e had been mo&in down and we e$pect an! down mo&e to end with either a clima$ or a simple runnin out or e$haustion of suppl!. The clima$ would be e&idenced b! increased &olume and widenin of spread and the e$haustion of suppl! on the downside would be e&idenced b! decreasin &olume and a simple narrowin of spread and a beinnin to raduall! mo&e laterall!.  Gow% what happened at point 3 on chart four. The action is *uite difficult to interpret without the intrada! wa&e breakdown fiures in chart fi&e. The "a&e had been oin down from point/ 1 to point/ 3 in a radual downward trend with the rallies enerall! weaker than the dri&es downward. 5nd then on Kul! 32 an important chane took place. 5 lon sustained dri&e up occurred for o&er an hour ainin @=1D3 million shares+ the acti&it! was hih. T(#! wa! good de%and and e/#dence of )o!!#.le )"el#%#na"$ !*))o"& 5fter/ the mo&e from point/ 3 to point/ < there was still ood suppl! in the third wa&e of Kul! 32% but the fourth wa&e showed a &er! decided lack of demand compared to the suppl! and so the "!ckoff "a&e continued on down to close on the low. The ne$t mornin% Kul! <4% the "a&e opened down and continued on downward for a loss of >1 points with &olume of >1D= million shares/ for an hour and a half; There was hea&! suppl! and a dumpin of stocks. T(#! #! a )oen#al !ell#ng cl#%a w(#c( wo*ld .e )"o/en o" d#!)"o/en .$ (e !econda"$ e!& The second wa&e% an up wa&e% had ood demand on it. The &olume per minute was slihtl! hiher than in the first wa&e. It ained back/ o&er half of the loss and the acti&it! was hih. Thus% the potential sellin clima$ is followed b! ood demand on a rall! and the ne$t reaction would be either a continuation on the downside or a secondar! test. The secondar! test would show a decreasin suppl! compared to that of the sellin clima$ in wa&e one. "a&e three is <4 minutes with a loss of onl! 33ADE points. It held abo&e the sellin clima$ and the &olume and acti&it! are reatl! reduced also; There is much less suppl! on this wa&e. The indications of increasin demand comin into the wa&e shown b! the possible  preliminar! support on the mo&e from point/ 3 to point/ <% then the sellin clima$ at point/ =% the automatic rall! at point/ > and then the secondar! test at point/ @ as the ob'ecti&e was bein reached% indicate that the "a&e has% at least temporaril!% stopped oin down and !ou would e$pect a rall!.

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 Gow% what would !ou do about the rall!F An$ !oc+! #n w(#c( $o* (ad a !(o" )o!##on w(#c( (ad no gone down, $o* !(o*ld #%%ed#ael$ clo!e o*& "h!F If the! had not one down the! ma! rall! well durin/ the ne$t up mo&e on the "a&e. 8ou should close out also an! stocks that are meetin their ob'ecti&es on the downside. If% howe&er% !ou had a short  position in a stock which has not met its ob'ecti&e% !ou ma! decide to ride out the rall!% not lose !our position and 'ude the rall! as it occurs. If a stock turns *uite stron on the ne$t rall! !ou could simpl! close it out. If% howe&er% it continues to be weak !ou could maintain the short  position and pla! for a much lower ob'ecti&e. Suppose !ou’&e been on the sidelines. 8ou ma! now bu! stocks which are stroner than the "a&e% ha&e been resistin the decline% ha&e si0able counts and are now in a position to mo&e upward and bein workin out those counts. "a&e four% Kul! <4% showed ood price proress% &olume and acti&it!. The duration% &olume and acti&it! were increased compared to the second and third wa&e as was the spread/; It is a minor  sin of strenth. The fifth wa&e was the last point of support and we ha&e completed our  identification of the principles and of the shift from weakness to strenth which came into operation on a &er! small basis at a critical turnin point on/ our larer trend chart. Let’s o on to the Optimism  )essimism Inde$% sometimes called the O.). Inde$. The Optimism  )essimism Inde$ is a stud! of &olume; It is not a mo&in a&erae% it is pure unadulterated &olume and our calculation for the &olume comes directl! from the "!ckoff "a&e. (ere is how it is calculated. "e take the precedin da!’s closin O.). fiure as the base fiure. Then we add the &olume for the first wa&e to that fiure and arri&e at the new fiure. Then we add or subtract the second &olume fiure to that and so forth% until we come to the end of the da! and that becomes the new O.). Inde$ fiure for that da!. In other words% we calculate the O.). Inde$ fiure for each wa&e and we also arri&e at a total fiure for the end of the da!. )lease turn to chart three and find the O.). fiure of >E3.44 for the last wa&e on -rida!% 5uust 33/. The &olume for the first wa&e of 5uust 3> would be added to it. The calculation is >E3.44  131+ we drop one 0ero and it !ields the new O.). fiure of >E4.A2. The &olume fiure of  E1.1A. This is the process of  calculation. "e are i&in !ou the formula for the O.). Inde$ so that !ou ma! understand and accept readil! the loic behind it and how we use it with the price action of the "!ckoff "a&e. 5s the O.). is a stud! of &olume% it has the characteristic of bein &er! persistent when it beins a trend. 5 trend on the O.). Inde$ persists and persists and persists and once the O.). has formed a series of support and suppl! lines% there is a stron tendenc! to sta! within them. 8ou ma! use  both the normal and the re&erse use of trend lines; The re&erse use will show opposin action. 8ou ma! use trend lines% halfwa! points and the thrusts. 7o not fail to e$tend trend lines into the future for further reference and possible further indications. "e sa! that when the O.). is mo&in up that it is e$pressin optimism because there is an e$cess of plus &olume o&er the minus &olume and when the O.). Inde$ is oin down we sa! that pessimism is comin into the market. The "!ckoff "a&e and the O.). Inde$ ma! be used toether and the comparisons ma! be made between the action of these two inde$es to i&e some &er! important information. An$ "end #n (e )"#ce w(#c( #! no !*!a#ned .$ /ol*%e #! #n a /*lne"a.le cond##on& In other  words% as the price mo&es up% the &olume should come in to sustain it and as the price declines the &olume should come in on the downside to sustain the downward push of prices. If the &olume does not come in to sustain the price mo&e the market is &ulnerable to a mo&e in the opposite direction.  Gow% with this basic market truth as a backround we ma! conclude se&eral thins; 1/ That if the "!ckoff "a&e and the O.). Inde$ are oin in opposite directions and ha&e beun trends in the opposite direction% this condition cannot lon continue. "e call this di&erence  because the! are oin in di&erse or di&erent directions+ 3/ If the "!ckoff "a&e and the O.). Inde$ are oin in the same direction and the trend of both is up% but if the! are mo&in at different speeds% aain% this condition cannot lon continue. "e call this inharmonious action+
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di&erent action or di&erence indicatin a possible chane in price trend from down to up. There are two wa!s this ma! be e$pressed+ the first wa! is for the O.). Inde$ and the "!ckoff  "a&e to mo&e downward with the "a&e failin to reach a new low as the O.). records a new low for that mo&e. In other words the O.). oes into new low round% below a pre&ious support area and the price of the "!ckoff "a&e fails to do that. #hart nine has an illustration of this. 5nother  indication of a possible chane in price trend from down to up is the di&erence occurrin when the "!ckoff "a&e mo&es into new low round without pessimism bein e$pressed for that mo&e  b! the O.). Inde$ oin into new low round also. In other words the "a&e oes below a  pre&ious support area and the O.). does not. 5n illustration of this is in chart ten. It is important to remember that both inde$es do not alwa!s mo&e into new low round or new hih round on the same da!. "hen one inde$ records a new hih !ou should i&e the other inde$ time to complete its mo&e. In a few da!s or a week or so the other inde$ ma! also reach a new hih and the inde$es will be riht back in harmon!.  Gow% the inharmonious action occurs when the two inde$es are not in di&erence; The! are mo&in in the same direction% but the! are not mo&in toether+ essentiall! the! are oin at different speeds. This condition is determined mainl! with the trend lines and the old le&els of  support or suppl! or stoppin points for comparison. It is a warnin that the mo&e in the "a&e ma! be in trouble. #hart ele&en portra!s inharmonious action% where the O.). Inde$ is mo&in much faster than the "!ckoff "a&e. Both mo&ed into new hih round% but the O.). mo&ed faster and farther upward than the "a&e. #hart twel&e illustrates the "!ckoff "a&e mo&in up much faster than the O.).. "hen either of these conditions occur !ou ma! continue to operate on the lon side of the market as lon as the "a&e continues up% but !ou must be alert for  indications of a re&ersal or hesitation in the up trend in the "a&e. #harts thirteen and fourteen illustrate this inharmonious action on the down side. The O.). Inde$ is mo&in faster than the "a&e in chart thirteen% reflectin stron pessimism bein e$pressed. In chart fourteen the "a&e is mo&in downward faster than the O.). These inharmonious actions usuall! do not last lon and are a warnin to anal!0e the "!ckoff "a&e and the indi&idual stocks carefull! for an! re&ersals of trend.  Gow% here are some reminders; -irst of all% before !ou come to an! definite conclusions as to whether or not !ou ha&e inharmonious action or a di&erence% alwa!s i&e both the O.). Inde$ and the "!ckoff "a&e a few da!s to confirm each other. One ma! o into hiher round abo&e an old suppl! point or stoppin point before the other and !ou ma! prematurel! call a di&erence and then a few da!s later the other inde$ will mo&e up and come riht back into harmon! with it. 8ou should also not o&er use the O.). Inde$ as a mechanical tool. This is  probabl! the biest source of misunderstandin and misinterpretation of the O.). Inde$. :se the O.). Inde$ as another means of measurin the forces operatin within the market and the effect the! are producin and ne&er fail to brin in other market principle to confirm or den! the indications of these two inde$es. 0(en (e O&P& and 0a/e #nd#ca#on! a))ea", c(ec+ (e!e w#( o(e" #nd#ca#on! !*c( a! (e old !*))o" le/el! of (e 0a/e and (e "end l#ne!& Loo+  fo" !ell#ng and .*$#ng cl#%ae!, e/#dence of d#!"#.*#on and *)("*!!, !)"#ng! and (e 9.ac+>*): o (e edge of (e c"ee+ and o(e" %a"+e )"#nc#)le! w(#c( %a$ .e #n o)e"a#on& There is a phenomenon called the double di&erence. This is a double indication of  di&erence or two di&erences followin each other in close succession. 5 double di&erence usuall! means a much more important chane of trend on the part of the "a&e or of the O.). Inde$. 5s an e$ample% a double di&erence ma! come about in this wa!; -irst% there is a new hih b! the O.). and a lower hih b! the "a&e and then a lower hih b! the O.).Inde$ with a new hih b! the "a&e. This is illustrated in chart fifteen. This is often the start of an important mo&e in the opposite direction. 5ain% a double di&erence warns a person to be alert. The O.). and the "a&e are tellin us that this is the time that a mo&e is likel! to start. 5fter the O.). re&erses itself and beins a &er! stron rall! followin a/ double action and the "a&e remains sluish% this sharp up mo&e usuall! is the start of the mo&e. "hen neati&e Optimism  )essimism is bein e$pressed it would be an ideal time to take profit on stocks which !ou own that are oin throuh a bu!in clima$ and that ha&e mo&ed up into important ob'ecti&e areas and/ also to sell those stocks which !ou own which ha&e not responded to the ad&ancin market. 5lso/ !ou ma! put out short positions where the! are indicated% but do not buck the trend of either the "!ckoff "a&e or the stock in sellin short. In makin comparisons of mo&es in the O.). Inde$% it is important that !ou deal with ad'acent minor to intermediate mo&es onl!. There ma! be a &alid interpretation of the mo&es in the O.). Inde$ which are a !ear or two apart% but we are not certain that our interpretation is

;8

correct. -or e$ample% on chart four% reaction lows were reached on the "!ckoff "a&e at points A and 3. The O.). Inde$ at point/ 3 was holdin much hiher than at point/ A% whereas the "!ckoff "a&e was in new low round% below point A. 7o not make this kind of a comparison. There is too much elapsed time and price action between these two points. 8ou could make a comparison between points 3 and E as the mo&e from point/ E to point/ 2 and from point/ 2 to point/ 3 are intermediate mo&es. 8ou could also compare points 2 and 14. (owe&er% do not compare point/ 2 with point/ 11 in determinin inharmonious action or di&erence between the "a&e and the O.). Inde$. In October 12@@% the O.). Inde$ bean a lon upward mo&e from 12A and e&entuall! reached @13 in -ebruar! 12@2. 5ain% there ma! be a &alid interpretation of the lon term trend in the O.). Inde$ such as this particular trend% but we are not certain that our  interpretation is correct. 5t this point in the de&elopment of our knowlede of the Inde$% we suest that !ou simpl! accept that a ma'or trend e$ists% but in coordinatin the O.).Inde$ and the "!ckoff "a&e that !ou *!e (e !(o"e" c(a" )#c*"e= (e %#no" and (e #ne"%ed#ae %o/e! onl$& :npro&en theories are danerous in the market and enerall! cost mone!% therefore% we do not teach them. "e do ha&e some unpro&en theories reardin lon term trend interpretation of the O.). Inde$ which we will continue workin on. "e hope that !ou will aid us with !our obser&ations and e$perience.  Gow% let’s mo&e on. Our ne$t stud! co&ers the accumulation which took place in -ebruar! and March 12@E and in&ol&es the coordination of the &arious charts of the "!ckoff  "a&e and the Optimism  )essimism Inde$. "e will use chart four and charts si$teen throuh twent!one. #hart se&enteen is the table of data for man! of the more important da!s in this  base. Se&eral of these charts ma! be sent to !ou on se&eral paes. )lease stop now and put these toether into one continuous chart% where necessar!% before continuin with this Basic Lecture. Incidentall!% the same numbers of the same action will be used on all the charts where&er   possible. 7ue to limitations of time and space we will not be able to co&er all of the possible  points on these charts% howe&er% we will co&er most of the more important ones. The first thin we must do is to e$amine the action prior to -ebruar! 12@E. )lease turn to chart eihteen% the 3> point modified chart of the "!ckoff "a&e. This will enable us to dianose the ma'or trend of the "!ckoff "a&e. "here&er possible the dail! &ertical chart should be used for that purpose% but our dail! &ertical does not o back that far% therefore% we will use the fiure chart. The "a&e mo&ed in a ma'or up trend from point/ 1 to point/ 3 and then% as it was approachin point 13% was comin down towards the ma'or one half point of 3@44. The count in the oriinal distribution area at point < was &irtuall! fulfilled at point/ =. The count in the re distribution area at point > i&es an ob'ecti&e of 3@>4 to 3>A>. The count at point/ @ separates  phases 5 and B and is sufficientl! lare so that these phases could onl! be combined with some difficult!. Thus% we ma! conclude% as point/ 13 is approached that the "a&e is comin down to a ma'or one half correction and that the ob'ecti&es are 3@>4 to 3>A>. "e would e$pect some form of a sellin clima$ to occur as this down mo&e terminates. Gow% turn to chart nineteen% the 14 point modified chart of the "!ckoff "a&e. The count at point 1< i&es se&eral ob'ecti&es+ the main one bein a possibilit! of 3@34 to 3>E4. This is the count from point/ 1< to point/ 1=. 5n e$amination of the O.). Inde$ in charts twent! and twent!one shows/ that the O.). is in a lon up trend and is reactin toward the halfwa! point of =1@. )lease turn to chart four. Trend lines 55 and BB frame the down trend. 5t point 13 the "a&e reached BB. This is a natural place for a rall! to bein within the down trend. To summari0e our brief sur&e! of this  backround+ the "!ckoff "a&e% as it approaches point/ 13 is in a down trend with a halfwa!  point and ob'ecti&es of about 3@44. "e e$pect climactic action and it could rall! from point/ 13. The O.). Inde$ is in a lon up trend and is approachin a halfwa! point% also a probable turnin point.  Gow% turn to chart si$teen% the intrada! chart of the "!ckoff "a&e and O.). Inde$. 5s  point 13 was approached the "a&e became o&ersold on the support line 77 which is drawn  parallel to ##. The intrada! fiures for -ebruar! 1< on chart se&enteen show that in the twelfth wa&e the "!ckoff "a&e went throuh climactic action. It lost 1EADE  points on a &olume of  1%>34%444 shares. The acti&it! was 111D3; That was climactic% but not a massi&e clima$. The last wa&e had ood demand+ it was the automatic rall! and the first wa&e on -ebruar! 1= was the secondar! test. The clima$ was at point/ 1A and the secondar! test was at point/ 13. This stopped the down mo&e% at least temporaril!. Gote that there was an intrada! di&erence  between the "a&e and the O.). at point 13. #ompare points 1A and 13; 5t point/ 13 the "!ckoff "a&e reached a new low while the O.). held abo&e point/ 1A+ a teen! weenie di&erence. So%e#%e! (e d#/e"gence! and (e #n(a"%on#o*! ac#on! occ*" a /e"$ !"aeg#c *"n#ng )o#n! and a! a "e!*l a+e on %*c( g"eae" !#gn#f#cance (an (e$ wo*ld

;;

o(e"w#!e& Both inde$es were stron on the up wa&es to point 1E and then at point/ 12 had an important di&erence. This action of the se&enth wa&e of -ebruar! 1= identifies it as a probable intrada! shakeout. It was not sustained b! the O.). comin in stronl! on the downside. The "a&e is in position to turn up and it did% &er! stronl!% in the last wa&e of -ebruar! 1=. The strenth in the O.). Inde$ continues. This entire action occurred as the important ob'ecti&e of  3@34 was approached.  Gow% let’s mo&e on. There is a di&erence between the "a&e and the O.). at point/ 34 and then at point/ 31 there is another di&erence settin the stae for a more e$tensi&e reaction on the "!ckoff "a&e. ,$amine this carefull!. This is a double di&erence. -irst% the "!ckoff  "a&e reached a minor new low and then the O.). reached a minor new hih. The "a&e came down to point/ 33 and then rallied to point/ 3<. Gote the persistent strenth in the O.). Inde$. -inall!% the "a&e reached a bu!in clima$ at point/ 3= and a secondar! test at point/ 3>. The intrada! fiures in the first wa&e for -ebruar! 31 on chart se&enteen show that the duration% price chane% &olume and acti&it! all indicated the e$istence of a climactic condition. The "a&e was mo&in up stronl! with &er! hea&! &olume. 7emand was not as stron in the third wa&e the secondar! test/. The eihth wa&e with the e$pansion of price action% &olume and time on the downside indicated increasin suppl! on the downside. This weakness persisted into the twelfth wa&e. On the ne$t market da!% the 3. The! are both mo&in in the same direction. (owe&er% the O.). Inde$ has been mo&in much stroner than the "!ckoff "a&e and at point/ 3= there is inharmonious action. This is a warnin to stud! the entire situation carefull!% pa!in particular attention to the "!ckoff "a&e.  Gow% e$amine this area on chart four. The mo&e from point/ 13 to point/ 3= must be rearded as possible preliminar! support and note% it broke throuh the suppl! line 55. There was ood demand on this rall!. This is confirmed b! an e$amination of the intrada! fiures of  the "!ckoff "a&e and of the O.). Inde$. The O.). is showin persistent strenth% howe&er we do ha&e a probable turn followin the bu!in clima$ at point/ 3=. Gote% the pronounced di&erence at point/ 3A. The "a&e and the O.). both react to point/ 3E and then on the rall! to point/ 32% the "a&e holds at a lower top compared to point/ 3=% while the O.). oes into new hih round. It is an important di&erence and is a &er! important timin indication. )oint/ 32 is a bu!in clima$ of the mo&e from point/ 3E to point/ 32 and point/ <4 is the secondar! test. The bu!in clima$ is the first wa&e of -ebruar! 3E% the automatic reaction is the second wa&e% the secondar! test is the third wa&e. Suppl! remains stroner than the demand for the rest of that da!. The mo&e from point/ <4 to point/ <1 is an intrada! sin of weakness and the mo&e to point/ <3 is the intrada! last point of suppl!.  Gow% let’s tie somethin else into this. 5t point/ 32 the "!ckoff "a&e almost reached the same le&el as at point/ 3=. #ompare the first wa&e of -ebruar! 31 with the first wa&e of  -ebruar! 3E. On the 3Eth this is at point 32/ there is much less demand than there was at point 3=. This decreased demand is shown b! the decreased time% price chane and the &olume at  point 32. 5s a result% the "!ckoff "a&e was not able to break throuh point 3=. This% tied in with the di&erence% warned that the "!ckoff "a&e was likel! to turn downward. Yo* w#ll f#nd # (el)f*l o d"aw (e ("*!!, (alf>wa$ )o#n! and (e "end l#ne! on (e #n"ada$ c(a"!& ,$periment a bit+ then erase the minor and the unimportant indications. (ere we will draw onl! a few of these indications. Line ,, is drawn throuh points/ 12 and 33 with -- parallel to it and at point/ 3= the "!ckoff "a&e is o&erbouht. 5t point/ 3E it becomes o&ersold and then at point/ 32 fails to reach line --.  Gow% what about the mo&e from point/ 32 to point/ AF 6emember that there is an ob'ecti&e of 3>A> on the 3> point modified chart and of 3>E4 on the 14 point modified chart/. "e suest that/ !ou anal!0e this mo&e !ourself before oin further. The re&erse use of trend lines% ??% is drawn throuh points/ << and <=. It is met at point/ <> and fails to reach it at point/ A% thereb! puttin suppl! line (( in 'eopard!. Line/ (( is drawn parallel to line/ ?? throuh point 32. Gote the lack of downward proress at area/ <@% the di&erence at <@a and then the strenth of the rall! to point/ shows that this was ood demand which came in on the third and fifth wa&es on this action from point/ <@ to point/
;<

clima$ with the ne$t wa&e bein the automatic rall! and point A the secondar! test. The "!ckoff  "a&e was stopped on the downside. Gote that the mo&e from point/ <@ to point/ and then broke downward. 5t point/ =@ the "a&e and O.). Inde$ were in di&erence when !ou compare points/ == and =@. The! were in a more important di&erence if !ou compare points/ =@ and 32. 5s a result the "!ckoff "a&e went to point/ =< for a more important last point of support. Incidentall!% point/ =< is also a di&erence; The "a&e went below point/ =A% but the O.). did not. Gote how stronl! the "!ckoff "a&e mo&ed from point/ =< to point/ =E. It is a more important sin of strenth and it met suppl! as line KK was reached. There was a di&erence at point/ =2 which timed the start of  the reaction down to the last point of support at point/ >4. There was an o&ersold condition at point/ >4 as line 99 was broken. Gow% how did this reaction to point/ >4 endF The third wa&e of March 33 is climactic; It went down for a full hour with a loss of 3> 1D3 points on a &olume of  1%E444%444 shares. The fourth wa&e was the automatic rall! and the fifth wa&e was the secondar! test. -inall! in the eihth wa&e &er! stron demand came in. 5ain% the intrada! fiures enabled us to anal!0e and dianose the shift in strenth from suppl! to demand. Gow that we ha&e dianosed the principles and the relati&e strenth of the &arious intrada! wa&es and ha&e determined that point/ =< is the last point of support% we ma! calculate the counts and the ob'ecti&es on the fiure charts of the "!ckoff "a&e and the O.). Inde$. "e ha&e also identified point/ >4 as bein a more important last point of support and therefore% after the counts from point/ =< ha&e worked out% we would use point/ >4 for our ne$t point of count. "e will be unable to discuss this in detail in this lecture and will therefore simpl! draw these counts on the charts for !ou. In most cases we are showin the ma$imum counts. In actual practice the! would be broken down into phases and would be taken step b! step in accordance with the count uide. "e must conclude that this base is likel! to be accumulation+ that the ne$t important mo&e is likel! to be up and that it should bein soon or that it ma! be alread! in the earl! staes of the up mo&e and we ha&e calculated the probable ob'ecti&es. "hat is the process that/ we ha&e followed in this stud!F "e ha&e e$amined the prior   backround% then ha&e used the intrada! wa&e and O.). to determine what principles are in operation% ha&e related them to the dail! &ertical chart and to the fiure charts of the "!ckoff  "a&e and the/ O.). Inde$ and ha&e then pro'ected the probable direction% timin and the e$tent of the ne$t mo&e out of this base. The intrada! breakdown fiures ha&e enabled us to anal!0e the dail! &ertical chart as thouh we were usin a fluoroscope or perhaps a microscope.  Gow% let’s summari0e a bit. The "!ckoff "a&e and the O.). Inde$ are uni*ue and &er! &aluable market tools. The "!ckoff "a&e is used as a trend chart and as a tape readin tool. This enables one to anal!0e% minutel!% the critical turnin points. (owe&er% indications that a mo&e is continuin are as &aluable as indications of chanin direction. "hen the "!ckoff  "a&e is in the middle of a mo&e or is not at/ a critical point in its tra&els from one le&el to another% !ou ma! pa! relati&el! little attention to the intrada! fiures. "h!F The trend is alread! established. (owe&er% when it ets into a critical situation or is at a possible turnin  point% then !ou will find the intrada! breakdown &er! &aluable. "e ha&e introduced the

<@

Optimism  )essimism Inde$ to !ou. T(e O&P& Inde #! de"#/ed d#"ecl$ f"o% (e #n"ada$ wa/e! and #! (e "end of (e /ol*%e of (o!e wa/e!& This means that the O.). is also uni*ue. I %a$ .e *!ed w#( (e 0a/e o d#agno!e d#/e"gence! and #n(a"%on#o*! ac#on! w(#c( a"e #%#ng #nd#ca#on!& 5t first !our anal!sis of the indi&idual wa&es ma! be painstakinl! slow and will be the result of a conscious effort in thouht. 5s !ou become mo&e familiar with it !our anal!sis will  become unconscious% swift and almost instincti&e. ,&en after !our knowlede and e$perience are well de&eloped% !ou should make a careful anal!sis of the "a&e and O.). at important actions and critical turnin points and then determine which are the important indications and which are of relati&el! minor importance+ then act accordinl!. 8ou will disco&er that the "!ckoff "a&e is !our most important and &aluable market tool. It has no e*ual as an anal!tical and timin tool. It is the startin point of all our market operations.


BASIC LECTURE NUMBER ELEFEN STEP BY STEP ANALYSIS O ACCUMULATION

The main sub'ect of Basic Lecture ,le&en is a step b! step anal!sis of an accumulation area. The purpose of this lecture is to present to !ou a step b! step anal!sis of an accumulation area and the resultin ma'or up mo&e% to demonstrate how !ou ma! plan and e$ecute a campain and to aid !ou in the coordination of the principles alread! presented pre&iousl! in these Basic Lectures. Our &ehicle for this discussion is “Montomer! "ard%” which% later on% mered with another compan! and chaned its corporate name to “Marcor.” It is still the same stock. 5s the charts of Basic Lecture ,le&en co&er se&eral !ears of/ market action% the! will be sent to !ou on a number of separate sheets of paper which !ou must put toether into a continuous chart where necessar!. "e are preparin all charts of the Basic Lectures so that the! will fit into/ !our  course binder as the Basic Lectures are an interal part of !our course. #hart one is of the "!ckoff "a&e. The &ertical line chart of “Montomer! "ard” is chart two. The one point fiure chart of “Montomer! "ard” is chart three and the three point fiure chart is chart four. )lease splice these charts toether where needed% b! cuttin off the riht ede of the &ertical or  fiure chart and splicin them toether with scotch tape or some other method. )lease stop now and put them toether before oin further with this lecture and then co&er up all of/ the action to the riht of the arrow at number 1 so that/ !ou cannot see what happened followin number/ 1. 7o this on both chart one and chart two. "e will anal!0e the action to the left of number/ 1 first and then will unco&er and deal with the action to the riht of number/ 1. "e make the assumption that we bein this anal!sis and the campain on -ebruar! 1% 12@E. This date/ is desinated on the chart with a lare arrow labeled number/1. "e assume that in earl! Kanuar! we went short other stocks and now ha&e the task of followin throuh and e&entuall! closin out the short positions on those stocks. Meanwhile% before the down mo&e is completed we must bein to search for other candidates. "h!F 6emember% the basic process is this; The first step is to dianose the trend of the market usin the "!ckoff "a&e. The second step is to compare the stocks which !ou are followin for comparati&e strenth and weakness. The third step is to anal!0e those stocks which we ha&e selected as bein the most likel! candidates in step two. 5n! campain in an indi&idual stock must be coordinated with the action of the stock  market+ the "!ckoff "a&e. 8ou want to operate in harmon! with the trend of the eneral market and the "!ckoff "a&e is the best tool for dianosin that trend. 5s far as step one is concerned% the trend of the "!ckoff "a&e is still down. "e must continue to follow that trend and operated on the short side of the market until either the "!ckoff "a&e or the indi&idual stocks show action which demonstrates/ that the down trend is endin. 5t that time we will co&er our short  positions and then bu! those stocks which we are now selectin as the best candidates.  Gow% let us deal with step two% comparati&e strenth and weakness and three re*uirements which are especiall! important in the initial selection process. The! are these; 1/ That the stock should be stroner than the "a&e on the immediatel! precedin rall!+ 3/ That it should be holdin on the current reaction stroner than the "!ckoff "a&e+
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operations and for the most efficient use of !our time. It helps !ou to concentrate !our efforts on those stocks which ha&e the best chance of mo&in well on the ne$t rall! in the "a&e. The third re*uirement in the initial selection process is that the fiure chart must show that there is sufficient count or cause worthwhile to warrant takin a position. Our profit  risk  ratio must be at least <  1and if we take a position on this reaction we must be able to put in a stop below point/ 3 or we will ha&e to use a floatin stop. 5 simple lance at our fiure chart shows that in phase 5 there are/ appro$imatel! 1= points alread! built up and as the reaction continues it is entirel! possible that an additional count will be added. Therefore% a <  1 profit  risk ratio would allow appro$imatel! a > point stop. Incidentall!% it is entirel! possible that  phase B could be included later on in the lon term count. (ad there not been a si0able count on the fiure chart% we would ha&e discarded this stock as a possible candidate for purchase on this reaction in the "a&e and would/ ha&e looked for other opportunities. The main thin is that a simple lance at the fiure chart shows that there is sufficient count to warrant further  in&estiation and anal!sis of this stock. "e must now et better ac*uainted with “Montomer! "ard” throuh a *uick check of  its chart backround% learn some of its characteristics and then anal!0e it in detail. If possible we should anal!0e the prior distribution area to determine that the entire distribution count has been worked out. Often this ma! be done from the fiure chart onl!. Then we %*! anal$e (e en#"e acc*%*la#on a"ea o dee"%#ne, a! nea" a! )o!!#.le, #f # #! l#+el$ o .e acc*%*la#on& To do this properl! we need a &ertical chart/ and a/ fiure chart of the entire accumulation base. "h!F "e determine how far the stock can mo&e from the fiure chart and use the &ertical chart for determinin the direction and timin of the comin mo&e and also/ to aid in anal!0in the fiure chart. "e first/ make a brief comparison between “Montomer! "ard” and the "a&e. In 12@@% the "a&e went throuh ma'or reaccumulation and man! stocks bean ma'or accumulation at the same time. 0e +now (a %an$ !oc+! go f"o% co%)a"a#/e !"eng( o co%)a"a#/e wea+ne!! o ne*"al and fl*c*ae .ac+ and fo"( d*"#ng (e acc*%*la#on )"oce!!& 5t point/ > “"ards” was stroner than the "a&e and then was weaker than the "a&e all the wa! down to point/ @% which we briefl! note as a sellin clima$. Then from point/ @ to point/ A it  participated with the "a&e in the up mo&e. "e note that point/ A on the "a&e is considerabl! abo&e point/ >% whereas it is considerabl! below point/ > on “"ards.” -rom point/ A to point/ E “"ards” was weaker than the "a&e and then% from point/ E all the wa! o&er to point/ 3 was relati&el! unresponsi&e to both the up mo&es and down mo&es in the "a&e. On a ma'or basis it is weaker than the "a&e. T(e ne (#ng we %*! +now #! w(e(e" (e !oc+ wo"+! o* #! #%)o"an co*n!& If the stock does not work out its counts it ma! be that the sponsors and other professionals operate in the stock intermittentl!% lea&in it alone for lon periods of time. "e ha&e drawn some of these counts on the fiure chart without the use of a &ertical line chart and must assume from the fiure chart formation where the sin of weakness and last point of suppl! occurred. In actual practice !ou ma! make those assumptions reconi0in that the! are substantiall! correct%  but could be modified b! an e$amination of a &ertical line chart. The count taken at point/ 2 is somewhat o&errun at point/ 14. The count taken at point/ 11 is fulfilled at point/ 13. The count at point/ 1< is fulfilled at point/ 1= and so we can assume that the stock does work out its important or larer counts. T(e ne (#ng 9(a: we %*! dee"%#ne #! w(e(e" o" no (e !oc+ (a! f*lf#lled #! %o! "ecen down co*n& #oordinate the fiure chart with the &ertical chart/ b! identif!in the important indications on the &ertical chart/ first and then locatin the same points on the fiure chart. The most recent distribution bean on the rall! followin point/ 1>. It met suppl! at point/ 1@% bean a tradin rane% had an upthrust at point/ 1A% a test of that upthrust at point/ > and a sin of weakness at point/ 1E and a last point of suppl! at point/ 12. The count is alon the J<>.44 line/ from point/ 12 o&er to point/ 34% a count of 1= points with a ma$imum ob'ecti&e of J31.44. That count was fulfilled at point/ @. 5lriht% (e ne 5*e!#on #!= (a! (#! !oc+ ."o+en #! %a3o" long e"% down "end l#ne! "h! ask this *uestion in the first placeF Simpl! because we know as a stock meets the down trend line% it &er! often will run into suppl! and turn downward or hesitate. There is a stron tendenc! for these ma'or trend lines to persist and persist and persist until finall! broken. If it has not been broken% we want to e$tend that line a lon wa! because we would e$pect suppl! to come in as it is reached. Gow% on these charts we don’t necessaril! know where the all time hih is on either the one point or the three point fiure/ charts. (owe&er% we can draw a suppl! line 55 throuh points/ 33 and 31 and on the rall! to point/ >% the stock turns downward

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on both the 1 point and < point fiure/ charts. Gow% on the one point chart we can draw line BB throuh points/ 31 and >. So far line BB is still not broken. Suppl! line ## is drawn on both the 1 point and the &ertical line/ chart throuh points/ > and A. On the mo&e from point/ 3 to point/ < hih &olume comes out as line ## is approached and then broken. Line 77 is drawn throuh points/ A and = and% of course% is no loner in operation.  Gow% what about the (alf>wa$ )o#n!& "e calculate the important halfwa! points on the &ertical line chart/ onl! and find that the rall! to point/ A and the mo&e down to point/ E o&erran the halfwa! points. The mo&e from point/ 3 to point/ < stopped at the halfwa! point of the decline from point/ A to point/ 3. So far we note that the stock is stroner than the market+ that there is sufficient count in the base to warrant our anal!0in it+ that the stock obser&es technical indications and works out its counts+ that the down mo&e was stopped and that the more recent suppl! line has been  penetrated.  Gow% let’s anal!0e the base in detail beinnin with point/ >% keepin in mind that our   purpose is to determine if% in fact% this base is likel! to be accumulation and reconi0in that there are some minor indications which will not be discussed. The stock oes down sharpl! from point/ > to point/ 3<. The action bracketed at area/ 3= is the number one sprin. Gote the rall! at point/ 3>; There is ood &olume and price spread on the upside. This is e&idence of  ood demand+ possible preliminar! support. "e draw suppl! line re&erse use of trend lines/ ,, throuh points/ 3< and 3@. 5t point/ @ the stock fails to touch that line. Suppl! line -- is drawn throuh point/ 3A% parallel to ,,. The stock follows ,, downward on the reaction to @a and holds awa! from ,, and the support at point/ @. )reliminar! support is/ at point/ 3E% the sellin clima$ at point/ @% the automatic rall! at point/ 32 and then the secondar! test at @a. I (en (ad a %#no" "ad#ng "ange w#( !*))l$ a 7. and 7c, .* (e )"#ce doe! no c"ac+ on (#! (ea/$ /ol*%e and !o we can concl*de (a (e de%and (a !o))ed (e down %o/e a 9)o#n: 7 #! !#ll !"ong&  Gow% co&er up all of/ the action to the riht of @c and slowl! unco&er it a few da!s at a time. Gotice that as the stock mo&es from @c to point/ A% that there is an e$pansion of spread and &olume on the rallies and that the stock has a tendenc! to dr! up the suppl! promptl! on the reactions; Holume *uickl! decreases on the reactions. 5lso% the &olume and spread are enerall! stroner on the mo&es up than the! are on the reactions. The mo&e from @a to point/ <4 is with widenin spread% increasin &olume and the reaction to point/ <1/ has a comparati&e lack of  suppl!. The rall! to point/ <3 aain has widenin spread and/ increasin &olume+ e&idence of  ood demand. On the mo&e down from point/ <3 to point/ << some suppl! comes out which finall! dries up at point/ <=. The action at point/ <> is &olume off the bottom. The mo&e to point/ <@% aain% has ood demand and the last da! at point/ <@ has a narrow spread% &er! hih &olume% e&idence that suppl! is comin in to stop it. (owe&er% the suppl! promptl! dries up on the reaction to point/ and 1= chart <1/ on hea&! &olume. This is abo&e the halfwa! point in the area of the ma'or suppl! line. The ne$t da!% point/ =<% breaks the backbone of that ad&ance with hea&! suppl!+ increased &olume on the downside. This is an important chane. This suppl! is of such manitude as to indicate a rather  deep reaction or lon hesitation. "hen suppl! like this persists it ma! force the stock to the

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 bottom of the tradin rane or force a resumption of the old down mo&e. It is oin to be critical as to whether or not that suppl! continues and persists and remains hea&!. If it does% it ma! be that the stock absorbed on the mo&e from @c to point/ A has been thrown on the market and a campain of accumulation would ha&e to be started all o&er aain. If it shrinks rather promptl!% it ma! be e&idence that a new phase of accumulation ma! ha&e beun without unloadin the ma'or holdins pre&iousl! ac*uired in phase B. Holume is hea&! to point/ ==; Then on the mo&e from point == to point/ E it shrinks and remains low+ e&idence that hea&! li*uidation has stopped. The da! marked => is an e$ception. There was suppl!% hea&! &olume% but little effect on price. The hih &olume that da! ma! ha&e been larel! one or two blocks which could ha&e no effect% essentiall!% on the suppl!  demand relationship. The o&erall e&aluation of the mo&e to point/ E is one of decreasin suppl!. The #omposite Operator ma! simpl! be lettin the stock  decline of its own weiht.  Gow% let’s e$amine the action from point E to point/ =. There is a widenin spread and an increase in &olume on the rallies at points/ =@% =A and =E. This is e&idence of ood demand. T(#! !*dden (ea/$ /ol*%e #nd#cae! (e e#!ence of (ea/$ !*))l$ !o))#ng (e %o/e, fo" aw(#le a lea!& ,&en point/ >3 was &olume on the upside+ demand. Gow% this is followed b! an immediate shrinkae of spread and &olume on the reactions to points/ =2% >4 and >1. T(e !oc+ w(#c( wa! .o*g( on (e %o/e! *) o 9)o#n!: 17, 18 and 1; wa! no #%%ed#ael$ ("own on (e %a"+e on (e "eac#on!& "ithout *uestion there is still suppl! present in the tradin rane; But% this tradin rane is likel! to be accumulation rather than distribution or it could be/ nothin. Gow% at point/ >1 the stock has *uieted down and reached a stalemate. Holume is dried up. "hat is area/ >= support line ?? is broken and the stock has a number two sprin below the  pre&ious supports at points/ E% =2% >4 and >1. (owe&er% demand does not come in stronl!. It is a number two minus sprin or a number two minus one sprin and the stock continues to react to point/ >>. It holds stroner than the market at point/ >@% fails to carr! throuh on the rall! to point/ >A and then% on the reaction to point/ 3% breaks throuh the support at points/ >@ and >E% desinated b! the arrow. )oint 3 is the number two sprin% as there is some &olume at point 3. There is an immediate rall! to point/ >2. )oint/ @4 is the secondar! test of the number two sprin at point 3. "e draw in the creek across the suppl! points in the tradin rane to define the flow of suppl!. The lower branch is 'umped on the mo&e to point/ >2 and point/ @4 is the “backup to the ede of the creek/.” The upper branch is drawn across the top of the rall! at point/ <. Gow% summari0in the anal!sis thus far% we conclude that phase B is likel! to be accumulation and that/ phase 5 is also probabl! accumulation. The mo&e from point/ 3 to point/ < is with wide spread and increasin &olume and is a potential sin of strenth; It has stron demand. Should the subse*uent reaction ha&e a lack of suppl! e&idenced b! a narrowin of the spread and a decrease in &olume on that reaction% that action would be a last point of  support and would put the stock on the sprin board for a lare mo&e up. On the reaction from point/ < to point/ 1 there is a narrowin of the spread and a stead! decrease in the &olume compared to the action from point/ 3 to point/ <. "e conclude that this reaction to point/ 1 is  probabl! the last point of support. Gow% let’s summari0e further. This stock is a candidate for a  possible purchase as the "a&e turns around for the ne$t rall!. It was stroner than the "a&e on the last mo&e up and is holdin stroner than the "a&e on the current reaction. It has a lare count with two phases of possible accumulation+ the first count bein appro$imatel! 1= points with a possible lon term count of appro$imatel! <@ points% combinin phases 5 and B. Thus% should we take a position% the profit  risk ratio would be more than <  1% perhaps = or >  1.

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It is reconi0ed that there are man! other indications which could be discussed or could  be discussed more full!% howe&er% these are amon the most important considerations in anal!0in a stock preparator! to takin a position for a ma'or mo&e. It is also reconi0ed that a first speculati&e position could ha&e been taken at point/ 3 on the number two sprin or on the reaction at point/ @4. (owe&er% to ha&e bouht there would ha&e meant bu!in when the "!ckoff "a&e was i&in indications that it would probabl! mo&e lower. "e do not want to  buck the trend of the "a&e% but want to operate with the trend of the "a&e. 5lso% it would ha&e  been a &iolation of the principle of comparati&e strenth and weakness+ e&en thouh the "a&e miht ha&e mo&ed up later% the stock could ha&e continued relati&el! unresponsi&e to that up mo&e; It could ha&e continued dull% driftin until a later market mo&e occurred. Often it is much  better to miss the e$act bottom if in doin so !ou ha&e much reater assurance that the stock is oin to mo&e and bein workin out its ma'or count GO". The stock ma! be oin throuh accumulation% but not be read! to mo&e when !ou take !our first position or e&en !our second  position. 5nd if !ou do take a position in a stock and it does not mo&e in a short time it is best  practice to et out% wait and then reestablish the position when the opportunit! presents itself.  Gow% what is our ne$t taskF Stop for a moment. "hat is our ne$t taskF Our ne$t task is to follow this stock on this reaction% attempt to 'ude when the "!ckoff "a&e is completin its down mo&e and to take a position in “Montomer! "ard” as that down mo&e is endin 5ll throuh the discussion so far the market action to the riht of number 1 has been co&ered up so that !ou cannot see it and would not be influenced b! it. "e are now read! to  bein to anal!0e the action to the riht of number 1 and will establish speculati&e positions when  possible. The columns in the chart action to the riht of number 1 ha&e been numbered as column 1 throuh column =4. -or the most part we will unco&er these columns one column at a time. 5s we mo&e alon% I will desinate which columns to unco&er and when. This will appro$imate the process !ou will ha&e to o throuh in actual practice. (owe&er% in actual  practice !ou would post and anal!0e this action one da! or a few da!s at a time. Oka!% read!% let’s o. Slowl! unco&er column 1. 9eep charts one and two in such a position that !ou ma! readil! compare this chart action as we o alon. In column 1% “Montomer! "ard” shows a tendenc! to mo&e up while the "a&e is mo&in down. Gow% unco&er column 3. It mo&ed down with the "a&e% but since the "a&e still has not reached its turnin point+ we do not bu!. "e draw suppl! line (( throuh points/ @1 and @3. "e want !ou to draw a trend line throuh  points @ and 3. "e will not draw it. Gotice how that support line and line ## are comin to an ape$. This balancin of forces and compressin of the price swins cannot continue lon. "e must be alert for action which would penetrate either line. ,$tend the trend lines ## and (( as lon as the! ma! possibl! be useful. 5lwa!s e$tend ma'or trend lines a lon wa!. :nco&er column <. The action at point/ @< on the "!ckoff "a&e occurred as the "a&e was reachin an important ob'ecti&e. It is identified as probable preliminar! support and therefore we could make a tentati&e purchase% a first purchase of “Montomer! "ard” at point/ @<% sa!% around J3<.44 per share% knowin that we would e$pect this action on the "!ckoff  "a&e to be followed b! the final sellin clima$. "e still do not bu!. "h!F "h! run the risk of  ettin smashed as the "a&e has the clima$F The trend of the "a&e is still downward. If  “Montomer! "ard” is to continue stroner than the "a&e% it ma! rall!% be stroner on this rall! and hold on the followin reaction as the "a&e oes throuh the sellin clima$. This is what we will attempt to do should the action of the stock and the "a&e continue fa&orable. “Montomer! "ard” breaks suppl! line (( in column <.  Gow% unco&er column =. “"ards” mo&ed up on ood demand as shown b! the widenin spread and the increased &olume. The "a&e mo&ed down. Gote that the suppl! line ## is decisi&el! broken. )oint/ @< ma! now be identified definitel! as the end of the reaction and as the last point of support. :nco&er column >. The "!ckoff "a&e went throuh a sellin clima$ at point/ @=+ it was o&ersold and meetin ob'ecti&es% a natural place for the "a&e to turn around. This is 'ust what we ha&e been waitin for. The "a&e is read! to turn upward and attempt to rall!. The stock is stroner than the "a&e. It has a sin of strenth and a last point of support and for the last week has been mo&in up while the "a&e is mo&in down. On this reaction at point/ @= there is a dr!in up of the suppl! on “Montomer! "ard” and it continues to be stron and would appear to be poised% read! to mo&e up. The halfwa! point on the mo&e from point/ @< to point/ @A is at 3=.44 per share and place a stop order at 31>DE. The profit  risk ratio is fa&orable. The "a&e rallies for the automatic rall! at point/ @>% but% the stock does not respond.

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(owe&er% it is still continuin to be stroner than the "a&e and now% as the "a&e reacted to the secondar! test around point/ @@% “Montomer! "ard%” if an!thin% is beinnin to rall!. It is important to reali0e that we had fi&e da!s in which to take a position in this stock  here. This is in the area from point @= to point @@. Should the stock bein to mo&e out of this area on the upside% !ou could add to !our position as it mo&es up. The point we want to brin out here is that there is no one e$act minute% price or one particular/ da! on which !ou must do !our bu!in and that if !ou don’t bu!% !ou ha&e not missed the mo&e completel!. :suall!% !ou can bu! in a eneral area of a couple of points where !ou estimate that an action should occur% for instance% the end of a reaction and usuall! !ou ma! do !our bu!in o&er se&eral da!s. :nco&er column @. The stock rallies to point/ @E on &er! hea&! &olume. This hea&! &olume occurs as the stock is mo&in abo&e the pre&ious suppl! areas at point/ < and point/ =E. It warns us to be cautious. The spread is rather wide. This is ood. This &olume is absorbin the sellin of all the old losers who bouht pre&iousl! in the [email protected] to J3E%44 le&el and now want to et out. The hih &olume can be e$pected to cause some form of hesitation or a reaction%  but% as lon as this absorbed stock is not immediatel! thrown on the market on the downside% the stock should be in a position to continue the up mo&e. The hiher branch of the creek can be drawn throuh the suppl! at points/ >2% <% @1% @3 and @A and this is a “'ump of that creek.” It will either be successful in lea&in this area or not. If suppl! dries up on the ne$t reaction the  probabilities are that the stock will continue to mo&e up. If there is hea&! suppl! on the reaction as shown b! hea&! &olume and a widenin spread% we must et out and look for opportunities in other stocks durin this ne$t mo&e in the "a&e and perhaps take a position in this particular  stock later. Support line KK ma! now be drawn throuh points/ @< and @@ with suppl! line 99 drawn  parallel to it throuh point @A. 5t point/ @E the stock became o&er bouht and it reacted. The halfwa! point should also be calculated; It is 3@ 1D=. The sinificance of line KK and this halfwa!  point is that we would e$pect the stock to be supported on the reaction as the! are met. The! also tie in with the creek itself which we will continue to e$tend to the riht. On the reaction followin point/ @E there is a narrowin of the spread and a decreasin &olume; It is on a “back up to the ede of the creek.” Our ne$t challene is to determine where this “backup to the ede of the creek”/ will end or to dianose the end of the reaction as it turns. "e ma! add to our   position on this “backup...” and will do so. There are two wa!s to do this. One is to determine a loical price at which the stock is likel! to turn and enter an order 'ust abo&e that price. Gow% let’s calculate this. Line KK and the creek are around [email protected] and the halfwa! point is 3@1D=. Therefore% should the stock continue to react normall! we would e$pect it to turn upward from the [email protected] area. Therefore we would enter an order to bu! at 3@1D3 with a stop 'ust below point @=% sa! at 33ADE. 5ssume that/ !ou do that; -ollow throuh on it and see what happens. The alternati&e method is to wait until we ha&e determined that the reaction is about o&er  and then establish a market position. In usin either procedure do not e$pect to et the e$act low. "e must stri&e to establish the position without incurrin a lare loss% but must be willin to ride out a small continuation of the current reaction. In this stud! we are oin to use the second method on this ne$t purchase. Therefore% we wait% on the alert to act. Gow% unco&er  column A. The reaction down to point/ @2 shows a lack of suppl!% narrow spread and/ decreasin &olume; )oint/ @2 is the “backup to the ede of the creek.” The ne$t da! the stock  responds to the rall! in the "a&e. "e could bu! here. The followin da! the "a&e reacts and the stock holds. "e must bu! without dela! and do so the ne$t mornin% March 33. 5ssume the  price is J3A.44 and we place a stop at 3<>DE 'ust below the reaction low at point/ @=. :nco&er column E. The "a&e mo&es up and “Montomer! "ard” responds. "e can e$pect suppl! to come in as the old suppl! le&el% around point/ A% is reached and it is doin so. In order to mo&e up% the #omposite Operator must be able to bu! all of the stock offered for sale from people who had bouht pre&iousl! and who now want to et out% enerall!% prett! much e&en% plus an! of the shorter term traders who want to take profits in anticipation of reactions. Thus% it is normal to e$pect this hea&! &olume to come out as the stock mo&es up. T(e c"##cal (#ng #! w(e(e" o" no (e !oc+ w(#c( #! a.!o".ed on (e wa$ *) #! #%%ed#ael$ ("own ono (e %a"+e& T(a $)e of ac#on wo*ld .e !(own e#(e" .$ (ea/$ o" )e"!#!en /ol*%e on (e down !#de on a "eac#on o" a w#de o)en )"#ce ."ea+ w#( l#5*#da#on& Should the reaction followin this hea&! suppl! ha&e a prompt narrowin of the spread and decreased &olume% it would be e&idence that the stock% which is bein absorbed as the price is mo&ed up% is not immediatel! bein thrown on the market and thus the stock could continue upward. This is  partiall! a repeat of the comments on the action at point @E% but we want to emphasi0e this so that !ou do not et out of a stock in an upward trend automaticall! on the first hih &olume. 5im

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to et out as the mo&e is endin or reachin the ob'ecti&es or if it is oin ha!wire. "e now raise the stop on our first purchase to 3< >DE. "e’&e been dealin with the &ertical chart and should be approachin ob'ecti&es. "e use the fiure chart ob'ecti&es to determine how far the stock ma! mo&e and for/ a price le&el at which we should watch the &ertical chart/ for stoppin action.  Gow turn to chart three% the one point fiure chart of “Montomer! "ard” and unco&er  all of the action to the riht of number/ 1. The first thin we will do is e$tend the trend lines and then determine the count and the ob'ecti&es. The first count is from the sprin at point/ 3. The count from point/ 3 to point/ E is 2 points for an ob'ecti&e of <4. The mo&e from point/ 3 to point/ < is a sin of strenth and the reaction to point/ @< is the “backup to the ede of the/ creek” and the last point of support. The count is 1> points for an ob'ecti&e of J<@.44 to J4.44. This ob'ecti&e ma! or ma! not be confirmed b! the one point fiure/ chart. If it is/ not confirmed/ we will use the counts of both charts and anal!0e the &ertical chart carefull! as the ob'ecti&es are reached in order/ to determine what action we should take. The sinificant thin about this is% that should that count work out% it would break the ma'or down trend at line 55. It would also be a &er! worthwhile mo&e.  Gow unco&er column 2. The "a&e mo&es up sharpl!. There is a relati&e shortenin of   price proress with &er! hea&! &olume as the stock tries to absorb the suppl! between the/ J32.44 to J<3.44 le&el in the old resistance/ area between points/ <@ and =<. The stock is at its first important ob'ecti&e of J<4.44% but there are other loical% hiher ob'ecti&es which we e$pect it to reach. Since we are operatin for a larer mo&e and since the "a&e indicates that/ it is still continuin to mo&e up% we retain our positions and wait. "e will attempt to ride out a reaction should one occur and ma! bu! aain on that reaction. It is often difficult to et a position which will not be threatened durin a ma'or mo&e and so% one of our prime considerations is to protect the speculati&e positions that/ we ha&e established and to not et out prematurel!. :nco&er column 14. The "a&e mo&es up and “Montomer! "ard” reacts showin considerable weakness. (owe&er% note that there is a prompt decrease in &olume on that reaction indicatin a lack of suppl!; "e hold our position. Gow unco&er column 11. The "a&e reacts sharpl! at point/ A1 and the stock does not. )oint/ A1 chart number 3/ is identified as a secondar! test of the shakeout which occurred si$ da!s pre&iousl!. It the test/ respected the halfwa! point of 3EDE. :nco&er column 13. The stock continues stroner than the "a&e. Gow% unco&er column 1<. The stock mo&es abo&e point/ A4 on the mo&e to point/ A3. 5t point/ A3 “Montomer! "ard” went abo&e point/ number A% takin out the last of the suppl! in that old suppl! area and then beins to react and there is a prompt narrowin of the spread and decreased &olume. "e now raise the stop orders on all commitments to 3@ ADE. :nco&er column 1=. It “"ards”/ remains stroner than the "a&e. "e draw support line LL throuh points/ @< and A1 with suppl! line MM parallel to it% throuh point/ A4. 5t point/ A3 the stock ran into suppl! in the &icinit! of line/ MM. Gow% unco&er column 1>. The "a&e continues to react and the stock holds on that reaction with a prompt shrinkae of spread and &olume. So far this has been a perfectl! normal up mo&e. Gow% unco&er column 1@ and e$amine carefull! the reaction down to point/ A<. Is there li*uidation on that reactionF The answer has to be no. That is a normal reaction with a narrowin of the spread and a decreasin &olume. Go hea&! or persistent sellin is takin place and the stock turned upward as support line LL was reached. It also held well abo&e the halfwa! point of the last rall!. “Montomer! "ard” continues to be stroner than the "a&e. Gow% unco&er column 1A. The mo&e to point/ A= ends on narrowin spread and increased &olume. This is suppl! comin in to o&ercome demand. It lea&es the stock &ulnerable to a reaction. "e can e$pect a reaction as the stock is approachin the ob'ecti&e area at f J<@.44 to J
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stone count and this could take an!where from se&eral weeks to se&eral months. (owe&er% considerations for sta!in in are these; 1/ "e ha&e dianosed phase B as probable accumulation+ the ob'ecti&e would be about [email protected]+ 3/ The stock does not ha&e a massi&e &olume bu!in clima$ at point/ A=% indicatin that the ma'or up trend is not likel! to be o&er+ + &er! wide spread and &er! hea&! &olume. "hat is thatF On the da! that this occurs we would be faced with the problem of either sta!in in or ettin out and the interpretation would ha&e to be that this is likel! to be either possible preliminar! suppl! or possibl! an ordinar! shakeout within the upward trend. If it is preliminar! suppl! we would e$pect a rall! abo&e point/ A= for the bu!in clima$ which could occur in the ob'ecti&e area of J there is a dr!in up of spread and &olume on the down side indicatin that the sellin is no loner persistent. 5ctuall!% the mo&e from point/ A= to point/ A> could be the ordinar! shakeout itself with the intrada! rall! from the low of <1 % indicatin that this action is probabl! oin to be a more important secondar! test of the shakeout at point/ A>. The half wa! point is J32.44. 5s the stock approaches this area we would e$pect it to meet support or   perhaps ha&e a turnaround and rall!. Support line LL is no loner in operation and we are *uite likel! to ha&e to establish a new loner term support line. Gow% unco&er the action in column 34. A 9)o#n: 8; (e"e #! na""ow#ng !)"ead and #nc"ea!ed /ol*%e a! (e (alf>wa$ )o#n #! a))"oac(ed, #nd#ca#ng (a de%and #! co%#ng #n o o/e"co%e (e !*))l$& "e would e$pect a rall! and we et one. Gow% unco&er column 31. The rall! reco&ers all of the pre&ious loss on wide spread and hea&!% persistent &olume and is a possible or potential sin of strenth. Should the suppl! dr! up on the/ reaction we would then ha&e a possible last point of support and could reard this entire area from point/ A> to the riht as bein accumulation. "e can now look back  and reard the action at point/ AE as bein a secondar! test of the ordinar! shakeout at point/ A>. Oka!F 5lriht% let’s o on. :nco&er column 33. The stock holds stroner on this reaction than the "a&e and with narrowin spread and decreased &olume. The action from point/ AE to point/ A2 has now been defined as a sin of strenth and the reaction to point/ E4% with decreased spread and decreased &olume% as the last point of support. (ad we been out of this stock we could bu! here on the last point of support. Since we alread! ha&e speculati&e  positions taken much lower% we will add to these positions b! bu!in now. "e bu! on Kul! 12 at J<3.>4 per share with a stop order at 3E>DE. Gow% please note that the stops on our other  commitments ha&e been left at 3@ADE. (ad our purpose been to et out in the J<@.44 to J
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!ou off as to where the mo&ements are endin. Gow% we suest that !ou mark the thrusts !ourself. :nco&er column 3<. “Montomer! "ard” holds as the "a&e continues its reaction. "e draw support line GG throuh points @< and AE with suppl! line OO throuh point A=. These lines should be e$tended until the! are no loner operati&e. Gow% unco&er column 3=. The stock  mo&es up while the "a&e mo&es down thereb!/ showin unusual strenth. :nco&er column 3>. The "a&e oes throuh a sellin clima$ and rallies and the stock continues to mo&e up with ood demand. It beins to meet suppl! in the &icinit! of line OO. "e draw support line )) throuh points/ AE and E1 with suppl! line  drawn parallel/ throuh point/ A2. There is narrowin of the spread and increased &olume+ e&idence of the suppl! o&ercomin the demand at a loical turnin point% the suppl! line and the ma$imum ob'ecti&e of phase 5; "e would e$pect a reaction. Gow% compare the action from point/ E4 to point/ E3 of the "!ckoff "a&e with/ “Montomer! "ard.” “Montomer! "ard” has one up and the "a&e has one down. “Montomer! "ard” is showin tremendous strenth and !#nce # (a! gone #no new (#g( g"o*nd a 9)o#n: ;2 a.o/e 9)o#n: 81, we can now "a#!e (e !o)! on all )o!##on! o 2< 8J;& Incidentall!% the count in the reaccumulation area on chart three is marked. The count is 2  points on the J<<.44 line for ob'ecti&es of J<2.44 to J=3.44 and we could add two points to these ob'ecti&es. Gow% what must we do as this mo&e continuesF Gow% stop and think a bit. "hat we must do is to/ follow throuh with this mo&e as it unfolds% et out onl! if it is necessar! and finall!% aim to close out as the mo&e comes to an end. 5t J and then a minor number two sprin occurred at point/ E@. The secondar! test took the form of a dr!in up of suppl! in the last couple of da!s in column <3. "e know that we ma! bu! on a secondar! test of a number two sprin. But% as in actual practice% this one would ha&e been &er! difficult to operate in. "e will skip it. Gow% please note that the speculati&e positions ha&e not been threatened. The reaction at point/ E@ could also be &iewed as the minor clima$ of a normal reaction from point/ E= down to point/ E@ with a secondar! test a few da!s later. 6eardless of what !ou call it% the interpretation of the suppl!  demand relationship is still the same. Gote that at point/ E= the stock has one abo&e the old ob'ecti&e area of J>DE 'ust under the support at point/ E@.  Gow% unco&er to column <>. “Montomer! "ard”/ mo&es up to point/ EE without clima$in and reacts to point/ E2 and then the &olume dries up at point/ 24 and the upward mo&e is resumed. Gotice how the trend lines are becomin steeper and steeper. The reaction to point/ 24 holds well abo&e the halfwa! point. Support line SS can be drawn throuh points/ EA and 24 with suppl! line TT drawn throuh point/ EE. The stock has now reached almost J=A.44 per share and has o&errun the count built up in area 5. Turn to chart three and we will add the count in/ phase B to the count in phase 5. The count from point/ 3 to point/ @ is a count of 32 points for an ob'ecti&e of J>4.44. This would tie in with the < point fiure chart/ ob'ecti&e of J>4.44 on chart four. )oint @< was identified as a last point of support. If an! of the count in phase B were to come into operation% we would e$pect the count from point/ @< to  point 3@ to be used. This i&es an ob'ecti&e of J>E.44 to [email protected]. It is a loical count ob'ecti&e. It takes in the count from the last point of support to the area of preliminar! support. Our aim now is to et out in the area of J>4.44 should the stock indicate that/ it is finishin its up mo&e there% or% if not there% to et out in the J>E.44 to [email protected] le&el. "e must et out at the J>E.44 to [email protected] le&el if there are an! sins of stoppin the up trend. "h!F 5t that le&el the stock will ha&e used up or e$pended all of the force of accumulation which we could loicall! e$pect to be in this base as measured b! the fiure chart count. It could possibl! mo&e

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abo&e the [email protected] le&el forcin us to use a hiher last point of support in the base+ howe&er%  before doin so% we would e$pect it to o throuh a ma'or correction or reaccumulation. :nco&er column <@. 5s point/ 21 is reached there is &er! wide spread and e$tremel! hea&! &olume. This is a bu!in clima$ and an o&er bouht condition due to the penetration of  suppl! line TT and it has o&errun the ob'ecti&e of J>4.44. "e must either et out riht now or  decide to ride out an! possible reaction and et out either on that reaction or on a later rall!. This is without *uestion a bu!in clima$ and that action will stop the mo&e either temporaril! or   permanentl!. Howe/e", (a/e we !een (e )"e/#o*! a))ea"ance of )"el#%#na"$ !*))l$ The answer is no and we know that &er! often this preliminar! suppl! occurs and that/ this ma! be the beinnin of that preliminar! suppl! and since the count is o&errun it is an indication that the J>E.44 to [email protected] ob'ecti&e ma! be comin into operation. 5 check of the "!ckoff "a&e indicates that its action is also fa&orable for sta!in in as it has reached% has met/ support for  o&er a week and is likel! to attempt to rall! back toward the resistance le&el marked b!/ point EA5. "e decide not to sell out here% but attempt to et out in that J>E.44 to [email protected] le&el. "e raise the stop orders on all positions to =1 >DE.  Gow please unco&er column E.44 to [email protected] le&el. "e can et out in one of se&eral wa!s. "e could ha&e sold part of our position at point/ 21 and the rest on this rall!. 5nother alternati&e is to enter a sell/ order 'ust below/ the ob'ecti&e as the stock beins to rall! awa! from point 23% for instance% at the J>A.44 le&el. Should the stock o throuh that point we would be out automaticall!. 5 third alternati&e is that we can watch the stock as it rallies and et out% howe&er% we must definitel! et out as this stock  reaches the ob'ecti&e. 5s the stock rallies from point/ 23 we draw support line :: throuh points/ 24 and 23 and suppl! line HH parallel to it/ throuh point/ 21. The ad&ance is &er! rapid and the anle is steep and we cannot e$pect this t!pe of proress to continue lon. 5s point/ 2< is reached at almost J>A.44 per share% we resol&e to et out the ne$t da! reardless of  what happens. Our possible ain should we han on is onl! a few points before we would hit the [email protected] le&el and a stock does not alwa!s reach the ma$imum count. Gow% what is the downside riskF "ell% if it oes into a reaction it is perfectl! loical to e$pect the stock to react to around the halfwa! point of the last mo&e. This would be the mo&e from point AE to point 2<. That would be appro$imatel! 1=E.>4 per share and cancel our stop orders. "hat is our profitF 8ou fiure it out. The action at point/ 2= is a  bu!in clima$ e&en thouh the &olume is not as hih as at point/ 21. T(e"e #! !#ll #nc"ea!ed /ol*%e and w#dened !)"ead a! an o/e" .o*g( cond##on #! c"eaed on (e "end l#ne! and (e o.3ec#/e a"ea #! "eac(ed& Incidentall!% there is one other techni*ue which can be used in ettin out of a stock which is sk! rocketin as this stock does on/ the mo&e from point/ 23 to point/ 2= and that is to raise the stop orders on the position to about
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stock. In anal!0in the stock% we determined that the base was probabl! accumulation% that the  profit risk ratio was fa&orable and that it had a sin of strenth and that it/ was on the last point of support. Then we waited until the "!ckoff "a&e indicated that/ it had stopped oin down and was turnin upward. Then we took our first position as the "a&e was read! to mo&e upward. Later positions were established at successi&el! hiher prices as near as possible to the lows reached on the reactions. "e used stop orders to protect both capital and profits. -rom the  beinnin we aimed for a ma'or mo&e rather than small% *uick tradin profits and we did not chane our purpose. 5s the upward trend de&eloped our main tasks were to determine that the up mo&e was continuin normall! and that important or persistent distribution was not takin  place either durin the mo&e or as ob'ecti&es were bein reached. Most of the effort was concentrated on the &ertical chart as it indicated how the base and the mo&e was proressin. In closin out the position we aimed to et out as the loical ob'ecti&e was bein reached. It coincided with the pre&ious appearance of preliminar! suppl! and an o&er bouht condition. "e sold out on a bu!in clima$ and did not foret to cancel the stop orders. "e did not pla! for the last 1DEth of a point/. "e ot out when we knew that/ we should. "e accomplished what we set out to do+ to dianose a de&elopin ma'or mo&e on an indi&idual stock+ to take a speculati&e  position in the earl! staes of that mo&e and to et out as the mo&e was endin. The result% lare  profits with relati&e safet!.

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BASIC LECTURE NUMBER T0ELFE STEP BY STEP ANALYSIS O DISTRIBUTION

The main sub'ect of Basic Lecture Twel&e is a step b! step anal!sis of a distribution area. The purpose of this lecture is to present to !ou a step b! step anal!sis of a distribution area and the resultin ma'or down mo&e and also/ to demonstrate how !ou ma! plan and e$ecute a campain and in addition/ to aid !ou in coordinatin the principles alread! pre&iousl!  presented in/ these Basic Lectures. Our &ehicle for this discussion is “,? R ?% Inc. .” The charts for this lecture will come to !ou on a number of paes which !ou must fit toether where necessar! so that !ou can see the continuous market action. Gow% please do not fail to do so. 5ll of the charts of the Basic Lectures are prepared so that the! will fit in !our course binder as the Basic Lectures are an interal part of !our course. )lease% stop now and put the charts toether  so that !ou will ha&e a continuous chart. #hart number one is the &ertical line chart of “, ? R ?” from Kanuar! 1% 12@E% throuh 5uust 33% 12@2. "e ha&e also placed the price action onl! of the "!ckoff "a&e on the same chart% abo&e “, ? R ?%” in such a manner that the price action of the "!ckoff "a&e and “, ? R ?” line up for read! comparison. This will be especiall! helpful in dianosin the trend of the "!ckoff "a&e and in dealin with the factor of comparati&e strenth and weakness. The &olume of the "!ckoff "a&e% that is/ the total market &olume which is used with the "!ckoff  "a&e% will not be included because it is not necessar! for our purposes. The &olume which appears on the chart is the &olume for “, ? R ?.” #hart number two is the one point fiure chart of “, ? R ?” from the time of the/ two for one split% which occurred/ in October 12@A% up until/ and includin 5uust 33% 12@2. #hart number three is the three point fiure/ chart of  “, ? R ?.” The main purpose of this stud! is to anal!0e the distribution area and the resultin down mo&e and to outline the speculati&e positions which could ha&e been taken. Gow% to do this we must first o back and anal!0e the prior action. 0e %*! anal$e (e .ac+g"o*nd )"#o" o (e d#!"#.*#on, (e d#!"#.*#on a"ea #!elf and (en (e "e!*l#ng down %o/e& 5s much as  possible% as we anal!0e this stud!% we will anal!0e it as thouh we were li&in throuh it and the chart was bein posted as we mo&e alon% so please% turn to chart number two. "e must first identif! what portion of the fiure chart is co&ered b! the &ertical line/ chart and identif! Kanuar! 1% 12@E% on this chart because the action after that date can be identified and anal!0ed with both the &ertical and fiure charts. (owe&er% the prior action can onl! be anal!0ed with the fiure chart. "e ha&e identified this point with an arrow; The &ertical chart starts here. In ac*al )"ac#ce $o* w#ll ofen (a/e o o)e"ae w#( /e"#cal and f#g*"e c(a"! w(#c( do no co/e" (e !a%e #%e )e"#od' Co>o"d#nae (e% ca"ef*ll$& In dealin with the prior action we must estimate what the price and &olume action on the &ertical chart would ha&e been from the appearance of the fiure chart. Our estimations ma! be correct or  incorrect% but with e$perience these estimations become rather h ihl! accurate. #hart number two beins with the two for one split in October 12@A and will not include the prior ma'or up mo&e. (owe&er% point 1 is the hih reached on that up mo&e. -ollowin point/ 1% the stock bean a down mo&e and our first task is to anal!0e that down mo&e. 1/ Suppl! line 55 is drawn throuh points 1 and 3 with the support line BB drawn throuh point <. This is the normal use of trend lines. Gote that first% at point/ = and then% at point/ > the stock  holds awa! from support line BB puttin suppl! line 55 in 'eopard! and lea&es 55 &ulnerable to  be broken. Suppl! line ## ma! also be drawn throuh points 3 and @. 3/ "e now draw in the halfwa! point of the mo&e from point/ 1 to point/ < which is [email protected]. 5t point/ 3 the stock  reached [email protected] then turns downward. 3.44 le&el for an ob'ecti&e of J@>.44. That count was not reached at point/ 3% therefore our assumption that this ma! be the count and that the entire area is accumulation is likel! to be incorrect. Onl! part of  the area ma! be accumulation% "e then assume that point/ E is the sin of weakness and point/ 2 the last point of suppl! in a redistribution area for a count of 1= points from [email protected] and J>2.44% i&in an ob'ecti&e of J=A.44 to J=>.44. Gow% that count was fulfilled at point/ = as the

?@-

stock reached J==.44. T(*!, al(o*g( we canno +now w(e(e" (e co*n #n (e o"#g#nal d#!"#.*#on a"ea (a! .een f*lf#lled, we do +now (a (e o.3ec#/e #n (e "e>d#!"#.*#on a"ea (a! .een %e& The last part of the mo&e down to point/ = appears on both the &ertical and the fiure charts% so we ma! now bein to coordinate the indications on both t!pes of charts & T(e %o/e down o 9)o#n: 1 d#d no (a/e a good /ol*%e !ell#ng cl#%a= (e"e wa! no w#de !)"ead, no (ea/$ #nc"ea!e #n /ol*%e, (*! # #! en#"el$ )o!!#.le (a (e down "end a (a )o#n #! no $e !o))ed& 5 stock can stop a ma'or down trend either with a &olume sellin clima$% indicatin panic sellin or b! simpl! stoppin oin down+ runnin out of suppl! on the downside. “, ? R ?” simpl! ran out of suppl! on the downside. There is a narrowin of the spread and decreased &olume indicatin a lack of the/ suppl! that is/ necessar! to keep pushin the stock down at that point. Gow% the demand ma! be stron or it ma! be weak. 5lso% #f a !oc+ doe! !o) go#ng down w#(o* a )an#c+$ /ol*%e !ell#ng cl#%a, # #! l#+el$ o .e !*.3eced, lae" on, o a !)"#ng o" a !(a+eo*& "h!F To force some of the people who bouht at hiher prices out of  the stock and to keep others on the sidelines in the earl! staes of the up mo&e. 5s that sprin% or  that shakeout occurs% there is a stron tendenc! for untrained people% the nonprofessional  people% to be misled as to the direction of the ne$t important mo&e. The stock oes into new low round and the! think that/ it is oin to keep on oin and the! either do not bu! or the! sell short. The ne$t thin that/ we must do is to/ anal!0e the count followin point/ = in this lateral mo&e. "e break the base area/ down into phases 5 and B. -rom the &ertical line chart we identif! point/ > as the number two sprin and point/ 14 as the secondar! test of that number two sprin. Gote% there was suppl! at point/ > and that suppl! dried up on the reaction at point/ 14 as indicated b! the decreased spread and &olume. -or the ma'or count% turn to chart three% the < three point fiure/ chart of “, ? R ?.” The first count from point/ 14 to point/ 11 i&es an ob'ecti&e of J@<.44 to J@>.44 and the count from point/ 14 to point/ = i&es an ob'ecti&e of JE1.44 to JE<.44. Gow% turn to chart two% the one point fiure/ chart. The first count is from point/ 14 to point/ 11% a count of 1A points% from the J=3.44 and J==.44 le&el% for  an ob'ecti&e of J>2.44 to [email protected]. That count was fulfilled and e$ceeded at point/ 13. Gow% rather than immediatel! takin the count from point/ 14 to point/ = for our ne$t ob'ecti&e% we sta! within phase 5. "e identif! the sin of strenth on the &ertical chart as bein the mo&e from point/ > to point/ 1< as shown b! the wide spread and increased &olume and the reaction to point/ 1= as bein the last point of support. This i&es a count from point 1= to point 11/ of  3= points from the J=3.44 and J=E.44 le&el for an ob'ecti&e of J@@.44 to JA3.44. The mo&e to point/ 1< is the “'ump across the creek%” the lower branch of the creek and point/ 1= is not onl! the last point of support% it is a “backup to the ede of the creek.” )oint/ 1> is another “'ump across the creek%” this time the upper branch of that creek/ and point/ 1@ is a “backup to the ede of that creek.” "e would add phase B to this count onl! if it became necessar!.  Gow% let’s anal!0e the mo&e from point/ > to point/ 1A. The first support line would be drawn throuh points/ > and 14; That is broken *uickl!. So support line 77 is then drawn throuh points/ > and 1@ with suppl! line ,, parallel to it throuh point/ 1>; This is the normal use of trend lines. Line/ 77 is respected at points/ 1E and 12 and at point/ 34 A 9)o#n!: ?2, 2? and ?8 # fa#l! o "eac( l#ne EE (e"efo"e, we d"aw !*))l$ l#ne  9(e "e/e"!e *!e of  "endl#ne!: ("o*g( 9)o#n!: ?6 and 2?& 5t point/ 1A on the bu!in clima$% the stock reaches that line and turns downward. The ne$t thin we do is measure the proress made on each dri&e up b! the thrusts 71% , 1 and -1. 5t -1 the thrust narrowed. The stock made much less proress than it had been makin on each dri&e up. Gow% slide a ruler across from point/ > all the wa! o&er to point/ 1A and !ou will note that on the mo&e up% there was a widenin spread and increasin &olume and there was a decided tendenc! for &olume to decrease on the reactions. 5t point/ 13 the stock reached its first ob'ecti&e and promptl! continued upward. Therefore the count from point/ 1= to point/ 11 came into operation. The action from point/ 31 to point/ 34 is preliminar! suppl!% hea&! suppl! comin in to stop the mo&e. Look at the count on the fiure chart followin point 31. It is appro$imatel! 1= points alon the J@>.44 line. The stock was mo&in back and forth in a narrow rane as the suppl! came in to attempt to stop the mo&e. There was ood &olume and on the da! marked 34 “, ? R ?”/ had an e$ample of where it tried to o up tried to o down and closed in the middle on an increase in &olume. This phenomenon usuall! indicates that the stock is oin to attempt to mo&e soon and it promptl! continued up to point/ 1A which is the bu!in clima$. Gote that at point/ 31 the stock reached the minimum ob'ecti&e of [email protected] and the bu!in clima$ at point/ 1A occurred as the ma$imum ob'ecti&e was reached. This stopped the upward trend.

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So far we ha&e not anal!0ed the distribution area. "e ha&e onl! been dealin with some of the necessar! preliminaries. "hat are these preliminariesF One is to determine some of the characteristics of this stock. 7oes it mo&e in an orderl! and/ loical mannerF Our answer is !es. "hen it oes throuh distribution% does it immediatel! collapseF The mo&e from point/ 1 to point/ > indicates that it oes down in an/ orderl! fashion/ and does not collapse. 7oes it ha&e ood spread and &olume indicationsF Is it one of those thin stocks which trades onl! a few hundred sharesF 7oes it swin in a wide tradin rane or is it alread! in a trendF 7oes it ha&e a tendenc! to o to ma$imum countsF Gow these are some of the *uestions !ou can often answer   before anal!0in the distribution area and takin a position. The more of those *uestions !ou are able to answer% the less likel! !ou are to run into une$pected problems as the situation de&elops. "e also determined that at the bu!in clima$ at point/ 1A the stock was meetin an important ob'ecti&e and therefore was likel! to either hesitate or react e&en thouh there are/ additional  possible hiher counts+ counts for hiher ob'ecti&es. "e ha&e also identified preliminar! suppl! and the bu!in clima$ and an! distribution which came later ma! ha&e beun at either of those  points. Let’s anal!0e the area followin point/ 1A as thouh we were ha&in to li&e throuh it. Man! students ha&e found this to be a &er! helpful techni*ue in anal!0in a stock prior to takin a speculati&e position. Gow% please co&er up all of the action to the riht of point/ 1A and unco&er the chart as we mo&e alon. I will not tell !ou when to unco&er a portion of the chart action+ !ou determine it for !ourself from our anal!sis. 5n! bu!in clima$ such as at point/ 1A is followed either b! an automatic reaction or a lateral mo&e% then a secondar! test or a continuation of the old upward mo&e. The reaction from point/ 1A to point/ 33 is the automatic reaction and the rall! from point/ 33 durin the same da! to point/ 3< is an immediate secondar! test. This is shown much more clearl! on the 1 point fiure chart. Then it is tested aain at point/ 3=. Thus% at point/ 3= we know that the up mo&e definitel! has been stopped% at least for awhile. In (e a.!ence of  an #n"ada$ ."ea+down we %*! "ega"d (e /ol*%e (a ca%e #n a 9)o#n: 21 a! .e#ng on (e down!#de !#nce (e clo!e wa! a (e low& 5t area/ 3> there is a tendenc! for &olume to e$pand. Suppl! is persistin on the downside. T(e !oc+ a 9)o#n: 27 (a! a /e"$ na""ow !)"ead and a !*dden #nc"ea!e #n /ol*%e= e/#dence of de%and o/e"co%#ng (e !*))l$, w(#c( !o)! (e "eac#on& The ne$t da! has wide spread and/ increased &olume on the rall!% but there is no carr! throuh. The stock mo&es sidewa!s and then at point/ 3A hea&! suppl! comes in on the downside. There is wide spread% e$tremel! hih &olume and the stock penetrates slihtl! into new low round below point/ 3@. So far there has  been a tendenc! for suppl! to increase on the downside rather than to dr! up or decrease. The rall! to point/ 3E has a tendenc! for the spread to narrow and &olume to decrease indicatin that there is a decreasin demand as the stock mo&es up. "e can now draw suppl! line ?? normal use of trend lines/ throuh points 1A and 3E with support line (( parallel to it throuh point/ 3@. Gote that so far the stock is ha&in lower tops usin points/ 1A% 3= and 3E. 5lso point/ 3A is lower than point/ 3@. 5 down trend is beinnin to form and we ha&e e&idence of  considerable suppl! on the downside in the tradin rane and demand is decreasin on the rallies. These are some of the indications and characteristics of probable distribution.  Gow% let’s check for comparati&e strenth and weakness. The "a&e and the stock were mo&in up toether to point/ 31 and then thins bean to chane. The "!ckoff "a&e reacted sharpl! to point/ 34 and the stock mo&ed sidewa!s. Then at point/ 1A the stock went abo&e point/ 31 and stopped. It then bean/ oin down and turned weaker than the "a&e. #ompare points/ 1A and 3=. On the stock point/ 3= is below point/ 1A and on the "a&e it is considerabl! hiher. Gow% compare the reaction from point/ 3= to point/ 3@ and point/ 3A. The "a&e held abo&e point 34 and the stock went considerabl! below it and then failed to  participate with/ the "a&e on the rall! to point/ 3E. 5t point/ 3E it is aain weaker than the "a&e. Suppose we first became interested in this stock at around point/ 3E+ what would we ha&eF "e would ha&e a stock which is weaker than the "a&e% has stopped oin up% has fulfilled its ob'ecti&es% is ha&in lower tops and lower bottoms% in summar!% a stock which/ is ha&in indications of distribution. Gow% look at the possible count because a stock ma! ha&e all of these characteristics and still ha&e such a small count as to make a commitment not worth while. "e are interested primaril! in lare mo&es% not in short% *uick% scalpin profits and a stock must ha&e a lare count to ha&e a lare mo&e. 7etermine the possible count from point/ 3E o&er to point/ 1A. It is appro$imatel! <3 points and if !ou took a short position with a >  point stop% !our profit  risk ration would be appro$imatel! > or @  1. Gow% this is &er! definitel! a candidate for a possible short sale. Our main problem now is to assess the

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de&elopment of the stock and then to establish a speculati&e position% probabl! a short position. Such a short position in an area of oriinal distribution should be taken on the last point of  suppl!% followin a sin of weakness or on an upthrust after distribution. "e should be on the alert for indications that this miht not be distribution. Our immediate problem then becomes that of identif!in a possible sin of weakness and last point of suppl! or perhaps an upthrust should one occur. 5s the mo&e from point/ 3E to point/ 32 de&elops% there is a tendenc! for &olume to e$pand as the stock mo&es down; Suppl! is comin in and increasin. "e ha&e drawn two upward slantin arrows in the &olume to indicate this. The mo&e from point/ 3E/ is weaker  than the "a&e% breaks into new low round with e$pandin spread and steadil! increasin &olume and is a potential sin of weakness. It will be pro&en or dispro&en b! the subse*uent rall!. The rall! from point/ 32 to point/ <4 is not a classic e$ample of a last point of suppl!% but it is the last point of suppl! ne&ertheless. The "a&e shows abrupt strenth to point/ <4 and this stock participates with ood spread and ood &olume+ it has ood demand on it. Howe/e", #f (e !oc+ #! go#ng o con#n*e *)wa"d, # %*! +ee) go#ng& It would ha&e had to break throuh suppl! line ?? and point/ 3E if it were to lea&e this tradin rane on the upside. Instead% as it met these points where suppl! could naturall! be e$pected to come in% it stopped and closed almost at the low. There was an abrupt increase in &olume% which% on a minor basis would be climactic. "e immediatel! sell short the ne$t da!. "e will assume that/ the price is J@@.>4 per  share and that our stop order is placed at A31DE% 'ust abo&e point <4. Incidentall!% we could ha&e had an order to sell short entered with our broker before the stock reached point <4. That would ha&e re*uired determinin ahead of time where the stock could loicall! be e$pected to stop on the rall!. There are three main indications for this+ the halfwa! point% the down trend line ?? and the prior suppl! le&el around point/ 3E. If the stock is rall!in stronl! as on the mo&e from point/ 32 to point/ <4% the halfwa! point has a ood probabilit! of bein o&errun and stroner  emphasis should be place on the pre&ious suppl! le&el in determinin a likel! turnin point. -ollowin point/ <4 at point/ <1% the stock reacted with wide spread and low &olume. T(#! #! e/#dence (a de%and #! no (e"e o !o) # f"o% go#ng down w(en # !(o*ld .e (e"e. 5nd then suppl! increases on the downside at point/ <3. Gow% if we had missed sellin short near the top of the rall! at point <4% we could still sell short after point <4 and we should be alert for opportunities to add to our short positions as the mo&e de&elops. "h!F T(e !oc+ (a! a log#cal co*n fo" a %*c( lowe" o.3ec#/e, (a! (ad a !#gn of wea+ne!! and a la! )o#n of  !*))l$ and #! #n (e )"oce!! of e!a.l#!(#ng a down "end& Gow% 'ust because !ou missed the e$act turnin point is no reason to abandon the attempt to take a position. Simpl! i&e the order  to !our broker for e$ecution. )resent e$chane rules re*uire an up tick before a short sale can be e$ecuted. Gormall! !ou et intrada! up ticks and normall! the short sales can be e$ecuted almost as readil! as orders to bu!. )rior to this it was sufficient to know the appro$imate possible count without pinnin it down e$actl!. "e must now determine the e$act count in accordance with the count uide. "e identif! the main points on the &ertical chart and mark these points on the fiure chart. "e identif! the main phases% #% 7% , and -. )hase 7 could be broken down into two phases. In other words% what we are doin is to anal!0e and identif! the cause on the &ertical chart and then to count the number of points in that cause on the fiure chart. "e take the count on the one  point fiure chart from the last point of suppl! at point/ <4 to the left and pro'ect it downward to determine what are the likel! ob'ecti&es as the stock works out the force of distribution built up in this area. The first count is ten points from point/ <4 to point/ 3E for an ob'ecti&e of J>2.44 or perhaps [email protected]. The ne$t count would be o&er to point/ 3=. (owe&er% an e$amination of the &ertical chart shows that the action from point/ 1A to point/ 3= is &er! concentrated and therefore if an! of this is likel! to be distribution% it is most likel! that all of it will be distribution. Ge&ertheless% we take our count o&er to point/ 3= for an ob'ecti&e of J
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action indicatin a re&ersal of the ma'or trend and perhaps% to add to our position later on% either  on a rall! or as a redistribution area is comin to an end. "ell% the stock continued on down and had a minor sellin clima$ at point/ << with a secondar! test at point/ <= and then went throuh redistribution. In doin so it o&erran the count from point/ <4 to point/ 3E and this immediatel! brins in the probabilit! that the ne$t important ob'ecti&e it ma! tr! for is J=1.44 to J. The mo&e from point/ <> to point/ <@ is the sin of  weakness and the rall! to point/ =.44 line on the fiure chart and the count is substantial. The rall! up to  point =.44 on 5uust 34 with a stop order at >E 1DE. The count on the one point chart in this redistribution area is from point/ E.>4. Our main alternati&es are; 1/ "e could take our profits on both positions and tr! to reestablish new positions later+ 3/ "e could maintain the positions as the!/ are with the stops where the! are+ 2 1DE% 'ust abo&e the suppl! in the redistribution area/. "e would do this an!wa! in followin the normal  procedure in usin stop orders. If necessar!% we will et out and cancel the stop should the stock  turn unusuall! stron. "ell% the stock rallies to the ice% the former support area% on the mo&e to point/ <2 and turns downward. The &olume is low and the spread is narrow on that rall! indicatin a lack of  demand. #ompare the stock with the "a&e at point/ <2. It is much weaker than the "a&e and then it turns downward while the "a&e continues its up mo&e. "e draw support line II throuh points/ << and
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5t point/ =1 the stock is holdin awa! from support line II. "e e$pect another attempt to rall! the "!ckoff "a&e% but it should be a short rall! as so far there is little cause for a/ sustained rall! out of this area. Incidentall!% the stock has not reached the ne$t loical ob'ecti&e of J=1.44 to J1.44 per share and that the stop order  is placed at >@1DE.  Gow% locate points << and =3 on this chart and check how much time has been lost while this stock has made no net proress on the downside. )oint/ << was reached in late Kul! and point/ =3 was reached in late Go&ember. 5bout four months ha&e past without an! more price  proress% while other stocks ha&e mo&ed well on the upside. 8ou can best determine whether  !ou will elect to wait out lare rallies aainst the trend b! li&in throuh a few of these. Market operations is an art and !ou must de&elop !our own st!le in appl!in the principles. Our ne$t task is to follow throuh with these commitments until we finall! close them out. "e will aim to close them out in the ob'ecti&e area% preferabl! on a sellin clima$.  Gow% let’s mo&e on. -ollowin point/ =3 the stock beins mo&in in a stead! down trend with attempts to rall! at points/ =<% == and =>% sometimes with &olume% but there is no carr! throuh% no sustainin abilit! on the rallies until finall! it reaches point/ =@. 5t point/ =@ the stock has fulfilled the ob'ecti&e of points <4 to 3= of J41DE% 'ust abo&e point =>. The stock did not clima$ at point/ =@ which is the ob'ecti&e areaof the count from point <4 to point 3= on the 1 point fiure chart/ and therefore we know that the ma'or down trend ma! not ha&e been stopped. 5lso% we e$pect the count from point/ <4/ to point/ 1A on the 1 point fiure/ chart to come into operation. "e mark the halfwa! point of the mo&e from point =3 to point/ =@ and would e$pect an! rall! to meet suppl! in the &icinit! of that halfwa! point. That rall! would likel! tie in with the suppl! line MM. Then% as the "!ckoff "a&e mo&es up from point/ =@ to point/ =A and then to point/ =E% “, ? R ?” mo&es sidewa!s 5s the "a&e oes to point/ =E% it beins to react downward. The stock is still weaker than the "a&e. It fails to reach near the halfwa! point or line MM+ more indications of relati&e weakness. "hen the stock breaks throuh the pre&ious support at point/ =2 and fails to rall!% we lower the stops on our market positions to 'ust abo&e point/ =A at ==1DE. It continues on down to point/ >4 and is approachin the ob'ecti&e of J<1.44 to J3E.44. It rallies sharpl! to point/ >1% is stroner than the "a&e and then holds much stroner than the "a&e on the reaction to point/ >3. The stock is beinnin to ha&e a chane of character as it approaches the loical ob'ecti&e. It was almost alwa!s consistentl! weaker than the "a&e and now it is becomin stroner than the "a&e. The rall! to point/ >< is stroner on the stock than it is on the "a&e and so as it beins to react at point/ >=% we determine to et out on the dri&e down towards the ob'ecti&e% preferabl! between J<1.44 and J3E.44 per share. Gow% to pin this down better% turn to chart two. There is a minor upthrust at point/ =A and we can take the count from point/ =A to point/ >>% a count of 1< points for an ob'ecti&e of J32.44. Fe"$ ofen !e))#ng !one co*n! fo"% l#+e (#! #n (e lae" !age! of a %o/e& 9T(#!: w#ll ena.le $o* o )#n)o#n (e eac o.3ec#/e! .ee"& In co&erin a short position% we aim to co&er the position on a sellin clima$ or perhaps on the preliminar! support and in the &icinit! of the ob'ecti&e. 5s it approaches point/ >@ we do not wait for the sellin clima$% but simpl! et out and cancel our stop orders for  the followin reasons; 1/ The "a&e i&es e&idence of attemptin to turn upward+ 3/ This stock 

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has had a chane of character+ it is now stroner than the "a&e+ 4 to point/ >< is e&idence of possible preliminar! support+ =/ There is an ob'ecti&e of J3E.44 and a steppin stone count ob'ecti&e of J32.44. >/ The stock% on a minor basis% is showin a tendenc! to hold stroner than the "a&e. @/ It is down aainst support line GG/ which is/ drawn  parallel to 99 throuh point =@ and it/ should either rall! or become o&ersold. The count from point <4 to point 31 could come into operation later. (owe&er% before it does/ so the stock could ha&e a &er! substantial rall! and perhaps correct the entire down mo&e from point/ <4 to point/ >@. That would mean a rall! of possibl! 1> points or so and we do not want to take the risk of that happenin. It ma! or ma! not o throuh a sellin clima$. (owe&er% the most we can loicall! e$pect the stock to reach is J3E.44 or J32.44 per share and if  we pla! for the last 1DE th there is a ra&e risk of not co&erin at all. So on the mornin of the da! marked >A we simpl! co&er all positions at around J<4.44 and cancel the stop orders.  Gow% this has been an illustration of how !ou ma! anal!0e and take a speculati&e position in a ma'or distribution area for a lare mo&e downward and how !ou ma! operate in a t!pical ma'or down trend until the speculati&e positions are co&ered. The price and &olume action of  each stock will be different and each market mo&e will be different% howe&er% the basic procedure is still the same; It is to 1/ anal!0e the direction of the comin mo&e usin the "!ckoff "a&e+ to 3/ take a position in a stock that is comparati&el! weaker than the "a&e. The stock must ha&e a lare count and must ha&e a sin of weakness and a last point of suppl! or an upthrust or upthrust after distribution and to then+
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stock preparator! to a down mo&e. Unle!! (e !oc+ (a! .een *nde" acc*%*la#on o" d#!"#.*#on, (e ec(n#cal #nd#ca#on! a"e l#+el$ o .e o.!c*"e and *nclea"& If !ou don’t understand a situation% sta! out of it. ?o into the market onl! when the indications are clear% the anal!tical situation is fa&orable% when the profit  risk ratio is in !our fa&or and time !our  commitments with action of the "!ckoff "a&e. Too man! students want to de&elop their own method of operation in the market b! combinin some of the principles tauht in the course with other thins or b! usin onl! a few of  the concepts that/ we teach. Often the! seem to be more interested in de&elopin their own market ideas than in makin mone!. 7o not do thisC 7o not combine the use of our method with the so called fundamental approach or/ with economic forecasts% political de&elopments% news or an! other techni*ues. 7o not combine it with the ta$ lawC #ombinin market operations with the ta$ law% especiall! in attemptin to obtain a lon term capital ain% is a sinificant source of  loss in the market. This causes people% includin some of our students% to fail to et out when the! know that/ the! should+ to lose accrued profits and to han on too lon to situations which ha&e one sour. Our method and techni*ues are complete in themsel&es. The! are all !ou needC But% !ou need to learn% understand and to use the entire method step b! step% s!stematicall!. Incidentall!% !ou do not need to know e&er!thin in the #ourse and in the Basic/ Lectures  before !ou bein to make mone! and to operate in the market. 8ou ma! concentrate !our earl! efforts on learnin a few concepts and techni*ues. Test them thorouhl! and operate with them. One such techni*ue is to learn to bu! on a reaction within an upward trend. There are others. Then !ou ma! raduall! e$pand !our knowlede and arsenal of pro&en mone! makin weapons. This seems to be an e$cellent wa! to operate in the practice phase of the course as the market and our course are/ too bi for most students to learn e&er!thin *uickl!. Then% safeuard what !ou ha&e learned. This knowlede is &er! &aluable and can produce e$traordinar! profits. "hen learned% !ou will become one of the few people in the market who know how to profit consistentl!. 8ou will be a special person with a &er! special knowlede. :se it+ &alue it+ impro&e it and profit from it. The startin point for an! anal!sis is to determine the trend or the comin trend of the "!ckoff "a&e. 5lwa!s operate in harmon! with the more important trend in the "a&e. Then% screen the stocks !ou are followin. ,liminate from consideration those which ha&e been weaker or ha&e been mo&in at about the same speed as the "a&e. Operate onl! in those stocks which are stroner than the trend of the "a&e when it is up and the re&erse when it is down. Then anal!0e those stron stocks to make sure that the stock is read! to mo&e and mo&e soon and then time !our commitment with the action of the "!ckoff "a&e. )rotect !our capital and  profits with stop orders. If it does not mo&e% et out and look for other opportunities. It is &er! important that !ou do !our market work and stud! reularl!+ that !ou post !our  charts% anal!0e them and follow throuh on !our commitments s!stematicall!. 5 relati&el! small amount of time spent dail! or e&er! other da! on the market pa!s rich rewards. 7oin/ nothin for two weeks% then tr!in to catch up and immediatel! takin/ a speculati&e position all too often leads to disaster. U!*all$ $o*" .#gge!, !afe! )"of#! w#ll .e o.a#ned f"o% !#*a#on! w(e"e $o* (a/e an#c#)aed eac( !e) of (e %o/e a! # de/elo)!& Often !ou can dianose that a stock is likel! to be under accumulation some weeks or months before the best time to bu! is reached. 7o !our homework first% then wait until the stock and the "!ckoff "a&e are/ read! to mo&e. Then and onl! then act. S)*" of (e %o%en dec#!#on! *!*all$ co! %one$& 8our market studies and !our commitments should be pri&ate. Do $o*" wo"+ #n )"#/ae and +ee) $o*" own co*nc#l& Do no al+ (e %a"+e& T(#! #! e!!en#all$ a lone wolf  o)e"a#on& 7o the necessar! work reularl!. 9eep records of commitments and some records of  !our more important thouhts. )ractice trade% practice trade and practice trade% e&en after !ou are successfull! operatin with the bulk of !our capital. ,&en after !ou are thorouhl! familiar  with !our "!ckoff/ #ourse and with the Basic Lectures% !ou should periodicall! re&iew them+ otherwise the finer points will slip awa! from !our memor!; That costs mone!. Impro&e !our  knowlede. Increase !our understandin of the course and the Basic Lectures and thereb!/  profit. The principles and concepts we teach are &alidC The! workC The! ha&e been learned and tested b! thousands of students. If others can learn them% so can !ou. :se them to make mone! and to protect !our capital and profits. #ontinue to stud! !our course% impro&e !our techni*ues% ain additional e$perience and check and impro&e !our results. Lea"n o )"of#4

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PRACTICE TRADIN TAPE NUMBER ONE

This is practice tradin tape number one. Most students of the "!ckoff method are *uick  to aree that practice tradin is a ood idea. :nfortunatel!% it is all too often considered a ood idea onl! for those who reall! need it. This mistaken notion depri&es man! potentiall! ood traders of a &aluable learnin e$perience that could help them better reali0e the profits that are readil! a&ailable. -or man!% admittin that practice tradin is a continuin need is somehow taken as indicatin a lack of abilit!. To make this admission after ha&in one throuh a proloned  period of in depth stud! is more than some people can bear. -or others practice tradin is simpl! a bother. To be done correctl! there are all kinds of records that need to be kept% which eats up a reat deal of time and !et does not produce one sinle penn! of profit. To these people their time is 'ust too &aluable for such foolishness and the fact that the &alue of their capital is sinificantl! reduced b! 'ust harborin this attitude somehow escapes them. Some students who feel that practice tradin is for the other u! and not for them adopt an e&en more danerous attitude% that is+ the onl! wa! to trul! learn is b! doin it for real. ?enerall! the feelin is that a person is much more likel! to proceed with the necessar! amount of caution when there is a si0able lump of his own cash on the line. This sounds like a reasonable idea% howe&er e$perience has shown us that in practice it does not work. Traders are not necessaril! more cautious when the! ha&e to di into their own pockets to produce the resources needed to trade. If an!thin% the! are less careful and the reason is usuall! reed. It ma! come in the form of wantin to s*uee0e more profit out of a position than it can be e$pected to produce or as a lack of discipline in failin to wait for a potentiall! profitable situation to de&elop to the point where a tradin opportunit! trul! e$ists. ,ither wa! the student probabl! will learn a lesson% but will ha&e to pa! a &er! hih price. (e ma! e&entuall! end up knowin all there is to know. The onl! problem is that/ he is likel! to end up with no funds left and be unable to utili0e the lessons learned. )erhaps !ou ha&e alread! identified !ourself as a member of one of these roups. If not% or if !ou are reluctant to admit 'ust how bi an offender !ou actuall! are% there is a wa! to pro&e the point. It in&ol&es a self e&aluation. This% of course% can be painful if done ob'ecti&el!. In this case howe&er% the e&entual benefit should be worth the pain that ma! be e$perienced. To make this e&aluation !ou will need a record of the trades completed durin the pre&ious twel&e months. "hat we want to look at first is the number of positions that were taken durin this  period. "e also want to determine what percentae of the positions completed produced a before commissions profit. Thirdl!% we want to take a look at the si0e of each profit. If !ou do not ha&e this information immediatel! a&ailable% take a few minutes now to fiure it out. This e$ercise alone ma! be *uite re&ealin. Oka!% now we’re read! to continue. "e will bein with the number of trades completed. It would be nice if we could sa! that this number or that number of trades is too man! or too few or 'ust riht. :nfortunatel!% it does not work that wa!. The different natures of the &arious t!pes of tradin that can be done makes it impossible to identif! an optimum number of trades. There are% howe&er% some uides that can be helpful in anal!0in this aspect of !our tradin. -irst of all% the trader should reali0e that e&en if losses are e$cluded% tradin in the stock market is not a free ride; It in&ol&es costs. Ob&iousl!% the manitude of these costs is directl! related to the number of trades made. Since stock market tradin should be &iewed the same as an! other  business &enture% the o&erall oal has to be to ma$imi0e profits throuh the minimi0in of e$penses. ,$cessi&e tradin works aainst this oal. ,nain in more and more tradin ma!  brin some additional profits+ it will certainl! brin hiher and hiher e$penses. Since there are onl! a limited number of trul! outstandin opportunities a&ailable% a lare amount of acti&it!

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means that the in&estor has to di deeper and deeper to come up with a stock to trade. The costs in&ol&ed simpl! do not 'ustif! diin to the bottom of the barrel to find a stock. :nfortunatel!% much of the time an in&estor’s o&er tradin has nothin to do with ma$imi0in profits. More often than not it is an indication that he is unable to identif! the best opportunities. In these cases the trader is hurt in both the profits and e$penses column. The final word then on o&er tradin is% don’t do itC It is &er! eas! to tell !ourself that !ou will not o&er trade. ,ach position taken will be in a &er! ood stock for a &er! ood reason. 7oin this howe&er% is often somewhat more difficult. Man! times an in&estor is not e&en aware that he is o&er tradin. This is probabl! because there is no clear cut definition that we can i&e him as to what constitutes e$cessi&e tradin. The confirmed lon term trader wants that capital ain. Therefore% he should be aimin to sta! with a  position for a !ear or loner. The t!pe of potential that leads to a position that can be held for this amount of time does not de&elop o&erniht or that often. In a ood !ear there ma! be three or four times at most when conditions fa&or the takin of positions that could become lon term in nature. The a&owed lon term in&estor who finds himself tradin more often than this is  probabl! tradin too often. (e likel! has one or more basic problems that he had better see about sol&in. The three or four mo&es in an! one !ear that ma! result in a lon term tradin opportunit! each represent an/ ideal intermediate tradin opportunit!. 5lthouh the potential for these mo&es is constructed more *uickl!% it is still not an instantaneous process. Man! weeks ma! be in&ol&ed. 5s a result% this t!pe of trader will likel! be tradin more often than his lon term oriented friend. But these trades/ should not be on more than a reular basis. If a  professed intermediate trader finds himself takin positions more than once a month% he likel! has a problem that needs to be resol&ed. Short term tradin presents some special problems. (ere the trader alwa!s seems to be doin somethin% so determinin when o&er tradin is in  proress becomes more difficult. In the case of the “da!” or “da! to da!” trader% his results should ser&e as a uide. If the net result of this acti&it! is a loss% then clearl!% too much tradin is  bein done. Most short term operators are not into “da! tradin.” ?enerall! the lenth of trades is a few da!s to a few weeks. That bein the case% if tradin is bein/ done more than once a week% it is likel! bein done too often. Instead of reasonin out each action% this trader is  probabl! bitin at an!thin and e&er!thin that comes alon. If he isn’t more careful% those  positions ma! start bitin back. -rom these eneral uidelines it should be possible to arri&e at some feelin about the fre*uenc! of !our own tradin. 7oes it seem to be too oftenF If so% !ou definitel! need practice tradin. The costs !ou are eneratin in !our market acti&ities are too hih for what the! are  producin. (opefull! this first step in the e&aluation has not re&ealed a problem. ,&en so% there is still likel! to be need for practice tradin that ma! be re&ealed b! the ne$t step. The second step in this self e&aluation centers around the number of profits. Gow% no one should e$pect that e&er! trade or nearl! e&er! trade% for that matter% will produce a profit. :n'ustifiabl! hih e$pectations can lead to frustration. It is reasonable to e$pect a profit a ma'orit! of the time% howe&er there is a reasonable standard of e$cellence aainst which to compare !our results. I #! (a wo o* of e/e"$ ("ee )o!##on! e!a.l#!(ed !(o*ld )"od*ce a )"of#& "hen combined with a three to one profit risk ratio% a two out of three rate on profitable trades should produce a ood return to the intermediate or lon term in&estor% pro&idin those  positions were worth establishin in the first place. Let’s consider the intermediate trader’s position for e$ample. (e should be oin for a  profit potential of twent!fi&e percent on each trade. If he loses one position out of e&er! three taken% his ross profit on a round of tradin should be about fourteen percent% pro&idin that/ the remainin two positions perform as e$pected. 5ssumin that this trader is able to complete three rounds of tradin each !ear% he should be able to reali0e a return of about fort!eiht percent. The lon term in&estor faces e&en brihter prospects. (e should be aimin at issues with a fift! percent or more potential. 5ssumin the loss of one position out of three to a stop order% the return on a round of tradin would be in the neihborhood of twent!se&en percent. This sounds like less than the intermediate results% but it must be remembered that these profits are intended to *ualif! as capital ains% therefore the! are more hih powered profits than those reali0ed from intermediate tradin. The settin of a standard for short term tradin has to be handled somewhat differentl!. In this t!pe of tradin the trader is oin after a ten to fifteen percent mo&e in the stock. To reali0e a worthwhile return from this small a mo&e he is u suall! obliated to trade the options of the stock instead of the stock itself. ,ach profit is likel! to be enormous. 5 one hundred percent

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ross return would not be all that unusual. :nfortunatel!% each loss is also oin to be enormous. ,&en if a mental stop is used on the stock to sinal when to et out of a poor commitment% the loss still can be substantial. If no such protection is used the loss probabl! will be total. To help compensate for this and bearin in mind that each position is not oin to  produce a hundred percent profit% the trader has to set a hiher oal. He "eall$ need! o *"n a )"of# a.o* fo*" o* of f#/e #%e!& This is not eas!. Most students ne&er de&elop this le&el of abilit! and none ha&e it from the beinnin. This is wh! most are discouraed from undertakin this t!pe of tradin unless the! can point to a record in other areas that would suest a  possibilit! of success. On this point in the self e&aluation there can be no hedin. ,ither the number of profits meets the standard or it does not. If it doesn’t% there is an ob&ious need for  practice tradin. The in&estor cannot rel! on an especiall! bi profit comin alon e&er! once in a while to make up for a poor performance. The! ma! materiali0e% but there is a reater likelihood that the! will not. The ne$t step in the e&aluation is to anal!0e the si0e of the profits that were made. (ere aain there are standards of e$cellence. The! ha&e alread! been mentioned briefl!% but let’s re&iew them once more. 5 lon term trade should produce a profit of fift! percent or more. Intermediate trades should produce a profit of twent!fi&e to fort! percent and short term profits should be ten to fifteen percent per trade unless the! are made in options. It will be necessar! to remember back to the trades bein e&aluated to determine what t!pe the! were. Once this is done it is a simple matter to fiure which were up to standard and which were not. If the! all were not up to standard% practice tradin is warranted. ,ither the positions don’t ha&e the potential at the outset or the! were poorl! e$ecuted. ,ither wa!% the problem is one that can be sol&ed. )ractice tradin should help locate the solution. "e ha&e now concluded the self e&aluation. If !ou were not answerin the *uestions as the! pertain to !ourself as we went throuh the steps% do so now. Those *uestions were; 1/ 7o !ou trade to oftenF 6emeber that the answer here is somewhat sub'ecti&e% so be careful./ 3/ 7o !our trades result in profits too infre*uentl!F 
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(owe&er% this ob'ection is *uickl! laid to rest b! another *uestion. (ow are !ou oin to make an! mone! if !ou don’t completel! know what !ou are doin in the first placeF (ere aain the answer is that !ou’re not. In this case thouh the trader ma! be a&oidin loss% so he could be ahead of where he would be if he went blindl! ahead/ into actual tradin. -or those who are willin to accept the idea of abstainin from tradin for a while% the ne$t consideration usuall! is+ how lon should that beF Should it be one month% three months% si$ months% a !earF 5n! of these could be the riht answer; It depends on the in&estor and the t!pe of  operation in which he is most interested. ?enerall!% the amount of time should be lon enouh to enerate the desired numbers and the t!pe of profit o&er three consecuti&e rounds of tradin. This ma! be onl! a few months for the trader in&ol&ed with short term tradin or it could be a couple of !ears for the lon term in&estor. The point is% that howe&er lon it ma! take% the time is well spent. The actual tradin opportunities missed durin this period are of no concern. Others will follow and the lessons learned from the opportunities missed stand to produce a better return from those of the future. Once the practice trader has achie&ed the results that indicate proficienc!% he is read! to mo&e on to the second step. This is the transition from pla! mone! to real mone!. It is a &er! critical period. 7urin this time the trader is still learnin% but now he is learnin more about himself then about how to trade. These lessons are sometimes e&en harder to learn. There are man! students of the market who can academicall! make a fortune% but for whom their  personalit!% when confronted with real mone!% becomes a ma'or obstacle. -or most howe&er% this can be o&ercome b! conditionin. The/ procedure for this phase is simple. The in&estor attempts to duplicate his results from the period of e$clusi&e practice% onl! now he backs up each commitment with what is for him a small amount of funds. In determinin what this amount should be% some consideration should be i&en to the t!pe of tradin bein done. Let’s assume that a particular trader plans to someda! be workin with an amount of cash where a fiure of J>44.44 per trade durin this transition phase could be 'ustified. If the trader’s  practicin is aimed at becomin a successful short term trader% there is no problem. -i&e hundred dollars will usuall! pa! for at least one put or call of most stocks e&en when the commission is added. If the trader is makin these first trades in stocks with an e!e toward becomin a better intermediate or lon term trader% he must reali0e that about ten percent o f his J>44.44 will be eroded awa! b! commissions. ,&en with this hea&! burden howe&er% correctl! selected positions of this small si0e will produce a return better than most sa&ins accounts. This i&es the in&estor the chance to earn while he learns. The &er! small in&estor is at somewhat of a disad&antae durin this phase. If a fiure of J144.44 is the most he can 'ustif! committin to each of his first trades% he is likel! to be priced out of the short term tradin arena and likel! to find that e&en &er! successful intermediate trades are onl! break e&en propositions. In this case it is likel! that onl! the ma'or profits of successful lon term trades will produce a reasonable net return. This is unfortunate% but% it is how the s!stem works. It is not a ood enouh reason to skip o&er this &ital step in the procedure. It is primaril! an e$tension of the learnin process. The actual dollar profit is a secondar! consideration. T(e %o! #%)o"an (#ng #! (a 3*dg%en #! no d#!o"ed .$ (e *!e of "eal dolla"!& 5s with the period of e$clusi&e practice tradin this second phase should continue lon enouh to pro&e the point. 5ain% the three consecuti&e rounds of tradin that measure up to the desired standards should be a sound oal. This means that an additional se&eral months or couple of !ears ma! be added to the learnin process. It represents a ood in&estment howe&er. 5ssumin that the in&estor has found an ade*uate measure of success in the first two steps of/ the practice tradin procedure% he is read! for the final step. This is the full utili0ation of his capital. The onl! thin different in this step is the number of dollars committed to each trade. There is no need to do an!thin different because the procedures alread! de&eloped ha&e  pro&en successful. There is no reason to tamper with success. 5s lon as the results continue to measure up to the predetermined standards% the trader can reali0e the fruits of his effort. Beware% howe&er% of the onset of results that are below standard. "hen this happens the in&estor should  back off one step and return to the takin of small positions. (e should ne&er 'ust o on makin the same dumb mistakes. The! seldom o awa! b! themsel&es. :suall! what is indicated is that a basic error is bein made that must be fiured out before it can be eliminated. The hih pressure realm of full utili0ation of funds is not the place to do this. It probabl! won’t work and e&en if it does% the cost is too hih. In discussin the three steps in the practice tradin procedure the term “round of trades” was used se&eral times. This implies the desirabilit! of di&ersif!in !our funds. )ro&idin the  primar! moti&e behind it is not to enerate commissions it is a &er! ood idea. In fact% durin the

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first step of practice tradin the more trades that are made% the more that is likel! to be learned. Of course% this assumes that the di&ersit! has some order to it% otherwise the result is likel! to be chaos. "hen the trader reaches the third step of the practice tradin procedure he should di&ersif! his funds with a reat deal more caution. 7i&ersif!in !our funds is another aspect of tradin that can be approached correctl! or incorrectl!. In eneral the correct approach will pre&ent the possibilit! of bein badl! hurt b!  bein too hea&il! or totall! committed in 'ust one bad trade. 5t the same time it will not result in  profits that are well below those that miht ha&e been reali0ed due to e$cess e$penses caused b! o&er di&ersification. #onsider two traders each of whom ha&e J<4%444 to commit to the market. One takes three positions of appro$imatel! J14%444 each. The second trader enters into ten trades of appro$imatel! J<444 each. ,ach trader e$periences the same eneral results; There are profits in two out of three trades. ,ach profit represents a twent!fi&e percent return and each loss is appro$imatel! eiht percent. ?i&en these conditions% the trader makin three trades miht e$pect a J=344 return from which he would ha&e to deduct about J>33.44 in e$penses for a net return of J<@AE. The trader makin ten trades could e$pect an o&erall profit of J=><4. In this case howe&er% the e$penses would total about J14E4 which would reduce the net return to J<=>4. The trader who has more thorouhl! di&ersified his funds in an effort to find more profitable trades actuall! made less in profits. ,$cessi&e di&ersit! is not alwa!s better. "hen it is used as a crutch to compensate for a lack of confidence it is a tradin error. 5s pre&iousl! mentioned% the primar! oal of the first two steps in the practice tradin  procedure is to learn. ,*uall! important he the trader/ needs to learn what it is that he doesn’t know how to do. If possible he should turn these thins that he is unable to do into thins that he can do. )ractice tradin should be done in a wa! that clearl! shows where the abilities and the inabilities lie. Since not e&er! student de&elops the same tradin abilities with each principle and since some concepts are easier to work with than others% it is not a sound procedure to 'ust lump all practice trades toether in one bi pile. To do so makes it difficult to determine what it is that !ou ma! be re&ealin. This tells us that ha&in 'ust one practice tradin account is not enouh. It shows o&erall results% but tells little about strenth and weaknesses. (a&in a practice account for  lon positions and one for short sales is a step in the riht direction. ,ach of these two t!pes of trades is based on a distinct set of tradin opportunities. Bein able to work with one set does not automaticall! translate into/ an abilit! to work with the other. 5s bu!in opportunities are distinct from short sellin opportunities% so also are the indi&idual bu!in and short sellin opportunities distinct from one another. Therefore it is possible for a student to ha&e a &er! ood abilit! at bu!in on “backups to the ede of the creeks%” but be absolutel! terrible at takin  positions on sprins. (e miht be reat at shortin on a rall! back to the ice% but not be able to tell an upthrust from a “'ump across the creek.” 5n! of these combinations of abilit! and inabilit! miht be hidden b! broad based tradin accounts that encompass all bu!s or short sales. 0(a (#! !a$! (en #! (a w(a %a+e! (e %o! !en!e #! o (a/e a )"ac#ce acco*n fo" eac( $)e of "ad#ng o))o"*n#$& This will show e$actl! where problems and abilities lie and let the trader know what t!pe of tradin he can approach with confidence. (ow man!  practice accounts to maintain depends on the indi&idual% but more is likel! to be better than less. ,$hibit 1 pro&ides a list of ten that miht be considered. All of (e acco*n! (a a"e go#ng o .e e!a.l#!(ed !(o*ld .e !a"ed a (e !a%e #%e& The! should be maintained for at least one complete c!cle of ma'or market mo&es. This will allow for the de&elopment of an e$tensi&e set of results which should pro&ide man! ob&ious indications. The results of practice tradin are onl! of &alue if the! are put to ood use. ,arlier it was stated that e$clusi&e practice tradin should be continued until three consecuti&e rounds of profitable tradin are achie&ed. This was a eneral statement. Gow that the idea of practice tradin has been refined% so can this statement. I #! no nece!!a"$ o wa# fo" e/e"$ acco*n o !(ow (e de!#"ed !anda"d of ecellence .efo"e .eg#nn#ng ac*al "ad#ng& "hen the results of practice tradin indicate that a concept has been mastered% it ma! be emplo!ed in actual market operations. Those accounts that show poorer results should be carefull! anal!0ed in an effort to isolate the tradin errors. "e know that the market repeats a certain set of tradin opportunities o&er and o&er aain. The same thin is enerall! true of the errors made b! traders. The! also tend to be repeated time after time. There are se&eral t!pes of errors. So%e of (e %o! co%%on a"e "ad#ng oo ofen, "ad#ng oo ea"l$, (old#ng a )o!##on oo long and *!#ng #%)"o)e" )"oec#on of  "ade!&   "hen an! of these show up in a particular account% it usuall! means that the concept on which the account is based is not clearl! understood. It should be restudiedC If these problems start to show up in e&er! practice tradin account% the student should return to Lesson One of his "!ckoff #ourse and bein aain. Much of the time problems that de&elop in practice tradin can be

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sol&ed b! the trader himself. The! ke! to bein able to sol&e a problem is bein able to reconi0e it. This will onl! be possible if careful records are kept. A !*den #! no l#+el$ o .e a.le o (el) (#%!elf, no" a"e we l#+el$ o .e a.le o (el) (#% *nle!! (e +now! w(a (e d#d, w(en (e d#d # and w($& If an! part of this information is missin the &alue of the e$perience is reatl! diminished. Two t!pes of records need to be kept. One is of the specifics of each trade+ when was it established% how man! shares were traded% what was the price and the commission% when was the trade closed out% what was the price and commission at the end of the trade and/ finall!% what was the net resultF These records are usuall! kept b! most because the! are eas! to maintain. ,$hibit 3 shows one con&enient format that miht be used. The second set of records that should  be kept is the one most fre*uentl! nelected. It is important to ha&e an accountin of the thouhts that led to the results reflected in the first set of records. "h! was a trade initiatedF "hat was the anticipated ob'ecti&eF "hat stop orders were usedF ,$hibit < shows how this data miht be kept. This information will tell wh! the net results were what the! were. In man! respects this is more important then the net profit or loss. If there is a problem with results% the si0e of the profit or the loss will onl! indicate that there is somethin wron. It is the underl!in thouht that contains/ the source of the problem. To reach a solution it is alwa!s best to be able to o to the source. The "!ckoff principles !ou ha&e learned are for the most part simple ideas. Their application% howe&er is not so simple. This is because the! are not mechanical tools. ,ach re*uires 'udment. The idea can be learned% but the 'udment needed to use it properl! must be de&eloped. The purpose of practice tradin is to allow this de&elopment to occur in a constructi&e manner. 5n! alternate approach will almost certainl! be paid for with disappointment% frustration and man! dollars. The remainin tapes in this series will be de&oted to indi&idual tradin techni*ues that are desined to be of help in specific t!pes of practice tradin. In addition to co&erin the ideas  behind each and to i&in e$amples of each% a short tradin e$ercise will be pro&ided. It is important to reali0e that the tapes are not an end but a beinnin. The material to follow% if utili0ed in the manner alread! co&ered% cannot help but produce a better trader. "here there are  problems we are here to help% but the first critical steps are up to !ou.

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PRACTICE TRADIN TAPE NUMBER T0O

This is practice tradin tape number two. The "!ckoff #ourse stresses trends. The! are the means b! which the market or a stock accomplishes a mo&e from an! point 5 to some other  point B. Because the! are such a basic part of market action% determinin the trend is the first step in the "!ckoff method. :nless the trend% which can be simpl! defined as the line of least resistance% is well defined and clearl! in mind% there is relati&el! little likelihood of success. Those who take the time to identif! the path of least resistance and will make their trades in harmon! with it cannot  be uaranteed a profit% but the! stand a much better chance of achie&in a positi&e result than does the indi&idual who resorts to strictl! random action. 5n in&estor who wants to learn how to trade trends profitabl! must reali0e that the market or a stock ma! occup! an unlimited number of positions within a particular trend. This is wh! knowlede of the trend is not enouh to uarantee a profit. It will help the trader make the riht t!pe of trade% but will do little about timin that trade correctl!. This will come from an understandin of the special position bein occupied within the trend. "ithout such knowlede% no trade% not e&en one in harmon! with the trend should be made. T(e )o!##on #! a! #%)o"an a! (e "end #!elf& The trader who wishes to de&elop the skill of bein able to trade trends is immediatel! faced with a problem+ that is% reconcilin the ideas of trend and position. The reason that this can be a problem is that makin a trade that is in harmon! with the trend and that/ at the same time is fa&orabl! positioned within the trend in&ol&es apparentl! conflictin actions. If the trend is up% it seems onl! natural to bu! as stock mo&es in the direction of the trend. Similarl!% if the trend is down% it seems natural to sell short as prices mo&e lower. 5lthouh both actions ma! appear reasonable% the! are both wron. If the trend is up% the position should be taken in harmon! with the trend% but as the price mo&es lower. If the trend is down% a short position should be taken to be in harmon! with the trend% but it should be established as the price mo&es hiher not lower. Since the position should be taken as the price is mo&in in what appears to be the wron direction% it is an action that is &er! difficult for some in&estors to do. Those who cannot stand little chance of reali0in the full measure of  profit possible from the tradin of established trends or from an! other t!pe of tradin for that matter. Takin a position as the price mo&es in the wron direction is not done simpl! to be contrar!. There are ood reasons for such action. One is to minimi0e risk. Stocks seldom mo&e from point 5 to point B in a straiht line. If the! did% bu!in as prices mo&e hiher or sellin short as prices mo&e lower would make sense. The normal course of mo&ement is alternatin  periods of proress and consolidation. If a position is taken durin a period of proress it stands to be lost to a stop order durin a period of consolidation. Therefore% the amount of risk is increased b! actin while proress is bein made. It is decreased b! actin durin the consolidation period because the likelihood of bein stopped out is less. The other reason for actin in a contrar! manner is to ma$imi0e profit. Her! few traders% if an!% are able to et in e$actl! at the bottom and out precisel! at the top. Such an e$pectation is not reasonable in the first place. I #! "ea!ona.le (owe/e", o ge #n nea" (e .oo% and o* nea" (e o)& If a position is established as a stock is mo&in awa! from the point at which the mo&e oriinated and therefore in the direction indicated b! the trend% the profit potential is not enhanced; It is reduced. The in&estor is workin aainst himself because he is makin his trade farther from the beinnin of the mo&e than he miht otherwise ha&e to b! waitin for a mo&e in the other direction. These eneral ideas must now be refined into procedures if the! are to be useful as tradin tools in workin with defined trends. The result is two primar! tradin opportunities associated with up trends and two associated with down trends.

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Po!##on! e!a.l#!(ed #n connec#on w#( a def#ned *) "end %a$ .e 3*!#f#a.l$ a+en on ce"a#n "eac#on! afe" (e "end c(annel (a! .een well def#ned& The! ma! also be taken on reactions that are anticipated to lead to the definin of an up trend. Both procedures will tend to ma$imi0e the profit potential at the time. In the case of bu!in on reactions after the trend has  been defined% the risk will be minimi0ed. This will also be true of bu!in on the reaction that leads to the definin of the trend% pro&idin that/ the anticipation is correct. Since this second approach in&ol&es a reater deree of uncertaint! and therefore risk% the reward for bein correct will be reater. If a stock is in an up trend or is in the process of definin one% it is in a position of relati&e strenth. If a stock is stron it should displa! a certain t!pe of beha&ior. -or e$ample+ consider the stock that has not as !et produced the second point that will lead to the definin of an up trend. T(e "eac#on (a w#ll end .$ )"o/#d#ng (#! )o#n !(o*ld no g#/e *) %o"e (an (alf of (e ga#n f"o% (e "all$ off (e f#"! )o#n& If it does% there is reason to *uestion whether  the stock is trul! stron. It is ne&er a ood idea to trade a stock while in doubt. 5 *uestion as to a stock’s strenth is reason enouh to look for opportunities elsewhere. It is true that some stocks that react more than half wa! as their up trends are bein defined do o on to make sinificant ad&ances. Because of this the practice has e&ol&ed of sa!in that the reaction should meet support in the &icinit! of the halfwa! point. "hat is the &icinit!F Is one point or ten per cent below the halfwa! point acceptableF "hat about two  points or twent! percentF There is no hard and fast rule here. It is strictl! a matter of 'udment which is somethin that can onl! be de&eloped o&er time. 5n!one who does not feel confident about makin such a 'udment or who lacks the e$perience to 'ustif! makin it should stick to the ob&ious. If the stock has i&en back more than half of the pre&ious ain% it is not acceptable. This is somethin that an!one can determine. If a stock is belie&ed to be stron and has alread! defined its up trend% it too should  beha&e in a certain manner. I !(o*ld no )ene"ae (e !*))o" l#ne of (e "end on (e "eac#on (a #! an#c#)aed o lead o (e "ad#ng o))o"*n#$& In addition it is best if no  pre&ious reaction resulted in a penetration either. The reason is that each penetration of the support weakens the trend. If the trend is weak% it is difficult to sa! that the stock is in a position of strenth. The best thin to do is to look for another opportunit!. The definin of an important up trend will often be associated with “the backup to the ede of a creek.” The “'ump...” that precedes it propels the stock up and out of a tradin rane. This is usuall! an ob&ious action. It clearl! indicates that the line of least resistance has chaned from bein hori0ontal to pointin in an upward direction. In the o&erwhelmin ma'orit! of cases it should not be necessar! to ask if a mo&e constitutes a “'ump across the creek.” If the *uestion is needed% the mo&e is probabl! somethin else and it would be best to lea&e the stock alone. 5s important as “the 'ump...” is% it is not the action that warrants a trade. That is reser&ed for “the  backup... .” Kust because there has been a “'ump across the creek” howe&er% does not mean that an! “backup...” effort can be used to establish lon positions. It must meet the same riid re*uirements alread! mentioned. If not% there is a ood chance that the stock will “fall back into the creek%” which will neutrali0e the positi&e indication i&en b! the “'ump... .” An #n/e!o" !(o*ld .*$ on (e .ac+>*) o (e edge of a c"ee+ onl$ #f (e !oc+ #! (old#ng a lea! (alf of (e ga#n "eal#ed on (e 3*%)&&& & Be &er! careful of this point  because it can lead to prematurel! bu!in a stock that reall! should not be traded at all. 5t the  beinnin of the “backup...” the stock ob&iousl! will be holdin more than half of/ its pre&ious ain. This does not count. "hat does count is how much of the ain is bein held when the  price beins to show sins of support. Most of the time these indications of support will be ob&ious. But% for confirmation% the le&el of &olume should be considered. 5s the stock “'umps across the creek” it should e$perience a sure in tradin. "hen the “backup...” beins% the le&el of acti&it! should subside. If the &olume has been reduced substantiall! at the time when the support and the price is percei&ed% it is *uite likel! that the “backup...” is nearin an end. If this happens at or abo&e the halfwa! point a lon position ma! be established with confidence%  pro&idin one more condition can be met. 5 stock that is producin a constructi&e “backup...” is likel! also to be/ workin on the definition of a relati&el! important new up trend. This sa!s nothin% howe&er% about the amount of proress that will be made b! the stock in the trend. -or this reason the amount of a&ailable  potential should be considered before an order to bu! is actuall! placed. If the anticipated mo&e is not in keepin with the in&estor’s ob'ecti&es% it doesn’t matter how spectacular the “'ump...” was or how constructi&e the “backup...” seems to be+ the position is not worth it. -ind a better opportunit!C

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It is possible that e&en with riid restrictions on what stocks to trade% like the ones alread! mentioned% an in&estor will find himself considerin more issues than his funds will allow him to trade. To further reduce the number of candidates and in an effort to be true to the "!ckoff method% the trader should compare the action of the stock to that of the eneral market. T(e !oc+ !(o*ld .e "ela#/el$ !"onge" (an (e %a"+e& To *ualif!% a stock must ha&e rallied more on the “'ump across the creek” and reacted back less on the “backup... .” It must also  possess a reater measure of future potential. These considerations are important enouh to be considered b! the in&estor whose funds would allow him to trade e&er! potential candidate. (e ma! find that some of them are not such reat opportunities after all. 5n! stock that can meet e&er! one of these *ualifications ma! be bouht and recorded as a trade in the practice tradin account desinated for “backups to the ede of the creeks.” )ro&idin that/ the protecti&e stop is not foolishl! placed% these positions should be amon the most reliable at producin a profit.  Got e&er! stock is oin to work out howe&er. If the action followin the takin of the position does not li&e up to e$pectations within a reasonable amount of time the position should be closed out. #ontinuin to hold the stock cannot be 'ustified. If it has failed to perform% it is better to et out than to risk bein stopped out. Some time after the up trend has been defined and positions ha&e been established in the  practice account set up for “backups... %” it ma! be possible to take additional positions in the same stocks and post them to the practice account established for trades in an established up trend. These opportunities ma! de&elop in other stocks as well. The first criteria that these  positions must meet is that the! be taken on reactions. E/en #f (e o*co%e #! )o!##/e, a long )o!##on (a #! no a+en d*"#ng o" a (e .oo% of a "eac#on "e)"e!en! an #%)o"an "ad#ng e""o"& If it becomes a habit it could pro&e to be a costl! one. In attemptin to bu! on a reaction the position will be established as the price mo&es toward the support line of the trend. Re%e%.e", # %*! no )ene"ae (e !*))o" and !(o*ld no (a/e )ene"aed an$ #%e )"e/#o*!l$& Bu!in in this position can be done with reater confidence if the reaction underwa! at the time has i&en up no more than half of the ain from the pre&ious rall!. S#ll %o"e conf#dence w#ll .e gene"aed #f (e /ol*%e #! o./#o*!l$ "ed*ced on (e "eac#on& This is%  perhaps% the most critical point. Unle!! (e /ol*%e #! *nden#a.l$ lowe", no ac#on !(o*ld .e a+en& If the &olume remains hih% the problem it creates is uncertaint!. The in&estor cannot be sure where the price will meet support or e&en whether it will meet support. This is a perfect e$ample of the truth of the phrase% “when in doubt do nothin%” comes throuh loud and clear. There are still two more criteria that must be met before a lon position can be taken. -irst% consideration must be i&en to the potential. 5 position established in a stock in this situation will not ha&e the same potential as would a position taken while the stock was still in the area of its base. Because the potential will be somewhat reduced it ma! not be possible to  'ustif! a trade e&en if the other criteria alread! mentioned are met. Let’s sa! we ha&e a stock that  bean its ad&ance with a twent!fi&e percent mo&e. It is now makin the riht kind of reaction within the up trend% but the remainin upside potential indicates that the mo&e left in the stock will onl! carr! it ten percent abo&e its current le&el. This means that we can onl! reall! 'ustif! about a three percent stop which in most cases would be &er! close. Therefore% we miht be forced to b!pass what would otherwise seem to be a &er! ood opportunit!. The final consideration should be i&en to the relati&e performance of the stock compared to that of the eneral market. T(e !oc+ #! %o! l#+el$ o )e"fo"% a! e)eced #f  # #! clea"l$ !"onge" (an (e %a"+e& :p/ to the point at which the trade is bein contemplated the stock should ha&e been makin more relati&e proress on the upside durin rallies and less downside proress durin reactions. 5 trade based on all these criteria cannot% of course% be uaranteed to produce a profit. The likelihood of success howe&er% is reatl! increased if e&er! point discussed has been met. Onl! those stocks that ha&e met e&er! point should be considered for either the practice tradin account dedicated to “backups to the ede of the creek%” or the one intended for trades in a well defined up trend.  Gone of these positions will last fore&er. The time to determine when to sell this t!pe of lon position or an! t!pe for that matter is at the time when the position is established. T(#! #! (e )o#n a w(#c( (e "ade" #! lea! l#+el$ o .e #nfl*enced .$ g"eed& T(e #n##al dee"%#na#on of a !ell#ng )o#n !(o*ld .e .a!ed on (e o.3ec#/e #nd#caed .$ (e f#g*"e c(a"& 6emember thouh+ this is onl! a uide. The most important thin is the trend. #ontinuin to seek a particular ob'ecti&e after the up trend has been broken is a danerous course of action. "hen the need arises to sell a position it should onl! be done on a rall!. If the reason is brouht about b! the breakin of the trend% it likel! will occur on some t!pe of reaction. It

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ma! e&en be a sharp reaction. DonG )an#c and !ell on (a "eac#on4 5 better time and  probabl! a better price will come on the ne$t rall!. This is when !ou sellC The two practice tradin accounts alread! mentioned ha&e their down side counterparts. 5 short sale can 'ustifiabl! be established on a rall! as a down trend is b ein defined or at the top of a normal correcti&e rall! in a pre&iousl! defined down trend. The onl! thin different in these cases is the anticipated direction of the mo&e. 5 short sale that is established as a down trend is  bein defined will often be associated with a “rall! back to the ice.” A "all$ of (#! $)e (a can 3*!#f#a.l$ .e *!ed a! a !(o" !ell#ng o))o"*n#$ w#ll fa#l o %a+e *) %o"e (an (alf of (e decl#ne f"o% (e )"e/#o*! "eac#on& If it is able to make up more than half the loss no indication of weakness is bein i&en and no short sale can be 'ustified. In add##on, (e "all$ o (e )o#n a w(#c( (e !(o" !ale #! .e#ng con!#de"ed %*! .e on !*.!an#all$ lowe" /ol*%e (an wa! )"e/#o*! "eac#on& If it isn’t% then aain% there is no particular indication of weakness bein i&en. Short sales can also be 'ustified on normal rallies in important down trends. In these cases the points to watch for are &er! similar to trades made in pre&iousl! defined up trends; The onl! thin different is the direction. A "all$ on w(#c( !(o"#ng #! o .e done !(o*ld .e acco%)l#!(ed on lowe" /ol*%e (an wa! e)e"#enced on (e )"e/#o*! "eac#on and (a "all$ !(o*ld al!o fa#l o %a+e *) %o"e (an (alf of (e ea"l#e" lo!!& 5t its top it is important that there be enouh potential remainin to 'ustif! a trade and the stock must be demonstratin that it is clearl! weaker than the market. "hen it comes time to co&er an! of these short  positions or an! taken on a “rall! back to the ice%” the points to consider are the relation of the  price to the ob'ecti&e and whether or not the suppl! line has been broken. "ith these two practice tradin accounts added to the similar accounts for lon positions% the in&estor has a means of monitorin the rowth of his abilit! at tradin trends from the point of their definition to the point at which the! were broken -or most stocks% this will represent the  bulk of their mo&es. Therefore% positi&e results in all of these accounts% but especiall! those  based on “backups to the ede of the creek/” and “rallies back to the ice/” are important.  Gow% let’s look at some applications. The in&estor should reali0e that some of the best applications of these techni*ues will be found when tradin ma'or mo&es. There will also be some ood intermediate applications. Similar de&elopments will occur on the short term% but the time factor ma! make it difficult to take ad&antae of most. This is especiall! true of opportunities that de&elop on reactions and rallies sometime after the trend has been defined. These tend to be harder to anticipate and can be completed within one da!s action. That means the trader almost has to watch the market throuhout each session% which is not possible for most. One ood e$ample of how these techni*ues can be applied in a loner term settin is to  be found in the action of 12A< and 12A=. In 12A< the "!ckoff "a&e reached a hih of 3E@< on Kanuar! 13th. The low for that !ear% which represented the end of the first le of the collapse that would continue into 12A=% came in September at 31E>. 5 little o&er a month later on October 32th the reco&er! hih of 3>@1 was reached on a pattern of &olume that did not indicate an!  particular enthusiasm. The 3>@1 fiure was onl! one and a half percent abo&e the halfwa! point of the pre&ious reaction. The fact that the price of the "a&e went abo&e the halfwa! point at all could ha&e been used as an arument for not considerin short positions at this point. Such a decision would ha&e resulted in missin some of the best short side opportunities of the last ten !ears. This could ha&e been a&oided with the use of some 'udment% which is what separates the "!ckoff approach from other strictl! mechanical methods. 5n inde$ is a measure of eneral market price action. 7ue to the nature of their composition the! cannot be absolutel! precise% therefore it is enerall! desirable to allow for some small marin of error. One and one half percent would seem to fall within such a marin. A wa$ of conf#"%#ng (#! (owe/e", #! o co%)a"e )"#ce ac#on w#( /ol*%e ac#on& It has alread! been mentioned that the &olume on the rall! to the halfwa! point was not indicati&e of strenth. This fact toether with the stoppin of the rall! so close to the halfwa! point could  'ustifiabl! ha&e been used to search out some short side candidates. In lookin for stocks to short% the standards should aain be made more riid. This would also be true if we were lookin for stocks to bu! in a different market situation. The reason for bein more demandin at this point is that the in&estor is onl! one step awa! from puttin his funds on the line. (e needs to be as certain as possible that the stock selected will perform as e$pected. ,$hibit number/ = shows a drawin of how the market action from the 12A< hih to the 12A= low appeared. Gotice that we ha&e marked the &alues of the "a&e at the important turnin  points and the percentae mo&es from one turn to the ne$t. Between the 12A< hih and the

?2@

12A=/ low% the "!ckoff "a&e lost twent!four percent. On the reco&er! that followed it ad&anced se&enteen percent. Gow% look at the price action of four stocks for the da!s on which the market made its turns. 7urin the first stae of the decline there can be no doubt that “(olida! Inn%” was the weakest stock. This is an important obser&ation because if we are oin to take short positions% the! should onl! be in stocks that are weaker than the market. Of course% the positions would not be taken at the September 1Eth prices. That would mean shortin at the  bottom of a reaction which &iolates one of the most basic directi&es of the "!ckoff method. The critical mo&e was the rall! to October 32th. 5ssumin that the pre&ious reaction had been seen as a ma'or sin of weakness% this rall! would be watched as endin in a ma'or Last )oint of Suppl!. "e ha&e alread! concluded that the market’s action 'ustified shortin. Therefore% an! stock that had the potential to mo&e lower and had been consistentl! weaker than the market would ha&e  been a short candidate. 5ll four of the stocks listed on e$hibit number/ = had potential to mo&e lower% but onl! two *ualified for bein sold short. “-ord” and “(olida! Inn%” had been weaker than the market on the decline to September 1Eth and on that ad&ance to October 32th the! could  'ustifiabl! ha&e been shorted+ the other two could not. "hat if the potential to decline had been reater in “,$$on” and “BurrouhsF” Both stocks had been weaker than the market on the rall! into October. #ould not this factor be combined with the reater potential to make these stocks the choices instead of “-ord” and “(olida! InnF” It could ha&e% but the deree of risk would ha&e been substantiall! increased. )otential is not alwa!s full! reali0ed. It is an indication onl!. #onsistent relati&e weakness% on the other hand% is a fact. A! long a! (e )oen#al #! g"ea eno*g( o 3*!#f$ (e $)e of "ade .e#ng cone%)laed (e con!#!enc$ of (e wea+ne!! !(o*ld .e (e dee"%#n#ng faco"& If we now look at the final result we can see that the most consistentl! weak of the four stocks produced the biest decline. It is true that “Burrouhs” and “,$$on%” also made substantial declines% howe&er% this is hindsiht. 5t the time the positions were bein taken both “Burrouhs” and “,$$on%” had ma'or flaws. The in&estor has to protect himself b! oin with the best candidates a&ailable at the time. The absolute best performer ma! not be chosen e&er! time% but the/ chances are that a ood performer will be chosen most of the time. ,$hibit number/ > shows a chart of “Bethlehem Steel.” The pre&ious e$ample was out of the past. Its outcome was alread! known. In this case howe&er% we ha&e a de&elopin situation where the outcome is not known; It must be anticipated. Both the &ertical line chart and the fiure chart show a ma'or “creek.” The! also show that this “creek” has recentl! been “'umped.” T(a #! (e !#gnal o wa+e *) and )a$ aen#on& There is a ood chance that a trade on the lon side ma! he possible as a ma'or up trend is bein defined on the “backup to the ede of the creek.” 5 stock like this should be posted and anal!0ed dail!. )ro&idin that the stock oes no hiher than the <3 le&el which it has alread! touched% the halfwa! point of the rall! can be found 'ust below the 3E le&el. This appro$imates the top of the tradin rane and the “ede of the creek.” If the price will meet support around 3E on low &olume% which in this case would be somethin between <3%444 and @=%444% a lon position could be taken. The stock would be stroner than the market and ha&e a ma'or upside potential in the A4 to A= area. 5t the  point that/ this chart ends we don’t know whether a position is oin to be possible in this stock. 5ll we ha&e is a ood possibilit!. That is enouh howe&er to make note of what conditions would lead to a trade. Gotice that we said “make note” and not “take note.” "rite those conditions down in !our diar! of market thouhts. It is much easier to ob'ecti&el! consider what will 'ustif! a trade while the stock is at <1% than it will be/ to come to a decision when it ets  back to 3E. In e$hibit number/ = we had a lon term e$ample of tradin the concepts in this tape in a down trend. ,$hibit number/ @ pro&ides an intermediate e$ample. The first phase of the decline in this stock took the price from == to <4. This put the halfwa! point of the reaction at
?2?

In the same market en&ironment an in&estor miht ha&e considered the stock pictured in e$hibit number/ A. If so he would ha&e been in error. The first sinificant sin of weakness in this stock came on the mo&e down from @1 to >3. 5fter a sin of weakness we watch for a last  point of suppl! to take a short position. In this case the L)S8 came at point B. There are two important reasons wh! a trade could not be 'ustified in this case. One is the penetration abo&e the halfwa! point of the pre&ious reaction. 5 stock that does not penetrate this point pro&ides a clear indication. In this case it is possible that the action two da!s prior to point B could ha&e  been seen as a last point of suppl!. This was the first da! that the price tried to penetrate the halfwa! and it was decisi&el! turned back. That is *uite con&incin% but the takin of a position would ha&e been discouraed b! the limited amount of a&ailable potential. It was not of intermediate trade proportions. Some would arue that the count in this instance would ha&e been ade*uate if taken further to the left. This is true. Do#ng (a (owe/e" wo*ld /#olae (e conce) of  a+#ng (e %o! con!e"/a#/e co*n f#"!& If it does not 'ustif! the trade no position should be taken. ,&en if the entire top had been counted% a stock like the one in the pre&ious e$hibit would still ha&e ended up bein the choice for tradin. In addition to its other positi&e factors% its ma$imum downside count was more full! de&eloped as well. There seems to be an almost irresistible ure amon students% especiall! newer students to trade stocks that are determined to be “ood enouh.” 5 stock like the one in e$hibit number/ A miht fall into this cateor!. The truth is howe&er% that there is no such thin as a stock that is “ood enouh.” ,ither it is a ood tradin opportunit! or it is not. Those that are% are usuall! ob&ious. The! represent the onl! issue that should be traded. -or one final e$ample we turn to a short term situation. (ere the intrada! chart of the "!ckoff "a&e shows the first le of an ad&ance from point number/ 1 to point number/ 3. 5n up trend would result and a lon position would be 'ustified if the correction to that mo&e met certain criteria. 5t point number/ < there was support at the halfwa! point and a reduced le&el of acti&it!. 5 trade was 'ustified. 5 second one could ha&e been considered at point number/ =. The basis here would ha&e been a constructi&e correcti&e reaction in a pre&iousl! defined trend. It should be noted that no fiure chart is presented here. Befo"e %a+#ng a f#nal dec#!#on on w(e(e" o a+e a )o!##on, (e ca"ef*l #n/e!o" wo*ld con!*l (e f#/e )o#n f#g*"e c(a" of (e 0a/e o !ee w(a $)e of )oen#al wa! #n )lace& It is the desire of e&er! in&estor to bu! at the absolute low and to sell/ at the absolute top and then to sell short at the top and co&er at the bottom. Sometimes this is possible% but on a consistent basis it probabl! is not. Beware of those who sa! the! can. This does not mean that consistent and consistentl! ood profits are not possible. The techni*ues of takin positions as important trends are bein defined or on constructi&e rallies or reactions after the! ha&e been defined pro&es this. These techni*ues enerall! result in positions bein taken *uite a wa!s abo&e the absolute low or below the absolute top. Still the positions% much of the time% will  produce a reasonable profit. The reason is that the heart of the mo&e is bein traded. This is enerall! the time when the reatest amount of proress is made and the most profits enerated. The techni*ues discussed in this tape are amon the simplest to understand; The! are also amon the easiest to appl!. Techni*ues to be discussed in the followin tapes are more comple$+ the! tend to re*uire more 'udment. The! also will usuall! enerate larer profits if applied correctl!. Learnin them will be important too% but learn to use the techni*ues in this tape first. The! are the first steps toward a record of profitable tradin.

?22

PRACTICE TRADIN TAPE NUMBER THREE

This is )ractice Tradin Tape Gumber Three. One of the principle purposes of practice tradin is to e$pose potential problems before the! become a real problem. ,&er! indi&idual in&estor is uni*ue% therefore an! difficulties he e$periences are likel! to ha &e their own set of uni*ue characteristics. -rom these% common trouble spots can be deri&ed. One of the biest is the seeminl! irresistible ure to alwa!s be doin somethin. The idea that the le&el of tradin acti&it! and profits are somehow directl! related is a common misconception. "hat matters in stock market tradin is not its *uantit!% but its *ualit!. -re*uent trades produce commissions% while ood trades result in profits. E/e"$ #n/e!o" !(o*ld *nde"!and and acce) (e "*( (a good "ad#ng o))o"*n##e! de/elo) "a(e" #nf"e5*enl$& This should not be a difficult idea to comprehend. It comes directl! from one of the three basic laws that control all stocks and market acti&it!. T(e law of ca*!e and effec ell! *! (a #n o"de" o ge an effec (e"e %*! f#"! .e a ca*!e& T(e "ade"! o.3ec#/e #! o a+e ad/anage of (e effec and no o wa!e #%e on (e ca*!e& All )"#%a"$ "ad#ng o))o"*n##e! can .e fo*nd #n a co%)a"a#/el$ !(o" )e"#od of #%e nea" (e end of (e ca*!e .*#ld#ng )(a!e& )ositions taken at other times are at best *uestionable and at worst wron. 5n! attempt to pin down e$actl! how much time will or should be consumed in preparin for a primar! tradin opportunit! is sub'ect to error. The speed with which e&ents are accomplished is directl! tied to &olatilit!. The more &olatile the market or a stock is% the more *uickl! it can accomplish ob'ecti&es. :nfortunatel!% &olatilit! does not run on a fi$ed timetable. It speeds up and slows down. The onl! wa! to tell how the clock is runnin at a particular time is b! watchin and stud!in. ,&en thouh the specifics of how often a primar! tradin opportunit! ma! de&elop are &aue% there are se&eral eneral comments that can be made. The purpose of these is not reall! to indicate when tradin ma! be in order% but rather to suest when the le&el of tradin has one be!ond reasonable bounds and becomes a clear case of o&er tradin The lon term or ma'or mo&e in&estor% if !ou prefer% must reali0e that the preparation re*uired for his t!pe of mo&e takes a relati&el! lon time to de&elop. The enerall! accepted fiure of fift! percent potential will likel! de&elop onl! once a !ear or perhaps twice. Tradin opportunities that can lead to intermediate profits are more common% but the! are still not e&er! da! occurrences. )erhaps three or four times durin a particular twel&e month period a stock or the eneral market will de&elop the potential that can lead to an intermediate profit. Between the de&elopin of the potential and the reali0in of the profit a few tradin opportunities will de&elop. The! will also de&elop at the same place for short term traders. The bi difference is that the amount of potential bein souht is less. Therefore it de&elops more *uickl! and the tradin opportunities come more often. The! ma! come as fre*uentl! as once a month. "hiche&er t!pe of tradin is bein undertaken% the ob'ecti&es remain the same. There are three. The! are to achie&e the 1/ ma$imum amount of profit from+ 3/ a minimum number of trades in+
?2-

The trader watchin what he percei&es to be a period of accumulation is interested in the de&elopment of primar! bu!in opportunities. There are four of these that are clearl! reconi0able. The! are; 1/ a number three sprin+ 3/ the test of a number two sprin+ f#/e )e"cen o" le!! of no"%al /ol*%e wo*ld 5*al#f$& 5n! more than this and it  becomes difficult to sa! that there is no interest in the downward price action. Man! stocks seem to ha&e a normal pattern to their &olume. It is eas! in these cases to sa! whether a particular &olume is normal or e$tremel! low. "hat about all those stocks where &olumes tend to be erraticF "hat is e$tremel! low &olume for a stock whose/ &olume &aries widel! from da! to da!F It ma! not be possible to sa! for sure and it is ne&er ad&isable to uess. If !ou cannot sa! for sure that the &olume is e$tremel! low% admit it and look elsewhere for an opportunit!. If a stock is seen as bein in a number three sprin condition an! lon position that is oin to be taken must be established on the penetration of the support le⪙ 8ou cannot  'ustif! waitin. The response is likel! to be a sharp rall! and there will be no test. Other opportunities ma! de&elop later% but it is unlikel! that the price will be as ood. The lon

?21

 position that should not be dela!ed in these cases should also not be taken prematurel!. 5nticipatin a number three sprin before it actuall! e$ists could result in the takin of a position for a reason that ne&er de&elops. This would mean that the position would be taken on what amounts to onl! a normal reaction in a tradin rane. Such a position ma! produce a profit. (owe&er% since it is not a primar! bu!in opportunit!% it is unlikel! that the profit will be an!where near what would be e$pected to de&elop out of a true number three sprin condition. There is also the possibilit! that no profit will result and that% as is the case with so man!  premature positions% it will be stopped out. "hen a sprin action does not meet the riid re*uirements of a number three sprin% it is classified as a number two sprin. It ma! pla! an important part in de&elopin a bu!in opportunit!% but that will remain to be seen. Take note of the sprin condition% but let it pass. Tradin cannot be 'ustified. ,ither due to the depth of penetration below the support le&el or the amount of &olume on the penetration or both there is a *uestion as to the meanin and outcome. The action that should be awaited is the test of the sprin. It will pro&ide the meanin and a much clearer indication of the outcome. 5s with the number three sprin a number two sprin in its test presents an appearance that is *uite a bit different than the statement made b! the action. 5t the time when the test beins% the sprin has alread! produced a penetration of the support line. This creates the illusion of the bottom bein broken out of the tradin rane. "hen the test comes alon it pro&ides a second attack on the support le&el which seems to confirm the idea of a down side breakout. The loical response to this t!pe of action is to sell short and man! members of the eneral public would do 'ust that. The problem with this is that it is a response to the appearance onl! and fails to take into account the actual statement that was made. "hen the sprin action de&eloped it suested that the stock miht be unable to make sinificant proress in the downward direction. This came from the le&el of &olume and the deree of penetration. Gotice that we said “miht be unable” instead of “would be unable.” It is this element of doubt that makes it impossible to act on the number two sprin. The test has the abilit! to turn the word miht into would. It does this in two wa!s. One is b! occurrin on less &olume than the sprin and the other is b! meetin support at a somewhat hiher le&el than the sprin. If these two points are met the statement bein made is a positi&e one and the stock ma!  be bouht. The test of the number two sprin is a critical action. ,ach stock’s attempt at it should be &iewed in a critical manner. There is a temptation to conclude that an!thin short of an un*uestionable break below the support le&el is 'ustification for a lon position. Such a feelin is 'ust one more manifestation of that irresistible ure to trade. It is wronC 5 test that does not ha&e the proper character does nothin to resol&e the doubt left b! the sprin. 5t the &er! least it suests that there will be another test and there is no uarantee that this second test will be an! more successful than the first. The in&estor who insists on establishin a lon position based on a poor *ualit! test should reali0e that he is takin a reatl! increased risk. The trade ma! work out for him% but he likel! will ha&e to wait out additional testin actions an! one of which could  brin an abrupt end to the position. A n*%.e" ("ee !)"#ng o" a n*%.e" wo !)"#ng and #! e! .o( "e)"e!en !#gn! of !"eng( and la! )o#n! of !*))o"& T(e$ a"e !)ec#f#c $)e! of (e!e ac#on! and (e$ a"e /e"$ !)ec#al& That is wh! the! are primar! bu!in opportunities. More eneral forms of these actions also represent bu!in opportunities. The ma'or difference between these and those alread! discussed is that the! tend to be less ob&ious. That means there is an e&en reater need for critical anal!sis to compensate for the increased possibilit! of error. "hen a stock de&elops a sin of strenth and follows it with a last point of support% the appearance created is of an attempt to break out of the tradin rane on the upside that failed. This suests that the stock should be considered for a short sale. The actual statement bein made howe&er is 'ust the opposite. The sin of strenth shows that the stock has an abilit! to ad&ance. The reaction back towards the last point of support is an interruption in this ad&anc e% but it indicates a relati&e inabilit! to i&e up the proress alread! ained. That bein the case% when the stock completes its reaction% it should be read! to resume important upside proress. Therefore% it is a stron candidate for a lon position.  Got e&er! rall! and reaction combination within a tradin rane should be looked at as  bein a sin of strenth and last point of support. This is where the need for critical anal!sis comes in. If it is not emplo!ed !ou will probabl! find !ourself 'umpin at e&er! reaction that occurs beinnin with the secondar! test of the sellin clima$. A "all$ (a 5*al#f#e! a! a !#gn of !"eng( #! an agg"e!!#/e, 5*#c+ "*n *) #n )"#ce (a co%e! on a !*.!an#al #nc"ea!e #n /ol*%e& The reaction that follows% in order to be considered a last point of support must be 'ust

?26

the opposite. T(a )o"#on of (e )"e/#o*! "all$ w(#c( #! g#/en .ac+ !(o*ld .e "el#n5*#!(ed %o"e !lowl$ and g"ad*all$& T(#! need! o .e "e#nfo"ced .$ g"eal$ "ed*ced /ol*%e w(#c( f*"(e" #nd#cae! a lac+ of #ne"e! #n (e down!#de& The rall! that constitutes the sin of strenth ma! or ma! not penetrate the top of the tradin rane. If # doe!, # #! e"e%el$ #%)o"an (a (e )"#ce .e !*))o"ed 5*#c+l$ and (a (e /ol*%e d"o) off !(a")l$ a! (e )"#ce !a"! o .ac+ off f"o% (e o) of (e !#gn of !"eng(& The reason for this should not be too difficult to see. The penetration of the resistance le&el created b! the sin of strenth could  be seen as a potential upthrust. Ob&iousl! it would not make an! sense to be considerin lon  positions in the/ face of an/ upthrust. "hat is needed therefore is a means of discountin the upthrust possibilit!. The rapid meetin of support and drastic decline in &olume accomplish this. It is e$actl! the opposite of what would be e$pected if the penetration had been an upthrust; Fol*%e (a "e%a#n! "ela#/el$ (#g( a! (e )"#ce fall! well .ac+ #no (e "ad#ng "ange conf#"%! (e wea+ne!! #nd#caed .$ (e *)("*!& If the price does not penetrate the resistance% the concern o&er a potential upthrust is remo&ed. Still% there is a need for price support and reduced &olume. In (e!e ca!e! (e )"#ce %a$ g#/e .ac+ a! %*c( a! (alf (e ga#n ac(#e/ed .$ (e !#gn of !"eng(& T(e /ol*%e need! o .e "ed*ced, .* (e w(ole )"oce!! of "ed*c#on #n /ol*%e and %ee#ng of !*))o" %a$ .e eended o/e" a !o%ew(a longe" )e"#od of #%e& It is not uncommon for the reaction to a last point of support to last two to three weeks. It should be ob&ious that there is a reat deal more 'udment in&ol&ed in anal!0in these t!pes of actions. The restrictions placed on the actions are rather eneral. It is up to the in&estor or trader to draw the conclusion as to when the time is riht for takin a position. In doin this there is aain a need to be &er! critical. Make the stock pro&e itself. 7on’t be o&er an$ious to trade. If an opportunit! is missed% don’t worr! about it+ there will be others to take its place. In attemptin to take a position don’t do it on the sin of strenth. This is someone else’s chance to make a profit. -or !ou it is onl! an indication of a future profit potential. 8our tradin opportunit! will start to de&elop after the sin of strenth has been completed. There are two wa!s to handle the placin of an order. The first is to wait until a  'udment is made as to whether a last point of support does in fact e$ist and to trade accordinl!. The second approach is to anticipate where the last point of support ma! be accomplished and to  place an order at that le&el in ad&ance. If !ou wait to place the order% there is the risk of missin an opportunit!. If the order is placed in ad&ance there is a risk of endin up with a poor position. In eneral it is better to wait. Missin an opportunit! should be much less of a concern than  bein trapped into a position that reall! isn’t an opportunit! at all. -or those who want to place an order in anticipation of an L)S% there are two wa!s in which to proceed. The! depend on whether the resistance le&el has been penetrated. If it has not% place the bu! order a little abo&e the halfwa! point of the sin of strenth. If there has been a penetration of the resistance% the  bu! order ma! be placed as soon as there is e&idence that the &olume is contractin. )lace the order a little below the current price% perhaps a point lower to allow for a small amount of additional decline. ,ither wa! the trader should reali0e that there is a ood chance that the trade will o aainst him for awhile. This should not be of too much concern. 5 properl! placed stop order will pro&ide the necessar! protection aainst an anticipated opportunit! that doesn’t de&elop. If !ou ha&e set up a practice tradin account for this t!pe of opportunit!% don’t be o&erl! concerned if initial results are relati&el! poor. 7ue to the much reater reliance on  'udment in selectin these opportunities% it is much more difficult. 6emember% ood 'udment is somethin that will ha&e to be allowed to de&elop. It is not somethin that can be switched on at will. 0(a #! #%)o"an (e"e #! (a (e ca*!e of eac( "ad#ng e""o" .e *nde"!ood& It is the onl! wa! that results can be e$pected to impro&e. The last primar! bu!in opportunit! is to be found in the “'ump across” and “backup to the ede of the creek.” This sub'ect was discussed on tape number two because of its fre*uent association with the definin of an important up trend. It is important to reali0e howe&er% that the two do not ha&e to o toether. 5 “'ump across the creek” and “backup...” ma! not at all be in&ol&ed with the definin of an up trend. It is still a bu!in opportunit!% treated 'ust the same as those that are in&ol&ed with the creation of an up trend. 5ll tradin rane acti&it! is not preparator! for an/ up mo&e. The market makes important declines 'ust as often as it makes important ad&ances. Often these declines are more &iolent than most ad&ances creatin the possibilit! of a substantial profit in a shorter amount of time. Because of this potential the in&estor owes it to himself to learn how to trade the downside. The eneral public% b! and lare% will not do it. The! either do not understand short sellin or do not see it as a leitimate means of makin a profit. The "!ckoff student should know better and should stri&e 'ust as hard to de&elop short sellin skills. 5s with the takin of

?27

lon positions% there are relati&el! few times when short sellin can be trul! 'ustified. Short sellin opportunities can be found on upthrust action. The! also de&elop on the test of up thrusts% on a last point of suppl! after a sin of weakness and on a “rall! back to the ice le&el.” The reason these are short sellin opportunities does not come from their appearance% but rather from the statement made b! each action. The! can all be seen as presentin an appearance of strenth% howe&er each makes a neati&e statement. The remainder of this topic will be discussed on tape number four.

?28

PRACTICE TRADIN TAPE NUMBER OUR 

5n upthrust or the test of an upthrust creates the illusion of strenth. The tendenc! is to see the penetration abo&e the resistance le&el of the tradin rane as an indication of an upside  breakout. That bein the case% the stock in *uestion should be bouht. The problem with this is that it represents a conclusion based on appearance onl!. The statement bein made b! this action is reall! *uite neati&e. Mo! *)("*! ac#on! occ*" on "ela#/el$ (#g( /ol*%e&   This sa!s that it takes a reat deal of effort to penetrate the resistance. "ith so much effort bein re*uired to achie&e such a small result% the indication is that the stock is oin to b e unable to make an! sinificant proress in an upward direction. The stock therefore becomes a candidate for a short sale. In o(e" ca!e! (e /ol*%e %a$ .e 5*#e low& T(#! !a$! (a (e "e!*l #! no .e#ng !*))o"ed .$ an$(#ng& I )"o.a.l$ w#ll no la!, (e"efo"e (e !oc+ #! a cand#dae fo" a !(o" !ale& "here these statement cannot be easil! read% no action should be taken. The action bein  'uded ma! not be an upthrust. It could% for e$ample% be the lead into a “'ump across the creek.” If so% certainl! no short sale would be in order. The point is% don’t uessC :nless !ou can look at a potential upthrust action and are able to sa! with confidence that it is in fact an upthrust% there is a ood chance that it is not. ,&en if it is% !ou will likel! be i&en a second chance at a price that will be almost as fa&orable. T(e !econd !(o" !ell#ng o))o"*n#$ and (e one (a %a$ clea" *) an$ do*.! !*""o*nd#ng (e *)("*! ac#on #! (e e! of (e *)("*!& (ere the appearance ma! aain  be positi&e as the price renews its attack on the resistance le&el. But the statement bein made is still neati&e. The upthrust has alread! said that the stock probabl! will not be able to make an! important upside proress. T(#! #! conf#"%ed .$ (e e! w(#c( !(o*ld co%e on lowe" /ol*%e& If the stock was not able to accomplish an upside breakout on the upthrust it should be much less able to do it on a test with reduced &olume. (ow an upthrust and its test are traded will% of course% depend on how the! de&elop in each particular case. If the funds are a&ailable the oal should be to establish a position at each opportunit!. The important point in seekin to take a position on the upthrust is to be sure that it is an upthrust. 5s mentioned earlier% an error on this could result in a “'ump across the creek%”  bein called an upthrust. This would &irtuall! uarantee a loss. One wa! to 'ude is b! e$aminin the rallies and reactions prior to the upthrust. The! should pro&ide indications of either strenth or weakness. 0(a need! o .e !een a"e !low !l*gg#!( "all#e! on low /ol*%e followed .$ !(a")e" "eac#on! on !#gn#f#canl$ (#g(e" /ol*%e& This indicates weakness. It also increases the likelihood that the action bein seen as an upthrust reall! is one. If (a )"#o" )ae"n of "all#e! and "eac#on! canno .e !een, (e"e #! a good "ea!on o le (e o))o"*n#$ )a!!& If the price does drop well back into the tradin rane% chances are that an upthrust has occurred and the opportunit! has been missed. 7on’t despair. 5 test of the upthrust is likel!. Since !ou ha&e alread! been alerted to the presence of weakness throuh the upthrust% it should  be easier to take ad&antae of the test. Be careful thouh% not to assume that the test will become a short sellin opportunit!. It ma! not. So% make the action pro&e itself. 7oes the &olume on the action immediatel! followin the upthrust remain relati&el! stronF It should. #ontinued hea&! tradin on this decline tends toconfirm the upthrust and allows the in&estor to look towards the anticipated test with a reater deree of confidence. A! (e )"#ce !a"! o *"n .ac+ *) owa"d (e le/el of (e *)("*!, the &olume should noticeabl! decline. This is further confirmation of the sins of weakness alread! seen and especiall! critical if shortin is anticipated on the de&elopin test. Con#n*ed (#g( o" #nc"ea!#ng /ol*%e on (#! "all$ wo*ld .e ca*!e fo" do*.& I !*gge!! (a (e"e #! !#ll #ne"e! #n (e *)!#de and d#%#n#!(e! (e l#+el#(ood (a (e ad/ance w#ll .e !o))ed .$ (e

?2;

ea"l#e" "all$ o) . In these cases short positions should not be taken. There ma! be another test that will produce a better set of conditions and if not% there are alwa!s other stocks. The best place to take a short position is at the top of the test. :nfortunatel! we seldom know in ad&ance where this is oin to be& If (e e! #! go#ng o .e a.!ol*el$ )e"fec (e lowe" /ol*%e on w(#c( # #! acco%)l#!(ed !(o*ld !o) (e )"#ce "#!e a a.o* (e (alf>wa$ )o#n of (e "eac#on (a followed (e *)("*!& This would be a ood place to consider takin a short position. Got e&er! test is oin to be perfect+ in fact it is likel! that &er! few will  be. This means that the price of the stock ma! o aainst !our position for a brief time at the outset. P"o/#d#ng (e /ol*%e "e%a#n! low o" con#n*e! o con"ac and )"o/#d#ng (e )"#ce #! (eld a o" .elow (e o) of (e *)("*!, (e"e #! no "ea!on fo" *nd*e conce"n& Should the worst happen% as it will from time to time and the stock starts to rall! aressi&el!% a properl!  positioned stop will protect !our funds from a terrible disaster. ,&er! short sellin opportunit! comes at a last point of suppl! followin a sin of weakness. The combination of an upthrust and its test is a special form of this t!pe of action& A %o"e gene"al fo"% #! a "ea!ona.l$ agg"e!!#/e "eac#on followed .$ a !l*gg#!( "all$&   The untrained obser&er could take the reaction% the sin of weakness% as a positi&e indication. The stock has made an important attempt to mo&e down and out of the tradin rane on the down side and has failed. The conclusion therefore is that the stock can now be bouht. "hat the stock is actuall! sa!in howe&er% is somethin *uite different. The sharp reaction which has most/ likel! come in on increased &olume indicates an abilit! and a desire to decline. The rall! that is to follow points to an inabilit! to make sinificant proress on the upside. This fact comes from the sluishness of the rall! and is in keepin with the interest alread! e$pressed in the downside. Therefore this stock is actuall! sa!in that it should be sold short. To find these sins of weakness and last points of suppl!% bein b! e$aminin the character of the rallies and reactions within the tradin rane. 0ac( fo" (e "eac#on (a a))ea"! o .e %o"e !e/e"e (an (o!e w(#c( (a/e al"ead$ occ*""ed& I %a$ .e a !#gn of wea+ne!!& Doe! (e )"#ce g#/e *) g"o*nd 5*#c+l$ I! (e /ol*%e no#cea.l$ (#g(e" on (e "eac#on! If .o( (e!e c"#e"#a a"e %e (e"e #! a good )o!!#.#l#$ (a (e "eac#on #! a !#gn of wea+ne!!& T(#! #! $o*" wa"n#ng o .e ale"& The ne$t rall! could become an important last point of suppl!. 0(a $o* wan o !ee on (#! "all$ #! "ed*ced /ol*%e f"o% (a of (e )"e/#o*! "eac#on& If possible% the &olume should decrease as the rall! proresses. This suests that a relati&el! low le&el of interest in the upside to start with is further diminishin as the price continues to push upward. It is not a positi&e sin. If (e )"#ce cea!e! o %a+e f*"(e" *)!#de )"og"e!! a"o*nd (e (alf>wa$ )o#n of (e )"e/#o*! "eac#on # #! /e"$ l#+el$ (a # #! )o!##oned a a la! )o#n of !*))l$& T(e"e #! "ea!on o !ell !(o"& The reaction that represents the sin of weakness ma! penetrate the support le&el of the tradin rane or it ma! not. "hether it does or does not will not alter whether there is a sin of weakness or not. It ma!% howe&er% make anal!sis somewhat more difficult. 5 penetration of the support le&el is part of the definition of a sprin. 5 sprin followin a sin of weakness is a contradiction. One indicates the likelihood of a decline while the other points to an ad&ance. It is not possible to ha&e it both wa!s. ,ither the “sin of weakness” is not a sin of weakness or the “sprin action” is not a sprin. T(e wa$ o ell #! o wac( (e "all$ (a follow!& If resistance is met *uickl! as the &olume retreats markedl!% the sin of weakness is probabl! &alid. On the other hand% if there is a ood response from the penetration on &olume that remains stron or increases% it is more likel! that the sprin is &alid and the sin of weakness is not. )ut off an! thouhts of sellin short in these instances. In those cases where there is no penetration% the anal!sis is likel! to be easier. The rall! that follows should be stopped at or below the halfwa!  point. In addition% the &olume must be reduced. The sin of weakness and last point of suppl! do represent a short sellin opportunit!. Before takin that short position howe&er% be sure that/ !ou ha&e i&en it a chance to full! de&elop. Shortin on the sin of weakness is too earl!. If the proper t!pe of follow throuh is not allowed to de&elop% no additional downside proress ma! come. 8our short position will  probabl! be taken at or near the bottom of a reaction. 5s a result it ma! be necessar! to co&er at a loss or the position could be stopped out. If there has not been a penetration of the support le&el on the sin of weakness% short sales ma! be initiated on the rall! to the anticipated last  point of suppl! in the area 'ust below the halfwa! point of the sin of weakness. If the sin of weakness did produce a penetration of the support le&el% waitin to take a short position up around the halfwa! point ma! mean waitin for somethin that ne&er happens. 5s soon as resistance to the price rall! is noted or as soon as the &olume is substantiall! reduced% the short  positions ma! be taken.

?2<

5s with lon positions% it is unreasonable to e$pect e&er! short position to mo&e consistentl! in !our fa&or from the minute it is established. Go one’s timin is this perfect. 5 continued rall! after a position is established is not uncommon. It should not produce an!  particular problem howe&er% as lon as the situation has been allowed to full! de&elop first. 5  properl! placed stop will protect those positions that 'ust do not work out. The in&estor has one more shot at a primar! short sellin opportunit!. It is on the “rall! back to an ice” le&el. This was discussed in the second tape alon with the “backup to the ede of the creek” because of its important connection with the definin of an important down trend But this action is not so in&ol&ed. It still represents a primar! short sellin opportunit!. The reason is% that it makes a neati&e statement. It ma! appear after the “ice le&el” has been shattered that all opportunities to sell short ha&e been missed. The stock has% after all% likel! to ha&e fallen a considerable distance. This decline% howe&er% is a clear indication of weakness. In fact% it couldn’t be much clearer at this point. )ro&idin that/ the potential can be found in the fiure chart to back it up% the stock is sa!in that it is read! to make an important mo&e. The “rall! back to the ice” pro&ides one last chance to et on board. "hat matters in attemptin to 'ude this t!pe of mo&e or an! t!pe of mo&e is not how much mo&ement has alread! occurred but rather how much more is likel! to occur. If it is ade*uate enouh to 'ustif! the position% that which has alread! happened should onl! ser&e to add confidence to an! position that is established. 5ction that meets the definition of a primar!  bu!in or short sellin opportunit! ma! happen at an! time durin the tradin rane. -or this reason it is important to alwa!s be alert. If a stock or the market catches !ou nappin it is not oin to whisper in !our ear when the time to act ma! be at hand. It will tell !ou% but chances are this will not come until it is too late to take an! action. The opposite e$treme is bein too *uick on the trier. If a primar! tradin opportunit! seems to ha&e de&eloped% the first step is not to call !our broker to place an order. -irst% turn to the fiure chart of the stock. 5 tradin opportunit! onl! tells !ou that the stock or market can mo&e. There is no uarantee that it will and no indication how far an! mo&e miht carr!. The fiure chart will tell this. The t!pe of tradin !ou are doin will determine how much potential must be in e&idence on that fiure chart before an! order is placed. If there is not enouh% the tradin opportunit! ma! belon to someone else% but it is not !ours. 7ecidin to trade an!wa! opens the door to a lon frustratin ride up and down that ma! end up oin nowhere and could result in bein stopped out alon the wa!. 5 tradin opportunit! sinifies a beinnin. It is the point from which a mo&e or a substantial portion of a mo&e is likel! to de&elop. This is onl! true howe&er% if the pre&ious mo&e has clearl! ended and there is little or no possibilit! that it will be renewed. 6emember% it is not &alid to assume that a tradin rane followin a decline is accumulation or that one comin after an ad&ance is distribution. These facts must be pro&en. The wa! this is accomplished is throuh the use of bu!in and sellin tests. 5 list of these is included as the nest e$hibit. 8ou could also find them in !our "!ckoff #ourse. In mentionin an ade*uate count we ha&e alread! touched on one of the tests/. If used as a roup howe&er% the! reatl! reduce the chances of takin a position that is totall! wron. If a "ad#ng o))o"*n#$ de/elo)! afe" all of (e .*$#ng o" !ell#ng e!! (a/e .een %e !o%e $)e of )"of# #! /#"*all$ a!!*"ed& If the position is handled correctl! from the point at which it is established there is e&er! reason to belie&e that the profit will be &er! worthwhile. Much of this discussion has dealt with a stock as an indi&idual% but it does not e$ist in a &acuum. The market is the atmosphere in which the stock resides. Its actions are influenced b! the market in which it e$ists. This does not mean that some stocks will not mo&e aainst the trend of the eneral market+ the! will and some will do it in a &er! impressi&e fashion. The thin to remember about these issues is that the! are rare. E/e"$ #%e (a $o* e!a.l#!( a )o!##on #n a !oc+ (a #! %o/#ng aga#n! (e %a"+e (e odd! a"e aga#n! (e !*cce!! of (a "ade& It ma! re&erse itself and start followin the market or its performance ma! simpl! be se&erel! retarded b! the market. ,ither wa! the result is likel! to be much less than had been anticipated. T(e"efo"e, a fa#(f*ll$ followed "*le !(o*ld .e, ne/e", e/e" "ade aga#n! (e "end of (e %a"+e& If not one sinle stock can be found to trade that is in harmon! with the market% there is either somethin wron with the anal!sis or a primar! tradin opportunit! does not e$ist. This idea of tradin in harmon! with the market can and should be taken one step farther. In addition to bein in harmon!% a stock should be stroner or weaker than the market dependin on the direction of the anticipated mo&e. 5 result of this combination of factors ma!  be that the stock is one step ahead of the market. -or e$ample% let’s sa! that the market is anal!0ed as bein in a number two sprin position. 5n! stock that was also in a number two

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sprin condition would be a tradin candidate. But think how much better a stock would be that was alread! testin an earlier sprin condition. These stocks are one step ahead of the market. The! are read! to mo&e now. Those issues that are onl! in harmon! with the market still ha&e to  pro&e what their sprins seem to be sa!in. 5nother e$ample miht de&elop when the market in the first e$ample reached the test of its sprin. 5ll those stocks that had been in sprin conditions and were now also makin successful tests would% of course% be trade candidates. Better candidates would be those that had 'ust e$perienced a sin of strenth and were now reactin back to a last point of support.  Gow% let’s assume that we ha&e found the perfect stock. It is mo&in in harmon! with the market. It is stroner than the market. It is positioned in a primar! tradin opportunit! and has the abilit! to mo&e. One response to such a stock would be to bu! it for all !ou’re worth. The wisdom of such an action howe&er% depends on 'ust how  much that is. The in&estor tradin a relati&el! small account ma! be limited to the takin of 'ust one position in each stock selected. These indi&iduals should take full ad&antae of an! especiall! attracti&e opportunit!. This is e&en more true if one or two opportunities ha&e alread!  been missed. The in&estor with a larer account has an ad&antae o&er the smaller in&estor. (e is in a position where he can take more than one position. (e ma! e&en be able to trade at e&er! opportunit!. There is a benefit to takin multiple positions. ,&er! time a commitment is make there is some chance of error. If so the position ma! be stopped out and this will result in a loss. If all the funds a&ailable to be in&ested in this stock were all committed at the same time and the  position was stopped out% the loss would be bier than if the funds had been split up. The  benefit pro&ided b! the multiple position approach is an e$tra measure of protection for !our capital. 5lwa!s remember that this is !our most important ob'ecti&e. "ithout capital there can  be no profit.  Gow% let’s spend time considerin a few e$amples. "e will bein with the chart of “9errMc?ee.” 5s the chart suests “9errMc?ee%” is a relati&el! &olatile stock. In !our tradin !ou ma! choose to work with stocks that ha&e a *uieter personalit!. It ma! take somewhat loner for these to reach their oals% but the action will probabl! be easier to interpret. This should make the stock easier to trade and less likel! sub'ect to errors in 'udment. The main reason that it has been chosen for this discussion here is that it shows so much in such a short period of time. Our discussion beins on -ebruar! 1>th when the stock penetrated the top of the tradin rane. This b! definition is a potential upthrust. Should !ou sell shortF To answer this *uestion two important determinations need to be made. One is the likelihood of the stock mo&in hiher. To answer this *uestion we cannot simpl! sa! that the e$istence of the potential upthrust limits the likelihood of sinificant additional upside proress. It is not certain that the action is in fact an upthrust. Tr!in to answer a *uestion usin an uncertaint! as the basis for the answer onl! results in another *uestion. 0(a #! needed #! !o%e )"e/#o*! #nd#ca#on (a *)!#de )"og"e!! (a! .een !o))ed& In this case there is a &er! clear indication that the upside proress has been stopped. The combination of a bu!in clima$% automatic reaction and secondar! test is the normal stoppin procedure for an up mo&e. This limits the likelihood of further upside proress of an! conse*uence% at least temporaril!. The potential upthrust represents the first primar! tradin opportunit! followin the stoppin action. Since what it is sa!in is in harmon! with the stoppin action% a short sale could be 'ustified. The fact that the trade can be 'ustified does not mean it is for e&er!one. To determine what t!pe of trader should consider this short sale it is necessar! to e&aluate the potential. In this case that could cause a problem. "e want to count to the left from the upthrust to another action of importance. The problem with this is that the upthrust sticks up abo&e all the pre&ious action. 5s a result it appears as thouh there is onl! a point to count from% but no point to count to. This is not an uncommon occurrence and there is a solution. The ob'ecti&e was to count to the left to another point of importance. "hat point could be more important in this case than the bu!in clima$F The answer is none. Therefore we take the count on a sliht anle from the 2< le&el established b! the upthrust to the 23 le&el established at the bu!in clima$. This countin on an anle is not the traditional method% but it can be 'ustified as lon as the two points chosen are selected &er! carefull!. "hat does this count tell usF It indicates the possibilit! of a twent!fi&e  point decline down to the @E le&el. Twent!fi&e points seems to be a bi mo&e% but the number of points is not the most important factor. The primar! factor should be the percentae indicated mo&e. Twent!fi&e points represents about a twent!se&en percent mo&e. This is in the intermediate rane. The short term and intermediate term trader should be interested. The lon term or ma'or mo&e trader should not. (e should be lookin for about fift! percent.

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The intermediate trader who took ad&antae of the short sellin opportunit! represented  b! the upthrust captured a si$teen point paper profit in less than two weeks. This is e$ceptional. Most of the time profits row more slowl!. Man! traders seein the upthrust probabl! would ha&e elected to wait for the test to take their first position. There is nothin wron with that% but in this case there is no ob&ious test so the opportunit! would ha&e been missed. These thins happen. The lack of a test would not 'ustif! chasin after the stock and takin a short position on the reaction. Such action in&ol&es too much risk. Sometimes there is a *uestion as to 'ust what t!pe of action represents a sin of weakness. But when the price of a stock drops si$teen points in less than two weeks the weakness indicated is ob&ious. There is an important lesson in this. Alwa$! .eg#n .$ loo+#ng fo" (e o./#o*!& If !ou ha&e to di to find somethin to come to a conclusion% chances are there reall! isn’t an!thin there. The de&elopment of the sin of weakness should sound an alarm in the trader’s mind. It tells him that another primar! tradin opportunit! lies ahead. It will come on the de&elopment of a last point of suppl!. 5s “9errMc?ee%” started to reco&er from its reaction down to AA% the in&estor should ha&e established in his mind or preferabl! on paper% e$actl! what he wanted to see in the wa! of a last point of suppl!. (e should ha&e been lookin for a rall! proressin at relati&el! low &olume that had failed to reach the halfwa! point of the sin of weakness. ?i&en these conditions he could 'ustif! placin his order% perhaps as much as a point below the halfwa! point. The desired conditions were bein met as of the actions of -ebruar! >th 5n order could ha&e been placed at E=. The ne$t da! it would ha&e been e$ecuted. On the da! that the position would ha&e been taken% it should be noted that the price rallied abo&e the halfwa! point. 5 weak stock should not reall! do this. This &iolation of the halfwa!  point could ha&e been used as 'ustification for not makin a commitment. The indi&idual who did ha&e a position at this time should not ha&e looked upon the o&errunnin of the halfwa!  point as a reason for panic. It could be seen as a reason for concern or as a neati&e de&elopment% but not as a cause for panic. If the position was taken for ood reasons% well thouht out in ad&ance% there is a &er! ood likelihood that the end result will be positi&e% e&en if  e&er! detail does not fall into place precisel! as desired. "as the tradin opportunit! presented as the stock rallied toward the L)S8+ somethin that e&er! in&estor should ha&e consideredF -or the short term trader the answer is !es. The potential a&ailable at that time was clearl! enouh to 'ustif! a short term trade. "hat about the intermediate traderF The count at EA% if taken in its entiret!% suests a mo&e of fort!three points. This would be well o&er the enerall! accepted minimum twent!fi&e percent potential for these positions. There is a  problem howe&er. The count clearl! di&ides into two ma'or phases and could be broken down into se&eral smaller ones. In takin the full e$tent of the count to 'ustif! the trade% an intermediate trade would be the result of a lon term indication. This is ne&er a sound practice. If an intermediate trade commitment is desired it should be based on intermediate indications. This is not to sa! the “9errMc?ee%” will not e&entuall! decline the fort!three points% but the time in&ol&ed ma! be substantiall! more than the intermediate trader wants to in&est. To determine whether an intermediate trade can be 'ustified in this case the trader should onl! consider the first ma'or phase of the count. If it has the minimum acceptable measure of  potential% the commitment ma! be made. (ere the potential was twent!fi&e percent so action was warranted. This idea of usin onl! the first important phase when there is a ma'or build up should be used in e&er! case. The loner term trader who would be willin to hold the stock for a !ear or more could consider the entire count. The fort!nine percent decline it represents is the t!pe of  potential that/ the ma'or mo&e in&estor could pursue. That means that in this particular instance traders of all persuasions could ha&e been tradin in the stock at the same time% each with a different ob'ecti&e in mind and with all three positions bein 'ustified. 5fter the last point of suppl! there were no additional primar! short sellin opportunities. There was howe&er a lesser opportunit! in the area at the end of March when the price worked itself into an ape$. There is nothin uncertain about the meanin of an ape$.. It sa!s that an important mo&e in one direction or the other is about to happen. "hat it doesn’t tell is the direction of that mo&e. That has to be deri&ed from other information. T(e"e #! a endenc$ fo" a)ee! o .e ."o+en #n (e d#"ec#on of (e )"e/#o*!l$ e!a.l#!(ed "end& On “9errMc?ee%” a suppl! line could be defined across the upthrust and the last point of suppl! resultin in a down trend. Therefore the break from the ape$ should ha&e been anticipated to be in/ a down trend direction and it was. The trader lookin for an additional position could ha&e 'ustified his trade durin the period from March 1Ath to March 33nd based on the low &olume and the presence of the ape$. The potential was limited to ele&en points at the E1 le&el which is about fourteen

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 percent. The onl! trader who should likel! be interested in such a mo&e would be the short term in&estor. There is simpl! not enouh potential to interest an!one else. 5s the stock left the ape$ it had three downside ob'ecti&es. One was @E% the second was @A to A3 and the third was A4 to A@. "hene&er a number of counts all point to the same area it should automaticall! become a focus of attention. It cannot be uaranteed that the mo&e will be stopped in the area% but there is a &er! ood reason to watch for a stoppin action. On the initial mo&e down to the @E
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In doin this it also 'umped a creek. The short term trader who took a position at the test should ha&e taken his profit at the AE le&el. 5 ood rule to follow is that if !ou ot what !ou ot in to/ et% et out. This helps reed from ainin control. "hen that happens% an! profits that ma! e$ist are/ likel! to be one in a &er! short time. 5lthouh the short term trader would ha&e seen the mo&e to AE as an end% an!one else should ha&e looked upon it as a beinnin. -ollowin a “'ump across the creek%” which is an important sin of strenth% it is normal to et a “backup... .” That is what happened to “9err Mc?ee.” The “backup...” is enerall! the last important bu!in opportunit! that a stock will i&e. Therefore intermediate and loner term traders should ha&e been alert. The short term trader as well should also ha&e been on his toes because of the possibilit! of another short term opportunit!. The area to watch on a “backup...” is the halfwa! point of the “'ump... .” In this case% that was A<>DE. )ro&idin the &olume is sinificantl! reduced as this le&el is approached% a  bu! order ma! be placed. 5n order placed to bu! “9errMc?ee%” at A= would ha&e been a totall! 'ustifiable action. The dip below that le&el which occurred is of no concern. It is &er! unlikel! that an! of !our positions will e&er be taken at the absolute best price. "e said that a position taken at A= would ha&e been 'ustifiable% but would it ha&e been the thin to do for e&er!oneF The answer is no. The eihteen point mo&e indicated b! the fiure chart at the A< le&el represents a potential ad&ance of about twent!fi&e percent. If the stock were to mo&e onl! half of that it would be of interest to the short term trader. The entire mo&e would be of interest to the intermediate trader% but probabl! not be of interest to the lon term in&estor. 5s of the end of this chart the short term and the/ intermediate traders/ probabl! would be both holdin lon positions. The lon term in&estor most likel! would still be sittin on the sidelines% but he need not be without hope. (is chance to trade this stock ma! !et de&elop.  Gotice that the price seems to be meetin resistance at the A2 le&el. 5 reaction ma! be comin. Let’s sa! that the stock is unable to mo&e an! hiher than the A2>DE alread! recorded. Before that reaction beins remember/ the ad&ance bean at @E1D3. This puts the halfwa! point at A=. 5 return to that le&el on reduced &olume could represent a ma'or last point of support. The potential a&ailable at that time ma! be sufficient to warrant a lon term in&estment. “9errMc?ee%” represents a rather unusual e$ample. Most charts will not present so man! clear indications in such a short period of time. ,&en thouh the! ma! de&elop more slowl! and less often in !our practice tradin or the actual tradin that will follow% the important  point to remember is that the! will de&elop. 5 tradin opportunit! that is not clear should be a&oided. Onl! those where the indication is ob&ious are likel! to produce ood profits on a consistent basis. Those are the ones to trade.

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PRACTICE TRADIN TAPE NUMBER IFE

It is a enerall! accepted fact that the market as a whole and man! stocks in particular spend most of their time oin nowhere. This is another wa! of sa!in that the bulk of all tradin is confined within the bounds of some tradin rane. This bein true% it would seem that in the interest of ma$imi0in profits it would be a &er! ood idea to take ad&antae of those tradin opportunities that de&elop within tradin ranes where the ob'ecti&e is also within the tradin rane. In theor! this makes a reat deal of sense. Then this ma! e$plain wh! so man! traders come to this conclusion. The problem is that in practice it is e$tremel! difficult to constantl! reali0e profits from tradin swins within a tradin rane. This is not to sa! it is impossible% but it will probabl! be the last practice tradin work to show a consistent and acceptable profit. "ithout ha&in tried it% the idea that tradin within a tradin rane is so difficult ma! seem like a contradiction. If the reatest amount of time of stocks/ is consumed b! this t!pe of acti&it!% it stands to reason that it must produce a &er! lare portion of the total potential profits. This is loical% but its truth is somewhat *uestionable. Time is an important factor% but profits are measured in price mo&ement. 5 lare price mo&ement represents a substantial profit reardless of the amount of time it takes to enerate. 5 small price mo&ement on the other hand% alwa!s represents a small profit. This aain is true reardless of the time factor. (ow then can small profits result in ma'or tradin opportunitiesF 5s indi&idual trades the! cannot% but the trader who looks upon this t!pe of market acti&it! as an important source of profits is likel! countin on eneratin a lare number of small profits in a short period of time. There is nothin impossible about this% but we belie&e that !ou will find &er! *uickl! that it is much easier said then done. 5side from us simpl! tellin !ou that tradin within a tradin rane is difficult% is there an! wa! to see the difficult! in&ol&ed without actuall! doin the tradinF There is at least one. Let’s consider three h!pothetical stocks. One sells for J1>.44 per share. The second is at J>4.44 and the third sells for J144. 44 per share. The width of the tradin ranes &aries. There are  probabl! as man! &ariations as there are stocks. "e will assume howe&er% that the standard is ten percent. If the J1>.44 stock mo&es from the bottom of its tradin rane to the top% it will enerate a ross profit of J1>4.44. 5fter allowin for discount commissions% the net profit could  be [email protected] or fi&e percent. If that same stock were to make an intermediate mo&e of twent!fi&e  percent% the ross profit would be J.44. 5fter the commissions are subtracted% the net profit miht be J32E.>4 or twent! percent. Most twel&e month periods contain at least three intermediate opportunities. That means% if !ou were tradin J1>.44 stocks e$clusi&el! and not re in&estin the profits% the net profits for the !ear would be si$t! percent. The onl! wa! that/ this return could be matched b! tradin rane actions would be to complete twel&e profitable trades in the same period. This is possible% but findin twel&e J1>.44 stocks at the rate of one per month that will complete a 11D3 point mo&e in a month is e$tremel! difficult. If we mo&e up to J>4.44 stocks% the burden on the trader is lessened somewhat. (is tradin rane has now likel! e$panded to fi&e points. 5s a result the net profit that miht be e$pected from each trade would 'ump to about se&en percent. If a J>4.44 stock were traded for a twent!fi&e percent intermediate mo&e% the net profit could mo&e up to about twent!two  percent. "hat these chanes mean is that the number of tradin rane mo&es of fi&e points that would be needed to e*ual the profit that could be e$pected from intermediate trades in a !ears time is decreased from twel&e to nine. 5lthouh still not eas! b! an! means% this oal should be less difficult to attain than the first. The second e$ample suests that as the price of the stock bein traded is increased% its desirabilit! as a &ehicle for tradin rane tradin is also increased. This is confirmed b! the

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results from tradin a J144.44 stock. In this case the normal tradin rane has e$panded to 14  points. 5fter allowin for commissions a mo&e within such a rane could net about eiht  percent. Tradin this stock for an intermediate mo&e would likel! net twent!three percent per trade. That means it would take about eiht tradin rane trades to e*ual the results that could come from intermediate tradin. This should make achie&in the oal a little easier. These three e$amples show a couple of thins. -irst% the! indicate that tradin rane tradin is more likel! to produce an acceptable return if conducted in hiher priced stocks. The! also show how difficult it can be to match intermediate results. The e$amples re&eal that it takes from two to four times as man! tradin rane actions to e*ual the results of intermediate trades. Since the idea behind this t!pe of tradin is that it will produce more profits in the sa me period of time since more trades are bein completed% the results from the e$amples are disappointin. If it takes as much as four times as man! trades to e*ual intermediate results% 'ust think how man! it will take to produce sinificantl! better results. 5t some point the *uestion arises whether the result is worth the effort. There also arises the serious *uestion of the market’s abilit! to produce such a lare number of tradin opportunities. The need for e$act timin is another factor that makes this t!pe of tradin e$tremel! difficult. In the case of the J1>.44 stock with the a 11D3 point wide tradin rane% missin the e$act top and bottom of each mo&e b! onl! 1D= of a point would cost 1D< of the entire mo&e. Missin the top and bottom of the mo&e on a J>4.44 stock b! 1D3 a point would cost twent! percent of the mo&e. Twent! percent would also be sacrificed with the J144.44 stock if the e$tremes of the mo&e were missed b! 'ust 1 point. 5n! of these+ the% 1D= point% the 1D3 point% or the full point could come from bein 'ust one da! too earl! or too late. The! could e&en come from bein a couple of hours too earl! or late. Go one should e&er enter into an! t!pe of tradin with the idea that his timin will consistentl! be that perfect. It simpl! is not oin to happen. If the success of a trade re*uires that t!pe of perfect timin% it simpl! is not worth it. ?ettin timin e$act or e&en &er! close to e$act in a tradin rane/ is &er! difficult for one reason. In most cases there is no clearl! defined turnin action as there is with the loner forms of tradin. "hen we see such thins as sprins and upthrusts and “backups...” and “rallies back...%” the turnin action is clear. "ith &er! few e$ceptions these t!pes of indications do not e$ist when tradin is in a tradin rane. 6eliance is placed totall! on the abilit! of the support and resistance le&els to turn the price. 5s we will see when we et to some e$amples% such blind faith is not such a ood idea. If this t!pe of tradin is so riddled with problems% is there an!one who should e&en tr! itF "ell% that depends on how we use the word tr!. If we are speakin in terms of practice tradin% then the answer is that e&er!one should tr! it. "e ne&er know what we can do until we tr!. Since this t!pe of tradin is so difficult an! one who can de&elop the abilit! to do it profitabl! on a consistent basis should be a &er! ood trader with other approaches as well. In practice tradin within a tradin rane% it is important to de&elop a performance record that e$ceeds that which is enerall! considered acceptable with other t!pes of practice tradin before oin on to actual market operations. The reason for this can be found in the &ehicle that is likel! to be used for tradin. In most cases the tradin ranes bein traded will be relati&el! narrow. 7ue to commissions% this makes it *uite difficult to net a reasonable profit b! tradin the stock unless an unusuall! lare number of shares is traded. This lea&es% as one of the onl! alternati&es% the tradin of the stock’s options. "hen doin this% it is necessar! to use a mental stop. If the stock oes aainst !our trade b! a predetermined number of points the option will be sold. 5lthouh this is a sound course of action it will result in unusuall! lare percentae losses when the trade oes bad. To make up for these% it is necessar! to enerate a hiher percentae of profitable trades. If this t!pe of tradin is attempted for real without first ha&in de&eloped a pro&en record of performance% the trader will likel! see that portion of his funds dedicated to this t!pe of operation *uickl! e&aporate. Once the decision has been made to undertake this t!pe of tradin% the ne$t *uestion  becomes+ how to do it. In eneral% we want to bu! on reactions that approach the bottom of the tradin rane where there is no indication of a break from the rane and to sell on rallies that approach the top of the tradin rane where there is no indication of a break from the rane. This is a simple idea% but as we will find out later% one that is not so eas! to appl!. The first tradin opportunit! within a tradin rane comes at its beinnin on the clima$ of the pre&ious mo&e. Bu!in at the sellin clima$ or sellin short at the bu!in clima$ will  pro&ide the trader with a &er! ood price. If he is luck! enouh to not onl! hit the da! of the clima$% but also the appro$imate time of it% he ma! secure the absolute best price possible. 7on’t count on this howe&er. This is a difficult trade to make. One reason for the difficult! is that not

?-7

all clima$es are ob&ious. This seems to be more true of bu!in clima$es than sellin clima$es. The classic picture of a clima$ is a sure upward or downward in price on hea&! &olume after a sustained mo&e in that direction with a sharp re&ersal comin on the da! of the hea&iest &olume. These t!pes of clima$es are ob&ious and with the de&elopment of 'udment% can e&en be anticipated. The &ariations on this classic theme are not so ob&ious howe&er. -or e$ample% the &olume pattern is often not classic. Instead of ha&in a swell in tradin that centers on the da! of  the clima$% the &olume ma! be somewhat ele&ated for a considerable period before and after the actual clima$. This accomplishes the same thin% but it is more difficult to see the clima$ as it is occurrin and e&en harder to anticipate it in ad&ance. 5nother common occurrence is no noticeable increase in tradin as the price action oes into% what appears to be% climactic action. In these cases the &olume will often ha&e been hih at the bottom of the pre&ious reaction or as preliminar! support was bein met. There is an ob&ious  problem here and that is% how to a&oid lookin at the preliminar! support as bein the clima$% which could result in a premature trade. The wa! to a&oid this is to look at a percei&ed clima$ with a *uestion in mind. If (#! ac#on #! (e cl#%a, w(e"e #! (e )"el#%#na"$ !*))o" If # canno .e fo*nd, # #! 5*#e )o!!#.le (a (e ac#on (o*g( o .e (e cl#%a #! ac*all$ (e )"el#%#na"$ !*))o"& 5 similar situation ma! e$ist with preliminar! suppl! and bu!in clima$es. In these cases similar *uestions can help to/ a&oid a premature short position. 5 third possibilit! is when the &olume appears climactic% but the price does not. This will often appear as a radual roundin o&er or under in the price action instead of the sharp re&ersal normall! associated with a clima$. In these cases it ma! be clear that a chane is occurrin% but whether a commitment will be made before the break in the opposite direction comes is more *uestionable. In addition to the problems in&ol&ed in identif!in the clima$% there is a difficult! in knowin how far the automatic rall! or reaction that follows ma! carr!. This is because there is seldom an! well defined preparation for these mo&es. 8ou ma! et into a position riht at the end of the clima$% but how are !ou oin to know when to et out of there is no count on the fiure chart to pro&ide an indication. The answer is that !ou are not oin to know. The onl! wa! to tell when an automatic rall! or reaction is oin to come to an end is as it is occurrin.  Gormall! &olume will be first lare at the beinnin of an automatic rall! or reaction. It will then drop off sharpl! as the mo&e proresses. )rice action at the beinnin of these mo&es tends to be aressi&e with wide dail! price ranes and ood net proress. 5s the rall! or reaction de&elops% the ranes and amounts of proress made will diminish. This should occur in con'unction with a decreasin &olume. Throuh continued practice !ou will de&elop the  'udment necessar! to know when the narrowin of the proress and decreasin of the &olume ha&e reached a point that is likel! to stop the mo&e. There are no hard and fast mechanical rules that can be applied to this. It is strictl! a matter of 'udment. The second tradin opportunit! in a tradin rane comes at the end of the automatic rall! or reaction. 5s with the tradin at the clima$ this can also be &er! difficult to trade. One  problem that does not e$ist in this case is knowin where the anticipated mo&e is likel! to end. It should be completed near the le&el of the clima$. The ma'or problem that does e$ist with these trades is in knowin when to make the commitment. This is a problem because it in&ol&es knowin when the automatic rall! or reaction that had been underwa! is o&er. 5s we ha&e alread! seen% that is not alwa!s such an eas! determination to make. The first reall! ood tradin opportunit! in a tradin rane comes at the end of the secondar! test. In this case there is some information or indication a&ailable on the points that had been unclear at the earlier tradin  possibilit!. T(e )o#n of (e ea"l#e" cl#%a #nd#cae! w(e"e (e e! !(o*ld end& If it is to be a trul! successful test the price ma! be stopped a small distance before the clima$ le&el. The distance on the fiure chart between the secondar! test and the clima$ should re&eal how much  proress should be e$pected on the ne$t rall! or reaction. This is the first time since the  beinnin of the tradin rane where there is an indication of when to et in and where to et out. It is this information that makes this the first ood tradin rane opportunit!. 5fter the reaction or rall! that de&elops out of a successful secondar! test% the tradin procedure is to re&erse positions as the resistance or support le&els are approached and as the last small build up of count has been used up. T(e ece)#on o (#! wo*ld .e #f (e )"e/#o*! %o/e (ad "e!*led #n !o%e #nd#ca#on (a (#! #! (e #%e w(en (e )"#ce #! l#+el$ o lea/e (e "ad#ng "ange& In these cases re&ersin an alread! held position would make no sense. It would in&ite bein stopped out with a substantial and totall! una&oidable loss. In addition to the price action% &olume and fiure chart% indications as to how to handle these t!pes of trades can be otten

?-8

throuh eneral market conditions. This is especiall! true of those re&ealed b! the Trend Barometer. Let’s assume that a stock is approachin the top of its tradin rane. Gothin has happened that would suest that it is preparin for an upside breakout. Our thouhts should be to take a short position for the anticipated ride back to the bottom of the tradin rane. 5ll of/ the pre&iousl! mentioned points should first be taken into consideration and then the position of the Trend/ Barometer should be considered as well. If (e Tec(no%ee" #! #n (e o/e".o*g( "eg#on, #f (e o"ce #! nega#/e and decl#n#ng and #f (e Mo%en*% #! al!o decl#n#ng, (e 9T"end: Ba"o%ee" #! conf#"%#ng (e de!#"a.#l#$ of a+#ng a !(o" )o!##on&  Gow let’s re&erse that situation and assume that a stock is approachin the support le&el of the tradin rane. 5ain there has been no action that would lead to the e$pectation of a downside breakout from the rane. #onsider the other factors first and then turn to the Trend Barometer. Is the Technometer in the o&ersold reionF Is the -orce Inde$ impro&inF Is the Momentum ad&ancinF If the answer to these three *uestions is !es% the likelihood of the anticipated rall! is increased.  Gow let’s spend some time considerin se&eral e$amples of tradin rane opportunit! The first chart for this lecture is “St. 6eis )aper.” This stock does not ha&e options which reduces the tradin abilit!% but the actions within the tradin rane are still worth stud!in. -irst of all% find the bu!in clima$. Gotice the sharp re&ersal on &er! hea&! &olume. This stronl! suests a clima$. The first point to consider is proof that it is in fact a bu!in clima$. If it is% there should be sins of preliminar! suppl! some time earlier and there are/. 5ppro$imatel! three weeks earlier there was another swellin up in both the price and the &olume. Someone% seein the preliminar! suppl! and the bu!in clima$ miht want to take a position on the short side. 6emember thouh that this trader has no idea in ad&ance how far the automatic reaction miht carr!. T(e a*o%a#c "eac#on la!ed a.o* a wee+& DonG e)ec (e% o la! %*c( longe"& 0#( (#! $)e of "ad#ng $o* ge #n and $o* ge o*& There is seldom 'ustification for waitin around if a stock mo&es aainst !ou. In this case the stock repeatedl! met support at <<. 5n alarm to et out and to/ re&erse sides was bein sounded. There was a test of the automatic reaction’s low after which upside proress set in. "ould the immediate testin of the automatic reaction be reason for concernF It could be% especiall! if the test had started to penetrate the  pre&ious low on increased &olume. 5s we can see thouh% neither of these thins happened. The support line was respected and the &olume remained low. 5lthouh a lon position would probabl! ha&e been taken about a point hiher% the une$pected dip would not ha&e pro&ided reason to sell the position. If the stock had been bouht at << the upside e$pectation would ha&e been a four point mo&e to the top of the tradin rane. If the potential profit was four points a < to 1 profit  risk ratio would ha&e allowed the placin of  a stop at 1)lanned "ange .elow (e ac*al o) of (e "ad#ng "ange w(#c(, #f ene"ed, wo*ld !#gnal a "e/e"!al of )o!##on&   This could be a 1D= point% 1D3 point or e&en a whole point. In the determinin of somethin like this is where 'udment pla!s an important part. The onl! wa! to de&elop it is throuh practice. A! a gene"al g*#del#ne (owe/e", *!e (e #dea (a, a! (e )"#ce of (e !oc+ .e#ng con!#de"ed #nc"ea!e! o" (e w#d( of (e "ad#ng "ange e)and!, (e %a"g#n fo" e""o" #n (ow clo!e (e !oc+ w#ll co%e o "eac(#ng (e o) of #! "ad#ng "ange al!o #nc"ea!e!& The other wa! to handle a situation like this is to 'ude the *ualit! of the price action. This is more difficult than the first approach which was more mechanical% but the lon term results in this case are likel! to be more positi&e. On the da! where the price hit <@1D3% its upside  price proress was abruptl! stopped in spite of a sure in &olume. That does not fa&or a continued ad&ance. The ne$t da! the price aain made a sharp decline earl! in the da! on continued hih &olume. That is two da!s then that did not fa&or a continuation of upside  proress. T(a !(o*ld .e eno*g( of an #nd#ca#on& 6emember% in this t!pe of tradin !ou don’t want to wait around too lon. -or those who wanted more proof howe&er% the ne$t da!% when the rall! started to falter on continued hih &olume% that pro&ided it. The ne$t reaction took the price down to the bottom of the tradin rane% producin another four point profit. The  price was aain in the bu!in rane. There was 'ustification to re&erse sides and establish lon  positions. This time somethin should ha&e clicked about the character of this turn. The bottom

?-;

of the reaction penetrated the support le&el resultin in a potential sprin. Two da!s later the sprin was tested successfull! on reatl! reduced &olume. This de&elopment would not ha&e discouraed the re&ersin of positions% but it should ha&e had an impact on the e$pectations for the ne$t mo&e. 5 successfull! tested sprin suests that the ne$t ad&ance ma! take the price up and out of the tradin rane. That bein the case% !ou would be less inclined to re&erse the  position as the ne$t rall! approached the top of the rane. In this case it would ha&e been a mistake not to re&erse the position aain. The price approached the top of the rane. The &olume e$panded% but the resistance was not broken. In this case the in&estor would ha&e  probabl! ridden his position to the bottom of the rane aain. On the ne$t rall! to the top of the rane in earl! -ebruar!% the e$istin position would likel! ha&e been sold and re&erse. This time the reaction failed to make the kind of proress made b! the earlier ones before it was aain turned upward. The position likel! would not ha&e  been re&ersed and therefore would ha&e been stopped out/. 5s !ou can probabl! tell% this definitel! is not eas!. It re*uires that the trader be constantl! alert and read! to act. Man! in&estors can’t handle this and man! others probabl! do not want to put up with the tension. -or these indi&iduals the tradin opportunities co&ered in earlier tapes are the path to follow. Those who can li&e with this t!pe of tradin should take note of somethin that ma! be helpful. T(e ea!#e! "ade! w#(#n a "ad#ng "ange end o co%e nea" (e %#ddle of  #! d*"a#on& This fact is reflected aain b! the second chart which shows a &ertical line chart of “(ospital #orporation of 5merica” and the Trend Barometer of the market. The tradin rane as defined here de&eloped after the rall! to
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results with ma'or tradin opportunities% but are totall! unable to make a profit within a tradin rane. 7iscipline is a determinin factor. It is re*uired in e&er! transaction if there is to be/ an! hope of a profit% but the deree of discipline can &ar! considerabl!. In the case of profitin from tradin rane acti&it!% the trader must be able to absolutel! and totall! keep h is emotions under control. Some 'ust cannot do this. If !ou find !ourself consistentl! unsuccessful at this t!pe of tradin% e&en in a practice settin% don’t be concerned. 8our tradin record as a "!ckoff student can still be &er! ood.

?1@

PRACTICE TRADIN TAPE NUMBER SI

This is practice tradin tape number si$. Go doubt !ou ha&e come to reali0e from this set of tapes that we put an incredibl! hih priorit! on practicin what !ou ha&e learned. In fact% we would rank practice tradin ahead of profits on a list of priorities. The reason is simple; :nless !ou ha&e workin knowlede of what !ou ha&e learned% it will produce nothin. T(e )"#ned and !)o+en wo"d! #n (e 0$c+off Co*"!e a"e onl$ a .eg#nn#ng& T(e$ "e5*#"e (e de/elo)%en of good 3*dg%en o $#eld (e#" f*ll )oen#al& 8ou ma! choose to de&elop this  'udment throuh actual market operations or throuh practice. But we think that/ !ou will find the practice tradin approach more constructi&e and much less costl!. 5s we said thouh% the choice is !ours. "e cannot make it for !ou. 5s hih of/ a priorit! as we place on the eneral topic of practice tradin% it is not at the top of the list. The sinle most important part of an! market operation% be it practice or real% is  protection. "e ha&e sa&ed this topic for last in the hopes that% if nothin else from the series of tapes is retained% at least this one absolutel! critical point will be. 8ou see% the onl! thin worse than an in&estor who does not maintain an onoin proram of practice tradin is the in&estor who will not or does not no how to properl! protect his funds. ,&en the trader who is &er! successful runs the risk of man! ma'or setbacks if his efforts at self protection are inade*uate. Learnin how to safeuard funds aainst potential ma'or loss is the one sure wa! to uarantee that !our personal in&estment or tradin proram will ha&e a tomorrow. In order to protect !ourself aainst somethin it is necessar! to be in with an understandin of what it is that !ou are protectin !ourself aainst. It is fine to sa! that  protection is bein taken aainst potential loss% but that is reall! not enouh. Losses are results not causes. If an!thin is to be ained% the causes must be determined. These are uni&ersal and therefore are &er! well known. The underl!in cause of a loss in an! particular tradin situation is the trader’s own fear and reed. "hat this sa!s then is that in takin steps to protect his funds an in&estor is actuall! attemptin to protect them from himself. This fact makes the effort much more challenin. 7ealin with an e$ternal force is normall! much easier than handlin one that is internal. -ear and reed are &er! different. The! come into pla! at different times and are responsible for different t!pes of problems. -ear% when it is the cause of a loss% enerall! results in a loss of opportunit!. These are the trades that somehow manae to et awa! from !ou e&en thouh the potential was percei&ed. ?reed is perhaps more basic. "hen it is responsible for a loss it is a loss of alread! reali0ed profits. These are especiall! painful% but both are serious  problems. The! will assist !ou in relin*uishin as much of !our resources as possible if !ou let them. The ob'ect is not to let them -irst let’s consider protection aainst fear. Some lon term traders ma! appear to approach each of their commitments with ner&es of steel. The! alwa!s seem to be so totall! ob'ecti&e and completel! unemotional. 7on’t !ou belie&e it. Go in&estor% no matter how ood his record% e&er approaches a commitment without at least a small measure of fear. 5n! fear that does e$ist works in two wa!s. 5s alread! mentioned% there is the fear of missin an opportunit!%  but there is also the fear of incurrin a ma'or loss. The protection aainst each is somewhat different. )rotection aainst the fear of missin an opportunit! is discipline. Gobod! wants to  be left out. This is especiall! true when it comes to stock market profits. One supposedl! sure wa! to pre&ent bein left behind is to et on board earl!. That’s e$actl! what most of us do. "e’re so afraid of missin a profit that we tend to constantl! trade too earl!. The common mistake made here is to conclude that a little bit of a wait is no problem because the e&entual result will 'ustif! it. (ow do !ou know it’s oin to be 'ust a short waitF That’s an assumption. 5 much bier problem% howe&er% is that the 'udment upon/ which the trade is based ma ! be

?1?

in&alid. If a )o!##on #! a+en oo ea"l$, # canno )o!!#.l$ .e .a!ed on a (o"o*g( a))"a#!al of (e o))o"*n#$ (a (e "ade #! #nended o a+e ad/anage of .eca*!e (a o))o"*n#$ (a! no (ad a c(ance o f*ll$ de/elo) . T(a %ean! !o%e(#ng co*ld go w"ong& If it does% the  position will probabl! be stopped out. :nfortunatel! there is no mechanical tool that will in&ariabl! keep !ou from tradin too earl!. There are howe&er% a series of tools that% when used correctl! will help force a disciplined approach to the proper timin of trades. T(e!e a"e (e .*$#ng and !ell#ng e!! (a $o* w#ll f#nd #n $o*" 0$c+off Co*"!e& These can be used as a check list of criteria that must be met before an! position can be taken. ,&en so% the stock  bouht or sold short ma! not bein to mo&e immediatel! the ne$t da!% but it will ha&e the  potential. 5 position taken before all of/ the tests ha&e been passed won’t start to mo&e immediatel! either% but in this case% it is lackin the potential as well. In appl!in the tests to a stock% !ou are workin on a pass or fail basis. The stock either passes all nine tests clearl! or it fails as a candidate. There is no room for a/ marinal pass and definitel! no room for uessin& If $o* can )o#n o (e ac#on (a "e!*l! #n (e )a!!#ng of eac( e!, $o*" )o!##on w#ll .e a+en #n #%e o a+e ad/anage of (e %o! #%)o"an )a" of (e an#c#)aed %o/e& A (e !a%e #%e $o* w#ll g"eal$ "ed*ce (e c(ance! of lo!#ng (e )o!##on o a !o)&   There ma! still be a sliht feelin of fear% but !our actions will be keepin it from beco min an!thin more. The other t!pe of fear is of incurrin a ma'or loss. Let this one take control of !our actions and !ou will find !ourself ne&er doin an!thin. -ortunatel! &er! few in&estors e&er  become this totall! possessed b! such fear. -or most the desire to be doin somethin is 'ust to reat to be totall! round to a halt b! fear. O/e"co%#ng, o" a lea! con"oll#ng (e fea" of lo!! #! )o!!#.l$ (e ea!#e! $)e of )"oec#on o en!*"e& I #! done w#( a !o) o"de"& The use of a stop order allows the in&estor to make and maintain a relati&el! ob'ecti&e appraisal of a percei&ed opportunit!. It lets the in&estor take comfort in the fact that if his appraisal is badl! flawed% his loss will be cut short before it turns into a disaster. The stop order will do its 'ob of protectin the in&estor% pro&idin that/ it is not a mental stop. The mental stop order is a de&ice used b! some traders whereb! the! can admit to a mistake without ha&in to  pa! the price. This sounds like a perfect situation% but it is reall! an e$ercise in self deception. If  a mistake has been made% the price can be paid now or it can be paid later% but be assured that e&entuall! it will be paid. Often% dela!in the pa!ment onl! makes it worse. If a mistake wasn’t made and the mental stop is hit% it suests that the thouht that went into the placin of the mental stop was not sound+ it had no business bein at that le&el in the first place. It probabl! wouldn’t ha&e been there either if the stop had been an actual order and not a thouht filed awa! for safe keepin. 5 commitment with cash or on paper tends to be more well thouht out. T(e"e #! !#%)l$ no good "ea!on no o *!e a "eal !o) o"de" and no good "ea!on o *!e a %enal one& On this last point there ma! be one possible e$ception% but we will et to that later. Sometimes the fear of a ma'or loss and fear of missin an opportunit! can et in each others wa!. The fear of a missed opportunit! ma! result in a premature trade. The fear of a ma'or loss will result in a stop order bein placed. If a trade has been made too earl!% the stop ma! be too close to sur&i&e the remainin and unknown action of the tradin rane. In these cases the position ma! be lost to a stop resultin in a loss e&en thouh the e&entual outcome has  been properl! dianosed. This ma! be the most frustratin tradin e$perience an indi&idual can ha&e. If it happens repeatedl!% it can become *uite destructi&e. Gobod! wants to be penali0ed for bein riht. Someone who is so penali0ed/ on a reular basis probabl! will turn his interests toward somethin other than the stock market. If the bu!in and sellin tests are reularl! used% the chances of bein stopped out in situations other than those that deser&e to be% are small; This is% pro&idin that/ the stop orders that are used are properl! placed. :sin a stop correctl! means maintainin a profit  risk ratio that is in !our fa&or. Be careful howe&er% that !ou don’t end up usin this idea in a wa! that undul! restricts the stock’s abilit! to mo&e. 5n e$tremel! hih profit  risk ration would seem to be in the traders fa&or% howe&er if it increases the chances of bein stopped out% the result will be more harm than ood. The problem with &er! hih profit  risk ratios is that the! re*uire unusuall! close stop orders% unless the amount of potential a&ailable is massi&e. There is nothin wron with ha&in a close stop% pro&idin the in&estor’s records indicate &er! ood timin. A! a !o) o"de" #! ."o*g( clo!e" o (e "ade )"#ce!, (e %a"g#n fo" e""o" #n #%#ng (a "ade w#ll .eco%e !%alle"&  Got onl! must !ou be riht% but !ou must be riht% riht nowC It’s true that trades lost to the close stop orders re*uired b! hih profit  risk ratios will be small% but if the! become &er! fre*uent% the cost will start to et *uite hih before lon.

?12

O&er the !ears we ha&e found that the most enerall! acceptable profit  risk ration is < to 1. -irst of all% it pre&ents a ma'or loss. 5ssumin that funds ha&e been di&ersified into se&eral  positions% the o&erall loss% e&en thouh the stops on indi&idual positions ma! be rather liberal% should remain small. It also i&es the stock some breathin room. It is unreasonable to assume that e&er! stock will be cauht e$actl! at its turn. 5 lon position ma! mo&e somewhat lower  before it turns up and a short position ma! mo&e somewhat hiher before it turns down. Yo* (a/e go o allow !o%e %a"g#n fo" e""o"& Go trader is so ood that he can hit the e$act top or  bottom e&er! time. "ithout a little breathin room otherwise &er! sound positions will be lost to their initial stop orders. 5 < to 1 profit risk ration will help pre&ent this.  Gow% let’s mo&e on to the sub'ect of protection aainst reed. Go doubt !ou ha&e heard the phrase that “nothin succeeds like success.” This ma! be true in man! endea&ors% but there is some *uestion as to its &alidit! when it comes to the stock market. (ere the sa!in miht more aptl! read; “Gothin impedes like success.” -rom an ob'ecti&e standpoint !ou would think that when a reasonable profit has been de&eloped in a position there would be a reat deal of satisfaction in the/ takin of that profit. :nfortunatel!% it doesn’t alwa!s work that wa!. ?i&en a certain le&el of profit there is a tendenc! to want more instead of bein satisfied. If this desire switched on in our mind suddenl!% it would be ob&ious and probabl! could be controlled more easil!. ?reed howe&er% is sneak!. It doesn’t 'ust stand up and sa!+ “(ere I am.” It tends to creep in with &er! leitimate consideration and then raduall! take o&er. #onsider these e$amples. 5 stock is in an up trend and has been for *uite some time with ood upside proress  bein the result. The stock becomes o&erbouht% reaches its upside ob'ecti&e and then drops  back into the trend channel. There are two ood reasons here for sellin this stock% but the support line remains intact. B! concentratin on this last point% the more important points mentioned first can easil! be o&erlooked. The desire to ha&e more profit causes the situation to  be anal!0ed from that standpoint and not from the standpoint of thins as the! reall! are. 5t that  point reed has taken control and the profit alread! ained is put in 'eopard!. (ere is another e$ample that is probabl! more classic. 5 stock is in an up trend. It has fulfilled one phase of a two phase ad&ance. The recent action of the stock has been to become o&erbouht% mo&e sidewa!s and then break its up trend. This stock is potentiall! in &er! serious trouble% but it has that hiher ob'ecti&e. If an #n/e!o" #! )a"#c*la"l$ )"one o g"eed, (e e#!ence of a (#g(e" o" lowe" o.3ec#/e #! an al%o! !*"e wa$ fo" g"eed o a+e o/e"&   The current action starts to pla! a more and more secondar! role to the possibilit! of a bier profit. 5t this point it is the desire for that profit that has taken o&er. The stock can do whate&er it  pleases; Its action will not be i&en the consideration that/ it deser&es. (a&in some idea of how reed enters into a situation and how it/ raduall! s*uee0es reason out is a form of  protection% but it is not enouh. "eed #! )"o.a.l$ (e !#ngle %o! de!"*c#/e fo"ce a wo"+ #n (e %a"+e& #ountin on bein able to catch it in the act before the damae is done will not work and tr!in to practice trade this idea probabl! will not work either. 8ou can take a whole mountain of practice positions and e&er! da! with each one tell !ourself; “I will not be reed!C I will not be reed!C” Before lon thouh% don’t be surprised if !ou find !ourself sa!in; “That’s not bein reed! is itF” "hen this happens !ou are 'ust one step awa! from the final statement; “I was reed after all% wasn’t IF” The onl! wa! to totall! protect oneself from reed is to take steps aainst it at the time a position is One of (e .e! wa$! o do (#! #! o )"edee"%#ne and )"e>e!a.l#!( a !ell o" co/e" o"de" #n (e a"ea of (e an#c#)aed o.3ec#/e& "hen the stock reaches that le&el the established. position will be automaticall! eliminated and the profit protected.” ?reed won’t e&en ha&e a chance.  Got e&er! position is oin to make it to its indicated ob'ecti&e. "e’&e alread! seen how the idea that the! will pla!s riht into the hands of reed. In those cases where the ultimate ob'ecti&e is not met an! preestablished sell or co&er order will not be e$ecuted. 7oes that mean no protection. It could mean 'ust that% but it doesn’t ha&e to. The stop order can be used &er! effecti&el! for this t!pe of protection pro&idin that/ it is used correctl! throuhout the life of the position. That means repositionin it as the mo&e proresses& T(e f#"! o.3ec#/e #n "e)o!##on#ng a !o) #! o ge *) o o" down o (e "ade )"#ce a! 5*#c+l$ a! )o!!#.le&   One this is accomplished% the in&estor’s funds are protected aainst loss and he can breathe a little easier. This repositionin% or an! to follow% cannot be done in a careless fashion. If it is% initial capital ma! be protected% but profits will likel! be scarce. ,$cept in those &er! rare instances when a stock e$plodes upward or downward to its ob'ecti&e% a mo&e will be accomplished throuh a series of pushes and rests. The rest periods between the periods of proress are e$tremel! important. The! will indicate when a stop can be mo&ed and more importantl! to what le&el it can be mo&ed. 5 restin period will either come as a normal correction or as a

?1-

hori0ontal consolidation. T(e !o) !(o*ld .e "e)o!##oned 3*! a.o/e o" .elow (e e"e%e! of (e!e )e"#od! 3*! a! !oon a! (e"e #! an #nd#ca#on (a (e )"#o" )"og"e!! #! .e#ng "enewed& 7on’t be in too much of a hurr! on this. If !ou cannot point to some action that clearl! indicates the prior mo&e is about to be renewed% !ou ma! be settin !ourself up to be stopped out b! a correction that oes a little farther than !ou had e$pected or b! the consolidation that ends with an une$pected shakeout or upthrust action. 0(en a !o) #! "e)o!##oned e/e"$ effo" !(o*ld .e %ade o %a#na#n a - o ? )"of# > "#!+ "a#o& Suppose !ou had bouht a hundred dollar stock with a twent!fi&e point upside potential. 8our stop could 'ustifiabl! ha&e been placed eiht point lower at about ninet!two. 6emember% ne&er place a stop at an e&en 1DEth. -rom here the stock ad&ances to 11> and then reacts back to 114. 5t this point the &olume dries up and the price rane narrows down% indicatin that the reaction has come to an end . "ith the stock at 114 there is a potential 1> points left in the mo&e. To maintain a < to 1 profit  risk ratio for the ne$t part of the mo&e% the stop should be placed about fi&e points below the bottom of the reaction. In doin this the in&estor is still pro&idin the stock with some breathin room% protectin all of his initial capital and uaranteein half of the profit reali0ed at that point. If this same stock were now to rall! to 134 and then react back to 11>% the stop order could aain be repositioned. This time there would be ten points left in the oriinall! indicated mo&e% so the new stop could be placed a little more than three points below the bottom of the correction. #an !ou see the pattern hereF 5s the mo&e proresses resultin in more and more potential profit to lose and less and less potential mo&e left% the stop is mo&ed  proressi&el! closer to uarantee as much of the profit as possible% should somethin o wron in the final staes of the mo&e. There is an alternati&e method for repositionin stops which ma! be used. 8ou bein with an initial stop that maintains a < to 1 ratio. 5fter this% the stop is mo&ed up to a le&el a fi$ed number of points from the end of the correction. :suall! a fiure in the three to fi&e point rane is used; This method is certainl! eas!. )ro&idin a stocks action is watched carefull!% it is an acceptable approach% but there are a couple of potential problems that should be kept in mind. If a stock has a lare potential% maintainin a three to fi&e point stop durin the earl! staes of the mo&e could result in restrictin the action too much. 5t the other end of the mo&e% as the stock approaches its ob'ecti&e% the fi$ed three to fi&e point stop could result in i&in the stock too much breathin room. 8ou could be riskin more of !our accumulated profits than what/ can be  'ustified.  Gow% let’s consider some e$amples. The stock we will stud! is “Kohnson and Kohnson.” 5s the chart beins “Kohnson and Kohnson%” was finishin a lenth! period of preparation. It is  possible that a lon position could ha&e been 'ustified on either the reaction down to AA in  Go&ember or the one down to A@ in Kanuar!. (owe&er% since we cannot see the entire  preparation phase% this could onl! be a uess. The first mo&e that can be clearl! identified is the hih &olume aressi&e rall! to EE. This is a sin of strenth. 0(e"e (e"e #! an SOS (e"e (a! o .e an LPS and w(e"e (e"e #! an LPS, (e"e !(o*ld .e a .*$#ng o))o"*n#$& The low &olume at the bottom of the normal halfwa! correction in the E1 to E3 rane pro&ided that opportunit!. -or simplicit! we will assume that we were luck! enouh to bu! at E1. The indicated mo&e from the last point of support was 3E points. If taken conser&ati&el!% that results in an ob'ecti&e of 14=. "ith a likel! potential of twent!three points% a stop A>DEths points below the trade price could ha&e been 'ustified. This point is marked on the chart as “S1.” “Kohnson and Kohnson%” then rallied to 2= before beinnin a rest period. "hen the stock bean its reaction% we could ha&e e$pected a reaction to the halfwa! point at about EA points of upside potential remained. 5 fi&e point stop could ha&e been 'ustified. That means it would ha&e been positioned in the E< to E= rane. In this case the position would ha&e sur&i&ed. Let’s take another look at that action marked with the “.” 7id it pro&ide 'ustification for repositionin the stopF The answer seems to be no. T(e /ol*%e a (e .oo% of (e "eac#on wa! 5*#e (#g(& If (e co""ec#on wa! o/e", (e /ol*%e !(o*ld (a/e .een low& Gow look at/ what happened to the &olume as the stock/ started to rall! awa! from the bottom of the reaction. It decreased. Is that indicati&e of a true resumption of/ upside proressF 5ain the answer is no. -ailin to notice these important  points could not ha&e affected the outcome in this case. In other instances howe&er% the result could be losin the position to its stop. S#%)l$ *!#ng a !o) o"de" doe! no le!!en (e need fo" ca"ef*l and con#n*#ng anal$!#!& The da! on/ which the repositionin of a stop could ha&e

?11

 been 'ustified has been marked. No#ce (e w#de !)"ead, good )"og"e!! and (#g( /ol*%e& T(a #nd#cae! a "e!*%)#on of (e "all$& The low point of the reaction was E@. -rom that  point eihteen points of potential remained in the mo&e. Therefore a new stop could ha&e been  positioned si$ points below the bottom of the reaction. This has been marked as “S3.” 5fter the stock rallied to 143 it aain started to correct. The reaction carried the price  back to the halfwa! point on decreased &olume. It then started to rall! aain with ood price  proress and ood &olume. This pro&ided 'ustification for repositionin the stop a second time. The bottom of the reaction was at 2<. The remainin potential was ele&en points% so a stop around E2 was reasonable. Gotice that in this instance the stock had to test the bottom of the reaction before actuall! resumin the ad&ance. If either of these tests had failed% the newl!  positioned stop would ha&e become &er! important. 7ependin on the action that miht ha&e followed% this stop could ha&e meant the difference between an eiht point profit and no profit. 5t the end of the chart the stock appears to ha&e aain one into a restin spell. There is no action !et to indicate a resumption of the ad&ance. Therefore there is no 'ustification for repositionin the stop. It should be noted that on the pre&ious rall! the 14= le&el was briefl! touched% which is in the ob'ecti&e rane. 5s a result% this stock should now be watched &er! closel!. It ma! be nearin the time to eliminate lon positions. The ideas in this tape and others are all basic and &ital to success in the market. The in&estor who seeks profits without first stud!in and understandin them is likel! to be doomed. The onl! thin he has to o on is luck% which is ne&er especiall! reliable. 9nowlede of the "!ckoff concepts represents the takin of a iant step awa! from a reliance on luck% but it is 'ust a beinnin. )rofits are still not uaranteed. The knowlede contained in the "!ckoff #ourse will onl! be of &alue when it can be transformed into positi&e performance. (opefull! these past se&eral hours of discussions ha&e impressed upon !ou that the onl! wa! to reali0e an acceptable le&el of performance is throuh practice. The "!ckoff principles are not mechanical tools. The! cannot simpl! be switched on and off producin a set result. )roper use re*uires 'udment. It’s somethin like dri&in a car. 5 relati&el! !oun child likel! knows how to et in and start the enine% but that is probabl! about all. The car runs% but it doesn’t perform. That re*uires someone who knows when to put it in ear% when to use the as and brake and when and how to steer. Onl! a small amount of this can be learned from a book% the rest has to come from the de&elopment of 'udment ained from continued practice. In man! respects the stock market is much more complicated than !our car% therefore it probabl! will take loner to de&elop the  'udment re*uired to !ield the desired performance. It ma! take si$ months or it could take si$ !ears. One (#ng #! ce"a#n (o*g(, # wonG (a))en #f  $o* a"e *na.le o acce) (e /al#d#$ of (e )"ac#ce "ad#ng e)e"#ence& Those who insist on fihtin this pro&en approach are fihtin themsel&es and likel! will i&e up in frustration some da! because the! are fihtin a  battle that cannot be won. -rom our standpoint% nothin pleases us more than to see a well thouht out% well documented and onoin practice tradin proram. It is enerall! one of the best sins of a ood student. These indi&iduals know e$actl! what the! did and the details of wh! the! did it. If the action is successful there is a foundation on which to build repetition after repetition. If somethin is unsuccessful there is a clear record from which to find the error and an ine$pensi&e lesson on what not to do in the future. If !ou need help in learnin the lesson% 'ust let us know. Throuhout histor! a common response to problems has been to throw mone! at them. It hasn’t worked &er! well in histor! and chances are it won’t work for !ou in the stock market either. #an !ou afford this approachF Our uess is% probabl! not. So% wh! not do somethin that worksF )ractice trade. There is no better time to start than riht now.

Submitted b! member Bruce (ands 6e&ision dates; AD1@D2E

Initial release

If !ou enhance or modif! this document% send it back to the rest of us with the re&ision histor! abo&e updated.

?16

WYCKOFF GLOSSERY OF TERMS PART 1: Acc*%*la#on' from the Suppl!D7emand perspecti&e is demand comin  in to raduall! o&ercome and absorb the suppl! and to support the stock at this le&el. A*o%a#c "all$ 9AR:' -ollowin the Sellin #lima$ one of two thins ma! happen; an 5utomatic rall! 56/ or a lateral mo&e. This is then followed aain b! one or two thins either a Secondar! Test ST/ of the Sellin #lima$ or a continuation of the down mo&e. To understand this we must o back to what happens on the Sellin #lima$; The Sellin #lima$ is caused b! panick! li*uidation% panick! sellin. The price is dri&en down to far and this creates a &acuum and as soon as the down mo&e has been stopped the stock should bein to rall!. "e call this the 5utomatic 6all! 56/ because it occurs automaticall !. ?enerall! the 56/ lasts for onl! a few da!s to about a week. The rall! ma! be weak or stron. It ma! be howe&er% so weak and the suppl! press on the market so stronl! that instead of  bein able to rall! well the price simpl! mo&es sidewa!s for a couple of da!s% or perhaps for as much as a couple of weeks and a lateral mo&e will then continue the downtrend. If there is a simple lateral mo&e the stock is -56 MO6, LI9,L8 to continue the downtrend then if there is a ood rall!. A*o%a#c "eac#on 9AR:' -ollowin the Bu!in #lima$ is the 5utomatic 6eaction; 5s with the 5utomatic 6all!% the time factor here is enerall! measured in da!s. The e$tent of the reaction depends on how completel! the demand is e$hausted and how e$tensi&e the first wa&e of short sellin is. The 56/ will also be limited b! renewed  bu!in bu! those who see the reaction as a wa! of ac*uirin stock at barain prices% and b! the fact that the 6,5#TIOG does not ha&e an! sinificant preparation in ad&ance to sustain it. Bac+*) o (e edge of (e c"ee+ 9BEC:' is normall! a potential SOS/% after 'umpin the creek the backup to the ede is usuall! the reaction of the 'umpin of the creek rall!/ and comes to rest find support/ abo&e the creek. The Backup to the ede is normall! a potential Last )oint of Support L)S/. M#no" C"ee+' lower branch% The minor creek &er! often occurs in the lower or the middle part of the TD6  but is still somewhere in the TD6. Ma3o" C"ee+' upper branch% The 'ump of the ma'or creek is a larer mo&e and it &er! often carries the stock abo&e the old suppl! le&els in the TD6 often into new hih round. B*$#ng Cl#%a 9BC:' The clima$ endin an uptrend is called a Bu!in #lima$ because it is the end of the condition where the bu!in is stroner than the sellin. The bu!in raduall! builds up R builds up and finall! comes in with a 6:S( and ,(5:STS itself on the bu!in clima$. The bu!in clima$ has increased &olume and a widenin spread as it mo&es up. -ollowin a bu!in clima$ one of two thins can occur% either a 56/ or a lateral mo&e. This in turn is followed b! one of two thins; either a continuation of the uptrend or a Secondar! Test ST/. If  the suppl! is to weak to dri&e the stock down or demand to stron to allow it to o down instead of ha&in the 56/ the stock will ha&e the lateral mo&e. :suall! howe&er% it will ha&e some form of an 56/. That 56/ ma! ha&e increased &olume% hea&! &olume or no &olume. It ma! ha&e wide price spread% or relati&el! narrow price spread.

Cl#%a' the peak% the e$treme or the end of somethin and as the point of hihest dramatic tension or a ma'or turnin point in the action. Some s!non!ms are; top% pinnacle% heiht% ma$imum% consummation% culmination or turn of the tide. "hat does a clima$ doF 5 clima$ stops a trend either temporaril! or permanentl! dependin on the subse*uent action. 5 clima$ is preceded b! some sort of a t rend. C"ee+' relates to the flow of suppl! across the top of the tradin rane. The creek itself is a wi l!% s*uil! trend line drawn free hand throuh the tops of the rallies within that tradin rane. C"o!! o" *%) (e c"ee+ 9AC:' either minorDma'or. To 'ump rall!/ abo&e the creek drawn trendline/ or flow of suppl!. This 'ump or crossin is a Sin Of Strenth SOS/. Gow where is the creekF 5fter much searchin for the answer to this *uestion Mr. ,&ens finall! reached the conclusion that the #6,,9 is "(,6, the BO8 K:M),7. 5ppl!in this to the market% the #6,,9 is "(,6, the HOL:M, #5M, IG% where the ,--O6T the ):S( the )O",6 came in. It is important to reconi0e that there is no one e$act wa! of drawin these creeks. 7o some e$perimentin with them% !ou ma! wish to draw the creek lihtl! in pencil on !our chart and continue the creek as lon as it is useful% then later% either erase the creek% or a branch of t he creek% or perhaps remo&e it from !our chart altoether. (owe&er% lea&e the important creeks on !our chart as the! can be ,T6,M,L8 (,L)-:L in drawin !our attention to the M,,TIG? of suppl! in a TD6 and in assistin in definin the probable e$tent of the reaction% that is the B5#9 :)% which is likel! to occur after a possible crossin of the creek. It will be especiall! helpful in drawin !our attention to situations where a stock falls back into the ede of the creek% because e&er! so often it

?17

does that and e&er! so often that little old bo! scout sort of drowns. Our problem and &er! often is GOT to drown with him. D#!"#.*#on'  from the Suppl!D7emand perspecti&e% 7istribution area is where the Suppl! o&ercomes 7emand and stops the upward mo&e and e&entuall! beins the downward mo&e. 7istribution refers to the elimination of a lon in&estment or speculati&e position and often in&ol&es establishin a speculati&e short position b! professional interests in anticipation of a decline of price. In the distributi on area the professional in&estors or speculators who had pre&iousl! had bouht stock% sell there stock to the public. The public bu!s and it enerall! bu!s because of ood news of &arious sorts. ?ood news on the compan!% its product% the econom! or an! news which will entice untrained people to rationali0e there bu !in decision. The best news of all is the ad&ancin of the price of a stock. Often the reason that untrained people bu! is that the! do not want to miss out on the anticipated profits the! think there are oin to et as the stock continues to mo&e up. Or the! ma! bu! because the stock has reacted a few points from the top and the! think the! are ettin a barain. 5fter ha&in sold there lon stock professionals ha&e no reason to support the stock on reactions and so the! cancel there bits under the market% the! ma! not onl! cancel the  bids but the! ma! establish short positions in anticipation of a lare decline in price. Distribution is usuall! accomplished in a relati&el! S(O6T TIM,% "hereas accumulation takes M:#( LOG?,6% sometimes o&er man! !ears. M5KO6 distribution occurs in onl ! a few weeks or perhaps a few months &er! rarel! o&er a se&eral !ear  period. 7istribution is usuall! characteri0ed b! wide price mo&ements and hea&! &olume and ?6,5T acti&it!. Effo" /e"!*! Re!*l 9EJR:'  if !ou ha&e an effort e$pressed the result should be in proportion to the effort. If a stock  has been mo&in up e&er! da! with a two point spread e&er! da! with ten thousand shares and it breaks into the hih round with twent! thousand shares and a half point spread for a couple of da!s straiht we know suppl! is comin in and is o&ercomin the demand. This is an effort that is not ha&in an proportionate result% therefore the stock i s likel! to be in trouble and ha&e a re&ersal in its mo&ement.

Half>wa$>)o#n! 9?J2:' are used as a measurement of relati&e strenth on a rall! or reaction. ,$ample% if a stock mo&es from J>4 to J>@ the distance of si$ points and then reacts% the halfwa!point would be half of that si$ points or at J><. 6e&erse the process for calculatin t he halfwa!point on a rall! followin a decline. ,$ample% if a stock mo&es down from J<4 to J31 a distance of nine points. The halfwa!point woul d be at half of that distance and is J=  points added to J31 i&es a halfwa!point of J3> . 7o not e$pect the stock or inde$ to o e$act halfwa!  point at the e$act 1DEth. It is sufficient to meet support or suppl! in the &icinit! of that halfwa!point. 5lwa!s calculate (alfwa!points mathematicall! do not uess% because !our e!es will lead !ou astra!. Ice' The I#, is the -O6M,6 S:))O6T 56,5 at the BOTTOM of the TD6 which B,#OM,S a S:))L8 56,5. The I#, is shown b! drawin a wile! trendline across the &arious support points at the bottom of the rane. In a manner similar to the creek which is drawn throuh the suppl! points at the tops of the rallies in the TD6. La! Po#n Of S*))o" 9LPS:' Should ha&e a L5#9 O- S:))L8 indicated b! a 6,L5TIH, G566O"IG? of the S)6,57 and a 7,#6,5S, IG T(, HOL:M,. The comparison is between the up mo&e constitutin the SOS/ and the 6,5#TIOG -OLLO"IG? it% the L)S/. See the Backup to the ede of the creek. "hat if the stock has a possible SOS/ indicated b! a widening spread and increasing volume on the move up and is then followed b! ood suppl! on possible L)S/ indicated by wide spread and high volume on the reactionF This  CANCELS the  probability of the fist action bein a SOS/ and the stock will probabl! continue in the tradin rane for additional testin. La! Po#n Of S*))l$ 9LPSY:'  The L)S8/ is proceeded b! the )S8/% B#/% 56/% ST/% SO"/ and then the L)S8/ occurs.  The reaction preceding the (LPSY) must be a (SOW /. an! possible or potential SO"/ must be confirmed% denied or left in doubt b! the S:BS,:,GT rall!. If the rally has a relative lac o! demand on "T# enerall! e&idenced b! a decreased spread and decreased &olume % this would be #OG-I6M5TIOG and )6OO- of a L)S8/. $owever % should demand still be stron on that rall! as e&idenced b! ood or increased &olume as well as wide or widenin spread% it is usuall! best to reard such action as a DENIAL of the SO"/ and such action ma! well leave the interpretation of the SO"/ and the L)S8/ #n do*. . "hen this occurs 7O GOT take a S(O6T )OSITIOG. It is better to miss a mo&e then to run a reat risk of bein wron. The L)S8/ rall! will often stop 'ust  below the  wa! point. It is GOT particularl! important where a L)S8/ stops on the rall!% howe&er% it &er! often turns in the &icinit! of that that  wa! point. There is no one e%act point  in which to take a position. 8O: M:ST  'ude the L)S8/ as it occurs and attempt to establish a short position as close to the T:6GIG? )OIGT as possible. Often !ou can tie this in with other principles% such as; The meetin of the suppl! line% The pre&ious suppl! or support area and the  wa! point% Her! often the L)S8/ will come in the same area as the )S8/ or the B#/. Law of Ca*!e  Effec 9CJE:' in order to ha&e an effect !ou must first build a cause. The effect will be i n direct  proportion to the cause and cannot be separated from the cause. Her! often the workin of this law can be most easil! seen in the fiure chart. Law of S*))l$  De%and 9SJD:' "hen demand is stroner than suppl! prices will rise. "hen suppl! is stroner than stroner than demand prices will fall.

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Ma"+>down 9MD:'  from the Suppl!D7emand perspecti&e is% Suppl! that is reater than 7emand. Ma"+>*)9MU:'  from the Suppl!D7emand perspecti&e is% 7emand that is reater than Suppl!.

Mea!*"#ng T"end!' 5t SMI we use three methods of measurin trends; Trend lines% which measure the anle% there are two t!pes of trend lines; the normal use and the re&erse use. Thrusts are used to measure each dri&e up R dri&e down. The third measurement is the (alfwa !point which is an indication of comparati&e strenth and weakness and the ade*uac! of the correction. "hen placin these measurin m ethods% do it with a reat deal of e$actness. (owe&er% do not e$pect the stock or inde$ t o obser&e or reach them perfectl! . O/e".o*g( 9OB:' the stock or the market oes throuh distribution. O/e"!old' 9OS: the stock or the market can o throuh accumulation. Po!##on S(ee' 5 tall! sheet showin the trend positions of specific securities. The position within a trend shows where the price position/ is in the trend. P"el#%#na"$ S*))l$ 9PSY:' is the -I6ST important S,LLIG? or meaninful "eac#on / which is part of the distribution area this indicates the first important wa&e of suppl! or sellin is bein brouht to market/ and which comes in to stop the upward trend T,M)O656IL8. :suall! there’s some form of a Bu!in #lima$ which stops the mo&e and that is followed b! a REACTION % 9PSY: % which has pronounced ",59G,SS or &olume or preferabl!  both wide spread R hih &olume/. The bu!in clima$ B#/% is part of the )reliminar! Suppl! )S8/ this  GO6M5LL8 (5S L,SS HOL:M, T(5G T(5T OG T(, -IGI5L B:8IG? #LIM5. The price reached on the L)S8/ after a sin of weakness &er! often is in the same area reached on the )S8/. 5nal!ticall! the sinificance of the )S8/ is that if the entire area is distribution. That distribution ma! ha&e beun in the area of the )S8/. Gote; sometimes the )S8/ and the B#/ occur on the larest and lonest le of an upwards thrust of the uptrend. P"el#%#na"$ S*))o" 9PS:'  is a form of a sellin clima$ and is an action in which important demand comes in to stop the down mo&e e&en temporaril!. The first important rall! in a downtrend is the )S/ it ma! occur after the first o&ersold condition% and is especiall! likel! as the stock or the market reaches its downside ob'ecti&e. The importance of the )S/ is as a warnin that the end of the down mo&e ma! be near. The sinificance of the )S/ is that if the entire base is accumulation the accumulation ma! ha&e beun at the )S/ and continued throuhout the  base. )reliminar! Support and the Last )oint of Support L)S/ often occur at the same price le&el. The )S/ is sometimes obscured due to the &iolence of the price action and sometimes it is &irtuall! missin. But usuall! on accumulation some form of )S/ is present. P"#%a"$ "ow( T"end'  sometimes it is a downward slantin trend. This is the eneral direction or rate of rowth the market; an inde$% a stock% or the econom!% or compan! is takin. P"#ceJdown'  There are two wa!s price can o down; price can o down and ha&e an increased suppl! meet a superior force of demand at that point. Or price can o down and simpl! drift and drift and drift until it stops and ultimatel! rallies. Mentioned on tape 3 side B; alon with re&erse trend lines. P"#nc#)le' is a comprehensi&e and fundamental law% doctrine or assumption. It is an unchanin rule. P"of#JR#!+ Ra#o' Should ne&er be less than <;1% This means that for e&er! point below the purchase price the stop is placed% three points of profit are anticipated. So for a stop that is placed three points below the purchase price% nine points of profit are anticipated. It is B,TT,6 )65#TI#, to L,5H, !our STO) underneath the )6IO6 support area and I- G,#,SS568 ?,TO:T B,-O6, that stop is reached.

Rall$' 5 short term ad&ance in the price of an! securities or class of securities. "hen rallies% or uptrends are stroner than the reactions% 7emand is st roner than Suppl!. 8ou will be able to 'ude the Suppl! R 7emand on  basis of the )rice action% Holume and Time. There is a widened spread and an increasin &olume on the rallies. On the reaction there will be decreased &olume and a comparati&el! narrow spread compared to the rall!% indicatin less sellin on the reaction then there was bu!in on the upside. In an uptrend !ou should not ha&e proloned price weakness or massi&e dumpin of stocks on the reactions. Reacc*%*la#on' Takes place within a si0able upward trend when a stock oes int o a tradin rane and in the  process builds a count for a hiher ob'ecti&e% usuall! confirmin a prior base count. It oes into a restin stae and the professionals continue to absorb the suppl!. 5lso called a ST,))IG? STOG,. Reac#on' 5 short term decline in the price of an ! securities or class of securities. "hen reactions% or downtrends are stroner than the rallies% Suppl! is stroner than 7emand. 8ou will be able to 'ude this on the basis of the )rice action% the Time and the Holume. Holume should remain ood% stron% on the downside% the rallies howe&er should

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 be relati&el! weak indicatin a lack of 7emand. There should not be wide spread or increased &olume or sustained increased &olume and it miht take *uite a bit of time on the rallies. The main point is that !ou ha&e a unbalanced condition in the Suppl! and 7emand with Suppl! ood on the downside and a lack of 7emand% weak 7emand on the rally. Seconda"$ Te! 9ST:' Immediatel! follows the 56/. There should be less sellin than on the Sellin #lima$. ,&idenced b! the decreased price weakness% the narrowin of the Spread and especiall! b! the 7ecreased Holume.  &t that point the down move has been stopped . The stock ma! o throuh redistribution% accumulation% or a tradin rane in which nothin of importance is oin on. There ma! be repeated secondar! tests dependin upon the abilit! of the professionals to absorb the suppl! and the continued e$istence of that suppl!. Self Rel#ance' learn to rel! on !ourself alone. This is a lone wolf business. Learn to make !our own decisions% discuss them with no one. Stick to !our uns and follow throuh until the commitment is completed. Sell#ng Cl#%a 9SC:'  5 situation characteri0ed b! the hihest int ensit! of speculati&e suppl! occurrin within a downtrend. This situation occurs onl! after a m o&e has been in effect for some time. This conditi on marks the end or  the approachin end of a particular downtrend. This panic sellin creates an e$treme e$pansion of the price spread and an e$pansion of the &olume% this action ma! occur o&er one da! or o&er se&eral da!s. If it does GOT (5H, T(IS IT IS GOT 5 S,LLIG? #LIM5. The "!ckoff principle of the sellin clima$ does not alwa !s occur at the end of e&er! decline. 5ll that the ST/ of the S#/ does is STO) the 7O"GMOH,. S#gn Of S"eng( 9SOS:' is an 5#TIOG which shows that 7,M5G7 is in control. The SOS/ should ha&e ?OO7 7,M5G7 on the :) MOH,% a "I7, S)6,57 and IG#6,5SIG? HOL:M, on the :)SI7,. Gow let us deal  briefl! with the SOS/. The Sigh o! Strength and the 'rossing o! the 'ree are o!ten two ways o! looing at the S& &'T"O* and the +&', -P to the edge o! the '., very o!ten is the (LPS) Last Point o! Support . This SOS/ is usuall! is preceded b! a TD6 and a stock can continue in a TD6 until it either has a SO"/ or a SOS/. The SOS/ shows that 7,M5G7 is in #OGT6OL the )rice R Holume characteristics are that it has "I7,GIG? S)6,57 and an IG#6,5S, in HOL:M, evidence of the ood 7,M5G7. This is )6OH,G and followed b! the 6,5#TIOG to the L)S/% that L)S/ should ha&e a G566O"IG? of the S)6,57 and a 7,#6,5S,7 of HOL:M, compared  to the SOS/ indicatin the L5#9 of S:))L8 on the 6,5#TIOG

S#gn Of 0ea+ne!! 9SO0:' is an action which shows that S:))L8 is in control. The reaction will decline with a widening spread# increased price weaness# and increased volume% e&idence of increased and hea&! sellin% this is B,56IS(. The SO"/ is usually proceeded b! a TD6. If the TD6 was in an uptrend it would ha&e been stopped b! the )S8/% B#/% 56/% ST/. The TD6 will end% on the far riht hand side% it ma! end its mo&e with a classic :T/ or :T57/ or it may GOT. It ma! simpl! ha&e a SO"/ and a L)S8/ with perhaps lower tops and lower bottoms. 5n! possible or potential SO"/ must be confirmed% denied or left in doubt b! the S:BS,:,GT rall!. The critical thin is GOT (O" -56 the stock rallies% the critical thin is (O" it 65LLI,S. If it rallies with a radual decrease in demand% evidenced by a narrowing spread and decreased volume# and with a lower top this #OM)565TIH, lack of 7,M5G7 would )6OH, and #OG-I6M that the pre&ious reaction was a SO"/. Thus 7O GOT take a speculati&e positi on until !ou see an :T/ or an :T57/% or where there is no :T/% the first place to take a position is on the L)S8/ after the SO"/ and aim to p!ramid with the comin trend. S)"#ng'  a sprin is a refinement of Mr. "!ckoff Us concept of a Terminal ShakeOut and rew out of that concept. 5 sprin is a penetration below a pre&ious support area which enables one to 'ude that *ualit! and *uantit! of that suppl! on that penetration. The #6ITI#5L thin that is shown b! t he S)6IG? or the T,6MIG5L S(59,O:T is the 5MO:GT of S:))L8 that #OM,S O:T on the 76IH, to G," LO" ?6O:G7 and (O" ",LL that S:))L8 IS 5BSO6B,7. 6emember this &ital point% it is important. The main difference between the sprin and the terminal shakeout is how far it penetrates into new low round. ,$ample; in a J>4 dollar stock if the dri&e into new low round is = or > points and then it turns around% we would call that a terminal shakeout. (owe&er% if it reacted or penetrated V or a point% a point or a point and a  or a much shorter penetration we would call this a sprin. 5dditional definitions; 5s the stock oes into new low round one of two thins will happen. ,ither o&erwhelmin suppl! will come in or no suppl!. Overwhelming supply is a /0spring % it is evidenced by a wide open brea in price action and very heavy volume. & 10spring is with no signi!icant price weaness and low volume on the penetration into new low ground . There is a very large area between these two e%tremes2 We call these number 30springs and a 30spring is very similar to a terminal shae0out in that both have supply and both must be tested by a secondary test . It is H,68 IM)O6T5GT to understand that there is GO #L,56 #:T LIG, of demarcation  between a 1 sprin and a 3 sprin% a 3 sprin and a < sprin. The #6ITI#5L -5#TO6 is GOT the T,6MIGOLO?8% the #6ITI#5L -5#TO6 is 8O:6 :G7,6ST5G7IG? of the relationship of S:))L8 to 7,M5G7 in the B5S, area and on the S)6IG?. ? SPRIN' The 1 S)6IG? has OH,6"(,LMIG? S:))L8 which is indicated b! a ,T6,M, )6I#, ",59G,SS and hea&! sellin. The )6I#, and HOL:M, characteristics are that there is a "I7, S)6,57 and (,5H8 IG#6,5S, in HOL:M,. This is ,HI7,G#, of an 5B:G75G#, of S:))L8. The stock oes throuh the TD6 on the 7O"G SI7, and continues 7O"G until the 7O"GT6,G7 can -IG,L8 be (5:LT,7. If the stock has been under accumulation% usuall! it will 6,:I6, ,T,GSIH, further )6,)565TIOG before the stock is 6,578 TO MOH, O:T of the accumulation area. :suall! howe&er% the 1 S)6IG? is )6,#,7,7 b! at least MIGO6 7IST6IB:TIOG and O-T,G% IGT,6M,7I5T, or M5KO6 7IST6IB:TIOG. The 1 S )6IG? is

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-56 MO6, LI9,L8 to occur in stocks whi ch are in M5KO6 and S:ST5IG,7 7O"GT6,G7S then the! are to occur in :)T6,G7S. (,5H8 S:))L8 and small demand a 1 sprin.

2 S)"#ng' now there’s a H,68 L56?, 56,5 inbetween the 1 and the 3 S)6IG? in which there is SOM, S:))L8. "e call this a 3 S)6IG?. The S:))L8 on the 3 S)6IG? is e&idenced b! SOM, IG#6,5S, in )6I#, ",59G,SS% in other words SOM, IG#6,5S, IG T(, "I7,GIG? of the S)6,57 as it oes IGTO  G," LO" ?6O:G7 and SOM, IG#6,5S, in the HOL:M, o&er the ?,G,65L le&el of T657IG?. S:))L8 is not absent% it is GOT OH,6"(,LMIG?L8 5B:G75GT. That S:))L8 will either be 5BSO6B,7% in which case it will be a 3 plus S)6IG?% or a 3< sprin% suppl! on the 3 sprin itself and then a L5#9 of S:))L8 on the SDT/% or it will not be absorbed and S:))L8 will persist and  persist and persist dri&in the )6I#, 7O"G and will ha&e the S5M, effect as a 1 S)6IG?. This alternati&e we call a 3 minus S)6IG?% or a 31 sprin% the weiht of S:))L8 is increased R increased until the demand simpl! cannot handle it/. The 3 minus S)6IG? has the S5M, effect as the 1 S)6IG? in that the S:))L8 persists and  persists and persists and 76IH,S the )6I#, of the stock 7O"G% 7O"G and 7O"G until it is finall! halted and has to start a G," S:))O6T L,H,L all o&er aain. S:))L8 7,M5G7 is more in balance with a 3 sprin% hence the need for a secondar! test. Incidentall! the )6I#, and HOL:M, indications on a 3 S)6IG? are L,SS LI9,L8 to be #L,56 #:T then on a 1 sprin or a < sprin. The classic illustrations are -," and -56 in  between. This is wh! it is necessar! to ST:78 M5G8 ,5M)L,S and to ha&e e$amples from different periods of  market histor!. - S)"#ng' The second alternati&e is that GO S:))L8 is 7:M),7 on the market. Go IG#6,5S, in S:))L8 can #OM, O:T on the 76IH, into G," LO" ?6O:G7 we call this a < S)6IG?. The < Sprin is e&idenced b! lack of a IG#6,5S, in the eneral le&el of tradin. 5n! IG#6,5S, in &olume if at all is &er!% &er! MIGO6. 5nd there is a lack of IM)O6T5GT )6I#, ",59G,SS as it oes into G," LO" ?6O:G7 and t he S)6,57 does  GOT materiall! "I7,G. Small suppl! and (,5H8 7,M5G7 a < sprin. 9o"d#na"$: S(a+eo* 9OS:' the 7I--,6,G#, between the Terminal Shakeout and a ordinar! Shakeout is that the ordinar! Shakeout occurs in an :)"567 trend. The Terminal Shakeout occurs at the ,G7 of the 5##:M:L5TIOG area and at the ,G7 of a T657IG? 65G?, or a S:))O6T 56,5. "hile the ordinar! Shakeout occurs in an :)"567 trend. 5n ordinar! Shakeout ma!be defined as a sharp 7O"G"567 T(6:ST occurrin in an :)"567 T6,G7 without e$tensi&e pre&ious preparation. It is e$ecuted for the purpose of bu!in all the stock possible from ",59 or H:LG,65BL, holders% it is )6,#,7,7 B! an :)"567 mo&e. The ordinar! Shakeout is characteri0ed b! )6I#, ",59G,SS and usuall! an IG#6,5S,7 HOL:M,. In other words a "I7, S)6,57 and some IG#6,5S, i n HOL:M,. (owe&er% the HOL:M, ma!be (I?(% M,7I:M or LO" . "hen there is S:))L8 on the Shakeout itself it must be tested b! a S,#OG7568 T,ST. The secondar! test should ha&e a G566O" S)6,57 and a 7,#6,5S,7 HOL:M, compared to that of the O67IG568 S(59,O:T. This indicates that there was less S:))L8 on the secondar! test then there was on the Shakeout and the bu!ers then 9GO" that the stock is 5?5IG prepared to MOH, :) with relati&e S5-,T8. Ta+#ng a Po!##on #n a Soc+'  if important accumulation or distribution in a stock is oin on it is &er! difficult to hide it% this will normall! show up on the charts. "hen it is not clear sta! outC "hen indications are clear take a  position with the timin and the profit risk ratios in !our fa&or. 8our first 'ob is to protect !our capital% !our second  'ob is to obtain a profit when the risk is in !our fa&or.

Te"%#nal S(a+e>O* 9TSO:'  is a sharp downward thrust throuh a pre&ious support area. 5 sprin is a refinement of Mr. "!ckoff Us concept of a Terminal ShakeOut and rew out of that concept. It is e$ecuted for the purpose of  bu!in all the stock possible from weak or &ulnerable holders. It is )6,#,7,7 b! a T657IG? 65G?, or a S:))O6T L,H,L or at the end of 5##:M:L5TIOG area. It is -OLLO",7 b! an attempted to bein the markup  phase of the c!cle. The Terminal Shakeout is a dri&e down throuh the support le&el for the purpose of S(59IG? O:T all of the people who can be scaredout or forced out of the market and forced to sell. The #6ITI#5L thin that is shown b! the Terminal Shakeout is the 5MO:GT of S:))L8 that comes O:T on that Shakeout and whether  or not that S:))L8 is 5BSO6B,7. 6emember this &ital point% it is important.

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T("*!' measures the price proress the stock or inde$ makes on each wa&e within the trend. The thrust is the price difference between consecuti&e tops in up trends% or between consecuti&e bottoms in down trends. To measure the thrust we draw a series of hori0ontal lines at the le&el the hihs and lows are reached on the dri&es within the trend and connect them with a &ertical line. T"ad#ng Range9TR:'  a condition characteri0ed b! temporar! price trends% whi ch are offset b! ensuin mo&es in the opposite direction% and b! a persistin e*uilibrium in the suppl!demand relationship. Beha&ior of; ?enerall! in the first part of the tradin rane t he price swins are rather wide. Then in the later part of the tradin rane the price action usuall! beins to narrow down. The stock ets dull. "hat happens to the &olume or the eneral le&el of tradin% usuall! in the earl! part of this rane there is rather hih &olume sometimes rather erratic &olume both the  price and &olume action ma!be somewhat erratic and &er! difficult to anal!0e. Then in the latter part the closer !ou et to the end of the tradin rane or lea&in the tradin rane the &olume beins to dr! up. 5s the floatin suppl! or  the flow of orders come into the market and bein to decrease the eneral le&el of the dail! &olume should decrease. 5ctuall! !ou do not know for certain that the TD6 is distribution until it oes throuh the testin process as in
Re/e"!e T"end l#ne! 9RTL:' There are two kinds of trendlines; t he normal use and the re&erse use. In the normal use of trendlines in an upward trend we draw the support line first throuh two consecuti&e reactions. The suppl! line is drawn second throuh the rall! that is between the two consecuti&e reactions% and parallel to the support line. "ith the re&erse use of trend lines used in an upward trend% we draw the suppl! line first% throuh two consecuti&e rallies followed b! a support line drawn second throuh the reaction that is between the two consecuti&e rallies% and  parallel to it. In a downtrend usin the re&erse use of trendlines the support line is drawn first throuh two consecuti&e support points and the suppl! line is drawn parallel to it throuh the top of the rall! occurrin between those two support points. The importance of the re&erse use of trend lines is that it is determined b! points a which the opposition came in to stop the mo&e. The re&erse use of trend lines is drawn throuh where it is stopped % where the opposition came in and acti&el! stopped the trend% to stop it and re&erse it e&en on a temporar! basis. Later on demand miht come in at the same anle to stop the mo&e.

T"end! of fo*" )"#%a"$ +#nd!'

1/ 3/
The intrada! The minor  The intermediate The ma'or

IGT65758 T6,G7S; are caused b! &er! small fluctuations those fluctuations occurrin within a da!. There ma!be se&eral of these occurrin within one da!. Intrada! trends are usuall! a da! or two in duration. MIGO6 T6,G7S; are made up usuall! of three or more intrada! trends and are mo&es of up to appro$imatel! ten percent of the price of the stock. :suall! the! last up to a couple of da!s to a couple of weeks and are mo&es of up to appro$imatel! 14W of the price of the stock. IGT,6M,7I5T, T6,G7S; which are made up of three or more minor trends and are mo&ements of around fifteen to twent! percent of the stock. The! usuall! run for a couple of weeks to a couple of months and are mo&ements of around 1>W to 34W of the stock.

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M5KO6 T6,G7; is made up of three or more intermediate trends and is a mo&ement of o&er twent!fi&e  percent of the price of the stock. :suall! ma'or trends will last for se&eral months or perhaps much loner and is a mo&ement of o&er 3>W of the price of the stock. U)("*! 9UT:' ; 5n :pthrust is a sharp price mo&ement 5BOH, a prior supply level which does GOT (OL7% but immediatel! reacts below that pre&ious le&el. :suall! on the :pthrust the spread will be narrow and the &olume will  be increased% this is e&idence of the suppl! o&ercomin demand. Suppose a stock mo&es up from J>4.44 to J>1.44 and it takes 14%444 shares to do it and then mo&es to J>3.44 and it takes 34%444 shares to do it. The &olume% the suppl! has increased in strenth relati&e to demand. If the &olume doubles the price proress should be double and when it does not the inference ma!be drawn that the S:))L8 is OH,6#OMIG? the 7,M5G7. Suppose a stock mo&es up one point on 14%444 shares and then mo&es up a  point on 34%444 shares% here the narrowin of the spread and the suppl! comin in to o&ercome the demand is much more emphatic. This usually is what occurs on a :pthrust. The confirmation that it is an :pthrust is in the promptness and in the manner in which it reacts% it should react promptl! to show that the attempt to lea&e the TD6 on the :pside has failed and generally it will react with either a lac o! demand or with the pressure o! supply coming in on the downside. The :pthrust itself is the sin of weakness SO"/ and the Last )oint of Suppl! L)S8/ all in the same action. It is normall! followed b! a more important SO"/ and a L)S8/.

U)("*! Afe" D#!"#.*#on 9UTAD:'  The :pthrust after distribution is a special t!pe of distribution in which the stock oes upC Stops oin up% builds a cause and then tries to lea&e that TD6 on the upside% fails and then beins the downtrend. In appl!in the rules !ou must use some 'udment and some fle$ibilit!. The :pthrust 5fter 7istribution is a special market phenomena or a principal  which Mr. ,&ens defined throuh his "!ckoff studies. )erhaps the most important problem that !ou will ha&e with the :pthrust 5fter 7istribution :T57/ is that !ou must a&oid lookin for e$amples% or e$pectin e$amples of the :T57/ to occur all the time% the! simpl! 7O GOT. $owever when they do occur the (-T&D) can be an e%tremely help!ul and pro!itable tool . Let us read the rule itself. 5fter a stock inde$ or a commodit! has mo&ed up% has #lima$ed% has then mo&ed laterall! and built a )OT,GTI5L cause and is then mo&ed into new hih round on a increase in &olume and a relati&e narrowin of the spread to then return to the 5H,65?, le&el of closes would indicate that the entire lateral le&el was GOT accumulation% but was distribution instead. M,MO6IX, T(IS 6:L,% in Mr. ,&an’s oriinal rules he stated; it mo&es sidewa!s for a  period of four to twel&e weeks. (owe&er% to put these constraints on the rule has pro&ed to limit the understandin of this e$cellent rule. Therefore we ha&e modified t he rule and ha&e used; “ The building o! a potential cause ”. The onl! other chane in the rule is that we now sa! that it has mo&ed into new hih round on a “relative “ narrowin of  the spread% we ha&e added this word relati&e because a widenin or a narrowin of the spread is 6,L5TIH, to the HOL:M,. The spread M:ST B, #OM)56,7 to the HOL:M,. ,&er! word in t he rules for the :T57/ had been desined for a purpose. Fol*%e'  "hat is the difference between clima$ HOL:M, and that which is known as B6,59O:T HOL:M, or 5BSO6)TIOG HOL:M, F Both enerall! ha&e an "IG7,GIG? S)6,57 and IG#6,5S,7 HOL:M,. (owe&er% the #LIM5 HOL:M, is stoppin a trend which is out in open territor! and has been in proress. 5BSO6BTIOG HOL:M,  proressDprice action R pushD&olume/ how e&er% occurs with a "I7,GIG? S)6,57 and IG#6,5S,7 HOL:M, as the stock is breakin throuh a pre&ious S:))L8 56,5 and is simpl! absorbin 5LL of the S,LLIG? that takes place as it mo&es up to G," (I?( ?6O:G7. This process also occurs in re&erse on the downside. Fol*%e Off T(e Boo%' Holume off the bottom is caused b! the professional man simpl! absorbin all the suppl! thrown off the market and mo&in the stock :). It usuall! indicates a turnaround. 0a/e' Intrada!% Minor% Intermediate% Lon term% -luctuations that buildup R builddown and form trends. 5ctuall! e&er! upward or downward swin in the market whether it amounts to man! points% or onl! a few points% or fractions of a point consists of numerous bu!in R sellin wa&es. These ha&e a certain duration% the! run 'ust so lon as the! can attract a followin. "hen this followin is e$hausted for the time bein that wa&e comes to an end and a contrar! wa&e sets in. These wa&es represent the shi ftin relationship of Suppl! to 7emand.

Glossary of Terms PART 2

These terms are defined in relationship to the manner in which they are used in the text and at the Stock Market Institute.

Absorpto!:  The reduction of the floating supply caused by persistent longer term buying within a trading

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range. A""#m#lato!:  The establishment of investment or speculative position by professional interests in

anticipation of an advance in price. A$%a!"e: A rise in price or an upward movement in a stock, index, security, etc.

&S'ort( A)a!st t'e *o+:  a protracted action in which one sells short a security which he currently owns.

The purpose of this action is that of a limiting risk during a period of market uncertainty. A!)le of :  That inclination of arising price trend. Ape+:  the focal point of converging support and supply lines. See dead center, hinge, pivot, wedge!. ASE: or AME,: American Stock "xchange. A%era)e: a numerical representation which purports to reflect the mean average! price of a particular

class of stocks. A%era)!): &1( -ollar A%era)!): a periodic investing of a definite number of dollars

irrespective of the number of shares involved# &2( S'are A%era)!):  periodic purchases of the same number of shares irrespective of the number of dollars re$uired. &.( A%era)!) #p:  periodic purchases on rising scale whose purpose generally is to permit profits# and &/( A%era)!) $o0!:  periodic purchases as a price declines, which has the general purpose of lowering the mean cost of the stock. *ear: A speculated who concludes that the profitable future trend will be one of declining prices.

*ear Maret: A market condition characteri%ed by declining prices. *oar$ Room: The room in a brokerage house in which stock prices are visually displayed. *reat'ro#)':  A price movement of above&below a previous supply&support area. *#l)e:  A sudden expansion of price or volume. 'owever, bulge generally is used in reference to

volume.! *#ll: A speculator who concludes A the probable future trend will be one of advancing in prices. *#ll Maret: A market condition characteri%ed by advancing p rices. *#y!) Clma+: A situation characteri%ed by the highest intensity of speculative demand occurring within

an uptrend. This situation occurs only after a move has been in effect for some time. This condition marks the end or the approaching end of the particular uptrend. Campa)!:  A organi%ed market operation for the purpose of moving the price of the stock. Close:  The last price of the security, issue, index, etc. (or specific time period. )enerally, the last price

of the day. Commtme!t:  A market position in a stock or other trading medium. Commo! Sto": Securities which represent an ownership interest in a corporation. If the company has

also issued preferred stock, both common and preferred have ownership rights, but the preferred normally has prior claim on dividends and, in the event of li$uidation, assets. *ommon stockholders assume the greater risk but, generally, exercise the greater control and may gain the greater reward in the form of dividends in capital gains. Composte A%era)e: An index composed of a number of stock which is used to represent the general

market. +ormally constructed by adding to prices of a limited but fixed number of stocks, adusting for splits, etc., then dividing by the number of stocks making up the average. Composte Ma!: The term used to refer to the sponsors or large professional interests in the stock

market, also called composite operator. See -reface "xplanatory +otes.! Cor!er:  A condition in which the available supply of stock is held by a single speculative interest for the

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purpose of effecting a controlled price rise. The purpose of a corner is that of forcing those who have sold the stock short to pay an inordinately high/priced cover their short position. Co%er:  the act of buying a security previously sold short. See short sale, short covering!. C#lm!at!):  The ending of the move. -ay Or$er: An order to buy or sell which is good only on the particular day on which it is made. -ea$ Ce!ter: The focal point of converging support and supply lines. Also, apex, hinge, pivot wage!. -e$#"to!:  The form of logic or reasoning which proceeds from the general statement to the specific

case. -strb#to!:  The elimination of a along investment or speculative position. -%$e!$:  The payment designated by the 0oard of 1irectors to be distributed pro rata among the shares

outstanding. -o0! T": A transaction with a price lower than that of the last preceding transaction. E+-%$e!$  2ithout 1ividend! the condition of the stock in which the purchasers are not entitled to the

most recently declared dividend. Abbreviated xd!. F)#re C'arts:  A chart of a stock, commodity or index, which takes into consideration price movements

and fluctuations. 3olume and regular time intervals are not generally used in the construction of figure charts. Float!) S#pply:  The supply of the stock that is normally available for purchase during a given period of

time. For"e 3!$e+: An index developed by the stock market Institute to portray the investment factors during

continuous periods of market history. G4T4C4 )ood4 til canceled! a customer4s order to his broker to buy or sell securities at a sp ecified price.

The order remains in effect until it is either executed or canceled. 5e$)e:  A condition in which both long and short positions are maintained by the same interests. 5)': The highest price of the security, issue, index, etc., for specified time period. )enerally, the highest

price of the day. 5!)e:  The focal point of converging support and supply lines. See apex, dead center, pivot, wedge!. 5ypo$erm"s:  A deliberately forced, fast markup in the price of a common stock. The purpose of

hypodermics is the stimulation of uninformed buying in order to facilitate distribution. 3!$e+ &Pr"e(:  A statistical instrument which is used to determine the trend of particular class of security.

This is not an average. 3!$#"to!:  The reasoning process or logic which begins with specific cases and proceeds to a broad

generali%ation. 3!s$e -ay: A day for which the high and low prices are, respectively, lower and higher than those of the

preceding day. 3!stt#to!al !%estors:  )enerally, large corporate investors such as banks, insurance companies,

investment trusts, mutual funds, pension funds, colleges and universities, and charitable foundations. 3!terme$ate Tre!$:  A price movement which has two basic characteristics. These are a! a move of

approximately 56 7 of its value and b! the duration of two weeks to two months. 3!tra-ay Wa%e C'ar)e: A continuous line chart reflecting the price wings occurring entirely within the

single days trading I12*! 3!%estme!t posto!:  securities holdings established for investment purposes only. La0 of S#pply a!$ -ema!$:  The basic economic law used to explain the cause of all price changes. Lmt Or$er: An order to buy or sell only at a specified price or at one more favorable than the specified

price.

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L!e of Least Ressta!"e:  The trend of security prices, whether it be advancing or declining. L6#$ato!:  The process of converting securities and&or other property into cash. Lo"e$3!:  The psychological state of mind which exists when an individual believes that he cannot

afford to li$uid a security position. Lo!):  The ownership of securities. Lo!)sale:  The sale of along security position. Lo!) Terms:  (inancially, it is considered to be a five/year investment# the tax definition is six months. Lo0: The lowest price of the security, issue, index, etc., for a specific time period. )enerally, the lowest

price of the day. Ma!te!a!"e Mar)!:  The minimum margin re$uired in order to maintain a previously established

position. Mar)!:  The amount of money deposited by a customer when he uses credit to buy securities, the

balance being financed or advanced by the broker. Mar-o0!:  A sustained downward price movement. Maret Or$er: An order to buy or sell at the best price available at the time the order is received at the

appropriate trading post. Mar7p:  A sustained upward price movement. Mome!t#m 3!$e+:  An SMI index to measure speculative market forces. 8YSE: +ew 8ork Stock "xchange. O$$ Lot:  An amount less than the established round lot for any class of security. Opto!:  A contractual right to buy or sell a security at a specified price within the specified period of time. Optmsm Pessmsm 3!$e+: An index developed by stock market Institute which reflects the optimism

due to buying and pessimism due to selling during any specific period market history. O%erbo#)'t:  A condition in which the supply / demand relationship for a particular class of securities is

such that normal e$uilibrium between economic forces exists only a t a price below that at which the current trades are being made. O%ersol$ L!e:  In a downtrend, a line drawn through a point of support parallel to that trend4 s supply

line. P%ot:  the focal point of converging support and supply lines. See apex, dead center, hinge, wedge!. Posto!:  'oldings of securities, whether long and & or short. Posto! S'eet:  A tally sheet showing the trend positions of specific securities. Preferre$ Sto": Stock which has a prior claim to earnings and&or dividends over the common stock. It

is secondary to bonds in the other floating debts. Preparato!:  Transactions designed to affect the supply&demand relationship for a security in order to

facilitate its future price move. Press#re: Sustained selling of a security. Prmary -strb#to!:  The initial li$uidation of along position. Pro"ess of Rotato!:  The principle that all securities of class to do not prepare, advanced, or decline at

the same time. Some stocks lead the various stages while others lag. P#ts a!$ Calls:  9ptions which give the right to buy or sell a fixed amount of the certain stock at a

specified price within a specified time. A put gives the holder the right to sell and call gives the holder the right to buy. Pyram$:  The use of accrued profits to enlarge a speculative position.

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Rally:  A short/term advance in the price of any securities or class of securities. Rea"to!: A short/term decline in the price of any securities or class of securities. Ro#!$ Lot:  A unit of trading. 9n the +ew 8ork Stock "xchange the unit of trading is, generally, 5::

shares in stocks and ;6, ::: par value in the case of bonds. Se"o!$ary -strb#to!:  The li$uidation of a long security position occurring after primary distribution but

prior to the next mark/down phase. A plateau in a big down move. Se"#rtes: Stocks, bonds, commodity futures contracts, or other issues which may be traded. SEC: The securities and exchange commission established in 5<=> by *ongress to regulate the

investment industry. Se"#rty Posto!:  Securities held long and&or short by investors and&or speculators. Sell!) Clma+:  A situation characteri%ed by the highest intensity of speculative supply occurring within a

downtrend. This situation occurs only after a move has been in effect for some time. This condition marks the end or the approaching and of the particular downtrend. S'aeo#t:  A deliberately forced price reaction, whose purpose is that of stimulating public selling in order

to facilitate the accumulation of speculative positions. S'ort Co%er!):  0uying the stock to eliminate or close out a short position. S'ort Posto!:  Securities and&or commodity future contracts sold short. S'ort Sale:  sale of a borrowed stock by a person who believes the price will decline. I.e. you instruct

your broker to sell short ?:: shares of @8. 8our broker borrows the stocks so he can deliver the ?:: shares to the buyer. The monetary value of the shares borrowed his deposited with a lender. 8ou are later re$uired to cover your short sale by purchasing the same amount to return to the lender. SM3: Stock Market Institute, Inc. Spe"#lato!:  To assume a market risk and expectation of gains# especially, to buy or sell in expectation

of profiting from market fluctuations. Spr!)boar$:  A condition in the price movement of a stock that has completed preparation and has been

brought to a point where the stock may move into a mark/up for a ma rk/down period. Stop Lmt Or$er:  an order to buy or sell which becomes a limit order as soon as the stock4s price

reaches or sells through a specified stop price. Stop Or$er:  An order to buy or sell which becomes a market order as soon as the price of the stock

reaches or sells through the specified price. Stra$$le:  )oing long in one security or option and short in another. Stre!)t':  A security or class reflects strength when it4s price shows the ability to advance. Stro!) Te"'!"al Posto!:  *ondition in which normal available demand exceeds floating supply. S#pply L!e:  In a downtrend in line connecting at least two important points of supply. Tape Rea$er: A person trained to determine the characteristics of market fluctuations, using data which

he derives from the ticker tape. Te"'!"al Posto! *arometer:  A chart which graphs the number of stocks in the various positions as

determined by the 2yckoff -osition Sheet. Te"'!"al Rally:  A technical rebound. A part of the typical selling climax. Automatic rally! Te"'!"al Rea"to!:  9pposite of technical rally // part of the typical buying climax. Automatic reaction! Te"'!ometer: An index developed by the Stock Market Institute for the purpose of indicating normal

extremes in the supply // demand conditions. Term!al S'aeo#t:  A sharp down with thrust through a previous support area. "xecuted for the purpose

of buying all the stock possible from weak or vulnerable holders.

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Term!al T'r#st:  A temporary bulge through the top of the trading range which fails to hold. T'r#st:  The price difference between consecutive tops in uptrends o r between consecutive bottoms in

downtrend4s. T'r#st Mo%eme!t:  A sharp run/up out with an area of distribution# or a temporary bulge through the top

of a trading range which fails to hold Synonym upthrust!. Tra$e: To buy or sell stocks, securities, options, etc. Tra$!) ra!)e:  A condition characteri%ed by temporary price trends, which select techno/m offset by

ensuing moves in the opposite direction, and buy a persisting e$uilibrium in the supply // demand relationship. Tra!sL#+: "$uipment for optical viewing of stock sales. Tre!$:  The line of least resistance. It is the direction in which a price is moving. Tre!$ *arometer: A statistical tool which is portrayed graphically and consists of the Momentum Index,

the (orce Index Technometer. This was 1eveloped by the Stock Market Institute. Tre!$ C'arts: These are charts which graphically depict the trend of the market, in index, or an individual

stock. T#r!!) Po!t:  The place at which a security price trend reverses its direction. 7pt'r#st:  A sharp price movement above a prior supply level, which does not hold, but immediately

reacts below that previous level. 9ert"al L!e C'arts:  charts which graph the volume, high, low, and closing prices for the day, week,

month, or year of any security or class of securities. Warra!ts: Bights to buy a stock a specific price. generally, issued for longer periods of time than ordinary

stock subscription rights. Wea!ess: The ability of price to decline. Wea Te"'!"al Posto!:  A condition in which normal available demand is exceeded by the floating

supply. We$)e: The focal point of converging support and supply lines. See apex, dead center, hinge, pivot.! W'psa0e$:  A situation in which a speculator is repeatedly wrong the matter what he does. It usually

results from buying at the Thompson4s selling at the bottoms. 7pT":  A transaction with the price is higher than that of the previous transaction. eroM!#s T":  The transaction price identical to the preceding price S.! which itself had been a down/

tick. eroPl#s T":  A transaction price identical to the preceding price S.! which itself had been up/tick.

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FROM ALVIN & BETTE NELSON PHONE NO. 847 724 8793 JUN. 2E 2E92 eg:42RM RI FAX TO: Fred

Phone Fax Phone CC: I Date 6/29/98 Number of pages including cover sheet 10  FROM: Alvin A Nelson 44 Park Drive Glenview, IL 60025-2721

 Phone  Fax Phone 847-724-8809  REAMRKS: For your review

Fred,  Here are some notes I took from the Wyckoff manuals and tapes for your review  Al

Wyckoff Notes From Tapes Intraday Moves: Very Small fluctuations occurring with a day (need tape reader's techniques)

Minor Moves: Three or more intraday trends that last a couple of days to a couple of weeks. Magnitude 10%.

Intermediate Moves: Three or more minor trends lasting a couple of weeks to a couple of months. Magnitude of 15% - 20%.

Major Moves: Three or more intermediate trends lasting several months to several years. Magnitude over 25%. The End Of a Down Move and Stan of Trading Range: 1. Preliminary Supply 2. Buying Climax 3. Automatic Reaction 4. Secondary Test of the Low

Terminal Shakeout: Deep, sharp break through previous support level designed to slake stock out of weak bands.

Spring: Short, sharp break through former support level - with purpose of shaking out stock from weak hands and seeing what volume of stock is available

No.1 Spring. Wide price swing on heavy volume. Supply is in control. Most prevalent in down moves. Possible short sale on rally after the spring.

No.2 Spring; Medium level of price spread and medium volume. Bullish sign, hilt because of the volume on the down side the low will be tested again. There should be good demand on the rally off the bottom. If less supply shows up on the secondary test of the low -buy. if more supply shows up - wait for further tests.

No.3 Spring.

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Very small, if any, price drop below former low. Lack of increase in normal volume level below support. This spring low does not have to be tested because professionals know very little, if any, stock is left in weak hands. Buy on the spring.

Up-Thrusts and Up-Thrusts After distribution: Distribution is usually accomplished in a relatively short time, where as, accumulation takes much longer - often many years. Major distribution occurs over a few weeks to a few months. The action is characterized by wide price movement, heavy volume and great activity.

Take A Short Position Only 1. On an Up-thrust or Up Thrust after distribution. 2. On last point of supply after a sign of weakness

How To Take A Speculative position: 1. Determine the trend of the general market 2. Classify stocks by their relative strength or weakness 3. Analyze the stocks most likely to move with the market and pick the ones most likely to do better than the market.

Questions About Individual Stocks 1. 2. 3. 4. 5' 6.

Which direction is the stock going to move? How Soon is it likely to move? How far will it probably move? (point & figure chart) Take action now? Wait & watch for point to take action Remove stock from consideration & look for others

Establish a Position For An Up Move On Spring Board at Right Hand Side of Trading Range 1. 2. 3. 4. 5. 6. on

On a No.3 Spring On a No.2 Spring or its test A Terminal Shakeout or its test A backup To The Edge of the Creek On Last Point of Support after a Sign Or Strength if a stock is in an up trend buy on normal correction, usually around the half way point or an ordinary shakeout or its test.

Close Cut Your Long Position: 1. When stock reaches the objective built by Cause in the original accumulation. 2. As stock reaches the objective of the area of re-accumulation 3. At the appearance of Preliminary Supply 4. On a Buying Climax 5. On a shortening of Price Thrust (big volume but little price move) 6 Reaching a major "Half Point" range or an overbought condition 7 Reaching of a Supply Line

Taking a Short Position On a Down Move 1. Take a short position on an Up-Thrust or an 2. On the Last Point Of Supply after a Sign of 3. wben a stock is in a downtrend you can take normal correction around the Half Way Point of

Up-Thrust after distribution Weakness a short position on an Up-Thrust or a the last down move

Where To Close Cut Your Short Position 1. When the stock reaches the objective built by the "Cause" in the original area of distribution. 2. When the objective of an area of re-distribution is met. 3. At the point of Preliminary Support 4. At a Selling Climax 5 A shortening of Price Thrust on the down side 6 Reaching major Half Way Points 7 At a Support Line or on an Over Sold condition

Risk/Reward Ratio 1. Never take a position with less than a One to Three Risk/Reward Ratio 2. Always use a Stop Loss Order (placed at same time yon place your buy order) to limit risk a specific amount in line with your Risk/Reward Ratio Ratio 3. How to place Stop Loss Order a. Place Place just below full $ figure figure on long long side side (27 (27 7/8) 7/8) b. Place Place just above full $ figure figure on short short side (28 1/8) 1/8)

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In playing for a rally look at the Risk/Reward ratio just like yon were looking to buy into a new stock.

Profit Goals For Different Types Of Trading Long Tern Positions: 50% profit objective per trade- Positions held for more than a year. One round of trades per year.

Intermediate Term Positions; Profit goal of 20% to 40% with positions held from 4 to 6 months. Possible to do 3 rounds of trades in 1 year.

Short Term Positions; Short term profit objectives need not be more than 10% to 20% with positions held only for a few weeks. Possible to do 12 rounds of trades in the 1st year.

Wyckoff Principles The Law of Supply & Demand: If an investor wants to exchange his dollars for someone else's shares, but can only get those shares by offering more dollars than did the previous buyer and if he is, in fact, willing to offer the increased number of dollars, the price of the stock increases to absorb the extra dollars. In this case, it is said that the demand is greater than the supply. On the other hand, if the investor wants to exchange his shares for dollars and will accept fewer dollars than the seller before him to accomplish his objective, the price of the stock will be reduced. In this case, it is said that supply is greater than demand The Law of Cause & Effect: In order for there to be an effect that shows up as a change in the price of a stock, there must first be a cause. The effect realized by a cause will be in direct proportion to that cause. To get an important move, or effect there must be an important cause. These are not built from one trade, but rather take time, sometimes a long time, to develop. Generally these causes are built during an important shift in who is holding the stock The most important flow of shares is the one that occurs as shares leave the strong hands of the professional traders and go to the weaker hands of the general public The knowledgeable trader will go with the upward trend as long as prices continue to move up easily. At some point. prices will begin to encounter resistance and the professional uses this buying as an opportunity to liquidate his holdings

The Law of Effort vs. Result: The result is what happens to the stock price. It is the volume that produces the effort that achieves the result. Without effort there can be no result. When the amount of effort and the extent of the result are not in harmony, something is wrong. Any positions held when this situation exists are potentially in danger They may not be liquidated, but they should be protected Example: As the stock advances; the amount of each successive advance decreases. The volume on the other hand increases steadily throughout the four days This results in a clear case of an effort without a corresponding result. It produces a warning of potential trouble

The Nine Buying Tests 1. To be certain the preparation in the trading range that leads to the perceived buying opportunity is in fact accumulation, the downside objective of the previous trading range must be accomplished. 2. The price and volume action of the stock must be bullish before taking a long position. That is volume should increase on rallies and decrease on reactions. This action does not have to appear throughout the trading range. After an important decline, it is normal for early rallies & reactions to carry some of the negative qualities of the prior down move- However, if the trading range is accumulation, this pattern will stop Until this switch to a bullish pattern, no buy orders are warranted. 3. Unless the two critical points of stopping action are present - preliminary support

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& selling climax no buying is justified. Many strong moves overshoot the downside objective. Therefore, it is not correct to buy just because the price reaches the objective. There must be a clearer indication the prior move is over and this is provided by the process of first meeting preliminary support and then experiencing a selling climax.  Exception: In major bull markets, one period of accumulation and advance can be followed by another period of accumulation leading to a further advance. The beginning of the second period of accumulation begins with preliminary supply and a buying climax instead of preliminary support and a selling climax. 4. The stock must be stronger than the market This means the relative strength index must be showing a strong picture. The strong stock advances by a greater percentage than the general market on rallies and retreats by a smaller percentage on reactions. 5 As long as the supply line of the down trend remains unbroken no buy orders are warranted. Once that line is penetrated, however, the fixture of the down trend becomes more doubtful. The more penetrations that occur, the more doubtful the down trend's future becomes. The supply line must be totally destroyed before any long positions can be taken. 6. & 7. In order for a stock to be considered a good buy, it must demonstrate higher highs and higher lows (stair-steps) A stock that moves from a spring situation, up through a sign of strength, back to a last point of support, jumps the creek, and then successfully backs up to the edge of the creek is producing the ideal example of higher supports and tops, 8. If a stock is to be considered for along position, it must have built a base. Just because a stock has stopped going down does not mean it is ready to go upRemember the law of cause and effect. If a worthwhile base is not in place, a long position is not justified. The base is everything that goes into the make up of the accumulation phase and part of that is the point & figure count. What constitutes a worthwhile base depends on your investment time frame. A short term trader needs10% to 15%, an intermediate traders needs 20% to 4004 and a long term trader needs over 50%. 9. The estimated profit in the stock being considered must be at least 3 times as large as the risk of putting on the position. The estimated profit comes from the point & figure count The risk is calculated by how far below your entry price a logical stop loss order can be placed. A proper stop loss order must be placed just below an important support level. If you can't set a proper stop loss point and still preserve a 3 to 1 risk reward ratio, don't make the trade. Note: if a stock passes all 9 of the buying tests, it is a potential buy. This assumes it also possesses adequate potential to make a worthwhile move, and is located in one of the primary buying positions. All of these qualifications significantly limit the number of stocks that are suitable for trading at any particular time Even so, the number will always be large enough to satisfy even the largest amount of funds.

The Nine Selling Tests 1. To be considered as a short candidate, a stock must reach its previously established upside objective. This provides an indication that the prior up move is over. Distribution leading to an eventual decline is then possible. 2. The potential short sale candidate must also exhibit bearish or negative behavior. This is determined by the pattern of price and volume action. In order to be considered bearish, volume must increase on reactions in price and decrease on rallies. This indicates a greater interest in the downside3. There must be an indication by the price and volume action that the pervious up move is over. This test is satisfied by the development of preliminary supply and a buying climax. In those instances where a phase of distribution and decline is followed by a redistribution, which is likely in very weak markets, there is no preliminary supply and buying climax. This precludes the passing of this selling test, but does not stand in the way of taking a short position if all other qualifications are met 4. The stock must be weaker than the market as indicated by the relative strength index. In this case, the comparison made between the general market index and the price action of the stock will reveal a pattern of responsiveness to reactions and

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resistance to rallies that exceeds that of the general market. 5. Before any short position is established, it is necessary that the upward stride of the previous up trend be broken. This means that the support line of the trend must be decisively penetrated. In addition, it is desirable that any attempts by the price to reenter the trend channel be turned back. 6. & 7 A stock most show a pattern of lower tops on rallies and lower supports on reactions to be seriously considered as a short sale candidate. This pattern does not have to be evident throughout the entire distribution phase. It must, however, be in evidence just before the short selling position is established. This pattern indicates that supply is exceeding demand, which is necessary if a significant decline is going to develop. 8. Has the lateral movement or trading range built a worthwhile amount of downside potential? This is another important point that must be met before any short position is taken. In considering the significance of the potential, use the same guidelines used for long positions. Short term opportunities need 10% to 15% potential, intermediate positions from 25% to 40%, and 50% or more for long term opportunities. 9. The final selling test is to compare the probable profit to the risk indicated by positioning of the initial stop loss Order above the purchase price. It must be no less than three to one. If the stop loss order cannot be properly positioned with the result being that the potential profit is at least three times the risk, something is wrong. No action can be taken in that stock. Note: The greatest degree of confidence in a short position exists if all the selling test are passed. Failure to pass even one test creates a doubt that may be considered reason enough not to act. Trying to weigh the selling or buying test as to importance is not advisable. There is no way to determine how much more important, if at all, one test is than another. Trying to rank the tests can lead to taking a poor position. It never makes sense to try bargaining with the market. The market will invariably win. The buying and selling tests are presented in the order they are for a reason. This is the normal sequence in which a stock will attempt to pass them. There is another approach that can be used. Generally the most difficult tests to pass involve the potential and the stop. Can a stop be properly positioned and still maintain at least the minimum acceptable profit/risk ratio? The fact that two tests help to prevent so many potential problems is no reason to avoid becoming familiar with the other tests. At some point, a stock being considered for a trade provides positive answers to all theses tests. This is not an automatic green light to the taking of a position. The normal order in which all the other tests tend to be passed indicates that the positive response to the last two verifies the desirability of action. The problem with this is that the other tests do not have to be passed in the usual order. As a result, the passing of the last two tests may not prove anything. when they are passed, the wise trader will then check to make sure all the others are passed as well.

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Submitted b! Mike ,llis

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SECTION 1 1. Richard I. Wyckof, through long experience, developed a method o judging the stock market by its on action. !.  A speculator uses intelligent oresight in buying or selling stocks. "o sell or buy stocks otherise is gambling. #. $ou must learn to determine the position and probable uture trend o the market. "o do this, you must learn the Wyckof principles then devote time to applying them in your market operations. 4. 1hroughout this course e ill help you to develop independent judgment and sel% discipline so as to become an intelligent, scienti&c and successul trader and investor. '. (n important point to learn early is that hen in doubt % do nothing. Wait and see. ). *y conscientious application o the Wyckof principles. you should strive to be right most o the time % but reali+ing that many times you are going to be rong. . -lan your on stock market activities like you ould any campaign. . "he Wyckof /ethod o trading in stocks is a logical &ve%step approach to stock market investing0speculating. . "he -re%"rade (nalysis Record is a check%list hich should be used prior to making any decision to trade. 12. "he -erormance 3ame is practice trading experience in a simulated real%lie market situation.

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SECTION 2 1. "he uture course o the market may be judged by its on action. !. "he action o stocks re4ects the efect o the orces hich dominate them. #. 5olume o stock changing hands in each transaction is important. 6. "he 7a o 8upply and 9emand governs all price changes. a. hen demand is greater than supply prices rise. b. hen supply is greater than demand prices decline. '. "he trend :up or don; is the line o least resistance. ). /inor and major turning points and points here the price breaks through the opposition are the critical moments in all phases o the market. . In the market it is most important to operate ith the proper principles. . "he <"rend 7etter= as published in 111 by Richard 9. Wyckof.

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SECTION 3

1. "he purpose behind Wall 8treet and the market is to &nance businesses. !. 8ome securities are good % others are not so good. #. 8easoned securities are those on the market or a long time and ith established earning poer and value. 6. "ape and chart reading helps us to relate price movement and volume to the uture course o stocks. '. (lays strive to select the most promising issues. ). 8tudy charts ith the purpose o judging the behavior o the stock and the motives o those ho dominate it. . -rices re4ect strengths and eaknesses o stocks. . Important acts or operations in the market are> a. price movement b. volume c. relationship o price movement to volume d. time or each movement. . When trading, ignore all tips rumors. and other inside inormation.

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SECTION 4 1.

Most principal mo&es in the market are caused b! lare interests.

3.

#harts are raphic representations of stock transactions.

<. #harts ha&e reat &alue in determinin the position and probable future trend of the market or an indi&idual stock. =.

To stud! charts% look for the moti&es behind the action which the chart portra!s.

>. The "SMI "!ckoff Stock Market Institute/ recommends three t!pes of charts; Hertical Line #harts% -iure #harts% and Intra7a! "a&e #harts. @. A.

E.

Hertical line charts show the hih% low% and closin prices as well as the &olume. Holume and price mo&ement pro&ide the reatest aid in; a. determinin the direction of comin mo&es.  b. decidin when to bu! or sell. c. knowin when a stock is on the sprinboard.P d. knowin when a mo&e is culminatin. On fiure charts. a person is able to detect accumulation and distribution from the eneral formations.

2. (ori0ontal formations on the fiure chart indicate the probable direction and appro$imate number of points a stock should mo&e. 14. (ori0ontal formations on fiure charts are of &alue in determinin; a. how far a stock should mo&e.  b. when it meets opposition. c. the trend. d. when a stock is on the sprinboard.P 11. -iure #harts onl! take into account whole number fluctuations. a. 5 <point fiure chart disreards all re&ersals less than three whole diits.  b. 5 >point fiure chart disreards all re&ersals less than > full diits. 13. The 1pt. fiure chart indicates immediate objectives; whereas the <pt. fiure chart is used as a uide to the general trend.

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SECTION 5 I. ?very upard or donard sing o the market @onsists o numerous buying or selling aves. !. "he degree o success or ailure o buying or selling aves indicates hether the market is groing stronger or eaker. #. In buying stock look or the down aves in the market and in your stock. 4.  "he aves provide clear indications o the relative changes o supply and demand. '. "o be able to determine the turning points is the mark o the ability o a good trader or investor. ). It is important to master the ability to> a. determine the &nal tops o bull markets and intermediate or minor up moves. b. determine the &nal bottoms o bear markets and the intermediate and minor don moves. 7. @over your shorts and go long at the bottom o a panic. . 8ellout all long stocks and go short at the top o a boom. . @ontrol your emotions.

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SECTION 6 1. Aur trend chart o a general market index is the medium through hich you are able to study larger aves o the market . !. "he Intra%9ay Wave @hart enables you to detect the approaching turning points o the large aves generally to to our days in advance. #. 3roup charts or the -osition 8heet enable you to determine hich groups are the most advantageous or trading. 6. (im to trade in harmony ith the trend o the market. '. ( a. b. c. d.

minimum recommendation o chart records are> the Wyckof Wave and Aptimism%-essimism vertical line charts o 10-25 stocks &gure chart o !'%122 stocks the Intra%9ay Wave @hart :I9W@;

). Weekly and monthly vertical charts are not suBciently sensitive to permit accurate timing but may be used in combination ith daily vertical line charts and &gure charts to give meaningul indications. . Weekly and monthly vertical line charts are o value or their long range background.

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SECTION 7 I.

"he most important aspect to kno about the market is the trend.

!. Aur aim is to operate in harmony ith the trend. #. "he Wyckof Wave is a market index, hich re4ects the movement o the market leaders. 6. ( selling climax is caused by panicky unloading o stocks by the public :supply; hich is matched by buying :demand; o> a. experienced operators b. large interests c. short covering by bears ho sense a turn. '. (n abnormal increase in volume is characteristic o a selling climax. ). (ter a technical rally, i prices hold around or above the climax los on shrinking volume. "hen e have an indication o support and the completion of liquidation . "hree possible buying opportunities to establish a long position are> a. ater the completion o a selling climax. b. ater completion o a secondary reaction here the selling pressure is being lited as shon by closes or the various days. c. hen the index breaks into ne high ground. :"he last is the least satisactory since the risk ould not be at a minimum.; . When the trend is doubtul take a neutral position. . "o limit risks. -lace stop orders below the previous support points in long trades. 12. *ullish behavior is oten accompanied by higher tops. Cigher los. (nd higher closes in combination ith gradually increasing volumes. II. (bsorption rather than distribution may be observed by> a. 5olume remaining lo on reactions or possible tapering of  b. -rice movement restricted to a narro range as compared to a halay reaction c. 5olume consistently building up, or there is a liting o support points. 1!. 7arge volume ith no urther material gain is an indication o distribution. 1#. Increased public participation creates active demand :o a poor Duality; hich acilitates selling :supply o a good Duality; by large. interests. 16. (t the top o a rally or up%trend, close out your long positions and seek those stocks in the eakest technical position to establish short commitments.

1'. Hypodermics is the sudden run%up o prices on expanding volume created by large interests. It may be an indication o a turning point. 1). 8harp acceleration o a donard movement oten creates an over%sold condition. 1. 9eclining markets are normally accompanied by loer volume than advancing markets, except perhaps at times o active liDuidation. 1. ( sudden or abnormal increase in volume, appearing ater a given price movement has been in progress, usually indicates the end or the approaching end o that particular movement. Coever. i this occurs hen the price breaks through a de&ned trading range. this probably indicates a continuation o the movement in the direction o the break%through. 1. ( common seDuence in market 4uctuations is> a. selling climax a> buying climax b. technical rally or b> technical reaction c. secondary reaction. c> secondary rally !2. Risks are greatly increased by> a.ailure to liDuidate promptly on early arnings o danger to bull position b.reusal to place stop orders on long commitments