BASIC LECTURE NUMBER ONE

PHILOSOPHY, HISTORY AND BASIC CONCEPTS

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

A BRIEF HISTORY OF THE WYCKOFF COURSE

Mr. Wyckoff was experienced and qualified in every important area of the stock market:
Founder and publisher of the then prestigious Magazine of Wall Street, stock market advisor to
thousands, author of numerous articles, editorials and books based upon personal experience and
his association with such famous speculators as Harriman, Keene and Livermore and with other
leaders of finance during his era; Richard D. Wyckoff tells us in his own words: By taking the
best of what forty years in Wall Street have taught me and preparing it for others so that it can be
readily absorbed and applied, I will be creating something that should aid in establishing a new
standard of practice in the publics stock market operations. I do not claim any monopoly of
stock market knowledge, but up to this time, no one else seems willing to be so frank in offering
to the public the most intimate knowledge of the inner workings of the stock market. Thus with
forty years of study and personal experience, Mr. Wyckoff crystallized his knowledge into one
writing and published The Richard D. Wyckoff Course in Stock Market Science and
Technique.
Since then, The Stock Market Institute, formerly known as Wyckoff Associates, Inc., has
continuously endeavored to preserve the value of this course. As new principles have been
discovered, they have been added to the time tested laws upon which the curriculum is based.
The same watchfulness (is) applied to new techniques of market operation. These are being
reviewed and developed as time, regulations and market conditions change. Our knowledge and
educational program is in a continuous state of evolvement and has been enhanced with each
management succession.
When death came to Mr. Wyckoff in 1934, Mr. Robert E. Stanlaus assumed the
responsibility to continue to offer the public specialized education in the stock market science
and technique. He expanded the program with material (that) he and Mr. Wyckoff had written
since the original printing.
In 1951 Mr. Robert G. Evans began his career as the promulgator of the Wyckoff Course.
Mr. Evans has made considerable contributions to the benefit of all students of market action.
They are most notable in the further development of technical analysis, market psychology and
philosophy. His unique talent in using analogies to explain various market phenomena and
principles (has) become an inseparable part of the Wyckoff Course.
Lloyd I. Andrews was selected in 1967 to continue SMIs leadership in educating the
public in a true understanding and knowledge of stock speculation. Mr. Andrews placed
emphasis in the development of a structured educational program to enhance and speed up the
learning process. He has expanded the SMI with both experienced educators and market
speculators. Today SMI proudly offers over seventy-five years of continuous study in stock
speculation; a proven product, professionally prepared and presented by a uniquely competent
staff of principled people.
It is our experience that you will discover you have no need for anything more of any
other technique than Wyckoff and should you use other techniques along with your Wyckoff
Course, it can hurt you. This is a very difficult thing for many students to accept because most
students, prior to their Wyckoff experience, have tried to learn about the market by picking up an
idea here, picking up an idea there, trying them out and if they show reasonably good results,
using them. Often these people become intellectual gimmicks collectors. Forget it! It will cost
you money, much money. You have enrolled into a proven, time tested program. Please,
discipline yourself to learn it (and) practice it as taught. Dont return to a trial and error
approach.
Actually there are many good things written in books, but often they are mixed up with
other ideas and concepts which are not valid. It is a long, costly and difficult process to
determine what is valid and what is not. At SMI we have already sifted out what is good and
useful and after thorough testing have incorporated it in the Wyckoff Course; it has already been
done for you.
Actually, many things which we read or hear about simply are not reliable. For instance,
occasionally you will read, the short interest is the highest in history, and this is interpreted as
being very bearish. This high short interest may be perfectly natural because of the increased
and increasing number of stocks which are outstanding and are traded. Again, you may read that
the market went down today, but it was on less volume and therefore that is perfectly normal.

In fact, there are times when it is perfectly normal for the market to go down with somewhat
decreasing volume and that can still be bearish, depending upon the circumstances. You see,
very often the basic assumption that is made is completely wrong and that leads to disaster.
Again, you may have read that a gap is always filled. Sometimes it is many years before a gap
is filled. There is still a gap on Chrysler at 2 5/8 which was established in 1932. Do you want to
wait for it to be filled? Many are never filled. When a gap is filled, it is accidental or incidental
to the movement of the stock. If a principle is to be a principle, it must work in all markets to be
valid and reliable. The Wyckoff Course is based upon principle and laws. It is valid! It is
reliable!
SMI believes that there is a very definite distinction between short term trading compared
to trading important accumulation or distribution areas for intermediate and major moves. The
short move trading often requires what is essentially a tape reading technique and a special
understanding of the market. Trading the major accumulation or distribution areas for a larger
move is more readily understood. For most students it is more profitable and it is the method of
operation which should be learned first. It is the basic method discovered and practiced by Mr.
Wyckoff. This is described very well in the text in sections 9, 10, 16, and 17 and is summarized
in section 21 of the Wyckoff Course. This type of operation lends itself readily to long term
capital gains which under current tax laws is a vital concern to many of our students.
To trade a major accumulation or distribution area, you must have a large count, a sign of
strength and a last point of support. We would like to emphasize this essential strategy, that you
must have a large count, a sign of strength and a last point of support! Stay out of the stock until
it is on the springboard! We will emphasize this repeatedly and illustrate it in later tapes. This is
the precise area where accumulation is being completed and an attempt is being initiated to begin
the mark-up process.
Now, just what do we teach and what can you learn at SMI? We teach the science, the
technique and the art of speculating in the stock market. Lets review the definition of these
three terms.
1) Science: Knowledge of facts and laws arranged in an orderly system. This is
precisely our endeavor. Our study of stock market science provides a careful insight into the
sociological and psychological aspects of market operations. We study the characteristics and
habits of the individuals and groups participating. We probe why the varying mental attitudes of
these groups have an effect upon stock prices and how the character of the market is influenced
by psychological conditions. Further, we expect the student to discover the importance of his
mental attitude and the effect it will have on his degree of success. Through continuous practice
trading, he will learn that disciplined application of knowledge can overcome the common
obstacles caused by ones hopes and fears and (by) ones timidities and obstinancies.
2) Technique: Method or way of performing the mechanical details of an art or
science. Our approach to the stock market requires up to date records prepared from the factual
data of daily price action and volume of sales as compiled by the principle stock exchanges.
Vertical line and figure charts are constructed for a) the individual stocks of particular interest; b)
carefully selected indexes of leading groups and c) sensitive indexes reflecting the condition of
the general market. From these we are able to make a serious and instructive study of the action
of the stock together with the action of other stocks of a similar character and finally, the action
of the market as a whole. Our students are schooled in the techniques we believe are essential to
technical analysis.
3) Speculation: Buying or selling where there is a large risk with the expectation of
making a profit from future price changes. We believe speculation is an art and a science
whose fine points may be readily learned by those who will apply themselves to their studies. To
become successful one must operate in the style of the men who have proven their expertise.
Learning the modus operandi of these astute gentlemen will assist the student in developing this
professional attitude toward the stock market. Each student must learn to understand the
meaning of these definitions as well as the Wyckoff principles through systematic study. Then
its practice. Practice trading to test his understanding of their application and to determine how
he can best operate with them. Then, when ready, he will begin to speculate with his capital.
It is important that we have a common language. In Volume Two of the course we have
included a glossary of terms. Whenever you are uncertain as to the exact meaning of a term, we
suggest that you refer to the glossary. If you find a term that is not explained there, refer to your
dictionary or ask us for our definition. Occasionally a term will be used in a special way with a
special meaning of SMI. This arises out of our special usage and understanding of the market. It
is often helpful for a student to relate the technical terminology, that is the language of analogies

being used, down to whatever he does in his daily life. This may help in using the principles and
may prevent them from being purely abstract ideas. An illustration of what we mean can apply
to the term selling climax. Knowledgeable speculators understand selling climax to be the
phenomenon which occurs after a stock has been going down, down, down and has reached the
point where panic selling begins to set in leading to a dumping of stocks by people who bought
at higher prices. This panic selling creates an expansion of the price spread and an expansion of
volume. The price weakens at an increasing rate. The price characteristic is that it sharply
increases at the point where they, the professionals come in and absorb this panic selling: The
down move is over and the stock begins to rally. We call this action a selling climax.
The Wyckoff principle of a selling climax does not always occur at the end of every
decline. In other words, not all declines end with a selling climax, but when it does, when you
can identify it clearly, it is a principle. We can have a common understanding that this is the
principle of the selling climax and act and operate accordingly. The principles do not change.
However, they may manifest themselves in many ways and where the price and volume will be
different on each occasion.
It is very important to realize that the Wyckoff Course is based upon sound principles. A
principle has been defined as a comprehensive and fundamental law, doctrine or
assumption. It is an unchanging rule. Prove your principles. Learn how the principles tie in
with each other and learn to anticipate which principle is likely to occur following the current
unfolding picture of market activity. Build your analysis on principles, not upon your feeling
about the stock, not on your hopes, dreams and wishes. That which is built upon principle is
sound and will last.
The Wyckoff Course is based directly upon the law of supply and demand and the law of
cause and effect. The law of supply and demand says, when demand is stronger than supply
prices will rise. When supply is stronger than demand, prices will fall. The law of cause
and effect says, in order to have an effect, you must first build a cause. The effect will be in
direct proportion to the cause and cannot be separated from the cause. Very often the
working of this law can be most easily seen in the figure chart which sometimes has been called
the cause and effect chart. This is because to have a very large move, you must first build a
cause of a count. A stock, in order to have a major move, a large, large move, thirty, forty, fifty
percent or more usually goes through some form of accumulation or preparation. This will show
up on the figure chart as a large count.
We sometimes use a third law in our work and that is the law of effort versus result.
It is most readily seen in the working of the Optimism - Pessimism Index and in the upthrust
after distribution. The basic concept is that, if you have an effort expressed, the result
should be in proportion to the effort. In the Optimism -Pessimism Index we have the
phenomenon of the divergence and the inharmonious action in which an effort on the part of
either the Wyckoff Wave or the O.P. Index is expressed and the other Index does not respond.
Something may be wrong and wed better find out what is wrong and what to do about it.
In the case of the upthrust after distribution; if a stock has been moving up with a two
point spread every day with 10,000 shares and it breaks into the high ground with 20,000 shares
and a 1/2 point spread for a couple of days straight, we know supply is coming in and is
overcoming the demand. This is an effort which is not having a proportionate result. Bulls have
been buying stock and have not been able to move the price when it should be at a critical point
in the movement of the market and therefore the stock is likely to be in trouble and have a
reversal in its movement.
As indicated previously, we teach the science, the technique and the art of the stock
market and the mechanics of the use of charts. We have found that there are some suggestions
which can be quite helpful in keeping your charts. First, always keep your charts neat. Keep
your charts as clean, neat and orderly as possible. Once you have them organized this way, mark
all indications on the chart, such as trend lines, half-way points, climaxes, etc. We suggest that
you keep your charts in black ink, either using felt or ball-point pens. Put the temporary
indications in pencil and when you are completely certain of the calling and the identification of
the principles, then you may wish to change them to ink. Mark the important indications in ink,
but mark the relatively unimportant indications in pencil. You may wish to erase the unimportant
trend lines and other things later as the action unfolds.
Start your charts on the same point on the page. This is very helpful technique. Also, use
the same volume and price scale for similar priced stocks whenever possible. This eliminates
posting a chart that you may have on a double or quadruple scale as a single scale chart. This
can be quite frustrating and lead to market losses.

When analyzing, spend your time where it is most likely to pay off. If you have to search
for something, usually it is not worth finding on the charts. Often the best situation will be
obviously good almost at a glance. There are some situations in which you will not be able to
understand what is going on. Very often no accumulation or distribution or anything of
importance is going on in the stock at that time. It is simply drifting with no large interests and
sponsors interested and no one preparing a campaign in it. In other stocks, you will be able to
determine what is going on, however you will not be able to take a trading or investing position
largely because the profit - risk ratio is not in your favor; it is simply too risky: Or at times you
may wish to stay out of the market because of price or volume action which is somewhat
obscure. To a large extent a student should stay out of these first two types of situations. The
third type of situation is where you do understand what is going on and the move indicated is
large enough to give you a good risk. Analyze it thoroughly. Time your commitment as well as
you can and take your position. As soon as you have finished taking your position, review it and
then follow it through until you finally close it out.
It is often very helpful to write down what you think as you are analyzing or perhaps to
make notes on the charts. This is a way you can check your work later and you will not lose
track of your ideas. Writing down the main points of your analysis forces you to organize
logically and you are less apt to miss important details. We have found it especially helpful to
analyze the Wyckoff Wave in writing every week. Also, it is helpful to write out your
analysis of an individual stock before taking a position in that stock. Prove to yourself (that)
you are making the correct decision. Be sure before you act.
Now for some comments on taking a position in a stock. If important accumulation or
distribution in a stock is going on, it is very difficult to hide it. This will normally show up on
the charts. When it is not clear, stay out! When indications are clear, take a position with the
timing and the profit - risk ratio in your favor. Your first job is to protect your capital! Your
second job is to obtain a profit when the risk is in your favor.
If you are afraid to be wrong in the stock market you will have a very difficult time
because each time you take a position either in a practice trade or with the bulk of your cash,
you run the risk of being wrong. Very often we find that a newer student has the majority of his
initial trades wrong with losses. It is better to take your losses with practice then to risk the bulk
of your capital. A funny thing about being wrong or being afraid to be wrong is that our ego
normally reacts to protect us from being wrong. Often we will rationalize, twist the truth and in
fact would rather lose money than to admit we are wrong.
Build on your profits and on the knowledge that you do have. Minimize the losses!
Learn what you can from your mistakes and try not to repeat them. This is a lone wolf business.
After having seen some bad experiences of students who were tempted to work with others in the
market, we recommend that you learn to rely on yourself alone and when you have problems,
discuss them only with an SMI staff instructor. If you know another student you may wish to
discuss principles. Never, but never discuss trades! Learn to keep quiet. Very often another
person will take the opposite point of view and throw you off. Unconsciously, he may do this so
that he can be right and you be wrong: This is a professional malpractice which some people do
unconsciously and it is especially easy to do in the stock market. Learn to make your own
decisions. Discuss them with no one. Stick to your guns and follow through until the
commitment is completed.
We have often found that no two people trade the same. Quite by accident, a number of
years ago we found that three people in our office were trading the same stock. The stock
happened to be Chrysler. The first person had a capital gain of about 25 points and was
attempting to obtain a much larger move. He was also attempting to obtain a long term capital
gain taxwise. However, he had diagnosed that Chrysler was going to have a reaction of 10 to
12 points. He decided to ride that reaction out in order to obtain the long term capital gain. The
second man diagnosed that the stock was going to go down and took a short position for about 10
points. The third man had had no previous interest in Chrysler, but as the stock moved down
to the end of the reaction he bought. The principles are the same. It is the same stock, but three
people operated in it differently. No two people have the same character, personality or
necessarily the same objectives. You must define how you will operate through systematic
practice trading and cash trading.
In dealing with your broker it is often very helpful for you to have an understanding of
his functions and of your functions. Essentially he performs three functions. One is to keep a
record of your transactions and maintain your account, another is to execute your buy (and) sell
orders promptly and as accurately as he possibly can and third, to provide you with factual

information when requested. Your function is to analyze and select stocks. You will have to ask
your broker to do what you want; to take your orders, to execute them, but to give you no advice
or other information unless asked for. If you need stock quotations, you can arrange to get them
through your brokers secretary. We have found that many students prefer to have a broker who
is not located in the same town. This eliminates overly frequent contacts and the inadvertent
influence of the broker on them. Again, one of the basic reasons for taking the Wyckoff Course
is to learn to operate based on your own judgment. We maintain that you can operate
independently and confidently with your Wyckoff principles. Ignore news, tips, rumors, etc.
Often news times the market; moves and motivates the neophyte to do something: Usually it is to
lose (his) own money. Often it gets you to act irrationally. The stock moves down and then the
bad news comes out on it. The stock moves up, or we might say it is moved up and then the
good news comes out. The time to take your position, a short position, (is) before the stock is
ready to go down on the springboard and the time to take a long position is on the springboard
just before an important move up. You can learn to diagnose this from market action alone.
The basic method of analysis we teach at SMI is spelled out in section 9, page 1,
paragraph 1. It reads as follows: After we have determined the position and probable trend of
the general market and have examined the action of the various groups to see which are most
likely to go with and to lead the market as a whole, we must single out those individual stocks
which are in the best position for our purpose, which is to operate in harmony with the indicated
trend. Restated, the three strategic principles are: 1) He determines the trend of the market; 2)
Compares for strength and weakness and then;
3) Analyzes the individual stocks. Why? First you determine the trend of the market, using the
Wyckoff Wave, in order to go with the market. To buck the trend of the market usually leads to
extra problems or loss. Second, you compare for strength or weakness (in order) to eliminate the
obvious losers and to select those stocks most likely to lead the market in the coming move.
Third, you analyze an individual stock to determine if it is ready to move. It must be on the
springboard.
In summation, you do not need to learn and know everything about the market in order to
make money. To begin to operate in the market it may be sufficient to learn one or two important
techniques, but learn them well. Apply them systematically time and time again whenever the
opportunity arises. You may make only a few trades in a year and still have unusual profits.
How? By trading for the larger moves, keeping the profit - risk ratio well in your favor, a bare
minimum of 3 - 1 and by not risking all of your funds on one stock.
Few students appreciate the Wyckoff Course as they really should. Many at first think
they know as much about the market as we do. This is simply not true. In learning to operate
with the Wyckoff principles well, you will be operating as a professional. There are relatively
few real professionals in the market. There is a somewhat larger number of reasonably good
amateurs, but very few professionals. You can be among elite. We hope you will learn this
knowledge systematically, apply it with diligence and discipline and begin receiving an
increasing profit from your efforts. By the time you have learned to operate profitably in the
market, you will have paid a rather modest price. The highest price you will have to pay is in the
time, the effort and the persistent dedication to learning and to testing your knowledge. By that
time you will have become a special person with a special, most unusual and unique
understanding of the stock market.
In succeeding tapes we will be referring to many of the refinements, analogies and
principles embodied in the Wyckoff Course. We will use some classic examples and some
oddball variations to drive specific points home. Perhaps the most important thought or
admonition which we can possibly put on any of these tapes is this; that you regularly review
your written three volume text along with these lectures. These principles soon will slip away
unless you keep reviewing and renewing your knowledge. Read and re-read your text. Then
practice, practice, practice and practice some more the analysis and charting exercises included
throughout your course of studies. We have found the better students study it systematically,
learn it, practice it, rely on it exclusively and apply it, often to their great and astonishing profit.
This same success can be and should be yours.

BASIC LECTURE NUMBER TWO

TRENDS
The main subject of this tape will be trends; what trends are, what causes them, how to
identify and analyze them and how to use them in speculative operations.
Let us define a trend first. A trend is to have or to take a particular direction. It is the
underlying or prevailing tendency of inclination of movement. In other words, a trend is a
tendency to move in a particular direction. Trends are governed by the law of supply and
demand. For a brief review, the law of supply and demand says that when demand is stronger
than supply prices will rise, when supply is stronger than demand prices will decline. When
demand and supply are in equilibrium the price will move sideways or will be unchanged. This
sideways trend is called a trading range. Supply and demand must be judged by what happens to
the price; price, the number of shares bought and sold; volume and how long it takes to complete
the movement; time, in other words price, volume and time.
Our purpose is to diagnose the direction and strength of the coming trend and to take a
position in harmony with it. We aim to take that position as the trend is beginning to be
established or, after a reaction within the trend has occurred, to take a position as the trend is
resuming its movement. CAUTION, DO NOT BUCK TRENDS!
Price changes and trends which result from these price changes are caused by an
unbalanced condition of the flow of orders coming into the market. Please turn to chart number
one for a very simple illustration. Suppose an order for two thousand shares comes into the
market to buy a stock. The stock is selling for $50.00 per share and there are only three hundred
shares to be sold at that price. The specialist could fill this order for three hundred shares and
then raise the bid price until the entire order is filled. We will assume that there are no additional
buying and selling orders coming in as this particular order is executed. So, three hundred shares
are sold at 50, another hundred shares at 501/8, two hundred at 501/4, a hundred shares at 503/8,
five hundred at 501/2, two hundred at 505/8 and these orders to sell have all been filled. At this
point the specialist still has six hundred shares to be bought. There are one hundred shares at
503/4 and then at 507/8 the remaining 500 shares are bought. Thus the price has moved up 7/8 ths of
a point in executing the order. This is extremely simplified. In the actual market as this order
would be executed, additional orders would come into the market on both the buying and the
selling side to be matched and executed. The price would move back and forth depending upon
whether there were more shares to be bought or to be sold at any particular moment.
These trends may be portrayed in tabular form or in chart form. They may be most
readily analyzed when they are in chart form. We use three types of charts primarily; a vertical
line chart, a figure chart and a wave chart and in these lectures we will discuss all three.
Most people think there are only two trends, however, there are three types of trends
classified as to direction of movement. There is an upward trend, a downward trend and a
sideways trend or trading range. There are many ways to classify trends as to types or the size of
trends. Elaborate systems have been worked out to classify trends. Do not do this! It leads to
extreme confusion and very often to financial disaster. At Stock Market Institute we use four
classifications for simplicity; 1) the intraday, 2) the minor, 3) the intermediate and 4) the major
trend. This is not a precise or mathematically absolute classification and we are not interested
primarily in what you call a trend, but we are extremely interested in your understanding of it.
What is extremely important is your understanding of the supply and demand relationships as the
trend develops.
The intraday trends are caused by very small fluctuations; those fluctuations occurring
within a day and there may be several of these within one day. Intraday trends are usually a day
or two in duration. Essentially, a person must have an intraday breakdown to analyze these
intraday trends and it really requires a tape readers operating setup and technique. Intraday
trends on the Wyckoff Wave are published on our daily stock report
Minor trends are made up, usually, of three or more intraday trends and are moves of up
to approximately 10 percent of the price of the stock. Usually they last for a couple of days to a
couple of weeks.

The intermediate trends which are made up of three or more minor trends and are
movements of around 15 to 20 percent of the (price of the) stock usually run for a couple of
weeks to a couple of months.
A major trend is made up of three or more intermediate trends and is a movement of over
25 percent of the price of the stock. Usually major trends will last for several months or perhaps
much longer.
We wish to emphasize that you should not make a precise or exact mathematical or
absolute classification of strict percentages. There is a gray area between intraday to minor, the
minor to intermediate, intermediate to major. The important thing is not how you classify the
trend but your judgment as to the strength of supply compared to the strength of demand. To
show you how these trends persist and persist and persist, on the Wyckoff Wave there was a
major support trend line drawn through the low of September 1953 and the low of 1957. This
support line was met on the low of the 1960 down market and the Wave turned upward. This
support line was finally broken on the 1962 decline.
We have found that very often we can illustrate principles best by drawing a free hand
chart or a schematic diagram to illustrate the general principles, followed by a discussion of
actual examples showing some classic situations and some variations. To begin this study please
turn to chart number two. On this chart we have a study of supply and demand. The Wyckoff
Course teaches (that) the student must first learn and understand the motives, behavior
patterns and the emotions of the people who go to make up the market. For instance, it is
normal for people to go to extremes. In an advancing market it is normal for greed to overcome
reason resulting in a demand which pushes the stock up into an overbought position. Likewise,
in a declining market it is easy for fear to cause selling which may result in lower prices causing
more fear and supply which drives the price down, down, down into an oversold position.
These market fluctuations are caused primarily by fear and greed. Lets take time out to
discuss this for a moment. This is a good use of fear and greed. Actually everything that you
and I and everyone else does is to some degree based upon the simple use of the emotions of fear
and greed. At first they sound like nasty words because they are very often used in a very noncomplimentary way. We mean them in a very delicate and positive way. There is nothing wrong
(with) being greedy as long as it is not carried to extremes. The reason you are studying your
Wyckoff Course is because you want to get ahead, you want to make money or protect your
capital. Furthermore, almost all of us carry life insurance because we are fearful; we are fearful
something will happen. This is a very simple use of a very important emotion. Now, everything
that you and I do is based upon some use of these two emotions. We may rationalize and attempt
to base our analysis and actions on reason, but this fear and greed are still there to some extent.
The trouble is, in the stock market fear and greed are carried to extremes. Lets see what
happens as the market begins to go down and panic selling comes in. This is usually precipitated
by bad news. Usually this fear selling will snowball until it is finally stopped by superior
demand coming in on a selling climax. Gradually this fear runs itself out. It goes to too much of
an extreme. Similarly, the buying based on greed grows and grows on an upward move until it is
finally stopped by a buying climax. As the market moves up, too much greed comes in. This
process creates what we call the oversold and overbought positions or situations. In the oversold
area the stock or the market can go through accumulation and in the overbought area it goes
through distribution.
Lets return to chart number two. Here we portray the market in a general upward
slanting trend. We call it the primary growth trend. Sometimes it is a downward slanting trend.
This is the general direction or rate of growth that the market, an index, a stock or you might say
the economy or company is taking. Now, market prices, or the price line fluctuates widely above
and below this growth trend line. If we draw a line through the center of the general price
pattern as it moves up and down, we get somewhat of a curved line or cycle. It goes way down
below the primary growth trend line and then fluctuates well above it and then back and forth.
Again, generally the stock will go through accumulation in the oversold area and distribution in
the overbought area.
Now, please turn to chart number three. We can break down this cycle or wave like
pattern into four phases: 1) accumulation; 2) markup; 3) distribution and 4) mark-down. We are
interested primarily in what is happening to supply and demand. In the accumulation area
demand is coming in to gradually overcome and absorb the supply and to support the stock at
this level. In the mark-up area demand is greater than supply. In the distribution area supply
overcomes the demand, stops the upward move and eventually begins the downward move. In
the mark-down phase supply is greater than demand. We can also look at this in another way.

Mr. Wyckoff says that each stock or each move goes through a period of preparation before the
execution of the move. This would correspond to the accumulation and mark-up phases, the
other preparation and execution phase being distribution and mark-down.
In chart number three we have shown the oversold position as an area where the
intelligent and knowledgeable investor or speculator accumulates stock. The overbought
position is the area where he will distribute or sell his stock. This pattern holds true whether his
speculative objectives are short term, intermediate or long term.
In chart number four we have portrayed a series of minor fluctuations or intraday waves.
These build up and build down and form minor moves or minor trends. Actually, every upward
or downward swing in the market whether it amounts to many points, only a few points or
fractions of a point, consists of numerous buying and selling waves. These have a certain
duration. They run just so long as they can attract a following. When this following is exhausted
for the time being, that wave comes to an end and a contrary wave sets in.
The small buying and selling waves which occur during every stock market session run
so many minutes. These small waves are part of the larger waves which run so many days and
eventually make up movements which we call short term rallies and reactions or minor moves.
Our illustration shows this up and down price action which reflects the buying and selling waves
caused by the shifting relationship of supply to demand.
In chart number four from A to B we have a series of intraday moves of generally equal
strength and in general the up moves are about the same strength as the down waves. Thus, the
stock moves sideways in a narrow trading range, a very small trading range. However, from B to
C we have a minor up move composed of several intraday trends in which the rallies are stronger
than the reactions. Demand on the rallies is stronger than the supply which comes in on the
reactions and thus we have an upward minor trend.
In chart number five we have shown how these build up and build down into intermediate
advances and declines. All stock movements however large or small are made up of buying and
selling waves. A stock moves to a higher or lower level by a series of surges a good deal like an
incoming tide with successive waves higher or lower than those preceding. As shown in chart
five, the short term rallies and reactions, the minor moves, build into intermediate advances and
declines. By studying the relationship between these upward and downward waves; their
duration, speed and extent and comparing them to each other we are able to estimate and judge
the relative strength of the bears and the bulls or better yet the supply and demand as the price
movement progresses.
In chart six we have a series of intermediate trends which form the long term or major
trends or to express it another way, the long term bull and bear markets. From A to B we have an
upward trend, a major upward trend which is composed of a number of intermediate trends in
which the up trends are stronger than the reactions; demand is stronger than supply. You will be
able to judge the supply and demand on the basis of the price action, volume and time.
There is a widened spread and an increasing volume on the rallies. On the reaction there will be
decreased volume and a comparatively narrow spread compared to the rally, indicating less
selling on the reaction than there was buying on the upside. In an up trend you should not have
prolonged price weakness or massive dumping of stocks on the reactions.
Continuing with chart number six from B to C we have a downward trend composed of a
number of intermediate trends indicating the good supply on the downside and a lack of demand
on the rallies. Again, you will be able to judge this on the basis of the price action, the time and
the volume. Volume should remain good on the downside, the rallies however should be
relatively weak, indicating a lack of demand. There should not be wide spread or increased
volume or sustained increased volume and it may take quite a bit of time on the rallies. The
main point is that you have an unbalanced condition in the supply and demand with supply good
on the downside and a lack of demand, weak demand on the rally.
Lets spend a little time with chart number six and discuss some variations. Very often
these stocks will go through a period of re-accumulation, building a complete new count such as
is illustrated from E to D. Sometimes instead of going through a complete new count building
process, the stock will simply come down, dry up the supply and again resume the upward trend
after having made an intermediate correction. We have portrayed this at F. Often it will go
through minor or intermediate distribution in the major upward trends, precipitating and causing
these corrections. The same thing can occur in the down market with a rally in which a stock
will build a complete new stepping stone count for the down side, or it may simply rally, run out
of demand and then resume the down trend. This in brief is the basic idea behind trends; how
they are formed and what causes them.

10

Now lets go into some practical applications including how you can measure the trends
and how you can trade a stock that has already begun this upward or downward trend. Please
turn to chart number seven. Chart number seven is a study of two important trends in the
Wyckoff Wave Index beginning in August, 1968. The first important trend is from (point)
number 1 to (point) number 2. The second is a down trend from (point) number 2 to (point)
number 3. The first is an intermediate trend made up of several smaller or minor moves. The
first minor move is from (point) 1 to (point) 4, a reaction from (point) 4 to (point) 5 and then a
long move from (point) 5 to (point) 2 with some very small reactions such as (from point) 6 to
(point) 7. On an up trend there should be good demand on rallies followed by a falling off or
decreasing volume and a narrowing spread on reactions compared to the prior rally. The
Wednesdays closing on the New York stock exchange during the later half of 1968 caused some
distortion in the normal volume pattern. This usually caused exceptionally high volume on
Thursday.
At SMI we use three methods of measuring trends; trend lines, thrusts and half-way
points. (First) we measure the angle at which the trend is moving through the use of trend lines.
Trend lines form a channel of movement similar to a frame for a picture. There are two types of
trend lines; 1) the normal use and 2) the reverse use. (Second) we also measure the amount of
progress that is made on each drive up and drive down. This is called the thrust. (Finally,) the
third measurement is the half-way point which is an indication of comparative strength and
weakness and the adequacy of the correction.
When placing the trend lines, the thrust and the half-way point on your chart, you should
do it with a great deal of exactness. However, do not expect the stock or the index to observe or
reach them perfectly. For instance, on a reaction within an upward trend, do not expect the stock
to come down to the exact trend line and turn upward. It may penetrate a little bit, or it may hold
slightly above the support line or the trend line. The important thing is how it reacts, not the
exact point to which it reacts.
To break a support line on light or decreasing volume means relatively little and often
enables the stock to resume the up trend within the same primary trend lines. To break the
support lines on increased or high volume and good price spread is a different matter. It
indicates a change in the supply - demand relationship and usually results in the stock
establishing a new trend, perhaps a new trend in the same upward direction. Another way to
analyze the breaking of a supply line is to study the possibility (that) it is creating an overbought
condition. It may result in a steeper angle of trend. To summarize, the breaking of a trend line
may result in establishing a slower or faster trend in the same direction or in a complete new
trend. The supply - demand relationship will determine the continuing trend. It can change
rapidly. So our advice is to watch it closely. We usually identify trend lines with letters such a
AA, BB, CC, etc. It may be helpful for you to follow this practice and it will help us in our
correspondence with you if we all use the same system of letters and numbers.
At SMI we use two types of trend lines, the normal use and the reverse use. In the
normal use of trend lines, in an upward trend we draw the support line first with the
supply line drawn second, parallel to the support line. How do we draw these trend lines?
First, locate two consecutive lines of support on a reaction and draw the support lines through
those points. Examples of these are on chart seven, line AA, which was drawn through points 1
and 5, and chart nine, line AA drawn through points 1 and 3. Now, the supply line is drawn
parallel to these support lines; drawn through the top of the rally which occurs between the two
support points. On chart seven, line BB is the supply line drawn parallel to AA through (point) 4.
In a down trend, again using the normal use of trend lines, the supply line is drawn first, through
two important supply points. An example of this is line EE on chart nine which is drawn through
(points) 2 and 20 with the support line FF drawn parallel to it through (point) 21.
With the reverse use of trend lines, in an upward trend, we draw the supply line
first, followed by a support line drawn second and parallel to it. An example of this is on
chart nine. Line CC is the supply line drawn through points 7 and 8 with a support line DD
drawn second through (point) 11.
In a down trend using the reverse use of trend lines, the support line is drawn first
through two support points and the supply line drawn parallel to it through the top of the
rally occurring between those points. An example is line CC on chart eight drawn through
points 4 and 5 with the supply line DD drawn parallel to it through point 7. We have never seen
the reverse use of trend lines used except by SMI. You should soon discover their unique value
in your technical analysis of individual stocks and of the market.

11

On chart seven we are going to use the normal use of trend lines only. Line AA is the
support line drawn through (points) number 1 and 5. The Wave meets support several times near
AA on small reactions, then meets it at (point) number 7 and turns up. At (point) number 8 it
breaks through AA with wide spread and increased volume indicating that AA is no longer
operative. These shorter and temporary lines within the more important trend lines often are
very helpful in alerting one to (a) coming change in trend, a change of character or a decisive
shift in supply or demand. They may be erased later when no longer needed. The supply line
BB is drawn through (point) number 4, parallel to AA and eventually it is met at (point) number
2 and the Wyckoff Wave turns downward. We could also draw another supply line, CC, parallel
to AA through point number (12), when (price) failed to reach line BB at (point) number 12.
This would show the failure to reach the line BB where it could or perhaps should have reached
Slowly study the price action and volume beginning with point number 1 over past point
number 8. Do you see the expansion of the price spread and the increasing volume on each
rally? This is evidence of good demand. Then, note the lack of supply on the reactions. The
volume shrinks on the reactions at (points) 5, 9, 10, 11 and 7. However, at (point) number 8
there was a decisive change in character as supply was heavy, as shown by the wide spread and
increased heavy volume on the downside.
Now lets draw the thrust. The thrust measures the price progress that the stock or index
makes on each wave within the trend. The thrust is the price difference between consecutive
tops in up trends or between consecutive bottoms in down trends. To measure the thrust, we
draw a series of horizontal lines at the level the highs and lows are reached on the drive within
the trend and connect them with a vertical line. For example, we have drawn the thrust A1, B1
and C1 to measure the net progress of each subsequent drive up on the move from (point) 1 to
(point) 2. A1 measures the amount of progress made from (point) 1 to (point) 4. B 1 measures the
progress from (point) 4 to (point) 6. There is a sizable reaction and a more prolonged reaction
from (point) 6 down to (point) 7 and then C 1 measures the progress from (point) 6 up to (point)
2. Note the shortening of the thrust, the lack of progress made on a move. This is an indication
that you should examine the market action very carefully to determine what is happening to that
trend. It may be running out of the underlying push caused by demand overcoming supply, or
opposition may be coming in to stop the advance, or supply overcoming demand.
There will be times when you will be in doubt as to whether you should draw the thrust
through a certain point. This is a matter of individual judgment. The judgment will largely
depend on the depth of the correction within the trend, the time spent in the correction,
your objectives and purposes and your perspective in analyzing the trend. You will be well
schooled in the basics however, as we will present many examples for you to study and use as a
reference.
Now for the half-way points. What is a half-way point? The half-way point is used as
a measurement of relative strength on a rally or reaction. To use an example to calculate the
half-way point, assume that a stock moves from 50 to 56, a distance of six points and then reacts.
The half-way point would be half of that six points or at 53. Reverse the process for calculating
the half-way point on a rally following a decline. For instance, suppose a stock moves down
from 30 to 21, a distance of nine points. The half-way point would be at half of that distance and
is 41/2 points added to 21 (which) gives a half-way point of 25 1/2. On a correction to a half-way
point, do not expect the stock or the index to go to the exact half-way point at the exact 1/8 th. It
is sufficient to meet support or supply in the vicinity of that half-way point. The ability to hold
above the half-way point substantially is an indication of relative strength. The overrunning of
the half-way point is an indication of relative weakness. Again, on a reaction, the important
thing is not that it comes down to the exact 1/8 th, but how it comes down. It should react within
an upward trend with a lack of supply, shortening of spread and decreasing volume.
Lets turn to chart number seven for an example of determining the half-way point of a
correction Calculate the exact half-way point on the reaction from (point) 1 to (point) 4
mathematically. The low point at (point) number 1 was 2750. The high at (point) number 4 was
2866 or a move of 116 points. One half of that is 58 added to 2750 gives a one half-way point of
2808. You can calculate all of your half-way points this way. Do it mathematically. Do not
guess because your eyes will lead you astray. This half-way point was respected at (point)
number 5. Others have been drawn. Please note how the Wave held slightly above the half-way
point on the reaction to (point) 9 and over-ran it at (points) 10, 11 and 7, indicating relative
weakness. Thus, we have a normal up trend from (point) 1 to (point) 2 with good demand on
rallies, lack of supply on the reactions. The narrowing spread at C 1 and the over-running of the

12

half-way points warned of a possible change of trend. The supply on the downside at (point)
number 8 confirmed it.
After the Index reached (point) number 2 a long down trend began from (point) number 2
to (point) 3. Using the normal use of trend lines we would draw supply line DD through point 2
and point 13 with the support line EE parallel to it drawn through point 14. At (point) 15 the
Wave becomes oversold when the line EE is broken and the Wave turns upward but does
not reach line DD at (point) number 16. Thus we can draw a new and a steeper supply line
FF through (point) number 13 and (point) number 16 with a support line GG parallel to FF
through (point) number 15. Please note how the failure to reach the supply line DD at (point)
number 16 put the support line EE in jeopardy at (point) number 17. When we draw a new and
steeper line such as FF, it is usually best to continue the original line such as DD as it may come
into play much later. Do not fail to extend major lines a long way.
Now, lets measure the thrusts on the move down from (point) 2 to (point) 3. D 1, E1, F1
1
and G measure the thrusts on the wave from (point) 2 to (point) 14, (point) 14 to (point) 15,
(point) 15 to (point) 17 and (point) 17 to (point) 3 respectively. Again, note the shortening of the
thrust at G1. It is an indication that either the Index is running out of supply or demand is coming
in to stop the down move. It is a visual indication signaling you to be alert and very careful in
your analysis and in your trading.
The rallies to (points) number 13, 16 and 18 first overran the half-way point at (point) 13,
then stopped in the same area (as the half-way point) at (point) 16 and then failed to reach the
half-way point at (point) 18, showing progressive weakness. We should calculate the half-way
points on the minor moves, but (only) after these minor half points have been over-run
substantially. Then go back and calculate the half points on the more important moves such as
from (point) number 2 to (point) number 3. This point is 2865 and is shown by the bracketed
half number. This move from (point) number 2 to (point) number 3 is a normal down trend with
good supply on the down side evidenced by expanding price spread and volume and a lack of
demand on the rallies shown by the narrowing of spread and decreased volume.
Now, please turn to the Chrysler, chart number eight, which has an example of the
reverse use of trend lines. As Chrysler starts down from point number 1, the first line which
we can draw is the normal use of trend lines, line AA through points number 1 and 2, with line
BB drawn through (point) number 3 parallel to AA. It should be noted that in drawing trend
lines, we start off with the normal use of trend lines. Later on, after additional support and
supply points have been created it may be possible to switch to the reverse use of trend
lines.
We have drawn line CC, which is the reverse use of trend lines, through points 4 and 5.
You may ask; why use reverse rather than normal? Well, the importance of the reverse use of
trend lines is that it is determined by the points at which the opposition came in to stop the
move. Look at (point) number 4 on Chrysler. It went down from (point) 2 to (point) 4 and
volume came in. There was good supply, but there was good demand to stop it, even on a
temporary basis. There was a battle going on there and Chrysler rallied slightly from that
point. At (point) number 5, again the price came down and demand came in to stop it. There
was increased volume and an increased amount of trading and the down move was stopped
temporarily. It is important to remember (that) there are two ways to go down. Price can go
down and have an increased supply met by a superior force of demand at that point or price can
go down and simply drift and drift and drift until it stops and ultimately rallies. The reverse use
of trend lines is drawn through where it is stopped; where the opposition came in and
actively stopped the trend; to stop it and reverse it even on a temporary basis. Later on
demand may come in at the same angle to stop the move. Points 4 and 5 respectively,
illustrate this thought. Now, what about the supply line. We draw the first supply line, DD,
through (point) number 7. It is the supply point on the rally between (points) number 4 and 5.
DD is met at (point) number 8. The price fails to meet CC at (point) number 9 indicating
strength. Then DD is broken at (point) number 10 indicating demand overcoming supply. We
can also draw a line EE through point number 1, parallel to CC; again the reverse use of trend
lines. Notice the anchor point for line EE is at point number 1 where the preceding up
trend was stopped or more correctly stated, where supply overcame demand.
In drawing your trend lines, you may have to experiment, trying several points and try
both the reverse use and the normal use. This failure to reach one line leaves the other
vulnerable to being broken. A helpful tool to use is to draw an arrow from a stopping point
to the trend line (in order) to indicate the failure to reach that particular trend line. For
example, see the arrow drawn between point 9 and the support line CC.

13

Now, please turn to chart number nine, Grace. From point number 1 to point number 2,
Grace is in a long up trend. The support line AA, using the normal use of trend lines, is drawn
through points number 1 and number 3. The supply line BB is drawn parallel to AA through
point number 4, the top at rally points between (points) number 1 and 3. At point number 5 the
stock fails to meet line BB and then penetrates line AA at (point) number 6. The breaking of line
AA at (point) 6 occurred on low volume, decreasing volume and a narrowing spread, indicating a
lack of supply on this reaction. This lack of supply indicated that Grace was not about to
have a change of trend.
The stock rallied well and began a long move from (point) number 6 to (point) number 2.
The reverse use of the supply line CC was drawn through (points) number 7 and 8. Note
the volume that came in at both of these points. (Numbers) 71 and 81 are indications on the
volume level. Supply came in to stop the advance. Line CC was respected several times around
(point) number 9. At (points) number 10 and 2 the stock became overbought on the clear
penetration of line CC, leaving the stock vulnerable to a reaction. The support line DD, drawn
parallel to CC through (point) number 11 was then penetrated on the reaction from (point)
number 2.
The thrusts A1 through F1 have been drawn to indicate the amount of progress on each
phase of the move up. Note the narrowing of the thrust at B 1 and the prolonged and deep
reaction which follows. Also the narrowing of the thrust at F 1 disclosed the lack of progress at
point number 2, which, as the price action shows, was the end of move. The reaction lows at
(points) number 12, 3 and 6 were significantly below the half-way point, indicating relative
weakness on those reactions. However, from that point on the reactions to (points) number 11,
13 and 15 held considerably above the half-way point, indicating relative strength.
There are a series of supply points between (points) number 7 and 16 and two half-way
points could be calculated from (point) number 6 to (point) number 7 or perhaps from (point)
number 6 to (point) number 16. This is an illustration of how sometimes judgment must be used
and how you may not have a clear cut situation with which to deal.
Thus far we have discussed how to analyze the trends aided by trend lines, thrust and
half-way points. How do you put it to practical use and how can you take a position in a stock
which already has moved out of the base and has established its trend? The following is one
procedure which has proven to be quite helpful and profitable to many students. In an up move,
first of all determine in fact (that) the stock is in a normal up trend. It should have good demand
on the up moves and a lack of supply on the reactions. Second, the stock should have plenty of
count for a much higher objective. Why? Because you do not want to be buying into a trend as
it is coming to an end. Third, calculate the exact half-way point and place a stop order below the
preceding support area. Then as the stock continues its normal reaction your buy order may be
executed. Reverse this process for a down trend.
Lets see how this works out in practice in this example. An analysis of the chart action
to (point) number 5 indicates that the stock is establishing a normal upward trend. It has good
demand on the rallies and a lack of supply on the reactions. In applying this technique of buying
around the half-way point on the corrections we calculate the half-way point on the move from
(point) number 3 to (point) number 5 which is at 371/4. We can place an order to buy around this
area just above the half-way point, perhaps 1/2, 3/4 or maybe a full point above the half-way
point and a stop order below (point) number 3. This means that very often we will have to ride
out a bit of correction as we are buying on the reaction and we rarely will buy at the exact low
point on the reaction. However, if it continues the normal reaction, it should dry up the supply
and resume the upward trend. This occurs at (point) number 6.
By placing an order to buy ahead of time, just above the half-way point on a reaction, the
order may not be executed. For example, after the rally from (point) 6 to (point) 7, as the stock
did not get down to the half-way point, the reaction at point 11 held above this level. Such an
order may not have been executed on the reactions to (point) number 11, (point) number 13 and
(point) number 15. If your order is not executed, you can cancel the order and simply look
elsewhere for other opportunities or evaluate your risk gain situation and possibly purchase the
stock on the next reaction. It is important to realize there are times when you may decide to ride
out a correction. Simply take the risk, follow it through and if it looks as though your stop order
may be executed, you may get out before it is reached. No market technique is perfect. It will
require considerable practice trading before you will be able to operate with any technique with
competence and confidence.
Part of your problem in buying on reactions in trends is going to be the problem of
judging when the supply is drying up or when it has dried up on the reaction. You may take the

14

speculative position in one of two ways. Either put the order in ahead of time as previously
discussed or secondly, wait until the stock has completed its reaction and then buy as demand is
coming in, such as after the reaction at (point) number 6, to buy at (point) number 17 as the stock
is moving up. Both methods have their good points. We have generally found that it is best to
buy as the stock is reacting as the risk is at a minimum. There are many false starts which can
fool you and can result in your buying at the top of a minor rally such as at (point) number 18.
The move from (point) 2 to (point) 19 is a perfectly normal down trend with supply on
the downside and a relative lack of demand on the rallies. We have drawn in line EE, the normal
use of trend lines, through points 2 and 20, with the support line FF parallel to it, drawn through
the bottom of the reaction at point number 21. At (point) 22 to (point) 23 this support line is
respected. The half-way points and the thrusts have been drawn. On the rally from (point) 21 to
(point) 24 the stock did not get near the half-way point between (point) number 2 and (point)
number 21. An order placed around the half-way point would not have been executed. However,
an order to sell short placed just below the half-way point from (point) 2 to (point) 25 would
have been executed at point 20 and would have resulted in rather large profits. This half-way
point is at 481/4. A stop order could have been place around 51 1/8 or 503/8, which would be just
above the prior resistance area at (point) number 26.
Remember that the longer the trend is in progress and the nearer you are to the end of the
trend, the more risk attends buying or selling short on the corrections around the half-way area.
Your greatest profit potential and your least risk will occur when the stocks are leaving the
accumulation or distribution areas or are very early in the trends. It is at this point where your
profit - risk ratio will be the greatest and you will be able to use liberal stops.
Chart (number) ten is of Amrep Corporation, on the American Stock Exchange. At
(point) 1 around the $11.00 a share level the stock began moving up and was still in the up trend
as of the end of this study. The purpose of this discussion is to analyze the trend and to discuss
how a speculative position could be taken in this up trend. We must make the assumption for
this purpose that there is a much larger count on the figure chart for a much higher possible
objective. Beginning at (point) 1, cover up the chart to the right of point number 1 with one
sheet of paper. Gradually move the paper to the right, uncovering the chart a few days or lines at
a time. Note on the move from (point) 1 to (point) 2 (that) there is an expansion of price spread
and volume on the rallies and a decrease in volume on the reactions along with a narrowing
spread. Following (point) 2 the stock begins to react with somewhat decreasing volume.
Our purpose in this illustration is to place an order to buy and have it executed as the
stock reacts. The exact half-way point of the rally from (point) 1 to (point) 2 is at $17.00 per
share. Suppose we decided to place an order to buy slightly above that half-way point, say 17 3/4.
We must next place our stop order. There are two choices. We could put a floating stop order a
couple or three points below the half-way point, say at 13 7/8 or we could place it underneath the
support area bracketed at (point) 3 at around 117/8. Which stop you will use will depend directly
on the amount of risk that you wish to take.
The stock continues to react to (point) 4 and the order is filled. At that point a bit of
volume comes in to stop the down move. It has had a lack of supply as shown by the narrow
price spread on the down side and the drying up of volume. The stock goes to (point) 5. Is there
good demand on this rally? Our answer has to be yes because of the wide price spread and the
increased volume on the rally. Now, as it begins to react from (point) 5, calculate the half-way
point from (point) 4 to (point) 5 This is $23.00. Place an order for a second position above it,
say at 233/4. Next, enter a stop order below (point) 4, perhaps at 16 7/8. It reacts with a lack of
supply, less price weakness, a narrowing spread on the downside and somewhat decreased
volume on the reaction to (point) 6. The buy order is filled.
Now, just because you have bought a stock does not mean (that) it is going to go up
immediately: Neither can you put it away and forget about it. You must watch it carefully. On
the move from (point) 6 to (point) 7 there is good demand and on the reaction to (point) 8 there is
a lack of supply and a gradual drying up, a decrease in the volume. Draw support line AA
through (points) 3 and 4, normal use of trend lines with the supply line BB drawn through (point)
2 parallel to AA. At (point) 8 the stock is oversold, however, look at the volume and the price
action as that line is broken. It is without pressure and thus it may develop a slower trend
in the same direction, but will probably not have a complete reversal of direction. This is a
judgment decision you must learn to make. We could take a position on the reaction following
(point) 7. However at (point) 5 and at (point) 7, it became quite overbought, indicating that it
was vulnerable to a reaction. Also, an analysis of the thrust indicates that at C 1 there was a very
pronounced shortening of the thrust. Supply is coming in at lower levels and there may be a

15

more pronounced reaction. Thus, calculate the half-way point and then watch it as it reacts. It is
usually better to be safe and go into the stock market when you are more certain than to take
unnecessary risks. The reaction at (point) 9 is with more pronounced price weakness compared
to the reaction following (points) 5 and 2, thus, we simply stay out of the situation for the
moment.
We may calculate the half-way point from (point) 4 to (point) 7 as being $24.00 per
share. This however is very close to the position already taken at (point) 6 and a new purchase
would be at about the same price level. It is usually best not to do this. If capital is available,
look for another opportunity. However, the reaction to (point) 8 is a normal correction within the
trend. It shows a drying up of supply. The move from (point) 8 to (point) 10, again has good
demand. Notice the increased volume on this rally. On the reaction following (point) 10, it
began to come down with decreasing volume and decreasing spread. We calculate the half-way
point as 277/8 and enter an order to buy, say at 281/2. Put a stop order below (point) 8 at 217/8 and
the buy order is executed on the way down to (point) 11. At (point) 12 there is some heavy
volume causing a decline, but it finally dries up at (point) 13 and the stock resumes the upward
trend. We now have three positions taken on the reactions to (points) 4, 6 and 11. We aim to sell
out as the stock is meeting important objectives, preferably on a buying climax. At (point) 14 the
stock goes through such a buying climax at an important objective area and we sell all or part of
the long positions. Let us assume that all is sold.
The stock begins to react from (point) 15, which is the secondary test of the buying
climax (which took place at point) 14. As it does so, there is a marked shrinkage of volume and
a lack of price weakness. It is entirely possible that the major upward trend is still intact. We
have seen heavy demand on the rally from (point) 13 to (point) 14 and a lack of heavy supply on
the subsequent reaction. The half-way point of the move from (point) 12 to (point) 14 is at 35 7/8.
One may place an order to buy just above that half-way point at 36 1/2 and a floating stop order
two, three or four points below it, say at 32 7/8 and (then) watch the stock as it reacts. The order to
buy is executed at (point) number 16. At (point) number 17 volume comes in to stop this minor
reaction. The secondary test at (point) 18 confirms that the selling has dried up. The stock
moves up to (point) 19 and begins to react. The half-way point is at 40 7/8 and an order is placed
at 411/2 with a stop underneath the support level at (point) 20, say at 36 7/8. There is much more
price weakness and volume than we would like to have on (this) reaction as our order is executed
at (point) 21. However, the stock eventually moves sideways and resumes the upward trend.
What could help us as we attempt to determine where it could resume the upward
trend. One thing is the reverse use of trend lines CC drawn through (points) 5 and 14,
where volume came in to stop the upward move. The support line DD (again reverse use) is
drawn parallel to CC through (points) 12 and 13. At (point) 22 the stock meets support at DD
and resumes the upward trend. On the move from (point) 22 to (point) 23 there is good demand
on the rally and then it begins to react with a lack of supply. Again calculate the half-way point
at 421/2, put in a buy order at 43, a stop order underneath (point) 22 at, say, 37 7/8 and let the order
be executed as the stock reacts. It is executed. Our stop order is not touched off and we now
have three positions taken on the reactions to (points) 17, 21 and 24. There is still a normal up
trend action with good demand on the rallies and a lack of supply on the reactions. The stock
moves from (point) 24 to (point) 25 and we could attempt to take a position again on the reaction
following (point) 25. The half-way point is at 471/4. Place and order to buy just above it, say at
473/4 with a stop order underneath (point) 24 at 407/8. On the reaction to (point) 26 this buy order
is executed. We now have an additional position and as of the end of this chart we have a profit
in all four of these positions. Now, why dont you figure out the profits accrued on each
speculative position taken.
On this tape we have dealt primarily with normal trend action and a normal correction
and reaction within the trend. However, there are two ways that a trend may be corrected. One
is a normal correction, which we have just discussed. The other is with an ordinary shakeout. As
the ordinary shakeout is very similar to a terminal shakeout, this will be discussed on the tape on
terminal shakeouts and springs.
Now for a word of caution. Be very careful of an action which is not normal, for instance
in an up trend, when the stock runs out of demand. This would be indicated by a narrowing of
the spread and a decreasing volume as it continues to move upward. Also be careful of
heavy sustained supply on the downside. This is not normal for a normal correction.
In a sustained down move be careful of good demand, wide spread and a long
sustained volume on a rally. The running out of supply in the down trend, evidenced by
decreasing volume and narrowing spread can leave it vulnerable for a rally. In taking a

16

speculative position, you should take the position as early in the trend as possible,
preferably as the trend is being established. It is especially important that you pyramid
with the trend. Do not take a second position when your first position shows you a
substantial loss.
These are the basic concepts of trends and one method of taking a position as a trend is
being established or as a trend is about to be resumed. It is not necessarily the only method of
establishing a market position in a trend. However, it has been tested by many, many students
and by the staff of the Stock Market Institute with excellent results. We suggest that before
applying this technique with any sizable portion of your capital that you do extensive practice
work with it.
This has been the Basic Lecture on Trends, Thrusts and Half-way Points. We have
illustrated some proven techniques in establishing a speculative position in harmony with the
trend and to close out that position as the trend is ending. Listen to this tape regularly. Study the
illustrations carefully. Then, practice; practice until you are competent and confident in your use
of this proven technique. Then begin to profit from the knowledge and skill you have developed.

17

BASIC LECTURE NUMBER THREE

ACCUMULATION

The subject of this Basic Lecture will be accumulation areas. The lecture will have
several objectives. They are 1) to describe the process of accumulation; 2) to indicate the
specific principles which are usually part of accumulation; 3) to tie these principles together into
an orderly, understandable, workable analysis and to indicate a number of methods of taking a
speculative position in these areas
The lecture will deal with major accumulation primarily, that is, accumulation for large
moves. The same process takes place on an intraday, minor, intermediate and major basis and
the same principles will come into operation regardless of the size of the area of accumulation.
The lecture will also deal with a number of examples of re-accumulation in stepping stone count
bases. Our primary concern (in) this lecture is to aid you in organizing your understanding of
accumulation and of the various principles which may appear in accumulation.
A number of principles mentioned (in) this lecture will be defined, but will not
necessarily be discussed in detail. Among these will be the principles of preliminary support,
selling climax, secondary test, the spring and terminal shakeout, preliminary supply and the
upthrust after distribution. We do use several analogies in our work to help explain market
phenomena. One of these analogies is the crossing of the creek story. We have found these to be
quite helpful to our students in their learning process, especially as it relates to the subject of
accumulation.
To begin, let us define accumulation. Accumulation refers to the process of
establishing an investment or speculative position by professional interests in anticipation
of an advance in price. This may be done in order to secure a large block of the security before
the market rises. The motive is a long term profit rather than a show of strength to support the
market or quick small trading profits. In the accumulation area, professional investors or
speculators are buying stock from people who for many reasons no longer have an interest. It
may be (that) the stock is very inactive. It may be that the stock has gone through a selling
climax and people have sold out because of fear. There are two main phenomena which cause
the public to panic. One is in the area of the selling climax and the other is through a terminal
shakeout or spring situation. The best illustration of this occurs in major base accumulation
areas where the public is panicked by a selling climax. This is followed by a long period of
waiting them out and then the stock goes through a terminal shakeout or spring. This is more
clearly understood through an analysis of charts so lets move right into several chart studies.
Our first two charts are illustrative drawings. They are, you might say, theoretical models
which we have found to be quite helpful to grasp the basic concepts. Every stock goes through a
cyclical process very similar to the chart number one. This cycle can be broken down into four
phases; 1) accumulation; 2) mark-up or a sustained upward move; 3) distribution and 4) markdown or a sustained downward move, with these four phases repeated until finally the stock goes
out of existence as a medium of trading. These four phases come in all shapes and sizes.
Now, please turn to chart (number) two. This chart has been marked off in several
sections, A, B, C, D (and) E. It is a sample drawing of a large accumulation area. The same
process occurs on a major, intermediate, minor and an intraday basis. In section A, there is a
down move which is stopped with panic selling. Certain principles usually come into operation
when panic selling occurs. They are 1) preliminary support; 2) selling climax; 3) automatic rally
and 4) a secondary test. On the secondary test there should be less selling then on the selling
climax, evidenced by the decreased price weakness, the narrowing of the spread and especially
by decreased volume. At that point the down move has been stopped. The stock may go through
redistribution, accumulation or perhaps a trading range in which nothing of importance is going
on: No large interests are attempting to move the stock or are preparing to move it.
On chart (number) two, the preliminary support occurred at (point) 1, the selling climax
at (point) 2, the automatic rally at (point) 3 and the secondary test at (point) 4. There may be
repeated secondary tests, depending upon the ability of the professionals to absorb the supply

18

and the continued existence of that supply. Thus there may be additional secondary tests such as
(at point) 5 and the more important later secondary test such as at (point) 7.
The stock then goes into a trading range such as in section B. Generally in the first part
of the trading range the price swings are rather wide. Then in the later part of the trading
range the price usually begins to narrow down: The stock gets dull. What happens to the
volume or the general level of trading? Well, usually in the early part of this range there is rather
high volume, sometimes rather erratic volume; both the price and volume action may be
somewhat erratic and very difficult to analyze. Then in the latter part, the closer you get to
the end of the trading range or leaving the trading range the volume begins to dry up. As
the floating supply or the flow of orders coming into the market begins to decrease, the general
level of the daily volume should decrease.
Now, lets take a few minutes to discuss trading ranges. We have drawn line AA, BB, CC
and DD to define the limits of the trading range. AA is drawn through the selling climax at
(point) 2 and is the first point at which we can begin to define the limits of the trading
range. As soon as (point) number 3 has been determined we can draw line BB and the
stock is entitled to fluctuate between those limits indefinitely until it attempts to come out
of that trading range. Line BB helps to show the penetration of point 3 (by the price action to
point) 6 and the failure to continue upward. We draw CC through (point) 6 to indicate the
widening of the limits of the trading range. Then at (point) 7 on the penetration of AA, we
draw a new line, DD. This line is eventually broken at (point) 8 and it helps to define the spring
or terminal shakeout and to call attention to it.
Whether you will draw these horizontal trend lines or not will largely depend on your
normal method of analysis, what you are trying to determine and the price and volume action in
the situation you are analyzing. These horizontal trend lines are helpful in drawing your
attention to the penetration or the failure to penetrate a support or supply area. We suggest you
do considerable experimenting and practicing with them.
Now, in section C the stock goes through a testing process. What we are showing is one
of two alternatives. Let us outline these two alternatives first. The stock could begin to come
out of the trading range on the upside with higher tops and bottoms. The second alternative is
that it could try to go through the bottom with a terminal shakeout. What we are showing on the
chart is the second alternative, the terminal shakeout or spring, which is probably the most
desirable situation analytically. Why? Because the purpose of a terminal shakeout is to clean
up the remaining supply, force all of the weak holders to sell and to create a completely
false impression as to the direction of the ultimate move. It is necessary to give a brief outline
of the spring and the terminal shakeout before moving forward with the analysis of the chart
examples.
A spring is a refinement of Mr. Wyckoffs concept of a terminal shakeout and grew out of
that concept. A spring is a penetration below a previous support area which enables one to
judge the quality and quantity of that supply on that penetration. The main difference
between the spring and the terminal shakeout is how far it penetrates into new low ground. Say
on a $50.00 stock, if the drive into new low ground is four or five points and then it turns around,
we would call that a terminal shakeout. However, if it reacted or penetrated three quarters of a
point or (one) point , a point or a point and a half, in other words a much shorter penetration, we
would call this a spring. It is primarily a matter of terminology. The basic understanding and the
basic concept is the same. As the stock goes into new low ground one of two things will happen.
Either overwhelming supply will come in or no supply. Overwhelming supply is a one spring. It
is evidenced by a wide open break in price action and very heavy volume. A three spring is with
no significant price weakness and low volume on the penetration into new low ground. There is
a very large area between these two extremes. We call these number two springs and a two
spring is very similar to a terminal shakeout in that both have supply and both must be tested by
a secondary test.
Following this terminal shakeout or spring situation at (point) 8, there is a rally to (point)
9, then a secondary test of the spring or terminal shakeout at (point) 10. At that point, should
supply be completely absorbed, the professionals know (that) they cannot move the stock
on the down side, that the buyers (demand) are in control of the situation and it is relatively
safe to move the stock up. The professionals may attempt to drive the stock out of the trading
range on the upside and begin establishing an upward trend or the mark-up phase. This process
occurs in section D. The stock moves up to (point) 11, which is a sign of strength which we label
SOS, backs off to (point) 12 which is an LPS, the last point of support, moves up to (point) 13

19

for a more important sign of strength and backs off to (point) 14, a more important LPS or last
point of support.
On this move up, we use the analogous term and say the stock has jumped the creek.
Now very briefly the creek story is an analogy similar to a parable, which relates to the flow of
supply across the top of the trading range. The creek itself is a wiggly, sqwiggly trend line
drawn free hand through the tops of the rallies within that trading range and on the move to
(point) 11 it jumps this wiggly trend line which we call a creek. This (particular) example
illustrates a minor creek. On the reaction to (point) 12, it backs up to the edge of this creek.
The move from (point) 12 to (point) 13 jumps what we will classify as a major creek, with
the reaction to (point) 14 being the back-up to the edge of that major creek. Now, when this is
accomplished, the stock is in a position to leave the trading range and work out the force of
accumulation which has been built up in this area; in other words to work out its figure chart
count. More on this subject will come later.
For now, lets look at what happens to the supply - demand relationship in this
accumulation area. In the area A, supply is in control; supply is stronger than demand and at the
bottom of that area around (points) 1 and 2 there is an attempt to absorb the supply and stop the
down move. In (areas) B and C demand and supply on a major basis are pretty much in
equilibrium. There is no decisive trend. However, the supply steadily becomes weaker and the
demand becomes stronger; the professionals are buying or absorbing the supply.
In section C, beginning with (points) 8 and 10 as the stock begins to establish its upward
trend and enters the mark-up phase, demand is consistently stronger than the supply on balance.
This supply and demand is created by people as they do their buying and selling. What happens
to the people in the accumulation area? In general weak holders are motivated to sell the stock,
which they bought earlier, to the professionals, who recognize the high profit, low risk level of
prices. The professionals, on balance, are buying and they continue buying the stock until they
eventually begin to sell out in the distribution area.
How do you take a speculative position in this type of base? First of all, we are teaching
stock market speculation aiming for a larger move or more simply stated the expectation of
making a profit on the price fluctuation of stocks listed on the various stock exchanges. We aim
to take our position in the right hand side of the trading range as the stock is going to leave the
trading range on the upside and work out the force of accumulation and the count built up in the
accumulation area. We want to take our position if the stock is establishing its upward trend.
Thus, on chart (number) two you can buy in the area of (points) 8 to 10 and at (points) 12 and 14.
You can continue to buy on any normal correction thereafter as discussed in Basic Lecture
Number Two.
Let us narrow this down to the specific principles. If you have a number three spring,
you can take a position on that number three spring immediately. If you have a number two
spring, you can take a position on the number two spring or wait to buy on the secondary test of
the number two spring. If the action can be identified as a terminal shakeout, you can buy on the
terminal shakeout itself or on the secondary test of the terminal shakeout. We have found that
establishing the first position on the test is usually better than taking it on the number two spring
or the terminal shakeout itself. The second position may be established on the back-up to the
edge of the creek, which is the last point of support. This way you are pyramiding with the
market instead of bucking the market. You do not take a second position until the first shows
you a profit.
For those few students who are going to be in and out traders, a person may buy on a
selling climax such as at point 2 and sell out on the automatic rally at (point) 3, scalping a few
points, then go short at (point) 3 and cover at (point) 4 on the secondary test, go long at (point) 4
or (point) 5 and sell out at (point) 6. Again, you can buy on the secondary test at (point) 7 and
sell out towards the top of the trading range. There will be few students who will be able to do
this well. We are not advocating this process. It essentially requires a tape readers technique and
a very fine understanding of the market. We suggest very strongly that you confine your buying
to this area over at (points) 8 to 10 and at (points) 12 to 14 on the LPS or the backup to the
creek, as the stock is establishing its upward trend. It is in these areas that the profit - risk ratio
can be greatest in your favor.
Due to the nature of this lecture, which is to cover the accumulating area, on a number of
the charts, we will only hit the highlights of the many principles without going into great detail.
There may be indications such as trend lines, half-way points etc., marked on the charts which
are simply not discussed. Remember, the purpose of this tape is to help you to organize your
understanding of the basic process of accumulation.

20

Now, please turn to chart number three. It is the Wyckoff Wave Index illustrating the
major area of accumulation which took place in the summer of 1966. We use the Wyckoff Wave
to indicate the position and the (probable) future trend of the general market. The Wyckoff Wave
itself moved from the 2800 level to (the) 2200 level, a major, sustained decline. The prices on
many individual stocks were badly smashed. The (Wyckoff) Wave did an excellent job of
indicating the turning points, the shift of control from supply to demand and was beautiful in
defining the turning points. Let us analyze it briefly.
From (point) 1 to (point) 2 there is a sustained downward move; a bear market. How did
the trend come to an end? At (point) number 3 there is preliminary support. Look at the volume
which came in at (point) 3 to stop it. It is a form of selling climax. It was immediately followed
by the selling climax at (point) 2, the automatic rally at (point) 3 1 and the secondary test at
(point) 4. These principles will be outlined in greater detail elsewhere. The Wave went into a
trading range with the upper limits being at (point) 31 and the lower limits at (point) 2. At (point)
5 it attempted to leave that trading range, failed to do so and then began to move down. At
(point) 6 the Wave went into new low ground for a number two spring This was followed by an
immediate rally and then the secondary test of the number two spring at (point) 7. (Point) 8 is
the crossing of the minor creek and a sign of strength and (point) 9 is the backup to the edge
of the creek, which is the last point of support. The jump across the creek is normally a sign
of strength and the backup to the edge of the creek is normally the LPS or last point of support.
Before listening to the discussion of any of the future charts in the Basic Lectures, we
urge you to analyze the charts yourself before listening to our discussion of them. You will gain
most from lectures if you will follow this procedure as it enables you to check your
understanding of the principles. You will see things that we will not discuss and we may perhaps
discuss some things which you will not identify: But this you will soon learn is an excellent way
to learn.
Chart number four is Boeing, 1962 - 63. It is a classic illustration of an accumulation
area. The stock moved down in early 1962 from $56.00 a share to 35 1/8 at (point) number 1,
which was the selling climax. The preliminary support was at (point) 2. Following the selling
climax at (point) 1, there was an automatic rally at (point) 3 and a secondary test at (point) 4. At
(point) 4 the stock had stopped the major down move. There was not sufficient supply to resume
the major down trend. It then went into a long trading range to (point) 5. Note that in the trading
range there was generally good demand on the rallies, as evidenced by an expanding price action
and expanding volume with a decreased volume and a general narrowing of the price spread on
the reactions. At (point) number 6 there is a number two spring, but the demand that came in
following it was not sufficient to enable the stock to leave the trading range on the upside. At
(point) 5a on the volume level there was a pronounced decrease in the general level of
trading; the stock was getting scarce. Lines AA and BB, the ordinary use of trend lines,
indicate the angle at which supply was coming in during this trading range. Support line CC is
drawn through (point) 1 to indicate the bottom of the trading range and helps to define the
penetration of the support on the terminal shakeout down to (point) 7. It also draws our attention
to the apex at (point) 5. Until the stock goes through the testing process we cannot be certain
that the trading range is accumulation and therefore we do not take a speculative position
for a large move until it has shown strong evidence of leaving the range permanently.
Boeing continued in the trading range until it went through the previous supports for a
terminal shakeout down to (point) 7. Following (point) 7, there was a rally to (point) 8 and then
a secondary test of the terminal shakeout at (point) 9. On the reaction to (point) 9, there was less
price weakness and less volume compared to the move from (point) 5 to (point) 7. This
indicated that the supply which was present on the move down to (point) 7 was no longer
present. The move up to (point) 10 is a sign of strength and a crossing of the minor creek and
the reaction down to (point) 11 is the last point of support and also the back up to the edge of
the minor creek. The move from (point) 11 to (point) 12 had an expanding price action and an
increased volume indicating good demand and the reaction to (point) 13 was with lack of supply.
(Point) 12 was a major sign of strength and (point) 13 the major last point of support.
Now, please turn to chart five, the one point figure chart of Boeing. We have drawn the
numbers for the major indications on it and (have) indicated a logical count from the major last
point of support, (point 13) and (also point 11). The stock moved from 30 1/2 at (point) 7 to over
100, reacted, went through re-accumulation and finally reached $182.00 per share in 1966.
Now, where were the best places at which to establish a speculative position. They are on
the terminal shakeout at (point) 7 and the secondary test at (point) 9. Additionally, at (point) 11
and also a later position in the area from (point) 14 to (point) 13. In order to take a position at

21

the right hand side of the trading range as the area of accumulation is being completed and as the
stock is entering the mark-up phase, the following essential conditions must be present: 1) It (the
stock) must have a substantial figure chart count. 2) It must have some form of a sign of
strength. 3) It must have a last point of support. Why is it necessary to have a large count?
Because we must always have the profit - risk ratio in our favor. If the figure chart shows that
the most count you can have is 4 points and the stop order is three points below the purchase
price, the risk is approximately 1 -1: These are not good profit - risk ratios. It should be a
minimum of 3 - 1. However, should the figure chart indicate a possible move of twenty points
with a three point stop, adding approximately one point for commissions gives a cost of four
points if one is stopped out. The profit - risk ratio is then 5 - 1. This is excellent. We are at least
in the ballpark.
Now, why must there be a sign of strength? Simply because a stock can continue to
move sideways in the trading range indefinitely until it has a sign of weakness or a sign of
strength. Why must there be a last point of support? Simply to confirm that the sign of strength
is in fact a sign of strength. Let us define the sign of strength. The sign of strength is an action
which shows that demand is in control. The sign of strength should have good demand on the
up move; a wide spread (and) increasing volume on the upside. The last point of support
should have a lack of supply, indicated by a relative narrowing of the spread and a decrease
in volume. The comparison is between the up move, constituting the SOS, or sign of strength,
and the reaction following it, the LPS or last point of support. What if the stock has a possible
sign of strength indicated by a widening spread and an increasing volume on the move up and is
then followed by good supply on the possible LPS, indicated by wide spread and high volume on
the reaction? This cancels the probability of the first action being a sign of strength and the stock
will probably continue in the trading range for additional testing.
Lets get back to charts. Chart number six is Control Data, 1965 and 1966. The stock
had gone through major distribution in the area from $55.00 to $65.00 and then in June 1965
began a major decline from (point) 1 down to (point) 2 which is the preliminary support and
finally to the selling climax at (point) 3. (Point) 4 is the automatic rally and (point) 5 is a
secondary test. Compare the volume at (point) 3 and (point) 5. At (point) 5 the supply was
much less than at (point) 3. It then began a long trading range with some very wide price
swings, a trading range that consisted of three large phases; from (point) 5 to (point) 6; from
(point) 7 to (point) 8 and from (point) 9 to (point) 10. There was, in general, good demand on
the rallies and a drying up of volume, a comparative lack of supply on the reaction compared to
the preceding up moves, however, it was not until the area of (point) 9 to (point) 11 that the
general level of trading, comparatively, as shown by the volume, began to dry up or
decrease substantially. There was one attempt to leave this trading range at (point) 12 and then
the stock went through a terminal shakeout to (point) 13, the rally to (point) 14 and a secondary
test of the terminal shakeout at (point) 15. Look at the figure chart count on chart number seven.
The possible count is massive. The move from (point) 15 to (point) 16 is a minor sign of
strength and the crossing of the creek, followed by a last point of support at (point) 10, which
is the backup to the edge of the creek. (Point) 17 is the crossing of the major creek and sign
of strength and (point) 18 the backup to the edge of that major creek, the last point of support.
Supply line AA, normal use of trend lines, is the angle that the supply came in during this trading
range. (Lines) BB and CC are horizontal support lines which delineated the penetration at
(point) 7 and then the final terminal shakeout at (point) 13.
Now where could a speculative position be taken (in) this situation for the major move?
The first position could have been established at the terminal shakeout at (point) 13 or the
secondary test at (point) 15. Another position could have been taken on the reaction to (point) 10
and another one on the reaction to the major LPS at (point) 18. These positions would have
meant an average cost of around $30.00 per share. In June 1968 the stock reached $174.00 per
share.
The large counts have been marked on the figure chart of Control Data, on chart seven.
Is it a realistic expectation that you could have caught all of the move from 30 to 174? The
answer is this: If the base area of accumulation is diagnosable so that you can determine the
supply - demand relationships and you have a logical place to take a position and the upward
trend is normal, you can play for all or a very substantial portion of the major up move. This
move on Control Data was diagnosable; the major indications were there; there were logical
places at which to take a position and the up trend was normal. A large part of our problem is
that sometimes we simply do not believe the potential count in the accumulation area. At other
times we get scared out prematurely during the mark-up phase. You do not have to play for the

22

entire base count. You can however attempt to get the next intermediate drive up and then sell
out before a substantial reaction occurs. Where you will sell out in the up trend will largely
depend upon the purpose in taking the speculative position, the amount of risk you are willing to
assume and the estimate of the depth and likelihood of possible reactions.
Now for re-accumulation. What is re-accumulation and how can you identify it and take
a speculative position in the re-accumulation area? Re-accumulation takes place within a sizable
upward trend when a stock goes into a trading range and in the process builds a count for a
higher objective, usually confirming a prior base count. It goes into a resting stage as the
professionals continue to absorb the supply. The basic process of re-accumulation is very similar
to that of chart number two with one major variation. Usually it will have been preceded by an
up trend instead of a down trend as in area A.
Chart number eight of Beckman Instruments, of 1969, contains many of the same
indications and (these) are marked on both the vertical and the figure chart. The action from
(point) 3 to (point) 4 is the area of original accumulation. (Point) 5 is a terminal shakeout and
the move to (point) 6 is a sign of strength, followed by the last point of support at (point) 4. The
stock then moved up to (point) 7, went through a minor distribution with a sign of weakness
shown on the chart as SOW at the 51 1/2 level and the last point of supply or LPSY along the 54
line. The down count was 7 points. With this as background let us examine together the reaccumulation area from (point) 1 to (point) 2.
The minor selling climax at (point) 1 was in the vicinity of the major 1/2 correction. Note
that the reaction from (point) 7 to (point) 1 had less volume then on the move from (point)
5 to (point) 7. It had a price climax at (point) 1, a secondary test at (point) 8, a minor spring at
(point) 9 with a secondary test at (point) 10. It then began to have higher tops and higher
bottoms rather than a terminal shakeout. It did however have a number 3 spring at (point)
number 2 on the penetration of (point) 11. There was no supply. The move from (point) 2 to
(point) 12 is a minor sign of strength and the reaction to (point) 13 is an LPS, the last point of
support. The larger figure chart counts have been marked.
Now, how do you take a speculative position in this situation? One can be taken at
(point) 9 or 10 on the first minor spring. A second logical position can be taken at (point) 2, (the)
number three spring and a third position on the reaction to around (point) 13. It should be noted
that the reaction to (point) 13 was very brief and it would be difficult to get a position there.
However, that is the stock market; it is seldom easy. Be very wary when it is.
Chart number nine of Mack Truck has a stepping stone confirming count, an area of reaccumulation which is a bit different than Beckman... in that it did not react down to the major
(half-way) point, but simply stopped going up, moved sideways, went through re-accumulation
and then continued the major upward trend. The stock moved up from $28.00 a share to 48 3/8 at
(point) number 1, which is a buying climax, stopping the up move, at least for awhile. (Point)
number 2 is the automatic reaction, (point) 3, the secondary test, indicating a lack of demand.
Volume was much less than at (point) 1. However, the reaction down to (point) 4 did not have a
great deal of supply on it and was followed immediately by a good rally to (point) 5, (then)
another reaction to (point) 6, which, (again), did not have a great deal of volume on it. The rally
to (point) 7 had good demand evidenced by the spread and especially the volume; they (both)
expanded. The reaction down to (point) 8 had a lack of supply. Examine very carefully the
sharp drop off in volume. The spread on the downside was (relatively) narrow. It did not
have price weakness and then the rally to (point) 9 was reasonably good with a low volume
reaction following it to (point) 10. Note, it has higher supports. Then, the move from (point)
10 to (point) 11 is on increased, but still relatively light volume compared to (points) 1, 3, 5 and
7. It is buoyant. It is a sign of strength and a crossing of the creek all in one action. The
reaction to (point) 12 is the last point of support and a backup to the edge of the creek.
Where could a speculative position be taken? Preferably on the lower edge of the trading
range on the reaction to (point ) 8 as it approached (points) 4 and 6 and especially around (point)
10. The second position should be taken on the reaction to the LPS at (point) 12. A stop order
should be placed at around 417/8, below the previous support at (points) 4, 6, 8 and 10. Assuming
that a buying order is executed at 47, the risk is approximately 6 points should the stop order be
caught. The potential count is 28 points which means a profit - risk ratio greater than 4 - 1. The
count is marked on the figure chart, chart ten. It should be pointed out that should the stock
continue to react and threaten to take out the stop order, as students, we should attempt to
get out before that stop order is executed. These are very, very favorable odds and an
excellent risk. The stock resumed its upward trend and within about three months reached
$72.00 per share.

23

Do not expect the charts of the stocks or indices to follow the exact pattern outlined in the
theoretical model of chart two rigidly. The basic elements, however, usually will be present in
each area of the accumulation. The essential elements are, again, that you have a large count,
a sign of strength and an LPS.
A stock may come down and not go through panicky liquidation on a selling climax with
preliminary support, selling climax, automatic rally and secondary test. It may simply saucer out
without going through massive liquidation. Should it do so, however, the people who have
bought at higher prices have not been forced out of the stock and therefore, usually the stock will
stay in the trading range longer. And the longer it stays in this trading range, the more likely
it is to be subjected to a shakeout or perhaps repeated shakeouts. Excellent examples of this
type of situation are Brunswick and High Voltage Engineering. Due to their length, these
charts will not be enclosed with the charts accompanying this lecture.
For a brief description, Brunswick went through major distribution in early 1961 with a
high of 747/8. By the end of December 1963, it had reached a new low of 10 1/8. It never really
climaxed on the down side. There were repeated outbreaks of liquidation, but it never went
through anything approaching a classical selling climax to stop this down move. As a result, the
stock, in early 1969, five years later was still around $20.00 a share. It had gone through a major
shakeout at around $6.00 a share in 1966.
High Voltage Engineering went through distribution in 1963 with a high of $55.00 a
share. Eventually it reached $15.00 in 1965 without having gone through a good selling climax.
Since then the stock has fluctuated as high as the low $40s with early 1969 prices around the 30
area. This is much better than a price of $15.00. However, that is nowhere near the old high of
$55.00, reflecting the lack of strong major accumulation. Just because a stock does go through a
selling climax, a near classic selling climax, does not mean that the trading range is
accumulation. It may be accumulation, re-distribution or nothing. However, the presence of the
selling climax does strengthen the total situation.
Chart number eleven of Bendix Corporation in early 1968 had a sizable accumulation
area with some variations from the pattern outlined in chart two. The main variations are that the
preliminary support is not apparent on the vertical line chart and that the terminal shakeout does
not carry the stock into new low ground, below the selling climax and secondary test. Briefly,
the stock moved down from (point) 1 to (point) 2. The selling climax is at (point) 2, the
automatic rally at (point) 3, the secondary test at (point) 4. Theres a complete lack of liquidation
at (point) 5.
Now, where is the preliminary support and how can you identify it? It is not apparent on
the drive down to (point) 2 from an examination of the vertical line chart. We must identify it
from an examination of the figure chart. At (point) 6 on the figure chart, chart twelve, the stock
reached $37.00 per share and then rallied 3 points to $40.00. This is the preliminary support.
To continue with the vertical line chart at (point) 5, the supply has dried up on the
downside and the stock begins a rather wide swinging trading range. In general, there is good
demand on the rallies and there is a tendency to dry up the volume toward the bottom of the
reactions to (points) 8, 10 and 12. At (point) 14 there is wide spread and price weakness which
precipitates the shakeout down to (point) 15. At (point) 15 there is no important dumping of
stock: No-one panics. It is however a terminal shakeout. The rally to (point) 16 is with good
demand and the one day reaction to (point) 17 is on light volume. (Point) 16 is a minor sign of
strength and (point) 17 is a minor LPS. Now, what do we have? We have good stopping action
from (point) 2 to (point) 5, a sizable trading range and then a terminal shakeout with a sign of
strength and an LPS. An examination of the figure chart shows a potential count of 17 points
Where is it the most advantageous to buy and establish a speculative position? The first
purchase can be made at (point) 15 between $37.00 and $36.00 a share as it (the stock) broke
below (points) 10 and 8. The second position may be taken on the reaction on the reaction to
(point) 17 with a stop at, say, 33 7/8. The profit - risk ratio is greatly favorable. The move from
(point) 17 to (point) 18 is a jumping of the major creek and is a possible more important sign
of strength. The reaction to (point) 19 is a backup to that creek and a possible more important
last point of support. It is the point at which we would take a higher count should one be
necessary. It is also a point at which an additional purchase could be made.
Now, lets hit the highlights only of the next three charts. They cover the same market
period. Chart thirteen is Allied Chemical of 1962. The stock was in a down trend from (point)
1 until the selling climax at (point) 2. Preliminary support came in at (point) 3 to stop the down
move temporarily. The automatic rally and secondary test occurred at (points) 4 and 5
respectively. Note that the major supply line AA was penetrated several times and then finally

24

decisively broken at (point) 4. The stock moved sideways in (a) rather tight trading range from
(point) 5 to (point) 6. It then drove into new low ground for a terminal shakeout or number two
spring at (point) 7 and the secondary test at (point) 9. The move from (point) 9 to (point) 10 is a
sign of strength and a crossing of the creek. The reaction to (point) 11 is a last point of support
and the back-up to the edge of the creek.
American Cyanamid of 1962, chart fourteen, has another interesting variation. There is
no preliminary support apparent on the vertical line chart. The selling climax occurred at (point)
1, automatic rally at (point) 2 and the secondary test at (point) 3. The stock went into a trading
range from (point) 3 to (point) 4 and then broke through the supports and shook out of the
trading range on the move to (point) 5. Due to the short depth of penetration below (point) 6, we
would call this a number two spring with a secondary test at (point) 7. (Point) 8 was the
jumping of the major creek and the sign of strength. The backup (to the edge of the creek)
and the more important LPS is at (point) 9.
Jones Laughlin, chart fifteen, shows another very interesting variation. Beginning at
(point) number 1 the stock completes re-distribution and resumes a major downtrend. At (point)
2 preliminary support comes in followed by a selling climax at (point) 3, automatic rally at
(point) 4 and the secondary test at (point) 5. The move to (point) 6 decisively broke the supply
line CC, normal use of trend lines. The trading range from (point) 7 to (point) 8 was
considerably above the secondary test at (point) 5 and then the stock broke for a terminal
shakeout down to (point) 9 with a rally at (point) 10 and a secondary test with a complete drying
up of supply at (point) 11. (Point) 12 is a crossing of the minor creek and a sign of strength
and (point) 13 is the backup to the edge of the creek and an LPS. The move to (point) 14 is the
crossing of the major creek and a more important sign of strength and the reaction to the area
at (point) 15 is the more important last point of support and the backing up to the edge of the
major creek. Note the good demand on the move from (point) 9 to (point) 14 and the lack of
supply on the reaction down to (point) 15.
Where could speculative positions be taken on the stock? First of all in the area around
16 and the area of the terminal shakeout, preferably on the reaction down to (point) 11, which is
the secondary test of the terminal shakeout. A second position (could be taken) on the reaction to
(point) 13 and a third position in the area of (point) 15. Again, this is pyramiding with the trend
as it develops.
Let us now review briefly some of the main concepts in this lecture on accumulation. We
have described the process of accumulation, how it fits into the cyclical process and discussed
the specific Wyckoff principles which are often part of accumulation. We have described the
supply - demand relationship and what happens to the people operating in the market in an area
of accumulation. In taking a speculative position by buying in the area of accumulation, the aim
is to diagnose the area as accumulation and then attempt to take a position as the stock is leaving
the trading range at the most advantageous point; to pyramid with the market and to attempt to
obtain a larger move than would be provided by short in and out trading. This, like all stock
market operations, requires considerable experience and practice. Do not in any manner attempt
to short circuit or limit the practice trading which is necessary to sharpen your skills. When you
do have questions and problems discuss them with us. Our purpose is always to help you to
protect your capital and to make more profits; safer, surer, faster profits.

BASIC LECTURE NUMBER FOUR

CLIMAXES AND SECONDARY TESTS
The main subjects of this lecture are climaxes and secondary tests. The purpose of this
lecture is to discuss with you what climaxes and secondary tests are, what they do and how you
can use them in speculative stock market operations. Before going further, let us define a
climax. Our dictionary defines climax as the peak, the extreme or the end of something and as
the point of highest dramatic tension or a major turning point in the action. Some synonyms of
climax are, top, pinnacle, height, maximum, consummation, culmination or turn of the tide. This
is our understanding of the climax because this is exactly what happens on a climax in the stock
market. What does a climax do? A climax stops a trend either temporarily or permanently,
depending on the subsequent action.

25

A climax is preceded by some sort of a trend. Now, what is a trend? A trend is the
tendency for the price to move in a specific direction: It is the line of least resistance. The trend
may be a major, minor, intermediate or intraday trend and it may be an upward trend or a
downward trend. The type or violence of (the) climax generally should be in keeping with the
type or speed of the trend. In other words, you would expect a much greater widening of spread
and heavier volume on a climax stopping a swift moving major trend than on one stopping a
leisurely moving minor trend. Actually, any trend may be stopped by a climax or by running out
of the force which is creating the trend. Now let us deal with the latter for a moment.
Any down trend is caused by selling being dominant over the buying; supply greater than
demand and that selling may decrease and decrease until it has exhausted itself on the downside:
The stock saucers out and begins to move sidewise without any ability to continue the trend.
Demand has the opportunity then to come in and create some sort of an up trend. This
exhaustion of the selling on the down move would be indicated by a narrowing of spread and a
decreasing of volume as the stock moved downward. An example of this is on Addressograph
Multigraph, chart one at the area marked 1. This is not a selling climax. It is demand equaling
and then overcoming supply. Similarly, an up trend can end by running out of the basic
underlying demand. This would be indicated by a narrowing spread and a decreased volume.
Examples of these are on Kennicott, chart two at (points) 1 and 2. Now, these are not buying
climaxes. Such a condition leaves the stock vulnerable to supply coming in and creating some
sort of down move. When a trend is stopped in this manner, it is often only temporary. The
stock may have a correction and then resume the trend which has been in progress. This is due
to the very strong tendency of all trends to go to excess and climax. You will often see this type
of action midway in a trend.
Now, lets remember (that) all stock market action is caused by people, the people who
are operating in the market. They do not always act rationally or logically. People, even the
professionals are strongly influenced by the emotions of fear and greed. This is not a nasty,
vulgar use of these terms. This is a very delicate, constructive, but accurate use of these
emotions. Training, analysis and experience can help in controlling the effect of these emotions,
but the best of the professionals have their problems in operating logically at critical times and
on the basis of a cold, hard analysis of the situation.
Alright, lets deal with down trends and look at what happens to the people when a stock
or index goes down. Please turn to chart number three. This is the major down move of the
Wyckoff Wave in 1966. What happens to the untrained person who buys when the news is good,
for example at (point) number 1. The Wave goes to (point) number 2 and hes happy; he has a
nice profit: And then it comes smashing down to (point) 3 and he has a minor loss. He begins to
get a little worried, but not enough really to get out. As the market zips up to (point) number 4,
hes happy again, but it hesitates there for a few days and then comes down to (point) number 5.
Its a little bit like being on a roller coaster; hes had a lot of action and its gone nowhere; but the
news is good, maybe with a little uncertainty, but the country is in good shape, the market writers
are giving good reports on companies and the country, making most people happy. Most of us
have experienced this happening. It (the stock) rallies somewhat feebly to (point) number 6 and
he says, if it gives him a decent profit, hes going to get out: But, what happens? It drops right
down to (point) number 7 where he may be able to get out even: But if he pulls out in here, hes
lost two months of action now and may not be able to cover his commissions, so he decides to
wait. It goes right down to (point) number 8 and hes beginning to get a little bit sick: He has a
little loss. Actually at this point he may begin to rationalize that there is no reason for it to be
down there. The news is still good (and usually is) and if it gets up to the point where he can get
out even, he will. So, it rallies up to the previous support area at (point) 9 and then heads for the
cellar; it doesnt give him a chance to get out even. As a matter of fact, it may not give anything
more than a brief rally. This is usually the way the market acts in a sustained down move or a
bear market; it doesnt give you a chance to get out. If youre wrong in the market, do not expect
much sympathy: Certainly, do not expect anyone to give you a chance to get your money back, it
just doesnt happen.
The price goes on down to (point) 10 and by that time he is beginning to wonder what is
really wrong. He has a substantial loss; he cant possibly get out. Besides the news is beginning
now, finally, to turn somewhat mixed and he knows for sure (that) if it rallies, a half decent rally
of just a few points, hes going to get out. So, it (rallies) up to (point) 11 and hope springs
eternal. It got above (point) 8. It was a decent rally and he thinks, Ill just hang on and see if I
can squeeze a few more points out; I hate to take this kind of a loss. So, down it goes to (point)
12 and he is sick. He goes home at night, he cant eat right, he cant sleep right, he cant be part

26

of the family, hes just miserable: But after some rationalization, he finally decides hell stick it
out. This is how commitments that start out as short term, quick trades, become long term
investments. When a stock or a market goes through distribution for a major down move it often
is many, many years before it gets back up to that same price and sometimes it never does.
So, the stock begins to plummet and the bad new begins to come out. Earnings are down,
orders for new equipment are off, orders are canceled. There is extreme uncertainty. There may
be a money crisis or any one of a thousand different rationalizations which the newspaper
financial reporters can use for a plausible explanation for what is going on. And the Wave drops
right (down) to (point) 14 and he is scared and he says now, if it rallies at all, Im going to get
out. It rallies so briefly to (point) 15, that he doesnt have a chance to get out; he cant move or
think that fast and then it comes crunching down to (point) 16: The bottom has dropped out of
the market; prices are being smashed and volume is coming in and the worst news finally hits
and at (point) 16 he simply sells his stock for whatever he gets for it. Hes so relieved to get out
of it that he just dumps it and this creates the selling that takes place on the selling climax. This
is the place where the momentum builds into a climax that ends the downward move. And all of
us, the trained and the untrained can be forced into a similar situation unless we are careful and
protect ourselves. We must learn to govern our actions, acting not on emotions of fear, but on
principles of knowledge. Incidentally, the selling that has taken place on the move down from
(point) 2 to (point) 16 does not mean that every single share of stock in the market has been sold.
What it means is that during this move the selling was dominant over the buying on balance; that
the selling drives were stronger than the rallies until finally it washed itself out in a panicky
situation.
Now, what about the professionals? Where did the buying come from? Well, some of the
professionals who anticipate lower prices simply go short in the higher areas; they take short
positions and when they buy on the selling climax, they have double buying power. They have
to cover their short positions and then go long should they wish to do so. This means they buy
twice. Other professionals simply get out of all or part of their positions at higher levels and stay
on the sidelines until they see that the down trend is coming to an end. Then they step in and
buy. These are the two largest sources of the buying power that comes in on a selling climax.
The buying comes from informed, trained professional operators who buy either to support the
market temporarily or begin to establish very substantial positions by buying steadily over the
next number of weeks or months.
Now, look at the move from (point) 2 to (point) 16. Stand away from the chart. The
down drives are stronger than the rallies. The moves down are generally with widening spread
and the volume remains high or increases. The rallies have a tendency toward decreasing spread
and volume compared to the moves down. Finally, in the area of the selling climax there is an
extreme widening of spread and high volume. This action may occur over one day or it may be
over several days, but the selling climax has a widening spread and increasing volume. If it
does not have this it is not a selling climax. We know that the down trend does not stop all at
once. There are often a number of attempts to stop the down move before the last one is
successful. It is very similar to driving your car and then trying to stop. What would happen if
you were going 70 mph in your car and you slammed on the brakes? Youd skid all over the
place and quite possibly have a wreck. If youre driving a semi-trailer it would undoubtedly
jack-knife for a major wreck. So instead of slamming your brakes on all at once, you would put
on your brakes, release them, put on your brakes, release them, pump the brakes several times
and gradually slow down the car. This is very often what happens in the market where the
professionals try to stop the move temporarily and it rallies. If their purpose is to simply give the
stock a bit of temporary support, they will sell out on the rally. However, if their purpose is to
begin accumulation on this price level, they will hold that stock and not throw it on the market
immediately and add to their positions as the stock continues to go down. They buy all through
the base. This stopping and holding temporarily creates the principle of preliminary support.
Preliminary support is an action in which important demand comes in to stop the down move,
even temporarily. The significance of the preliminary support is that if the entire base is
accumulation, the accumulation may have begun at preliminary support and continued
throughout the base. Preliminary support and the last point of support often occur at the same
price level. The preliminary support is sometimes obscured due to the violence of the price
action and sometimes it is virtually missing, but usually on accumulation, some form of
preliminary support is present.
Of the ways in which a down trend can come to an end, probably the most desirable is
where the following sequence of events or sequence of principles is present: 1) Preliminary

27

support; 2) Selling climax; 3) Automatic rally; 4) Secondary test. To repeat that, the most
desirable situation is where all four of these principles are clearly present, clearly defined and in
this sequence, preliminary support, selling climax, automatic rally and the secondary test. These
principles will not always come into operation, but when they do, you know that the down trend
is stopped. You should learn and memorize this sequence.
Following the selling climax, one of two things may happen, an automatic rally or a
lateral move. This is then followed again by one of two things, either a secondary test of the
selling climax or a continuation of the down move. To understand this we must go back to what
happens on the selling climax. The selling climax is caused by panicky liquidation, panicky
selling. The price is driven down too far and this creates a vacuum. And as soon as the down
move has been stopped, the stock should begin to rally. We call this the automatic rally because
it occurs automatically. That rally may be weak or it may be strong: It may be, however, so weak
and the supply press on the market so strongly, that instead of being able to rally well, the price
simply moves sideways for a couple of days or perhaps for as much as a couple of weeks in a
lateral move and then continues the down trend. If there is a simple lateral move, the stock is
far more likely to continue the down trend then if there is a good rally. On chart three, the
automatic rally is the rally to (point) 17. Following the automatic rally or the lateral move, the
stock will come down to test the climax lows. That test may hold above, at the same level or
below the climax low. It is not particularly important where the price holds on the secondary
test. It is very important how it holds. The important thing is whether supply is still present on
the secondary test, whether the panicky selling is still going on. If it is and is persistent and
increasing, the stock may resume the down trend. The indication that it is likely to resume the
down trend would be given by a test in which there is a widening of spread and (an) increase in
volume compared to that on the selling climax. Should that occur, you would expect the stock to
continue on down until finally the selling had run its course. However, if the selling was much
less intense and persistent on the secondary test than on the selling climax, the stock would not
be able to resume the down trend and we would have a secondary test. Mr. Wyckoff called this a
secondary reaction, we now call it a secondary test. This secondary test is indicated by
decreased price spread and decreased volume compared to that of the selling climax. An
example of this is at (point) 18 on chart three. The move from (point) 17 to (point) 18 is less
volatile and has less volume than on the move from (point) 15 to (point) 16, indicating that the
stock had stopped going down and the heavy selling at (point) 16 is no longer present. Should
there be some heavy selling on the secondary test, but not sufficient to resume the down trend, it
would still be a secondary test. However, it would be what is referred to as a secondary test with
volume and we would expect further secondary tests until there is a secondary test without
significant volume. The secondary test without significant volume indicates that the selling
which was present on the selling climax and on the prior secondary test is no longer present and
the liquidation, the panicky selling, has now stopped and the down trend has stopped.
Another way to think of this principle is to recognize (that) the purpose of the secondary
test is to test the selling climax. In the process, it reveals how much supply is still present on the
attempt to continue the last prevailing trend. An example of this is on chart four of Collins
Radio, 1966. The selling climax was at (point) 1, the automatic rally at (point) 2, and the first
secondary test was at (point) 3. This secondary test, however, still had heavy volume.
Liquidation, panicky selling, was still present, but not greater than on the selling climax. At
(point) 3 it could not continue the down trend and it rallied to (point) 4. It eventually drifted
down to (point) 5 with the narrowing spread and a steadily decreasing volume, indicating a lack
of heavy selling. (Point) 5 is a secondary test without volume. We have developed no distinctive
terminology for a secondary test with volume and a secondary test which occurs without volume
as none really is needed. When we refer to a secondary test we mean a secondary test without
liquidation unless otherwise specified.
All the selling climax and the secondary test show is that the down move has been
stopped. What can follow the secondary test? Usually what follows is some form of a trading
range or a cause building process. There is no cause to go down. There is no extensive cause to
go up and therefore the stock usually moves up and down in a trading range. That trading range
may be accumulation, distribution or an area where no one is accumulating or distributing: And
the trading range may be re-distribution. Occasionally in minor accumulation and much more
rarely in intermediate accumulation, the secondary test is followed by an immediate sign of
strength and a last point of support. In major accumulation, however, due to the necessity of
building a larger count, the stock normally goes into a more extensive trading range before
having a sign of strength and the last point of support. On chart three, following the secondary

28

test at (point) 18, the stock moved in a wide swinging trading range for about a month. The sign
of strength is the move from (point) 19 to (point) 20 and the last point of support is the reaction
down to (point) 21. On chart four, the sign of strength was the move from (point) 5 to (point) 6
and the last point of support was the reaction at (point) 7. This sign of strength followed the
secondary test immediately. However, the stock had already built an extensive count from
(point) 1 to (point) 5.
Turn now to chart five, Mohawk Data Sciences. The stock established a major down
trend following (point) 1, which was finally stopped by the selling climax at (point) 2. Look at
the price action and the volume at (point) 2. The volume is extremely heavy and the price spread
is extremely wide, almost fourteen points in one day, on what is, roughly, a $70.00 stock at that
point. This is panic selling with a smashing of prices. It is a potential selling climax. Now, why
call it a potential selling climax? Any climax must always be regarded as a potential or a
possible selling climax until it is proven by the secondary test. Why? Because it is not
certain that the selling has been stopped until it is proven by the secondary test. (Point) 2 must
be regarded as a potential selling climax on that day because it could have continued for many
more points on the downside (on) the next day and the next day and the next day, until, finally,
the selling was overcome by a superior force of demand, or until the selling exhausted itself.
Look at (point) 3 on this chart. On that day the spread was wide, the volume was
extremely heavy and it could have been regarded as a possible selling climax to be proven or
disproven by the subsequent action. Of course, if we had an intraday break down, we could find
that there was in fact a minor selling climax at (point) 3, a minor automatic rally at (point) 4 and
the secondary test occurred at (point) 5. However, looking at it from the standpoint of the larger
move from (point) 1 to (point) 2, (point) number 3 was not a selling climax. The volume and
more liquidation came in and the price continued to move down
Now, lets go back to (point) 2, chart number five. Following (point) 2, there was the
automatic rally to (point) 6 and a secondary test at (point) 7. That secondary test, however, still
had very heavy volume on it. It was followed by a rally to (point) 8 and then another secondary
test at (point) 9. Volume was much less and the spread was narrow compared to (point) 2. The
selling on the downside is steadily decreasing compared to that which took place at (point) 2.
There is another rally to (point) 10 and then a secondary test at (point) 11. Look at the volume!
The volume, the selling, the liquidation, the dumping of the stock, had finally dried up on the
downside. This means (that) the stock has probably stopped going down for the time being. It
may go into a trading range which could be accumulation, re-distribution or nothing. It could
simply rally and exhaust the count and the force of demand built up in this area from (point) 2 to
(point) 11 by working out the count and then resume the down trend; or it could rally and then go
through re-distribution again. All you know on the secondary test at (point) 11 is (that) this stock
has stopped going down at this time. What it will do later will depend largely on the action
which follows (point) 11.
Now, where is the preliminary support? Look at the move from (point) 12 to (point) 13.
It (the stock) rallied about eleven point in two days and volume came in on the upside; good
demand came in in this area and this is the possible preliminary support.
Now why is it necessary to qualify our thinking by using such words as possible
preliminary support or a potential selling climax; possible and potential? Why not say
definitely, it is a specific principle and can be nothing else? Well, the main reason is that we
are not the persons who are running the stock, who are controlling the situations. Often no one
person or group is in control of the stock. No one is large enough or influential enough to
control the action of a stock. We are playing, essentially, the role of a detective, trying to find
out what is going on in the market by an analysis of some clues. These clues are largely the price
action, the volume and the time that it takes to complete the movement. Sometimes these clues
are reasonably clear, other times they are obscure and other times they are completely absent.
Another reason is that usually one principle must be proven by another principle. For
example, on the preliminary support, usually there is some form of a selling climax. This is not
the final selling climax in the trend and may be only a temporary hesitation. If it is preliminary
support it will be proven so by the next drive down, which may be the final selling climax. The
selling climax is proven by the secondary test. A sign of strength is only a potential or a possible
sign of strength and may be canceled or confirmed by its test. If confirmed, then we are able to
correctly call it the last point of support. The action may be a potential sign of strength, but if it
is not proven by the last point of support, then it is not a sign of strength. In other words, the
reaction to what should be the last point of support will either confirm, deny or leave in doubt the
sign of strength.

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The stock market is an unfolding picture in which the evidence will build up and build up
and build up until you can definitely say you have accumulation or distribution and you can
finally take a speculative position or the action and the clues may be so obscured as to warrant
not taking a position. In that case, you must simply stay out of the situation. To establish a
speculative position where the evidence and the principles are not clear is to invite disaster.
Now, move on to chart six. Computer Sciences in early 1968 moved down to the
selling climax at (point) 1 and had an automatic rally at (point) 2. On the secondary test at
(point) 3 it immediately dried up the selling. The spread was narrow, the volume was greatly
decreased compared to the selling climax: There was no supply at (point) 3. The stock, at least
temporarily, stopped going down. Now, where is the preliminary support? Well, the preliminary
support is in the area circled at 4. There was some selling on the move from (point) 5 to (point)
4 and then there was good demand on the rally to (point) 6; evidence of the good demand
attempting to reverse the down trend.
The next chart, chart seven, is Atlantic Richfield, 1969. The stock moved from
$130.00 down to $94.00 per share and had a selling climax at (point) 1. Price spread was wide,
volume expanded. The automatic rally was at (point) 2 and the secondary test at (point) 3. On
the secondary test there was a lack of supply as shown by the narrow spread and decreased
volume. The preliminary support was in the area circled at 4. There was fair demand on the
rally from (point) 4 to (point) 5 as shown by the wide spread.
In chart number eight of Sanders Associates, 1969, the stock went through distribution
and established a major down trend from (point) 1 to (point) 2. The selling climax was at (point)
2. Now, where is the preliminary support? Look at the $44.00 per share level at (point) 3. The
stock had high volume and wide spread at (point) 3 and then rallied about two points. This is the
preliminary support and the area has been circled on the chart. Following the selling climax
there was a brief automatic rally to (point) 4, a quick secondary test to (point) 5 and then (a)
further rally to (point) 6 and more important secondary tests at (points) 7 and 8.
Now, one of the most difficult things to teach is perspective. You can analyze the chart on
a minute basis, on a broad basis or on the basis of what has happened over many years, in other
words, intraday, minor, intermediate and major. Let us examine this area briefly from a larger
perspective. This area could also be viewed as having preliminary support at (point) 3, a selling
climax at (point) 2 and the move from (point) 2 to (point) 6 as an automatic rally and from
(point) 6 to (point) 8 as a secondary test. Its a different perspective, but the principle is the
same. Preliminary support is followed by a selling climax, followed by an automatic rally and
then a secondary test. Remember this very important lesson.
Lets go on. Now, thus far we have had secondary tests which have held above, at the
same level and have held below the point reached on the selling climax. There has been less
price weakness and less volume on the secondary test then on the selling climax. Chart number
nine of Computer Sciences, 1969, has two examples of the selling climax. The first is on the
move down to (point) 1. (Point) 1 is the selling climax: The automatic rally is at (point) 2 and
the secondary test at (point) 3 with possible preliminary support at (point) 4 (Point) 3a is another
secondary test. The (second example) occurred on the move following (point) 5 with
preliminary support at (point) 6, the selling climax at (point) 7, the automatic rally at (point) 8
and the secondary test at (point) 9. Now, look at the spread and volume at (point) 9 compared to
the selling climax at (point) 7. At (point) 9 theres still considerable price weakness and
considerable volume; supply is still present and as a result the stock rallied to (point) 10, but
needed to test supply again at another secondary test at (point) 11. Was volume still coming in at
(point) 11? Was the heavy selling still present? The answer is no. As a result the stock began to
rally.
Chart ten of ACF Industries, has a selling climax at (point) 1, an automatic rally at
(point) 2 and then: What is (point) 3? Look at the price and the volume. The spread is narrow
and the volume is heavy at (point) 3: Or is it? We have deliberately included this chart to show
how easily your eye can be fooled. Now take a ruler and carefully line up the price action at
(point) 3 with the correct volume. The correct volume is marked 4: It is not the volume marked
3. The volume marked 3 is on the upside, is volume off the bottom and is a turnaround. If there
were no markings on the chart, it would be very easy at first glance to line up the price action
marked 3 with the volume marked 3. You would be wrong and you would misinterpret the chart.
Always be sure that you are analyzing the price and volume action for the same day and not for
different days. So (point) 3 on the price action is a secondary test of the selling climax at (point)
1. The spread is still wide, but much narrower than at (point) 1 and the volume is much less than
at (point) 1. Now, what about the volume that occurred at (point) 5. On that day the stock tried

30

to go up: It tried to go down and it closed, off the low, with a heavy increase in volume. In this
type of situation those operating in the stock may have attempted to get a move going on the
upside and failed or a large block of stock, say 45,000 or 50,000 shares could have exchanged
hands in one transaction and been included in the total volume for that day. If the latter is the
case, that large block can probably be excluded from the normal supply - demand study for that
day in analyzing that stock. That large volume will still have its effect, but, it may be regarded as
much less serious than it would be otherwise. In actual fact, there was one large block of 37,000
shares sold that day.
So far we have dealt with the selling climax and down trends. The climax which stops an
up trend is called a buying climax. An up trend is caused by an unbalanced condition in the
supply demand relationship with demand being stronger than supply. The up moves are stronger
within the trend than the reactions. Up trends come in all shapes and sizes and angles. They
may be major, intermediate, minor or intraday in size. In duration they may last only a short
time on the one extreme or many years at the other extreme. There is a strong tendency for any
up trend, like any down trend to go to an extreme and to climax. The climax ending an up trend
is called a buying climax because it is the end of the condition where the buying is stronger than
the selling. The buying gradually builds up and builds up and builds up and finally comes in
with a rush and exhausts itself on the buying climax. The buying climax has increased volume
and a widening spread as it moves up.
`
Now, who does the buying and the selling on the buying climax. The sellers are, in
general, the professionals, who had bought at much lower prices; they sell. The buying primarily
comes from the untrained people, the public. This buying is caused mainly by the emotion of
greed; not a vulgar use of the word greed, but it is greed nevertheless. They buy in hopes of
selling to someone else at a higher price. They expect the stock to keep on going up and give
them immediate profits. They buy mainly because of emotions, not because of a sound analysis
of the situation.
When the panic selling comes in on a down trend it can create the principles of
preliminary support, selling climax, automatic rally and secondary test. The sequence of
principles which may come into operation as an up trend ends are as follows: 1) Preliminary
supply; 2) Buying climax; 3) Automatic reaction and 4) Secondary test. The functions and
technical indications are very similar, however the names of the principles are different. One
sequence of principles applies to a down trend, the other applies to an up trend.
Now, please turn to chart eleven, American - South African. The stock had started an
up trend and then reacted sharply at (point) 1. It resumed the up trend which had good demand
on the rallies and in general a lack of supply on the reactions until the stock finally reached the
buying climax at (point) 2: That buying climax had sharply increased volume and a widening
spread. The next day at (point) 3 the volume was heavy on the downside, indicating that the
heavy selling which came in to stop the upward move on the buying climax at (point) 2 was
continuing. One of the old time professionals said; It is astonishing the amount of stock that
can be sold on the way down. Why? Because people think that they are getting bargains as the
news is usually still good on that stock. The automatic reaction was to (point) 4. The secondary
test was at (point) 5, however, note that the secondary test still had heavy volume on it, evidence
that good demand was still there. There was another reaction to (point) 6 and demand was less
on the rally to (point) 7. (Point) 7 is another secondary test. Here the stock began to break. Just
as a down trend does not come to an end all at once, neither does and up trend. There may be a
number of attempts to stop the upward trend, creating preliminary supply. Preliminary supply
is the first important selling which is part of the distribution area and which comes in to
stop the upward trend temporarily. Usually there is some form of a buying climax which
stops the move and that is followed by a reaction which has pronounced weakness or volume or
preferably both. The buying climax which is part of the preliminary supply normally has less
volume than that on the final buying climax. The price reached on the last point of supply after a
sign of weakness very often is in the same area reached on the preliminary supply. Analytically,
the significance of the preliminary supply is that if the entire area is distribution, that distribution
may have begun in the area of the preliminary supply. On chart eleven the preliminary supply is
at (point) 8. (Point) 9 was also possible preliminary supply which could come into operation as
part of a larger area of distribution.
Following a buying climax one of two things can occur, either an automatic reaction or a
lateral move. This in turn is followed by one of two things, either a continuation of the up trend
or a secondary test. If the supply is too weak to drive the stock down or demand too strong to
allow it to go down, instead of having the automatic reaction, the stock will have the lateral

31

move. Usually, however, it will have some form of an automatic reaction. That automatic
reaction may have increased volume, heavy volume or no volume. It may have wide price
spread or relatively narrow spread. If there is a heavy volume on the automatic reaction it is an
indication that the selling that came in to stop the upward trend is continuing to press on the
market. The more violent the buying climax, usually the more violent the automatic reaction will
be.
Now, the action following the automatic reaction is either a continuation of the old move
or a secondary test. In order for the stock to continue the old move it must have greater demand
or less supply on the rally than was in evidence on the buying climax. This would be indicated
by a widening spread and increased volume compared to the buying climax; evidence that
demand is stronger than on the buying climax. However, should demand be less on this test than
on the buying climax, it is a secondary test. The secondary test is indicated by decreased
spread and decreased volume on the rally to test the buying climax. That secondary test may
end above, below or at the same price level as the buying climax. It is not particularly important
where it comes to an end. What is important is how it comes to an end. The demand should be
less. If there is still good demand on the first secondary test, you may expect another test of that
area which will either succeed or fail.
We will cover the next several charts quickly. Chart twelve is of IBM, 1968. After the
split it moved quickly up to the buying climax at (point) 1. The automatic reaction was at (point)
2 and the secondary test at (point) 3. From this vertical line chart it is not possible to identify the
preliminary supply.
Chart thirteen has a buying climax at (point) 1, the reaction from (point) 1 to (point) 2 is
an automatic reaction and the secondary test is at (point) 3. Now, where is the preliminary
supply? Again, it is difficult or impossible to determine the preliminary supply from the vertical
line chart. Go to the figure chart. At point 4 the stock reached $45.00 per share and then during
the day reacted one point. This is likely to be the preliminary supply.
The buying climax at (point) 1 on chart fourteen occurred in an area of re-distribution.
The stock had rallied from the $40.00 level and met preliminary supply at (point) 2. Look at the
tremendous volume. It had a buying climax at (point) 1, an automatic reaction at (point) 3 and a
secondary test at (point) 4. In this case, the volume on the preliminary supply was much greater
than that on the buying climax. It occurred as the stock was running into an old supply level.
(Point) number 1, nevertheless, was still the buying climax. On the secondary test at (point) 4
there was a lack of demand shown by the decreased spread and volume compared to the buying
climax at (point) 1. This action stopped the up move.
On all the examples the amount of the price spread and the amount of the volume which
came in on the preliminary supply, buying climax, automatic reaction and the secondary test
have all been different, however on each example each principle could be identified with
common characteristics. The preliminary supply has some sort of volume and very often some
supply on the reaction which is part of the preliminary supply. The buying climax has widening
spread and increasing volume and it is automatically followed by the automatic reaction which is
strong or weak on the downside with or without significant volume. The secondary test has a
narrower spread and less volume than on the buying climax. The action which follows the
secondary test of a buying climax may be accumulation, re-accumulation, distribution or nothing
and it may be a simple stopping of the up move temporarily.
Now, lets review a few of these important aspects of volume. What is the difference
between climax volume and that which is known as breakout volume or absorption volume?
Both generally have a widening spread and increased volume, however, the climax volume is
stopping a trend which is out in open territory and has been in progress. Absorption volume,
however, occurs with a widening spread and increased volume as the stock is breaking
through a previous supply area and is simply absorbing all of the selling that takes place as
it moves up to new high ground. This process also occurs in reverse on the downside. To
illustrate this further, lets play football. There are two sides; we will call one supply, the other
demand. The center snaps the ball, the quarterback takes it, spins, hands off to a charging
fullback who hits the line of scrimmage and tries to burst through into the defensive backfield.
For him to keep going he must make progress (price action) and he must have push behind him
(volume). He must be able to keep driving forward. If he fails to make progress or runs out of
the push behind him, hes stopped. Similarly, if a stock, moving up, runs out of demand
(volume) or fails to make price progress, it can be stopped. For the fullback to burst through the
line requires a positive push through the opposition. The same thing happens to stocks and we
call that push the absorption volume. An example of this absorption volume is on chart ten of

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Basic Lecture Two at point 25. Now, suppose he bursts into the backfield and keeps on going
and is racing toward the goal and then somebody stops him cold. Well, that is his buying climax.
How can you use climactic action to close out or to establish a speculative position?
How you will use it depends on your motives and your purpose in making the commitment and
whether you are an in and out or short move trader or whether you operate for larger moves.
Those students who trade for a few points and are in a situation for a few days or at most a few
weeks at a time may buy on the selling climax, get out on the automatic rally, attempt to go short
there, cover on the secondary test and go long and trade the up and down moves within the
trading range. It should be noted that the longer the trading range continues, the more dangerous
this procedure becomes and you must be in constant contact with the market to operate in this
extremely speculative manner. We caution all who attempt it.
Chart fifteen illustrates why you must get out quickly on the automatic rally if you buy on
a selling climax. If you buy on a selling climax, you cannot hold it for a long time safely.
Suppose you had bought at $64.00 per share on a selling climax at (point) 1. The stock
immediately rallies to (point) 2. In getting out somewhere on that rally, you will not get the
exact top. Suppose you had gotten out at $71.00. The profit is seven points minus one point for
commissions. With a three point stop, the profit - risk ratio is about 2 - 1; not good. (Point) 3 is
a secondary test of the climax at (point) 1. (Point) 4 is another selling climax. The automatic
rally was brief and the stock continued on down. This illustrates why you cannot simply buy on
a selling climax and secondary test and expect to hold for long without serious risk of loss.
Most students are and should be intermediate to major move speculators. Therefore they
will use a selling climax of a major down trend to cover short positions on the selling climax.
Usually there will be a number of other indications tying in with the selling climax. Some of
these are, the reaching of an objective area, the previous appearance of preliminary support, an
oversold condition on trend lines and perhaps a shortening of thrust. Some or all of these
corroborating indications may be present. Incidentally, occasionally it may be advantageous to
let the trend run as far as it can and if necessary to get out on the secondary test, but at most
times it is far better to get out of a short position on the preliminary support or the selling climax.
The psychology of trying to play for the last 1/8 th can be deadly. You will rarely get the exact top
or the exact bottom in either establishing positions or closing them out. Many students who have
not closed out their positions on the climax have not gotten out on the secondary test either and
then they have gradually seen their profits erode and finally vanish.
Those students who are going to operate for the larger move will not buy on either the
climax or the secondary test terminating a major down trend. Why? When they buy on a selling
climax they are bucking the major trend and this is highly dangerous. Also, as there is no cause,
one has to form. If they buy here, they may be shaken out on a terminal shakeout or have the
price go drastically against them. These students will use the preliminary support, the selling
climax, automatic rally and the secondary test primarily as an analytical tool, but will not use
them to establish trading positions. Instead, they will establish their trading positions as the
trading range comes to an end, which occurs after accumulation has taken place.
To summarize, trends do not always end with a climax, but when they do and have been
tested by a secondary test, you know that the trend definitely has been stopped. What it does
thereafter depends upon the action following the secondary test. The climax has wide spread and
increasing volume. The secondary test should have narrowing spread and decreasing volume
compared to that of the climax. Memorize this sequence of principles; 1) Preliminary supply; 2)
Buying climax; 3) Automatic reaction and 4) Secondary test. You can identify these principles,
analyze how they fit into the market action and then act or not act accordingly. This is an
important lesson, one you should consciously remember.

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BASIC LECTURE NUMBER FIVE

SPRINGS AND TERMINAL SHAKEOUTS
The subject of this lecture is springs and terminal shakeouts. The purpose of this lecture
is to discuss with you the phenomena of a terminal shakeout (and) a spring, where they fit into
accumulation, how you can use them, how you can take a position on the spring or the terminal
shakeout and how to trade for maximum potential profit with a minimum of risk.
First, let us define a terminal shakeout. A terminal shakeout is a sharp downward thrust
through a previous support area. It is executed for the purpose of buying all the stock possible
from weak or vulnerable holders. It is preceded by a trading range or a support level. It is
followed by an attempt to begin the mark-up phase of the cycle. The terminal shakeout is a drive
down through the support level for the purpose of shaking out all of the people who can be
scared out or forced out of the market and forced to sell. Now, why start this lecture with the
terminal shakeout? Simply because that was the term and the concept and the understanding
(that) the old time professional stock operators used. It is the understanding and terminology
which Mr. Wyckoff passed on to all of us. Now what happens to the people on the terminal
shakeout: In other words, who does what to whom? It is largely the untrained people, the public,
who sell on the terminal shakeout. These are people who have bought at higher prices and now
see the stock go into new low ground, which some people think is the worst thing that can
happen. They look at what the stock is doing, not how it is doing it. When a stock is driven into
new low ground it often looks disastrous. It may look as though it is going to resume a
downward trend or start a downward trend when it makes a new low; that it is going to continue
to go down, down, down. If these untrained people are doing the selling, who is doing the
buying?
The professionals are buying. The pros or shall we say the composite operators, who
have been absorbing the stock, buying the stock, now are attempting to see if they can control the
stock so that they can begin moving it up. The critical thing that is shown by the terminal
shakeout is the amount of supply that comes out on that shakeout and whether or not that
supply is absorbed. Remember this vital point, it is important.
A number of years after Mr. Wyckoffs passing a refinement of the terminal shakeout was
developed by Mr. Robert G. Evans, former president of our firm. This refinement is the spring.
The spring came out of our understanding of the terminal shakeout and is similar to it. However,
at the Institute we use both terms and both understandings. We use the (term) spring to refer to a
short, sharp downward thrust through a previous support area for the same purpose of buying all
the stock possible from weak or vulnerable holders. We now use the (term) terminal shakeout to
refer to a longer or a larger sharp downward thrust through a previous support area. The main
difference between the spring and the terminal shakeout is how far below the support area the
drive down goes and the difference is largely a matter of depth of penetration into new low
ground; they both accomplish the same thing: They enable professionals to buy up all the cheap
stock (that) they can, to put people on the sidelines so that they do not buy in the early stages of
an up move and the spring and the terminal shakeout give a completely false impression as to the
direction of the ultimate move. Again, their purpose is to determine the amount of supply
that comes out on the drive to new low ground and how well that supply is absorbed.
Most of this lecture will be devoted to the spring of which there are three types; a number
one spring, a number two spring and a number three spring. They (the numbers) are used to
define the degree of supply that comes in on the drive to new low ground. Now, what can
happen as the stock goes into new low ground? It can have overwhelming supply and if it does,
we call this a number one spring. This is evidenced by a very heavy, overwhelming, sudden
increase in volume and the price spread is wide; volume is massive, people are dumping stocks.
There is an extreme price weakness and the stock goes down, down, down and down until the
downward trend can finally be halted.
The second alternative is that no supply is dumped on the market, no increase in supply
can come out on the drive into new low ground. We call this a number three spring. The number
three spring is evidenced by a lack of an increase in the general level of trading. Any increase in
volume, if at all, is very, very minor and there is a lack of important price weakness as it goes
into new low ground and the spread does not materially widen.

34

Now, there is a very large area between the number one and number three spring in which
there is some supply. We call this a number two spring. The supply on the number two spring is
evidenced by some increase in price weakness; in other words, some increase in the widening of
the (price) spread as it goes into new low ground and some increase in the volume over the
general level of trading Supply is not absent, (on the other hand) it is not overwhelmingly
abundant. That supply will either be absorbed, in which case it will be a number two plus spring,
or it will not be absorbed and supply will persist and persist and persist, driving the price down
and (will) have the same effect as a number one spring. This alternative we call a number two
minus spring. The number two minus spring has the same effect as the number one spring in that
the supply persists and persists and persists and drives the price of the stock down, down, down
until it is finally halted and has to start a new support level all over again.
Now, please turn to chart number one which is Beckman Instruments, 1965. The stock
had begun an up trend in 1964 starting at $47.50 a share and moved up to around 80 1/2 at point
number 1. It then began a long trading range with supports at (points) 2, 3, 4, 5, 6 and then at
(point) 7 broke through all of those supports with a wide spread and a considerable increase in
volume. It penetrated deeply below the supports. The penetration was about 7 points below
(points) 4, 5, and 6 and about 5 points below the supports at (points) 2 and 3. Should the price
hold at that point and should the supply be absorbed, it would be called a possible terminal
shakeout. If the price broke right on down as a result of not being able to absorb the supply, it
then would have been a number one spring.
The next days spread was good on the upside and volume was increased. This was
evidence that the professionals had taken all the supply that had been thrown on the market and
were in the process of absorbing the supply and moving the stock up. We call this volume,
volume off the bottom. It usually indicates a turnaround in the market. Now, in our
example, the stock rallies at point number 9 and then settles back to (point) 10 very briefly.
Theres no supply on the reaction to (point) 10, thus (point) 7 is a terminal shakeout and (point)
10 is a secondary test of that terminal shakeout. Since some supply was present, the stock had to
be tested at (point) 10 with a secondary test before resuming its advance. Should a position be
taken at any time during the trading range from (point) 1 to (point) 6 with a reasonably close stop
order, somewhere in the vicinity of 717/8, just a few points below the support at (point) 3, on the
drive down to (point) 7, that stop order would have been executed. It would be difficult to buy
again very shortly after having sustained such a loss, but lets analyze this situation because its
going to happen to you and you should be prepared to react to the event.
If you had made a purchase in the trading range between (points) 1 and 6 without a stop
order, on the drive down to (point) 7, the extreme price weakness and the volume coming in
would have left a student in doubt as to whether or not the stock was leaving the trading range
permanently for a sustained downward move. It was quite likely that he would sell near the
bottom at (point) 7, sustaining an even larger loss. Likewise, if he had been stopped out of the
stock, this would put him on the sideline just before a 36 point rise. Thus, it becomes extremely
important that either no purchases be made in a stock in a trading range, even near the bottom of
the trading range, or should one be made, that a close stop order be used in order to eliminate
large losses and to hold losses to a bare minimum.
Due to the depth of the penetration below the support level, we would call this a terminal
shakeout rather than a number two spring. Had Beckman... penetrated at (point) 7 only a
couple of points, it would have been called a number two spring instead of a terminal shakeout.
For other examples of terminal shakeouts, see Basic Lecture Three, chart four at (point) number
7 and Basic Lecture Three, chart six at (point) number 13 and Basic Lecture Three, chart fifteen
at (point) number 9. These we have seen earlier and it is a good idea to write down these
examples so you can use them for further reference.
The next chart, chart number two, is the vertical line and figure chart of Outboard
Marine, 1969. A brief examination of the figure chart shows (that) the stock had moved up in a
major up trend from (point) 1 to (point) 2. Our vertical line chart shows the last stages of this
move, or from (point) 1a to (point) number 2. On the vertical chart we see the stock hesitated at
(point) 3 and then had a short, sharp reaction from (point) 3 to (point) 4. Now, this is a
wonderful example of an ordinary shakeout. The difference between a terminal shakeout
and an ordinary shakeout is that the terminal shakeout occurs at the end of the
accumulation area and at the end of a trading range, while the ordinary shakeout occurs in
an upward trend. An ordinary shakeout may be defined as a sharp downward thrust
occurring in an upward trend without extensive previous preparation. It is executed for the
purpose of buying all the stock possible from weak or vulnerable holders. It is preceded by an

35

upward move. The ordinary shakeout is characterized by price weakness and usually increased
volume; in other words, wide spread and some increase in volume. However, the volume may be
high, medium or low. When there is supply on the shakeout itself, it must be tested by a
secondary test. The secondary test should have a narrow spread and a decreased volume
compared to that of the ordinary shakeout. Now, this indicates that there was less supply on the
secondary test than there was on the shakeout and the buyers then know (that) the stock is again
prepared to move up with relative safety. In our example on chart number two, the sharp
reaction to (point) 4 had wide spread and a moderate amount of volume. We would thereby call
it an ordinary shakeout. What we could expect follows; an automatic rally at (point) 5 and a
secondary test at (point) 6.
If you could obtain an intraday wave chart of a shakeout, you would find (that) there is
usually a minor selling climax on the low of the shakeout which is then followed by the
automatic rally and the secondary test. Incidentally, this action at (point) 4 would not be
considered a normal correction within the upward trend due to the very large widening of
spread. Had the spread been narrow along with the low volume, it could have been
regarded as a normal correction, but it (wasnt) and thus we correctly diagnose it as an
ordinary shakeout.
Now, this stock moved from (point) 2 down to (point) 7 for a major 1/2 correction of that
move from (point) 1 to (point) 2. As it declined, the preliminary support came in at (point) 8,
followed by the selling climax at (point) 7. The automatic rally was at (point) 9 and the
secondary test at (point) 10. Then the stock moved sideways in a trading range. With this as
background let us begin to study the trading range.
As it moves sideways, it will attempt to come out of this trading range either on the
upside or the downside and if it attempts to break through the supports, it could create a spring,
either a number one spring, a number two spring or a number three spring. Thus, we must train
ourselves to anticipate what could result from the present action. In this case we should watch
for a potential spring. Now, the spring is an analogy and a refinement of the terminal shakeout.
Now, you know what happens when you push down on a spring and you release the pressure. It
springs up. Now, better yet, stop listening to this for a moment and go get a spring, put it down
on the table and push down on it: NO, DO IT! Alright, now, release the pressure with a snap. It
should spring right across the room. It will jump into the air, pop across the room and you may
have trouble finding it if there is enough spring in it. Now, something similar happens in a good
spring situation in the market. When the stock breaks a support level, the buyers can see if
demand has control of the stock and if so, there is a good chance (that) this demand will move
the stock up, perhaps completely out of the trading range. If the supply has been absorbed and it
is ready to go, its almost like blowing the lid off (of) a pressure cooker; up it goes and it springs.
It is much like springing off (of) a diving board. Now, you know what happens on a diving
board in a swimming pool. If you bounce up and down on it without a great deal of push, you
dont go very high in the air, but if you come out on the spring board and come smashing down,
the bounce back is strong. Well, again, the same thing happens when a stock springs
successfully.
Now, in order to illustrate and get this concept in your mind better, take a celluloid ruler
and place an edge across the $34.00 level of Outboard Marine, chart number two. This is in
the area where it was supported repeatedly, roughly the mid-point of (points) 8, 10, 12, 14 and
15. Now, hold the ruler with your left hand and place your left thumb one inch away from the
right hand edge of the ruler and place the mark for one inch away from the right hand edge at
point 15. The end of the ruler should be exactly on the day at number 20. This means that your
left thumb is just above (point) 15 and the only portion of the ruler which can be forced to bend
toward you is that one inch covering the area from (point) 15 to (point) 20. Now, with your right
hand, pull toward your body the right edge of the ruler. Bend the ruler backward toward (point)
18. Please dont just sit here and listen to this, DO IT! Otherwise youll miss what were trying
to teach. Now, force it back: Hold it. Now, what is going to happen? If you pull backward
more and more and the pressure continues to build up, it will eventually break the ruler. The
same thing happens to stocks. However, if you take away that pressure suddenly, the ruler will
snap back and if there was anything in its path, it would spring it forward; it springs and this is
what we mean by the spring. Now, remove the ruler and let us continue.
The stock met support repeatedly at (points) 8, 7, 10, 12, 14 and 15 and support line AA
can be drawn through (points) 7 and 14. It met supply at (points) 9, 11, 13 (and) 16 and a supply
line BB can be drawn through (points) 11 and 13. At (point) 17 these two lines AA and BB
converge for an apex. There has been a gradual narrowing of the price swings and this cannot

36

long continue. The supply - demand condition is increasingly in balance; it will have to move up
or down. The closer it gets to the narrow point of the apex, the more likely it is to attempt to
come out of this narrowing range. Now, please note that the trading range from (point) 9 to
(point) 17 is a narrow, compact one. This generally is the better type. The more compact the
trading range is, the more likely the stock is to be under control by the professionals and
the greater the possibility of a swift explosive move upward following a spring or a
shakeout: Watch for them!
Now, look at the volume. Note that the farther the stock moved to the right in the trading
range from (point) 9 to (point) 17, the smaller the general level of trading became, indicating the
lessening of the selling or the gradual absorption of the supply. In the area marked 17a, the
relatively light volume indicated a scarcity of offerings. Now, what about the spring at (point)
18? Was there supply on the dip down to (point) 18? Was anyone dumping stocks? The answer
is no. There was no wholesale dumping of stocks. There was no large increase in supply and
this is all the professionals have to know. It is a number three spring. The stock immediately
rallied to (point) 19 sharply, had a minor reaction to (point) 20 and then it moved up to (point) 21
very rapidly; a classic example of a number three spring. The length or size of the move
following a spring will depend directly on the size of the figure chart count. The larger the
count, the larger the possible move, the smaller the count, the smaller the possible ultimate move.
Where could you take a speculative position on this stock or in this situation? The best
place is to take a position on the reaction to (point) 18 as it breaks through the previous supports.
This would be between $34.00 and 331/8. If you do not take your position as it is going down,
very often you will not be able to take the position at all or at an advantageous price. One
position could be taken on the move down to (point) 18, a second position on the minor reaction
at (point) 20. In this instance the reaction to (point) 20 was very brief and in actual practice
could have been missed easily.
Now, refer again to chart number one. What is (point) 11? Look at the price action and
the volume. Did supply come out on the reaction below the support at (points) 4, 5 and 6? Yes.
Some supply was present at (point) 11. (Point) 11 is a number two spring. It (the stock) rallied
to (point) 12 and then reacted to (point) 13. On the reaction at (point)13 there was price
weakness, a widening of the spread on the downside and some volume. Supply was still present
on the test of the number two spring at (point) 11. When this occurs, be very careful! The result
of the failure to absorb the supply at (point) 13 was that it (the stock) continued to move on down
to (point) 7. Here is an example where you have a minor spring which failed and developed
into a more important terminal shakeout.
Chart number three is of Commercial Solvents, 1965. The stock was in a long term
upward trend beginning in 1962. Then from (point) 1 to (point) 2 (it) reacted within that long up
trend without climaxing, without going through a pronounced classic volume selling climax at
(point) 2. It then went sideways with supports generally around the 30 area at (points) 3, 4, 5 and
6. Again, please put a celluloid ruler on edge along the $30.00 per share line with your left
thumb about one inch from the right hand side of the ruler at (point) 6 and then begin to bend the
edge of the ruler toward you. What happens? As the ruler begins to bend down at (points) 7 and
8, it breaks through all the support levels. Only a very small amount of volume comes out at
(point) 8. (Point) 8 is a number two spring which is tested with less volume and price weakness
on the secondary test at (point) 9. The stock then holds in this area for a few days and explodes
up to (point) 10. The result from (point) 8 to (point) 10 is very rare, but this actually happened in
the market as a result of the spring phenomenon at (point) 8. The time to take a position was on
the spring. The logical place to put a stop order was at 267/8 which would be just below the lower
support level at (point) 2.
The next chart under discussion is the chart of Beckman Instruments, chart three A.
Youll remember this is the same as chart eight of Basic Lecture Number Three. Note, the stock
was supported repeatedly around the $48.00 level and there is support at (point) number 11.
Sometimes the previous support which is broken on the spring consists of a very extensive level.
Sometimes the level consists of only one point. On the spring at (point) 2, it only broke one
point. However, due to the progressive development of the area of accumulation, that one point
was quite important. As the price broke through (point) 11 at number 2, was stock dumped on
the market? The answer to this has to be an unqualified no. The spread was relatively narrow
and the volume remained low. This is a number three spring and a number three spring does not
need to be tested because the professionals and trained knowledgeable people already know as a
result of the number three spring that no one is dumping stocks, no one is scared and that the
sellers are not in control as of that moment. It gives the buyers a chance to begin moving the

37

stock up. Buying will be strong or it may be weak. If it is weak, it may simply throw the stock
back into the trading range for a continued sideways move and further testing. If, however,
demand is strong, it may be sufficiently strong to drive the stock through the top of the trading
range and into an upward trend. This is what you should plan for. Anticipate what could
happen and be prepared to act decisively and quickly.
Let us move on to an example of the number one spring. The number one spring has
overwhelming supply which is indicated by an extreme price weakness and heavy selling. The
price and volume characteristics are that there is a wide spread and a heavy increase in volume.
This is evidence of an abundance of supply. The stock goes through the trading range on the
downside and continues down until the down trend can finally be halted. If the stock has been
under accumulation, usually it will require extensive further preparation before the stock is ready
to move out of the accumulation area. Usually, however, the number one spring is preceded
by at least minor distribution and often intermediate or major distribution. The number
one spring is far more likely to occur in stocks which are in major and sustained down
trends than they are to occur in up trends.
Our first example is chart four of Korvette, 1965. The stock rallied in early 1965 to
1/2
50 at (point) number 1. It then went down to (point) 2 and began to move sideways in a
slightly upward slanting trading range. There were supports established at (points) 2, 3, 5, 6, 8
and 10. Now, watch what happens as the stock reacts from (point) 11. The day marked 12 has
wide spread and high volume on the downside. At (point) 13 it breaks through the support at
(points) 10 and 8 with extremely heavy volume and very wide spread; supply is overwhelming:
It is a number one spring and the rally from (point) 13 to (point) 14 has a comparative lack of
demand on it; the rally is weak, the spread is narrow and the volume is considerably decreased
compared to (point) 13. The stock goes on down to the (area labeled) 15. Thus, on the move
from (point) 11 to (point) 13 supply was very heavy; it was overwhelming. (Point) 13 was a
number one spring.
Now, how does one take a speculative position on a number one spring? As the spring
occurs, you should be able to diagnose that supply is overwhelming. Do not buy! For the stock
to go up, that supply must be absorbed. The stock would normally have to be tested in such a
manner as to indicate that the supply is no longer present. Since supply is overwhelming, do not
buy on the number one spring. However, you can use it for a way of determining the possibility
of taking a short position on the rally following the number one spring. If that rally is weak,
you may use it to take a short position to play for the coming decline. As Korvette began
to move down from (point) 14, heavy supply was still present at (area) 15 The selling was not as
heavy as at (point) 13, but supply was still present and still had not been absorbed. There was a
complete absence of good rally power and of good demand on the rally to (point) 16. As a result
the stock continued in its down trend until it reached (point) 17.
The next chart, chart five is of Montgomery Ward, 1966, which shows another number
one spring. The stock had been in a more extensive trading range prior to the point 1 on our
chart. It moved to (point) 2 and then built an addition to the trading range with supports at
(points) 3, 4, 5, 6 and 7. It had an upthrust at (point) 8 and immediately began to react. On the
day marked with the arrow at (point) 9, the stock broke through the supports at (points) 3, 4, 5
and 6. The spread was quite wide. Look at the volume however. The volume was not
overwhelming. The stock was not falling so much because of the massive pressure of the heavy
selling of stocks at that point, but because demand was not there to stop it where it should stop
the decline if the stock was going to go up immediately. (Point) 9 was a number one spring,
mainly on price weakness rather than on heavy selling pressure, thus the stock continued
on down to $19.50 per share at (point) 10.
The next example, chart six, is of Papert, Koenig, Lois, 1969, on the American Stock
Exchange. The stock moved from (point) 1 to (point) 2 with preliminary supply at (point) 3, a
buying climax at (point) 4, automatic reaction at (point) 5 and the secondary test at (point) 2. At
(point) 2 the stock had definitely stopped the upward trend. The reaction to (point) 6 had heavy
supply and was a possible sign of weakness with the rally first to (point) 7 and then to (point) 8
being a possible last point of supply. Now look at the support at (points) 6, 9, 10, and 11. The
stock was extensively supported in the $22.00 to $23.00 area and then at (point) 12 it broke
through this support area for a number one spring. Supply was overwhelming the demand as it
broke the supports. There was a heavy increase in volume and the price broke by 5 points. On a
$23.00 stock this is about 20 percent in one day. (Point) 12 is a number one spring, but less clear
cut than on charts four and five. The rally to (point) 13 was with decreasing demand compared
to the supply to (point) 12. The rally was weak. Then additional supply came in on the move

38

down to (point) 14. There was a more extensive rally to (point) 15 which met supply and
stopped in the previous support area of (points) 6, 9 10 and 11 and then the stock moved down to
(point) 16.
Now, let us move on to the next chart. The chart (number) seven is of Famous Artists
Schools with a number one spring in November 1968. The stock moved from (point) 1 to
(point) 2 with a buying climax at (point) 2 and stopped the up trend. It then began a trading
range with supports at (points) 3, 4, 5, and 6, went into new high ground at (point) 7 for an
upthrust and reacted to (point) 8, where the stock had generally been supported around the
$52.00 level. On the day marked 9, the stock opened down and closed at the low, breaking all
the supports in the trading range. The decline was 10 3/4 points below the previous day. It was a
number one spring. Supply was in control. There was wide spread, heavy volume and demand
was not sufficiently strong to overcome it. The stock continued on down to (point) 10 and
eventually rallied to (point) 11 and (then) continued on down to $27.50 per share in April 1969.
Now, let us summarize what we know about number one springs. The number one
spring reveals that supply is in control of the situation on the spring. Demand is not in
control on the number one spring. Whether the stock will collapse and immediately move
downward extensively as in charts four and five will depend upon the continued outpouring of
selling on the market and the failure of the buyers to stop the move. On a number one spring the
stock moves down and eventually has to build a complete new area of accumulation before a
substantial up move can occur. Do not buy on the number one spring! Instead look for a
possible short sale on the subsequent rally.
So far we have discussed the number three spring and the number one spring: Now for
the number two spring. A number two spring has some supply on it. It is somewhat midway
between the number one spring which has overwhelming supply and the number three spring
which has no supply. A number two spring is a relatively minor penetration below a
previous support level on which some supply is present. The price and volume characteristics
are that there may be some widening of spread and some increase in volume. Since there is
supply on the penetration into new low ground below the supports, the stock must be tested by a
secondary test on which there is a decreased spread and volume compared to the spring itself.
The spring does not necessarily have to go into new low ground or into all time new low ground
for the move. It is sufficient to break an important support area. The number two spring
occurring in the accumulation area is very similar to a terminal shakeout except that it penetrates
only a short distance below the support area.
Now why does a number two spring have to be tested? The answer to that is wrapped up
in the process of accumulation and in the principle of the selling climax. Usually accumulation
in an original base area takes place after a sizable down move. The stock stops going down and
then goes into a trading range and the untrained people, the public, gradually sell their stock, on
balance, and the professionals buy on balance. As the professionals continue to accumulate,
eventually the stock may be allowed to drift below a support area or it may be driven below that
support area (by the composite operator in order) to test the level. Many years ago these tests
were deliberately engineered. Nowadays they are far more likely to be a direct result of the
simple withdrawal of the bids and the resultant lack of buying orders on the part of the
professionals. They (the professionals) must know how much supply will come out on the
market before they can safely begin to move the stock up. Why? If they begin moving the stock
up without knowing this, someone, perhaps a fund manager, may sell 100,000 to 200,000 shares
at a very awkward time and at much higher prices. By allowing the stock to go into a spring
situation, they may prevent this. That 100,000 to 200,000 shares may be sold in the
accumulation area before the real move starts. The other part of the answer to this question has
to do with the principle of the selling climax. Usually on the move down to the number two
spring, which lasts only a few days or at most a few weeks, the stock reacts on relatively
moderate volume and as it breaks into new low ground below the supports there is an increase in
volume and somewhat of a widening of the spread. If you look only at this move itself and have
an intraday breakdown on it, you will find that usually on the break into new low ground there is
a minor selling climax followed by an automatic rally and then a secondary test. This is exactly
what you would expect to happen as any important trend movement comes to an end. You would
expect it to end with a selling climax and a secondary test. Be very wary and careful if you
have a number two spring which has not been tested. It may be tested later, several days
later.
Now, before going further, I want to illustrate in a different way what happens on a
spring. This is an analogy in which I will act as the supply and you can play the role of demand.

39

Now please stand up. Go across the room and turn your back towards me. Bend your knees and
crouch down and be ready to spring up because I am going to jump on your shoulders. Alright, I
come across the room, I take a jump and jump right, smack on your shoulders. Now, try to
spring. You cant spring, can you? Why? Because I am the supply and I am heavy and you
cannot possibly spring. Now, lets carry this a step further because we know that (within) the
spring principle one of three things can happen. Suppose that you, the demand, weigh 50 lbs.
and I, the supply, weigh 200 lbs.. You bend down, get ready; I run across the room, jump up and
come smashing down on your shoulders. Whats going to happen? Well, youre squashed like a
bug, you collapse and this is exactly what happens on a number one spring.
Now, suppose we reverse this and you, the demand, weigh 200 lbs. and I, the supply,
weigh 50 lbs.. I come running across the room and jump on your shoulders. You can spring up
with ease, I hope. And now the third alternative is basically somewhere in between and again we
have used somewhat the process of elimination; we have gone to both extremes, heavy supply
and small demand; a number one spring; small supply and heavy demand; a number three spring.
Now, suppose the supply and demand are largely in balance. Suppose you, the demand, weigh
125 lbs. and I, the supply, weigh 135 lbs. or 140 lbs.; now, what happens? I jump on your
shoulders, you stagger around for a little bit, get your balance, steady yourself and hold. You
may almost fall down, but eventually you hold and then you spring up. This is what happens on
a number two plus spring where you have supply on the number two spring itself and then a lack
of supply on the secondary test.
Lets carry this another step further. Suppose I jump on your shoulders and as you are
trying to gain your balance I jump off. This is what happens very often in the stock market
because as the spring occurs the buyers are trying to absorb the selling and if the sellers find that
they cannot continue to drive the stock down, down, down, they will turn around, stop selling
and reverse their positions and up it (the stock) goes.
Now, lets do this again. You, the demand weigh 125 lbs. and I, the supply, weigh 140
lbs. . Suppose I jump on your back. You stagger around and then somebody hands me a 25 lb.
weight. You try to shift that, you almost go down and eventual somebody hands me another 15
lb. weight and you collapse. This is what happens on a number two minus spring. The weight of
supply has increased and increased until the demand simply cannot handle it. The stock goes on
down. Sometimes it is fortunate that there is a floor there. That floor in the stock market may be
a selling climax which stops the down move or it may be a previous area of support. Thus, on
the number two spring the stock goes below the previous supports, stops, then rallies and then
comes down to test this new support area. If supply increases on the test, the stock may go
down. We call this a number two minus spring or a twenty-one spring. And the stock will
continue on down until demand is finally able to stop the down move.
The second alternative on the secondary test of the number two spring is that there will be
a lack of supply compared to the number two spring. This is indicated by the narrowing of the
spread and a decrease in volume compared to the number two spring itself. There is a lack of
supply at that point. This is called a number two plus spring or a twenty-three spring. It is very
important to understand that there is no clear cut line of demarcation between a number one
spring and a number two spring, a number two spring and a number three spring. The critical
factor is not the terminology. The critical factor is your understanding of the relationship of
supply to demand in the base area and on the spring.
After a successful test of the number two spring, demand may be strong or it may be
weak. If the demand which comes in on the subsequent rally is weak, the stock will probably
continue in the trading range for further tests. If however the demand is persistent and strong, it
may be sufficiently strong to establish a major upward trend, leave the trading range on the
upside and begin to work out the count and the force of the accumulation which took place in the
accumulation area. Incidentally, the price and volume indications on a number two spring are
less likely to be clear cut than on a number one spring or a number three spring. The classic
illustrations are few and far between. This is why it is necessary to study many examples and
have examples from different periods of market history.
Let us illustrate this with a classic number two spring, chart number eight of Natomas
Co., 1968. The stock moved up from about $10.00 a share in October 1966 to 23 5/8 at (point) 1,
reacted down to (point) 2 which is about a major 1/2 correction and then went through reaccumulation. There was a support area established at (points) 2, 3, 4, 5 and 6. Now, stop for a
moment and cover up all the area on the chart to the right of (point) 6. NOW, DO IT! Do not
continue listening to this without covering up the area to the right of (point) 6. Now, what do
you have?: A long trading range lasting from November to March with, actually, two areas of

40

support. Now, what about the area at (point) 5 to (point) 6? It is compact, it is tight, it is narrow
and the general level of trading as indicated by 5a has fallen off considerably compared to the
previous volume action. Now, uncover the area to the right of (point) 6. Look at the three days
marked 7; at the price action and the volume. This a phenomenon that is described as tried to
go up, tried to go down, closed in the middle on an increase in volume. This one occurred over
three days. When this high, low and close in (the) middle on increased volume occurs, usually
the move will start soon, in only a few days: You are about to get some answers. The stock
begins to react down to (point) 8 and (point) 8 actually could have been a number three
spring, however it did not spring and get used to this, they wont always spring when you
would like them to. The rally from (point) 8 to (point) 9 was very weak and then it broke
through all the preceding supports, all the way back to (point 2). Look at the price and look at
the volume especially. There was some supply at (point) 10, there was a rally to (point) 11 and
then a secondary test of the number two spring at (point) 12. There was still a bit of supply at
(point) 12. The stock rallied up to (point) 13 and then on the reaction to (point) 14 continued to
have a lack of supply. The stock moved up and worked out the count built up in this area and
went through repeated re-accumulation until it went above 100 in early 1969, about one year
later.
How could a speculative position have been taken as this stock was going through the
testing process in the area of the spring, which was also terminating the area of re-accumulation?
It is well to keep in mind that in attempting to establish a position, a student should be very
careful as to his timing and that he not take excessive risks. Often the timing of a purchase or
short sale should be co-ordinated with the action on the Wyckoff Wave as the Wave may indicate
that the current reaction on the part of the general market has not ended. If so, it may be wise to
hold off purchases in the individual stocks even though they appear to be ready. We cannot give
you an ironclad general rule on this which you can then apply at all times and in all situations.
You must develop and use your own judgment. If the Wave is moving up and the stock itself is
going through spring action with a number two spring or a number three spring, you know you
are going to have the help of the general market in making your purchases and in beginning the
mark-up phase of the move. With this in mind there are several places at which a student could
establish speculative positions on this stock.
The first occurred on the number three spring at (point) 8 in the area bracketed as 15.
This was a perfectly logical place at which to take a position. Had one been taken, a stop order
could have been placed at 157/8 or 147/8 giving a logical minimum risk. As the stock broke below
$17.00 per share on the number two spring at (point) 10, it created another logical place to buy
with a stop order again in the same area. Another logical purchase could have been made on the
reaction to (point) 14. Now, suppose you had missed buying at (point) 12 or prior to (point) 12.
All of the important indications are present in the chart that the stock is ready to go up and you
could have bought on the rally following (point) 12 up to (point) 13 or even the rally following
(point) 14, preferably buying on a reaction. A student with a large amount of capital, requiring
that the position be established over many days or weeks could have bought steadily each day all
through this area of the spring and in the early stages of the mark-up phase. This is marked as a
curved arrow 16. A very substantial speculative position can be taken this way. To buy after the
occurrence of a number three spring or a number two plus spring as the stock is beginning to
move up is not what we call chasing after a stock. This is going with it as it is leaving the
accumulation area. Chasing after a stock refers to buying it without having sufficient analytical
indications that it is going to move substantially. Chasing after a stock is buying it because of
emotions, that you want the stock and have to have it now, without thinking it through. Analyze
the situation carefully and if it is in the early stages of the trend, then you may go with it.
Lets cover chart nine of Occidental Petroleum. Briefly, it has another classic number
two spring. The support area is at (points) 1, 2, 3, 4 and 5 and note that the support area is not
exactly at the same 1/8th, but it is (at) the same general price level. Usually the support, the
reactions within the trading range, will stop at generally the same level, but not at the exact same
price. The number two spring occurred at (point) 6. There was some increase of volume. The
next day good demand came in on the upside and look at the volume. We call this phenomenon
volume off the bottom. Volume off the bottom is caused by the professional man simply
absorbing all of the supply thrown off the market and moving the stock up. It usually
indicates a turnaround. The stock rallied to (point) 7 and the secondary test of the number two
spring was at (point) 8.
There are several methods of indicating the supply level which could be broken on the
spring or shakeout. One method is to draw a free hand, wiggly line through the points at which

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the stock was supported in the trading range. This is shown on chart one. Another method is to
draw a horizontal arrow indicating the support level as on chart three. A very similar method is
to draw a horizontal trend line such as AA on chart five. These lines may he drawn prior to the
spring and when penetrated will serve to draw your attention to the spring.
In buying on springs, there are some cautions you should observe. If you are going to use
the spring as one of your prime tools in the stock market, you may have a very strong tendency
to see springs every hour on the hour. You may think that every chart should show you a spring:
It wont. They dont occur that way. However, when they do occur, you have a wonderful
market tool. Unless you absolutely know that you have an example of the spring story, do not try
to use it. If the spring is not reasonably clear, do nothing! There are many times when it is best
to do nothing. Sometimes your best investment is cash. Stay on the sidelines. Be free of the
emotional pressure of making a decision and be ready to go in when a good opportunity arises.
Another caution is to be very careful about buying springs in stocks which have major downward
trends or when the market itself is in a major downward trend or when there is much supply on
the spring itself. Use the spring as a tool to think with. Use it to tell you how heavy the supply
is. Remember, it is not that only one thing will occur on the spring: It is that one of three
possible things can occur, a number one spring, a number two spring or a number three spring:
Overwhelming supply, some supply or no supply. If you have overwhelming supply, do not buy.
Look for a possibility of going short on the subsequent rally. If you have a number two spring,
you can buy on the spring itself or better yet on the secondary test. If there is a number three
spring, you can take your position immediately. Always use a stop order and very often a close
stop order to protect your capital and to keep the possible profit - risk ratio greatly in your favor.
If you do buy and the stock does not move, then get out and look elsewhere.
In summary, do not use the spring as a mechanical gimmick. Use it as a means of
estimating the amount of supply that comes in on the dip into new low ground and a way of
judging the strength of the demand on the rally following the spring itself. The supply may
be heavy; it may be light. The demand may be strong; it may be weak. Judge it and then act. If
you wait until you can detect an area of accumulation terminating with a spring, do not buy in
the trading range. You will avoid having your money tied up in stocks which are not ready to
move and avoid being driven out of a stock when a spring or shakeout occurs by having a stop
order caught. It gives you the means of taking a speculative position just before the stock is
ready to move. You are either right or you are not right. Your timing is right or it is not right. It
either moves or it doesnt move. With the spring you buy and get an immediate answer. It is a
beautiful timing tool. Learn springs. Practice with them and profit from them.

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BASIC LECTURE NUMBER SIX

JUMP ACROSS THE CREEK
The main subject of Basic Lecture Six will be the jump across the creek story. The
purpose of this lecture will be too discuss with you the analogy of the jump across the creek,
where it fits into accumulation, how you can analyze it and use it to take a speculative position
for potential profit with a minimum of risk. The jump across the creek story is an analogy
used to illustrate what can happen as a stock tries to leave the trading range on the upside. It
gives you a means of thinking about the market. We use an analogy to illustrate a principle and
to give us an insight into the operation of the stock market. The jump across the creek is
usually a sign of strength and the backup to the edge of the creek is usually a last point of
support. They are actually two different ways of looking at the same action. (In) this lecture we
will deal with the jumping across the creek story first and then later on with the sign of
strength. Keep in mind that the jump across the creek primarily has to do with the supply that
is present in the trading range and as the stock tries to leave that trading range.
One of the major contributions of Mr. Robert G. Evans, former President of our firm, is
his excellent use of analogies to illustrate market principles. The jump across the creek is one
of these analogies which he developed. Students have found it to be especially helpful in
learning this phase of their market study. Many students will use the jump across the creek as
their primary market tool in establishing speculative positions. They will make their first
purchase on the back-up to the edge of the creek and they may add to their position on later
reactions.
The jump across the creek can also be used very well in conjunction with the spring.
Following that procedure, the first speculative position is taken in the area of the spring. The
second position would be taken on the back-up to the edge of the creek. Later positions could
be established at higher levels on later reactions: This is pyramiding with the trend. A second
position would not be established unless the first has already (shown) a profit and later positions
would not be established unless those taken previously already showed a profit.
In order to understand and use the jump across the creek, we are going to use our
imagination and visualize (a) boy scout on an outing. We are going to use (this) boy scout to
illustrate the market principles which will help us to avoid being drawn into the market
prematurely and which will help us to do our buying at the moment that the risk is the least. The
risk is always least the day before the market moves up. That is the perfect time to buy. In
actual practice we will not often buy one day and see the stock begin to move up the next day
and keep on going, but we can aim for this (and) the jump across the creek story will help us to
do that.
Now, will you please turn to chart number one, which is a very homespun, hand drawn
chart. It is the exact chart that Mr. Evans originally used to illustrate this principle. We start with
our scout at the letter X and he is going to go to the letter Y, which is his objective. It is actually
quite a distance and to go there he will have to cross some broad, open fields, (go) through some
woods and cross a few creeks. So, he goes up to (point) number 1 and at that point encounters a
stream. The stream is too wide to jump across and too swift to swim across. Now, as a boy
scout, what is he going to do? The answer really is in the story itself. As a boy scout the logical
thing to do would be to move along the edge of the creek hoping to find a spot which is not quite
so wide so that he could attempt to jump across it. If he finds such a point, he has a chance of
going across without getting wet. Now, remember that a stream never, or very rarely ever runs in
a straight line; it meanders all over the place. Furthermore, the scout probably would not be able
to walk along the edge of the water. There may be swampy spots, trees, rocks or other obstacles
in his way. He would probably have to walk along the edge of the bank, move away from the
bank and make frequent trips down to the waters edge to inspect the situation.
So, here he is at (point) 1 and he has the problem of getting across the stream. He begins
to move downstream. The path that he takes is a broken line which is drawn along the edge of
the creek and as you can see, he goes up to the creek several times. He finds the creek is too
wide to jump across and too swift to swim across until he finally gets over to (point) 3. He has
made a number of trips to the edge of the creek, attempting to find a spot which is not quite so
wide and not quite so swift and at (point) 3 he finds that spot. Now, what does our boy scout do?

43

Does he stand on the bank to jump across or does he back up a ways to get a good running start
to jump across the creek? Now, maybe you have done this yourself at one time; if not try it
sometime. If you do not get a good run, you are almost sure to end up in the water. So, our
scout at (point) 3 says to himself: Well, I believe if I back up and make a run for it, I think I can
jump across the creek. He backs up to (point) 4 and he runs and where we have drawn the
arrow is where he jumps across the creek. Now, what happens as the boys feet land on the other
side of the creek? Does he stop right there, dead in his tracks? No, the momentum itself will
carry him a good way beyond the edge of the creek. This is the momentum made up of the run,
the jump and the landing. He made it so far.
He is now on the other side of the creek, but is he safe? Well, not necessarily. What has
happened? In the first place, the back-up, the run and the jump across the creek (have) burned
up most of the boys energy. It is logical for him to rest a bit before he continues and thus, the
normal thing to do (is) for him to simply sit down and relax. Where? He moves along the edge
of the creek until he finds a restful place, maybe under a shady tree. Perhaps he takes off his
shoes and maybe dangles his feet in the water. He cools off, rests and attempts to regain his
strength before continuing his move on toward his objective at (point) Y. Along the way from
(point) 1 to (point) 4 our scout encountered alot of things which were unpleasant and frustrating.
If he decided to move on immediately toward Y, he may find himself in trouble further on down
the road before he gets to Y, so it is only logical for him to make sure he is still able to go on to
(point) Y before he begins his journey.
Now, lets tie this into the action of the stock market. How many times do we have
reactions. Sometimes a reaction of only one day is all that is necessary to determine that it is
safe to go ahead with the move. At other times it is necessary to back up to the edge of the
creek. For the sake of our discussion, we are going to back up to (point) 6 at the edge of the
creek and we will analyze how our strength is, how much power we have and what the next
move is. Now, if it was necessary to make only a minor hesitation or, market-wise, a one day
reaction, we could expect to resume our move up to (point) Y and have a rather strong, free and
easy time of it and reach our destination rather quickly. However, suppose we found it necessary
to go all the back to (point) 6. What would make you go back there? Well, you might have
sprained an ankle, thrown your back out of place, gotten hot and tired and so you back up to the
edge of the creek, sit down and relax. Now, be careful, because you dont want to fall back into
the creek. If you do, you are in trouble. You may have to return to the beginning and start all
over again. As our boy starts to move on, one of two things will happen. Either he will be able
to resume a move from (point) 6 up to Y or he will find that as he starts to move away from the
edge of the creek he is not able to do so and he will fall back into the creek.
At (point) 6 he starts to move away and he goes up to (point) 7. In order to get to (point)
7 he must be strong; he must keep pushing forward. Incidentally, at (point) 7 he has gone well
beyond (point) 5 and he is on his way toward Y. On the other hand, suppose he started out and
began to falter; he wasnt able to keep going. We have drawn this type of action at (point) 8.
Perhaps his ankle is hurting or his back is hurting: He runs into other troubles, a different set of
circumstances is in operation and he falls back into the creek.
Now, lets again carry this concept into the stock market. First of all let us define a creek
as it will help us to understand how the jump across the creek story ties in with the stock
market. A creek is the flow of supply across the top of a trading range. It is drawn with a
wiggly, freehand trend line, drawn through or across the top of the rallies within the trading
range. The jump across the creek is the action in which the price jumps across this creek of
supply. The jump across the creek is normally followed by a back up to the edge of the creek.
Again, the jump across the creek is normally a potential sign of strength and the back up to
the edge of the creek is normally a potential last point of support.
Suppose a stock is going to try to go from X to Y: It goes up to number one and then
begins to move sideways in a trading range. Why? Because the stock has run into too much
supply and that supply is what we call the creek. The creek is the flow of supply across the top
of the trading range. It is defined by the rallies within the trading range and as those
rallies do not all stop at the same price, the creek winds, just like a stream would. Now,
from (point) 1 all the way over to (point) 3 there is too much supply and at (point) 3 there is a
rally to the top of the trading range and finally we find that there is much less supply in evidence
and thus there is a back-up to (point) 4, then a strong effort to go through all of that supply,
followed by a reaction and then an attempt to move on to the final destination at Y. Incidentally,
on the back-up to (point) 4, we may back up far enough to create a spring or a terminal shakeout.

44

The move from (point) 4 to (point) 5 is a sign of strength and the reaction to (point) 6 is
the last point of support. In this process the stock is attempting to establish an upward trend and
you would expect to have normal up trend action with good demand on the rallies and a lack of
supply on the reactions. Be that as it may, suppose (that) following (point) 4, the stock starts to
move up and fails to jump the creek and lands right, smack in the middle of the creek: Or on
(the) back-up to (point) 6 or on the reaction to (point) 8, it could fall back into the creek and find
itself unable to continue on up. This action can create an upthrust. Upthrusts will be
discussed in more detail (in) a later lecture. As we move up from (point) 4 we are actually
attempting to begin an up trend. Now, what is the type of price and volume action that we would
expect to have in an up trend? We would expect good demand on the rallies with a widening
spread and an increase in volume, followed by a lack of supply or a narrowing spread and a
decreased volume on the reactions. Thus, from (point) 4 to (point) 5 we would expect a
widening spread, an increase in volume and on the reaction from (point) 5 to (point) 6, a
narrowing spread and a decrease in volume.
Lets take a look at an actual example. Please turn to chart number two of Natomas
Company. It has a classic crossing of the creek. This is the same chart picture as chart eight of
Basic Lecture Five: The numbers will be somewhat different. The stock went up to (point) 1,
stopped and then began to move sideways in a trading range: There was too much supply at
(points) 2, 3, and 4. But at (point) 4, the boy scout says; Well, I believe if I back up and get a
run for it, I believe I can make it. So, he backs up all the way to (point) 5 and finally to (point)
6 and he digs in and he starts to make his run and on the move from (point) 6 to (point) 7 he
jumps the creek and (then) backs up to the edge of the creek at (point) 8.
Now, where is the creek? After much searching for the answer to this question, Mr.
Evans finally reached the conclusion that the creek is where the boy jumped. Applying this to
the market, the creek is where the volume (comes) in, where the effort, the push, the power
(comes) in. If you look at the day marked 9, there is somewhat of an increase in volume and the
price action was good; it jumped on that day. We know that a stream or a river or a creek of
supply is not a horizontal area; it winds all over the place and we know that very often there is
more than one branch of the creek, so we have what we sometimes refer to as an upper branch
and a lower branch or sometimes as the major creek and the minor creek. The minor creek very
often occurs in the lower or the middle part of the trading range, but is still somewhere in the
trading range.
The jump of the major creek is a larger move and it very often carries the stock above
the old supply levels in the trading range, often into new high ground. On chart number two, the
lower branch has been labeled A, the upper branch labeled B. Following the reaction to (point)
8, the stock jumps the creek at (point) 10 with a back-up... (taking place) the next day. Now,
look at where effort and volume came in at (point) 10. Then it continues on up to (point) 11 and
(finally) backs up to (point) 12. (Point) 12 was a one day reaction and those operating in the
stock found that it was safe to continue to move it up.
Now, let us take a different perspective and view this chart on a much broader basis
because we have an old supply area at (point) 1, another one at (point) 4 and the stock has the
problem of being able to absorb the supply as it attempts to get through those areas. When we
view the chart broadly this way, we can then draw another branch, branch C, which is really a
creek drawn through (points) 1, 2, 3, 4 and then to the right. Now, where was this major creek
jumped? Look at the volume. The volume came into the stock over two days at (the area
marked) 13. There was an immediate back-up to the edge of the creek at (point) 14. It started
on at (point) 15 and then ran into too much supply and it backed up... again, back to the cool
shade of the tree near the creek and rested. Look at the volume dry up at (point) 16: There was
no supply on that reaction. It eventually went all the way up to (point) 17 and then came down
to (point) 18 for a back-up to the edge of the major creek. Note that the volume remained
relatively low until it got to the day marked 18, climaxing that reaction. At (point) 17 the
volume was much less, indicating that it (the stock) was running out of demand as it attempted to
move up. Applying this to the (jump) across the creek story, we could say that the boy scout
tried to move on toward his destination, but found that he did not have the push and so had to
back up again to the edge of creek at (point) 18.
Please turn to chart number three, Reeves Broadcasting, early 1968. We have drawn
the creek for the small trading range which was a part of a much larger one (encompassing the
area) from (point) 1 to (point) 2. Let us examine this area from (point) 1 to (point) 2. There are
several places where the stock ran into supply on a rally. It did so at (point) 3, backed off and
then at (points) 4 and 5 again ran into supply. Following (point) 5 the stock reacted to (point) 6

45

and supply was still present. It finally dried up at (point) 7 and then, on the rally from (point) 7
to (point) 2, the volume failed to come in and so it backed up to (point) 8, dug in and jumped
the lower branch of the creek at (point) 9. Now, where was this lower branch jumped? Look at
the volume that came in at (point) 9 There was a pronounced expansion of volume along with
good price action and so the stock reacted back toward that branch of the creek for the backup... at (point) 10. It attempted to continue the move up to (point) 11 and ran into too much
supply and so it backed up again toward the edge of the creek at (point) 12. There was a lack
of supply on that reaction as shown by the relatively low volume and the continued narrowing of
the spread. Note that at (point) 12 the stock moved back into the general area where the original
jump occurred at (point) 9. Following this, the stock attempted to come out of the trading range
again by jumping the creek of supply all the way back in this trading range. It did this on the
move from (point) 12 to (point) 13. Look at the heavy volume that came in at (point) 14. This is
where the jump... occurred, where the demand overcame the supply. The stock continued on
and then backed up... at (point) 15 toward the area where the volume came in. As there was no
significant supply at (point) 15, it did not continue to move on down. It did not have a deep
correction and did not have to have one since there was little supply on this reaction: It was a one
day reaction.
Now, the move from (point) 8 to (point) 11 is a minor sign of strength. The reaction
down to (point) 12 is a minor LPS (last point of support) and the move from (point) 12 to (point)
13 is a more important sign of strength. The reaction to (point) 15 is a more important LPS
which could come into operation after the count from (point) 12 to (point) 16 had been worked
out
Now, reviewing this; where exactly is the creek? Where did the stock jump the creek?
The creek was actually at the point where the boy scout (or stock) jumped. Applying this to the
market, the creek is the point where demand overcomes supply. Usually it is where the
volume comes in and absorbs all of the supply and the stock is able to move well. Now, note
that in moving from (point) 12 to (point) 13 there was good demand on the rally and a lack of
supply on the reaction to (point) 15. The demand is shown by the widening spread and increased
volume. The lack of supply was indicated by the light volume. This is normal action expected
in an up trend.
Now, where could a speculative position have been taken? Anywhere in the area from
(point) 10 to (point) 12 on the reaction back toward the edge of the creek and on the reaction
down toward the upper branch at (point) 15. Either you can wait until the stock gets down to the
edge of the creek and then go in and buy or you can enter resting orders or bids underneath the
market and wait until the stock reacts toward the edge of the creek and see if these orders are
filled. If you enter bids underneath the market, some of these will be executed and some will
not. Both of these methods of buying in on the back-up to the edge of the creek have been
used with equal success. You may find it advantageous to use one method in one situation or
stock and the other method of entering orders in a different stock or market situation. Now, we
suggest that you practice trade with both and see which you prefer.
Chart number four contains a small creek, lasting only a few weeks. The stock moved
from (point) 1 to (point) 2 and then began to react. We can draw a creek across the rally tops.
Now, where was the creek jumped? Look at the spread and look at the volume. The spread
began to widen and the volume began to increase on the two days marked 3. This is where the
stock jumped the creek. It continued to (point) 4 and then reacted at (point) 5 for a one day
reaction. Volume was low on the reaction at (point) 5 indicating a lack of supply. The stock did
not back up deeply and was not in danger of falling into the creek: There was no supply on that
reaction. Note that before the stock began to try to cross the creek, it had a number three spring
at (point) 6. Reviewing this; we know that a purchase could have been made on the number
three spring at (point) 6 and a later purchase made on the back-up to the edge of the creek at
(point) 5.
Now, lets go on to chart number five, General Development, 1969. The stock had
been in a major up trend and at (point) 1 began to react within that up trend. There was a minor
selling climax at (point) 2 which stopped the down trend for some time and we can begin
drawing the creek from (point) 3 to (point) 4. The boy scout says, If I back up a ways and get a
run for it, I think I might be able to make it. So he backs up to (point) 5 and digs in. As he
starts to make his jump, there is increased volume at (the area marked) 6 over several days and
he runs into trouble at (point) 7: There is a lack of push there, at (point) 7; the volume is low. So
he backs up again to (point) 8 and then jumps the creek at (point) 9. Look at the volume and
the price action at (point) 9. The volume shows exactly where he did jump. In doing so it (the

46

stock) took out all of the supply between the $28.00 - $29.00 level and then, following that,
backs up to the edge of the creek at (point) 10. There is a lack of supply until it got down to
the last day at (point) 10. Now, watch how it pushes off at (point) 11. It has strength, it has push
and it is able to move on toward the goal. In the individual stocks and in the indexes this is what
you can look for and play for.
Chart number six is of Milgo. The stock reacted to (point) 1 and then began a trading
range. At (point) 2 the supply was too wide and too deep to go across and so it simply backs up
until at (point) 3 it says, I think that if I back up and get a run for it, I think I can make it.
Now, look at the lack of supply at (point) 3; theres not a great deal of volume on it (the stock)
and so it backs up to (point) 4 jumps at (point) 5 and look at the strength of the jump at (point) 5.
There is a one day reaction at (point) 6, which incidentally had heavy volume. As this occurred,
you would have had some doubt as to how deep of a reaction back to the edge of the creek would
take place. However, there was no follow through on the reaction. The stock moved on up to
(point) 7 and then had a one day reaction to (point) 8 with considerably decreased supply. You
can see the results of the absorption of the supply and the strength of the jump. It is apparent that
the jump is strong and that the stock has no need for a prolonged back-up to the edge of the
creek. The resulting move toward the objective is likely to be stronger than where this strength
does not occur.
The next chart, chart number seven of Papert, Koenig, Lois, will be viewed on the
broadest (of) terms only. The stock had been in a trading range and ran into supply at (point) 1.
Now, let us draw a creek, beginning with the area at (point) 1, all the way over to (point) 2 where
it ran into a place where the flow of supply is too strong, too wide (and) too deep to jump across.
And so it reacts to (point) 3 and tries again. At (point) 4 the river, the creek of supply is still too
strong to go through and so it backs up all the way to (point) 5 and moves sideways until finally
it backs up to (point) 6 and has really dug in. It says, I may have backed up far enough, if I try,
I may be able to make it. So it gradually begins to move up to the edge of the creek and at
(point) 7 the volume begins to come in and at (point) 8 it jumps the creek, continuing on to
(point) 9 and is in open territory and new high ground for this trading range. There is too much
volume to continue: The boy scout is out in the hot sun all tuckered out and so it (the stock)
backs up to (point) 10. On the back-up... it did not have to back-up all the way down to $8.00
per share. It simply had to back up towards the edge of the creek and show that the supply that
was present at (points) 8 and 9 was no longer pressing on the market. The stock moved up
strongly from here.
Sometimes the creeks are somewhat difficult to see and are not too obvious and chart
number eight is one of these. The stock reacted to (point) 1 and then rallied to (point) 2. We can
draw the creek through (points) 2 and 3. Note the bouncing action of the price and the volume
which came in the area circled at (number) 4. The stock is slammed down and bounces up and
then down again. Then at (point) 5 there is no supply on the downside. Our scout says: I think
if I try, I can jump the creek. So he moves up from (point) 5 to (point) 6: Progress is good; and
where did the stock jump the creek? Look at where the volume came in over the two days
marked 7. This is where the volume, the push, the effort came in to boost the stock through this
creek of supply and note that it came in over a price range, not at one specific price only. The
stock found that it did not have to move toward the edge of the creek. It simply moved sideways
and the volume dried up at (point) 8 and it continued on up towards the objective.
The next chart, chart number nine is the same as the early part of chart number nine of
Basic Lecture Number Two. You may wish to transfer the creek to that chart. The stock came
down to (point) 1, stopped going down and then moved into a trading range. Now, cover up all
of the action to the right of the vertical arrow (marked) 2 so that the only chart action you are
examining is from (point) 1 to (point) 2, thus you have a small perspective. The stock met
supply at (points) 3, 4 and 5 and reacted. There was a spring at (point) 6. The spring indicated
that there was a lack of overwhelming supply. There was some volume, but supply was not in
control and therefore it gave demand an opportunity to come in. That demand would either be
strong or weak and it could be sufficiently strong to attempt to cross the creek. The stock rallied
to (point) 7 on good volume. There was supply at (point) 8, which immediately dried up the next
day and then it jumped the creek on the day marked 9. Now, uncover the rest of this chart. At
(point) 10 there was a one day reaction and (then) it (the stock) continued on up to (point) 11 and
eventually backed down into this area at (point) 12 and again at (point) 13. Why would it do
this? There may be several reasons including the action of the general market itself. The stock
may be ready, but the general market may be simply reacting and usually a stock will not buck
the general market move for too long. Do not under estimate the effect of the general market,

47

using the Wyckoff Wave on the individual stocks. More about that later. Also, the stock may not
be sufficiently strong to leave the trading range permanently. It is like the boy scout: Every time
he pokes his head out into the open field, our boy scout gets hot, sweaty, tired and simply backs
up again for some more rest, relaxation and recuperation.
Now, beginning at (point) 11, we can draw another creek through (points) 11, 14, and 15
because the stock has established a new supply area. Throughout this area from (point) 11 to
(point) 15 there is, in general, good demand on the rallies and comparatively less spread and
volume on the reactions. At (point) 15 he (the boy scout) says, I think, if I back up, I may be
able to make it. And so he backs up to (point) 16 and the price action from (point) 16 to (point)
17 is good; hes making progress and look at the volume; it has push and the volume came in in
the area of $38.00 to $39.00 per share, stopped at (point) 17 and then reacted: Or did it? Instead
of reacting, it actually moved sideways in a trading range to (point) 18, but the lower levels of
that trading range (were) along the edge of the creek, so (point) 18 is the back up to the edge of
the lower branch of this creek. Now what about the problem of getting through the supply area
between $40.00 and $41.00 per share at (points) 14, 15 and 17 to 19. It (the stock) still must do
this if it is going to continue the up trend and it will either succeed or fail. Essentially, it is going
to be that clear cut. The price and volume action may be difficult to interpret as it occurs, but the
end result will be that it will either jump across the creek or it will not. At (point) 20 the stock
jumps this upper branch of the creek and then settles back toward the edge of the creek. Was
there heavy supply on the reaction to (point) 21? No. (Point) 21 is the back-up to the edge of
the creek and the stock continues on toward its objective.
Now, where could a speculative position have been taken on this stock? First of all, one
could have been taken in the area of the spring at (point) 6. A later position could have been
taken on the back up to the edge of the creek at (points) 10, 12, 13, or even (point) 16. In
buying on the bottoms of the reactions from (points) 10 to 16 it might have been expedient or
necessary to get out on the rallies due to the inability of the stock to continue its up trend.
Getting out on the rallies would avoid the possibility of riding the stock on down through your
purchase point. A new purchase could have been made on a later reaction. Additional purchases
could have been made on the back up to the edge of the creek at (point) 18 and (point) 21.
These are all logical areas (at) which to establish a first market position or to add to your line.
Chart number ten is of a stepping stone count. The stock had moved up to (point) 1
where it ran into supply and began a trading range with supply being met at (points) 2 and 3 and
finally at (point) 4 the boy scout says: Theres much less supply (flow) here then over (there) at
(points) 1 and 2 and I think if I back up and get a good run for it, I might be able to make it. So
he backs up all the way to (point) 5, digs in and what happens? He jumps. Where did he jump?
Where did the volume come in? The volume came in on both days marked 6 and it jumped the
creek and then backed up to (point) 7. There was good demand on the jump of the creek and
there (was) a narrowing of the spread and a decrease in volume, signifying a lack of supply, on
the reaction at (point) 7: There is no selling pressure forcing it (the stock) back into the creek. It
holds and then moves on up. We will not draw a higher creek; you may do that However, look
at the action that took place on the day marked 8. The stock jumped through all of the supply in
the $19.00 to $20.00 area. That is also a jump across the creek and the one day reaction at
(point) 9 is a back-up to the edge of that creek.
Chart eleven contains an up trend with a creek of supply starting at (point) 1 through
(points) 2 and 3 and finally (point) 4. At (point) 4 it says: There is too much supply here, but if
I back off, I may be able to dig in far enough and try to make it through this supply. So it backs
up all the way down to the spring at (point) 5. A first purchase could have been made on the
spring at (point) 5 with a stop order at, say, 19 7/8. Now, the demand following that spring is
either going to be strong or weak and it will either jump the creek or it will not. What does it do?
Where does the volume come in? The heavy volume came in at (point) 6 on the drive up to
(point) 7. It ran into too much supply at (point) 7 and backed off all the way down to the edge of
the creek at (point) 8
Occasionally a stock will back down farther than you would hope it would. When that
happens, you either stay in or you get out. You must decide as it occurs. At any rate, it is not
easy. Now, compare the price action from (point) 5 to (point) 7 with the action from (point)
7 to (point) 8. Compare the volume on those two moves. On the move from (point) 5 to
(point) 7 the price spread and the volume are both stronger than on the reaction to the area at
(point) 8. It should be noted that the stock stayed in the area of the creek for at least two weeks
before finally attempting to resume the up trend. Is it possible that there is a lower branch of the
creek in this area? Look at the volume that came in at (point) 5a and the reaction to (point) 5b.

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It is entirely possible that 5b is a back-up to the edge of that branch of the creek, which you
may draw.
It is important to recognize that there is no one exact way of drawing these creeks.
Do some experimenting with them. You may wish to draw the creek lightly in pencil on your
chart and continue the creek as long as it is useful; then later, either erase the creek or a branch of
the creek or perhaps remove it from your chart altogether. However, leave the important creeks
on your chart as they can be extremely helpful in drawing your attention to the meeting of supply
in a trading range and in assisting in defining the probable extent of the reaction, that is the
back-up..., which is likely to occur after a possible crossing of the creek. It will be
especially helpful in drawing your attention to situations where a stock falls back into the the
creek because every so often it does that and every so often that little old boy scout sort of
drowns and our problem, very often, is not to drown with him.
Alright, lets move on to (point) 9 where the stock finally stopped going up and then
began a trading range through (points) 10, 11 and 12. It backed off to (point) 13, dug in and then
jumped the creek. Or did it? Well, at least it tried. The volume came in heavily over three
days marked 14. It stopped at (point) 15 and then backed up to the creek. Look what
happened to the volume at (point) 16 on the back up. The volume came in on the down side,
supply came in, pushing downward. Then when it tried to rally at (point) 17 there was not
enough demand to continue the move as shown by the price action and the volume: So it fell
back into the creek. What would have happened had you bought in the area circled (at) 18? If
you had put in a 2 or 3 point stop order, you would have been stopped out. This occasionally
will happen. It is, however, better than going in without a stop order because by the time it got
down to (point) 19 you would have had a large loss and may have been forced to take that loss
either due to finances or emotions. Remember that many of our operational problems are
emotional. At times we may know what to do correctly and still do exactly the opposite because
of emotional pressures.
Lets examine the next several charts quickly and briefly. Chart number twelve has a
supply area from (point) 1 all the way over to (point) 2. The stock backs up to (point) 3 and then
jumps from (point) 3 to (point) 4. The jump... took place in one day and the back-up...
occurred within the next day at (point) 5. The jump across the creek was with wide spread,
increased volume and the reaction at (point) 5 had a narrow spread and decreased volume
compared to the up move at (point) 4.
Chart number thirteen is next with a creek from (point) 1 to (point) 2 and beyond. The
jump across the creek was the move from (point) 3 to (point) 4. The volume came in at (point)
5 and the stock reacted into the area (in) which this volume occurs. The back-up to the edge of
the creek was at (point) 6. The supply dried up and it (the stock) moved on upward from there.
Chart fourteen has a creek which winds all over the place until finally at (point) 1 the
price action is good: There is a bouncing, a stretching of price and some volume comes in on the
upside, indicating that the boy scout says: I think Ill try. It backs off to (point) 2 and on the
move from (point) 2 to (point) 3 it jumps the creek and immediately backs up to (point) 4. Note
the low volume at (point) 4; no heavy supply on the downside. Then at (point) 5, the next
day, we have an example where it (the stock) tried to go up, tried to go down and closed in the
middle on an increase in volume. The stock is going to try to move and soon: And it did!
Chart fifteen will be viewed on the basis of a large trading range. The stock met supply
at (point) 1, in the area at (point) 2 and again at (points) 3, 4 and 5 and finally reacted to (point) 6
for a number three spring. It broke through the entire support area bracketed at (number) 7 and
then began to move up. Now, where did it jump (across) the major creek? It is so obvious that
when you do have this kind of a situation, that often all you have to do is wait for the jumping
of the major creek. And this jump... occurred at (point) 8. It overcame all of the supply at
(point) 8, moved on to (point) 9 and then at (point) 10 backed up toward the edge of the creek.
The move up to (point) 9 was with wide spread and heavy volume, excellent demand and there
was a lack of supply as indicated by the narrowing of the spread and the decrease in volume on
the reaction to (point) 10. Incidentally, within this broad trading range there were a couple of
minor crossings of the creeks. One of them was at (point) 11, the back-up... being at (point)
12. Another occurred at (point) 13 with the back-up to the edge of the creek at (point) 14.
Chart sixteen is the same as chart six of Basic Lecture Three. The stock met supply
throughout the trading range, finally backed off to a terminal shakeout at (point) 13, jumped the
creek on the move from (point) 15 to (point) 16 and backed up to the edge of the minor creek
at (point) 10. It jumped another branch of the creek at (point) 17, backed (up) to that branch

49

of the creek at (point) 18 and finally jumped the major creek at (point) 19 with a back-up...
at (point) 20.
Now, let us deal briefly with the sign of strength. The sign of strength and the crossing of
the creek often are two ways of looking at the same action and the back-up to the edge of the
creek very often is the last point of support. This sign of strength is usually preceded by a
trading range and a stock can continue in a trading range until it either has a sign of weakness or
a sign of strength. The sign of strength shows that demand is in control. The price and
volume characteristics are that it has a widening spread and an increase in volume;
evidence of the good demand. This is proven and followed by the reaction to the last point
of support or LPS. That LPS should have a narrowing spread and a decreased volume
compared to the sign of strength, indicating the lack of supply on the reaction.
Turn to chart number sixteen. The move from (point) 15 to (point) 16 had widened
spread and increasing volume, evidence of good demand and it was followed by a reaction to
(point) 10 with a lack of supply. As the up move progressed and the figure chart count taken
from point 10 was exceeded, we would be forced to regard the move from (point) 15 to (point)
17 as a more important sign of strength and the reaction to (point) 18 as a more important LPS.
Note that the move from (point) 15 to (point) 17 again had wide spread, excellent price action
and good volume: And the reaction to (point) 18 had a decreased spread and volume compared to
the move up; good demand on the rally and a lack of supply on the reaction; a sign of strength
and an LPS.
Turn to chart number three. The move from (point) 8 to (point) 11 was a sign of strength
with wide spread and increasing volume and the reaction to (point) 12 was not only a back-up
to the lower branch of the creek, but it was an LPS. Note the lack of supply, the narrowing
spread and the decrease in volume on the reaction to (point) 12.
On chart number four the sign of strength was a move from (point) 6 to (point) 4 and the
back-up to the edge of the creek at (point) 5 was also the LPS.
On chart number seven the move to (point) 9 is a major sign of strength and the back-up
to (point) 10 is the major LPS.
On chart number nine the move from (point) 16 to (point) 17 is a sign of strength and the
reaction to (point) 18 is the LPS.
Now, on chart number ten the move from (point) 5 to (point) 6a is an excellent example
of a sign of strength, wide spread and the increased volume, evidence of the good demand. Then
on the reaction to (point) 7 there was a comparative lack of supply, evidenced by the narrowing
spread and the decreased volume.
Why dont you examine the rest of these jumps across the creek from the standpoint of
the sign of strength? You will find that they had good price action and increased volume on the
upside and this was followed by the reaction; the back up to the creek, the last point of support,
which also had a decreased volume and a narrowing of spread. If there is volume on the LPS,
that must be dried up or tested by a secondary test.
Occasionally in interpreting a chart, you will be in doubt. You will not get many classic
situations. When a stock jumps the creek and has a back-up to the edge of the creek, it
is in the process of establishing or resuming an upward trend. An upward trend should have
a widening spread and an increase in volume on the rallies and a lack of supply on the reaction.
For example, turn to chart number thirteen. The move from (point) 3 to (point) 4 which
was a sign of strength and (a) jump across the creek had good demand on it and the reaction to
(point) 6, the LPS, dried up the supply. This is normal action for an up trend and support line AA
can be drawn through (points) 3 and 6 with supply line BB drawn parallel to that support line.
The same line of reasoning can be applied to all of these examples.
And now for a brief summary of the jump across the creek. The jump across the
creek story is an analogy which we use to describe what can happen as a stock tries to go
through the supply area of a trading range. The creek is the flow of supply across the top of the
trading range and is drawn by wiggly trend line. The jump is indicated mainly by an increase
in volume where the effort comes in to overcome the supply. The jump is followed by the
back-up to the edge of the creek. The jump across the creek is usually a sign of strength and
the back-up to the edge of the creek is an LPS, last point of support. The jump across the
creek has wide spread and volume. The back-up to the edge of the creek has narrow spread
and decreased volume compared to the jump. This is normal action for an up trend. You may
buy on the back-up to the edge of the creek, the LPS.
Now, to move on to something else. I think if I push my chair back, keep in mind my
objective, dig in, get a run for it and jump, I just might make it. And you can too.

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51

BASIC LECTURE NUMBER SEVEN

DISTRIBUTION AND THE UPTHRUST AFTER DISTRIBUTION
The main subject of this (Basic) Lecture will be distribution. It will also cover the
principle of the upthrust after distribution. The purpose of this (Basic) Lecture will be to discuss
with you the process of distribution, where it fits into the cyclical process, how to analyze areas
of distribution and how you can take a position as the distribution is ending in order to profit
from the resulting down trend. Due to the scope of the subject, some things will be covered only
as highlights. The lecture will deal (primarily) with distribution for large moves. The same
process, however, takes place on an intraday, minor, intermediate as well as a major basis. These
same principles come into operation regardless of the size of the area of distribution.
The lecture will also deal with several examples of re-distribution for a further down
move, as well as a number of methods of establishing a speculative short position. Our main
concern in this lecture is to aid you in organizing your understanding of distribution and of the
various principles which may appear in the distribution area. A number of principles mentioned
(in) this lecture will be defined, but will not necessarily be discussed in detail. Among these
principles are preliminary supply, buying climax, automatic reaction (and) secondary test.
Now first, let us define distribution. Distribution refers to the elimination of a long
investment or speculative position and often involves establishing a speculative short position by
professional interests in anticipation of a decline in price. In the distribution area, the
professional investors or speculators that previously had bought stock, sell their stock to the
public. The public buys and it generally buys because of good news of various sorts; good news
on the company, its product, the economy or any news which will entice untrained people to
rationalize their buying decision. The best news of all is the advancing of the price of a stock.
Often the main reason untrained people buy is (that) they do not want to miss out on the
anticipated profits (that) they think they are going to get as the stock continues to move up, or
they may buy because the stock has reacted a few points from the top and they think (that) they
are getting a bargain. After having sold their long stock, professionals have no reason to support
the stock on reactions and so they cancel their bids under the market. They may not only cancel
the bids, but they may establish short positions in anticipation of a large decline in price.
The first five charts of this Basic Lecture are illustrative drawings, theoretical models,
which we have found to be quite helpful in grasping the basic concepts. Every stock goes
through a cyclical process similar to chart number one. This cycle can be broken down into four
phases: 1) accumulation; 2) mark-up or a sustained upward move; 3) distribution and 4) markdown or a sustained downward move. Now, these four phases come in all shapes and sizes.
They are repeated time and time again until finally the stock goes out of existence as a medium
of trading.
Chart two contains an area of distribution at A (and) a mark down phase at B which is
then interrupted with re-distribution at C, followed by a further mark down phase at D. We have
drawn the re-distribution phase C as a horizontal movement. This may actually be a horizontal, a
slightly upward or slightly downward slanting area of re-distribution.
In chart three, the area of original distribution is at A. A mark down phase (follows) at B,
which is (then) interrupted by a rally at C, (followed by) re-distribution at D and then the
resumption of the mark down at E. In both charts two and three the re-distribution is essentially
an interruption of the long mark down phase following the original area of distribution at A.
Actually, in a long sustained downward move or in a bear market, there may be several of these
areas of re-distribution.
Now, please turn to chart number four. It is a simple drawing of a large distribution area.
The same process occurs on a major, intermediate, minor and an intraday basis. Now, this chart
has been marked off (into) several sections; A, B, C, D, and E. In section A the up move is
stopped. In section B the stock forms a trading range. In section C the stock goes through a
testing process and in this case we have shown the upthrust or upthrust after distribution. In
section D the stock has an important sign of weakness and last point of supply and is in (the)
process of establishing a down trend. In section E the stock continues its down trend. Now, lets
discuss this section by section.

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In section A there is a large up move which is stopped by a buying climax. Usually,

certain principles come into operation when this stopping occurs. These are preliminary supply,
buying climax, automatic reaction and a secondary test. The old up move can end by simply
rounding over and running out of demand, evidenced by a decreasing volume and a narrowing
spread. For clear cut distribution, the climactic action is preferred. Preliminary supply is, by
definition, the first important heavy or persistent selling on the part of the professional investors
and speculators as they begin to liquidate their major long positions. The preliminary supply
usually has some form of a buying climax. Usually the reaction following that buying climax is
part of the preliminary supply. That reaction may have wide spread on the down side or heavy
volume or persistent volume: Or even better, it may have both wide spread and heavy volume on
the reaction. This is evidence of heavy, persistent selling. This preliminary supply has been
circled on chart number four at point 1. Preliminary supply stops the up move temporarily and if
the entire area is distribution, it is quite likely that the distribution (begins) at the point of
preliminary supply. Often the last point of supply and the preliminary supply will come in the
same general price level. The preliminary supply is followed by the drive up to the final buying
climax which simply stops the up move. In actual fact, the buying climax may be followed by
either an automatic reaction or a lateral move. That action is then followed by a secondary test
or a resumption of the up move. We are portraying the most desirable situation where the buying
climax is followed by the automatic reaction and then the secondary test.
On chart four the preliminary supply is at (point) 1, the buying climax at (point) 2, the
automatic reaction at (point) 3 and the secondary test at (point) 4. At that point the up move has
been stopped. Incidentally, there may be repeated secondary tests, such as (points) 5 and 7,
depending largely upon the continued existence of good demand for the stock at those points.
In section B the stock is in a trading range. Generally, in the first part of the trading
range the price swings are rather wide. Then in the latter part of the trading range the price
action begins to narrow down: The stock generally has high volume, very often erratic volume.
Sometimes in a trading range, in the distribution area, the spread will be wide and the volume
will increase on the drives down and these will be followed by decreasing volume and narrowing
of the spread on the rallies. This is evidence of heavy and continued selling of large quantities of
stock by professionals on the reactions and (also) that demand is not good when it does have the
opportunity to be dominant temporarily. Actually, you do not know for certain that the trading
range is distribution until it goes through the testing process as in area C. The trading range may
be accumulation, distribution or nothing; nothing being an area in which no one is preparing for
a large move. Thus, a stock may remain in the range indefinitely, until it has a sign of strength,
followed by a last point of support, indicating an upward move or a sign of weakness, followed
by a last point of supply, indicating a downward move. Furthermore, the early part of the trading
range may be nothing and only the later part distribution. This is why it is extremely important
that you not establish a long or a short position in the trading range unless the stock has clear
indications of leaving the trading range and beginning a new trend.
In section C the stock goes through a testing process. In this testing process it may
attempt to leave the trading range on the up side or the down side. What we are showing is the
former, where the stock goes into new high ground and attempts to leave the trading range on the
upside and fails due to the pressure of supply or due to the lack of demand at the point where
demand should be very strong and dominant. This creates the upthrust. The upthrust occurring
at this point exhausts the remaining demand, forces premature short sellers to cover their
positions and creates a completely false impression as to the ultimate move. The upthrust itself
is the sign of weakness and the last point of supply all in the same action. It is normally
followed by a more important sign of weakness and a last point of supply. The upthrust is at
(point) 11. The upthrust breaks through the previous supply level, perhaps above all the supply
points in the trading range, although it does not need to do so. The reaction to (point) 12 carries
the stock below the previous supply area and it is immediately followed by a rally to the test at
(point) 13. This test is in the nature of a secondary test in that it has less demand on it than at
(point) 11.
In section D the stock reacts down toward or through the bottom of the trading range and
the supports (located) at (points) 6, 8 and 10 with a sign of weakness at (point) 14 and a last
point of supply at (point) 15. It continues on down to (point) 16 and then rallies to (point) 17. A
down trend has been established and then in section E, the stock simply continues with that down
trend and is definitely in the mark down phase of the cycle.
Chart five shows a distribution area (in) which the stock does not go through an upthrust
or an upthrust after distribution, but instead, simply has a sign of weakness and a last point of

53

supply with, perhaps, lower tops and lower bottoms. Section A and B are the same as in chart
four. In section C of chart five however, the stock has a sign of weakness at (point) 10 and a last
point of supply at (point) 11 indicating that supply is in control of the situation and the stock is
now going to attempt to leave the trading range on the downside. It does this in section D,
breaking all the support areas with a possible more important sign of weakness at (point) 12 and
a more important LPSY at (point) 13. It continues the down trend in section E.
Now, how do you operate in the distribution area? Where do you make a commitment to
buy or sell? For the quick in and out traders there are a number of places at which to take a long
or a short position. They may sell short on the buying climax, cover and go long on the
automatic reaction, sell out on the secondary test and go short for the subsequent reaction and
repeat this process as long as they can. It should be noted that the longer the stock stays in the
trading range, the more dangerous this becomes. We are not advocating that you do this quick in
and out trading and most of the students do not do well at it. The aim is to diagnose possible
large distribution and to take a speculative position as the distribution is coming to an end and as
the stock is beginning to establish a sustained down trend. Thus, do not take a speculative
position until you see an upthrust or an upthrust after distribution or a last point of supply
following a sign of weakness. Aim to pyramid with the coming trend.
Now look at chart four. The first position could be taken on the upthrust at (point)
number 11. An additional position may be established on the rally at (point) 13 and you could
add to your position on the rallies to (points) 15 and 17 and on any later normal correction of the
down trend. On chart five, where there is no upthrust, the first place to take a position is on the
last point of supply after the sign of weakness at (point) number 11 and additional positions
could be established at (point) 13 and on any subsequent rally within the down trend.
At this time we would now like to introduce you to another analogy; that of the ice story.
Its a story introduced by Mr. Robert Evans and has become an inseparable part of the
distribution message. You have often seen how a former support area can become a supply area.
The ice story concerns this process. The ice is the former support area at the bottom of the
trading range which becomes a supply area. The ice is shown by drawing, a wiggly trend line
across the various support points at the bottom of the range; in a manner similar to the creek
which is drawn through the supply points at the tops of the rallies in the trading range. The
analogy of the ice story is as follows:
A boy is walking along the ice on a frozen river in the middle of winter. It supports him
well. Remember, we liken the ice to the supports in a trading range. All of a sudden he falls
through the ice. Now stop and picture it. What can happen? He must get back above the ice or
he will drown: 1) He could fall through the ice and then quickly come up through the same hole
and be safe; 2) However, the current could carry him down stream. If it does, as he comes up, he
could find a spot where the ice is weak enough so that he could break through and again, get
above the ice and not drown; 3) However, what happens if he comes up to the ice, bumps his
head, finds it too deep or too thick to break through? He immediately pushes off, down in the
water, so that he can come up with a stronger force and perhaps break through. If he doesnt
break through this time and the ice is still too strong, he goes down and down and down and
drowns. Much the same thing happens in the market.
Turn to chart four. The stock was supported at (points) 3, 6, 8 and 10 and 14. What
happens to the people who bought in those areas? At (point) 16 they have a loss and as the stock
rallies to (point) 17 many of these people will want to get out even or to simply get out at all,
even with a small loss. Thus, many of these people sell on the rally to (point) 17 and this creates
the supply as the old support areas are approached or reached. If demand is not strong on the
rally to (point) 17 at the level of the ice, demand will be overcome by supply and the stock turns
down and as we have learned, weak demand is indicated by a narrowing spread and decreasing
volume on the rally
Now, lets go into some examples of distribution. Chart six of Sanders Associates, has
an example of original distribution and (of) re-distribution. The original distribution area began
on the move to (point) 1 which is the buying climax. This occurred as the stock reached and
penetrated a previous supply level at $62.00. The volume the next day at (point) 2 was heavy
and increased and the spread was wide on the downside. Selling continued to come in, pressing
on the stock, (causing) the automatic reaction; (viz.) the move from (point) 1 to (point) 3. The
secondary test occurred at (point) 4. It then reacted to (point) 5 with wide spread and the volume
remained heavy; there is continued selling. The price action from (point) 5 to (point) 6 started
out with good price spread then decreased along with the volume as the stock continued to move
up; demand is dying out. More supply (came in) at (point) 7; look at the increased volume on the

54

downside. The move from (point) 6 to (point) 8 had wide spread and heavy volume,
indicating the presence of heavy supply. It is a potential sign of weakness which will be
proven or disproven or be left in doubt by the subsequent rally. (Point) 9 is the last point of
supply. Note that the spread was wider and the volume was heavier on the move from (point) 6
to (point) 8 than it was on the move from (point) 8 to (point) 9. The move from (point) 6 to
(point) 8 showed relatively heavier supply than the demand which came in on the move to
(point) 9. Also, the action from (point) 6 to (point) 8 took place in approximately two weeks:
However from (point) 8 to (point) 9 was approximately four weeks. Thus, the comparative lack
of demand on the move to (point) 9 confirmed that the reaction to (point) 8 was the sign of
weakness. Well, following (point) 9, the stock broke downward. The preliminary support at
(point) 10 and the selling climax at (point) 11 stopped the down trend. The automatic rally was
at (point) 12 and the secondary test at (point) 13 with another at (point) 14. All that the
secondary test of the selling climax does is stop the down move. The subsequent action may be
accumulation, distribution or nothing. The stock rallied, {(point) 15}, reacted to (point) 16 and
then at (point) 17 had an upthrust.
Now, before going further, let us define an upthrust. An upthrust is a sharp price
movement above a prior supply level which does not hold, but immediately reacts below
that previous level. Usually on the upthrust the spread will be narrow and the volume will be
increased. This is evidence of the supply overcoming demand. Suppose a stock moves up from
50 to 51 and it takes 10,000 shares to do it and then moves to 52 and it takes 20,000 shares to do
it. The volume (the supply) has increased in strength relative to demand. If the volume doubles,
the price progress should be double and when it does not, the inference may be drawn that the
supply is overcoming the demand. Now, suppose a stock moves up one point on 10,000 shares
and moves up 1/2 point on 20,000 shares. Here the narrowing of the spread and the supply
coming in to overcome the demand is much more emphatic. This usually is what occurs on an
upthrust. The confirmation that it is an upthrust is in the promptness and in the manner in
which it reacts. It should react promptly to show that the attempt to leave the trading range on
the upside has failed and generally it will react with either a lack of demand or with the pressure
of supply coming in on the downside. The reaction at (point) 18 is prompt and with wide spread:
The volume is low, but the spread is wide. Had demand been good there, the price would not
have cracked on that low volume. There is a lack of demand at the point where there should
be good demand. There are times in the market (when)you can say that the stock has to go and
keep going NOW or it is in trouble: (Point) 17 is one of those situations. The stock stabilizes and
then at (point) 19 attempts to move up again: This also fails. The stock moves down, supply
coming in heavily on the downside at (point) 20 and it finally reaches the objective of this redistribution on the move down to (point) 21.
Where could a logical short position be taken in this stock? In the original distribution
area one could be taken in the area circled around (point) 9 with a stop above (points) 6 and 1,
perhaps at 64 1/8 per share: This is on the LPSY (last point of supply) after the sign of weakness.
In the re-distribution area a short position could have been taken on the upthrust at (point) 17 or
on the rally following (point) 18 at (point) 19 with a stop, perhaps at 49 1/8 or anywhere in the
area circled. Now, please memorize this! In a distribution area you take a short position only; 1)
on the upthrust or upthrust after distribution or; 2) on the last point of supply after a sign of
weakness.
Chart seven of IBM, begins with a two for one split. The stock had been in an up trend
and had moved up to (point) 1, a buying climax. The automatic reaction was at (point) 2, the
secondary test at (point) 3. Then, immediately, the stock had a sign of weakness from (point) 3
to (point) 4. Note the price weakness; the wide spread on the downside and the heavily
increased volume as it began to move down. This is heavy supply coming in on the
downside and it is the potential sign of weakness which would be confirmed, denied or left
in doubt by the subsequent rally. It rallied from (point) 4 to (point) 5 and then immediately
came down to (point) 6 with price weakness. A strong stock should not react as it did at (point)
6: And then the stock moved up to (point) 7. Compare the price action and the volume of the
sign of weakness from (point) 3 to (point) 4 with the rally from (point) 6 to (point) 7. The
supply is stronger than the demand as shown by the greater price weakness and the greater
volume on the move to (point) 4. It was more difficult for the stock to move up than it was
to move down. Thus (point) 7 is a last point of supply after the sign of weakness and a logical
count may be taken from that point to give the possible objective that the stock could reach on
the down side.

55

Distribution is usually accomplished in a relatively short time, whereas accumulation

usually takes much longer, sometimes over many years. Major distribution occurs in only a
few weeks or perhaps a few months, very rarely over a several year period. Distribution is
usually characterized by wide price movements and heavy volume and great activity.
In early 1968, Scientific Resources, chart eight, began moving up from around $10.00
and finally reached $38.00 per share. It met preliminary supply at (point) 1, which is circled on
the chart and then went on up to the buying climax at (point) 2. Note that the volume was
heavier on the preliminary supply than on the buying climax. The automatic reaction is at (point)
3 and the secondary test at (point) 4 and then the stock went on down to the sign of weakness at
(point) 5. It did so with widened spread, price weakness and heavy sustained volume. This is
heavy selling as the stock moves down. Now, compare the spread and volume on the rally to
(point) 6 with the reaction to (point) 5. There is less demand on the rally to the LPSY at (point) 6
than there was supply on the drive down to (point) 5. This is shown by the comparative lack of
price progress, the comparative narrowing of the spread and especially the decreased volume and
(it) took a longer time. The LPSY came in the vicinity of the half-way point. It is not
particularly important where the LPSY stops on the rally, however it very often turns in
the vicinity of that half-way point. The stock reacted down to (point) 7 with a good climax,
rallied to (point) 8 and went through re-distribution. It ran into supply at (point) 8 and had a lack
of selling pressure at (point) 9. The day marked 10 had good demand as evidenced by the wide
spread and the heavy volume, however, the spread the next day narrowed and volume was
slightly increased. This is evidence of supply overcoming the demand at a point where it
should not stop the move. There are times in the market when you can say that the stock should
go and go now if its going to be good and at (point) 11, instead of the spread being wide, it
narrows. At (point) 11, a point where the stock should continue to make progress, it does not.
As a result, it reacts to (point) 12 for a sign of weakness and a last point of supply at (point) 13
and continues on down. The lack of demand at (point) 13 is shown by the narrowing spread and
decreased volume and is confirmation and proof that (point) 12 is a sign of weakness.
Chart nine had a very compact area of distribution. The stock met preliminary supply at
(point) 1 and (had) a buying climax at (point) 2. The automatic reaction was at (point) 3 and the
secondary test at (point) 4. All that the comparative lack of demand on the secondary test at
(point) 4 showed was that the stock had stopped going up. At that point it could continue
moving sideways in a trading range and go through accumulation, distribution or nothing.
Instead, it immediately reacted down to (point) 5 with a widening of spread and an increase in
volume. (Point) 5 is a potential sign of weakness and the rally to (point) 6 is the LPSY (last
point of supply) confirming the sign of weakness. A short position could have been taken on the
rally to (point) 6 and following (point) 6 the stock reacted with good spread down to (point) 7
into new low ground below (point) 5. Demand simply died out on the rally to (point) 8. The
move down to (point) 7 is a more important sign of weakness and the rally to (point) 8 is a more
important last point of supply. The next day, following (point) 8, the stock immediately started
down with very wide spread and heavy volume, evidence of supply; selling coming in on the
downside. Thus, a first position could have been taken on the rally to (point) 6 and a second
position on the rally to (point) 8.
There is no one exact point at which to take a position. You must judge the last point of
supply as it occurs and attempt to establish a short position as close to the turning point as
possible. Often you can tie this in with other principles, such as the meeting of the supply line,
the previous supply or support area and the half-way point. Very often the last point of supply
will come at the same area as either the preliminary supply or the buying climax.
Chart ten, Sunshine Mining, was in a long up trend. It met preliminary supply at
(point) 1 and (had) a buying climax at (point) 2. Note the heavy supply, the volume coming in
on the downside as well as the widening of spread on the automatic reaction to (point) 3. The
selling continued. Then the secondary test was at (point) 4. The stock immediately reacted down
to the sign of weakness at (point) 5 and (then) began a long rally to the last point of supply at
(point) 6. Note that on that last point of supply it went above the area 7 for an upthrust.
The heavy volume at (point) 6 occurred as the stock was trying to penetrate through the area 7
and then the selling continued on the downside where it closed on the low. Now, compare the
price action, the volume and the time on the move from (point) 4 to (point) 5 with the move from
(point) 5 to (point) 6. The sign of weakness to (point) 5 took less time, had wider spread, greater
price weakness and more volume than on the move from (point) 5 to (point) 6. Supply was
stronger than demand. It was a sign of weakness, confirmed and proven to be one by the last
point of supply at (point) 6. The stock immediately went down to (point) 8, but did not climax

56

the down move as evidenced by the failure of volume to increase substantially. Then it rallied to
go through re-distribution. This very often happens to a stock. It had preliminary supply at
(point) 9, a buying climax at (point) 10 and an immediate secondary test at (point) 11 and then
reacted to (point) 12 and had another test of the climax at (point) 13. Note where this
distribution is coming in. It is coming in just below the old supply area at (points) 7 and 6. The
sign of weakness occurred at (point) 14. It lost all the gain and broke through the support at
(points) 12 and 15, but more important was how it did it. It came down with a widening spread,
increased price weakness and increased volume; evidence of increased and heavy selling. This is
bearish. The rally to (point) 16 is a last point of supply. The next day, (point) 17, the supply
overpowered the demand and the stock began immediately to go down for a move of about 20
points.
So far we have been mainly discussing distribution in which the stock stops the major up
trend with a buying climax and a secondary test. It is important to recognize that all up trends do
not end with a classic volume buying climax. It may simply run out of demand with a gradual
narrowing of the spread and a decreasing volume. Should this occur, it leaves the stock
vulnerable for supply to come in and the distribution may be shown mainly by the supply which
comes in on the reactions. You will be able to judge that by the spread and volume.
Chart eleven is just such a situation. The stocks move did not end with a classic volume
buying climax at (point) 1. There was a steady decrease in volume, marked by the arrow, and a
narrowing of the spread at (point) 1. Then strong supply came in on the downside; on the
reaction to (point) 2. The spread was wide and volume increased ; evidence of supply. Be very
careful when supply such as this comes in on the downside. That supply must be absorbed or the
stock is quite likely to be in trouble. Regardless, the supply cannot fail to have its effect.
Demand decreased on the rally to (point) 3; narrowing spread and decreasing volume. The stock
was supported at (point) 4 and met supply at (point) 5 and then began moving down. Note how
it moves down with lower tops and lower bottoms and thus far the supply is stronger than the
demand. Now the stock moves on down to (point) 6 with a widened spread and heavy volume.
(Point) 6 is a potential sign of weakness which will be confirmed or denied by the later
action, the rally. The critical thing is not how far the stock rallies. The critical thing is how
it rallies and here it rallies with a gradually decreased demand, evidenced by a narrowing
spread and a decreased volume. The supply to (point) 6 is stronger than the demand to (point)
7 and thus (point) 7 is a last point of supply after a sign of weakness and the stock continued in
the down trend.
It is entirely possible that as the stock moved down to (point) 4 it could have been
regarded as a potential sign of weakness. However, again, any possible or potential sign of
weakness must be confirmed, denied or left in doubt by the subsequent rally. If the rally has a
relative lack of demand on it, generally evidenced by a decreased spread and decreased volume,
this would be confirmation and a last point of supply. However, should demand still be strong on
that rally, as evidenced by good or increased volume as well as wide or widening spread, it is
usually best to regard such action as a denial of the sign of weakness and such action may well
leave the interpretation of a sign of weakness and the last point of supply in doubt. When this
occurs, do not take a short position. It is better to miss a move than to run a great risk of being
wrong. Thus (point) 4 could have been regarded as a possible sign of weakness as it occurred.
(Point) 5 would have left this in doubt. Look at the spread especially. There is increased volume
as well as widening spread: There is still good demand. However, there should be no such doubt
as the stock rallied toward (point) 7 to the LPSY after the potential sign of weakness at (point) 6.
Now, how do you take a short position. You must time your commitment with the
general market action. First of all, do not go against the major trend. Calculate the half-way
point and in this case there are two half-way points to consider; the one from (point) 5 to (point)
6 and the other from (point) 1 to (point) 6. The half-way point from (point) 1 to (point) 6 is by
far the more important. Another excellent indication is the reaching of down trend lines such as
supply line AA. Both of these indications are in operation as the stock rallies toward (point) 7
and an order to sell short could have been entered just below $37.00 per share with a stop order
just above (point) 5, say at 411/8. The profit - risk ratio would have been about 4 - 1, a perfectly
logical speculative risk.
Lets go on to the upthrust after distribution. The upthrust after distribution is a special
type of distribution in which the stock goes up, stops going up, builds a cause and then tries to
leave that trading range on the upside, fails and then begins the down trend. In applying the rules
you must use some judgment and some flexibility. The upthrust after distribution is a special
market phenomenon or a principle which Mr. Evans defined through his Wyckoff studies.

57

Perhaps the most important problem that you will have with the upthrust after distribution is that
you must avoid looking for examples or expecting examples of the upthrust after distribution to
occur all the time. They simply do not. However, when they do occur, the upthrust after
distribution can be an extremely helpful and profitable tool. Let us read the rule itself. It says
this: After a stock index or a commodity has moved up, has climaxed, has then moved laterally
and built a potential cause and has then moved into new high ground on an increase in volume
and a relative narrowing of the spread, to then return to the average level of closes would
indicate that the entire lateral level was not accumulation but was distribution instead.
Memorize this rule. In Mr. Evans original rules, he stated that it moves sideways for a period
of four to twelve weeks. However, to put these constraints on the rule has proved to limit the
understanding of this excellent rule. Therefore, we have modified the rule and have used the
building of a potential cause. The only other change in the rules is that we now say that it
(has) moved into new high ground on a relative narrowing of the spread. We have added this
word relative because a widening or a narrowing of the spread is relative to the volume and the
spread must be compared to the volume. Every word in the rules for the upthrust after
distribution (has) been designed for a purpose. Now, as we apply them to chart twelve and as we
go along, (we) bring in the why of the rules as well as what happens to the people involved.
The stock has been moving up and it climaxes at (point) 1. Why? Why should we want
it to climax? Simply because if it climaxes, we know that it (has) stopped the up trend. This
means that there should be a buying climax, an automatic reaction and a secondary test, so that
we know it has stopped going up. The buying climax is at (point) 1, the automatic reaction is at
(point) 2 and the secondary test is at (point) 3. It then moves laterally. It (moves) laterally to
(point) 4 and (builds) a potential cause. It then moves into new high ground on an increase in
volume; it (does) that at (point) 5. It (moves) into new high ground above the trading range and
in actual fact it would not have to move into all time new high ground above (point) 1. It is
sufficient to go above a supply level. To continue with the rule: On a relative narrowing of
spread... : Well, it did that. The spread is narrowing and the volume is increased; evidence of
supply coming in to stop the move up. Now, lets stop here for a moment. Suppose a stock has
been moving up. It moves up two points on 50,000 shares and then it moves up another two
points on 80,000 shares. It is not making the progress that it should make consistent with the
volume. There has been a relative narrowing of the spread. Now, lets do this again. Suppose it
moves up the first day, two points on 50,000 shares and the next day the spread is one and a
quarter points on 80,000 shares. Draw it. Draw it on one of the charts, so that you can see it.
This makes the relative narrowing of the spread emphatic. However, the first is just as validly
narrowing, relative to the volume as the second is. Now, the next section of the rule is: To then
return to the average level of closes... . Now, what does that mean? What is the average level
of closes? Do not be too exact in this. The close at (point) number 1 was $50.00 per share. The
close at (point) 6 was 455/8. These are the limits of the closes in the trading range. The average
level of closes would be somewhere in the midpoint between these two extremes or around 47 7/8.
The intent of this provision of the rule is that the stock should come back into the center of
the trading range. If it does not reach the exact 1/8th, it does not mean that the rule does
not apply. Let us reason a bit as to the why of this provision. It has to do with how people
operate in a trading range. You be the professional and I will be the public, the untrained people.
Now, I want to be certain before I buy and usually the way to be certain is to make sure it (the
stock) is going into new high ground. Many people buy on new highs, but Ive become smarter.
Why? Whenever I buy in new high ground, on new highs, I usually get hurt. Why? Because it
is usually followed by a reaction, sometimes a very, very deep reaction. In the trading range Im
pulled and hauled back and forth. The stock bounces up a few points and then comes down a
few points and Im uncertain; Im waiting. And finally, here at (point) 5 it punches into new high
ground and its on its way, so I know which direction it is going: It is going up! I now have the
emotional courage to buy. All the reasoning that I have may say no, but the emotions say yes.
But, Ive been burnt before by buying on these new highs, so, what Ill do is wait for a reaction.
Now, Im going to ask you a question. As an untrained person who has not paid the price to
learn how the market operates, do I deserve to buy so that I can make a profit? The answer is
obviously no. I want to buy it (the stock) with a little bit of a price bargain. I want to be a little
bit smarter, so I buy as a stock reacts.
Now, there is another person who is going to go in and buy as it reacts; that is the
professional man, who has taken a premature short position. He has sold short up here, around
(points) 2, 4 and on the other rallies within the trading range and now it punches into new high
ground and he is in trouble. He has a loss and he is afraid that it is going to be a big one if he

58

doesnt get out. Thus, he knows that the trend is going to be upward, so hes going to buy to
cover his shorts and that means he buys again to establish his long position. So, there are three
parts of the buying power that comes in as a stock goes into new high ground or reacts. The
main point is that the people who are doing the buying are buying at the wrong time for the
wrong reason.
Now, who is going to sell? The sellers are the larger interests who have been selling
throughout the trading range and are liquidating their large, long positions and are going short
and continue to go short as the stock develops the down trend. Now, as I buy on the reaction
after it goes into new high ground, to have the stock come down deeply so that I can get a price
bargain just does not make sense. This is why: If the stock reacts into the average level of closes,
the indication is that this action was distribution. The rest of the rule says: That to do so would
indicate that the entire lateral level was not accumulation but was distribution instead. At
(point) 7 the stock had come back into the general average level of closes, to around 48 and at
that point the inference is that this area was distribution.
Where do you sell the stock short? The place to take your short position is on the
upthrust itself, as it breaks through the supply level with a relative narrowing of the spread and
the high volume; where supply is coming in to overcome whatever demand that is there. If you
do not take your position there, you can take your first position or add to an original position on
any normal rally thereafter, as long as the stock is continuing to give indications of either
establishing or continuing a down trend. Thus, on chart twelve, the first place to establish a short
position would be at (point) 5. Very often you will find a test of the upthrust itself, such as at
(point) 8, another place to sell short. Note the lack of demand, the narrow spread and the
decreased volume at (point) 8. This next (point) is important. The upthrust after distribution
itself is both a sign of weakness and a last point of supply and so your first count should be
made from that point. Incidentally, very often this is followed by a more important sign of
weakness and more important last point of supply.
Chart thirteen, Twentieth Century Fox, has another example of the upthrust after
distribution. The preliminary supply came at (point) 1 and the buying climax is at (point) 2, the
automatic reaction is at (point) 3 and the secondary test at (point) 4. So far the stock has moved
up and has climaxed and stopped going up. It has then moved laterally to build a potential cause.
As it moves laterally, you can look at the figure chart to determine the extent of the probable
cause. In general it is best that the lateral move be relatively narrow, relatively tight, however, it
does not have to be so. The stock moves sideways with supports at (points) 5 and 6 and at
(point) 7 had a number two spring with a secondary test at (point) 8. Then it moves up. It moves
into new high ground on an increase in volume. Look at the volume at (point) 9; it is very high
and the spread is relatively narrow. There is only one thing which can cause this condition and
that is heavy supply coming in, attempting to stop the up trend and attempting to stop it from
continuing on up and working out the count built up in the lateral move on the upside.
Now,
where is the average level of closes? It is midway between (point) 2 and the low reached at
(point) 8, say at 541/8. Following (point) 9, the stock breaks badly at (point) 10. A strong stock
simply does not do this. There is supply on the down side: Volume is heavy and it persists and
the stock reacts on down through the trading range to (point) 11. To react into the area circled at
10 would be sufficient to indicate that the entire lateral level was not accumulation, but was
distribution. Following this the stock moved sideways for further re-distribution and had an
upthrust at (point) 12. Note again the very heavy volume and the relative narrow spread as it
went above the supply area at (point) 12. It did not make price progress comparable to the
expansion of volume. When the stock moves up as the volume expands, the price progress
should expand with it in proportion. Here, too much supply came into the stock, stopped it and it
immediately reacted. Note the price weakness as it came down to (point) 14. The reaction was
too deep and then the stock failed to rally well at (point) 15. There was narrowing spread (and)
decreasing volume compared to the rally up to (point) 12. The day marked 16 is another
example of, it tried to go up, tried to go down and closed in the middle on an increase in
volume. We are going to get some answers very shortly and we did.
The beautiful part about the upthrust after distribution is that when you see it come
back into the average level of closes, you have your answer. Usually you have the answer in
plenty of time before the main move starts. All you need is one day or so before it moves down
and the upthrust after distribution often gives you that advantage. Again, we caution you: Do not
misuse the upthrust after distribution rules. Use them only when the situation develops
according to the rule. The necessary elements must be there: 1) It must move up; 2) it must
climax with a secondary test; 3) it must move sideways in order to build a potential cause and 4)

59

it should move in a reasonably narrow range; 5) the stock must then move above a supply level
with a relative narrowing of the spread compared to the increased volume. If it does that and
then 6) moves down into the middle of the trading range, the inference is that the entire level was
distribution.
Now, where is the best place to take a short position? Sell short on the upthrust itself as it
breaks through the supply level. On chart thirteen it is at (point) 9 and on chart twelve it is at
(point) 5. You may also sell short or add to your short position on any rally thereafter. When
you do take that short position, put in a close stop, perhaps two or three points just above your
price. In establishing positions, you may have resting orders in the area where a possible
upthrust could occur or you can wait until it gets there and then judge it and act accordingly.
Which you will do in actual practice will depend directly upon your own experience and your
own preference. We suggest (that) you practice with both.
Now lets go on to chart fourteen, Transcontinental Investing. The stock did move up,
climaxed at (point) 1 with a secondary test at (point) 2 and then moved sideways and built a
cause, but the distribution should be a concentrated area of selling. This was the reason for the
original four to twelve weeks in the rules and the stock has gone sideways for five months or
more. Therefore it is highly questionable whether that would apply. Also, it is a very wide
swinging range. In the upthrust after distribution, the stock is moved up; it is held up there while
concentrated selling goes on and (it) tries to go out (of the range) on the upside, fails and then
goes on down. And (this proves that) the entire level is distribution, not just a part of it. This is
not likely to be the case here. (Transcontinental Investing) moved sideways (for far) too long a
period and in too wide a range. Therefore, although at (point) 3 there is without a question an
upthrust, this must be regarded as an ordinary upthrust and not as an application of the rules for
the upthrust after distribution. Why (is it) an ordinary upthrust? Because as the stock moved
into new high ground there was a relative narrowing of the spread compared to the volume. The
volume was extremely high, indicating the presence of very, very heavy supply and on the day
marked 4, there was supply increasing on the downside, then as the stock rallied to (point) 5,
there was a comparative lack of demand as shown by the volume compared to (point) 3. It is
entirely possible that the only area which is distribution would be over to (point) 7 where supply
stopped the up move.
Chart fifteen has an ordinary upthrust at (point) 4. The stock had been in a down trend,
failed to climax at (point) 1 and built a supply level at (points) 2 and 3 along the $19.00 level. At
(point) 4 it went above that level with a large increase in volume and the failure of the spread to
widen in keeping with the volume. Supply was coming in to overcome the demand. Also, if the
stock was going to go up from this point it should have kept on going. Instead, it promptly
turned downward with supply coming in on the reaction to (point) 5, which was into the middle
of the trading range. It reacted too deeply and it reacted with supply. The rally to (point) 6
was weak with less demand as shown by decreased spread and decreased volume compared
(with) the rally to (point) 4. Now, where could you establish a position or add to one? At (point)
4 between $19.00 and 197/8 as it went above the supply area of (points) 2 and 3 and in the area
circled at 6.
Chart sixteen has an area of re-distribution. It rallied, stopped going up at (point) 1 and
then moved sideways all the way over to (point) 2. Then on the reaction down to (point) 3 the
price cracked with volume coming in on the downside. This is a sign of weakness and note how
the volume and the price action died out at the area (marked) 4 on the rally to the ice. There was
a lack of demand where it was necessary for demand to come in if the stock was going to move
up: (Point) 4 is the last point of supply.
Lets hit the highlights only of chart seventeen. The original area of distribution had a
buying climax at (point) 1, the automatic reaction at (point) 2 and the secondary test at (point) 3.
The stock then went into a trading range with limits at (points) 4 and 1. The action from (point)
5 to (point) 6 is a sign of weakness and the rally to (point) 7 is the last point of supply. The stock
then went down to (point) 8, did not climax and began to rally. It then went through redistribution beginning with a preliminary supply at (point) 9 and the buying climax at (point) 10,
the automatic reaction at (point) 11 and the secondary test at (point) 12. Note the heavy supply
that came in at (point) 13 on the way down to (point) 14. The move from (point) 12 to (point) 14
is the sign of weakness and the rally to (point) 15, the last point of supply, died out with a
comparative lack of demand. This is shown by the narrowing spread and the decreased volume
as (point) 15 is reached. The stock reacted to (point) 16, rallied to (point) 17 and then broke
downward.

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Now for a brief summary. We have outlined the process of distribution and of redistribution, discussed the main principles which occur in these areas, what precedes it, what
follows it and discussed a special type of distribution with some special rules; the upthrust after
distribution. We have also indicated how to take a speculative position for a large down move;
that positions are established in the right hand side of the trading range on either the upthrust
itself or on the last point of supply after the sign of weakness. It is important that you stay out of
the trading range until the stock gives the indication that it is going to work out the force of the
distribution now. This indication is given by the upthrust or the last point of supply after the sign
of weakness. This will force you to get out of your long positions preparatory to going short so
that you are far less likely to see your profits slip away and will greatly aid you in protecting
your capital and in maximizing profits. We suggest you practice diligently and systematically
until you can diagnose distribution and sell short as well and as easily as you can diagnose
accumulation and go long. Then you will be able to operate in all kinds of markets.

61

BASIC LECTURE NUMBER EIGHT

FIGURE CHARTS
FIGURE CHART COUNTS AND THE COUNT GUIDE
The main (subjects) of Basic Lecture Number Eight (are) figure charts, figure chart
counts and the count guide. The lecture will have several objectives. They are to outline the use
of figure charts and the count guide and to discuss the co-ordination of vertical charts with figure
charts. In working with the charts for Basic Lecture Eight, we may refer you to vertical line
charts and to a much lesser extent figure charts discussed in prior lectures. Please, do not fail to
study those charts as it is extremely important to co-ordinate the vertical line and the figure chart.
We use three basic laws in our market operations. They are 1) the law of supply and
demand, which is primarily portrayed on the vertical line chart; 2) The second law is the law of
cause and effect, which can be most readily seen on the figure chart. The figure chart is
sometimes referred to as a cause and effect chart. 3) The third law is the law of effort versus
result. This law is most readily seen in the operation of a vertical line chart, the Optimism Pessimism Index and the trend barometer. In this lecture we are concerned with the figure chart
and the law of cause and effect.
The law of cause and effect says that every cause will have its effect; that the cause
cannot be separated from the effect and that the effect will be in direct relation to the cause. This
means that the resulting move will be in direct proportion to the amount of accumulation which
took place in the base; that in order to analyze what is happening to the up trend, you must first
analyze the base and that the extent of the possible move is directly dependent upon the extent of
the accumulation which took place in the base. We can measure the number of points which a
stock may move by counting and measuring the number of points of fluctuation in the base area.
We have rules to determine this count called the count guide. The count guide will be discussed
in detail in this lecture.
Now, a brief word as to the origin of the figure chart because many people have claimed
to be the inventor of figure charts. Mr. Wyckoff has stated that he traced figure charts back as far
as the 1880s to a broker in New York City named Mr. Green. As near as Mr. Wyckoff could
determine, Mr. Green is the inventor of figure charts. Mr. Green wanted a convenient way to
record price fluctuations. Thus, when a stock went up a full point, he put a check mark on the
chart. When it went another full point up or down he made another check mark on the chart. He
eliminated all fluctuations less than one full point and so the figure chart was born. It has had
much development since, with both proper use and much misuse.
Figure charts normally record price changes only. Time is recorded too, but usually only
on a weekly or monthly basis: In other words, they are quite limited. A figure chart tells what a
stock is doing. It does not tell how it is doing it. It does not show volume and it does not show
the amount of price spread. It does not show the speed of a move on a day by day basis and so it
does not show how a stock is moving, whether it is moving with increasing demand coming in or
increasing supply; whether supply is increasing, decreasing (and) so forth. So, in order to
operate properly in the market, you must use the vertical line chart for its proper function and the
figure chart for its proper function.
Lets explore these functions. In order to take a speculative position in a stock we must
make judgments which will provide the answers to three important question: 1) the probable
direction of the coming move; 2) the estimated timing of the move and 3) the probable or
possible extent of the move. We determine the probable direction and the estimated timing of the
move primarily from the vertical chart. However, we determine the extent of the possible move
from the figure chart; that is how far it may move and where it is likely to run into opposition.
This is done by making a measurement of the mass formation in the base which is our cause and
is referred to as the count. The term count is derived from the process of computing or
figuring the possible extent of the move. We locate the point in the base at which the
accumulation or distribution began and ended and then count the number of squares on
the figure chart between these points. Now, this will be illustrated later. Remember, the count
taken from the figure chart measures the possible extent of the cause.

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You have studied the mechanical process of posting and the construction of figure charts
earlier in your Wyckoff studies, thus, we will not go into that (in) this lecture. We will therefore
concentrate on the types of figure charts we use in analysis of stocks, mainly the one point and
the three point figure charts. This lecture will deal exclusively with these. However, the same
basic principles apply to any other figure chart, such as the five, ten or twenty-five point figure
chart of the Wyckoff Wave or the 1/8th point figure chart used by our tape readers in the
construction of the intraday wave. The main indications which we want to draw from figure
charts are the counts; the power of the cause. Yes, there are many additional indications which
may be derived from a study of mass formations (such as) previous areas of resistance and
support, trends and the many other uses described in the text. But, in this lecture we will
concentrate on determining the count
Now, why do counts work? Well, truthfully, we dont know. We do believe there is a
very complicated theoretical mathematical explanation for this. SMI will in time do extensive
research in this study. But for now, we must relate the analogy Mr. Wyckoff used and which has
been accepted by students for many years. Now, suppose you walked outdoors one morning and
saw three or four men working in a vacant lot across the street digging a foundation. After they
had dug down about eight feet or so and had poured some concrete, an engineer could come
along and tell you exactly how big a house could be put on that foundation. Now, likewise, a
layman could probably (also) tell you roughly, within a reasonable limit, how big a house would
probably go on that foundation. Suppose, however, (you) walked out the door and saw a couple
of steam shovels and some derricks digging a foundation forty, fifty (or) sixty feet deep and men
putting in a foundation eight feet thick. An engineer could then determine mathematically how
large a building (a skyscraper) could be built on that foundation. Mr. Wyckoff said that each
rally and reaction in the base as the stock moved sideways in the trading range was like one of
those digs down by the power shovel. The more digging and the larger the foundation, the larger
the possible building that could be put up. Similarly, provided accumulation or distribution is in
progress, the larger and more numerous the fluctuations in the base on the figure chart, the larger
the possible move which may result.
Now, suppose the people put in a foundation capable of (supporting) a sixty story
building and they start to erect the building. The foundation is all laid and they begin to build the
skyscraper and they get up twenty stories and run into labor problems, run out of money or
something else and they put a roof on. The other forty stories may never be built. In other
words, the foundation and the count (are) a potential. It does not say that they absolutely will put
up the sixty story building, but they can. Similarly, it is up to us to watch the stock as it moves
up (in order) to see if everything is normal, developing well and to determine what problems are
coming into the picture. Now, suppose they get up twenty stories, run into labor problems and
finally sell out and a new group comes in and takes over and they may move it up another fifteen
or twenty stories, run into problems, get out of the situation and later on another group comes in
and buys and finally finishes this sixty story skyscraper.
Now, lets see if we can help you see how this applies to the stock market. You may have
a sixty point count down in the base. The stock advances and moves up fifteen to twenty points,
builds a stepping stone confirming count for another twenty points, moves up and goes through
the same process (again), which will finally take you to the full sixty point objective. Now, lets
consider another alternative because any base may be accumulation, distribution or nothing. It is
entirely possible that only a portion, the latter portion of the base is accumulation and that no
accumulation occurred in the early part of the base. It is because of this that the count must be
broken down into phases. Also, there are some things in stock market analysis or stock market
action that we do not know exactly why they occur or we wish we had a better explanation.
Sometimes you, as a student, must make a leap on faith alone. The use of figure charts requires
somewhat of this attitude, but the more you work with them, the greater confidence you will
have and the more you will rely upon them.
To determine the counts and objectives on the figure charts effectively we need a
procedure. That procedure is contained in the count guide. The purpose of the count guide is to
provide a valid step by step procedure for breaking down the large levels in a base and for
computing the logical count objectives. We have a simple, one sentence count guide which is as
follows: After having seen a sign of strength locate the last point of support on a reaction
and count from right to left. This count guide applies to up counts. The count guide which
applies to down counts is as follows: After having seen a sign of weakness locate the last
point of supply on a rally and count from right to left. We ask you to memorize both of these
count guides. They are (each) a one sentence, easily remembered guide to taking counts and

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need considerable amplification. Much amplification is in the detailed count guide which has
been written for up counts and for down counts. We suggest (that) you stop listening now and
read the detailed count guide in its entirety. For best results, please read this out loud, slowly,
until you have a working understanding.
Alright, we will assume (that) you have done this and now we will go ahead with an
analysis of the count guide and some chart illustrations. We will deal with accumulation and up
counts first. The same process applies to distribution and down counts, which will be covered
later in this lecture. Now, 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: First, locate the sign of
strength and then the last point of support on a reaction. The move from (point) 1 to (point) 2 is
the sign of strength and the reaction to (point) 3 is the last point of support. Now, count from
right to left. To do this we must break the count down into phases. The rally to (point) 4 clearly
marks or separates phases A and B, therefore we start counting from right to left from (point) 3
over to (point) 5 first. This is a count of thirty-two points which is added to the low and the line
itself, giving an objective area of 60 to 63. Now, after that count has been fulfilled, you may
then add phase B to this count. The new count would be from (point) 3 to (point) 6 or sixty-eight
points added to twenty-eight and thirty-one for an objective of 96 to 99. Phase B may then be
marked with a broken line. Chart two shows a similar diagram illustrating the taking of a count
in an area of distribution. Now, study this example for a few minutes before you continue. Well
come back to it in a few minutes.
Chart three is a 25 point modified chart of the Wyckoff Wave. The count guide says that
after having seen a sign of strength, locate the last point of support on a reaction and count from
right to left. The first thing we must do is locate the sign of strength. To properly identify a sign
of strength and last point of support we need the price spread and volume. Spread and volume
are on the vertical chart not the figure chart. By looking at the figure chart only you can often
make a correct assumption that an action is a sign of strength, but you cannot be certain. The
first paragraph of the detailed count guide says that after having identified the sign of strength on
the vertical line chart, locate the last point at which support was met on a reaction, the LPS.
Locate that exact point on the figure chart. We identify the sign of strength and the last point of
support from the vertical line chart.
Chart four which was first discussed in Basic Lecture Three, chart three, has the vertical
line chart that goes along with this figure chart and the move from (point) 6 to (point) 8 is the
sign of strength and the reaction to (point) 9 is the last point of support. We will locate these
exact points on the figure chart. This last point of support is around the 2275 line. It says:
Count from right to left taking your most conservative count first and moving further to the left
as the move progresses. Let us go through the illustration and the detailed count guide and
bring in some of the reasoning behind it as we go along. Now, we move from right to left in
taking the count because only the right hand portion of the trading range may be accumulation.
There are times when a portion, the early portion of the count and of the base, does not have any
important accumulation going on, therefore, that portion of the possible count will not be used.
Many times maximum counts do not work out for this reason. If we started our count from left
to right there would be a strong tendency to immediately take the maximum count from the
beginning and frequently we would be in trouble, so we count from right to left, taking our most
conservative count first. In other words, we take a portion of the base at a time and project it to
give us the objective.
Now, the next section of this statement is that we move further to the left as the move
progresses. Suppose the objective of our first (portion of the base) has been reached and the
stock continues upward. We then have the problem of determining where the next objective is so
that we can determine when the stock is likely to run into either hesitation or opposition in the
move. So, we would then move to the left and take another section of the base. Our method of
doing that is indicated by the second paragraph of the detailed count guide. In moving to the left
turn to the vertical line chart and divide the area of accumulation into phases adding one
complete phase at a time. Now, what is a phase and how do we identify it? Well, a phase by
definition is a stage or (an) interval in a development or cycle or a part under consideration or a
homogenous, physically distinct and mechanically separate portion of matter. Now, we use the
term phase to refer to a portion of the base or a portion of market movement. We identify it by
price action and by volume. The beginning and the end of the phase is generally marked by
volume: This is an increase in the volume. Sometimes the increase in volume is absent and
the phase must be identified by price action only. On chart four the two large phases have
been marked as A and B. They are divided by the rally at (point) 5. That rally actually did not

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have a great deal of volume on it. However, the rally itself divided the base into two distinct
portions or phases and so we would take the count in phase A first and project it upward before
adding any of the count in phase B in computing any possible higher objective. Very often a
phase is an action and its test. For example, a selling climax and the secondary test or a sign of
strength and its test which is the last point of support or a buying climax and its secondary test.
Phase B could also be broken down into two phases, C and D. Phase C is the selling climax and
D the secondary test. However, in determining objectives for the larger moves and larger
trends it is better practice to take into account only the larger phases using a bigger
perspective otherwise you may end up with mass confusion. Once you have identified the
phase, do not add only a portion of that phase to the count. Always add the entire phase. You
may do this on the assumption that if any portion of that phase is accumulation, the entire area is
probably accumulation. This is why it is so important to identify the limits of phases.
Let us calculate and determine the count in phase A on chart three. The last point of
support is at (point) 9 and that phase began on the drive down from (point) 5. Thus, we count the
number of squares from (point) 9 over to that move down. This is 13 points and since this is a 25
(point) modified chart, each small square represents 25 points. We multiply 13 by 25 which is
325 points. We then add that 325 points to 2275, the line itself and have an objective of 2600.
We project that count upward and mark it A.
Now paragraph three of the detailed count guide says that as the move progresses you
will often see a lateral move forming at a higher level. Very often such a move will become a
stepping stone, confirming count of the original count. The lateral move from (point) 12 to
(point) 13 is such a stepping stone confirming count. Now, how did that come about? After the
stock went into the 2600 area and reached the objective of phase A, it then moved sideways in
re-accumulation for a stepping stone count from (point) 12 to (point) 13 for 12 squares,
multiplied by 25 or (a total of) 300 points. We add that count from the line itself and have an
objective of 2875. We know that if the Wave moves upward it will reach a higher objective. We
must then go back to the original base and add phase B to phase A to determine the next
objective. We begin counting from (point) 9 all the way over to the preliminary support at
(point) 3. This gives a count of 23 points times 25 or a move of 575 points added to the line
itself for an objective of 2850. So, the count from (point) 12 to (point) 13 with an objective of
2875 substantially confirms the count from (point) 9 to (point) 3 in the original base area.
Paragraph four says that for longer term counts one should add the count to the exact low
or a point about one half way between the low and the count line. This way you will be certain
that the most conservative count is being used. In other words, you should add the count of 575
points to 2150 for an objective of 2725 and to the line itself, which is 2275, for an objective of
2850. Now, to pin this count down better, you should add the count to a point about half-way
between or the 2225 line giving an objective of 2800. You will often find that this will give you
a workable count from the original base, which is still remarkably accurate and you will be able
to pinpoint the counts better with the stepping stone, confirming count. You have a range which,
when reached, you can expect the stock to run into supply, hesitation or stopping of some sort.
Now, as that stepping stone count develops to the point where it confirms the count in the
original base area it frequently will indicate by its own action that the stepping stone, confirming
count is coming to an end and the stock is ready to move again. It may do this by having a
spring or a back-up to the edge of the creek. It is very important to recognize that counts are
possible objectives as measured by the extent of the battle (between) supply and demand at the
base area. These objectives may be stop, look and listen points. They should never be looked
upon as exact points where the stock will stop and turn. You cannot project the count upward
and say, regardless of what happens, the stock will go there. It may or it may not. Market
conditions may not let it. Also, the phase you may be adding to the possible count actually may
not be accumulation. Any one of many things can happen in the mark-up phase of the cycle.
The important thing is that the count enables you to determine the probable extent of the possible
move, a point where the stock may run into trouble, opposition, hesitation or begin a prolonged
reaction. You should watch the vertical line chart to evaluate the action as these objective areas
are approached. You determine from the vertical line chart what you should do; whether you
should get out or maintain your position.
A review of the vertical line chart of the Wyckoff Wave would show the move from
(point) 13 to (point) 14 was triggered by a spring at (point) 13. At (point) 14 (figure chart) the
Wave fulfilled the count in the original base and the re-accumulation or stepping stone count
from (point) 13 to (point) 12. After it reached (point) 14 it moved sideways in a new area of reaccumulation. The move from (point) 15 to (point) 16 is the sign of strength and the reaction to

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(point) 17 is the last point of support. We would determine these points from the vertical line
chart. The count from (point) 17 to (point) 18 is fifteen squares, multiplied by twenty-five,
equals 375 points which is then added to the low of (point) 15 and the count line itself for
objectives of 3050 and 3125. We should also go back to the original accumulation area to see if
there is a logical count to a higher objective. We would regard the move from (point) 6 to (point)
19 as a more important sign of strength and the reaction to (point) 11 as a more important last
point of support. Locate the exact point on the figure chart and draw in the count from (point) 11
to (point) 3. Now that count should actually be taken from the low of (point) 6 and from the
count line at (point) 11 itself and to pinpoint it, from a point half-way in between. You already
know that phase A and phase B are accumulation because the count in these (two) phases
worked out on the move to (point) 14. The only issue then is whether or not there is a phase
to the left and to the right of these two phases which could be added and counted, perhaps
from a higher level. Therefore, essentially, we then add phase E to the count and in most cases
may take the count from the line itself to give the next important objective area. We may do that
simply because we already know that phases A and B are accumulation. Actually, each time you
move to the higher level you should add the count to the low, to a point half-way between or to
the line itself. However, once the original or the first count has been defined, usually, the
most significant later ones will be from the line itself. So, the count from (point) 17 to (point)
18 substantially confirms the count from (point) 11 to (point) 3 in the original base area. At
(point) 20 that count worked out. Now we can recognize that there is an additional higher
possible count down in the original accumulation area. This would be determined by regarding
the move from (point) 6 to (point) 21 as a more important sign of strength and the reaction to
(point) 22 as a more important last point of support. That would give a count of 33 squares times
25 or 825 points from the low and the midpoint giving an objective of 2975 and 3075. This
count was fulfilled at (point) 20. The count from the line itself gives a possible objective of
3200. We should mark this objective on the chart. However, we would not expect it to be
reached until the Wave gave strong indications in the area of (point) 20 to (point) 23 or later on
of moving to 3200.
Please go back and review our method of marking the counts on the chart. There are
many methods of flagging or marking counts. We suggest (that) you simply adopt ours for the
sake of uniformity. In flagging the count from the low (point) we use an open triangle, from the
midpoint a square and from the line itself a solid dot. Later phases will be added to the count by
a broken line such as (appears) on chart six.
In determining what is likely to be the longer term count, you should identify the
preliminary support. Why? Because if the entire base is accumulation, it is likely that the
accumulation began with the preliminary support and the count will be from the last point of
support at the right hand side of the base over to the preliminary support on the left hand side of
the base. After the sign of strength and last point of support have been defined and identified
you may determine what may be the long term count for the entire possible move. But, you must
still break the count down into phases and use the procedure outlined in the count guide as many
things may go wrong during the move (which may) prevent the full count objective (from) being
reached.
Now, please turn to charts five and six. These have the same action and many of the
same numbers as Basic Lecture Three, charts six and seven. First, we must identify the sign of
strength. There is a terminal shakeout at (point) 13 and a secondary test of it at (point) 15. The
detailed count guide says that a number three spring or the secondary test of a number two
spring quite often constitutes a sign of strength and the last point of support in the same
action, which is reached at the same point and at the same time. This applies also to the
secondary test of a terminal shakeout. So, we must regard the action at (point) 15 as the sign
of strength and last point of support and the point from which we will take our first count.
Before taking the count let us locate the possible preliminary support in order to determine what
may be the longer term count: That action is at 3a. So, the longer term count may be from point
15 all the way over to (point) 3a or perhaps from a higher level such as (point) 10 or (point) 18
over to 3a. Also, we should break the base down into phases. We do this on the vertical line
chart first. The volume that came in at (point) 19 and even at (point) 20 separates phase A from
phase B and the volume which came in around (point) 21 separates phase B from phase C. Thus,
there are three large phases in the base; A, B and C. Each one of these could be broken down
into smaller phases, however, lets deal with only the large counts first. Lets look at chart six.
The first count is from (point) 15 over to (point) 9. This gives us a count of 29 points added to
the $25.00 level or an objective of 54. Now, if it went to 54, what would be the significance of

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that? It would carry the stock above, substantially above, the supply areas at (points) 19, 20 and
21 and put it in position to have a major upward trend and to work out the accumulation and the
count in the base It went there and continued on upward.
Now, the detailed count guide says that usually a spring will be followed by a more
important sign of strength and the reaction following that sign of strength is also a valid
last point of support. The move from (point) 15 to (point) 16 is a sign of strength and the
reaction to (point) 10 is the last point of support. The count is along the 29 line from point 10 for
an objective of (from) 57 to 62. After the $62.00 level had been reached and the stock continued
to move up it would have been possible to take a count from point 18 over to (point) 9 for a
higher objective. For the sake of avoiding confusion, instead, let us begin to add the count in
phase B to phase A. The first count is from (point) 15 to (point) 7 or 69 points from the $25.00
level for an objective of $94.00. After that had been reached and the stock continued to move
up, we would take the count from (point) 10 over to (point) 7 or 74 points from the 25 and 29
(levels) for an objective of $99.00 to $103.00.
Now, after that count had been exceeded, again it is possible to take a count from (point)
18 over to (point) 7. However, let us again drop down to 15 and add the next major phase, phase
C going all the way over to the preliminary support at 3a We add phase C. The count from
(point) 15 over to 3a is 123 points for an objective of $148.00. After that had been exceeded and
the stock continued to move up, we then take the count from (point) 10 over to 3a for 127 points
added to the low and the line itself, gives a range of objectives from $151.00 to $156.00. To pin
that down further you could add it from half-way between the low and the line itself for an
objective of $154.00. The count from (point) 18 to 3a is 134 points for an objective of $158.00
to $166.00. To pinpoint the objective better you could take the count from the 28 level for an
objective of $162.00. The stock actually went slightly higher to $163.00 and then began a long
wide swinging trading range.
It should be recognized that these objectives are stop, look and listen points. They are
points where you should watch your vertical line chart to see if the stock (is) in fact going to turn
near the objective or perhaps even go through a sizable correction or distribution. Weve taken
the most conservative count first and added the phases, step by step, to each count. Even though
the last point of support comes in the area of the original support and as soon as the entire base
has been formed, you may calculate the long term objective, you must still follow the count
guide, break it down into phases and first work with the shorter term counts. Why? Well, the
stock may work out part of the count only and then go through complete distribution or redistribution. You cannot say categorically that the stock will fulfill the maximum count just
because you have a higher objective. Many things may happen. They may put a roof on it part
way up; the stock may go through a major correction or the market, as indicated by the Wyckoff
Wave, may begin a major decline taking the stock at least part way with it.
When a count is tight and compact, it may be very difficult to break the count down into
logical phases. In that case, it is simply best to take the entire count: Do not break it down into
phases and (be sure to) watch the vertical line chart carefully as the move continues. An example
of a compact count is in Basic Lecture Three, chart ten.
Chart seven of Natomas is the figure chart (showing) the stepping stone count of Basic
Lecture Six, chart two. The base has two phases, A and B and also (a) phase C which may or
may not be minor distribution. At (point) 1 there was a spring. This first count of three points
was immediately exceeded. The move from (point) 1 to (point) 2 is a sign of strength and the
reaction to (point) 3 is the last point of support. So, we go to (point) 3 for a count of five points
with an objective of $24.00, which was exceeded at (point) 4. The stock continued to move up
and therefore we combine phases A and B from (point) 1 to (point) 5. This gives a count of 12
points, added to $17.00 or an objective of $29.00. As the stock reached $29.00 we would watch
the vertical line chart to see whether or not it was going to hesitate or continue. It went to $30.00
backed off to $29.00 and continued upward on the move from (point) 6 to (point) 7. As soon as
it overran the $29.00 objective substantially and indicated that it was going to go higher, we
immediately take the count from (point) 3 to (point) 5 for an objective of (from) $31.00 to
$33.00. At (point) 7 that objective was met, however, the stock continued to move up and in
doing so it brought in the possibility of going all the way over to (point) 8 for the count, adding
phase C. If (point) 9 is the last point of supply the down count would be 8 points for an
objective of $16.00 to $14.00 and that count was not fulfilled. Therefore only part of that
phase may be distribution and therefore it is entirely possible that phase C could be added
to A and B. From (point) 3 to (point) 8 is 22 points added to the $17.00 low and the $19.00 line
itself, gives objectives of $39.00 to $41.00. The stock reached this objective at (point) 10.

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After Natomas fulfilled the count from (point) 3 to (point) 8 at (point) 10 it reacted to
the halfway point at (point) 11 and again went through re-accumulation. The sign of strength
was at (point) 12 and the last point of support was at (point) 13. The re-accumulation and the
count (are) from (point) 13 to (point) 11, however, it must be broken down into two phases
separated by the action at (point) 14. The first count is 7 points added to $31.00 or an objective
of $38.00. This was reached on the move to (point) 15. The stock continued to move up and so
the next count is 14 points from (point) 13 to (point) 11 added to the low of $29.00 and the line
itself of $31.00. This gives objectives of $43.00 to $45.00. That count was fulfilled. The stock
went through new re-accumulation and continued to move up.
The procedure for the determination of a count and its objective in an area of distribution
or re-distribution is very similar to that of accumulation. Please turn to the count guide for down
counts. It says: After having seen a sign of weakness, locate the last point of supply on a rally
and count from right to left. Now, please turn to chart two which is a theoretical model of a
figure chart of distribution. The area of distribution has been broken down into two phases,
phase A and phase B. The sign of weakness is the move from (point) 1 to (point) 2 and the rally
to (point) 3 is the last point of supply. The count is made from the $84.00 level, the count line.
The count in phase A is 24 points from (point) 3 to (point) 4, subtracted from the high and the
line itself, gives objectives of $63.00 to $60.00. That count is fulfilled at (point) 5. It then goes
through re-distribution and starts downward. We then add phase B to phase A. This count is
from (point) 3 to (point) 6 or 53 points subtracted from $87.00 and $84.00 giving an objective of
$34.00 to $31.00. The area of re-distribution following the low point at (point) 5 has a sign of
weakness at (point) 7 and a last point of supply at (point) 8. The count is 36 points from (point)
8 to (point) 9. This 36 points is subtracted from $74.00 and $69.00 for an objective of $38.00 to
$33.00. So the count in the re-distribution area confirms the count in the area of original
distribution.
Chart eight, Scientific Resources, has an area of major distribution with a sign of
weakness at (point) 1 and a last point of supply at (point) 2. The count is from (point) 2 to
(point) 3 or 23 points subtracted from $38.00 and $32.00: That is the high at (point) 4 and the
count line itself at (point) 2. This yields objectives of $15.00 and $9.00. To pinpoint this count
better, it should be deducted from a point halfway between $38.00 and $32.00 or the $35.00 line
for an objective of $12.00. In late July 1969 this was reached.
Now, let us use the detailed count guide for down counts. It says: After having
identified a sign of weakness on the vertical line chart, locate the last point at which supply was
met on a rally, the last point of supply. Alright, weve done this. Locate this point on the
figure chart also and count from right to left. Now, have we divided the area of distribution into
phases? The answer, actually, is no. The reaction at (point) 3 is preliminary supply and the
action at (point) 4 is the buying climax and both are part of the initial distribution. In
determining the larger phases, usually, the preliminary supply, buying climax, automatic
reaction and secondary test are all part of the same large phase. The minimum count in this
original area of distribution was fulfilled at (point) 5. On the way down a number of stepping
stone counts were formed. The first is a minor count from (point) 6 to (point) 7 of 6 points
subtracted from $28.00 gives an objective of $22.00. This was overrun and the count from
(point) 8 to (point) 9 came into operation. It gives a count of 9 points from $29.00 and $27.00 or
objectives of $20.00 and $18.00. This count was fulfilled at (point) 10. The stock again went
through re-distribution with a count from (point) 11 to (point) 12. This is a count of 10 points or
an objective of $14.00. The stock went to 14 3/8 at (point) 5. There was no selling climax at
(point) 5, instead the stock rallied, went through re-distribution and in late July 1969 reached
103/8.
It is important that the sign of weakness and the last point of supply be identified on
the vertical chart. Most of the time you can make the assumption that an action on the figure
chart is a sign of weakness or a sign of strength and be correct. However, in a minority of
instances you will be wrong. Look at the vertical chart eight at (point) 6. The stock bounced in
this area, built the count of 6 points and then moved down. You really must go to the vertical
chart to identify the last point of supply at (point) 8. The stock came down to $26.00, rallied to
$27.00 on an intraday basis and then went on down. Essentially the same thing happened at
(point) 11. The stock had come down from (point) 13 to (point) 14 and rallied 1 point to $24.00
at (point) 11 and, again the last point of supply is on an intraday basis. Looking at the figure
chart alone, (point) 13 could readily have been identified as the last point of supply. The vertical
chart showed that the move to (point) 14 was the sign of weakness and that the LPSY occurred
during the day.

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Chart nine has another area of distribution with vertical and figure charts shown. The
vertical chart was discussed in Basic Lecture Seven, chart nine. The first minor sign of weakness
was the reaction to (point) 5 and the last point of supply was at (point) 6. This is a count of 8
points which could be taken from the high at (point) 2 and the line itself giving an objective of
$75.00 to $73.00. That count was fulfilled on the reaction down to (point) 7. However, by going
to (point) 7 the stock went into new low ground with supply coming in. (Point) 7 is a more
important sign of weakness and (point) 8 a more important last point of supply. We may take the
next count from (point) 8 over to (point) 1. Now, what have we done? We identified the sign of
weakness and the last point of supply on the vertical chart first, then located those points on the
figure chart and counted from right to left. Now, go to paragraph six of the detailed count guide.
It says this: In the case of a longer term count often the last point of supply (LPSY) comes at the
original level of climax. This level should be looked at first in studying the longer term counts.
The climax itself indicated a reversal and the subsequent action is the formation of the cause for
the next effect. For the last point of supply to come at such a level of climax usually makes it a
more valid count... the last point of supply often occurs at the same level as the preliminary
supply. Now, the last point of supply is at (point) 8 and the preliminary supply is at (point) 1.
In calculating this longer term count the LPSY and the preliminary supply are tying in. The
count is 20 points and what does our count guide say about that? Paragraph four says to subtract
the count from the exact high, $83.00 at (point) 2, giving an objective of $63.00. It can also be
taken from a point half-way in between $80.00 or $81.00. This gives an objective of
approximately $60.00. The count can be taken from the line itself, so $78.00 minus 20 points is
an objective of $58.00. What did the stock do? At (point) 10 it reached $57.00 and fulfilled the
maximum objective.
It is important to recognize that very often the preliminary support comes in as the
count taken from the high is reached. For example on the count from (point) 1 to (point) 8, as
the $63.00 level is reached, we would be on the alert for indications of possible preliminary
support. It is also common that should that happen that the final selling climax occurs as the
count taken from the count line itself is reached. Again, using the count from (point) 1 to (point)
8, should we see such preliminary support, we would be on the alert for a possible selling climax
as the $58.00 level is reached.
To illustrate this point further, please, return to chart three. This time the count from
(point) 24 to (point) 25 illustrates this phenomenon in operation on the Wyckoff Wave. The
move down to (point) 26 is the sign of weakness and the rally to (point) 24 is the last point of
supply. These would be identified from the vertical line chart. The first large phase in this long
trading range is identified as phase F. The count from (point) 24 to (point) 25 is 19 squares times
25 points per square or 475 points deducted from the 2800 and 2700 levels gives objectives of
2325 and 2225. The preliminary support at (point) 3 occurred in the objective area of the count
taken from the 2800 level and the final selling climax occurred as the count taken from the 2700
line was reached. Note, in regard to this count it included only phase F of this long trading
range. Had you immediately taken phase F and phase G or perhaps added phase H, you would
have had a long, long wait as that count was never reached. Also, phase F can be broken down
into three phases, I, J and K.
Charts ten, eleven, twelve and thirteen are theoretical models illustrating some concepts.
Chart ten has two large areas of accumulation, phases A and C separated by another large area
(which is) distribution, phase B. When this occurs it is relatively difficult to combine phase A
with phase C. Why? The accumulation which took place in phase C was largely expended or
expressed or used up on the move up to phase B. Also, there is quite likely to be much time
elapsed between the end of phase C and the beginning of phase A. To add phase C to phase A is
not adding just an additional 20 points. It may be adding 40 or 50 points instead of only 20. An
additional reason is that these are large phases of almost equal size and the movements resulting
from them are quite likely to be complete within themselves. The entire 20 points of
accumulation in phase C is expended on the move up to phase B and the 15 points (of)
distribution in phase B is expended on the drive down to phase A. Thus, it is quite likely that the
only count that will work out will be that of phase A. In chart eleven we show this same process
for distribution. You should follow the same line of reasoning in dealing with it.
Two phases of accumulation separated by only minor distribution are much more likely
to be combined than when separated by major distribution. That situation is portrayed in chart
twelve. Here phase A and phase C are large areas of accumulation separated by only a small
move from phase C to phase B. Phase B is only a minor area of distribution. The count in
phases A and C are much more likely to be combined in chart twelve than they are in chart ten.

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On chart twelve all of the accumulation that took place in phase C was not expended on the
move up to phase B. The two areas of accumulation are separated by only a relatively short
period of time and by minor distribution. It is important that there not be massive volume in
phase B which would indicate that the long term holders who bought in phase C are getting
out. The stock moves up to phase B and simply goes through minor distribution, reacts and goes
through another large area of accumulation. Chart thirteen has two large areas of distribution
separated by a minor area of accumulation. Very similarly, the phases in this type of count are
much more readily combined than the phases in chart eleven.
Now, turn to chart fourteen. Phases A and C have 12 points and 6 points of accumulation
respectively, separated by the minor rally to the distribution of 5 points in phase B. The vertical
line chart will disclose a lack of massive sustained volume over a number of days on the move to
phase B. These two areas of accumulation may be rather readily combined due to the lack of
sustained selling, the small amount of time and the (relatively) minor amount of distribution
separating them.
On chart fifteen the entire count in the distribution area is from (point) 1 to (point) 2.
There are two areas of distribution, phase A with 9 points and phase C with 12 points. They are
separated by phase B, a possible area of accumulation of 5 points. The vertical chart shows that
only a week of accumulation could have taken place; that it was relatively minor in nature and so
it is relatively easy to combine phases A and C from the beginning in determining the probable
count. However, you should still break the count down into phases and add one complete phase
at a time
Chart sixteen is a three point chart of the Control Data base discussed in charts five and
six. A three point chart condenses a large count into a smaller, perhaps more manageable count
by, perhaps, eliminating the minor fluctuations in the base. A three point chart takes into account
reversals of only 3 points or more. It is used primarily for longer term counts, counts for the
major moves. Do not use a three point chart for minor moves. It shows the mass formations of
chart action in a base; long term trend lines, half-way points, the shortening of thrusts on a major
basis and previous large areas of support and supply. Do not always expect the three point and
one point counts to coincide. If the three point count is greater than the one point, as the
move progresses, additional stepping stone counts are often built on the one point (chart),
which will confirm the three point (charts) objective. Sometimes the one point count will be
much larger than the three point. You must watch the vertical line chart as the three point
objective is reached and if the vertical (line chart) indicates that the stock is going to go higher
and continue the move, then use the count on the one point chart for the most likely objective.
Remember, in dealing with three point (figure) charts you are using them for longer term counts.
What does the detailed count guide say about longer term counts? First of all you should look at
the preliminary support because if the entire base is accumulation, the accumulation may have
started with the preliminary support and the ultimate count will be from the last point of support
over to the preliminary support. You must still break this count down into phases in accordance
with the count guide. Add the count to the exact low, to the count line itself and to the point halfway in between and frequently your long term counts are confirmed by subsequent minor counts
as the mark-up phase progresses. Watch as these stepping stone counts develop because
when the number of points in the stepping stone count begin to confirm the longer term
count in the original base it often indicates that a move is about to be resumed. You should
then watch the vertical line chart very carefully for a spring, a back-up to the edge of the creek,
a drying up of supply on the reaction and so forth.
Now, on chart sixteen we have many of the indications of chart six. We have broken it
down into phases and calculated the count. With this chart is a tabulation of these counts with
the point on the chart where the count began and ended, the number of points in the count and
the objective. The first count is from (point) 10 to (point) 9. There are 11 squares times 3 or 33
points and it is added to the $24.00 line and the $29.00 line. This gives and objective or $57.00
to $62.00. Now, the midpoint could be either $26.00 or $27.00. We happened to use $26.00 and
they are showing those objectives. Here is a case where the count on the one point (chart)
exceeded the three point (charts) count. However, the major move did not begin until a count
had been formed on the three point (chart) to take it far above the previous highs and later
additional counts developed in the mark-up phase.
Charts seventeen, eighteen and nineteen cover the United Airlines, 1966, accumulation
area and the resulting up trend. Our purpose is to briefly review the principles covered in this
lecture and to co-ordinate the vertical line, the one point and the three point charts. The count
guide says that after having seen a sign of strength, locate the last point at which support was

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met on a reaction; the LPS and count from right to left. We determine the sign of strength from
the vertical line chart: It is the move from (point) 1 to (point) 2. The reaction down to (point) 3
could be the last point of support. It is also an ordinary shakeout. Most of the time you do not
need the vertical line chart in order to identify the last point of support. In this case it is vital
because the exact last point of support is at (point) 4, which is also a test of the shakeout at
(point) 3. So the count is on the $51.00 line and from (point) 4 and not the $50.00 line from
(point) 3. The base is then broken down into two phases, phases A and B.
Now, lets look at the figure chart. The first count is from (point) 4 to (point) 6, 20
points, for an objective of $65.00 to $71.00. At (point) 8 the minimum count was reached and at
(point) 12 the maximum was fulfilled. Following (point) 8 the stock moved sideways and built a
10 point count from (point) 10 to (point) 9 with objectives of $68.00 to $71.00 confirming that
maximum count in phase A. (Point) 11 was a sign of strength and (point) 10 the last point of
support. At (point) 12 that count was reached and the stock then began a trading range. Now,
what is the long term count? On the one point (figure) chart lets add phase B. This gives an
objective of $82.00 to $88.00 Pinpointing it from a point half-way between gives an objective of
$85.00. Now, lets go to the three point (figure chart) on chart eighteen. The long term count is
from (point) 4 to (point) 7. This is 13 squares (multiplied by) 3 or 39 points for a long term
objective of $84.00 to $90.00 and taken from the $48.00 level gives an objective of $87.00.
Now, go back to chart seventeen. Following (point) 12 the stock moved sideways
between the $65.00 and $71.00 level. To reach, say, $85.00, it would have to build a 15 to 20
point count and the closer it came to the end of building that count, the more likely it would be to
have a spring, a back-up to the edge of the creek or some other action which would indicate
that it is ready to begin the next drive up. In actual practice you can anticipate this type of
action. The count is from the last point of support at (point) 13 over to (point) 14, a count of 16
points for an objective of $81.00 to $82.00. The stock went to $81.00 at (point) 15. It moved
sideways and built another minor area of re-accumulation from (point) 16 to (point) 17. The
count from (point) 17 to (point) 16 is 10 points and as that count formed and was completed you
could have anticipated that an action would occur on the vertical line chart indicating that it is
going to resume the upward trend. Incidentally, the count from (point) 13 to (point) 18 is valid
and confirms the higher count on the one and three point (figure) charts. These counts were all
fulfilled in the area at (point) 19. The stock went through distribution subsequently.
To summarize, before taking action you must have the answers to three questions: 1)
What is the probable direction of the coming move? 2) When is it likely to begin? 3) How far is
it likely to go? Diagnose the direction and timing from the vertical (line) chart. Use the figure
chart to determine the extent of the possible move. Use the count guide for this. Remember that
a count is only a potential. It must be determined step by step with the count guide. The count
guide is more that just a set of rules; it is almost a way of life. It will aid you in organizing your
understanding of the market and in your practical operations. You should memorize the count
guide and become thoroughly familiar with the detailed count guide. Always locate the sign of
strength and the last point of support and the sign of weakness and the last point of supply and
other major indications on the vertical (line) chart. Transfer those indications to the figure chart
and then determine the count in accordance with the count guide. The stepping stone counts may
help (to) pinpoint the objectives of the next portion of the move and indicate when that move is
likely to begin. Although you may determine relatively early what the long term count is likely
to be, you must still break the count down into phases and analyze the vertical and figure charts
as the resulting move continues. The vertical (line) chart tells you how a stock is moving. The
figure chart and the count guide tell you far it may move. Practice with them and profit from
them.

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BASIC LECTURE NUMBER NINE

SPECULATING
TAKING A POSITION
The main subject of this (Basic) Lecture is the art of speculation, the taking of a
speculative position. The purpose of the (Basic) Lecture is to show you techniques used in
establishing a speculative position. We will review the basic approach, discuss entering and
placing orders to buy and sell, protecting your capital with stop orders and diversification,
practice trading and some troublesome market action. First of all, let us review two approaches
which you may use. The first method involves three steps. First, determine the trend of the
general market through an analysis of a market index such as the Wyckoff Wave Index.
Secondly, classify the individual stocks as to comparative strength and weakness. Thirdly,
analyze those individual stocks and the groups which are likely to lead the market in the next
trend (in order) to determine, in fact, whether or not they are desirable risks and are likely to
move with the market.
The second method is the same, but adds an important dimension. It provides additional
data which helps to more factually determine the market trend as well as segregating individual
stocks into various classifications. This method is to analyze a large number of stocks, determine
their technical position and record their positions on the position sheet, then calculate the
summary totals to determine the probable trend of the general market as indicated by the
individual 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 may be selected from those on the position sheet. This method is covered in the written
text. Should you have sufficient time available, we suggest that you do use the position sheet to
aid in selecting those stocks to buy and sell, as a check on the (first) method. Using the position
sheet we analyze the individual stocks to better determine the trend of the market. In the first
method we analyze from the general market to the individual stocks, not taking this intermediate
step. The first method is the one (upon which) we will concentrate now, however, both should be
learned, as the use of the position sheet gives an excellent check on the approach discussed in
this Basic Lecture.
Most Wyckoff students determine the trend of the market using our market index, the
Wyckoff Wave, for a very simple reason. We want to go with the market and not fight the
influence of the general market. It is difficult for most stocks to have a major up move in a bear
market. You want the help of the general market in your campaign. Compare the individual
stocks with the Wyckoff Wave (in order) to determine which stocks are obviously stronger than
the Wave, obviously weaker than the Wave or are moving at about the same speed as the Wave.
Make a visual comparison using previous support and supply points.
To illustrate this concept we will use chart one, the Wyckoff Wave, as our index. We will
make the assumption that we have analyzed the Wave and concluded (that) the Wave at (point)
number 3 is in a down trend, rallying within the down trend. The next important move is
downward and it should begin soon. Therefore, we are going to look for stocks which are
weaker than the Wyckoff Wave, eliminating from consideration those which are stronger than the
Wave or moving about the same speed as the Wave. Our search is for individual stocks which
have gone down more than the Wyckoff Wave from (point) 1 to (point) 2 and are weaker than the
Wave on the rally from (point) 2 to (point) 3. Now compare these points on chart two of
Bethlehem Steel. Actually the high was reached at (point) 1a and the move down to (point) 2
held stronger than the Wave. There was less price weakness and it was holding at a higher
bottom compared to point 4. We could eliminate it from consideration on this basis alone,
however, look at the move from (point) 2 to (point) 3 on Bethlehem Steel. It is pronouncedly
stronger than the Wave, therefore this stock is eliminated from consideration as a possible short
sale candidate. Now, compare chart three, Northwest Industries, at these points. Northwest...
had been in a down trend and on the move from (point) 1 to (point) 2 it was considerably weaker
than the Wave. Then, from (point) 2 to (point) 3 showed very early strength and then lost that
strength. Therefore, it is a candidate for a possible short sale. We would lay this aside for later
complete analysis. Chart four, General American Transportation, is pronouncedly weaker than

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the Wyckoff Wave from (point) 1 to (point) 2 and is again weaker than the Wave from (point) 2
to (point) 3. It is a possible candidate which then must be analyzed. Chart five of Honeywell
is moving roughly about the same speed or in the same general pattern as the Wave. It is perhaps
somewhat weaker than the Wave on the move down from (point) 1 to (point) 2 and it is
somewhat stronger than the Wave from (point) 2 to (point) 3, therefore, since it is not
pronouncedly weaker than the Wave, we eliminate it from consideration.
Now, what do we have? Our two candidates are Northwest Industries and General
American Transportation. These must then be analyzed to determine if in fact they are ready to
be sold short. We are not saying in this lecture that those stocks should have been sold short
right at this point. They must be analyzed thoroughly to determine if they were either in
distribution or in a down trend. A short position should not be taken until (a) stock shows by its
own action (that) it is going to go down and soon and that the profit - risk ratio is favorable. As
Mr. Wyckoff expressed it: It should be on the spring- board.
We have since refined and (re-)defined our techniques of diagnosing and taking a position
on the springboard. It is important to recognize that there is no one best or right way or exact
way to establish a speculative position. Each person must learn the principles, study individual
charts, analyze them to the best of his ability and determine the answers to the following
questions: 1) Which direction is a stock going to move? 2) How soon is it likely to move? 3)
How far will it probably move? Then analysis should lead to one of the following conclusions:
1) That you should take action now: 2) That you should wait: 3) That you should discontinue
interest in the stock and look for other opportunities. There are specific principles on which you
may establish a position. Mr. Wyckoff says that you establish your position on the
springboard. This is at the right hand side of a trading range. We have since refined this
concept so that you can establish a speculative long position by buying on a number three spring,
a number two spring or its test, a terminal shakeout or its test. You may also buy on the back-up
to the edge of the creek or the last point of support after a sign of strength. When a stock is in
an up trend you may buy on a normal correction of that up trend, usually around the half-way
point or on an ordinary shakeout or its test, preferably on the test. In order to take a speculative
short position in the distribution area for a down move, you may take a position on the upthrust
after distribution and on the last point of supply after a sign of weakness. Once the stock is in
the down trend, you may establish a short position on an upthrust or on a normal correction
within that down trend, generally around the half-way point. As these principles have been
discussed (in) other lectures, we will not discuss them in detail here.
Once your position
has been established, you must continually analyze the stock as the situation develops; follow it
through and close it out. Should the stock not move with the Wyckoff Wave within a reasonable
(amount of) time after the market has begun its move, close out that position. Aim to close out
your position as either the trend of the individual stock or the Wyckoff Wave is coming to an end.
Usually there will be some specific principles which will come into operation to aid you in
reaching the decision to get out. In closing out a long position some of these principles are: The
reaching of the objective built by the cause in the original area of accumulation, the objective of
the area of re-accumulation or both, the appearance of preliminary supply, a buying climax, a
shortening of thrust; the reaching of a major one half-point and an over bought condition or the
reaching of a supply line.
Closing out a short position is similar as among these principles are the following: The
reaching of an objective in the original area of distribution, the objective of the area of redistribution or both; preliminary support, a selling climax, a shortening of the thrust on the
downside and the reaching of major one half points and (an) oversold condition or the reaching
of a support line. Aim to get out of a long position as the trend is coming to an end, preferably
on the buying climax. Occasionally it is worthwhile to wait and get out on a secondary test.
Aim to cover a short position on a selling climax and conversely, it is occasionally worthwhile
waiting for the secondary test of that climax. Should the Wyckoff Wave show strong indications
of reversing the trend it is usually best to get out of a position even though the final objective of
the individual stock has not been reached. Before taking a position you should always be sure
that the profit - risk ratio is favorable, at least 3 - 1 in your favor.
Assume that a stock (which) you are considering has approximately 20 points of possible
logical count on the figure chart and youve decided that this is the approximate profit that you
will attempt to obtain. Assume also that you are going to put in a 3 point stop underneath the
purchase price and you calculate, roughly, one point for commission. The total risk is about 4
points as this is all you can normally lose if you are stopped out. The risk is 20 points of possible
profit against 4 points of possible loss. The profit - risk ratio is 5 - 1. The minimum ratio

73

acceptable is approximately 3 - 1. Never put yourself in a position where your profit - risk ratio
is as low as 2 - 1 or 1 - 1. There is no such thing as a sure thing in the market and no matter how
good the situation looks, do not go in if the ratio is less than 3 - 1. Our purpose is not to have
you learn how to scalp a couple of points here and there in the market. That requires, essentially,
a tape reader's technique and operational set-up. Your purpose and our purpose is to obtain large
profits with small risk.
It is usually best to spread your capital over several stocks rather than putting your capital
into only one situation. Why? Not all stocks will participate well in each sizable trend
movement in the Wyckoff Wave or (in) the market. Some will actually go against the trend.
Should all of your capital be in one stock which does not move with the market or shows you a
loss, you will miss participating in that particular move with an attendant loss of confidence, a
loss of opportunity, perhaps cash losses and much frustration. If you are out of tune in one
move, you are much more likely to miss the next move or to misplay it: Thus, spread your
money over several situations.
Now, there are several ways of doing this. A number of years ago Mr. Evans devised the
1/3, 1/3, 1/3 rule to limit the possibility of all of a person's capital being committed to one stock
or at one point, so the capital is committed in stages. The 1/3, 1/3, 1/3 rule provides that in
establishing speculative positions, you divide your capital into thirds and commit it 1/3 at a time.
We suggest (that) you modify this to suit your own purposes. You may make a 1/4, 1/4, 1/4, 1/4
rule or divide your capital into sixths or tenths.
To illustrate this; suppose you are able to locate three good stocks under accumulation:
You have analyzed them and now are faced with the problem of establishing a speculative
position in them. You divide your money into sixths, intending to put two of those units into
each stock which we will call stocks A, B and C. Assume your capital is $6000. You are going
to put $1000 into each stock. Stock A has a number three spring, so you buy $1000 worth.
Stock B has and number two spring with a secondary test and you buy $1000 worth of it. Stock
C does not go through a spring or shakeout, but instead is on the back-up to the edge of the
creek and so you buy $1000 of stock C. You are now using 50 percent of your capital. As the
situation develops stock A and B (have) a crossing of the creek and a back-up to the edge of
the creek and you buy $1000 of each. Then stock C has moved up and reacts and you buy
$1000 on this correction. Only now is your capital fully committed in the market. Also, the
second lot of each stock has not been bought until the first has shown you a profit.
In actual practice, you should take this basic idea and modify it to your own use. Keep in
mind that it is well to have a reserve of capital and not be fully committed in the market at any
one time. You may divide your capital into tenths (and) hold 2, 3 or 4 of those tenths in reserve
much of the time. To be fully committed puts a considerable strain on your emotions. You
should operate logically on a step by step basis and not go for broke.
Once you have decided what stocks to buy or sell short you must then enter the orders
with your broker so (that) they may be executed. There are two main types of orders, a market
order and a limit order. A market order is an order to buy or sell at the best price available at the
time the order is received at the appropriate trading post on the floor of the exchange. It is
usually executed within seconds or a few minutes of being placed with a broker. In relatively
inactive stocks the execution may take a bit longer, but the specialist who executes the order does
not have to wait for a specific price and will simply obtain the best price that he can. Most
orders should be entered at the market as market orders. The other type of order is a limit order
which is an order to buy or sell only at a specified price or one more favorable than the specified
price. Often these orders are placed days, weeks and months prior to execution so that should
the stock move to a specific price, the order is executed. We suggest (that) you practice with
both the market order and the limit order; both have their place and can be used to your
advantage. The limit order is especially useful in taking a position on a normal correction within
a trend. You determine that the stock is having a normal correction; determine the half-way point
and place a limit order.
To illustrate this, assume that a stock is in an up trend and that the last move up was from
$50.00 to $58.00 per share and it is now reacting to $56.00 with the supply drying up on the
reaction. You can determine the exact half-way point as being $54.00 per share and place a limit
order at, for instance, $54.50 and then watch the stock as it reacts. Should the stock begin to
show too much supply you can cancel your order. Should everything continue (normally)
however, you can let this order be filled. Then, follow through as the situation develops. Limit
orders may be used to begin and (to) close out market positions using other market principles
such as springs, upthrusts, climaxes and the backup to the edge of the creek. We would

74

suggest that you practice with both types of order. You may find that you prefer one rather than
the other or that you will adjust the type of order used with your normal method of operating in
the market and with the situation currently prevailing. The concepts of the profit - risk ratio, the
1/3, 1/3, 1/3 rule, the process of entering orders and the placement of stop orders are the same for
orders to buy (long positions) and orders to sell short (short positions).
At the time the original order to buy is executed you should place a stop order to protect
your capital. A stop order is an order to buy or sell, which becomes a market order (when) the
price of the stock reaches or sells through the specified price. Now, what does that mean?
Suppose you enter an order to buy at 541/2 and you enter a sell stop order at the same time at 497/8.
Should the stock decline to or through 497/8, your stop order to sell would immediately become a
market order and would be sold in its turn. The basic rule on stop orders is to always use a stop
order. Use it to protect your capital and to protect profits.
There are times when stop orders are prohibited on the exchange. Currently, on the
American Stock Exchange, all stop orders for one hundred shares or more are prohibited. These
are stop orders which would immediately become market orders when the stop price is reached.
Stop limit orders may be used. However, the stock may go through your stop limit price and
your order may not be executed. We suggest that you check with your broker when you establish
a position (in order) to determine (whether or not) a proper stop order may be used to protect
your capital. Stop orders should always be placed at the same time as the order to buy or
sell the security. If the stop orders are prohibited, we suggest that you use some form of the
following plan. After you have placed the order with your broker and established your position,
determine exactly where a stop order should be placed. Should that stop price be reached or
exceeded, immediately call up your broker and issue the order to take you out of the market.
There will be those who are listening to this who will say that they cannot rely on a
mental stop. They will say (that) mental stops are one of the things in the market which (sound)
good in theory and all too often prove disastrous in practice. The trouble all to often is (that) the
student, even an experienced student, will move his mental stop or really forget about it.
Gradually, he becomes a victim of his hopes and his dreams and his fears and greater and greater
losses (occur) until finally financial disaster overtakes him. If he is one subject to this weakness,
he must develop another plan, such as having his broker disciplined to call him when a stop level
is violated.
To illustrate the use of stop orders, please, turn to chart six which is a theoretical model.
The stock is in a trading range from (point) 1 to (point) 2 and then has a spring at (point) 3 and
you buy on the spring or the secondary test in the area circled at 3. Now, there may not be a
previous area of support under which you can logically put a stop, so, you have to put in a
floating stop order, one that is out in open territory, say, of 2 or 3 points. Perhaps you buy at 25 1/2
and we will call it unit 1 and put a stop order at 22 7/8. It is generally better to place a stop order
just below the full dollar figure. For short sales place a stop just above the full dollar figure: So,
you have a stop at 227/8. You do not move that stop to a higher level until the stock has
moved up, reacted and gone above the prior resistance area and indicated that it is going to
continue on going NOW. What does this mean? The stock goes from (point) 3 to (point) 4 and
reacts to (point) 5 which is the back up to the edge of the creek. You buy a second unit, say, at
281/4 and you place a stop order on that unit too, at, say, 25 5/8 at B. One technique is not to move
the stop on unit 1 until the stock goes above 29 1/2 at C and indicates that it is going to continue on
moving up. At that point you can move the stop on the first unit up to the same level as B at
255/8. Following the same technique of moving your stops with the unfolding of the market, you
leave the stops on both units at that point until the stock goes up to (point) 6, reacts to (point) 7
and then rallies through the 6 level at (point) 8 and indicates that it is going to continue on
moving up NOW. Then you move the (stops) on both units to under the reaction low at (point) 7,
say at 287/8 at D. We will assume that next a buying climax occurred at (point) 9 indicating that
the stock was going to stop advancing for quite a long time. Should it do this it is better practice
to simply sell out both units and cancel the stop orders. Later on, if the stock goes through reaccumulation, you may re-establish your position. So, you sell out completely and cancel your
stop orders.
Now assume that the stock goes through re-accumulation from (point) 9 to (point) 10.
Then, at (point) 10 the stock is on a springboard and has a spring or a shakeout. So, you buy in
the area circled, say, at $34.00 per share and put in a two or three point stop at 30 7/8 at E. Leave
it there until the stock goes up from (point) 10 to (point) 11, backs off to (point) 12 and goes
through the high reached at (point) 11, so as to indicate that it is going to continue going up
NOW. This is in the area (marked) 13. As soon as it has done that, then you may raise your stop

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to 337/8 at F. Leave that stop order there until the stock goes up to (point) 14, backs off to (point)
15 and goes above the high reached at (point) 14 in the area (marked) 16. At that point you may
raise the stop to approximately 377/8 at G, a few points under the reaction low at (point) 15. This
process should be followed until finally the position is closed out, preferably on a preliminary
supply or the buying climax as objectives are reached
Now, lets go back to point 10 on this chart. Assume that you have bought in this area at
$34.00, putting in a stop at 307/8. The stock continues to go down to 33; to 321/2 (then) to 321/8
and continues on down. It is your duty to get out before that stop is reached if at all possible.
The purpose of using 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 Associates, chart six of Basic Lecture Seven on the drop from
(point) 9 to (point) 10. Should this type of action occur you are out automatically with the bulk
of your capital.
Chart seven covers most of the chart action of chart ten, Basic Lecture Two. We will use
many 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 changing of the stop orders. Assume that we
had bought in the area of (point) 1. A stop order could have been entered at approximately 7 7/8.
We would not move that stop up until the stock had moved up, reacted and had gone above the
prior resistance and indicated that it was going to continue upward and continue moving NOW.
On the reaction to (point) 4 a purchase was made at 173/4 with a stop at 147/8. We would not move
the stop on the first purchase until the stock reached the area of 4a where the stock was making
good price progress along with the increased volume. At that point we can raise (that) stop (on)
the purchase made at (point) 1 to 147/8. Thus, we have assured a small profit on the first
purchase. The stock goes up to (point) 5, reacts to (point) 6 and fills the order at 23 3/4. The stop
order is at 167/8. A floating stop order at 197/8 could have been used instead with the stop on the
prior purchases moved to 167/8 or perhaps to 197/8. A floating stop order is one entered 2 or 3
points under the purchase price (which) just floats in open territory. It is not placed under a
previous support area. It is better practice to leave your stop underneath the prior support area
and if necessary get out before that stop is reached.
To continue, it would be very easy to interpret the widening spread and increasing
volume at (point) 7 as an indication that the stock was going to continue upward and continue
NOW. Let us play it that way and raise the stops on the previous purchases to the same level of
167/8. It should be noted that the increase in volume at (point) 7 was sudden and heavy
indicating the presence of heavy supply and the lack of demand at (point) 7a (indicates) it
(the stock) is not ready to continue but will react. It reacts all the way back to (point) 8. As it
does so we should remember that our first duty is to protect our stop order, to make sure that we
do not get stopped out because to do so is to sell on weakness. Again, if it is necessary to get out
we should do so before we are stopped out. The action at 8a is not such as to indicate that the
stock is going to continue and continue NOW, therefore we leave our stop orders where they are.
However (point) 10 had carried into new high ground and another purchase was made on
the following reaction at 281/2 with a stop order at 217/8. This 7 point risk could be regarded as
excessive, but we would expect to get out before the stop is reached. We leave this under
previous supports because it could be expected to again meet support there and we could
judge the support and any rally and then get out on the rally. As the stock moves through
the prior resistance of (point) 10 at 12a with good spread and volume, we raise the stop orders
and on all purchases including the last one to 237/8. We leave the stops there until we sell out all
positions at once on the buying climax at (point) 14 and simultaneously cancel the stops.
Let us suppose (that) on the reaction to (point) 17 a limit order is filled at 36 1/2. The stop
order is at 327/8. It goes to (point) 19 which is just barely above the previous supply at (point) 14
and therefore it is questionable that another purchase should be made on the following reaction.
However, we do so at 411/2 with a stop at 367/8. It would be nice if all trades were perfect and if
we never made a single mistake, however, it seldom works out that way. Another purchase could
be made on the spring at (point) 22 with a stop 2 or 3 points below the purchase price. On the
reaction to (point) 24, which is a back-up to the edge of the creek, we buy again at 43 with a
stop at 377/8. Why make so many purchases. One very excellent reason is that we may not have
completed the line of stock that we wanted and very often it is best to go into a stock in stages,
step by step. It is logical (at this time) to raise the stop on our first purchase to around 36 7/8.
(The stock) moves up to (point) 25 and reacts and we place our next order at 47 3/4 with a stop
order at 407/8. Note, we are using a full 7 point stop order and all through this move we have
avoided crowding stop orders.

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There is no exact percentage or number of points which you should use in determining
how far away the stop should be from the purchase or sale price. You must adjust your stop
order according to the purpose of your commitment and the amount of risk you are willing to
assume. Usually the difference between the commitment price and the stop order price will
range widely. Whenever you crowd a stop order you will leave it vulnerable to (being)
caught. You should get out on your knowledge and not on the execution of your stop.
We now raise the stops on the previous commitments to 37 7/8, although we could raise
them then to 397/8, just under this previous support at (point) 24. When the stock goes into the
new high ground above (point) number 25 at (area) 25a, we raise the stops; we raise the stops on
all trades to 447/8 which is just below the previous support at (point) number 26. At (point)
number 27 the stock has narrowing spread and high volume. This is evidence of strong supply
coming in to overcome the demand. A figure chart would show an objective of 59 to 63; we
have hit the objective. As it would be logical to expect a long hesitation or a large correction to
at least the half-way point of the move from (point) number 22 to (point) number 27, we sell out.
Many people are very excellent buyers, but very poor sellers. It is important to be
versatile at both taking a position and getting out of the position. It will do you little good in the
market to establish an excellent position, see it move in your favor giving you a sizable profit
and then, watch the profit melt away. Also, you should not play for the last 1/8 th of a point. To
do so usually results in not getting out at all or getting out finally in exasperation at much lower
levels. Aim to get out (of) a long position in the objective area as the important trend movement
is ending. Usually this will be on a buying climax.
To try to get out of one position and to go short in either the same stock or a different
stock on the same day is very difficult to do. Why? In the first place to do so requires a shifting
of mental gears and usually your attention is divided. It is usually better to concentrate on the
getting out of an established long position first and then get set to go short. Also, if the market is
going through sizable distribution, aim to get out of previously established long positions in the
left hand portion of the distribution area and to go short in the right hand side of that area. It is
also important to recognize that in most cases you will not be selling out on a long position and
going short immediately in the same stock. Why? You should be long a stock that is
pronouncedly stronger than the market and you should aim to go short a stock which is weaker
than the market. It usually takes considerable time for an individual stock to shift from this
pronounced strength to pronounced weakness and to build a sizable cause or count.
We will use chart eight, the same picture as chart ten of Basic Lecture Seven, as our
vehicle for discussing stop orders in a down move. After the move to (point) 5 had been
identified as a probable sign of weakness a limit order could have been entered to sell short
around 411/2, which is around the half-way point, with a stop above (point) 4 at 46 1/8. On the
move to (point) 7a that order would have been executed. Another short sale could have been
made at 6a with a similar stop order. When the stock reached (point) 17, these stop orders could
have been lowered to 421/8, just above (point) 18 and as the stock continued on down at 19, again,
the stop orders could have been lowered to about a point above (point) 20, say at 37 5/8. (Point)
21 showed good demand and as the stock rallied up toward the stop price, we should prepare to
get out around the $34.00 level at (point) 22.
In the re-distribution area the sign of weakness was (point) 14 and the last point of supply
at (point) 16. Assume a short sale is made on the rally to the last point of supply at (point) 16 at
number 23 around $37.00. A stop order should be placed just above the high at (point) number
13 at 421/8. It would be left there until the stock reached the area number 24 at which time it
would be lowered to above the supply at number 25 (at) about 381/8. It would remain there until
the stock reached (point) number 26, rallied to (point) number 27 and then after the area of
number 28 when it indicated that it was going to continue on down. At that time the stop order
would be lowered to just above (point) number 27 at 29 1/8. It would remain there until finally the
position is closed out in the area around number 29, after it had reached the objective area and
had an increase in volume and a narrowing spread at (point) 30. This is evidence of demand
coming in to overcome the supply.
Now a word or two about practice trading. This is perhaps the most important thing that
is in this particular lecture and do not let the brevity of the discussion about practice trading
mislead you as to its importance. You see, we must all go through three processes. The first
process involves learning to understand the basic techniques and the basic concepts behind and
governing stock market movements. The second process involves practice trading. After that
has been successfully completed to the point where you are ready to operate in the market with
capital, you begin the third phase which is actual cash trading using a sizable portion of your

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capital. We used to call practice trading paper trading because for many students who had very
small amounts of capital it meant trading with fictitious money, monopoly money or on paper,
however, that was still deadly serious, practice trading.
The practice trading must be planned and conducted as you would a cash transaction with
money on the line. If at all possible, you should do your practice trading with 10 shares, 25
shares, perhaps even 100 shares, but under no circumstances should you read the text, listen to
the lectures and immediately begin to operate in the market in order to obtain profits with the
bulk of your capital. Very early you will be able to operate defensively to protect your capital
from loss through placement of stop orders and by getting out of positions when you see action
endangering your holdings. However, do not operate in the market to obtain profits until you
have thoroughly prepared yourself. Most students are not ready to cash trade until at least six of
the last ten practice trades are profitable. You should test your understanding of the application
of the principles thoroughly first and you should regard the practice trading as the preparation for
cash trading.
If the practice trading does not go well, do not simply walk away from it and start over:
Assess what has happened: Determine what you should do next and operate accordingly. When
you need assistance call upon the Stock Market Institute for aid: That is what we are here for.
We want to help you to be successful. Much of your growth and knowledge will come about
through practice trading and even after you are well into cash trading you should still continue to
practice trade.
Do not ever limit your growth in knowledge by the amount of money you happen to have
at any one time. If you are going to operate with fictitious money, begin practicing with five to
ten times the amount of your present capital so that you can get used to operating with that
amount of capital.
Do not attempt to short circuit the practice phase and then rush into cash trading simply
because you are afraid you are going to lose possible profits or opportunities. It is too easy to
lose money if you are wrong and very difficult to gain it back once the capital is lost. You must
always act so as to protect your capital: Without it you are out of the market.
One excellent method of practice trading is to begin to concentrate on learning one
particular principle such as the spring or back-up to the edge of the creek. Learn it thoroughly!
Do very extensive practice trading with that particular principle and then you can begin operating
in the market with cash with that specific principle whenever the opportunity arises. Gradually
add other principles to the thoroughly tested tools which you can use. Then, once they have been
mastered, make sure that the ease and the fine ability which you have acquired in their use does
not slip away. Do this by practicing, practicing and more practicing.
It is often just as important to know what situations to avoid and are likely to cause
trouble as it is to know the situations in which to take a position. If you get in wrong it will lead
to loss of money, loss of time, loss of opportunity and usually considerable emotional turmoil.
Frequently a loss in one situation which is not remedied rather promptly leads to losses in others.
A student may have profits in three stocks and a loss in one. Past experience has shown that he
will concentrate his attention, efforts and time on the one in which he has the loss. Very often he
will ignore danger signals in those stocks in which he has profits.
For some specific examples; when a stock is in a trading range and rallies to or
through the top of the range and then encounters heavy, massive, sustained volume over
four, five or six or more days with little progress, this is evidence of heavy, sustained selling
by large interests and the inference is that many of the longer term holders in this situation
are getting out. Why? Usually because they see that they are unable to do what they originally
intended to do. Usually this heavy, sustained selling will stop the move for a long time,
anywhere from several weeks to several months or more. Frequently it will force the stock back
towards the bottom of the trading range as a minimum.
An example of this type of selling is in chart nine, Twentieth Century Fox. The stock
had been in a long trading range and had repeatedly met supply at (points) 1, 2, 3, 4, 5 and 6 and
then at (point) 7 (it) began to move up with heavy sustained volume until finally the stock went
above the supply area for an upthrust. For how many days did this heavy supply come in? You
count them. There were eight days as it moved up. This amount of supply can only come
from people who have large positions in the stock and are now getting out. For this stock to
continue to move up at (point) 8 in the area marked as 9, it had to keep going and going and
going and it did not do so. It went into new high ground, had too much supply and turned
downward. As it reacted to (point) 10 there was heavy volume on the downside, further
evidence of this continued massive selling. The rally to (point) 11 had a comparative lack of

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demand compared to the drive up to (point) 7 as shown by the narrowing of the spread and the
decreased volume and so the stock went on down. Eventually it broke through all of the supports
in the trading range.
Turn to chart ten, Federal Resources. It had met supply at various points including
(points) 1 and 2 and finally at (point) 3 went above them. At (point) 3 the narrowing of the
spread and the heavy, sustained volume for 1, 2, 3, 4 days indicated heavy selling, including
selling on the downside. Again, this heavy, sustained selling for almost a week or a week and
a half, perhaps even as long as two weeks, can only come from large interests who are
getting out of big positions in the stock. The usual effect of this type of action is that it will
prevent the stock from leaving the trading range for a substantial move for quite a long time,
anywhere from a few weeks to several months or longer.
The third example of this type of action is Brunswick, chart eleven. Brunswick
moved up in early 1967 to the buying climax at (point) 1. There was a secondary test at (point) 2
and then at (point) 3 the stock had very heavy volume over four days. This is heavy
concentrated selling. The effect of that selling was that the stock had an extensive reaction and
moved sideways for six months. Then at (point) 4 it again moved up above the previous supply
level to $17.50. Heavy selling came in over a two week period. The effect of that selling was
that it took a little over a year before the stock reached $21.00 per share. Supply again came in
heavily at (point) 5. It should be recognized that this type of condition can occur in long range
accumulation or long term accumulation. However, the immediate effect of such heavy
concentrated selling usually is to stop the move and to create a sideways movement for
several weeks to several or more months and often a rather sizable reaction.
Now turn to chart twelve of Spartans. The stock had been in a long trading range as
shown by the figure chart and at (point) 1 had wide spread and heavy volume. This type of
action in a supposed major accumulation area is not good. Why? To understand why we must
go back to the process whereby a stock is gradually moved up. It is not that the professionals get
together and say, Well, well buy in here in the 20s and move it up to 50. No, it is that
professional people understand and diagnose that the stock has the characteristics to move up and
therefore they take a position, a large position, perhaps several hundred thousands or in some
cases more than a million shares. Now, they cannot buy this stock all in one day, therefore, they
buy over many days, weeks, months and sometimes over several years. They may buy through
market orders or by placing bids ahead of time, frequently on a down scale so that if the market
reacts to a certain level they can buy.
Let us illustrate the mechanics of this. On chart twelve this stock went up from (point) 2,
met support in the area of (points) 3, 4, 5, and 6. Bids to buy stock would be placed below the
supports at (point) 6. For example, in order to buy a couple of thousand shares at 27 1/8, another
similar order (would be placed), say, at 26 3/4, another at 263/8, another at 26 and so forth, all the
way down, perhaps to about $23.00 and even some orders underneath the support at $21.00 and
$20.00. Or there may be one large order of, say, 50,000 shares at around $26.00 per share or
perhaps several orders. You get the basic idea of buying on a scale down. The same process is
used in buying on a scale up. Thus, in a good, strong situation there is usually a
concentration of orders underneath the market or people standing on the sidelines willing
to step in at a moments notice and buy the stock on the reactions. Now, what happens at
(point) 1? The stock begins to go down and there is no support. It cracks another 1/2 point and
(still) no support; down another point and it goes down, down and down. The best type of
situation will not have this type of air pocket.
Now a word of caution about this. This will have its effect, however, the presence of this
action does not mean that you can never buy into a situation where this type of action occurs.
You must judge the total situation and especially the subsequent action. Despite this, the entire
area could be accumulation. This is something to be cautious about. Should the subsequent rally
be strong, that can repair much of the damage. By all means do not hang all of the law on the
profits on this one action. It is, however, evidence that the good, strong demand that should have
been there was not there and the question is why and what is the future effect on the stock. In
this particular case the stock rallied to (point) 7. The spread and volume were decreased
compared to the previous up move and the drive down to (point) 1; evidence that the supply
(was) much stronger than the demand. As a result, the stock went on down toward the bottom of
the trading range.
Another example of this is U.S. Smelting, chart thirteen at (point) 1. The heavy
volume and wide spread on the downside was not good. It is evidence that the stock was not
being supported as it had been on the reaction, bracketed at (points) 2, 3, and 4. Prior to

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this the stock had been eased down in the reaction and here it cracked wide open. Why? And
what is the future effect? Another example of this is at (point) 5 You can see the effect of the
relatively weaker rallies at (points) 6 and 7. The stock declined to 401/4.
Chart fourteen of General Instruments, is next. The stock had been moving up and then
at (point) 1 it broke with very wide spread and heavy volume. Again, this is heavy supply on the
down side with much price weakness. Cover up all of the action to the right of (point) 1. For
that stock to remain strong it should rally from here and have a secondary test of the low of
(point) 1. In other words, this action could be a shakeout and a secondary test or it could
be the start of a sizable down move; that is the issue. Now, how do you operate with this
situation? If you are waiting on the sidelines to take a position, you do not buy until it rallies
and then (volume) dries up on the secondary test of this area. So, you do not immediately
rush in and buy. You attempt to buy on the secondary test. If you are already in the situation,
holding a long position, you have a different problem. It is very important to know whether or
not there is a count in a higher level such as at (point) 2 on the figure chart for a much lower
objective, or in the immediate level, such as (point) 3. If the immediate count is not fulfilled,
you know that it is possible or probable that that count will be reached and that this is likely to be
the beginning of a further move. An ordinary shakeout with an upward trend usually does
not have much count in front of it. The stock simply goes up, breaks or begins to react and
then breaks. So, if you can diagnose that it has a possible or probable lower objective or is not a
shakeout, usually the best thing to do is simply get out of the long position immediately, virtually
regardless of price. There are instances in which the stock will rally, but there are too many
times that it continues on down such as in this case.
Now, lets follow this through. What happens if you dont get out? The stock goes on
down to (point) 4 and rallies, but this is a weak rally, nowhere near the half-way area and so,
there is no really good place to get out on the rally to (point) 5. The big problem in not
liquidating right away is that you will hope and hope and hope and hope until finally the
situation becomes completely hopeless and then you finally sell. Alright, the stock goes down to
(point) 6 and then rallies, but the rally to (point) 7 is strong. Look how it pops up, almost 5
points in two days. This is strength and you are quite liable to say Oh, Im going to hang on and
see if I can get out in the $54.00, $56.00, $57.00 area, bracketed at 3. So, you are quite likely
not to get out. Watch what happens. The stock goes on down, down, down and down and down
and somewhere you are quite likely to sell, probably where the bad news begins to come out in
the area circled (at) 8 or 9 or perhaps later. Or, you may hold for many years before the stock
finally gets back up into these higher prices.
Now, lets go back to (point) 1. What is the relative risk of getting out as the stock
reached 511/4? Well, if it rallies, where could you expect the rally to end? Where would any rally
meet supply? One place is in the former support area at (point) 10 in the $53.00, $54.00 level;
this is the ice: Or, perhaps clear up to $55.00 (per) share in the middle of the range. So, you
could expect a 2 to 4 point rally if you hang on. Now, what is the risk of loss? You figure it out
please. Stop listening and figure it out. Please, do not just pass this over. In actual practice the
downside risk may be very uncertain and difficult to determine. This is all the more reason to
consider getting out and (to) wait until the situation clarifies. Your first duty is to protect your
capital. Now, the count in area number two is 31 points, subtracted from 63 or 59 giving an
objective of 32 to 28, so at (point) number 1 you could expect a 2 to 4 point rally, if it rallied and
should it decline it would be logical to go down another 20 or more points. In playing for the
rally, the risk is not good! What should you do about it? Simply get out regardless of price.
Lets summarize now. (In) Basic Lecture Nine we have passed on to you some ideas,
concepts and principles designed to help you to establish a speculative position. We have
reviewed the basic process, discussed the placement of orders to buy and sell and the protection
of your capital through a favorable profit - risk ratio, stop orders and the 1/3, 1/3, 1/3, rule. We
have outlined some market phenomena which can cause you some difficulties. These are mainly
the heavy, sustained supply which can come in to stop a move and the lack of demand at the
point where demand should be present if a situation is to remain favorable for you. It is
important to remember that the establishment of a speculative position is an art and not a
completely mathematically exact science. It is an art and like in any art some students and
practitioners will be outstanding, some will do well and some will essentially fail. You will find
that the great artists in painting, music, literature or in any other field must constantly practice
and practice and practice to sharpen their skills. You must do that too. You must practice and
practice and practice some more; diligently and systematically. Always continue to practice!

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BASIC LECTURE NUMBER TEN

WYCKOFF WAVE
AND
OPTIMISM - PESSIMISM INDEX
The main (subjects) of Basic Lecture Ten (are) the Wyckoff Wave Index and the
Optimism - Pessimism Index. The purpose of this lecture is to discuss with you the origin,
construction and the use of the Wyckoff Wave Index; to introduce the Optimism - Pessimism
Index to you and to discuss the co-ordination of the Wyckoff Wave and the Optimism Pessimism Indexes. The principles regarding the analysis of a vertical chart and a figure chart
discussed (in) prior Basic Lectures also apply to an analysis of the vertical chart and (the) figure
chart of the Wyckoff Wave. As these have already been discussed rather extensively, they will
not be discussed here in detail. Our main concern will be with the intraday waves, the coordination of the intraday waves with the daily vertical chart of the (Wyckoff) Wave and how
you may co-ordinate the charts which are used in the analysis of the Wyckoff Wave and the
Optimism - Pessimism Index.
In beginning any analysis we first determine the trend of the market. We use the
Wyckoff Wave Index for this purpose. We then compare the individual stock with the Wyckoff
Wave to determine which stocks are stronger or weaker than the Wave and then analyze those
individual stocks which are likely to lead the Wave in its next movement. We begin our analysis
with the Wyckoff Wave to determine the trend of the Wave. The Wyckoff Wave Index is
designed to show the line of least resistance or the trend of stocks generally. Mr. Wyckoff points
out that the market moves to higher or lower levels by a series of surges, much like an incoming
or outgoing tide with successive waves higher or lower than the preceding waves. All stock
market movements whether they are large or small are made up of buying and selling waves.
These waves build upward and build downward, but all large market movements begin with the
very smallest waves. The Wyckoff Wave Index is designed to show these small wavelike
movements and to measure their strength. We can then combine a number of these small waves
to obtain a larger perspective and to construct vertical and figure charts from the (Wyckoff) Wave
data.
Now, lets think about a wave in the ocean for a moment, say, a twenty foot wave which
breaks and rolls up on the beach.. There is some spray just ahead of the leading edge of the
wave; then there is the leading edge itself and then the bulk of the wave which could be divided
into the forward part, the middle and the back part of the wave. The water which is pushed the
farthest up on the beach is the water which is in the spray, the leading edge and the most forward
part of the wave. Now, very similarly, on any sizable drive up in the stock market there are a few
very early leaders or a few stocks which move contrary to the market on the preceding reaction.
These can be likened to the spray ahead of the ocean wave. Then, a day or so before the upward
drive begins, some early market leaders begin their up moves. These may be likened to the
leading edge. Then, as the market turns and begins to move upward, there are usually a large
number of stocks that begin to turn at about the same time and these move upward strongly until
finally they crest and begin a new reaction. These stocks may be likened to the forward part of
the wave. They are followed by stocks which turn upward later. These stocks are likened to the
back part of the wave; that portion of the water or wave farthest from the beach. These laggards
usually have relatively weak moves and usually stop moving up before the strong stocks finish
their trends. In other words, there is a tendency for the strongest stocks to turn up relatively
early, to be stronger and to move farther up than those stocks which were late in completing their
reaction and in beginning the move up. The same process occurs on the down moves.
Now, in order for a stock or a market to move upward, so much stock must be bought:
This is volume. It will move a certain distance: This is price or price change. And the movement
will last for a certain amount of time: This is time. The same process takes place on a downward
move. In other words, we can and do measure the duration, the amount of price change and the
volume of each wave and when each wave began and ended for both the up waves and the down
waves. We call it the Wyckoff Wave Index. This information is compiled by our staff of tape

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readers and then published each day in our daily report as the Pulse of the Market. The data
pertaining to the Wyckoff Wave, published for Monday, August 25, 1969, is on chart number one
of this Basic Lecture.
Now, before discussing what the Wyckoff Wave is, it is important to know what it is not.
The Wyckoff Wave is not designed to be a market average, nor is it designed to enable you to
calculate the percentage distance that all or a bulk of the stocks in the market have moved in any
trend movement. An average would be too slow moving, relatively insensitive and would not
give you time to establish your position as the market is turning. By the time a reversal would be
reflected in an average, the strongest and the best opportunities would already have turned and be
well away from the best buying or selling point. Also, the Wyckoff Wave is not composed of
stocks which may be dormant for many years and suddenly are whirled upward or smashed
downward for two or three months and then again become dormant for many more years. It is
not composed of stocks which move contrary to the general market for long periods of time or
for sizable distances, nor is it composed of habitual laggards. An index with these types of
stocks could be very misleading.
Now, what is the Wyckoff Wave Index and what is it designed to do? The Wyckoff Wave
is an index designed to measure the wavelike movements of the market and to reflect market
leadership. There are four parts to this statement. The name of the index, that it is an index, that
it measures the waves and that it reflects market leadership: All are important. The Wyckoff
Wave is named after its inventor, Mr. Richard D. Wyckoff. He designed and used it as a tape
reading tool so that he could better pinpoint the turning points and the relative strength of the
successive waves in the market. It is an index and a stock market index is comprised of a
number of stocks designed to represent something, usually a larger group of stocks or a
type of market movement. An index serves as an indicator, pointer or guide. The Wyckoff
Wave Index is designed to reflect market leadership, that is, the more permanent
leadership of the market. Why? Well, generally these leaders change direction before the bulk
of the stocks in the market reverse themselves, therefore, they have forecasting or barometric
value. Many of these stocks are used to influence many other stocks in (their respective)
industry (groups) or the entire market, as the market travels from one level to another. The
stocks selected for the Wyckoff Wave come from this type of active, leading stocks. Examples
of these stocks are US Steel, IBM, Chrysler, Sears, (and) Union Carbide. For many
years we have used the Wyckoff Wave for a dual purpose, as a tape reading tool to measure the
intraday waves and as a market index designed to enable one to analyze the longer term trends,
the intermediate and major moves. This development and dual purpose arose out of the needs of
Mr. Wyckoff and the students and out of our developing knowledge.
Very briefly, that development occurred in this manner. Mr. Wyckoff invented the Wave
as a tape reading tool to aid him in diagnosing the turning points and the small fluctuations
which occur during the day. He originally used five stocks in computing the Wave. He used the
New York Times Average, which is really an index, to determine the long term trend of the
market, that is the minor, intermediate and major moves. However, he used the Wyckoff Wave
for diagnosing the shifting of strength between supply and demand at the turning points. It was
found that the New York Times Average and the other non - Wyckoff averages and indexes were
not sufficiently sensitive to enable the student to take his position before the move was well
under way. So, a vertical line chart of the Wyckoff Wave was constructed and eventually
introduced in our work in place of the New York Times Average. It was an excellent step
forward. We now use a daily vertical chart of the Wyckoff Wave to portray this longer term
picture. And again, it was somewhat after that, that we began to use figure charts of the Wyckoff
Wave.
At present we are using the following types of charts for these purposes: 1) a daily
vertical chart of the Wyckoff Wave to determine the direction and timing of the minor,
intermediate and major moves; 2) the intraday wave chart to analyze the intraday waves; 3)
figure charts of the Wyckoff Wave to determine the counts and objectives of the Wave. We use a
modified 5 point chart, a modified 10 point chart and a modified 25 point chart. We use the 5
point chart for the smaller fluctuations, the 10 point chart for the minor and intermediate moves
and the 25 point chart for the major moves without making a clear or rigid distinction between
minor, intermediate and major. You must adjust the type of chart you are using according to the
type and size of move that you are examining. We anticipate that should the price of the index
reach much higher levels we may have to use a modified 20 point (chart) for the minor moves
and perhaps a modified 50 point chart for the major moves. The use of the daily vertical chart

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and the 25 point modified charts have been covered on prior Basic Lectures and will not be
discussed in detail here.
As the Wyckoff Wave is made up of market leaders, you will often find that it will turn a
day or two prior to the general market or a day or two before such a turn becomes apparent in the
other market indexes and averages. Due to its construction it has an extreme sensitivity at
turning points. It provides a break down measure of the Wave. It works out its counts and there
is price continuity which is very important. For the Index to function efficiently to diagnose the
longer term moves, price continuity is maintained and the stocks making up the Index are
changed relatively infrequently, (only) when market leadership is lost. Each time a stock
substitution is made in the Index, it changes the character of the Index slightly. This is done,
generally, at intervals of several years only. Students are notified of any substitutions and
changes in the composition of the Index. Incidentally, we have maintained price continuity in
the price of the Wyckoff Wave since 1946, but occasionally have changed the stocks used in the
Index. Originally Mr. Wyckoff used five stocks in computing the Wave and our present Wave
originally started with five stocks. However, over the years, due to splits and the rotation of
market leadership we have changed the number of stocks in the index and have added the
multiplication factors of each stock to reflect some splits and stock dividends, etc. We have not
tried to have all of the major industries nor the largest firms in each industry represented in the
Index. Actually, the stock of the largest firm in the industry may not have the most market
leadership or barometric value in reflecting changes in the fortunes of that industry. The stocks
making up the Wyckoff Wave Index and their multiplication factors as of July 31, 1969, are
shown in chart two. This is published monthly on the report of the last market day of the month.
Now for a brief word on how the Wave is compiled and calculated. We still follow the
basic principles in its calculation and construction as laid down by Mr. Wyckoff. However, we
have modified them to reflect the changing price level of the Index and the introduction of
modern, high speed computers. Now, very briefly, all of our figures still come directly from our
own stock exchange ticker. It generally takes a year and a half to two years to fully train a tape
reader. The tape reader reads the ticker tape and constructs a 1/4 point chart of all the stocks in
the Wyckoff Wave, reflecting the multiplication factors in its construction to aid him in the
calling of the waves. As he sees the Wave turn from downward to upward he determines when
each wave came to an end and then calculates the measurements of each wave during the day.
This is published as the Pulse of the Market, a sample of which is in chart one. The prices
used to make up the Index come directly from the ticker tape of our own stock exchange ticker.
If any quotation is questionable, we check it with a computer. At one time we had to determine
the volume for each wave by counting the number of shares printed on the ticker tape. We now
get this through the computer instead and this in brief is our present technique. It is not
necessary for you to know the detailed process which our tape reader goes through. It is
sufficient for you to know the general process, the purpose of the Wave, its advantages and how
to use it. Your job is to use it to make money.
With this as background, lets examine chart one of the Wyckoff Wave for Monday,
August 25, 1969, only from the standpoint of the information on the Wyckoff Wave which is
published on the report, not from the standpoint of its interpretation. You will be sent other
instructional material on the technical makeup of the Wyckoff Wave and the Optimism Pessimism Index and on the information published on our daily report. On the right hand side of
the page is a section of the vertical chart of the Wyckoff Wave and the Optimism - Pessimism
Index going back several months. This is printed so that those students who are pressed for time
and are temporarily unable to post their charts for a few days can still keep up to date in their
interpretation of the vertical chart of the Wyckoff Wave and Optimism - Pessimism Index. In the
lower left hand portion of the page is printed the non Stock Market Institute averages for the
previous day. They will not be discussed here. Above them is printed the table of data regarding
the waves which occurred during the day. This table of data lists the number of waves, the times
at which each wave ended, the duration of the waves, the price reached during that particular
wave, the price change, the volume, the activity and the individual Optimism - Pessimism
measurement for each wave. It also lists the opening price of the Wyckoff Wave and the total
volume of all stocks traded on the exchange for that day and the number of periods or waves in
which the tape was late. Directly above this table of data a short, up to date segment of the 1
point figure chart of the O.P. Index or the modified 10 point figure chart of the Wyckoff Wave is
published on alternate days. On August 25, the 1 point figure chart of the O.P. index was
published. The intraday wave chart is published in the upper left hand corner. It consists of
three sections. Beginning from the top, there is the intraday breakdown on the O.P. Index by

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waves. The middle portion of the chart contains the intraday wave chart of the Wyckoff Wave
and on the bottom of the chart is a graphic portrayal of the activity. Just to the right of the
intraday wave chart is printed the figure changes for the Wyckoff Wave for the modified 5 point,
the 10 point and the 25 point figure charts. Just below those are printed the 1/2 point figure
changes for the Optimism - Pessimism Index.
In comparing the strength and the weakness of the waves in the intraday wave, compare
one wave with the succeeding wave and also compare waves in the same direction. For
example, compare an up wave with the next wave which will be a down wave and compare
that up wave with the prior up wave. You will find it helpful to compare the waves which
occur at the same general price level, such as a climax wave and a secondary test wave. Not
all waves are important and certainly not of equal importance. Probably the two most
important factors used in the wave comparisons (are) the (price) change and the volume.
The change pertains to the price change on each wave of the Wyckoff Wave. The volume figure
is that of the total volume of all stocks on the exchange. As you work with the Wyckoff Wave,
your judgment of the relative importance and the relative strength of the waves will sharpen.
Now, lets deal briefly with the activity. The activity is a reflection of the number of
transactions and we calculate it by measuring the number of yards of tape during each
wave. The activity is a measurement of the intensity of trading. Due to the bunching of
orders at the beginning of trading the activity is usually high on the first wave and then tapers of
during the day until just at the end of the day there is a bunching of orders again. The activity is
most useful for those few students who will be in and out traders, quick traders and floor traders.
Those students operating in the market for intermediate and major moves may, for the most part,
simply ignore the activity except when there is a sudden surge of activity or a sudden sharp drop
in activity during the day. This type of change in activity is significant.
Now for some interpretation. It is important to recognize that all stock market
movements are governed by the longer term trend; that the shorter moves, the intermediate and
minor moves against the major trend are only temporary and fit into the context of the major
trend. The same thing applies to intraday waves. Therefore, the starting point for analyzing
the Wyckoff Wave is always to analyze the long term picture; to determine if the major
trend is up or down or if it is in a trading range.
Turn to chart four; the vertical chart of the Wyckoff Wave and the O.P. Index from
January 1, 1968, through September 5, 1969. An examination of the move down from (point) 1
to (point) 2 shows that it is a major move which had some form of climax at (point) 2, but not a
classic volume selling climax. There is a rally to (point) 3, a secondary test at (point) 4 and then
at (point) 5, the wave penetrates just above the supply area at (point) 3 on moderate spread
and moderate volume and closes on the high. It will either continue moving up or it will
not. It is at critical turning points like these where the intraday breakdown figures are
worth their weight in gold. These figures on the intraday waves are not obtainable through any
other source.
Now, the next day is (point) 6. Instead of continuing upward, the Wyckoff Wave turned
downward. Lets analyze how this turn developed. Please turn to chart three which contains the
breakdown figures for August 22 and 25 and the intraday wave charts for those days. On August
22 the last wave closed at 25477/8. If the Wyckoff Wave is going to continue upward, it
should continue to have demand stronger than supply and it should continue to move
upward NOW. On Monday, August 25, the Wave opened at 2544 1/4, down almost 4 points. The
first wave lasted 20 minutes, lost 105/8 points on volume of 1,210,000 (shares) and the activity is
11. It lost almost all of the price gain above (point) 3 (chart four) and almost all of the gain made
in the last wave on the 22nd (of August). Volume is heavier comparatively and this supply spells
trouble. It would have to be overcome quickly and in order to continue upward must have
good demand on the rallies and a comparative lack of supply on the reactions. Now, what
happened.? The second wave carries (to) 2548 with a new price change of +10 3/4; but how did it
do it? Volume is 380,000 shares and activity is 81/2; both are decreased compared to the
preceding down wave, wave number one. Now, compare this wave with wave twelve on August
22. The duration is less, the price gain is less, the volume is less and the activity is less. There is
a comparative lack of demand on this second wave compared to the preceding up wave: This is
bearish. Now, should wave three show a lack of supply, that is decreased price change, volume
and activity, it could set the stage for a further attempted rally, perhaps above 2548. However,
what actually happened in wave number three? There was increased supply; the wave lasted 15
minutes, it lost 27 points with a volume of 550,000 shares; the activity was 8.

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The price broke and the volume increased on the downside at the point where it should
not do so if the wave is going to continue upward. In period four in the fourth wave both volume
and duration are slightly increased and the net change is considerably less than the preceding
wave: There is relative weakness. You may make a comparison between the duration and
the volume to determine the amount of volume per minute in period four. The volume per
minute is somewhat less than in (period) three. Now, in period five there is an important change.
The price change is only a minor 15 5/8 and the wave lasts slightly longer, 25 minutes, but the
volume is almost double of that of period four. The quantity of supply has increased
considerably; there is a much greater number of shares being dumped on the market.
You may make a comparison between the activity and the volume to determine
whether the size of the order has increased or decreased. Remember, the activity is an index
of the number of transactions per minute. As an illustration, if there are ten transactions in each
of two waves and the first wave has a volume of 100,000 (shares) and the second wave has a
volume of 200,000 (shares), the size of the average transaction in the first wave is 10,000 shares
and in the second wave it is 20,000 shares. In other words, the intraday figures in the fifth wave
reveal that although the wave did not show the price weakness that it had had, supply was
increased and the average number of transactions increased. This is bearish.
This relative weakness continued in wave six. The shorter duration, less price change
and decreased volume all show that there was less demand on this wave than on wave four and
that the demand on this wave was weaker than the supply which occurred on wave five. This
weakness continued in waves seven, eight and nine and then in waves ten, eleven and twelve
reached a relative balance. In waves thirteen and fourteen the weakness continued. Now, please
review this for a moment. By the time wave four had been defined, the dominance of supply was
quite apparent. This is an illustration of how you can use the intraday waves to aid you in
analyzing the shift from demand to supply and back again at critical points and to judge the
various tests of support and supply levels and the ability of the Wave and the market to continue
its trend.
Lets go to another very important turning point which occurred in a downward trend. It
is the action at point 2 on chart four. At point 2 the Wave reached an important objective. The
intraday wave breakdown from July 24 through August 1 is in chart five with a table of data for
the most important days in chart six. The wave had been moving down and we expect any down
move to end with either a climax or a simple running out or exhaustion of supply. The climax
would be evidenced by increased volume and widening of spread and the exhaustion of supply
on the downside would be evidenced by decreasing volume and a simple narrowing of spread
and a beginning to gradually move laterally.
Now, what happened at point 2 on chart four. The action is quite difficult to interpret
without the intraday wave breakdown figures in chart five. The Wave had been going down
from (point) 1 to (point) 2 in a gradual downward trend with the rallies generally weaker than the
drives downward. And then on July 29 an important change took place. A long sustained drive
up occurred for over an hour gaining 64 3/8 points with 51/2 million shares; the activity was high.
This was good demand and evidence of possible preliminary support. (After) the move from
(point) 2 to (point) 3 there was still good supply in the third wave of July 29, but the fourth wave
showed a very decided lack of demand compared to the supply and so the Wyckoff Wave
continued on down to close on the low.
The next morning, July 30, the Wave opened down and continued on downward for a loss
of 51 points with volume of 51/4 million (shares) for an hour and a half: There was heavy supply
and a dumping of stocks. This is a potential selling climax which would be proven or
disproven by the secondary test. The second wave, an up wave, had good demand on it. The
volume per minute was slightly higher than in the first wave. It gained (back) over half of the
loss and the activity was high. Thus, the potential selling climax is followed by good demand on
a rally and the next reaction would be either a continuation on the downside or a secondary test.
The secondary test would show a decreasing supply compared to that of the selling climax in
wave one. Wave three is 30 minutes with a loss of only 22 7/8 points. It held above the selling
climax and the volume and activity are greatly reduced also: There is much less supply on this
wave. The indications of increasing demand coming into the wave shown by the possible
preliminary support on the move from (point) 2 to (point) 3, then the selling climax at (point) 4,
the automatic rally at (point) 5 and then the secondary test at (point) 6 as the objective was being
reached, indicate that the Wave has, at least temporarily, stopped going down and you would
expect a rally.

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Now, what would you do about the rally? Any stocks in which you had a short
position which had not gone down, you should immediately close out. Why? If they had not
gone down they may rally well (during) the next up move on the Wave. You should close out
also any stocks that are meeting their objectives on the downside. If, however, you had a short
position in a stock which has not met its objective, you may decide to ride out the rally, not lose
your position and judge the rally as it occurs. If a stock turns quite strong on the next rally you
could simply close it out. If, however, it continues to be weak you could maintain the short
position and play for a much lower objective. Suppose youve been on the sidelines. You may
now buy stocks which are stronger than the Wave, have been resisting the decline, have sizable
counts and are now in a position to move upward and begin working out those counts. Wave
four, July 30, showed good price progress, volume and activity. The duration, volume and
activity were increased compared to the second and third wave (as was the spread): It is a minor
sign of strength. The fifth wave was the last point of support and we have completed our
identification of the principles and of the shift from weakness to strength which came into
operation on a very small basis at a critical turning point (on) our larger trend chart.
Lets go on to the Optimism - Pessimism Index, sometimes called the O.P. Index. The
Optimism - Pessimism Index is a study of volume: It is not a moving average, it is pure
unadulterated volume and our calculation for the volume comes directly from the Wyckoff Wave.
Here is how it is calculated. We take the preceding days closing O.P. figure as the base figure.
Then we add the volume for the first wave to that figure and arrive at the new figure. Then we
add or subtract the second volume figure to that and so forth, until we come to the end of the day
and that becomes the new O.P. Index figure for that day. In other words, we calculate the O.P.
Index figure for each wave and we also arrive at a total figure for the end of the day.
Please turn to chart three and find the O.P. figure of 582.00 for the last wave (on Friday,
August 22). The volume for the first wave of August 25 would be added to it. The calculation is
582.00 - 121; we drop one zero and it yields the new O.P. figure of 580.79. The volume figure of
38 on the second wave is added to this, giving a new O.P. figure of 581.17. This is the process of
calculation. We are giving you the formula for the O.P. Index so that you may understand and
accept readily the logic behind it and how we use it with the price action of the Wyckoff Wave.
As the O.P. is a study of volume, it has the characteristic of being very persistent when it begins a
trend. A trend on the O.P. Index persists and persists and persists and once the O.P. has formed a
series of support and supply lines, there is a strong tendency to stay within them. You may use
both the normal and the reverse use of trend lines: The reverse use will show opposing action.
You may use trend lines, half-way points and the thrusts. Do not fail to extend trend lines into
the future for further reference and possible further indications. We say that when the O.P. is
moving up that it is expressing optimism because there is an excess of plus volume over the
minus volume and when the O.P. Index is going down we say that pessimism is coming into the
market.
The Wyckoff Wave and the O.P. Index may be used together and the comparisons may be
made between the action of these two indexes to give some very important information. Any
trend in the price which is not sustained by volume is in a vulnerable condition. In other
words, as the price moves up, the volume should come in to sustain it and as the price declines
the volume should come in on the downside to sustain the downward push of prices. If the
volume does not come in to sustain the price move the market is vulnerable to a move in the
opposite direction.
Now, with this basic market truth as a background we may conclude several things: 1)
That if the Wyckoff Wave and the O.P. Index are going in opposite directions and have begun
trends in the opposite direction, this condition cannot long continue. We call this divergence
because they are going in diverse or divergent directions; 2) If the Wyckoff Wave and the O.P.
Index are going in the same direction and the trend of both is up, but if they are moving at
different speeds, again, this condition cannot long continue. We call this inharmonious action; 3)
The principles of inharmonious action and divergence are a timing and a warning indication.
Their appearance very often times a reversal of trend and when they occur you should analyze
the Wyckoff Wave very carefully. Indications of the continuation of the trend of the O.P. Index
and of the Wyckoff Wave are very important, perhaps more important than reversals of trend.
Lets examine the phenomenon of the divergence. A possible change in price trend from
up to down is indicated by the O.P. Index expressing optimism by moving upward with the
Wyckoff Wave failing to respond and record a new high for that individual move as in chart
seven. It also may be indicated by the Wyckoff Wave reaching a new high without the O.P.
Index reaching a new high on that move. This is illustrated on chart eight. Now, there is (also)

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divergent action or divergence indicating a possible change in price trend from down to up.
There are two ways this may be expressed; the first way is for the O.P. Index and the Wyckoff
Wave to move downward with the Wave failing to reach a new low as the O.P. records a new low
for that move. In other words the O.P. goes into new low ground, below a previous support area
and the price of the Wyckoff Wave fails to do that. Chart nine has an illustration of this. Another
indication of a possible change in price trend from down to up is the divergence occurring when
the Wyckoff Wave moves into new low ground without pessimism being expressed for that move
by the O.P. Index going into new low ground also. In other words the Wave goes below a
previous support area and the O.P. does not. An illustration of this is in chart ten. It is important
to remember that both indexes do not always move into new low ground or new high ground on
the same day. When one index records a new high you should give the other index time to
complete its move. In a few days or a week or so the other index may also reach a new high and
the indexes will be right back in harmony.
Now, the inharmonious action occurs when the two indexes are not in divergence: They
are moving in the same direction, but they are not moving together; essentially they are going at
different speeds. This condition is determined mainly with the trend lines and the old levels of
support or supply or stopping points for comparison. It is a warning that the move in the Wave
may be in trouble. Chart eleven portrays inharmonious action, where the O.P. Index is moving
much faster than the Wyckoff Wave. Both moved into new high ground, but the O.P. moved
faster and farther upward than the Wave. Chart twelve illustrates the Wyckoff Wave moving up
much faster than the O.P.. When either of these conditions occur you may continue to operate on
the long side of the market as long as the Wave continues up, but you must be alert for
indications of a reversal or hesitation in the up trend in the Wave. Charts thirteen and fourteen
illustrate this inharmonious action on the down side. The O.P. Index is moving faster than the
Wave in chart thirteen, reflecting strong pessimism being expressed. In chart fourteen the Wave
is moving downward faster than the O.P. These inharmonious actions usually do not last long
and are a warning to analyze the Wyckoff Wave and the individual stocks carefully for any
reversals of trend.
Now, here are some reminders: First of all, before you come to any definite conclusions
as to whether or not you have inharmonious action or a divergence, always give both the O.P.
Index and the Wyckoff Wave a few days to confirm each other. One may go into higher ground
above an old supply point or stopping point before the other and you may prematurely call a
divergence and then a few days later the other index will move up and come right back into
harmony with it. You should also not over use the O.P. Index as a mechanical tool. This is
probably the biggest source of misunderstanding and misinterpretation of the O.P. Index. Use
the O.P. Index as another means of measuring the forces operating within the market and the
effect they are producing and never fail to bring in other market principle to confirm or deny the
indications of these two indexes. When the O.P. and Wave indications appear, check these
with other indications such as the old support levels of the Wave and the trend lines. Look
for selling and buying climaxes, evidence of distribution and upthrusts, springs and the
(back-up) to the edge of the creek and other market principles which may be in
operation.
There is a phenomenon called the double divergence. This is a double indication of
divergence or two divergences following each other in close succession. A double divergence
usually means a much more important change of trend on the part of the Wave or of the O.P.
Index. As an example, a double divergence may come about in this way: First, there is a new
high by the O.P. and a lower high by the Wave and then a lower high by the O.P.Index with a
new high by the Wave. This is illustrated in chart fifteen. This is often the start of an important
move in the opposite direction. Again, a double divergence warns a person to be alert. The O.P.
and the Wave are telling us that this is the time that a move is likely to start. After the O.P.
reverses itself and begins a very strong rally following (a) double action and the Wave remains
sluggish, this sharp up move usually is the start of the move.
When negative Optimism - Pessimism is being expressed it would be an ideal time to
take profit on stocks which you own that are going through a buying climax and that have moved
up into important objective areas (and) also to sell those stocks which you own which have not
responded to the advancing market. (Also) you may put out short positions where they are
indicated, but do not buck the trend of either the Wyckoff Wave or the stock in selling short.
In making comparisons of moves in the O.P. Index, it is important that you deal with
adjacent minor to intermediate moves only. There may be a valid interpretation of the moves in
the O.P. Index which are a year or two apart, but we are not certain that our interpretation is

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correct. For example, on chart four, reaction lows were reached on the Wyckoff Wave at points 7
and 2. The O.P. Index at (point) 2 was holding much higher than at (point) 7, whereas the
Wyckoff Wave was in new low ground, below point 7. Do not make this kind of a comparison.
There is too much elapsed time and price action between these two points. You could make a
comparison between points 2 and 8 as the move from (point) 8 to (point) 9 and from (point) 9 to
(point) 2 are intermediate moves. You could also compare points 9 and 10. However, do not
compare (point) 9 with (point) 11 in determining inharmonious action or divergence between the
Wave and the O.P. Index. In October 1966, the O.P. Index began a long upward move from 197
and eventually reached 612 in February 1969. Again, there may be a valid interpretation of the
long term trend in the O.P. Index such as this particular trend, but we are not certain that our
interpretation is correct. At this point in the development of our knowledge of the Index, we
suggest that you simply accept that a major trend exists, but in co-ordinating the O.P.Index and
the Wyckoff Wave that you use the shorter chart picture; the minor and the intermediate
moves only. Unproven theories are dangerous in the market and generally cost money,
therefore, we do not teach them. We do have some unproven theories regarding long term trend
interpretation of the O.P. Index which we will continue working on. We hope that you will aid us
with your observations and experience.
Now, lets move on. Our next study covers the accumulation which took place in
February and March 1968 and involves the co-ordination of the various charts of the Wyckoff
Wave and the Optimism - Pessimism Index. We will use chart four and charts sixteen through
twenty-one. Chart seventeen is the table of data for many of the more important days in this
base. Several of these charts may be sent to you on several pages. Please stop now and put these
together into one continuous chart, where necessary, before continuing with this Basic Lecture.
Incidentally, the same numbers of the same action will be used on all the charts wherever
possible. Due to limitations of time and space we will not be able to cover all of the possible
points on these charts, however, we will cover most of the more important ones.
The first thing we must do is to examine the action prior to February 1968. Please turn to
chart eighteen, the 25 point modified chart of the Wyckoff Wave. This will enable us to diagnose
the major trend of the Wyckoff Wave. Wherever possible the daily vertical chart should be used
for that purpose, but our daily vertical does not go back that far, therefore, we will use the figure
chart. The Wave moved in a major up trend from (point) 1 to (point) 2 and then, as it was
approaching point 12, was coming down towards the major one half point of 2600. The count in
the original distribution area at point 3 was virtually fulfilled at (point) 4. The count in the redistribution area at point 5 gives an objective of 2650 to 2575. The count at (point) 6 separates
phases A and B and is sufficiently large so that these phases could only be combined with some
difficulty. Thus, we may conclude, as (point) 12 is approached that the Wave is coming down to
a major one half correction and that the objectives are 2650 to 2575. We would expect some
form of a selling climax to occur as this down move terminates. Now, turn to chart nineteen, the
10 point modified chart of the Wyckoff Wave. The count at point 13 gives several objectives;
the main one being a possibility of 2620 to 2580. This is the count from (point) 13 to (point) 14.
An examination of the O.P. Index in charts twenty and twenty-one (shows) that the O.P. is
in a long up trend and is reacting toward the half-way point of 416. Please turn to chart four.
Trend lines AA and BB frame the down trend. At point 12 the Wave reached BB. This is a
natural place for a rally to begin within the down trend. To summarize our brief survey of this
background; the Wyckoff Wave, as it approaches (point) 12 is in a down trend with a half-way
point and objectives of about 2600. We expect climactic action and it could rally from (point)
12. The O.P. Index is in a long up trend and is approaching a half-way point, also a probable
turning point.
Now, turn to chart sixteen, the intraday chart of the Wyckoff Wave and O.P. Index. As
point 12 was approached the Wave became oversold on the support line DD which is drawn
parallel to CC. The intraday figures for February 13 on chart seventeen show that in the twelfth
wave the Wyckoff Wave went through climactic action. It lost 18 7/8 points on a volume of
1,520,000 shares. The activity was 111/2: That was climactic, but not a massive climax. The last
wave had good demand; it was the automatic rally and the first wave on February 14 was the
secondary test. The climax was at (point) 17 and the secondary test was at (point) 12. This
stopped the down move, at least temporarily.
Note that there was an intraday divergence
between the Wave and the O.P. at point 12. Compare points 17 and 12: At (point) 12 the
Wyckoff Wave reached a new low while the O.P. held above (point) 17; a teeny weenie
divergence. Sometimes the divergences and the inharmonious actions occur at very
strategic turning points and as a result take on much greater significance than they would

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otherwise. Both indexes were strong on the up waves to point 18 and then at (point) 19 had an
important divergence. This action of the seventh wave of February 14 identifies it as a probable
intraday shakeout. It was not sustained by the O.P. coming in strongly on the downside. The
Wave is in position to turn up and it did, very strongly, in the last wave of February 14. The
strength in the O.P. Index continues. This entire action occurred as the important objective of
2620 was approached.
Now, lets move on. There is a divergence between the Wave and the O.P. at (point) 20
and then at (point) 21 there is another divergence setting the stage for a more extensive reaction
on the Wyckoff Wave. Examine this carefully. This is a double divergence. First, the Wyckoff
Wave reached a minor new low and then the O.P. reached a minor new high. The Wave came
down to (point) 22 and then rallied to (point) 23. Note the persistent strength in the O.P. Index.
Finally, the Wave reached a buying climax at (point) 24 and a secondary test at (point) 25. The
intraday figures in the first wave for February 21 on chart seventeen show that the duration, price
change, volume and activity all indicated the existence of a climactic condition. The Wave was
moving up strongly with very heavy volume. Demand was not as strong in the third wave (the
secondary test). The eighth wave with the expansion of price action, volume and time on the
downside indicated increasing supply on the downside. This weakness persisted into the twelfth
wave.
On the next market day, the 23rd, in the first wave, the up move in the Wyckoff Wave
continued and then in the second wave it promptly lost almost all of the gain (made) on (the)
rally (of the first wave) with good supply coming in on the downside. Supply was stronger on
balance until finally in the sixth wave of the 23rd the Wyckoff Wave broke for 20 points at (point)
26. Note, the relative progress of the Wyckoff Wave and the O.P. on the move from (point) 12 to
(point) 24. Both have moved above the resistance level of February 15. They are both moving
in the same direction. However, the O.P. Index has been moving much stronger than the
Wyckoff Wave and at (point) 24 there is inharmonious action. This is a warning to study the
entire situation carefully, paying particular attention to the Wyckoff Wave.
Now, examine this area on chart four. The move from (point) 12 to (point) 24 must be
regarded as possible preliminary support and note, it broke through the supply line AA. There
was good demand on this rally. This is confirmed by an examination of the intraday figures of
the Wyckoff Wave and of the O.P. Index. The O.P. is showing persistent strength, however we
do have a probable turn following the buying climax at (point) 24. Note, the pronounced
divergence at (point) 27. The Wave and the O.P. both react to (point) 28 and then on the rally to
(point) 29, the Wave holds at a lower top compared to (point) 24, while the O.P. goes into new
high ground. It is an important divergence and is a very important timing indication. (Point) 29
is a buying climax of the move from (point) 28 to (point) 29 and (point) 30 is the secondary test.
The buying climax is the first wave of February 28, the automatic reaction is the second wave,
the secondary test is the third wave. Supply remains stronger than the demand for the rest of that
day. The move from (point) 30 to (point) 31 is an intraday sign of weakness and the move to
(point) 32 is the intraday last point of supply.
Now, lets tie something else into this. At (point) 29 the Wyckoff Wave almost reached
the same level as at (point) 24. Compare the first wave of February 21 with the first wave of
February 28. On the 28th (this is at point 29) there is much less demand than there was at point
24. This decreased demand is shown by the decreased time, price change and the volume at
point 29. As a result, the Wyckoff Wave was not able to break through point 24. This, tied in
with the divergence, warned that the Wyckoff Wave was likely to turn downward. You will find
it helpful to draw the thrusts, half-way points and the trend lines on the intraday charts.
Experiment a bit; then erase the minor and the unimportant indications. Here we will draw only
a few of these indications. Line EE is drawn through (points) 19 and 22 with FF parallel to it
and at (point) 24 the Wyckoff Wave is overbought. At (point) 28 it becomes oversold and then at
(point) 29 fails to reach line FF.
Now, what about the move from (point) 29 to (point) 7? Remember that there is an
objective of 2575 on the 25 point modified chart and of 2580 on the 10 point modified (chart).
We suggest (that) you analyze this move yourself before going further. The reverse use of trend
lines, GG, is drawn through (points) 33 and 34. It is met at (point) 35 and fails to reach it at
(point) 7, thereby putting supply line HH in jeopardy. (Line) HH is drawn parallel to (line) GG
through point 29. Note the lack of downward progress at (area) 36, the divergence at 36a and
then the strength of the rally to (point) 37. The table of data for March 5 shows that this was
good demand which came in on the third and fifth waves on this action from (point) 36 to (point)
37. It is preliminary support on an intraday basis. The fourteenth wave at point 38 is a selling

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climax with the next wave being the automatic rally and point 7 the secondary test. The Wyckoff
Wave was stopped on the downside. Note that the move from (point) 36 to (point) 37 is
preliminary support and on a much larger basis, the move from (point) 12 to (point) 24 is also
preliminary support. This is a matter of perspective or the relative size of the moves (that) we
are examining. The principles are the same, but the size of the moves are different. Good and
persistent demand came in on the move from (point) 7 to (point) 39 and continued to point 40. It
was also sustained by a strong rally on the intraday O.P. It is a possible intraday sign of strength
and the reaction down to (point) 41 with the gradual drying up of the spread and volume is an
intraday last point of support. Note how you may combine the thirteenth wave of March 6 and
the first wave of March 7 into one up wave which had very strong demand. The second wave of
March 7 had heavy supply, but the supply was not as strong as the demand on the prior up wave.
Then, the fourth and sixth waves had decreasing supply on the downside and this supply
gradually dries up until the twelfth wave of March 8. There, supply completely dried up on the
down side setting the stage for demand to come in. That demand was relatively strong on the
move to (point) 42
Now, due to time limitations we must move rapidly through the remainder of this study.
The move to (point) 42 carried into new high ground above (point) 40 on both the O.P. and the
Wave; they are moving in harmony. The move from (point) 7 to (point) 42 may be regarded as a
more important sign of strength and the reaction to (point) 43 as a more important last point of
support; it is also a shakeout. Note that the support line II is the normal use of trend lines and JJ
is the reverse use of trend lines. You may use either type of trend lines or use them in
combination as long as they may be validly drawn. The Wave met supply as it touched JJ at
(point) 44 and then failed to reach it at (point) 45 and then broke downward. At (point) 46 the
Wave and O.P. Index were in divergence when you compare (points) 44 and 46. They were in a
more important divergence if you compare (points) 46 and 29. As a result the Wyckoff Wave
went to (point) 43 for a more important last point of support. Incidentally, (point) 43 is also a
divergence: The Wave went below (point) 47, but the O.P. did not. Note how strongly the
Wyckoff Wave moved from (point) 43 to (point) 48. It is a more important sign of strength and it
met supply as line JJ was reached. There was a divergence at (point) 49 which timed the start of
the reaction down to the last point of support at (point) 50. There was an oversold condition at
(point) 50 as line KK was broken. Now, how did this reaction to (point) 50 end? The third wave
of March 22 is climactic: It went down for a full hour with a loss of 25 1/2 points on a volume of
1,8000,000 shares. The fourth wave was the automatic rally and the fifth wave was the
secondary test. Finally in the eighth wave very strong demand came in. Again, the intraday
figures enabled us to analyze and diagnose the shift in strength from supply to demand. Now
that we have diagnosed the principles and the relative strength of the various intraday waves and
have determined that (point) 43 is the last point of support, we may calculate the counts and the
objectives on the figure charts of the Wyckoff Wave and the O.P. Index. We have also identified
(point) 50 as being a more important last point of support and therefore, after the counts from
(point) 43 have worked out, we would use (point) 50 for our next point of count. We will be
unable to discuss this in detail in this lecture and will therefore simply draw these counts on the
charts for you. In most cases we are showing the maximum counts. In actual practice they
would be broken down into phases and would be taken step by step in accordance with the count
guide. We must conclude that this base is likely to be accumulation; that the next important
move is likely to be up and that it should begin soon or that it may be already in the early stages
of the up move and we have calculated the probable objectives.
What is the process (that) we have followed in this study? We have examined the prior
background, then have used the intraday wave and O.P. to determine what principles are in
operation, have related them to the daily vertical chart and to the figure charts of the Wyckoff
Wave and (the) O.P. Index and have then projected the probable direction, timing and the extent
of the next move out of this base. The intraday breakdown figures have enabled us to analyze
the daily vertical chart as though we were using a fluoroscope or perhaps a microscope.
Now, lets summarize a bit. The Wyckoff Wave and the O.P. Index are unique and very
valuable market tools. The Wyckoff Wave is used as a trend chart and as a tape reading tool.
This enables one to analyze, minutely, the critical turning points. However, indications that a
move is continuing are as valuable as indications of changing direction. When the Wyckoff
Wave is in the middle of a move or is not (at) a critical point in its travels from one level to
another, you may pay relatively little attention to the intraday figures. Why? The trend is
already established. However, when it gets into a critical situation or is at a possible turning
point, then you will find the intraday breakdown very valuable. We have introduced the

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Optimism - Pessimism Index to you. The O.P. Index is derived directly from the intraday
waves and is the trend of the volume of those waves. This means that the O.P. is also unique.
It may be used with the Wave to diagnose divergences and inharmonious actions which are
timing indications.
At first your analysis of the individual waves may be painstakingly slow and will be the
result of a conscious effort in thought. As you become move familiar with it your analysis will
become unconscious, swift and almost instinctive. Even after your knowledge and experience
are well developed, you should make a careful analysis of the Wave and O.P. at important actions
and critical turning points and then determine which are the important indications and which are
of relatively minor importance; then act accordingly. You will discover that the Wyckoff Wave is
your most important and valuable market tool. It has no equal as an analytical and timing tool.
It is the starting point of all our market operations.

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BASIC LECTURE NUMBER ELEVEN

STEP BY STEP ANALYSIS OF ACCUMULATION
The main subject of Basic Lecture Eleven is a step by step analysis of an accumulation
area. The purpose of this lecture is to present to you a step by step analysis of an accumulation
area and the resulting major up move, to demonstrate how you may plan and execute a campaign
and to aid you in the co-ordination of the principles already presented previously in these Basic
Lectures. Our vehicle for this discussion is Montgomery Ward, which, later on, merged with
another company and changed its corporate name to Marcor. It is still the same stock. As the
charts of Basic Lecture Eleven cover several years (of) market action, they will be sent to you on
a number of separate sheets of paper which you must put together into a continuous chart where
necessary. We are preparing all charts of the Basic Lectures so that they will fit (into) your
course binder as the Basic Lectures are an integral part of your course. Chart one is of the
Wyckoff Wave. The vertical line chart of Montgomery Ward is chart two. The one point
figure chart of Montgomery Ward is chart three and the three point figure chart is chart four.
Please splice these charts together where needed, by cutting off the right edge of the vertical or
figure chart and splicing them together with scotch tape or some other method. Please stop now
and put them together before going further with this lecture and then cover up all (of) the action
to the right of the arrow at number 1 so (that) you cannot see what happened following (number)
1. Do this on both chart one and chart two. We will analyze the action to the left of (number) 1
first and then will uncover and deal with the action to the right of (number) 1.
We make the assumption that we begin this analysis and the campaign on February 1,
1968. This (date) is designated on the chart with a large arrow (labeled number)1. We assume
that in early January we went short other stocks and now have the task of following through and
eventually closing out the short positions on those stocks. Meanwhile, before the down move is
completed we must begin to search for other candidates. Why? Remember, the basic process is
this: The first step is to diagnose the trend of the market using the Wyckoff Wave. The second
step is to compare the stocks which you are following for comparative strength and weakness.
The third step is to analyze those stocks which we have selected as being the most likely
candidates in step two.
Any campaign in an individual stock must be co-ordinated with the action of the stock
market; the Wyckoff Wave. You want to operate in harmony with the trend of the general market
and the Wyckoff Wave is the best tool for diagnosing that trend. As far as step one is concerned,
the trend of the Wyckoff Wave is still down. We must continue to follow that trend and operated
on the short side of the market until either the Wyckoff Wave or the individual stocks show
action (which demonstrates) that the down trend is ending. At that time we will cover our short
positions and then buy those stocks which we are now selecting as the best candidates.
Now, let us deal with step two, comparative strength and weakness and three
requirements which are especially important in the initial selection process. They are these: 1)
That the stock should be stronger than the Wave on the immediately preceding rally; 2) That it
should be holding on the current reaction stronger than the Wyckoff Wave; 3) That there be a
sizable count or cause. Now, lets deal with this.
On the move from (point) 2 to (point) 3 Montgomery Ward is comparatively stronger
than the Wave; the move itself is stronger. And when you compare (point) 3 with (point) 4,
Montgomery Ward has carried above point 4, whereas the Wave is holding considerably below
(point) 4. Thus, whereas the stock had been comparatively weaker in the past, it has shown an
ability to rally on this last attempt by the Wave to move up and is comparatively strong. This
strength must continue. Now, what about the current reaction? On this reaction, Wards again
is holding stronger than the Wave, especially (on) the last few days prior to (point) 1; so, this
stock is a candidate for purchase on the basis of comparative strength and weakness.
By checking the stocks (that) you are following (against) the Wyckoff Wave, you will
avoid wasting time on stocks which have lost their ability to move well on the upside, have
become neutral or, perhaps, have become weak. If a stock has become weak, this weakness has a
good chance to continue on the next rally in the Wyckoff Wave. This screening process takes a
few minutes and sometimes only a few seconds, but is vital for the most efficient market

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operations and for the most efficient use of your time. It helps you to concentrate your efforts on
those stocks which have the best chance of moving well on the next rally in the Wave.
The third requirement in the initial selection process is that the figure chart must show
that there is sufficient count or cause worthwhile to warrant taking a position. Our profit - risk
ratio must be at least 3 - 1and if we take a position on this reaction we must be able to put in a
stop below (point) 2 or we will have to use a floating stop. A simple glance at our figure chart
shows that in phase A there (are) approximately 14 points already built up and as the reaction
continues it is entirely possible that an additional count will be added. Therefore, a 3 - 1 profit risk ratio would allow approximately a 5 point stop. Incidentally, it is entirely possible that
phase B could be included later on in the long term count. Had there not been a sizable count on
the figure chart, we would have discarded this stock as a possible candidate for purchase on this
reaction in the Wave and (would) have looked for other opportunities. The main thing is that a
simple glance at the figure chart shows that there is sufficient count to warrant further
investigation and analysis of this stock.
We must now get better acquainted with Montgomery Ward through a quick check of
its chart background, learn some of its characteristics and then analyze it in detail. If possible we
should analyze the prior distribution area to determine that the entire distribution count has been
worked out. Often this may be done from the figure chart only. Then we must analyze the
entire accumulation area to determine, as near as possible, if it is likely to be accumulation.
To do this properly we need a vertical (chart) and (a) figure chart of the entire accumulation base.
Why? We determine how far the stock can move from the figure chart and use the vertical chart
for determining the direction and timing of the coming move and (also) to aid in analyzing the
figure chart.
We (first) make a brief comparison between Montgomery Ward and the Wave. In 1966,
the Wave went through major re-accumulation and many stocks began major accumulation at the
same time. We know that many stocks go from comparative strength to comparative
weakness to neutral and fluctuate back and forth during the accumulation process. At
(point) 5 Wards was stronger than the Wave and then was weaker than the Wave all the way
down to (point) 6, which we briefly note as a selling climax. Then from (point) 6 to (point) 7 it
participated with the Wave in the up move. We note that (point) 7 on the Wave is considerably
above (point) 5, whereas it is considerably below (point) 5 on Wards. From (point) 7 to (point)
8 Wards was weaker than the Wave and then, from (point) 8 all the way over to (point) 2 was
relatively unresponsive to both the up moves and down moves in the Wave. On a major basis it
is weaker than the Wave.
The next thing we must know is whether the stock works out its important counts.
If the stock does not work out its counts it may be that the sponsors and other professionals
operate in the stock intermittently, leaving it alone for long periods of time. We have drawn
some of these counts on the figure chart without the use of a vertical line chart and must assume
from the figure chart formation where the sign of weakness and last point of supply occurred. In
actual practice you may make those assumptions recognizing that they are substantially correct,
but could be modified by an examination of a vertical line chart. The count taken at (point) 9 is
somewhat overrun at (point) 10. The count taken at (point) 11 is fulfilled at (point) 12. The
count at (point) 13 is fulfilled at (point) 14 and so we can assume that the stock does work out its
important or larger counts.
The next thing (that) we must determine is whether or not the stock has fulfilled its
most recent down count. Co-ordinate the figure chart with the vertical (chart) by identifying
the important indications on the vertical (chart) first and then locating the same points on the
figure chart. The most recent distribution began on the rally following (point) 15. It met supply
at (point) 16, began a trading range, had an upthrust at (point) 17, a test of that upthrust at (point)
5 and a sign of weakness at (point) 18 and a last point of supply at (point) 19. The count is along
the $35.00 (line) from (point) 19 over to (point) 20, a count of 14 points with a maximum
objective of $21.00. That count was fulfilled at (point) 6.
Alright, the next question is; has this stock broken its major long term down trend
lines? Why ask this question in the first place? Simply because we know as a stock meets the
down trend line, it very often will run into supply and turn downward or hesitate. There is a
strong tendency for these major trend lines to persist and persist and persist until finally broken.
If it has not been broken, we want to extend that line a long way because we would expect
supply to come in as it is reached. Now, on these charts we dont necessarily know where the all
time high is on either the one point or the three point (figure) charts. However, we can draw a
supply line AA through (points) 22 and 21 and on the rally to (point) 5, the stock turns downward

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on both the 1 point and 3 point (figure) charts. Now, on the one point chart we can draw line BB
through (points) 21 and 5. So far line BB is still not broken. Supply line CC is drawn on both
the 1 point and the vertical (line) chart through (points) 5 and 7. On the move from (point) 2 to
(point) 3 high volume comes out as line CC is approached and then broken. Line DD is drawn
through (points) 7 and 4 and, of course, is no longer in operation.
Now, what about the half-way points. We calculate the important half-way points on the
vertical line (chart) only and find that the rally to (point) 7 and the move down to (point) 8
overran the half-way points. The move from (point) 2 to (point) 3 stopped at the half-way point
of the decline from (point) 7 to (point) 2.
So far we note that the stock is stronger than the market; that there is sufficient count in
the base to warrant our analyzing it; that the stock observes technical indications and works out
its counts; that the down move was stopped and that the more recent supply line has been
penetrated.
Now, lets analyze the base in detail beginning with (point) 5, keeping in mind that our
purpose is to determine if, in fact, this base is likely to be accumulation and recognizing that
there are some minor indications which will not be discussed. The stock goes down sharply from
(point) 5 to (point) 23. The action bracketed at (area) 24 is the number one spring. Note the
rally at (point) 25: There is good volume and price spread on the upside. This is evidence of
good demand; possible preliminary support. We draw supply line (reverse use of trend lines) EE
through (points) 23 and 26. At (point) 6 the stock fails to touch that line. Supply line FF is
drawn through (point) 27, parallel to EE. The stock follows EE downward on the reaction to 6a
and holds away from EE and the support at (point) 6. Preliminary support (is) at (point) 28, the
selling climax at (point) 6, the automatic rally at (point) 29 and then the secondary test at 6a. It
then had a minor trading range with supply at 6b and 6c, but the price does not crack on
this heavy volume and so we can conclude that the demand that stopped the down move at
(point) 6 is still strong.
Now, cover up all (of) the action to the right of 6c and slowly uncover it a few days at a
time. Notice that as the stock moves from 6c to (point) 7, that there is an expansion of spread
and volume on the rallies and that the stock has a tendency to dry up the supply promptly on the
reactions: Volume quickly decreases on the reactions. Also, the volume and spread are generally
stronger on the moves up than they are on the reactions. The move from 6a to (point) 30 is with
widening spread, increasing volume and the reaction to (point) (31) has a comparative lack of
supply. The rally to (point) 32 again has widening spread (and) increasing volume; evidence of
good demand. On the move down from (point) 32 to (point) 33 some supply comes out which
finally dries up at (point) 34. The action at (point) 35 is volume off the bottom. The move to
(point) 36, again, has good demand and the last day at (point) 36 has a narrow spread, very high
volume, evidence that supply is coming in to stop it. However, the supply promptly dries up on
the reaction to (point) 37. Good demand comes in again on the rally to (point) 38 followed by
drying up of supply at (point) 39. Then, the rally to (point) 40 has good demand, wide spread
(and) heavy volume. The reaction to (point) 41 is with a comparative narrow spread and
decreased volume. Throughout this range from (point) 36 to (point) 42 volume fails to
persist on the reactions; evidence that heavy selling is not coming in on the downside. Then,
on the move from (point) 42 to (point) 7 very heavy volume comes in and stops the up move.
Now, what has been going on in the move from 6c to (point) 7? Heavy selling has occurred as
the stock moved up. However, that selling has been absorbed and it has not persisted on
the reactions.
The concept of the Composite Operator is often very useful in understanding market
processes such as this. With this concept you deal with the market action as though it were the
result of the operations of one person called the Composite Operator. In order to move a stock
up, the Composite Operator must buy all the stock that is offered for sale. If he is unable to do so
the stock must react or decline and if the supply persists on the downside he may lose control of
the situation. Now, this is not the case here. He is absorbing all of the supply and it is heavy
supply: But that supply is not persisting on the reactions and it may mean that large
amounts of stock are going into the strong box of the Composite Operator and will stay
there until he either abandons the campaign or sells out in the area of distribution. On the move
to (point) 7 the stock stops in an area of previous support at (points) 15 and 14 (chart 31) on
heavy volume. This is above the half-way point in the area of the major supply line. The next
day, (point) 43, breaks the backbone of that advance with heavy supply; increased volume on the
downside. This is an important change. This supply is of such magnitude as to indicate a rather
deep reaction or long hesitation. When supply like this persists it may force the stock to the

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bottom of the trading range or force a resumption of the old down move. It is going to be critical
as to whether or not that supply continues and persists and remains heavy. If it does, it may be
that the stock absorbed on the move from 6c to (point) 7 has been thrown on the market and a
campaign of accumulation would have to be started all over again. If it shrinks rather promptly,
it may be evidence that a new phase of accumulation may have begun without unloading the
major holdings previously acquired in phase B. Volume is heavy to (point) 44: Then on the
move from point 44 to (point) 8 it shrinks and remains low; evidence that heavy liquidation has
stopped. The day marked 45 is an exception. There was supply, heavy volume, but little effect
on price. The high volume that day may have been largely one or two blocks which could have
no effect, essentially, on the supply - demand relationship. The overall evaluation of the move to
(point) 8 is one of decreasing supply. The Composite Operator may simply be letting the stock
decline of its own weight.
Now, lets examine the action from point 8 to (point) 4. There is a widening spread and
an increase in volume on the rallies at (points) 46, 47 and 48. This is evidence of good demand.
This sudden heavy volume indicates the existence of heavy supply stopping the move, for
awhile at least. Even (point) 52 was volume on the upside; demand. Now, this is followed by
an immediate shrinkage of spread and volume on the reactions to (points) 49, 50 and 51. The
stock which was bought on the moves up to (points) 46, 47 and 48 was not immediately
thrown on the market on the reactions. Without question there is still supply present in the
trading range: But, this trading range is likely to be accumulation rather than distribution or (it
could be) nothing. Now, at (point) 51 the stock has quieted down and reached a stalemate.
Volume is dried up. What is (area) 53? It tries to move up, down, up and down again over four
days with a widening spread and increased volume. This is an example where it tried to go up,
tried to go down and closed in the middle on an increase in volume. Those who are operating in
the stock are trying to get a move going. At (point) 4 they try again, fail and begin a long, slow
reaction. At (point) 4 the Wave is poised to go down considerably. The type of reaction that
takes place in Montgomery Ward from (point) 4 to (point) 2 enables professional
operators to buy large quantities of stock without getting hurt badly. They can buy at
successively lower levels without having to carry their inventory of stock at large losses. They
do not run the risk of having the stock move or get away from them until they have completed
buying their entire line and they avoid acquiring an unwanted following too early. The time to
begin buying at successively higher levels is when one is attempting to put the stock up a long
way in the major up trend. Then the professionals want and need the added buying power of
those who were uninterested in the stock when it was in the trading range or in the early stages of
the up move.
At (area) 54 support line GG is broken and the stock has a number two spring below the
previous supports at (points) 8, 49, 50 and 51. However, demand does not come in strongly. It is
a number two minus spring or a number two minus one spring and the stock continues to react to
(point) 55. It holds stronger than the market at (point) 56, fails to carry through on the rally to
(point) 57 and then, on the reaction to (point) 2, breaks through the support at (points) 56 and 58,
designated by the arrow. Point 2 is the number two spring, as there is some volume at point 2.
There is an immediate rally to (point) 59. (Point) 60 is the secondary test of the number two
spring at point 2. We draw in the creek across the supply points in the trading range to define the
flow of supply. The lower branch is jumped on the move to (point) 59 and (point) 60 is the
back-up (to the edge of the creek). The upper branch is drawn across the top of the rally at
(point) 3.
Now, summarizing the analysis thus far, we conclude that phase B is likely to be
accumulation and (that) phase A is also probably accumulation. The move from (point) 2 to
(point) 3 is with wide spread and increasing volume and is a potential sign of strength: It has
strong demand. Should the subsequent reaction have a lack of supply evidenced by a narrowing
of the spread and a decrease in volume on that reaction, that action would be a last point of
support and would put the stock on the spring board for a large move up. On the reaction from
(point) 3 to (point) 1 there is a narrowing of the spread and a steady decrease in the volume
compared to the action from (point) 2 to (point) 3. We conclude that this reaction to (point) 1 is
probably the last point of support. Now, lets summarize further. This stock is a candidate for a
possible purchase as the Wave turns around for the next rally. It was stronger than the Wave on
the last move up and is holding stronger than the Wave on the current reaction. It has a large
count with two phases of possible accumulation; the first count being approximately 14 points
with a possible long term count of approximately 36 points, combining phases A and B. Thus,
should we take a position, the profit - risk ratio would be more than 3 - 1, perhaps 4 or 5 - 1.

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It is recognized that there are many other indications which could be discussed or could
be discussed more fully, however, these are among the most important considerations in
analyzing a stock preparatory to taking a position for a major move. It is also recognized that a
first speculative position could have been taken at (point) 2 on the number two spring or on the
reaction at (point) 60. However, to have bought there would have meant buying when the
Wyckoff Wave was giving indications that it would probably move lower. We do not want to
buck the trend of the Wave, but want to operate with the trend of the Wave. Also, it would have
been a violation of the principle of comparative strength and weakness; even though the Wave
might have moved up later, the stock could have continued relatively unresponsive to that up
move: It could have continued dull, drifting until a later market move occurred. Often it is much
better to miss the exact bottom if in doing so you have much greater assurance that the stock is
going to move and begin working out its major count NOW. The stock may be going through
accumulation, but not be ready to move when you take your first position or even your second
position. And if you do take a position in a stock and it does not move in a short time it is best
practice to get out, wait and then re-establish the position when the opportunity presents itself.
Now, what is our next task? Stop for a moment. What is our next task? Our next task is to
follow this stock on this reaction, attempt to judge when the Wyckoff Wave is completing its
down move and to take a position in Montgomery Ward as that down move is ending
All through the discussion so far the market action to the right of number 1 has been
covered up so that you cannot see it and would not be influenced by it. We are now ready to
begin to analyze the action to the right of number 1 and will establish speculative positions when
possible. The columns in the chart action to the right of number 1 have been numbered as
column 1 through column 40. For the most part we will uncover these columns one column at a
time. As we move along, I will designate which columns to uncover and when. This will
approximate the process you will have to go through in actual practice. However, in actual
practice you would post and analyze this action one day or a few days at a time. Okay, ready,
lets go. Slowly uncover column 1. Keep charts one and two in such a position that you may
readily compare this chart action as we go along. In column 1, Montgomery Ward shows a
tendency to move up while the Wave is moving down. Now, uncover column 2. It moved down
with the Wave, but since the Wave still has not reached its turning point; we do not buy. We
draw supply line HH through (points) 61 and 62. We want you to draw a trend line through
points 6 and 2. We will not draw it. Notice how that support line and line CC are coming to an
apex. This balancing of forces and compressing of the price swings cannot continue long. We
must be alert for action which would penetrate either line. Extend the trend lines CC and HH as
long as they may possibly be useful. Always extend major trend lines a long way.
Uncover column 3. The action at (point) 63 on the Wyckoff Wave occurred as the Wave
was reaching an important objective. It is identified as probable preliminary support and
therefore we could make a tentative purchase, a first purchase of Montgomery Ward at (point)
63, say, around $23.00 per share, knowing that we would expect this action on the Wyckoff
Wave to be followed by the final selling climax. We still do not buy. Why? Why run the risk of
getting smashed as the Wave has the climax? The trend of the Wave is still downward. If
Montgomery Ward is to continue stronger than the Wave, it may rally, be stronger on this rally
and hold on the following reaction as the Wave goes through the selling climax. This is what we
will attempt to do should the action of the stock and the Wave continue favorable. Montgomery
Ward breaks supply line HH in column 3.
Now, uncover column 4. Wards moved up on good demand as shown by the widening
spread and the increased volume. The Wave moved down. Note that the supply line CC is
decisively broken. (Point) 63 may now be identified definitely as the end of the reaction and as
the last point of support. Uncover column 5. The Wyckoff Wave went through a selling climax
at (point) 64; it was oversold and meeting objectives, a natural place for the Wave to turn around.
This is just what we have been waiting for. The Wave is ready to turn upward and attempt to
rally. The stock is stronger than the Wave. It has a sign of strength and a last point of support
and for the last week has been moving up while the Wave is moving down. On this reaction at
(point) 64 there is a drying up of the supply on Montgomery Ward and it continues to be strong
and would appear to be poised, ready to move up. The half-way point on the move from (point)
63 to (point) 67 is at 243/8 and the stock at (point) 64 reacts to 241/4. This is (a) perfectly normal
reaction with narrowing spread and decreased volume; a lack of supply. We buy the next day,
March 8, say, at $25.00 per share and place a stop order at 215/8. The profit - risk ratio is
favorable. The Wave rallies for the automatic rally at (point) 65, but, the stock does not respond.

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However, it is still continuing to be stronger than the Wave and now, as the Wave reacted to the
secondary test around (point) 66, Montgomery Ward, if anything, is beginning to rally.
It is important to realize that we had five days in which to take a position in this stock
here. This is in the area from point 64 to point 66. Should the stock begin to move out of this
area on the upside, you could add to your position as it moves up. The point we want to bring
out here is that there is no one exact minute, price or one (particular) day on which you must do
your buying and that if you dont buy, you have not missed the move completely. Usually, you
can buy in a general area of a couple of points where you estimate that an action should occur,
for instance, the end of a reaction and usually you may do your buying over several days.
Uncover column 6. The stock rallies to (point) 68 on very heavy volume. This heavy
volume occurs as the stock is moving above the previous supply areas at (point) 3 and (point) 48.
It warns us to be cautious. The spread is rather wide. This is good. This volume is absorbing
the selling of all the old losers who bought previously in the $26.00 to $28,00 level and now
want to get out. The high volume can be expected to cause some form of hesitation or a reaction,
but, as long as this absorbed stock is not immediately thrown on the market on the downside, the
stock should be in a position to continue the up move. The higher branch of the creek can be
drawn through the supply at (points) 59, 3, 61, 62 and 67 and this is a jump of that creek. It
will either be successful in leaving this area or not. If supply dries up on the next reaction the
probabilities are that the stock will continue to move up. If there is heavy supply on the reaction
as shown by heavy volume and a widening spread, we must get out and look for opportunities in
other stocks during this next move in the Wave and perhaps take a position in this particular
stock later.
Support line JJ may now be drawn through (points) 63 and 66 with supply line KK drawn
parallel to it through point 67. At (point) 68 the stock became over bought and it reacted. The
half-way point should also be calculated: It is 26 1/4. The significance of line JJ and this half-way
point is that we would expect the stock to be supported on the reaction as they are met. They
also tie in with the creek itself which we will continue to extend to the right. On the reaction
following (point) 68 there is a narrowing of the spread and a decreasing volume: It is on a backup to the edge of the creek. Our next challenge is to determine where this back-up (to the edge
of the creek) will end or to diagnose the end of the reaction as it turns. We may add to our
position on this back-up... and will do so. There are two ways to do this. One is to determine
a logical price at which the stock is likely to turn and enter an order just above that price. Now,
lets calculate this. Line JJ and the creek are around $26.00 and the half-way point is 26 1/4.
Therefore, should the stock continue to react normally we would expect it to turn upward from
the $26.00 area. Therefore we would enter an order to buy at 26 1/2 with a stop just below point
64, say at 227/8. Assume (that) you do that: Follow through on it and see what happens.
The alternative method is to wait until we have determined that the reaction is about over
and then establish a market position. In using either procedure do not expect to get the exact
low. We must strive to establish the position without incurring a large loss, but must be willing
to ride out a small continuation of the current reaction. In this study we are going to use the
second method on this next purchase. Therefore, we wait, on the alert to act. Now, uncover
column 7. The reaction down to (point) 69 shows a lack of supply, narrow spread (and)
decreasing volume: (Point) 69 is the back-up to the edge of the creek. The next day the stock
responds to the rally in the Wave. We could buy here. The following day the Wave reacts and
the stock holds. We must buy without delay and do so the next morning, March 22. Assume the
price is $27.00 and we place a stop at 235/8 just below the reaction low at (point) 64.
Uncover column 8. The Wave moves up and Montgomery Ward responds. We can
expect supply to come in as the old supply level, around (point) 7, is reached and it is doing so.
In order to move up, the Composite Operator must be able to buy all of the stock offered for sale
from people who had bought previously and who now want to get out, generally, pretty much
even, plus any of the shorter term traders who want to take profits in anticipation of reactions.
Thus, it is normal to expect this heavy volume to come out as the stock moves up. The critical
thing is whether or not the stock which is absorbed on the way up is immediately thrown
onto the market. That type of action would be shown either by heavy or persistent volume
on the down side on a reaction or a wide open price break with liquidation. Should the
reaction following this heavy supply have a prompt narrowing of the spread and decreased
volume, it would be evidence that the stock, which is being absorbed as the price is moved up, is
not immediately being thrown on the market and thus the stock could continue upward. This is
partially a repeat of the comments on the action at point 68, but we want to emphasize this so
that you do not get out of a stock in an upward trend automatically on the first high volume. Aim

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to get out as the move is ending or reaching the objectives or if it is going haywire. We now
raise the stop on our first purchase to 23 5/8. Weve been dealing with the vertical chart and
should be approaching objectives. We use the figure chart objectives to determine how far the
stock may move and (for) a price level at which we should watch the vertical (chart) for stopping
action.
Now turn to chart three, the one point figure chart of Montgomery Ward and uncover
all of the action to the right of (number) 1. The first thing we will do is extend the trend lines
and then determine the count and the objectives. The first count is from the spring at (point) 2.
The count from (point) 2 to (point) 8 is 9 points for an objective of 30. The move from (point) 2
to (point) 3 is a sign of strength and the reaction to (point) 63 is the back-up to the (edge of the)
creek and the last point of support. The count is 15 points for an objective of $36.00 to $38.00.
There is no need as (of) yet to go over to phase B. Now, please turn to chart four; the three point
(figure) chart and determine the major count. If phase A and phase B will eventually be
combined, that count would be 9 points (multiplied by) 3 or 27 points for an objective of $48.00
to $50.00. This objective may or may not be confirmed by the one point (figure) chart. If it (is)
not (confirmed) we will use the counts of both charts and analyze the vertical chart carefully as
the objectives are reached (in order) to determine what action we should take. The significant
thing about this is, that should that count work out, it would break the major down trend at line
AA. It would also be a very worthwhile move.
Now uncover column 9. The Wave moves up sharply. There is a relative shortening of
price progress with very heavy volume as the stock tries to absorb the supply between (the)
$29.00 to $32.00 level in the old (resistance) area between (points) 36 and 43. The stock is at its
first important objective of $30.00, but there are other logical, higher objectives which we expect
it to reach. Since we are operating for a larger move and since the Wave indicates (that) it is still
continuing to move up, we retain our positions and wait. We will attempt to ride out a reaction
should one occur and may buy again on that reaction. It is often difficult to get a position which
will not be threatened during a major move and so, one of our prime considerations is to protect
the speculative positions (that) we have established and to not get out prematurely.
Uncover column 10. The Wave moves up and Montgomery Ward reacts showing
considerable weakness. However, note that there is a prompt decrease in volume on that reaction
indicating a lack of supply: We hold our position. Now uncover column 11. The Wave reacts
sharply at (point) 71 and the stock does not. (Point) 71 (chart number 2) is identified as a
secondary test of the shakeout which occurred six days previously. It (the test) respected the
half-way point of 283/8. The volume on the reaction to (point) 71 is light compared to the move
to (point) 70; no liquidation. We buy on the secondary test on April 23 at $29.00 with a stop
order at 267/8. We leave the stop orders on the other positions at 235/8.
Uncover column 12. The stock continues stronger than the Wave. Now, uncover column
13. The stock moves above (point) 70 on the move to (point) 72. At (point) 72 Montgomery
Ward went above (point) number 7, taking out the last of the supply in that old supply area and
then begins to react and there is a prompt narrowing of the spread and decreased volume. We
now raise the stop orders on all commitments to 267/8.
Uncover column 14. It (Wards) remains stronger than the Wave. We draw support line
LL through (points) 63 and 71 with supply line MM parallel to it, through (point) 70. At (point)
72 the stock ran into supply in the vicinity of (line) MM. Now, uncover column 15. The Wave
continues to react and the stock holds on that reaction with a prompt shrinkage of spread and
volume. So far this has been a perfectly normal up move. Now, uncover column 16 and
examine carefully the reaction down to (point) 73. Is there liquidation on that reaction? The
answer has to be no. That is a normal reaction with a narrowing of the spread and a decreasing
volume. No heavy or persistent selling is taking place and the stock turned upward as support
line LL was reached. It also held well above the half-way point of the last rally. Montgomery
Ward continues to be stronger than the Wave. Now, uncover column 17. The move to (point)
74 ends on narrowing spread and increased volume. This is supply coming in to overcome
demand. It leaves the stock vulnerable to a reaction. We can expect a reaction as the stock is
approaching the objective area at f $36.00 to $38.00 per share, the supply line MM and the old
supply area from points 20 to 19. If you look at chart three, the 1 point (figure) chart, you will
see that it is reaching supply line AA and would expect a hesitation, some supply or a reaction.
Since it is reaching the objective in phase A, any reaction is likely to be sizable, perhaps a major
1/2 correction. If we were not concerned about obtaining a long term capital gain or did not wish
to ride out the reaction, we could simply sell out now and attempt to re-establish a position later
in this stock should it be warranted. This stock could go through re-accumulation in a stepping

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stone count and this could take anywhere from several weeks to several months. However,
considerations for staying in are these: 1) We have diagnosed phase B as probable accumulation;
the objective would be about $60.00; 2) The stock does not have a massive volume buying
climax at (point) 74, indicating that the major up trend is not likely to be over; 3) Our purpose is
to attempt to play for the entire major move. We will carry out our purpose unless we are forced
to abandon the campaign.
In this Basic Lecture we will retain our positions and not sell out and will elect to ride out
any coming correction or re-accumulation and will get out only if our positions are threatened,
our stops are threatened or if persistent liquidation or persistent price weakness comes in
indicating that the Composite Operator has lost control. It is important to recognize that (it) is
necessary to make this decision, to either stay in or get out, before the stock gets well into
the reaction. Very often, by the time the stock gets into the correction deeply, it is essentially
then, too late to sell out, as you are selling on pronounced weakness. It has gone from point 63
to point 74 or 13 points. A half-way reaction would be 6 1/2 points to $29.00 and actually this
stock could continue up to the $36.00 to the $38.00 level before beginning such a reaction.
Now, uncover column 18. The day following (point) 74 it continues to rally with narrow
spread and decreased volume. This is evidence of a comparative lack of demand. That type
of action also leaves the stock vulnerable to a reaction and we get one at (point) 75; very wide
spread and very heavy volume. What is that? On the day that this occurs we would be faced
with the problem of either staying in or getting out and the interpretation would have to be that
this is likely to be either possible preliminary supply or possibly an ordinary shakeout within the
upward trend. If it is preliminary supply we would expect a rally above (point) 74 for the buying
climax which could occur in the objective area of $38.00. If it is an ordinary shakeout, this
volume and price weakness should not long continue. It should rally and then test this area. In
any event, if the price weakness and heavy volume continues, we would simply get out and look
for other immediate opportunities.
The day following (point) 75 there is a drying up of spread and volume on the down side
indicating that the selling is no longer persistent. Actually, the move from (point) 74 to (point)
75 could be the ordinary shakeout itself with the intraday rally from the low of 31 3/8 to the close
at 323/4 being an automatic rally and the reaction the next day being a possible immediate
secondary test of that ordinary shakeout. With either interpretation, the effect is the same: The
stock has stopped moving down, at least temporarily. The stock then rallied. It is moving pretty
much independently of the Wave for the moment.
Uncover column 19. The stock rallied and then reacted down to (point) 77 with
decreased volume as it broke through the previous support at point 75, indicating that this action
is probably going to be a more important secondary test of the shakeout at (point) 75. The halfway point is $29.00. As the stock approaches this area we would expect it to meet support or
perhaps have a turnaround and rally. Support line LL is no longer in operation and we are quite
likely to have to establish a new longer term support line. Now, uncover the action in column
20. At (point) 78 there is narrowing spread and increased volume as the half-way point is
approached, indicating that demand is coming in to overcome the supply. We would expect
a rally and we get one. Now, uncover column 21. The rally recovers all of the previous loss on
wide spread and heavy, persistent volume and is a possible or potential sign of strength. Should
the supply dry up on (the) reaction we would then have a possible last point of support and could
regard this entire area from (point) 75 to the right as being accumulation. We can now look back
and regard the action at (point) 78 as being a secondary test of the ordinary shakeout at (point)
75. Okay?
Alright, lets go on. Uncover column 22. The stock holds stronger on this reaction than
the Wave and with narrowing spread and decreased volume. The action from (point) 78 to
(point) 79 has now been defined as a sign of strength and the reaction to (point) 80, with
decreased spread and decreased volume, as the last point of support. Had we been out of this
stock we could buy here on the last point of support. Since we already have speculative
positions taken much lower, we will add to these positions by buying now. We buy on July 19 at
$32.50 per share with a stop order at 285/8. Now, please note that the stops on our other
commitments have been left at 267/8. Had our purpose been to get out in the $36.00 to $38.00
area we could have raised them later to just under (point) 73. Since we expected a reaction, we
avoided crowding the stop orders: We will leave them there temporarily.
So far we have used the trend lines and half-way points, but not the thrusts, in measuring
the trends. It would be awkward and difficult to mark the thrusts on this chart without tipping

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you off as to where the movements are ending. Now, we suggest that you mark the thrusts
yourself.
Uncover column 23. Montgomery Ward holds as the Wave continues its reaction. We
draw support line NN through points 63 and 78 with supply line OO through point 74. These
lines should be extended until they are no longer operative. Now, uncover column 24. The stock
moves up while the Wave moves down (thereby) showing unusual strength. Uncover column 25.
The Wave goes through a selling climax and rallies and the stock continues to move up with
good demand. It begins to meet supply in the vicinity of line OO. We draw support line PP
through (points) 78 and 81 with supply line QQ (drawn parallel) through (point) 79. There is
narrowing of the spread and increased volume; evidence of the supply overcoming the demand at
a logical turning point, the supply line and the maximum objective of phase A: We would expect
a reaction.
Now, compare the action from (point) 80 to (point) 82 of the Wyckoff Wave
(with) Montgomery Ward. Montgomery Ward has gone up and the Wave has gone down.
Montgomery Ward is showing tremendous strength and since it has gone into new high
ground at (point) 82 above (point) 74, we can now raise the stops on all positions to 297/8.
Incidentally, the count in the re-accumulation area on chart three is marked. The count is 9
points on the $33.00 line for objectives of $39.00 to $42.00 and we could add two points to these
objectives.
`Now, what must we do as this move continues? Now, stop and think a bit. What we
must do is (to) follow through with this move as it unfolds, get out only if it is necessary and
finally, aim to close out as the move comes to an end. At $38.00 we have met the maximum
objective of the count taken on the $23.00 line in phase A. We still have not included phase B in
the count. We continue to hold our positions. Now, uncover columns 26 through 32 slowly.
Supply line RR (reverse use of trend lines) can be drawn through (points) 74 and 82 due to the
high volume that came in at these points. The stock reached that line at (point) 84 and then
reacted. The reaction to (point) 83 is with narrow spread and relatively low volume, a normal
correction and the move to (point) 84 ended with narrow spread (and) high volume. This is
supply overcoming the demand, but it is not a volume buying climax where we would expect
wide spread along with the high volume.
This supply still forces a reaction down to (point) 85 and then a minor number two spring
occurred at (point) 86. The secondary test took the form of a drying up of supply in the last
couple of days in column 32. We know that we may buy on a secondary test of a number two
spring. But, as in actual practice, this one would have been very difficult to operate in. We will
skip it. Now, please note that the speculative positions have not been threatened. The reaction at
(point) 86 could also be viewed as the minor climax of a normal reaction from (point) 84 down
to (point) 86 with a secondary test a few days later. Regardless of what you call it, the
interpretation of the supply - demand relationship is still the same. Note that at (point) 84 the
stock has gone above the old objective area of $38.00 per share; it is holding and remains quite
strong.
Now, uncover column 33. The last point of support of the area of re-accumulation from
(point) 82 to (point) 87 is now defined. It is along the $38.00 line. The stock moves up sharply
with wide spread and heavy volume. We raise the stop orders on all commitments to 35 5/8 just
under the support at (point) 86.
Now, uncover to column 35. (Montgomery Ward) moves up to (point) 88 without
climaxing and reacts to (point) 89 and then the volume dries up at (point) 90 and the upward
move is resumed. Notice how the trend lines are becoming steeper and steeper. The reaction to
(point) 90 holds well above the half-way point. Support line SS can be drawn through (points)
87 and 90 with supply line TT drawn through (point) 88. The stock has now reached almost
$47.00 per share and has overrun the count built up in area A. Turn to chart three and we will
add (the count in) phase B to the count in phase A. The count from (point) 2 to (point) 6 is a
count of 29 points for an objective of $50.00. This would tie in with the 3 point (figure chart)
objective of $50.00 on chart four. Point 63 was identified as a last point of support. If any of the
count in phase B were to come into operation, we would expect the count from (point) 63 to
point 26 to be used. This gives an objective of $58.00 to $60.00. It is a logical count objective.
It takes in the count from the last point of support to the area of preliminary support.
Our aim now is to get out in the area of $50.00 should the stock indicate (that) it is
finishing its up move there, or, if not there, to get out in the $58.00 to $60.00 level. We must get
out at the $58.00 to $60.00 level if there are any signs of stopping the up trend. Why? At that
level the stock will have used up or expended all of the force of accumulation which we could
logically expect to be in this base as measured by the figure chart count. It could possibly move

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above the $60.00 level forcing us to use a higher last point of support in the base; however,
before doing so, we would expect it to go through a major correction or re-accumulation.
Uncover column 36. As (point) 91 is reached there is very wide spread and extremely
heavy volume. This is a buying climax and an over bought condition due to the penetration of
supply line TT and it has overrun the objective of $50.00. We must either get out right now or
decide to ride out any possible reaction and get out either on that reaction or on a later rally. This
is without question a buying climax and that action will stop the move either temporarily or
permanently. However, have we seen the previous appearance of preliminary supply? The
answer is no and we know that very often this preliminary supply occurs and (that) this may be
the beginning of that preliminary supply and since the count is overrun it is an indication that the
$58.00 to $60.00 objective may be coming into operation. A check of the Wyckoff Wave
indicates that its action is also favorable for staying in as it has reached, (has met) support for
over a week and is likely to attempt to rally back toward (the resistance level marked by) point
87A. We decide not to sell out here, but attempt to get out in that $58.00 to $60.00 level. We
raise the stop orders on all positions to 415/8.
Now please uncover column 37. Now, keep in mind that were attempting to get out on
this move. In actual practice we would be following (the stock) every day even if we had to get
daily quotations directly from the broker. The reaction to (point) 92 had heavy volume and this
is evidence of the continued selling on the down side; a change of character. The action at
(points) 91 and 92 is now identified as probable preliminary supply and we now determine to get
out on the next rally which we would expect to stop in the $58.00 to $60.00 level.
We can get out in one of several ways. We could have sold part of our position at (point)
91 and the rest on this rally. Another alternative is to enter (a sell) order just (below) the
objective as the stock begins to rally away from point 92, for instance, at the $57.00 level.
Should the stock go through that point we would be out automatically. A third alternative is that
we can watch the stock as it rallies and get out, however, we must definitely get out as this stock
reaches the objective. As the stock rallies from (point) 92 we draw support line UU through
(points) 90 and 92 and supply line VV (parallel to it) through (point) 91. The advance is very
rapid and the angle is steep and we cannot expect this type of progress to continue long. As
(point) 93 is reached at almost $57.00 per share, we resolve to get out the next day regardless of
what happens. Our possible gain should we hang on is only a few points before we would hit the
$60.00 level and a stock does not always reach the maximum count. Now, what is the downside
risk? Well, if it goes into a reaction it is perfectly logical to expect the stock to react to around
the half-way point of the last move. This would be the move from point 78 to point 93. That
would be approximately 143/4 points down and it could go all the way back to correct the entire
move from point 63 to (point) 93, so we resolve to sell out the next day regardless of what
happens.
Alright, uncover the rest of the chart. Assume (that) we sell out at, say, $58.50 per share
and cancel our stop orders. What is our profit? You figure it out. The action at (point) 94 is a
buying climax even though the volume is not as high as at (point) 91. There is still increased
volume and widened spread as an over bought condition is created on the trend lines and
the objective area is reached. Incidentally, there is one other technique which can be used in
getting out of a stock which is sky rocketing as this stock does (on) the move from (point) 92 to
(point) 94 and that is to raise the stop orders on the position to about 3/8 ths of a point below the
close each day after the close of trading. Should there be any minor reaction, you would
automatically be out of the stock. It leaves you wide open for continued profits as long as the
stock continues to blow off.
Now for some further observations on this Basic Lecture. There are some indications and
actions on these charts which we did not discuss or discuss in complete detail. However, we
covered those indications and actions which were pertinent to our purpose and appeared to be
most significant in evaluating the developing situation. Other market situations will be different
from this one. You must identify the important principles, determine what is going on in the
stock and act at the proper time. You may and undoubtedly will adapt these concepts to your
own market operations. You will develop your own style of analysis in applying the principles.
It is vital to stick to the principles and procedures outlined in the course. They work! You can
learn them!
Alright now, what have we done here? Lets review. We have followed the principles
and procedures of the course. This is most important. In establishing the first speculative
position, we diagnosed the trend of the Wyckoff Wave, made sure that the stock was stronger
than the Wave using the principles of comparative strength and weakness and then analyzed the

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stock. In analyzing the stock, we determined that the base was probably accumulation, that the
profit risk ratio was favorable and that it had a sign of strength and (that it) was on the last point
of support. Then we waited until the Wyckoff Wave indicated (that) it had stopped going down
and was turning upward. Then we took our first position as the Wave was ready to move
upward. Later positions were established at successively higher prices as near as possible to the
lows reached on the reactions. We used stop orders to protect both capital and profits. From the
beginning we aimed for a major move rather than small, quick trading profits and we did not
change our purpose. As the upward trend developed our main tasks were to determine that the
up move was continuing normally and that important or persistent distribution was not taking
place either during the move or as objectives were being reached. Most of the effort was
concentrated on the vertical chart as it indicated how the base and the move was progressing. In
closing out the position we aimed to get out as the logical objective was being reached. It
coincided with the previous appearance of preliminary supply and an over bought condition. We
sold out on a buying climax and did not forget to cancel the stop orders. We did not play for the
last 1/8th (of a point). We got out when we knew (that) we should. We accomplished what we set
out to do; to diagnose a developing major move on an individual stock; to take a speculative
position in the early stages of that move and to get out as the move was ending. The result, large
profits with relative safety.

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BASIC LECTURE NUMBER TWELVE

STEP BY STEP ANALYSIS OF DISTRIBUTION
The main subject of Basic Lecture Twelve is a step by step analysis of a distribution area.
The purpose of this lecture is to present to you a step by step analysis of a distribution area and
the resulting major down move (and also) to demonstrate how you may plan and execute a
campaign and (in addition) to aid you in co-ordinating the principles already previously
presented (in) these Basic Lectures. Our vehicle for this discussion is EG & G, Inc. . The
charts for this lecture will come to you on a number of pages which you must fit together where
necessary so that you can see the continuous market action. Now, please do not fail to do so. All
of the charts of the Basic Lectures are prepared so that they will fit in your course binder as the
Basic Lectures are an integral part of your course. Please, stop now and put the charts together
so that you will have a continuous chart.
Chart number one is the vertical line chart of E G & G from January 1, 1968, through
August 22, 1969. We have also placed the price action only of the Wyckoff Wave on the same
chart, above E G & G, in such a manner that the price action of the Wyckoff Wave and E G &
G line up for ready comparison. This will be especially helpful in diagnosing the trend of the
Wyckoff Wave and in dealing with the factor of comparative strength and weakness. The
volume of the Wyckoff Wave, (that is) the total market volume which is used with the Wyckoff
Wave, will not be included because it is not necessary for our purposes. The volume which
appears on the chart is the volume for E G & G. Chart number two is the one point figure
chart of E G & G from the (time of the) two for one split, (which occurred) in October 1967,
(up until) and including August 22, 1969. Chart number three is the three point (figure) chart of
E G & G.
The main purpose of this study is to analyze the distribution area and the resulting down
move and to outline the speculative positions which could have been taken. Now, to do this we
must first go back and analyze the prior action. We must analyze the background prior to the
distribution, the distribution area itself and then the resulting down move. As much as
possible, as we analyze this study, we will analyze it as though we were living through it and the
chart was being posted as we move along, so please, turn to chart number two.
We must first identify what portion of the figure chart is covered by the vertical (line)
chart and identify January 1, 1968, on this chart because the action after that date can be
identified and analyzed with both the vertical and figure charts. However, the prior action can
only be analyzed with the figure chart. We have identified this point with an arrow: The vertical
chart starts here. In actual practice you will often have to operate with vertical and figure
charts which do not cover the same time period: Co-ordinate them carefully. In dealing
with the prior action we must estimate what the price and volume action on the vertical chart
would have been from the appearance of the figure chart. Our estimations may be correct or
incorrect, but with experience these estimations become rather highly accurate.
Chart number two begins with the two for one split in October 1967 and will not include
the prior major up move. However, point 1 is the high reached on that up move. Following
(point) 1, the stock began a down move and our first task is to analyze that down move. (1)
Supply line AA is drawn through points 1 and 2 with the support line BB drawn through point 3.
This is the normal use of trend lines. Note that first, at (point) 4 and then, at (point) 5 the stock
holds away from support line BB putting supply line AA in jeopardy and leaves AA vulnerable to
be broken. Supply line CC may also be drawn through points 2 and 6. (2) We now draw in the
half-way point of the move from (point) 1 to (point) 3 which is $62.00. At (point) 2 the stock
reached $61.00 then turns downward. (3) Now, mark in the thrust A 1, B1 and C1. There was a
shortening of the thrust as the stock moved downward, denoting the lessened ability to drive the
stock down on each subsequent move. (4) Lets check the counts and objectives next. The first
count is from (point) 7 to (point) 3. It is a count of 13 points from the $52.00 level for an
objective of $65.00. That count was not reached at (point) 2, therefore our assumption that this
may be the count and that the entire area is accumulation is likely to be incorrect. Only part of
the area may be accumulation, We then assume that (point) 8 is the sign of weakness and (point)
9 the last point of supply in a re-distribution area for a count of 14 points from $61.00 and
$59.00, giving an objective of $47.00 to $45.00. Now, that count was fulfilled at (point) 4 as the

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stock reached $44.00. Thus, although we cannot know whether the count in the original
distribution area has been fulfilled, we do know that the objective in the re-distribution
area has been met. The last part of the move down to (point) 4 appears on both the vertical and
the figure charts, so we may now begin to co-ordinate the indications on both types of charts.
The move down to (point) 4 did not have a good volume selling climax; there was no wide
spread, no heavy increase in volume, thus it is entirely possible that the down trend at that
point is not yet stopped.
A stock can stop a major down trend either with a volume selling climax, indicating panic
selling or by simply stopping going down; running out of supply on the downside. E G & G
simply ran out of supply on the downside. There is a narrowing of the spread and decreased
volume indicating a lack of (the) supply (that is) necessary to keep pushing the stock down at
that point. Now, the demand may be strong or it may be weak. Also, if a stock does stop going
down without a panicky volume selling climax, it is likely to be subjected, later on, to a
spring or a shakeout. Why? To force some of the people who bought at higher prices out of
the stock and to keep others on the sidelines in the early stages of the up move. As that spring, or
that shakeout occurs, there is a strong tendency for untrained people, the non-professional
people, to be misled as to the direction of the next important move. The stock goes into new low
ground and they think (that) it is going to keep on going and they either do not buy or they sell
short.
The next thing (that) we must do is (to) analyze the count following (point) 4 in this
lateral move. We break the base (area) down into phases A and B. From the vertical line chart
we identify (point) 5 as the number two spring and (point) 10 as the secondary test of that
number two spring. Note, there was supply at (point) 5 and that supply dried up on the reaction
at (point) 10 as indicated by the decreased spread and volume. For the major count, turn to chart
three, the 3 three point (figure) chart of E G & G. The first count from (point) 10 to (point) 11
gives an objective of $63.00 to $65.00 and the count from (point) 10 to (point) 4 gives an
objective of $81.00 to $83.00. Now, turn to chart two, the one point (figure) chart. The first
count is from (point) 10 to (point) 11, a count of 17 points, from the $42.00 and $44.00 level, for
an objective of $59.00 to $61.00. That count was fulfilled and exceeded at (point) 12. Now,
rather than immediately taking the count from (point) 10 to (point) 4 for our next objective, we
stay within phase A. We identify the sign of strength on the vertical chart as being the move
from (point) 5 to (point) 13 as shown by the wide spread and increased volume and the reaction
to (point) 14 as being the last point of support. This gives a count (from point 14 to point 11) of
24 points from the $42.00 and $48.00 level for an objective of $66.00 to $72.00. The move to
(point) 13 is the jump across the creek, the lower branch of the creek and (point) 14 is not only
the last point of support, it is a back-up to the edge of the creek. (Point) 15 is another jump
across the creek, (this time the upper branch of that creek) and (point) 16 is a back-up to the
edge of that creek. We would add phase B to this count only if it became necessary.
Now, lets analyze the move from (point) 5 to (point) 17. The first support line would be
drawn through (points) 5 and 10: That is broken quickly. So support line DD is then drawn
through (points) 5 and 16 with supply line EE parallel to it through (point) 15: This is the normal
use of trend lines. (Line) DD is respected at (points) 18 and 19 and at (point) 20 At (points) 12,
21 and 17 it fails to reach line EE therefore, we draw supply line FF (the reverse use of
trendlines) through (points) 15 and 21. At (point) 17 on the buying climax, the stock reaches
that line and turns downward. The next thing we do is measure the progress made on each drive
up by the thrusts D1, E1 and F1. At F1 the thrust narrowed. The stock made much less progress
than it had been making on each drive up. Now, slide a ruler across from (point) 5 all the way
over to (point) 17 and you will note that on the move up, there was a widening spread and
increasing volume and there was a decided tendency for volume to decrease on the reactions. At
(point) 12 the stock reached its first objective and promptly continued upward. Therefore the
count from (point) 14 to (point) 11 came into operation. The action from (point) 21 to (point) 20
is preliminary supply, heavy supply coming in to stop the move. Look at the count on the figure
chart following point 21. It is approximately 14 points along the $65.00 line. The stock was
moving back and forth in a narrow range as the supply came in to attempt to stop the move.
There was good volume and on the day marked 20 (E G & G) had an example of where it tried
to go up tried to go down and closed in the middle on an increase in volume. This phenomenon
usually indicates that the stock is going to attempt to move soon and it promptly continued up to
(point) 17 which is the buying climax. Note that at (point) 21 the stock reached the minimum
objective of $61.00 and the buying climax at (point) 17 occurred as the maximum objective was
reached. This stopped the upward trend.

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So far we have not analyzed the distribution area. We have only been dealing with some
of the necessary preliminaries. What are these preliminaries? One is to determine some of the
characteristics of this stock. Does it move in an orderly (and) logical manner? Our answer is
yes. When it goes through distribution, does it immediately collapse? The move from (point) 1
to (point) 5 indicates that it goes down (in an) orderly (fashion) and does not collapse. Does it
have good spread and volume indications? Is it one of those thin stocks which trades only a few
hundred shares? Does it swing in a wide trading range or is it already in a trend? Does it have a
tendency to go to maximum counts? Now these are some of the questions you can often answer
before analyzing the distribution area and taking a position. The more of those questions you are
able to answer, the less likely you are to run into unexpected problems as the situation develops.
We also determined that at the buying climax at (point) 17 the stock was meeting an important
objective and therefore was likely to either hesitate or react even though there (are) additional
possible higher counts; counts for higher objectives. We have also identified preliminary supply
and the buying climax and any distribution which came later may have begun at either of those
points.
Lets analyze the area following (point) 17 as though we were having to live through it.
Many students have found this to be a very helpful technique in analyzing a stock prior to taking
a speculative position. Now, please cover up all of the action to the right of (point) 17 and
uncover the chart as we move along. I will not tell you when to uncover a portion of the chart
action; you determine it for yourself from our analysis. Any buying climax such as (at point) 17
is followed either by an automatic reaction or a lateral move, then a secondary test or a
continuation of the old upward move. The reaction from (point) 17 to (point) 22 is the automatic
reaction and the rally from (point) 22 during the same day to (point) 23 is an immediate
secondary test. This is shown much more clearly on the 1 point figure chart. Then it is tested
again at (point) 24. Thus, at (point) 24 we know that the up move definitely has been stopped, at
least for awhile. In the absence of an intraday breakdown we must regard the volume that
came in at (point) 24 as being on the downside since the close was at the low. At (area) 25
there is a tendency for volume to expand. Supply is persisting on the downside. The stock at
(point) 26 has a very narrow spread and a sudden increase in volume; evidence of demand
overcoming the supply, which stops the reaction. The next day has wide spread (and)
increased volume on the rally, but there is no carry through. The stock moves sideways and then
at (point) 27 heavy supply comes in on the downside. There is wide spread, extremely high
volume and the stock penetrates slightly into new low ground below (point) 26. So far there has
been a tendency for supply to increase on the downside rather than to dry up or decrease. The
rally to (point) 28 has a tendency for the spread to narrow and volume to decrease indicating that
there is a decreasing demand as the stock moves up. We can now draw supply line GG (normal
use of trend lines) through points 17 and 28 with support line HH parallel to it through (point)
26. Note that so far the stock is having lower tops using (points) 17, 24 and 28. Also (point) 27
is lower than (point) 26. A down trend is beginning to form and we have evidence of
considerable supply on the downside in the trading range and demand is decreasing on the
rallies. These are some of the indications and characteristics of probable distribution.
Now, lets check for comparative strength and weakness. The Wave and the stock were
moving up together to (point) 21 and then things began to change. The Wyckoff Wave reacted
sharply to (point) 20 and the stock moved sideways. Then at (point) 17 the stock went above
(point) 21 and stopped. (It then began) going down and turned weaker than the Wave. Compare
(points) 17 and 24. On the stock (point) 24 is below (point) 17 and on the Wave it is
considerably higher. Now, compare the reaction from (point) 24 to (point) 26 and (point) 27.
The Wave held above point 20 and the stock went considerably below it and then failed to
participate (with) the Wave on the rally to (point) 28. At (point) 28 it is again weaker than the
Wave.
Suppose we first became interested in this stock at around (point) 28; what would we
have? We would have a stock which is weaker than the Wave, has stopped going up, has
fulfilled its objectives, is having lower tops and lower bottoms, (in summary, a stock which) is
having indications of distribution. Now, look at the possible count because a stock may have all
of these characteristics and still have such a small count as to make a commitment not worth
while. We are interested primarily in large moves, not in short, quick, scalping profits and a
stock must have a large count to have a large move. Determine the possible count from (point)
28 over to (point) 17. It is approximately 32 points and if you took a short position with a 5
point stop, your profit - risk ration would be approximately 5 or 6 - 1. Now, this is very
definitely a candidate for a possible short sale. Our main problem now is to assess the

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development of the stock and then to establish a speculative position, probably a short position.
Such a short position in an area of original distribution should be taken on the last point of
supply, following a sign of weakness or on an upthrust after distribution. We should be on the
alert for indications that this might not be distribution. Our immediate problem then becomes
that of identifying a possible sign of weakness and last point of supply or perhaps an upthrust
should one occur.
As the move from (point) 28 to (point) 29 develops, there is a tendency for volume to
expand as the stock moves down: Supply is coming in and increasing. We have drawn two
upward slanting arrows in the volume to indicate this. The move from (point) (28) is weaker
than the Wave, breaks into new low ground with expanding spread and steadily increasing
volume and is a potential sign of weakness. It will be proven or disproven by the subsequent
rally. The rally from (point) 29 to (point) 30 is not a classic example of a last point of supply, but
it is the last point of supply nevertheless. The Wave shows abrupt strength to (point) 30 and this
stock participates with good spread and good volume; it has good demand on it. However, if the
stock is going to continue upward, it must keep going. It would have had to break through
supply line GG and (point) 28 if it were to leave this trading range on the upside. Instead, as it
met these points where supply could naturally be expected to come in, it stopped and closed
almost at the low. There was an abrupt increase in volume, which, on a minor basis would be
climactic.
We immediately sell short the next day. We will assume (that) the price is $66.50 per
share and that our stop order is placed at 721/8, just above point 30. Incidentally, we could have
had an order to sell short entered with our broker before the stock reached point 30. That would
have required determining ahead of time where the stock could logically be expected to stop on
the rally. There are three main indications for this; the half-way point, the down trend line GG
and the prior supply level around (point) 28. If the stock is rallying strongly as on the move from
(point) 29 to (point) 30, the half-way point has a good probability of being overrun and stronger
emphasis should be place on the previous supply level in determining a likely turning point.
Following (point) 30 at (point) 31, the stock reacted with wide spread and low volume.
This is evidence that demand is not there to stop it from going down when it should be
there. And then supply increases on the downside at (point) 32. Now, if we had missed selling
short near the top of the rally at point 30, we could still sell short after point 30 and we should be
alert for opportunities to add to our short positions as the move develops. Why? The stock has
a logical count for a much lower objective, has had a sign of weakness and a last point of
supply and is in the process of establishing a down trend. Now, just because you missed the
exact turning point is no reason to abandon the attempt to take a position. Simply give the order
to your broker for execution. Present exchange rules require an up tick before a short sale can be
executed. Normally you get intraday up ticks and normally the short sales can be executed
almost as readily as orders to buy.
Prior to this it was sufficient to know the approximate possible count without pinning it
down exactly. We must now determine the exact count in accordance with the count guide. We
identify the main points on the vertical chart and mark these points on the figure chart. We
identify the main phases, C, D, E and F. Phase D could be broken down into two phases. In
other words, what we are doing is to analyze and identify the cause on the vertical chart and then
to count the number of points in that cause on the figure chart. We take the count on the one
point figure chart from the last point of supply at (point) 30 to the left and project it downward to
determine what are the likely objectives as the stock works out the force of distribution built up
in this area. The first count is ten points from (point) 30 to (point) 28 for an objective of $59.00
or perhaps $60.00. The next count would be over to (point) 24. However, an examination of the
vertical chart shows that the action from (point) 17 to (point) 24 is very concentrated and
therefore if any of this is likely to be distribution, it is most likely that all of it will be
distribution. Nevertheless, we take our count over to (point) 24 for an objective of $38.00 to
$41.00 and the count from (point) 30 to (point) 17 gives an objective of $31.00 to $28.00. All or
perhaps only part of these counts will be fulfilled.
Now, turn to the 3 point (figure) chart, chart number three to project the possible major
down count. The count from (point) 30 to (point) 24 gives a count of 11 points (multiplied by) 3
or 33 points for an objective of $36.00 to $39.00. The count from (point) 30 to (point) 17 is 39
points for an objective of $30.00 to $33.00. We do not use the 3 point (figure) chart for the short
moves, as the 1 point figure chart is usually more accurate. Our objective or purpose is to take a
position and to attempt to obtain the entire major move. Since we have our first speculative
position, our task now is to analyze the down trend as it develops, to be on the alert for any

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action indicating a reversal of the major trend and perhaps, to add to our position later on, either
on a rally or as a re-distribution area is coming to an end.
Well, the stock continued on down and had a minor selling climax at (point) 33 with a
secondary test at (point) 34 and then went through re-distribution. In doing so it overran the
count from (point) 30 to (point) 28 and this immediately brings in the probability that the next
important objective it may try for is $41.00 to $38.00. That is much lower than where we are
now. Supply was heavy at (point) 35. The move from (point) 35 to (point) 36 is the sign of
weakness and the rally to (point) 37 is the last point of supply. Now, compare the Wyckoff Wave
with the stock at (point) 37. The stock failed to respond (to) the rally in the Wave at (point) 37.
The count is along the $54.00 line on the figure chart and the count is substantial. The rally up to
point 37 is a logical place to sell short, either to establish a new position or to add to the one
previously established. Thus, we will assume (that) we will sell short at $54.00 on August 20
with a stop order at 581/8. The count on the one point chart in this re-distribution area is from
(point) 37 over to the left for 17 points for an objective of $39.00 to $37.00 per share. The stock
goes on down to $38.00.
We are now faced with what is in actual practice a very difficult tactical decision in
operating in the market. We have an excellent first short position and a profit. The stock has just
gone through re-distribution and should go lower, but the Wyckoff Wave shows evidence of an
attempt to rally. It has considerable cause, not a massive cause or count, but the rally could be
quite substantial. What do we do? The nature of the dilemma is this: If we do get out, we lose
the safety of our first position, which should not be threatened easily and we will then have the
difficulty of re-establishing new positions later, if possible. If we do not get out, we (may) see
that profit vanish. Our second position is in much more danger. Should the stock rally
substantially, we could be stopped out and should the Wave rally strongly, the stock could
develop sufficient strength for a rally to the top of the re-distribution level or perhaps to the halfway area of the move from points 30 to 38 at $58.50. Our main alternatives are: 1) We could
take our profits on both positions and try to re-establish new positions later; 2) We could
maintain the positions as (they) are with the stops where they are; 3) We could lower the stops to
protect the profit on the first commitment and to cover our costs on the second; 4) We could
close out the second commitment and protect our first commitment with a stop order. Now, this
is not an easy decision, but it is a type of decision which we must make frequently. How you
will handle the situation will depend largely upon the type of move you are after, your estimate
of the probable strength of the rally against the major trend and to some extent upon your own
temperament. Some students have extreme emotional difficulty in attempting to ride out a
correction, for others it is relatively easy. In riding out any correction against the trend it
must be recognized that time is being lost as well as some of the accrued profits. Lost time
means lost opportunities which means lost profits.
Now, lets deal with this specific situation. Our estimate of the extent of the up move on
the Wyckoff Wave is that it should move up to around the old high at point 30 and should last for
several weeks. The stock is weaker than the Wave, but if the Wave worked out the projected
move, our second commitment would be in danger. Our purpose in opening this commitment
was to go with the down move resulting from the re-distribution: That cause and the move is not
likely to work itself out right now. We should get out. Therefore, we take our profit, close it out
and cancel the stop order. Assume the price is $49.00 per share.
Now, what should we do about the first commitment? Our purpose is to obtain the entire
down move projected from the original distribution area. We will still try to accomplish that.
Therefore, we do not close out the first commitment, but lower the stop order to 59 1/8, just above
the supply in the re-distribution (area). We would do this anyway in following the normal
procedure in using stop orders. If necessary, we will get out and cancel the stop should the stock
turn unusually strong.
Well, the stock rallies to the ice, the former support area, on the move to (point) 39 and
turns downward. The volume is low and the spread is narrow on that rally indicating a lack of
demand. Compare the stock with the Wave at (point) 39. It is much weaker than the Wave and
then it turns downward while the Wave continues its up move. We draw support line II through
(points) 33 and 38 (reverse use of trend lines) with supply line JJ drawn through point (30). (The
stock) breaks through the support on the $48.00 level at point 40, but since the action to (point)
41 is with narrow spread and a tendency of volume to increase, indicating that demand is coming
in to attempt to stop the down move, we leave our stop orders where they are for the moment.
Also (point) 41 is not substantially below (point) 38. We would prefer the move to be well
below the previous drive down before moving our stop order.

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At (point) 41 the stock is holding away from support line II. We expect another attempt
to rally the Wyckoff Wave, but it should be a short rally as so far there is little cause for (a)
sustained rally out of this area. Incidentally, the stock has not reached the next logical objective
of $41.00 to $38.00 and we expect it to eventually reach that objective unless strong contrary
indications develop as time goes on. Should the stock rally, we will attempt to sell short again,
timing the commitment with the turn in the Wave. We draw support line KK through points 38
and 41 (reverse use of trend lines) with supply line LL through (point) 39. The stock rallies to
41a, reacts and then breaks through (supply) line LL on the move to (point) 42. At (point) 42 it
creates an over bought condition on the penetration of supply line JJ and supply comes in to stop
it at the former supply of the distribution from (point) 33 to (point) 37 and (again) at (point) 39.
This is a natural point at which we would expect to meet supply. The stock will either overcome
the supply or turn downward. It actually turns down before the Wave does. Note that at (point)
42 it penetrated a fraction of a point above (point) 39 and then reacted. This is an ordinary
upthrust. As it tried to move above (point) 39 and began to fail, we could have sold short.
However, the Wave was still rallying, so we wait until the Wave gives indications of turning. As
soon as (point) 42 is defined, we draw a new supply line, MM, through (point) 42 parallel to line
KK. At (point) 42a the turn in the Wave is well defined and since the stock continues to be weak,
we do sell it short the next day. Assume that the price is $51.00 per share and that the stop order
is placed at 561/8.
Now, locate points 33 and 42 on this chart and check how much time has been lost while
this stock has made no net progress on the downside. (Point) 33 was reached in late July and
(point) 42 was reached in late November. About four months have past without any more price
progress, while other stocks have moved well on the upside. You can best determine whether
you will elect to wait out large rallies against the trend by living through a few of these. Market
operations is an art and you must develop your own style in applying the principles. Our next
task is to follow through with these commitments until we finally close them out. We will aim to
close them out in the objective area, preferably on a selling climax.
Now, lets move on. Following (point) 42 the stock begins moving in a steady down
trend with attempts to rally at (points) 43, 44 and 45, sometimes with volume, but there is no
carry through, no sustaining ability on the rallies until finally it reaches (point) 46. At (point) 46
the stock has fulfilled the objective of points 30 to 24 of $38.00 per share and the stock continues
to remain weaker than the Wave. The area from 41a to (point) 44 is an area of re-distribution
with a sign of weakness at (point) 43a and the last point of supply at (point) 44. The count is
sixteen points for an objective of $38.00 to $34.00. That count was eventually reached at point
46 We lower our stop orders to 50 1/8, just above point 45. The stock did not climax at (point) 46
(which is the objective areaof the count from point 30 to point 24 on the 1 point figure chart) and
therefore we know that the major down trend may not have been stopped. Also, we expect the
count from (point) (30) to (point) 17 on the 1 point (figure) chart to come into operation. We
mark the half-way point of the move from point 42 to (point) 46 and would expect any rally to
meet supply in the vicinity of that half-way point. That rally would likely tie in with the supply
line MM. Then, as the Wyckoff Wave moves up from (point) 46 to (point) 47 and then (to point)
48, E G & G moves sideways As the Wave goes to (point) 48, it begins to react downward.
The stock is still weaker than the Wave. It fails to reach near the half-way point or line MM;
more indications of relative weakness. When the stock breaks through the previous support at
(point) 49 and fails to rally, we lower the stops on our market positions to just above (point) 47 at
441/8. It continues on down to (point) 50 and is approaching the objective of $31.00 to $28.00. It
rallies sharply to (point) 51, is stronger than the Wave and then holds much stronger than the
Wave on the reaction to (point) 52.
The stock is beginning to have a change of character as it approaches the logical
objective. It was almost always consistently weaker than the Wave and now it is becoming
stronger than the Wave. The rally to (point) 53 is stronger on the stock than it is on the Wave and
so as it begins to react at (point) 54, we determine to get out on the drive down towards the
objective, preferably between $31.00 and $28.00 per share. Now, to pin this down better, turn to
chart two. There is a minor upthrust at (point) 47 and we can take the count from (point) 47 to
(point) 55, a count of 13 points for an objective of $29.00. Very often stepping stone counts
form like this in the later stages of a move. (This) will enable you to pinpoint the exact
objectives better. In covering a short position, we aim to cover the position on a selling climax
or perhaps on the preliminary support and in the vicinity of the objective. As it approaches
(point) 56 we do not wait for the selling climax, but simply get out and cancel our stop orders for
the following reasons: 1) The Wave gives evidence of attempting to turn upward; 2) This stock

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has had a change of character; it is now stronger than the Wave; 3) The action from (point) 50 to
(point) 53 is evidence of possible preliminary support; 4) There is an objective of $28.00 and a
stepping stone count objective of $29.00. (5) The stock, on a minor basis, is showing a tendency
to hold stronger than the Wave. (6) It is down against support line (NN) (which is) drawn
parallel to KK through point 46 and (it) should either rally or become oversold.
The count from point 30 to point 21 could come into operation later. However, before it
(does) so the stock could have a very substantial rally and perhaps correct the entire down move
from (point) 30 to (point) 56. That would mean a rally of possibly 15 points or so and we do not
want to take the risk of that happening. It may or may not go through a selling climax.
However, the most we can logically expect the stock to reach is $28.00 or $29.00 per share and if
we play for the last 1/8th there is a grave risk of not covering at all. So on the morning of the day
marked 57 we simply cover all positions at around $30.00 and cancel the stop orders.
Now, this has been an illustration of how you may analyze and take a speculative position
in a major distribution area for a large move downward and how you may operate in a typical
major down trend until the speculative positions are covered. The price and volume action of
each stock will be different and each market move will be different, however, the basic procedure
is still the same: It is to 1) analyze the direction of the coming move using the Wyckoff Wave; to
2) take a position in a stock that is comparatively weaker than the Wave. The stock must have a
large count and must have a sign of weakness and a last point of supply or an upthrust or upthrust
after distribution and to then; 3) time the commitment with the Wyckoff Wave. You may also
establish positions or add to a position in a re-distribution area or on a normal correction within
the trend. Aim to get out as the objective is reached, preferably on a selling climax.
Now, lets go on to some additional thoughts on the Basic Lectures and in learning to
operate in the market. First, lets review these Basic Lectures briefly. There has been an orderly,
logical development of the concepts presented in the Basic Lectures. In the first seven (Basic)
Lectures we were discussing primarily the indications on the vertical (line) chart because we
must diagnose how a stock is moving (and) the direction of the coming move (in addition to)
timing (all) from the vertical line chart. We then go to the figure chart in order to determine
approximately how far a stock can move. Most of our analytical effort is expended on the
vertical (line) chart. The first (Basic) Lecture discussed some of the basic concepts. Then, we
discussed trends because our purpose in operating in the market is to diagnose a trend either in
progress or as it is being established and to take a position so that we can profit from that trend.
Then we discussed the basic concept of accumulation with an overall view of accumulation and
then how accumulation may begin with a climax and a secondary test.
(Basic) Lectures Five and Six dealt with the spring and terminal shakeout and the jump
across the creek. These are refinements and improvements of Mr. Wyckoffs original concept
of the springboard position. We then shifted to a discussion of distribution and the principle of
the upthrust after distribution in Basic Lecture Seven. In Basic Lecture Eight we discussed the
figure chart, the figure chart counts and our rules for the count guide. After working with
thousands of students over the years we have found that most of their trouble in dealing with
figure charts and with counts stems from difficulties in interpretation of the vertical (line) charts.
If you can interpret the vertical chart correctly, it is a relatively simple matter to locate the
probable beginning and end of the accumulation or distribution on the figure chart and simply
compute the objectives using the count guide. In Basic Lecture Nine we discussed some
principles in applying our techniques in screening candidates and in protecting our capital. Then
we dealt with our own indexes, the Wyckoff Wave and the Optimism - Pessimism Index. The
last two Basic Lectures are a step by step analysis of accumulation and of distribution. They are
designed to aid you in integrating what you have already learned (in) the other Basic Lectures; to
aid you in applying our method of analysis and (in) establishing, maintaining and closing out
speculative positions as you apply these principles.
Our course is designed for one purpose. It is designed so that you can learn to make
money in the stock market and this should be your purpose. It is not designed so that you will
be able to understand every market move or market action and so that you may operate in
all types of markets in all stocks at all times. Many students want to do this. This is wrong
and leads to unnecessary losses. Our course is designed specifically so that you can learn to
diagnose accumulation when it is going on and to understand and operate in the upward trend
which results from that accumulation. It is also designed so that you can learn to diagnose and
understand distribution and the major down trend resulting from that distribution and to profit
from it. There are many moves in the market which are essentially random movements because
no large interests are trying to accumulate the stock (in order) to put it up or to distribute the

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stock preparatory to a down move. Unless the stock has been under accumulation or
distribution, the technical indications are likely to be obscure and unclear. If you dont
understand a situation, stay out of it. Go into the market only when the indications are clear, the
analytical situation is favorable, when the profit - risk ratio is in your favor and time your
commitments with action of the Wyckoff Wave.
Too many students want to develop their own method of operation in the market by
combining some of the principles taught in the course with other things or by using only a few of
the concepts (that) we teach. Often they seem to be more interested in developing their own
market ideas than in making money. Do not do this! Do not combine the use of our method with
the so called fundamental approach (or) with economic forecasts, political developments, news
or any other techniques. Do not combine it with the tax law! Combining market operations with
the tax law, especially in attempting to obtain a long term capital gain, is a significant source of
loss in the market. This causes people, including some of our students, to fail to get out when
they know (that) they should; to lose accrued profits and to hang on too long to situations which
have gone sour. Our method and techniques are complete in themselves. They are all you need!
But, you need to learn, understand and to use the entire method step by step, systematically.
Incidentally, you do not need to know everything in the Course and in the (Basic) Lectures
before you begin to make money and to operate in the market. You may concentrate your early
efforts on learning a few concepts and techniques. Test them thoroughly and operate with them.
One such technique is to learn to buy on a reaction within an upward trend. There are others.
Then you may gradually expand your knowledge and arsenal of proven money making weapons.
This seems to be an excellent way to operate in the practice phase of the course as the market
and our course (are) too big for most students to learn everything quickly. Then, safeguard what
you have learned. This knowledge is very valuable and can produce extraordinary profits. When
learned, you will become one of the few people in the market who know how to profit
consistently. You will be a special person with a very special knowledge. Use it; value it;
improve it and profit from it.
The starting point for any analysis is to determine the trend or the coming trend of the
Wyckoff Wave. Always operate in harmony with the more important trend in the Wave. Then,
screen the stocks you are following. Eliminate from consideration those which have been
weaker or have been moving at about the same speed as the Wave. Operate only in those stocks
which are stronger than the trend of the Wave when it is up and the reverse when it is down.
Then analyze those strong stocks to make sure that the stock is ready to move and move soon
and then time your commitment with the action of the Wyckoff Wave. Protect your capital and
profits with stop orders. If it does not move, get out and look for other opportunities.
It is very important that you do your market work and study regularly; that you post your
charts, analyze them and follow through on your commitments systematically. A relatively small
amount of time spent daily or every other day on the market pays rich rewards. (Doing) nothing
for two weeks, then trying to catch up and immediately (taking) a speculative position all too
often leads to disaster. Usually your biggest, safest profits will be obtained from situations
where you have anticipated each step of the move as it develops. Often you can diagnose that
a stock is likely to be under accumulation some weeks or months before the best time to buy is
reached. Do your homework first, then wait until the stock and the Wyckoff Wave (are) ready to
move. Then and only then act. Spur of the moment decisions usually cost money.
Your market studies and your commitments should be private. Do your work in private
and keep your own council. Do not talk the market. This is essentially a lone wolf
operation. Do the necessary work regularly. Keep records of commitments and some records of
your more important thoughts. Practice trade, practice trade and practice trade, even after you
are successfully operating with the bulk of your capital. Even after you are thoroughly familiar
with your (Wyckoff) Course and with the Basic Lectures, you should periodically review them;
otherwise the finer points will slip away from your memory: That costs money. Improve your
knowledge. Increase your understanding of the course and the Basic Lectures and (thereby)
profit.
The principles and concepts we teach are valid! They work! They have been learned and
tested by thousands of students. If others can learn them, so can you. Use them to make money
and to protect your capital and profits. Continue to study your course, improve your techniques,
gain additional experience and check and improve your results. Learn to profit!

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PRACTICE TRADING TAPE

NUMBER ONE

This is practice trading tape number one. Most students of the Wyckoff method are quick
to agree that practice trading is a good idea. Unfortunately, it is all too often considered a good
idea only for those who really need it. This mistaken notion deprives many potentially good
traders of a valuable learning experience that could help them better realize the profits that are
readily available.
For many, admitting that practice trading is a continuing need is somehow taken as
indicating a lack of ability. To make this admission after having gone through a prolonged
period of in depth study is more than some people can bear. For others practice trading is simply
a bother. To be done correctly there are all kinds of records that need to be kept, which eats up a
great deal of time and yet does not produce one single penny of profit. To these people their time
is just too valuable for such foolishness and the fact that the value of their capital is significantly
reduced by just harboring this attitude somehow escapes them.
Some students who feel that practice trading is for the other guy and not for them adopt
an even more dangerous attitude, that is; the only way to truly learn is by doing it for real.
Generally the feeling is that a person is much more likely to proceed with the necessary amount
of caution when there is a sizable lump of his own cash on the line. This sounds like a
reasonable idea, however experience has shown us that in practice it does not work. Traders are
not necessarily more cautious when they have to dig into their own pockets to produce the
resources needed to trade. If anything, they are less careful and the reason is usually greed. It
may come in the form of wanting to squeeze more profit out of a position than it can be expected
to produce or as a lack of discipline in failing to wait for a potentially profitable situation to
develop to the point where a trading opportunity truly exists. Either way the student probably
will learn a lesson, but will have to pay a very high price. He may eventually end up knowing all
there is to know. The only problem is (that) he is likely to end up with no funds left and be
unable to utilize the lessons learned.
Perhaps you have already identified yourself as a member of one of these groups. If not,
or if you are reluctant to admit just how big an offender you actually are, there is a way to prove
the point. It involves a self evaluation. This, of course, can be painful if done objectively. In
this case however, the eventual benefit should be worth the pain that may be experienced. To
make this evaluation you will need a record of the trades completed during the previous twelve
months. What we want to look at first is the number of positions that were taken during this
period. We also want to determine what percentage of the positions completed produced a before
commissions profit. Thirdly, we want to take a look at the size of each profit. If you do not have
this information immediately available, take a few minutes now to figure it out. This exercise
alone may be quite revealing.
Okay, now were ready to continue. We will begin with the number of trades completed.
It would be nice if we could say that this number or that number of trades is too many or too few
or just right. Unfortunately, it does not work that way. The different natures of the various types
of trading that can be done makes it impossible to identify an optimum number of trades. There
are, however, some guides that can be helpful in analyzing this aspect of your trading. First of
all, the trader should realize that even if losses are excluded, trading in the stock market is not a
free ride: It involves costs. Obviously, the magnitude of these costs is directly related to the
number of trades made. Since stock market trading should be viewed the same as any other
business venture, the overall goal has to be to maximize profits through the minimizing of
expenses. Excessive trading works against this goal. Engaging in more and more trading may
bring some additional profits; it will certainly bring higher and higher expenses. Since there are
only a limited number of truly outstanding opportunities available, a large amount of activity

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means that the investor has to dig deeper and deeper to come up with a stock to trade. The costs
involved simply do not justify digging to the bottom of the barrel to find a stock. Unfortunately,
much of the time an investors over trading has nothing to do with maximizing profits. More
often than not it is an indication that he is unable to identify the best opportunities. In these cases
the trader is hurt in both the profits and expenses column. The final word then on over trading is,
dont do it!
It is very easy to tell yourself that you will not over trade. Each position taken will be in
a very good stock for a very good reason. Doing this however, is often somewhat more difficult.
Many times an investor is not even aware that he is over trading. This is probably because there
is no clear cut definition that we can give him as to what constitutes excessive trading. The
confirmed long term trader wants that capital gain. Therefore, he should be aiming to stay with a
position for a year or longer. The type of potential that leads to a position that can be held for
this amount of time does not develop overnight or that often. In a good year there may be three
or four times at most when conditions favor the taking of positions that could become long term
in nature. The avowed long term investor who finds himself trading more often than this is
probably trading too often. He likely has one or more basic problems that he had better see
about solving.
The three or four moves in any one year that may result in a long term trading
opportunity each represent (an) ideal intermediate trading opportunity. Although the potential
for these moves is constructed more quickly, it is still not an instantaneous process. Many weeks
may be involved. As a result, this type of trader will likely be trading more often than his long
term oriented friend. But these (trades) should not be on more than a regular basis. If a
professed intermediate trader finds himself taking positions more than once a month, he likely
has a problem that needs to be resolved. Short term trading presents some special problems.
Here the trader always seems to be doing something, so determining when over trading is in
progress becomes more difficult. In the case of the day or day to day trader, his results
should serve as a guide. If the net result of this activity is a loss, then clearly, too much trading is
being done. Most short term operators are not into day trading. Generally the length of trades
is a few days to a few weeks. That being the case, if trading is (being) done more than once a
week, it is likely being done too often. Instead of reasoning out each action, this trader is
probably biting at anything and everything that comes along. If he isnt more careful, those
positions may start biting back.
From these general guidelines it should be possible to arrive at some feeling about the
frequency of your own trading. Does it seem to be too often? If so, you definitely need practice
trading. The costs you are generating in your market activities are too high for what they are
producing. Hopefully this first step in the evaluation has not revealed a problem. Even so, there
is still likely to be need for practice trading that may be revealed by the next step.
The second step in this self evaluation centers around the number of profits. Now, no one
should expect that every trade or nearly every trade, for that matter, will produce a profit.
Unjustifiably high expectations can lead to frustration. It is reasonable to expect a profit a
majority of the time, however there is a reasonable standard of excellence against which to
compare your results. It is that two out of every three positions established should produce a
profit. When combined with a three to one profit risk ratio, a two out of three rate on profitable
trades should produce a good return to the intermediate or long term investor, providing those
positions were worth establishing in the first place.
Lets consider the intermediate traders position for example. He should be going for a
profit potential of twenty-five percent on each trade. If he loses one position out of every three
taken, his gross profit on a round of trading should be about fourteen percent, providing (that) the
remaining two positions perform as expected. Assuming that this trader is able to complete three
rounds of trading each year, he should be able to realize a return of about forty-eight percent.
The long term investor faces even brighter prospects. He should be aiming at issues with
a fifty percent or more potential. Assuming the loss of one position out of three to a stop order,
the return on a round of trading would be in the neighborhood of twenty-seven percent. This
sounds like less than the intermediate results, but it must be remembered that these profits are
intended to qualify as capital gains, therefore they are more high powered profits than those
realized from intermediate trading.
The setting of a standard for short term trading has to be handled somewhat differently.
In this type of trading the trader is going after a ten to fifteen percent move in the stock. To
realize a worthwhile return from this small a move he is usually obligated to trade the options of
the stock instead of the stock itself. Each profit is likely to be enormous. A one hundred percent

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gross return would not be all that unusual. Unfortunately, each loss is also going to be enormous.
Even if a mental stop is used on the stock to signal when to get out of a poor commitment, the
loss still can be substantial. If no such protection is used the loss probably will be total.
To help compensate for this and bearing in mind that each position is not going to
produce a hundred percent profit, the trader has to set a higher goal. He really needs to turn a
profit about four out of five times. This is not easy. Most students never develop this level of
ability and none have it from the beginning. This is why most are discouraged from undertaking
this type of trading unless they can point to a record in other areas that would suggest a
possibility of success. On this point in the self evaluation there can be no hedging. Either the
number of profits meets the standard or it does not. If it doesnt, there is an obvious need for
practice trading. The investor cannot rely on an especially big profit coming along every once in
a while to make up for a poor performance. They may materialize, but there is a greater
likelihood that they will not.
The next step in the evaluation is to analyze the size of the profits that were made. Here
again there are standards of excellence. They have already been mentioned briefly, but lets
review them once more. A long term trade should produce a profit of fifty percent or more.
Intermediate trades should produce a profit of twenty-five to forty percent and short term profits
should be ten to fifteen percent per trade unless they are made in options. It will be necessary to
remember back to the trades being evaluated to determine what type they were. Once this is done
it is a simple matter to figure which were up to standard and which were not. If they all were not
up to standard, practice trading is warranted. Either the positions dont have the potential at the
outset or they were poorly executed. Either way, the problem is one that can be solved. Practice
trading should help locate the solution.
We have now concluded the self evaluation. If you were not answering the questions as
they pertain to yourself as we went through the steps, do so now. Those questions were: (1) Do
you trade to often? (Remeber that the answer here is somewhat subjective, so be careful.) (2) Do
your trades result in profits too infrequently? (3) Are your profits too small? These last two
questions can be answered objectively. You should be able to tell right off whether the answer is
yes or no. Anyone who can answer yes to any of these questions needs practice trading. In
fact, the need is so great that actual trading activity should be suspended immediately. Combining
real money with any yes answers results in an unacceptably high risk. Those who were able to
answer no to the three questions might be inclined to conclude that they have no need for practice
trading. Based on recent results, the conclusion can be justified. There is, however, more to think
about then just the past and the present. There is also the future. To be ready for it the trader
must constantly be striving to broaden his horizons.
It is very unlikely that any investor, no matter how great his capital, can take advantage
of every opportunity and thereby learn the lessons that those trades have to offer. Practice trading
makes this possible. It also helps (to) prevent stagnation. Consider the individual who gets up
and goes to work at the same job every day. There he does exactly the same thing year in and
year out. One day something happens and his job is no longer there. He is destroyed because that
was all he knew how to do. He had let himself stagnate and was now paying the price. The stock
trader who only engages in taking long positions or trading major moves is doing the same thing.
If the market is in a steady upward growth pattern or making large swings he likely does just fine.
But what about when there is a basic change. Since he doesnt know how to do anything else, he
is either out in the cold or doomed to mistake after mistake as he attempts to use procedures that
are designed for other types of markets. The way to prevent this is with practice trading.
Now lets assume that upon careful, objective consideration you come to the conclusion
that there is an undeniably obvious need for a thorough period of practice trading. First,
congratulate yourself on this realization. Its a tough one to make and many can never do it.
Next, be prepared to accept the fact that there is a right way and a wrong way to approach practice
trading. Actually there are many wrong ways, so we will only consider what we believe to be the
right way. Accepting what is about to follow may be as difficult as admitting the need for it. Any
trader who, due to a record of poor performance, sees an obvious need for practice trading should
begin by realizing that continued market operations in the face of that record represent an
unacceptably high risk. Since the traders primary obligation is to protect his capital, the taking of
such a risk should be avoided. There is only one good way to do this and that is to get out of the
market. The first step in any program of practice trading should be a period that is devoted
strictly to practice. The purpose is to learn to correct and to grow into a better trader.
The first objection to a ban on real market operations is: How am I going to make any
money if Im not trading? Youre not and therefore this may seem to be a justifiable objection.

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However, this objection is quickly laid to rest by another question. How are you going to make
any money if you dont completely know what you are doing in the first place? Here again the
answer is that youre not. In this case though the trader may be avoiding loss, so he could be
ahead of where he would be if he went blindly (ahead) into actual trading.
For those who are willing to accept the idea of abstaining from trading for a while, the
next consideration usually is; how long should that be? Should it be one month, three months, six
months, a year? Any of these could be the right answer: It depends on the investor and the type of
operation in which he is most interested. Generally, the amount of time should be long enough to
generate the desired numbers and the type of profit over three consecutive rounds of trading. This
may be only a few months for the trader involved with short term trading or it could be a couple
of years for the long term investor. The point is, that however long it may take, the time is well
spent. The actual trading opportunities missed during 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 achieved the results that indicate proficiency, he is ready to
move on to the second step. This is the transition from play money to real money. It is a very
critical period. During this time the trader is still learning, but now he is learning more about
himself then about how to trade. These lessons are sometimes even harder to learn. There are
many students of the market who can academically make a fortune, but for whom their
personality, when confronted with real money, becomes a major obstacle. For most however, this
can be overcome by conditioning. (The) procedure for this phase is simple. The investor
attempts to duplicate his results from the period of exclusive practice, only now he backs up each
commitment with what is for him a small amount of funds. In determining what this amount
should be, some consideration should be given to the type of trading being done.
Lets assume that a particular trader plans to someday be working with an amount of cash
where a figure of $500.00 per trade during this transition phase could be justified. If the traders
practicing is aimed at becoming a successful short term trader, there is no problem. Five hundred
dollars will usually pay for at least one put or call of most stocks even when the commission is
added. If the trader is making these first trades in stocks with an eye toward becoming a better
intermediate or long term trader, he must realize that about ten percent of his $500.00 will be
eroded away by commissions. Even with this heavy burden however, correctly selected positions
of this small size will produce a return better than most savings accounts. This gives the investor
the chance to earn while he learns. The very small investor is at somewhat of a disadvantage
during this phase. If a figure of $100.00 is the most he can justify committing to each of his first
trades, he is likely to be priced out of the short term trading arena and likely to find that even very
successful intermediate trades are only break even propositions. In this case it is likely that only
the major profits of successful long term trades will produce a reasonable net return. This is
unfortunate, but, it is how the system works. It is not a good enough reason to skip over this vital
step in the procedure. It is primarily an extension of the learning process. The actual dollar profit
is a secondary consideration. The most important thing is that judgment is not distorted by
the use of real dollars. As with the period of exclusive practice trading this second phase should
continue long enough to prove the point. Again, the three consecutive rounds of trading that
measure up to the desired standards should be a sound goal. This means that an additional several
months or couple of years may be added to the learning process. It represents a good investment
however.
Assuming that the investor has found an adequate measure of success in the first two
steps (of) the practice trading procedure, he is ready for the final step. This is the full utilization
of his capital. The only thing different in this step is the number of dollars committed to each
trade. There is no need to do anything different because the procedures already developed have
proven successful. There is no reason to tamper with success. As long as the results continue to
measure up to the predetermined standards, the trader can realize the fruits of his effort. Beware,
however, of the onset of results that are below standard. When this happens the investor should
back off one step and return to the taking of small positions. He should never just go on making
the same dumb mistakes. They seldom go away by themselves. Usually what is indicated is that
a basic error is being made that must be figured out before it can be eliminated. The high pressure
realm of full utilization of funds is not the place to do this. It probably wont work and even if it
does, the cost is too high.
In discussing the three steps in the practice trading procedure the term round of trades
was used several times. This implies the desirability of diversifying your funds. Providing the
primary motive behind it is not to generate commissions it is a very good idea. In fact, during the

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first step of practice trading the more trades that are made, the more that is likely to be learned.
Of course, this assumes that the diversity has some order to it, otherwise the result is likely to be
chaos. When the trader reaches the third step of the practice trading procedure he should
diversify his funds with a great deal more caution.
Diversifying your funds is another aspect of trading that can be approached correctly or
incorrectly. In general the correct approach will prevent the possibility of being badly hurt by
being too heavily or totally committed in just one bad trade. At the same time it will not result in
profits that are well below those that might have been realized due to excess expenses caused by
over diversification. Consider two traders each of whom have $30,000 to commit to the market.
One takes three positions of approximately $10,000 each. The second trader enters into ten trades
of approximately $3000 each. Each trader experiences the same general results: There are profits
in two out of three trades. Each profit represents a twenty-five percent return and each loss is
approximately eight percent. Given these conditions, the trader making three trades might expect
a $4200 return from which he would have to deduct about $522.00 in expenses for a net return of
$3678. The trader making ten trades could expect an overall profit of $4530. In this case
however, the expenses would total about $1080 which would reduce the net return to $3450. The
trader who has more thoroughly diversified his funds in an effort to find more profitable trades
actually made less in profits. Excessive diversity is not always better. When it is used as a crutch
to compensate for a lack of confidence it is a trading error.
As previously mentioned, the primary goal of the first two steps in the practice trading
procedure is to learn. Equally important he (the trader) needs to learn what it is that he doesnt
know how to do. If possible he should turn these things that he is unable to do into things that he
can do. Practice trading should be done in a way that clearly shows where the abilities and the
inabilities lie. Since not every student develops the same trading abilities with each principle and
since some concepts are easier to work with than others, it is not a sound procedure to just lump
all practice trades together in one big pile. To do so makes it difficult to determine what it is that
you may be revealing. This tells us that having just one practice trading account is not enough. It
shows overall results, but tells little about strength and weaknesses. Having a practice account for
long positions and one for short sales is a step in the right direction. Each of these two types of
trades is based on a distinct set of trading opportunities. Being able to work with one set does not
automatically (translate into) an ability to work with the other. As buying opportunities are
distinct from short selling opportunities, so also are the individual buying and short selling
opportunities distinct from one another. Therefore it is possible for a student to have a very good
ability at buying on back-ups to the edge of the creeks, but be absolutely terrible at taking
positions on springs. He might be great at shorting on a rally back to the ice, but not be able to
tell an upthrust from a jump across the creek. Any of these combinations of ability and inability
might be hidden by broad based trading accounts that encompass all buys or short sales.
What this says then is that what makes the most sense is to have a practice account
for each type of trading opportunity. This will show exactly where problems and abilities lie
and let the trader know what type of trading he can approach with confidence. How many
practice accounts to maintain depends on the individual, but more is likely to be better than less.
Exhibit 1 provides a list of ten that might be considered. All of the accounts that are going to
be established should be started at the same time. They should be maintained for at least one
complete cycle of major market moves. This will allow for the development of an extensive set
of results which should provide many obvious indications. The results of practice trading are only
of value if they are put to good use. Earlier it was stated that exclusive practice trading should be
continued until three consecutive rounds of profitable trading are achieved. This was a general
statement. Now that the idea of practice trading has been refined, so can this statement. It is not
necessary to wait for every account to show the desired standard of excellence before
beginning actual trading. When the results of practice trading indicate that a concept has been
mastered, it may be employed in actual market operations. Those accounts that show poorer
results should be carefully analyzed in an effort to isolate the trading errors. We know that the
market repeats a certain set of trading opportunities over and over again. The same thing is
generally true of the errors made by traders. They also tend to be repeated time after time.
There are several types of errors. Some of the most common are trading too often,
trading too early, holding a position too long and using improper protection of trades. When
any of these show up in a particular account, it usually means that the concept on which the
account is based is not clearly understood. It should be restudied! If these problems start to show
up in every practice trading account, the student should return to Lesson One of his Wyckoff
Course and begin again. Much of the time problems that develop in practice trading can be

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solved by the trader himself. They key to being able to solve a problem is being able to recognize
it. This will only be possible if careful records are kept. A student is not likely to be able to
help himself, nor are we likely to be able to help him unless he knows what he did, when he
did it and why. If any part of this information is missing the value of the experience is greatly
diminished.
Two types of records need to be kept. One is of the specifics of each trade; when was it
established, how many 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) finally, what
was the net result? These records are usually kept by most because they are easy to maintain.
Exhibit 2 shows one convenient format that might be used. The second set of records that should
be kept is the one most frequently neglected. It is important to have an accounting of the thoughts
that led to the results reflected in the first set of records. Why was a trade initiated? What was
the anticipated objective? What stop orders were used? Exhibit 3 shows how this data might be
kept. This information will tell why the net results were what they were. In many respects this is
more important then the net profit or loss. If there is a problem with results, the size of the profit
or the loss will only indicate that there is something wrong. It is the underlying thought that
contain(s) the source of the problem. To reach a solution it is always best to be able to go to the
source. The Wyckoff principles you have learned are for the most part simple ideas. Their
application, however is not so simple. This is because they are not mechanical tools. Each
requires judgment. The idea can be learned, but the judgment needed to use it properly must be
developed. The purpose of practice trading is to allow this development to occur in a constructive
manner. Any alternate approach will almost certainly be paid for with disappointment, frustration
and many dollars.
The remaining tapes in this series will be devoted to individual trading techniques that are
designed to be of help in specific types of practice trading. In addition to covering the ideas
behind each and to giving examples of each, a short trading exercise will be provided. It is
important to realize that the tapes are not an end but a beginning. The material to follow, if
utilized in the manner already covered, cannot help but produce a better trader. Where there are
problems we are here to help, but the first critical steps are up to you.

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PRACTICE TRADING TAPE

NUMBER TWO

This is practice trading tape number two. The Wyckoff Course stresses trends. They are
the means by which the market or a stock accomplishes a move from any point A to some other
point B. Because they are such a basic part of market action, determining the trend is the first
step in the Wyckoff method.
Unless the trend, which can be simply defined as the line of least resistance, is well
defined and clearly in mind, there is relatively little likelihood of success. Those who take the
time to identify the path of least resistance and will make their trades in harmony with it cannot
be guaranteed a profit, but they stand a much better chance of achieving a positive result than
does the individual who resorts to strictly random action. An investor who wants to learn how to
trade trends profitably must realize that the market or a stock may occupy an unlimited number
of positions within a particular trend. This is why knowledge of the trend is not enough to
guarantee a profit. It will help the trader make the right type of trade, but will do little about
timing that trade correctly. This will come from an understanding of the special position being
occupied within the trend. Without such knowledge, no trade, not even one in harmony with the
trend should be made.
The position is as important as the trend itself. The trader who wishes to develop the
skill of being able to trade trends is immediately faced with a problem; that is, reconciling the
ideas of trend and position. The reason that this can be a problem is that making a trade that is in
harmony with the trend and (that) at the same time is favorably positioned within the trend
involves apparently conflicting actions. If the trend is up, it seems only natural to buy as stock
moves in the direction of the trend. Similarly, if the trend is down, it seems natural to sell short
as prices move lower. Although both actions may appear reasonable, they are both wrong. If the
trend is up, the position should be taken in harmony with the trend, but as the price moves lower.
If the trend is down, a short position should be taken to be in harmony with the trend, but it
should be established as the price moves higher not lower. Since the position should be taken as
the price is moving in what appears to be the wrong direction, it is an action that is very difficult
for some investors to do. Those who cannot stand little chance of realizing the full measure of
profit possible from the trading of established trends or from any other type of trading for that
matter.
Taking a position as the price moves in the wrong direction is not done simply to be
contrary. There are good reasons for such action. One is to minimize risk. Stocks seldom move
from point A to point B in a straight line. If they did, buying as prices move higher or selling
short as prices move lower would make sense. The normal course of movement is alternating
periods of progress and consolidation. If a position is taken during a period of progress it stands
to be lost to a stop order during a period of consolidation. Therefore, the amount of risk is
increased by acting while progress is being made. It is decreased by acting during the
consolidation period because the likelihood of being stopped out is less. The other reason for
acting in a contrary manner is to maximize profit. Very few traders, if any, are able to get in
exactly at the bottom and out precisely at the top. Such an expectation is not reasonable in the
first place. It is reasonable however, to get in near the bottom and out near the top.
If a position is established as a stock is moving away from the point at which the move
originated and therefore in the direction indicated by the trend, the profit potential is not
enhanced: It is reduced. The investor is working against himself because he is making his trade
farther from the beginning of the move than he might otherwise have to by waiting for a move in
the other direction. These general ideas must now be refined into procedures if they are to be
useful as trading tools in working with defined trends. The result is two primary trading
opportunities associated with up trends and two associated with down trends.

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Positions established in connection with a defined up trend may be justifiably taken

on certain reactions after the trend channel has been well defined. They may also be taken
on reactions that are anticipated to lead to the defining of an up trend. Both procedures will tend
to maximize the profit potential at the time. In the case of buying on reactions after the trend has
been defined, the risk will be minimized. This will also be true of buying on the reaction that
leads to the defining of the trend, providing (that) the anticipation is correct. Since this second
approach involves a greater degree of uncertainty and therefore risk, the reward for being correct
will be greater.
If a stock is in an up trend or is in the process of defining one, it is in a position of
relative strength. If a stock is strong it should display a certain type of behavior. For example;
consider the stock that has not as yet produced the second point that will lead to the defining of
an up trend. The reaction that will end by providing this point should not give up more than
half of the gain from the rally off the first point. If it does, there is reason to question whether
the stock is truly strong. It is never a good idea to trade a stock while in doubt. A question as to
a stocks strength is reason enough to look for opportunities elsewhere.
It is true that some stocks that react more than half way as their up trends are being
defined do go on to make significant advances. Because of this the practice has evolved of
saying that the reaction should meet support in the vicinity of the half-way point. What is the
vicinity? Is one point or ten per cent below the half-way point acceptable? What about two
points or twenty percent? There is no hard and fast rule here. It is strictly a matter of judgment
which is something that can only be developed over time. Anyone who does not feel confident
about making such a judgment or who lacks the experience to justify making it should stick to
the obvious. If the stock has given back more than half of the previous gain, it is not acceptable.
This is something that anyone can determine.
If a stock is believed to be strong and has already defined its up trend, it too should
behave in a certain manner. It should not penetrate the support line of the trend on the
reaction that is anticipated to lead to the trading opportunity. In addition it is best if no
previous 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 say that the stock is in a position
of strength. The best thing to do is to look for another opportunity.
The defining of an important up trend will often be associated with the back-up to the
edge of a creek. The jump... that precedes it propels the stock up and out of a trading range.
This is usually an obvious action. It clearly indicates that the line of least resistance has changed
from being horizontal to pointing in an upward direction. In the overwhelming majority of cases
it should not be necessary to ask if a move constitutes a jump across the creek. If the question
is needed, the move is probably something else and it would be best to leave the stock alone. As
important as the jump... is, it is not the action that warrants a trade. That is reserved for the
back-up... . Just because there has been a jump across the creek however, does not mean that
any back-up... effort can be used to establish long positions. It must meet the same rigid
requirements already mentioned. If not, there is a good chance that the stock will fall back into
the creek, which will neutralize the positive indication given by the jump... .
An investor should buy on the back-up to the edge of a creek only if the stock is
holding at least half of the gain realized on the jump... . Be very careful of this point
because it can lead to prematurely buying a stock that really should not be traded at all. At the
beginning of the back-up... the stock obviously will be holding more than half (of) its previous
gain. This does not count. What does count is how much of the gain is being held when the
price begins to show signs of support. Most of the time these indications of support will be
obvious. But, for confirmation, the level of volume should be considered. As the stock jumps
across the creek it should experience a surge in trading. When the back-up... begins, the level
of activity should subside. If the volume has been reduced substantially at the time when the
support and the price is perceived, it is quite likely that the back-up... is nearing an end. If this
happens at or above the half-way point a long position may be established with confidence,
providing one more condition can be met.
A stock that is producing a constructive back-up... is likely also (to be) working on the
definition of a relatively important new up trend. This says nothing, however, about the amount
of progress that will be made by the stock in the trend. For this reason the amount of available
potential should be considered before an order to buy is actually placed. If the anticipated move
is not in keeping with the investors objectives, it doesnt matter how spectacular the jump...
was or how constructive the back-up... seems to be; the position is not worth it. Find a better
opportunity!

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It is possible that even with rigid restrictions on what stocks to trade, like the ones
already mentioned, an investor will find himself considering 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
Wyckoff method, the trader should compare the action of the stock to that of the general market.
The stock should be relatively stronger than the market. To qualify, a stock must have rallied
more on the jump across the creek and reacted back less on the back-up... . It must also
possess a greater measure of future potential. These considerations are important enough to be
considered by the investor whose funds would allow him to trade every potential candidate. He
may find that some of them are not such great opportunities after all. Any stock that can meet
every one of these qualifications may be bought and recorded as a trade in the practice trading
account designated for back-ups to the edge of the creeks. Providing (that) the protective stop
is not foolishly placed, these positions should be among the most reliable at producing a profit.
Not every stock is going to work out however. If the action following the taking of the position
does not live up to expectations within a reasonable amount of time the position should be closed
out. Continuing to hold the stock cannot be justified. If it has failed to perform, it is better to get
out than to risk being stopped out.
Some time after the up trend has been defined and positions have been established in the
practice account set up for back-ups... , it may 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 may develop in other stocks as well. The first criteria that these
positions must meet is that they be taken on reactions. Even if the outcome is positive, a long
position that is not taken during or at the bottom of a reaction represents an important
trading error. If it becomes a habit it could prove to be a costly one. In attempting to buy on a
reaction the position will be established as the price moves toward the support line of the trend.
Remember, it must not penetrate the support and should not have penetrated any time
previously. Buying in this position can be done with greater confidence if the reaction underway
at the time has given up no more than half of the gain from the previous rally. Still more
confidence will be generated if the volume is obviously reduced on the reaction. This is,
perhaps, the most critical point. Unless the volume is undeniably lower, no action should be
taken. If the volume remains high, the problem it creates is uncertainty. The investor cannot be
sure where the price will meet support or even whether it will meet support. This is a perfect
example of the truth of the phrase, when in doubt do nothing, comes through loud and clear.
There are still two more criteria that must be met before a long position can be taken.
First, consideration must be given to the potential. A position established in a stock in this
situation will not have 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 may not be possible to
justify a trade even if the other criteria already mentioned are met. Lets say we have a stock that
began its advance with a twenty-five percent move. It is now making the right kind of reaction
within the up trend, but the remaining upside potential indicates that the move left in the stock
will only carry it ten percent above its current level. This means that we can only really justify
about a three percent stop which in most cases would be very close. Therefore, we might be
forced to bypass what would otherwise seem to be a very good opportunity.
The final consideration should be given to the relative performance of the stock
compared to that of the general market. The stock is most likely to perform as expected if it is
clearly stronger than the market. (Up) to the point at which the trade is being contemplated
the stock should have been making more relative progress on the upside during rallies and less
downside progress during reactions.
A trade based on all these criteria cannot, of course, be guaranteed to produce a profit.
The likelihood of success however, is greatly increased if every point discussed has been met.
Only those stocks that have met every point should be considered for either the practice trading
account dedicated to back-ups to the edge of the creek, or the one intended for trades in a well
defined up trend.
None of these positions will last forever. The time to determine when to sell this type of
long position or any type for that matter is at the time when the position is established. This is
the point at which the trader is least likely to be influenced by greed. The initial
determination of a selling point should be based on the objective indicated by the figure
chart. Remember though; this is only a guide. The most important thing is the trend.
Continuing to seek a particular objective after the up trend has been broken is a dangerous course
of action. When the need arises to sell a position it should only be done on a rally. If the reason
is brought about by the breaking of the trend, it likely will occur on some type of reaction. It

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may even be a sharp reaction. Dont panic and sell on that reaction! A better time and
probably a better price will come on the next rally. This is when you sell!
The two practice trading accounts already mentioned have their down side counterparts.
A short sale can justifiably be established on a rally as a down trend is being defined or at the top
of a normal corrective rally in a previously defined down trend. The only thing different in these
cases is the anticipated direction of the move. A short sale that is established as a down trend is
being defined will often be associated with a rally back to the ice. A rally of this type that
can justifiably be used as a short selling opportunity will fail to make up more than half of
the decline from the previous reaction. If it is able to make up more than half the loss no
indication of weakness is being given and no short sale can be justified. In addition, the rally
to the point at which the short sale is being considered must be on substantially lower
volume than was previous reaction. If it isnt, then again, there is no particular indication of
weakness being given.
Short sales can also be justified on normal rallies in important down trends. In these
cases the points to watch for are very similar to trades made in previously defined up trends: The
only thing different is the direction. A rally on which shorting is to be done should be
accomplished on lower volume than was experienced on the previous reaction and that
rally should also fail to make up more than half of the earlier loss. At its top it is important
that there be enough potential remaining to justify a trade and the stock must be demonstrating
that it is clearly weaker than the market. When it comes time to cover any of these short
positions or any taken on a rally back to the ice, the points to consider are the relation of the
price to the objective and whether or not the supply line has been broken.
With these two practice trading accounts added to the similar accounts for long positions,
the investor has a means of monitoring the growth of his ability at trading trends from the point
of their definition to the point at which they were broken For most stocks, this will represent the
bulk of their moves. Therefore, positive results in all of these accounts, but especially those
based on back-ups (to the edge of the creek) and rallies back (to the ice) are important.
Now, lets look at some applications. The investor should realize that some of the best
applications of these techniques will be found when trading major moves. There will also be
some good intermediate applications. Similar developments will occur on the short term, but the
time factor may make it difficult to take advantage of most. This is especially true of
opportunities that develop on reactions and rallies sometime after the trend has been defined.
These tend to be harder to anticipate and can be completed within one days action. That means
the trader almost has to watch the market throughout each session, which is not possible for
most.
One good example of how these techniques can be applied in a longer term setting is to
be found in the action of 1973 and 1974. In 1973 the Wyckoff Wave reached a high of 2863 on
January 12th. The low for that year, which represented the end of the first leg of the collapse that
would continue into 1974, came in September at 2185. A little over a month later on October
29th the recovery high of 2561 was reached on a pattern of volume that did not indicate any
particular enthusiasm. The 2561 figure was only one and a half percent above the half-way point
of the previous reaction. The fact that the price of the Wave went above the half-way point at all
could have been used as an argument for not considering short positions at this point. Such a
decision would have resulted in missing some of the best short side opportunities of the last ten
years. This could have been avoided with the use of some judgment, which is what separates the
Wyckoff approach from other strictly mechanical methods.
An index is a measure of general market price action. Due to the nature of their
composition they cannot be absolutely precise, therefore it is generally desirable to allow for
some small margin of error. One and one half percent would seem to fall within such a margin.
A way of confirming this however, is to compare price action with volume action. It has
already been mentioned that the volume on the rally to the half-way point was not indicative of
strength. This fact together with the stopping of the rally so close to the half-way point could
justifiably have been used to search out some short side candidates. In looking for stocks to
short, the standards should again be made more rigid. This would also be true if we were
looking for stocks to buy in a different market situation. The reason for being more demanding
at this point is that the investor is only one step away from putting his funds on the line. He
needs to be as certain as possible that the stock selected will perform as expected.
Exhibit (number) 4 shows a drawing of how the market action from the 1973 high to the
1974 low appeared. Notice that we have marked the values of the Wave at the important turning
points and the percentage moves from one turn to the next. Between the 1973 high and (the

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1974) low, the Wyckoff Wave lost twenty-four percent. On the recovery that followed it
advanced seventeen percent. Now, look at the price action of four stocks for the days on which
the market made its turns. During the first stage of the decline there can be no doubt that
Holiday Inn, was the weakest stock. This is an important observation because if we are going
to take short positions, they should only be in stocks that are weaker than the market. Of course,
the positions would not be taken at the September 18th prices. That would mean shorting at the
bottom of a reaction which violates one of the most basic directives of the Wyckoff method. The
critical move was the rally to October 29th. Assuming that the previous reaction had been seen as
a major sign of weakness, this rally would be watched as ending in a major Last Point of Supply.
We have already concluded that the markets action justified shorting. Therefore, any stock that
had the potential to move lower and had been consistently weaker than the market would have
been a short candidate. All four of the stocks listed on exhibit (number) 4 had potential to move
lower, but only two qualified for being sold short. Ford and Holiday Inn, had been weaker
than the market on the decline to September 18th and on that advance to October 29th they could
justifiably have been shorted; the other two could not. What if the potential to decline had been
greater in Exxon and Burroughs? Both stocks had been weaker than the market on the rally
into October. Could not this factor be combined with the greater potential to make these stocks
the choices instead of Ford and Holiday Inn? It could have, but the degree of risk would
have been substantially increased. Potential is not always fully realized. It is an indication only.
Consistent relative weakness, on the other hand, is a fact. As long as the potential is great
enough to justify the type of trade being contemplated the consistency of the weakness
should be the determining factor.
If we now look at the final result we can see that the most consistently weak of the four
stocks produced the biggest decline. It is true that Burroughs and Exxon, also made
substantial declines, however, this is hindsight. At the time the positions were being taken both
Burroughs and Exxon, had major flaws. The investor has to protect himself by going with
the best candidates available at the time. The absolute best performer may not be chosen every
time, but (the) chances are that a good performer will be chosen most of the time.
Exhibit (number) 5 shows a chart of Bethlehem Steel. The previous example was out
of the past. Its outcome was already known. In this case however, we have a developing
situation where the outcome is not known: It must be anticipated. Both the vertical line chart
and the figure chart show a major creek. They also show that this creek has recently been
jumped. That is the signal to wake up and pay attention. There is a good chance that a
trade on the long side may he possible as a major up trend is being defined on the back-up to the
edge of the creek. A stock like this should be posted and analyzed daily. Providing that the
stock goes no higher than the 32 level which it has already touched, the half-way point of the
rally can be found just below the 28 level. This approximates the top of the trading range and the
edge of the creek. If the price will meet support around 28 on low volume, which in this case
would be something between 32,000 and 64,000, a long position could be taken. The stock
would be stronger than the market and have a major upside potential in the 70 to 74 area. At the
point (that) this chart ends we dont know whether a position is going to be possible in this stock.
All we have is a good possibility. That is enough however to make note of what conditions
would lead to a trade. Notice that we said make note and not take note. Write those
conditions down in your diary of market thoughts. It is much easier to objectively consider what
will justify a trade while the stock is at 31, than it will (be) to come to a decision when it gets
back to 28.
In exhibit (number) 4 we had a long term example of trading the concepts in this tape in a
down trend. Exhibit (number) 6 provides an intermediate example. The first phase of the
decline in this stock took the price from 44 to 30. This put the half-way point of the reaction at
37. First of all the trader would have to have concluded that the move from 44 to 30 was an
indication of weakness. Since it represented a move of over thirty percent it is hard not to see it
as being a sign of weakness. Having made the conclusion that weakness is present he is justified
in anticipating a last point of supply at which to take his short position. It should be below the
half-way point at 37 and on significantly reduced volume. There is only one place where these
conditions were met; it was at point A. The real tip off came from the volume which for four
days was drastically reduced from what it had been, as the upward progress of the price ran into
considerable resistance. Assuming (that) the stop had been properly placed, even the rally to 36
would not have caused a problem. After this a twenty-five percent or greater profit would have
been realized.

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In the same market environment an investor might have considered the stock pictured in
exhibit (number) 7. If so he would have been in error. The first significant sign of weakness in
this stock came on the move down from 61 to 52. After a sign of weakness we watch for a last
point of supply to take a short position. In this case the LPSY came at point B. There are two
important reasons why a trade could not be justified in this case. One is the penetration above
the half-way point of the previous reaction. A stock that does not penetrate this point provides a
clear indication. In this case it is possible that the action two days prior to point B could have
been seen as a last point of supply. This was the first day that the price tried to penetrate the
half-way and it was decisively turned back. That is quite convincing, but the taking of a position
would have been discouraged by the limited amount of available potential. It was not of
intermediate trade proportions.
Some would argue that the count in this instance would have been adequate if taken
further to the left. This is true. Doing that however would violate the concept of taking the
most conservative count first. If it does not justify the trade no position should be taken. Even
if the entire top had been counted, a stock like the one in the previous exhibit would still have
ended up being the choice for trading. In addition to its other positive factors, its maximum
downside count was more fully developed as well.
There seems to be an almost irresistible urge among students, especially newer students
to trade stocks that are determined to be good enough. A stock like the one in exhibit (number)
7 might fall into this category. The truth is however, that there is no such thing as a stock that is
good enough. Either it is a good trading opportunity or it is not. Those that are, are usually
obvious. They represent the only issue that should be traded.
For one final example we turn to a short term situation. Here the intraday chart of the
Wyckoff Wave shows the first leg of an advance from point (number) 1 to point (number) 2. An
up trend would result and a long position would be justified if the correction to that move met
certain criteria. At point (number) 3 there was support at the half-way point and a reduced level
of activity. A trade was justified. A second one could have been considered at point (number) 4.
The basis here would have been a constructive corrective reaction in a previously defined trend.
It should be noted that no figure chart is presented here. Before making a final decision on
whether to take a position, the careful investor would consult the five point figure chart of
the Wave to see what type of potential was in place.
It is the desire of every investor to buy at the absolute low (and to sell) at the absolute top
and then to sell short at the top and cover at the bottom. Sometimes this is possible, but on a
consistent basis it probably is not. Beware of those who say they can. This does not mean that
consistent and consistently good profits are not possible. The techniques of taking positions as
important trends are being defined or on constructive rallies or reactions after they have been
defined proves this. These techniques generally result in positions being taken quite a ways
above 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 move is being traded. This is
generally the time when the greatest amount of progress is made and the most profits generated.
The techniques discussed in this tape are among the simplest to understand: They are
also among the easiest to apply. Techniques to be discussed in the following tapes are more
complex; they tend to require more judgment. They also will usually generate larger profits if
applied correctly. Learning them will be important too, but learn to use the techniques in this
tape first. They are the first steps toward a record of profitable trading.

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PRACTICE TRADING TAPE

NUMBER THREE

This is Practice Trading Tape Number Three. One of the principle purposes of practice
trading is to expose potential problems before they become a real problem. Every individual
investor is unique, therefore any difficulties he experiences are likely to have their own set of
unique characteristics. From these, common trouble spots can be derived. One of the biggest is
the seemingly irresistible urge to always be doing something. The idea that the level of trading
activity and profits are somehow directly related is a common misconception. What matters in
stock market trading is not its quantity, but its quality. Frequent trades produce commissions,
while good trades result in profits. Every investor should understand and accept the truth
that good trading opportunities develop rather infrequently. This should not be a difficult
idea to comprehend. It comes directly from one of the three basic laws that control all stocks and
market activity. The law of cause and effect tells us that in order to get an effect there must
first be a cause. The trader's objective is to take advantage of the effect and not to waste
time on the cause.
All primary trading opportunities can be found in a comparatively short period of
time near the end of the cause building phase. Positions taken at other times are at best
questionable and at worst wrong. Any attempt to pin down exactly how much time will or
should be consumed in preparing for a primary trading opportunity is subject to error. The speed
with which events are accomplished is directly tied to volatility. The more volatile the market or
a stock is, the more quickly it can accomplish objectives. Unfortunately, volatility does not run
on a fixed timetable. It speeds up and slows down. The only way to tell how the clock is
running at a particular time is by watching and studying. Even though the specifics of how often
a primary trading opportunity may develop are vague, there are several general comments that
can be made. The purpose of these is not really to indicate when trading may be in order, but
rather to suggest when the level of trading has gone beyond reasonable bounds and becomes a
clear case of over trading
The long term or major move investor, if you prefer, must realize that the preparation
required for his type of move takes a relatively long time to develop. The generally accepted
figure of fifty percent potential will likely develop only once a year or perhaps twice. Trading
opportunities that can lead to intermediate profits are more common, but they are still not every
day occurrences. Perhaps three or four times during a particular twelve month period a stock or
the general market will develop the potential that can lead to an intermediate profit. Between the
developing of the potential and the realizing of the profit a few trading opportunities will
develop. They will also develop at the same place for short term traders. The big difference is
that the amount of potential being sought is less. Therefore it develops more quickly and the
trading opportunities come more often. They may come as frequently as once a month.
Whichever type of trading is being undertaken, the objectives remain the same. There are three.
They are to achieve the 1) maximum amount of profit from; 2) a minimum number of trades in;
3) the shortest period possible. Together they result in a very formidable challenge, but it is not
one that cannot be met. Once the knowledge is in place the only thing that stands between the
investor and his objectives is self discipline. The investor must be able to say no to the ever
present urge to trade; no to the idea that any position is better than no position and yes to the idea
that all trading will be restricted to those half dozen or so types of action that justify it. Saying
no is not easy. Discipline is not easy. It is something that is developed more than learned.
Practice trading provides an atmosphere that allows this development to occur. It also provides
additional time for the knowledge of the primary trading opportunities to be more thoroughly
digested.

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The trader watching what he perceives to be a period of accumulation is interested in the

development of primary buying opportunities. There are four of these that are clearly
recognizable. They are: 1) a number three spring; 2) the test of a number two spring; 3) the
back-up to the edge of a creek and 4) a last point of support following a sign of strength, not
covered by any of the other three opportunities. Why are these singled out as trading
opportunities? Every individual days action, every rally and every reaction says something
about the stocks action. Most of these statements however are of little importance. They
warrant nothing more than a passing glance. Those upon which action should be taken are the
ones that make an important statement and these are the trading opportunities. In the
development of a buying opportunity or any trading opportunity for that matter, it is important to
remember that how an action appears and what it says often seem contrary to each other. Some
moves in an upward direction provide the appearance of strength, but actually make a negative
statement. Conversely, a downward move can create the appearance of weakness while making
a positive statement. This is a major cause for the thoroughly discouraging results experienced
by so many of the general public. They allow themselves to be totally influenced by appearance.
Since the appearance is so frequently not an accurate reflection of the truth, the result is error
after error which usually means loss after loss. They certainly will miss out on the primary
buying opportunities because each of them produces a positive statement from a negative
appearance.
The first mentioned buying opportunity was a number three spring. In this case the stock
has likely been in a trading range for quite some time and is beginning to make a first timid
move below the bottom of the range. This creates the appearance that the bottom is about to be
broken out of the trading range and that the stock should therefore be sold short to take
advantage of the move that is about to develop. While this is the conclusion that could easily be
made from the appearance of the action, the actual statement being made is quite different. First
of all, appearance is a factor of price. Price indicates what a stock is doing, but reveals nothing
about how it is doing it. What a stock or the market is actually saying comes from combining the
what and the how.
With a number three spring the level of volume is always extremely low. This does not
confirm the price action; it tends to deny it. The price is pushing through the bottom of the
trading range and there is no interest in the action. Therefore it is virtually impossible for the
stock to make any significant progress in a downward direction, so it should be bought. When a
stock produces a number three spring action there is usually a quick and very dramatic upward
response. This can result in a substantial profit. Due to this possibility of quick substantial gain
there is a tendency to classify many more actions than should be as number three springs. The
idea seems to be that if you call something a number three spring it will behave like one even if it
isnt one.
In actuality, true number three springs are not very common and have rather rigid criteria
that they must meet. One (such criteria) is to be found in the depth of penetration below the
support level. A number three spring is intended to indicate no desire in or ability to make
downside progress. This is not done if the stock in question starts extending itself very far below
the support level. A penetration of 1/8th, 1/4 or even 3/8ths of a point would seem to be
acceptable. Where higher priced stocks are being considered a penetration of as much as a
point can be acceptable. (Going) beyond this however, stretches the definition past its breaking
point. It cannot be proven that a stock has no desire or ability to make downside progress if it is
in fact making it. The other criteria that must be met is extremely low volume. It is on this point
that springs will often get misclassified because volume is such a relative consideration.
Extremely low volume has to be seen as a small percentage of the normally traded volume. The
question is, how small? There is no hard and fast rule here, but certainly a figure of only
twenty-five percent or less of normal volume would qualify. Any more than this and it
becomes difficult to say that there is no interest in the downward price action.
Many stocks seem to have a normal pattern to their volume. It is easy in these cases to
say whether a particular volume is normal or extremely low. What about all those stocks where
volumes tend to be erratic? What is extremely low volume for a stock (whose) volume varies
widely from day to day? It may not be possible to say for sure and it is never advisable to guess.
If you cannot say for sure that the volume is extremely low, admit it and look elsewhere for an
opportunity. If a stock is seen as being in a number three spring condition any long position that
is going to be taken must be established on the penetration of the support level: You cannot
justify waiting. The response is likely to be a sharp rally and there will be no test. Other
opportunities may develop later, but it is unlikely that the price will be as good. The long

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position that should not be delayed in these cases should also not be taken prematurely.
Anticipating a number three spring before it actually exists could result in the taking of a position
for a reason that never develops. This would mean that the position would be taken on what
amounts to only a normal reaction in a trading range. Such a position may produce a profit.
However, since it is not a primary buying opportunity, it is unlikely that the profit will be
anywhere near what would be expected to develop out of a true number three spring condition.
There is also the possibility that no profit will result and that, as is the case with so many
premature positions, it will be stopped out.
When a spring action does not meet the rigid requirements of a number three spring, it is
classified as a number two spring. It may play an important part in developing a buying
opportunity, but that will remain to be seen. Take note of the spring condition, but let it pass.
Trading cannot be justified. Either due to the depth of penetration below the support level or the
amount of volume on the penetration or both there is a question as to the meaning and outcome.
The action that should be awaited is the test of the spring. It will provide the meaning and a
much clearer indication of the outcome. As with the number three spring a number two spring in
its test presents an appearance that is quite a bit different than the statement made by the action.
At the time when the test begins, the spring has already produced a penetration of the support
line. This creates the illusion of the bottom being broken out of the trading range. When the test
comes along it provides a second attack on the support level which seems to confirm the idea of
a down side breakout. The logical response to this type of action is to sell short and many
members of the general public would do just that. The problem with this is that it is a response
to the appearance only and fails to take into account the actual statement that was made.
When the spring action developed it suggested that the stock might be unable to make
significant progress in the downward direction. This came from the level of volume and the
degree of penetration. Notice that we said might be unable instead of would be unable. It is
this element of doubt that makes it impossible to act on the number two spring. The test has the
ability to turn the word might into would. It does this in two ways. One is by occurring on less
volume than the spring and the other is by meeting support at a somewhat higher level than the
spring. If these two points are met the statement being made is a positive one and the stock may
be bought.
The test of the number two spring is a critical action. Each stocks attempt at it should be
viewed in a critical manner. There is a temptation to conclude that anything short of an
unquestionable break below the support level is justification for a long position. Such a feeling
is just one more manifestation of that irresistible urge to trade. It is wrong! A test that does not
have the proper character does nothing to resolve the doubt left by the spring. At the very least it
suggests that there will be another test and there is no guarantee that this second test will be any
more successful than the first. The investor who insists on establishing a long position based on
a poor quality test should realize that he is taking a greatly increased risk. The trade may work
out for him, but he likely will have to wait out additional testing actions any one of which could
bring an abrupt end to the position.
A number three spring or a number two spring and its test both represent signs of
strength and last points of support. They are specific types of these actions and they are
very special. That is why they are primary buying opportunities. More general forms of these
actions also represent buying opportunities. The major difference between these and those
already discussed is that they tend to be less obvious. That means there is an even greater need
for critical analysis to compensate for the increased possibility of error. When a stock develops a
sign of strength and follows it with a last point of support, the appearance created is of an
attempt to break out of the trading range on the upside that failed. This suggests that the stock
should be considered for a short sale. The actual statement being made however is just the
opposite. The sign of strength shows that the stock has an ability to advance. The reaction back
towards the last point of support is an interruption in this advance, but it indicates a relative
inability to give up the progress already gained. That being the case, when the stock completes
its reaction, it should be ready to resume important upside progress. Therefore, it is a strong
candidate for a long position.
Not every rally and reaction combination within a trading range should be looked at as
being a sign of strength and last point of support. This is where the need for critical analysis
comes in. If it is not employed you will probably find yourself jumping at every reaction that
occurs beginning with the secondary test of the selling climax. A rally that qualifies as a sign
of strength is an aggressive, quick run up in price that comes on a substantial increase in
volume. The reaction that follows, in order to be considered a last point of support must be just

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the opposite. That portion of the previous rally which is given back should be relinquished
more slowly and gradually. This needs to be reinforced by greatly reduced volume which
further indicates a lack of interest in the downside. The rally that constitutes the sign of
strength may or may not penetrate the top of the trading range. If it does, it is extremely
important that the price be supported quickly and that the volume drop off sharply as the
price starts to back off from the top of the sign of strength. The reason for this should not be
too difficult to see. The penetration of the resistance level created by the sign of strength could
be seen as a potential upthrust. Obviously it would not make any sense to be considering long
positions in (the) face of (an) upthrust. What is needed therefore is a means of discounting the
upthrust possibility. The rapid meeting of support and drastic decline in volume accomplish this.
It is exactly the opposite of what would be expected if the penetration had been an upthrust:
Volume that remains relatively high as the price falls well back into the trading range
confirms the weakness indicated by the upthrust. If the price does not penetrate the
resistance, the concern over a potential upthrust is removed. Still, there is a need for price
support and reduced volume. In these cases the price may give back as much as half the gain
achieved by the sign of strength. The volume needs to be reduced, but the whole process of
reduction in volume and meeting of support may be extended over a somewhat longer
period of time. It is not uncommon for the reaction to a last point of support to last two to three
weeks. It should be obvious that there is a great deal more judgment involved in analyzing these
types of actions. The restrictions placed on the actions are rather general. It is up to the investor
or trader to draw the conclusion as to when the time is right for taking a position. In doing this
there is again a need to be very critical. Make the stock prove itself. Dont be over anxious to
trade. If an opportunity is missed, dont worry about it; there will be others to take its place. In
attempting to take a position dont do it on the sign of strength. This is someone elses chance to
make a profit. For you it is only an indication of a future profit potential. Your trading
opportunity will start to develop after the sign of strength has been completed.
There are two ways to handle the placing of an order. The first is to wait until a
judgment is made as to whether a last point of support does in fact exist and to trade accordingly.
The second approach is to anticipate where the last point of support may be accomplished and to
place an order at that level in advance. If you wait to place the order, there is the risk of missing
an opportunity. If the order is placed in advance there is a risk of ending up with a poor position.
In general it is better to wait. Missing an opportunity should be much less of a concern than
being trapped into a position that really isnt an opportunity at all. For those who want to place
an order in anticipation of an LPS, there are two ways in which to proceed. They depend on
whether the resistance level has been penetrated. If it has not, place the buy order a little above
the half-way point of the sign of strength. If there has been a penetration of the resistance, the
buy order may be placed as soon as there is evidence that the volume is contracting. Place the
order a little below the current price, perhaps a point lower to allow for a small amount of
additional decline. Either way the trader should realize that there is a good chance that the trade
will go against him for awhile. This should not be of too much concern. A properly placed stop
order will provide the necessary protection against an anticipated opportunity that doesnt
develop. If you have set up a practice trading account for this type of opportunity, dont be
overly concerned if initial results are relatively poor. Due to the much greater reliance on
judgment in selecting these opportunities, it is much more difficult. Remember, good judgment
is something that will have to be allowed to develop. It is not something that can be switched on
at will. What is important here is that the cause of each trading error be understood. It is
the only way that results can be expected to improve.
The last primary buying opportunity is to be found in the jump across and back-up to
the edge of the creek. This subject was discussed on tape number two because of its frequent
association with the defining of an important up trend. It is important to realize however, that the
two do not have to go together. A jump across the creek and back-up... may not at all be
involved with the defining of an up trend. It is still a buying opportunity, treated just the same as
those that are involved with the creation of an up trend.
All trading range activity is not preparatory for (an) up move. The market makes
important declines just as often as it makes important advances. Often these declines are more
violent than most advances creating the possibility of a substantial profit in a shorter amount of
time. Because of this potential the investor owes it to himself to learn how to trade the
downside. The general public, by and large, will not do it. They either do not understand short
selling or do not see it as a legitimate means of making a profit. The Wyckoff student should
know better and should strive just as hard to develop short selling skills. As with the taking of

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long positions, there are relatively few times when short selling can be truly justified. Short
selling opportunities can be found on upthrust action. They also develop on the test of up thrusts,
on a last point of supply after a sign of weakness and on a rally back to the ice level. The
reason these are short selling opportunities does not come from their appearance, but rather from
the statement made by each action. They can all be seen as presenting an appearance of strength,
however each makes a negative statement. The remainder of this topic will be discussed on tape
number four.

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PRACTICE TRADING TAPE

NUMBER FOUR

An upthrust or the test of an upthrust creates the illusion of strength. The tendency is to
see the penetration above the resistance level of the trading range as an indication of an upside
breakout. That being the case, the stock in question should be bought. The problem with this is
that it represents a conclusion based on appearance only. The statement being made by this
action is really quite negative. Most upthrust actions occur on relatively high volume. This
says that it takes a great deal of effort to penetrate the resistance. With so much effort being
required to achieve such a small result, the indication is that the stock is going to be unable to
make any significant progress in an upward direction. The stock therefore becomes a candidate
for a short sale. In other cases the volume may be quite low. This says that the result is not
being supported by anything. It probably will not last, therefore the stock is a candidate
for a short sale.
Where these statement cannot be easily read, no action should be taken. The action being
judged may not be an upthrust. It could, for example, be the lead into a jump across the creek.
If so, certainly no short sale would be in order. The point is, dont guess! Unless you can look at
a potential upthrust action and are able to say with confidence that it is in fact an upthrust, there
is a good chance that it is not. Even if it is, you will likely be given a second chance at a price
that will be almost as favorable.
The second short selling opportunity and the one that may clear up any doubts
surrounding the upthrust action is the test of the upthrust. Here the appearance may again
be positive as the price renews its attack on the resistance level. But the statement being made is
still negative. The upthrust has already said that the stock probably will not be able to make any
important upside progress. This is confirmed by the test which should come on lower
volume. 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 volume.
How an upthrust and its test are traded will, of course, depend on how they develop in
each particular case. If the funds are available the goal should be to establish a position at each
opportunity. The important point in seeking to take a position on the upthrust is to be sure that it
is an upthrust. As mentioned earlier, an error on this could result in a jump across the creek,
being called an upthrust. This would virtually guarantee a loss. One way to judge is by
examining the rallies and reactions prior to the upthrust. They should provide indications of
either strength or weakness. What needs to be seen are slow sluggish rallies on low volume
followed by sharper reactions on significantly higher volume. This indicates weakness. It
also increases the likelihood that the action being seen as an upthrust really is one. If that prior
pattern of rallies and reactions cannot be seen, there is a good reason to let the opportunity
pass. If the price does drop well back into the trading range, chances are that an upthrust has
occurred and the opportunity has been missed. Dont despair. A test of the upthrust is likely.
Since you have already been alerted to the presence of weakness through the upthrust, it should
be easier to take advantage of the test. Be careful though, not to assume that the test will become
a short selling opportunity. It may not. So, make the action prove itself.
Does the volume on the action immediately following the upthrust remain relatively
strong? It should. Continued heavy trading on this decline tends toconfirm the upthrust and
allows the investor to look towards the anticipated test with a greater degree of confidence. As
the price starts to turn back up toward the level of the upthrust, the volume should
noticeably decline. This is further confirmation of the signs of weakness already seen and
especially critical if shorting is anticipated on the developing test. Continued high or
increasing volume on this rally would be cause for doubt. It suggests that there is still
interest in the upside and diminishes the likelihood that the advance will be stopped by the

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earlier rally top. In these cases short positions should not be taken. There may be another test
that will produce a better set of conditions and if not, there are always other stocks.
The best place to take a short position is at the top of the test. Unfortunately we seldom
know in advance where this is going to be. If the test is going to be absolutely perfect the
lower volume on which it is accomplished should stop the price rise at about the half-way
point of the reaction that followed the upthrust. This would be a good place to consider
taking a short position. Not every test is going to be perfect; in fact it is likely that very few will
be. This means that the price of the stock may go against your position for a brief time at the
outset. Providing the volume remains low or continues to contract and providing the price
is held at or below the top of the upthrust, there is no reason for undue concern. Should the
worst happen, as it will from time to time and the stock starts to rally aggressively, a properly
positioned stop will protect your funds from a terrible disaster.
Every short selling opportunity comes at a last point of supply following a sign of
weakness. The combination of an upthrust and its test is a special form of this type of action. A
more general form is a reasonably aggressive reaction followed by a sluggish rally. The
untrained observer could take the reaction, the sign of weakness, as a positive indication. The
stock has made an important attempt to move down and out of the trading range on the down
side and has failed. The conclusion therefore is that the stock can now be bought. What the
stock is actually saying however, is something quite different. The sharp reaction which has
(most) likely come in on increased volume indicates an ability and a desire to decline. The rally
that is to follow points to an inability to make significant progress on the upside. This fact comes
from the sluggishness of the rally and is in keeping with the interest already expressed in the
downside. Therefore this stock is actually saying that it should be sold short.
To find these signs of weakness and last points of supply, begin by examining the
character of the rallies and reactions within the trading range. Watch for the reaction that
appears to be more severe than those which have already occurred. It may be a sign of
weakness. Does the price give up ground quickly? Is the volume noticeably higher on the
reactions? If both these criteria are met there is a good possibility that the reaction is a
sign of weakness. This is your warning to be alert. The next rally could become an important
last point of supply. What you want to see on this rally is reduced volume from that of the
previous reaction. If possible, the volume should decrease as the rally progresses. This
suggests that a relatively low level of interest in the upside to start with is further diminishing as
the price continues to push upward. It is not a positive sign. If the price ceases to make
further upside progress around the half-way point of the previous reaction it is very likely
that it is positioned at a last point of supply. There is reason to sell short.
The reaction that represents the sign of weakness may penetrate the support level of the
trading range or it may not. Whether it does or does not will not alter whether there is a sign of
weakness or not. It may, however, make analysis somewhat more difficult. A penetration of the
support level is part of the definition of a spring. A spring following a sign of weakness is a
contradiction. One indicates the likelihood of a decline while the other points to an advance. It
is not possible to have it both ways. Either the sign of weakness is not a sign of weakness or
the spring action is not a spring. The way to tell is to watch the rally that follows. If
resistance is met quickly as the volume retreats markedly, the sign of weakness is probably valid.
On the other hand, if there is a good response from the penetration on volume that remains strong
or increases, it is more likely that the spring is valid and the sign of weakness is not. Put off any
thoughts of selling short in these instances. In those cases where there is no penetration, the
analysis is likely to be easier. The rally that follows should be stopped at or below the half-way
point. In addition, the volume must be reduced.
The sign of weakness and last point of supply do represent a short selling opportunity.
Before taking that short position however, be sure (that) you have given it a chance to fully
develop. Shorting on the sign of weakness is too early. If the proper type of follow through is
not allowed to develop, no additional downside progress may come. Your short position will
probably be taken at or near the bottom of a reaction. As a result it may be necessary to cover at
a loss or the position could be stopped out. If there has not been a penetration of the support
level on the sign of weakness, short sales may be initiated on the rally to the anticipated last
point of supply in the area just below the half-way point of the sign of weakness. If the sign of
weakness did produce a penetration of the support level, waiting to take a short position up
around the half-way point may mean waiting for something that never happens. As soon as
resistance to the price rally is noted or as soon as the volume is substantially reduced, the short
positions may be taken.

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As with long positions, it is unreasonable to expect every short position to move

consistently in your favor from the minute it is established. No ones timing is this perfect. A
continued rally after a position is established is not uncommon. It should not produce any
particular problem however, as long as the situation has been allowed to fully develop first. A
properly placed stop will protect those positions that just do not work out. The investor has one
more shot at a primary short selling opportunity. It is on the rally back to an ice level. This
was discussed in the second tape along with the back-up to the edge of the creek because of its
important connection with the defining of an important down trend But this action is not so
involved. It still represents a primary short selling opportunity. The reason is, that it makes a
negative statement. It may appear after the ice level has been shattered that all opportunities to
sell short have been missed. The stock has, after all, likely to have fallen a considerable distance.
This decline, however, is a clear indication of weakness. In fact, it couldnt be much clearer at
this point. Providing (that) the potential can be found in the figure chart to back it up, the stock
is saying that it is ready to make an important move. The rally back to the ice provides one
last chance to get on board.
What matters in attempting to judge this type of move or any type of move is not how
much movement has already occurred but rather how much more is likely to occur. If it is
adequate enough to justify the position, that which has already happened should only serve to
add confidence to any position that is established. Action that meets the definition of a primary
buying or short selling opportunity may happen at any time during the trading range. For this
reason it is important to always be alert. If a stock or the market catches you napping it is not
going to whisper in your ear when the time to act may be at hand. It will tell you, but chances
are this will not come until it is too late to take any action.
The opposite extreme is being too quick on the trigger. If a primary trading opportunity
seems to have developed, the first step is not to call your broker to place an order. First, turn to
the figure chart of the stock. A trading opportunity only tells you that the stock or market can
move. There is no guarantee that it will and no indication how far any move might carry. The
figure chart will tell this. The type of trading you are doing will determine how much potential
must be in evidence on that figure chart before any order is placed. If there is not enough, the
trading opportunity may belong to someone else, but it is not yours. Deciding to trade anyway
opens the door to a long frustrating ride up and down that may end up going nowhere and could
result in being stopped out along the way.
A trading opportunity signifies a beginning. It is the point from which a move or a
substantial portion of a move is likely to develop. This is only true however, if the previous
move has clearly ended and there is little or no possibility that it will be renewed. Remember, it
is not valid to assume that a trading range following a decline is accumulation or that one coming
after an advance is distribution. These facts must be proven. The way this is accomplished is
through the use of buying and selling tests. A list of these is included as the nest exhibit. You
could also find them in your Wyckoff Course.
In mentioning an adequate count we have already touched on one (of the tests). If used
as a group however, they greatly reduce the chances of taking a position that is totally wrong. If
a trading opportunity develops after all of the buying or selling tests have been met some
type of profit is virtually assured. If the position is handled correctly from the point at which it
is established there is every reason to believe that the profit will be very worthwhile.
Much of this discussion has dealt with a stock as an individual, but it does not exist in a
vacuum. The market is the atmosphere in which the stock resides. Its actions are influenced by
the market in which it exists. This does not mean that some stocks will not move against the
trend of the general market; they will and some will do it in a very impressive fashion. The thing
to remember about these issues is that they are rare. Every time that you establish a position in
a stock that is moving against the market the odds are against the success of that trade. It
may reverse itself and start following the market or its performance may simply be severely
retarded by the market. Either way the result is likely to be much less than had been anticipated.
Therefore, a faithfully followed rule should be, never, ever trade against the trend of the
market. If not one single stock can be found to trade that is in harmony with the market, there is
either something wrong with the analysis or a primary trading opportunity does not exist. This
idea of trading in harmony with the market can and should be taken one step farther.
In addition to being in harmony, a stock should be stronger or weaker than the market
depending on the direction of the anticipated move. A result of this combination of factors may
be that the stock is one step ahead of the market. For example, lets say that the market is
analyzed as being in a number two spring position. Any stock that was also in a number two

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spring condition would be a trading candidate. But think how much better a stock would be that
was already testing an earlier spring condition. These stocks are one step ahead of the market.
They are ready to move now. Those issues that are only in harmony with the market still have to
prove what their springs seem to be saying. Another example might develop when the market in
the first example reached the test of its spring. All those stocks that had been in spring
conditions and were now also making successful tests would, of course, be trade candidates.
Better candidates would be those that had just experienced a sign of strength and were now
reacting back to a last point of support.
Now, lets assume that we have found the perfect stock. It is moving in harmony with the
market. It is stronger than the market. It is positioned in a primary trading opportunity and has
the ability to move. One response to such a stock would be to buy it for all youre worth. The
wisdom of such an action however, depends on just how
much that is. The investor trading a relatively small account may be limited to the taking of just
one position in each stock selected. These individuals should take full advantage of any
especially attractive opportunity. This is even more true if one or two opportunities have already
been missed. The investor with a larger account has an advantage over the smaller investor. He
is in a position where he can take more than one position. He may even be able to trade at every
opportunity. There is a benefit to taking multiple positions. Every time a commitment is make
there is some chance of error. If so the position may be stopped out and this will result in a loss.
If all the funds available to be invested in this stock were all committed at the same time and the
position was stopped out, the loss would be bigger than if the funds had been split up. The
benefit provided by the multiple position approach is an extra measure of protection for your
capital. Always remember that this is your most important objective. Without capital there can
be no profit.
Now, lets spend time considering a few examples. We will begin with the chart of
Kerr-McGee. As the chart suggests Kerr-McGee, is a relatively volatile stock. In your
trading you may choose to work with stocks that have a quieter personality. It may take
somewhat longer for these to reach their goals, but the action will probably be easier to interpret.
This should make the stock easier to trade and less likely subject to errors in judgment. 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 begins on February 15th when the stock penetrated the top of the trading
range. This by definition is a potential upthrust. Should you sell short? To answer this question
two important determinations need to be made. One is the likelihood of the stock moving higher.
To answer this question we cannot simply say that the existence of the potential upthrust limits
the likelihood of significant additional upside progress. It is not certain that the action is in fact
an upthrust. Trying to answer a question using an uncertainty as the basis for the answer only
results in another question. What is needed is some previous indication that upside progress
has been stopped. In this case there is a very clear indication that the upside progress has been
stopped. The combination of a buying climax, automatic reaction and secondary test is the
normal stopping procedure for an up move. This limits the likelihood of further upside progress
of any consequence, at least temporarily. The potential upthrust represents the first primary
trading opportunity following the stopping action. Since what it is saying is in harmony with the
stopping action, a short sale could be justified.
The fact that the trade can be justified does not mean it is for everyone. To determine
what type of trader should consider this short sale it is necessary to evaluate the potential. In this
case that could cause a problem. We want to count to the left from the upthrust to another action
of importance. The problem with this is that the upthrust sticks up above all the previous action.
As a result it appears as though there is only a point to count from, but no point to count to. This
is not an uncommon occurrence and there is a solution. The objective was to count to the left to
another point of importance. What point could be more important in this case than the buying
climax? The answer is none. Therefore we take the count on a slight angle from the 93 level
established by the upthrust to the 92 level established at the buying climax. This counting on an
angle is not the traditional method, but it can be justified as long as the two points chosen are
selected very carefully. What does this count tell us? It indicates the possibility of a twenty-five
point decline down to the 68 level. Twenty-five points seems to be a big move, but the number
of points is not the most important factor. The primary factor should be the percentage indicated
move. Twenty-five points represents about a twenty-seven percent move. This is in the
intermediate range. The short term and intermediate term trader should be interested. The long
term or major move trader should not. He should be looking for about fifty percent.

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The intermediate trader who took advantage of the short selling opportunity represented
by the upthrust captured a sixteen point paper profit in less than two weeks. This is exceptional.
Most of the time profits grow more slowly. Many traders seeing the upthrust probably would
have elected to wait for the test to take their first position. There is nothing wrong with that, but
in this case there is no obvious test so the opportunity would have been missed. These things
happen. The lack of a test would not justify chasing after the stock and taking a short position on
the reaction. Such action involves too much risk.
Sometimes there is a question as to just what type of action represents a sign of
weakness. But when the price of a stock drops sixteen points in less than two weeks the
weakness indicated is obvious. There is an important lesson in this. Always begin by looking
for the obvious. If you have to dig to find something to come to a conclusion, chances are there
really isnt anything there. The development of the sign of weakness should sound an alarm in
the traders mind. It tells him that another primary trading opportunity lies ahead. It will come
on the development of a last point of supply. As Kerr-McGee, started to recover from its
reaction down to 77, the investor should have established in his mind or preferably on paper,
exactly what he wanted to see in the way of a last point of supply. He should have been looking
for a rally progressing at relatively low volume that had failed to reach the half-way point of the
sign of weakness. Given these conditions he could justify placing his order, perhaps as much as
a point below the half-way point. The desired conditions were being met as of the actions of
February 5th An order could have been placed at 84. The next day it would have been executed.
On the day that the position would have been taken, it should be noted that the price rallied
above the half-way point. A weak stock should not really do this. This violation of the half-way
point could have been used as justification for not making a commitment. The individual who
did have a position at this time should not have looked upon the overrunning of the half-way
point as a reason for panic. It could be seen as a reason for concern or as a negative
development, but not as a cause for panic. If the position was taken for good reasons, well
thought out in advance, there is a very good likelihood that the end result will be positive, even if
every detail does not fall into place precisely as desired. Was the trading opportunity presented
as the stock rallied toward the LPSY; something that every investor should have considered?
For the short term trader the answer is yes. The potential available at that time was
clearly enough to justify a short term trade. What about the intermediate trader? The count at
87, if taken in its entirety, suggests a move of forty-three points. This would be well over the
generally accepted minimum twenty-five percent potential for these positions. There is a
problem however. The count clearly divides into two major phases and could be broken down
into several smaller ones. In taking the full extent of the count to justify the trade, an
intermediate trade would be the result of a long term indication. This is never a sound practice.
If an intermediate trade commitment is desired it should be based on intermediate indications.
This is not to say the Kerr-McGee, will not eventually decline the forty-three points, but the
time involved may be substantially more than the intermediate trader wants to invest. To
determine whether an intermediate trade can be justified in this case the trader should only
consider the first major phase of the count. If it has the minimum acceptable measure of
potential, the commitment may be made. Here the potential was twenty-five percent so action
was warranted.
This idea of using only the first important phase when there is a major build up should be
used in every case. The longer term trader who would be willing to hold the stock for a year or
more could consider the entire count. The forty-nine percent decline it represents is the type of
potential (that) the major move investor could pursue. That means that in this particular instance
traders of all persuasions could have been trading in the stock at the same time, each with a
different objective in mind and with all three positions being justified.
After the last point of supply there were no additional primary short selling opportunities.
There was however a lesser opportunity in the area at the end of March when the price worked
itself into an apex. There is nothing uncertain about the meaning of an apex.. It says that an
important move in one direction or the other is about to happen. What it doesnt tell is the
direction of that move. That has to be derived from other information. There is a tendency for
apexes to be broken in the direction of the previously established trend. On Kerr-McGee,
a supply line could be defined across the upthrust and the last point of supply resulting in a down
trend. Therefore the break from the apex should have been anticipated to be (in) a down trend
direction and it was. The trader looking for an additional position could have justified his trade
during the period from March 17th to March 22nd based on the low volume and the presence of
the apex. The potential was limited to eleven points at the 81 level which is about fourteen

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percent. The only trader who should likely be interested in such a move would be the short term
investor. There is simply not enough potential to interest anyone else.
As the stock left the apex it had three downside objectives. One was 68, the second was
67 to 72 and the third was 70 to 76. Whenever a number of counts all point to the same area it
should automatically become a focus of attention. It cannot be guaranteed that the move will be
stopped in the area, but there is a very good reason to watch for a stopping action.
On the initial move down to the 683/8 level there was some increase in volume, but
probably not enough to where it would have been seen as a selling climax. This was
immediately followed by a rally to 741/2. If the earlier low had not been seen as a selling climax,
this rally would represent nothing more than a normal rally in an important down trend. On the
second reaction down to the 69 area, the situation began to change. Instead of going on to make
a decisive penetration of the support level established by the prior low, the price met support on
lower volume. This does not fit with all the previous indications of weakness. However, there is
no reason to close out existing short positions; but there is reason for concern over their future.
It should be noted that the second move down to the 69 area that tested the earlier low also
produced a spring action on the support level established by the prior low.
Rallies in down trends are no problem, but the potential springs are. They are even
more of a problem when the stock responds to them as this one did. Lets assume that we had
ridden out the response to the spring which took the stock up to the top of the trading range by
themiddle of April. The rally did not penetrate the supply line and it did not bring out a surge in
volume. Was it a sign of strength? In a classic sense it was not, but the price action did show
some strength which would have been another reason for concern as to the future of existing
short positions.
The next reaction to the 69 area represents a critical turning point. The noticeably lower
volume as the price returned to and supported at the 69 area suggests a successful testing of the
earlier spring. At this point the figure chart indicated an upside potential of at least six points
and perhaps as much as nine. This falls in the range of a short term opportunity and anyone
involved with that type of trading would be justified in considering a long position. In this case
the intermediate and long term trader does not have reason to take a position. The amount of
time spent in the trading range was not long enough to produce an adequate level of potential. If
a position (was) held at this point by any of these traders it should have been on the short side.
Considering the possibility of a reasonably aggressive advance from this level, these investors
may have found themselves facing a great deal of uncertainty as to what to do with their
positions. The fact that the stock had entered a trading range after an important decline would
not be enough justification to eliminate any short position that might be held. The same would
be true with a long position if the stock had entered a trading range after an important up move.
A factor that would be important in determining the fate of a short position would be the
meeting of a major objective. In trading as low as 681/2 Kerr-McGee, had fulfilled three
objectives. It is true that the count at the 87 level had another major phase. The objective of the
entire count may still be worked out. This should never be automatically assumed however. If a
stock meets support or resistance at an important objective, that may be all the move that is going
to develop. If the stock has reached an important objective, the status of its trend becomes
a crucial factor. If the trend is still intact, the position may be held. There is a good
possibility that the potential being built is for a continued move in the direction indicated by the
trend. Should the trend be broken however, any reason to maintain the position is
eliminated. When this happens at a level that represents the meeting of a significant objective,
continuing to hold a position involves an unacceptably high risk. The Kerr-McGee, chart
provides a rather unique example on this matter of reaching objectives and breaking or
maintaining trends.
As of the 2nd of May the stock had reached a downside objective. It was in a trading
range, b ut the previously defined down trend was still intact. The reaching of the objective
represents a potential problem, but the continuation of the trend could be seen as a reason to let
any short position held ride a little longer. Normally this would be a sound judgment. In this
case however, there is another factor that must be considered.
We have already determined that the stock is positioned at the test of a spring, therefore it
should rally. It can also be seen that the price lies just below the supply line of the down trend.
If the stock responds to the test of the spring, it must break the down trend. That being the case,
the holder of a short position would be justified in closing out his position instead of waiting to
see what the outcome might be. After the test of the spring, Kerr-McGee, did respond as
expected. It broke the down trend and fulfilled the nine point count indicated by the figure chart.

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In doing this it also jumped a creek. The short term trader who took a position at the test should
have taken his profit at the 78 level. A good rule to follow is that if you got what you got in (to)
get, get out. This helps greed from gaining control. When that happens, any profits that may
exist (are) likely to be gone in a very short time.
Although the short term trader would have seen the move to 78 as an end, anyone else
should have looked upon it as a beginning. Following a jump across the creek, which is an
important sign of strength, it is normal to get a back-up... . That is what happened to KerrMcGee. The back-up... is generally the last important buying opportunity that a stock will
give. Therefore intermediate and longer term traders should have been alert. The short term
trader as well should also have been on his toes because of the possibility of another short term
opportunity. The area to watch on a back-up... is the half-way point of the jump... . In this
case, that was 735/8. Providing the volume is significantly reduced as this level is approached, a
buy order may be placed. An order placed to buy Kerr-McGee, at 74 would have been a
totally justifiable action. The dip below that level which occurred is of no concern. It is very
unlikely that any of your positions will ever be taken at the absolute best price.
We said that a position taken at 74 would have been justifiable, but would it have been
the thing to do for everyone? The answer is no. The eighteen point move indicated by the figure
chart at the 73 level represents a potential advance of about twenty-five percent. If the stock
were to move only half of that it would be of interest to the short term trader. The entire move
would be of interest to the intermediate trader, but probably not be of interest to the long term
investor. As of the end of this chart the short term and (the) intermediate trader(s) probably
would be both holding long positions. The long term investor most likely would still be sitting
on the sidelines, but he need not be without hope. His chance to trade this stock may yet
develop.
Notice that the price seems to be meeting resistance at the 79 level. A reaction may be
coming. Lets say that the stock is unable to move any higher than the 795/8 already recorded.
Before that reaction begins (remember) the advance began at 681/2. This puts the half-way point
at 74. A return to that level on reduced volume could represent a major last point of support.
The potential available at that time may be sufficient to warrant a long term investment.
Kerr-McGee, represents a rather unusual example. Most charts will not present so
many clear indications in such a short period of time. Even though they may develop more
slowly and less often in your practice trading or the actual trading that will follow, the important
point to remember is that they will develop. A trading opportunity that is not clear should be
avoided. Only those where the indication is obvious are likely to produce good profits on a
consistent basis. Those are the ones to trade.

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PRACTICE TRADING TAPE

NUMBER FIVE

It is a generally accepted fact that the market as a whole and many stocks in particular
spend most of their time going nowhere. This is another way of saying that the bulk of all
trading is confined within the bounds of some trading range. This being true, it would seem that
in the interest of maximizing profits it would be a very good idea to take advantage of those
trading opportunities that develop within trading ranges where the objective is also within the
trading range. In theory this makes a great deal of sense. Then this may explain why so many
traders come to this conclusion. The problem is that in practice it is extremely difficult to
constantly realize profits from trading swings within a trading range. This is not to say it is
impossible, but it will probably be the last practice trading work to show a consistent and
acceptable profit.
Without having tried it, the idea that trading within a trading range is so difficult may
seem like a contradiction. If the greatest amount of time (of stocks) is consumed by this type of
activity, it stands to reason that it must produce a very large portion of the total potential profits.
This is logical, but its truth is somewhat questionable. Time is an important factor, but profits
are measured in price movement. A large price movement represents a substantial profit
regardless of the amount of time it takes to generate. A small price movement on the other hand,
always represents a small profit. This again is true regardless of the time factor. How then can
small profits result in major trading opportunities? As individual trades they cannot, but the
trader who looks upon this type of market activity as an important source of profits is likely
counting on generating a large number of small profits in a short period of time. There is nothing
impossible about this, but we believe that you will find very quickly that it is much easier said
then done. Aside from us simply telling you that trading within a trading range is difficult, is
there any way to see the difficulty involved without actually doing the trading? There is at least
one.
Lets consider three hypothetical stocks. One sells for $15.00 per share. The second is at
00
$50. and the third sells for $100.00 per share. The width of the trading ranges varies. There are
probably as many variations as there are stocks. We will assume however, that the standard is
ten percent. If the $15.00 stock moves from the bottom of its trading range to the top, it will
generate a gross profit of $150.00. After allowing for discount commissions, the net profit could
be $76.20 or five percent. If that same stock were to make an intermediate move of twenty-five
percent, the gross profit would be $375.00. After the commissions are subtracted, the net profit
might be $298.50 or twenty percent. Most twelve month periods contain at least three
intermediate opportunities. That means, if you were trading $15.00 stocks exclusively and not reinvesting the profits, the net profits for the year would be sixty percent. The only way (that) this
return could be matched by trading range actions would be to complete twelve profitable trades
in the same period. This is possible, but finding twelve $15.00 stocks at the rate of one per month
that will complete a 11/2 point move in a month is extremely difficult.
If we move up to $50.00 stocks, the burden on the trader is lessened somewhat. His
trading range has now likely expanded to five points. As a result the net profit that might be
expected from each trade would jump to about seven percent. If a $50.00 stock were traded for a
twenty-five percent intermediate move, the net profit could move up to about twenty-two
percent. What these changes mean is that the number of trading range moves of five points that
would be needed to equal the profit that could be expected from intermediate trades in a years
time is decreased from twelve to nine. Although still not easy by any means, this goal should be
less difficult to attain than the first.
The second example suggests that as the price of the stock being traded is increased, its
desirability as a vehicle for trading range trading is also increased. This is confirmed by the

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results from trading a $100.00 stock. In this case the normal trading range has expanded to 10
points. After allowing for commissions a move within such a range could net about eight
percent. Trading this stock for an intermediate move would likely net twenty-three percent per
trade. That means it would take about eight trading range trades to equal the results that could
come from intermediate trading. This should make achieving the goal a little easier.
These three examples show a couple of things. First, they indicate that trading range
trading is more likely to produce an acceptable return if conducted in higher priced stocks. They
also show how difficult it can be to match intermediate results. The examples reveal that it takes
from two to four times as many trading range actions to equal the results of intermediate trades.
Since the idea behind this type of trading is that it will produce more profits in the same period
of time since more trades are being completed, the results from the examples are disappointing.
If it takes as much as four times as many trades to equal intermediate results, just think how
many it will take to produce significantly better results. At some point the question arises
whether the result is worth the effort. There also arises the serious question of the markets
ability to produce such a large number of trading opportunities. The need for exact timing is
another factor that makes this type of trading extremely difficult.
In the case of the $15.00 stock with the a 11/2 point wide trading range, missing the exact
top and bottom of each move by only 1/4 of a point would cost 1/3 of the entire move. Missing
the top and bottom of the move on a $50.00 stock by 1/2 a point would cost twenty percent of the
move. Twenty percent would also be sacrificed with the $100.00 stock if the extremes of the
move were missed by just 1 point. Any of these; the, 1/4 point, the 1/2 point, or the full point
could come from being just one day too early or too late. They could even come from being a
couple of hours too early or late. No one should ever enter into any type of trading with the idea
that his timing will consistently be that perfect. It simply is not going to happen. If the success
of a trade requires that type of perfect timing, it simply is not worth it.
Getting timing exact or even very close to exact (in a trading range) is very difficult for
one reason. In most cases there is no clearly defined turning action as there is with the longer
forms of trading. When we see such things as springs and upthrusts and back-ups... and
rallies back..., the turning action is clear. With very few exceptions these types of indications
do not exist when trading is in a trading range. Reliance is placed totally on the ability of the
support and resistance levels to turn the price. As we will see when we get to some examples,
such blind faith is not such a good idea.
If this type of trading is so riddled with problems, is there anyone who should even try it?
Well, that depends on how we use the word try. If we are speaking in terms of practice trading,
then the answer is that everyone should try it. We never know what we can do until we try.
Since this type of trading is so difficult any one who can develop the ability to do it profitably on
a consistent basis should be a very good trader with other approaches as well. In practice trading
within a trading range, it is important to develop a performance record that exceeds that which is
generally considered acceptable with other types of practice trading before going on to actual
market operations. The reason for this can be found in the vehicle that is likely to be used for
trading. In most cases the trading ranges being traded will be relatively narrow. Due to
commissions, this makes it quite difficult to net a reasonable profit by trading the stock unless an
unusually large number of shares is traded. This leaves, as one of the only alternatives, the
trading of the stocks options. When doing this, it is necessary to use a mental stop. If the stock
goes against your trade by a predetermined number of points the option will be sold. Although
this is a sound course of action it will result in unusually large percentage losses when the trade
goes bad. To make up for these, it is necessary to generate a higher percentage of profitable
trades. If this type of trading is attempted for real without first having developed a proven record
of performance, the trader will likely see that portion of his funds dedicated to this type of
operation quickly evaporate.
Once the decision has been made to undertake this type of trading, the next question
becomes; how to do it. In general, we want to buy on reactions that approach the bottom of the
trading range where there is no indication of a break from the range and to sell on rallies that
approach the top of the trading range where there is no indication of a break from the range.
This is a simple idea, but as we will find out later, one that is not so easy to apply.
The first trading opportunity within a trading range comes at its beginning on the climax
of the previous move. Buying at the selling climax or selling short at the buying climax will
provide the trader with a very good price. If he is lucky enough to not only hit the day of the
climax, but also the approximate time of it, he may secure the absolute best price possible. Dont
count on this however. This is a difficult trade to make. One reason for the difficulty is that not

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all climaxes are obvious. This seems to be more true of buying climaxes than selling climaxes.
The classic picture of a climax is a surge upward or downward in price on heavy volume after a
sustained move in that direction with a sharp reversal coming on the day of the heaviest volume.
These types of climaxes are obvious and with the development of judgment, can even be
anticipated. The variations on this classic theme are not so obvious however. For example, the
volume pattern is often not classic. Instead of having a swell in trading that centers on the day of
the climax, the volume may be somewhat elevated for a considerable period before and after the
actual climax. This accomplishes the same thing, but it is more difficult to see the climax as it is
occurring and even harder to anticipate it in advance.
Another common occurrence is no noticeable increase in trading as the price action goes
into, what appears to be, climactic action. In these cases the volume will often have been high at
the bottom of the previous reaction or as preliminary support was being met. There is an obvious
problem here and that is, how to avoid looking at the preliminary support as being the climax,
which could result in a premature trade. The way to avoid this is to look at a perceived climax
with a question in mind. If this action is the climax, where is the preliminary support? If it
cannot be found, it is quite possible that the action thought to be the climax is actually the
preliminary support. A similar situation may exist with preliminary supply and buying
climaxes. In these cases similar questions can help (to) avoid a premature short position.
A third possibility is when the volume appears climactic, but the price does not. This will
often appear as a gradual rounding over or under in the price action instead of the sharp reversal
normally associated with a climax. In these cases it may be clear that a change is occurring, but
whether a commitment will be made before the break in the opposite direction comes is more
questionable.
In addition to the problems involved in identifying the climax, there is a difficulty in
knowing how far the automatic rally or reaction that follows may carry. This is because there is
seldom any well defined preparation for these moves. You may get into a position right at the
end of the climax, but how are you going to know when to get out of there is no count on the
figure chart to provide an indication. The answer is that you are not going to know. The only
way to tell when an automatic rally or reaction is going to come to an end is as it is occurring.
Normally volume will be first large at the beginning of an automatic rally or reaction. It will
then drop off sharply as the move progresses. Price action at the beginning of these moves tends
to be aggressive with wide daily price ranges and good net progress. As the rally or reaction
develops, the ranges and amounts of progress made will diminish. This should occur in
conjunction with a decreasing volume. Through continued practice you will develop the
judgment necessary to know when the narrowing of the progress and decreasing of the volume
have reached a point that is likely to stop the move. There are no hard and fast mechanical rules
that can be applied to this. It is strictly a matter of judgment.
The second trading opportunity in a trading range comes at the end of the automatic rally
or reaction. As with the trading at the climax this can also be very difficult to trade. One
problem that does not exist in this case is knowing where the anticipated move is likely to end. It
should be completed near the level of the climax. The major problem that does exist with these
trades is in knowing when to make the commitment. This is a problem because it involves
knowing when the automatic rally or reaction that had been underway is over. As we have
already seen, that is not always such an easy determination to make. The first really good trading
opportunity in a trading range comes at the end of the secondary test. In this case there is some
information or indication available on the points that had been unclear at the earlier trading
possibility. The point of the earlier climax indicates where the test should end. If it is to be a
truly successful test the price may be stopped a small distance before the climax level. The
distance on the figure chart between the secondary test and the climax should reveal how much
progress should be expected on the next rally or reaction. This is the first time since the
beginning of the trading range where there is an indication of when to get in and where to get
out. It is this information that makes this the first good trading range opportunity. After the
reaction or rally that develops out of a successful secondary test, the trading procedure is to
reverse positions as the resistance or support levels are approached and as the last small build up
of count has been used up. The exception to this would be if the previous move had resulted
in some indication that this is the time when the price is likely to leave the trading range. In
these cases reversing an already held position would make no sense. It would invite being
stopped out with a substantial and totally unavoidable loss. In addition to the price action,
volume and figure chart, indications as to how to handle these types of trades can be gotten

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through general market conditions. This is especially true of those revealed by the Trend
Barometer.
Lets assume that a stock is approaching the top of its trading range. Nothing has
happened that would suggest that it is preparing for an upside breakout. Our thoughts should be
to take a short position for the anticipated ride back to the bottom of the trading range. All (of)
the previously mentioned points should first be taken into consideration and then the position of
the (Trend) Barometer should be considered as well. If the Technometer is in the overbought
region, if the Force is negative and declining and if the Momentum is also declining, the
(Trend) Barometer is confirming the desirability of taking a short position.
Now lets reverse that situation and assume that a stock is approaching the support level
of the trading range. Again there has been no action that would lead to the expectation of a
downside breakout from the range. Consider the other factors first and then turn to the Trend
Barometer. Is the Technometer in the oversold region? Is the Force Index improving? Is the
Momentum advancing? If the answer to these three questions is yes, the likelihood of the
anticipated rally is increased.
Now lets spend some time considering several examples of trading range opportunity
The first chart for this lecture is St. Regis Paper. This stock does not have options which
reduces the trading ability, but the actions within the trading range are still worth studying. First
of all, find the buying climax. Notice the sharp reversal on very heavy volume. This strongly
suggests a climax. The first point to consider is proof that it is in fact a buying climax. If it is,
there should be signs of preliminary supply some time earlier and there (are). Approximately
three weeks earlier there was another swelling up in both the price and the volume. Someone,
seeing the preliminary supply and the buying climax might want to take a position on the short
side. Remember though that this trader has no idea in advance how far the automatic reaction
might carry. The automatic reaction lasted about a week. Dont expect them to last much
longer. With this type of trading you get in and you get out. There is seldom justification for
waiting around if a stock moves against you. In this case the stock repeatedly met support at 33.
An alarm to get out and (to) reverse sides was being sounded. There was a test of the automatic
reactions low after which upside progress set in. Would the immediate testing of the automatic
reaction be reason for concern? It could be, especially if the test had started to penetrate the
previous low on increased volume. As we can see though, neither of these things happened. The
support line was respected and the volume remained low.
Although a long position would probably have been taken about a point higher, the
unexpected dip would not have provided reason to sell the position. If the stock had been bought
at 33 the upside expectation would have been a four point move to the top of the trading range.
If the potential profit was four points a 3 to 1 profit - risk ratio would have allowed the placing of
a stop at 13/8 points below the purchase price. This would have been 1/4 point below the low that
was actually experienced: The position would have survived.
After the test of the automatic reaction, upward price progress began. The expectation
should have been for a move back up to the 37 level, but remember that it is unreasonable to
expect the price to make it back up to exactly that price. It could be stopped before that. There
are two ways to handle something like this. One is to have a pre-planned range below the
actual top of the trading range which, if entered, would signal a reversal of position. This
could be a 1/4 point, 1/2 point or even a whole point. In the determining of something like this is
where judgment plays an important part. The only way to develop it is through practice. As a
general guideline however, use the idea that, as the price of the stock being considered
increases or the width of the trading range expands, the margin for error in how close the
stock will come to reaching the top of its trading range also increases.
The other way to handle a situation like this is to judge the quality of the price action.
This is more difficult than the first approach which was more mechanical, but the long term
results in this case are likely to be more positive. On the day where the price hit 361/2, its upside
price progress was abruptly stopped in spite of a surge in volume. That does not favor a
continued advance. The next day the price again made a sharp decline early in the day on
continued high volume. That is two days then that did not favor a continuation of upside
progress. That should be enough of an indication. Remember, in this type of trading you
dont want to wait around too long. For those who wanted more proof however, the next day,
when the rally started to falter on continued high volume, that provided it. The next reaction
took the price down to the bottom of the trading range, producing another four point profit. The
price was again in the buying range. There was justification to reverse sides and establish long
positions. This time something should have clicked about the character of this turn. The bottom

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of the reaction penetrated the support level resulting in a potential spring. Two days later the
spring was tested successfully on greatly reduced volume. This development would not have
discouraged the reversing of positions, but it should have had an impact on the expectations for
the next move. A successfully tested spring suggests that the next advance may take the price up
and out of the trading range. That being the case, you would be less inclined to reverse the
position as the next rally approached the top of the range. In this case it would have been a
mistake not to reverse the position again. The price approached the top of the range. The
volume expanded, but the resistance was not broken. In this case the investor would have
probably ridden his position to the bottom of the range again.
On the next rally to the top of the range in early February, the existing position would
likely have been sold and reverse. This time the reaction failed to make the kind of progress
made by the earlier ones before it was again turned upward. The position likely would not have
been reversed and therefore would have been stopped (out). As you can probably tell, this
definitely is not easy. It requires that the trader be constantly alert and ready to act. Many
investors cant handle this and many others probably do not want to put up with the tension. For
these individuals the trading opportunities covered in earlier tapes are the path to follow.
Those who can live with this type of trading should take note of something that may be
helpful. The easiest trades within a trading range tend to come near the middle of its
duration. This fact is reflected again by the second chart which shows a vertical line chart of
Hospital Corporation of America and the Trend Barometer of the market. The trading range as
defined here developed after the rally to 37 in November. It was climaxed by the larger volume
that occurred. Unless a trader had been working with a prior and wide definition of the trading
range, it seems unlikely that this particular reaction would have been traded. Those who were
working with a broader definition of the trading range could have been helped in their decision
of whether and when to trade by the Trend Barometer (indices). Regardless of the type of
trading being considered, it is generally best to hold off on the actual initiating of that trade
until the market has become overextended in a direction that favors the anticipated move.
This indication comes from the Technometer. In this case the stock was positioned at or near
the top of a trading range. The anticipation should have been for a reaction back toward the
bottom of the range. This reaction is most likely to happen when the Technometer is reading or
has been reading at an overbought level. On the day the price hit 37, which was also the day it
fell victim to a sharp reversal in price suggesting an end to the rally, the Technometer was
overbought. Therefore the market was vulnerable to a reaction and the stock was also vulnerable
by virtue of its action on that day. It could have been shorted
Sometimes there is a tendency to absolutely equate a short selling opportunity with an
overbought Technometer and a buying opportunity with an oversold Technometer. This is
wrong. A better word to use would be relate. We could justifiably relate an overbought
Technometer to selling short and an oversold Technometer to buying if the price and
volume action support the idea. This is a critical prerequisite. Unless there is price and
volume action to support it, dont ever act solely on the basis of a particular Technometer
reading. Many times the Technometer will become overextended and then hold there for several
days. The price and volume action may appear to favor action, but the signals are not absolutely
clear. If this (was) a major trading opportunity, being a few days off in the timing would not be
terribly important. However, when trading in a trading range with its relatively small moves,
being a few days off in timing (on) both ends of the trade could mean the difference between a
waste of time and money and an acceptable profit.
Timing can be further refined by bringing in the Force and Momentum. If the price and
volume action appear to favor a particular move and if the Technometer suggests that the market
is vulnerable to such a move, prices will most likely start moving in that direction when the
Force and Momentum start applying there pressure in that direction. After the rally to 37 the
force continued to pull upward for a few more days. When that pull was eliminated the price of
the stock started to break down badly. At the bottom of the next reaction after the stock had past
through the 31 level it found support as demand apparently came in to overwhelm the supply that
had brought the sharp decline of the previous couple of days. This suggests the possibility of a
rally. If we look up to the Technometer we see that the market was oversold. This indicates a
vulnerability to a rally and when the Force started to turn up, the rally began to make good
progress. Notice that again in this case the overextended condition of the market had come on
prior to any suggestions of a rally from the price action and before the significant movement of
the price got underway. As stated several times throughout this tape, trading within the defined
bounds of a trading range is not for everyone. Many investors are able to find very satisfactory

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results with major trading opportunities, but are totally unable to make a profit within a trading
range.
Discipline is a determining factor. It is required in every transaction if there is (to be) any
hope of a profit, but the degree of discipline can vary considerably. In the case of profiting from
trading range activity, the trader must be able to absolutely and totally keep his emotions under
control. Some just cannot do this. If you find yourself consistently unsuccessful at this type of
trading, even in a practice setting, dont be concerned. Your trading record as a Wyckoff student
can still be very good.

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PRACTICE TRADING TAPE

NUMBER SIX

This is practice trading tape number six. No doubt you have come to realize from this set
of tapes that we put an incredibly high priority on practicing what you have learned. In fact, we
would rank practice trading ahead of profits on a list of priorities. The reason is simple: Unless
you have working knowledge of what you have learned, it will produce nothing. The printed
and spoken words in the Wyckoff Course are only a beginning. They require the
development of good judgment to yield their full potential. You may choose to develop this
judgment through actual market operations or through practice. But we think (that) you will find
the practice trading approach more constructive and much less costly. As we said though, the
choice is yours. We cannot make it for you.
As high (of) a priority as we place on the general topic of practice trading, it is not at the
top of the list. The single most important part of any market operation, be it practice or real, is
protection. We have saved this topic for last in the hopes that, if nothing else from the series of
tapes is retained, at least this one absolutely critical point will be. You see, the only thing worse
than an investor who does not maintain an ongoing program of practice trading is the investor
who will not or does not no how to properly protect his funds. Even the trader who is very
successful runs the risk of many major setbacks if his efforts at self protection are inadequate.
Learning how to safeguard funds against potential major loss is the one sure way to guarantee
that your personal investment or trading program will have a tomorrow.
In order to protect yourself against something it is necessary to begin with an
understanding of what it is that you are protecting yourself against. It is fine to say that
protection is being taken against potential loss, but that is really not enough. Losses are results
not causes. If anything is to be gained, the causes must be determined. These are universal and
therefore are very well known. The underlying cause of a loss in any particular trading situation
is the traders own fear and greed. What this says then is that in taking steps to protect his funds
an investor is actually attempting to protect them from himself. This fact makes the effort much
more challenging. Dealing with an external force is normally much easier than handling one that
is internal.
Fear and greed are very different. They come into play at different times and are
responsible for different types of problems. Fear, when it is the cause of a loss, generally results
in a loss of opportunity. These are the trades that somehow manage to get away from you even
though the potential was perceived. Greed is perhaps more basic. When it is responsible for a
loss it is a loss of already realized profits. These are especially painful, but both are serious
problems. They will assist you in relinquishing as much of your resources as possible if you let
them. The object is not to let them
First lets consider protection against fear. Some long term traders may appear to
approach each of their commitments with nerves of steel. They always seem to be so totally
objective and completely unemotional. Dont you believe it. No investor, no matter how good
his record, ever approaches a commitment without at least a small measure of fear. Any fear that
does exist works in two ways. As already mentioned, there is the fear of missing an opportunity,
but there is also the fear of incurring a major loss. The protection against each is somewhat
different. Protection against the fear of missing an opportunity is discipline. Nobody wants to
be left out. This is especially true when it comes to stock market profits. One supposedly sure
way to prevent being left behind is to get on board early. Thats exactly what most of us do.
Were so afraid of missing a profit that we tend to constantly trade too early. The common
mistake made here is to conclude that a little bit of a wait is no problem because the eventual
result will justify it. How do you know its going to be just a short wait? Thats an assumption.
A much bigger problem, however, is that the judgment (upon) which the trade is based may be

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invalid. If a position is taken too early, it cannot possibly be based on a thorough appraisal
of the opportunity that the trade is intended to take advantage of because that opportunity
has not had a chance to fully develop. That means something could go wrong. If it does, the
position will probably be stopped out. Unfortunately there is no mechanical tool that will
invariably keep you from trading too early. There are however, a series of tools that, when used
correctly will help force a disciplined approach to the proper timing of trades. These are the
buying and selling tests that you will find in your Wyckoff Course. These can be used as a
check list of criteria that must be met before any position can be taken. Even so, the stock
bought or sold short may not begin to move immediately the next day, but it will have the
potential.
A position taken before all (of) the tests have been passed wont start to move
immediately either, but in this case, it is lacking the potential as well. In applying the tests to a
stock, you are working on a pass or fail basis. The stock either passes all nine tests clearly or it
fails as a candidate. There is no room for (a) marginal pass and definitely no room for guessing.
If you can point to the action that results in the passing of each test, your position will be
taken in time to take advantage of the most important part of the anticipated move. At the
same time you will greatly reduce the chances of losing the position to a stop. There may
still be a slight feeling of fear, but your actions will be keeping it from becoming anything more.
The other type of fear is of incurring a major loss. Let this one take control of your
actions and you will find yourself never doing anything. Fortunately very few investors ever
become this totally possessed by such fear. For most the desire to be doing something is just to
great to be totally ground to a halt by fear. Overcoming, or at least controlling the fear of loss
is possibly the easiest type of protection to ensure. It is done with a stop order.
The use of a stop order allows the investor to make and maintain a relatively objective
appraisal of a perceived opportunity. It lets the investor take comfort in the fact that if his
appraisal is badly flawed, his loss will be cut short before it turns into a disaster. The stop order
will do its job of protecting the investor, providing (that) it is not a mental stop. The mental stop
order is a device used by some traders whereby they can admit to a mistake without having to
pay the price. This sounds like a perfect situation, but it is really an exercise 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
eventually it will be paid. Often, delaying the payment only makes it worse. If a mistake wasnt
made and the mental stop is hit, it suggests that the thought that went into the placing of the
mental stop was not sound; it had no business being at that level in the first place. It probably
wouldnt have been there either if the stop had been an actual order and not a thought filed away
for safe keeping. A commitment with cash or on paper tends to be more well thought out. There
is simply no good reason not to use a real stop order and no good reason to use a mental
one. On this last point there may be one possible exception, but we will get to that later.
Sometimes the fear of a major loss and fear of missing an opportunity can get in each
others way. The fear of a missed opportunity may result in a premature trade. The fear of a
major loss will result in a stop order being placed. If a trade has been made too early, the stop
may be too close to survive the remaining and unknown action of the trading range. In these
cases the position may be lost to a stop resulting in a loss even though the eventual outcome has
been properly diagnosed. This may be the most frustrating trading experience an individual can
have. If it happens repeatedly, it can become quite destructive. Nobody wants to be penalized
for being right. Someone who is (so penalized) on a regular basis probably will turn his interests
toward something other than the stock market. If the buying and selling tests are regularly used,
the chances of being stopped out in situations other than those that deserve to be, are small: This
is, providing (that) the stop orders that are used are properly placed.
Using a stop correctly means maintaining a profit - risk ratio that is in your favor. Be
careful however, that you dont end up using this idea in a way that unduly restricts the stocks
ability to move. An extremely high profit - risk ration would seem to be in the traders favor,
however if it increases the chances of being stopped out, the result will be more harm than good.
The problem with very high profit - risk ratios is that they require unusually close stop orders,
unless the amount of potential available is massive. There is nothing wrong with having a close
stop, providing the investors records indicate very good timing. As a stop order is brought
closer to the trade prices, the margin for error in timing that trade will become smaller.
Not only must you be right, but you must be right, right now! Its true that trades lost to the
close stop orders required by high profit - risk ratios will be small, but if they become very
frequent, the cost will start to get quite high before long.

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Over the years we have found that the most generally acceptable profit - risk ration is 3 to
1. First of all, it prevents a major loss. Assuming that funds have been diversified into several
positions, the overall loss, even though the stops on individual positions may be rather liberal,
should remain small. It also gives the stock some breathing room. It is unreasonable to assume
that every stock will be caught exactly at its turn. A long position may move somewhat lower
before it turns up and a short position may move somewhat higher before it turns down. You
have got to allow some margin for error. No trader is so good that he can hit the exact top or
bottom every time. Without a little breathing room otherwise very sound positions will be lost to
their initial stop orders. A 3 to 1 profit risk ration will help prevent this.
Now, lets move on to the subject of protection against greed. No doubt you have heard
the phrase that nothing succeeds like success. This may be true in many endeavors, but there
is some question as to its validity when it comes to the stock market. Here the saying might
more aptly read: Nothing impedes like success. From an objective standpoint you would
think that when a reasonable profit has been developed in a position there would be a great deal
of satisfaction in (the) taking of that profit. Unfortunately, it doesnt always work that way.
Given a certain level of profit there is a tendency to want more instead of being satisfied. If this
desire switched on in our mind suddenly, it would be obvious and probably could be controlled
more easily. Greed however, is sneaky. It doesnt just stand up and say; Here I am. It tends to
creep in with very legitimate consideration and then gradually take over. Consider these
examples. A stock is in an up trend and has been for quite some time with good upside progress
being the result. The stock becomes overbought, reaches its upside objective and then drops
back into the trend channel. There are two good reasons here for selling this stock, but the
support line remains intact. By concentrating on this last point, the more important points
mentioned first can easily be overlooked. The desire to have more profit causes the situation to
be analyzed from that standpoint and not from the standpoint of things as they really are. At that
point greed has taken control and the profit already gained is put in jeopardy.
Here is another example that is probably more classic. A stock is in an up trend. It has
fulfilled one phase of a two phase advance. The recent action of the stock has been to become
overbought, move sideways and then break its up trend. This stock is potentially in very serious
trouble, but it has that higher objective. If an investor is particularly prone to greed, the
existence of a higher or lower objective is an almost sure way for greed to take over. The
current action starts to play a more and more secondary role to the possibility of a bigger profit.
At this point it is the desire for that profit that has taken over. The stock can do whatever it
pleases: Its action will not be given the consideration (that) it deserves. Having some idea of
how greed enters into a situation and (how it) gradually squeezes reason out is a form of
protection, but it is not enough. Greed is probably the single most destructive force at work
in the market. Counting on being able to catch it in the act before the damage is done will not
work and trying to practice trade this idea probably will not work either. You can take a whole
mountain of practice positions and every day with each one tell yourself: I will not be greedy!
I will not be greedy! Before long though, dont be surprised if you find yourself saying:
Thats not being greedy is it? When this happens you are just one step away from the final
statement: I was greed after all, wasnt I? The only way to totally protect oneself from greed
is to take steps against it at the time a position is One of the best ways to do this is to
predetermine and pre-establish a sell or cover order in the area of the anticipated objective.
When the stock reaches that level the established. position will be automatically eliminated and
the profit protected. Greed wont even have a chance.
Not every position is going to make it to its indicated objective. Weve already seen how
the idea that they will plays right into the hands of greed. In those cases where the ultimate
objective is not met any pre-established sell or cover order will not be executed. Does that mean
no protection. It could mean just that, but it doesnt have to. The stop order can be used very
effectively for this type of protection providing (that) it is used correctly throughout the life of
the position. That means repositioning it as the move progresses. The first objective in
repositioning a stop is to get up to or down to the trade price as quickly as possible. One
this is accomplished, the investors funds are protected against loss and he can breathe a little
easier. This repositioning, or any to follow, cannot be done in a careless fashion. If it is, initial
capital may be protected, but profits will likely be scarce. Except in those very rare instances
when a stock explodes upward or downward to its objective, a move will be accomplished
through a series of pushes and rests. The rest periods between the periods of progress are
extremely important. They will indicate when a stop can be moved and more importantly to
what level it can be moved. A resting period will either come as a normal correction or as a

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horizontal consolidation. The stop should be repositioned just above or below the extremes
of these periods just as soon as there is an indication that the prior progress is being
renewed. Dont be in too much of a hurry on this. If you cannot point to some action that
clearly indicates the prior move is about to be renewed, you may be setting yourself up to be
stopped out by a correction that goes a little farther than you had expected or by the
consolidation that ends with an unexpected shakeout or upthrust action. When a stop is
repositioned every effort should be made to maintain a 3 to 1 profit - risk ratio.
Suppose you had bought a hundred dollar stock with a twenty-five point upside potential.
Your stop could justifiably have been placed eight point lower at about ninety-two. Remember,
never place a stop at an even 1/8th. From here the stock advances to 115 and then reacts back to
110. At this point the volume dries up and the price range narrows down, indicating that the
reaction has come to an end . With the stock at 110 there is a potential 15 points left in the move.
To maintain a 3 to 1 profit - risk ratio for the next part of the move, the stop should be placed
about five points below the bottom of the reaction. In doing this the investor is still providing
the stock with some breathing room, protecting all of his initial capital and guaranteeing half of
the profit realized at that point. If this same stock were now to rally to 120 and then react back to
115, the stop order could again be repositioned. This time there would be ten points left in the
originally indicated move, so the new stop could be placed a little more than three points below
the bottom of the correction. Can you see the pattern here? As the move progresses resulting in
more and more potential profit to lose and less and less potential move left, the stop is moved
progressively closer to guarantee as much of the profit as possible, should something go wrong
in the final stages of the move.
There is an alternative method for repositioning stops which may be used. You begin
with an initial stop that maintains a 3 to 1 ratio. After this, the stop is moved up to a level a fixed
number of points from the end of the correction. Usually a figure in the three to five point range
is used: This method is certainly easy. Providing a stocks action is watched carefully, it is an
acceptable approach, but there are a couple of potential problems that should be kept in mind. If
a stock has a large potential, maintaining a three to five point stop during the early stages of the
move could result in restricting the action too much. At the other end of the move, as the stock
approaches its objective, the fixed three to five point stop could result in giving the stock too
much breathing room. You could be risking more of your accumulated profits (than what) can be
justified.
Now, lets consider some examples. The stock we will study is Johnson and Johnson.
As the chart begins Johnson and Johnson, was finishing a lengthy period of preparation. It is
possible that a long position could have been justified on either the reaction down to 77 in
November or the one down to 76 in January. However, since we cannot see the entire
preparation phase, this could only be a guess. The first move that can be clearly identified is the
high volume aggressive rally to 88. This is a sign of strength. Where there is an SOS there
has to be an LPS and where there is an LPS, there should be a buying opportunity. The low
volume at the bottom of the normal half-way correction in the 81 to 82 range provided that
opportunity. For simplicity we will assume that we were lucky enough to buy at 81. The
indicated move from the last point of support was 28 points. If taken conservatively, that results
in an objective of 104. With a likely potential of twenty-three points, a stop 75/8ths points below
the trade price could have been justified. This point is marked on the chart as S1. Johnson
and Johnson, then rallied to 94 before beginning a rest period. When the stock began its
reaction, we could have expected a reaction to the half-way point at about 873/4. Notice the
circled areas marked X. The stock began to rally again. Was the correction over? We know
now that it wasnt, but at the time that might not have been so easy to tell. Lets see what would
have happened had we repositioned the stop at this point.
The low point of the reaction was 89. That meant 15 points of upside potential remained.
A five point stop could have been justified. That means it would have been positioned in the 83
to 84 range. In this case the position would have survived. Lets take another look at that action
marked with the X. Did it provide justification for repositioning the stop? The answer seems
to be no. The volume at the bottom of the reaction was quite high. If the correction was
over, the volume should have been low. Now look (at) what happened to the volume as (the
stock) started to rally away from the bottom of the reaction. It decreased. Is that indicative of a
true resumption (of) upside progress? Again the answer is no. Failing to notice these important
points could not have affected the outcome in this case. In other instances however, the result
could be losing the position to its stop. Simply using a stop order does not lessen the need for
careful and continuing analysis. The day (on) which the repositioning of a stop could have

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been justified has been marked. Notice the wide spread, good progress and high volume.
That indicates a resumption of the rally. The low point of the reaction was 86. From that
point eighteen points of potential remained in the move. Therefore a new stop could have been
positioned six points below the bottom of the reaction. This has been marked as S2.
After the stock rallied to 102 it again started to correct. The reaction carried the price
back to the half-way point on decreased volume. It then started to rally again with good price
progress and good volume. This provided justification for repositioning the stop a second time.
The bottom of the reaction was at 93. The remaining potential was eleven points, so a stop
around 89 was reasonable. Notice that in this instance the stock had to test the bottom of the
reaction before actually resuming the advance. If either of these tests had failed, the newly
positioned stop would have become very important. Depending on the action that might have
followed, this stop could have meant the difference between an eight point profit and no profit.
At the end of the chart the stock appears to have again gone into a resting spell. There is
no action yet to indicate a resumption of the advance. Therefore there is no justification for
repositioning the stop. It should be noted that on the previous rally the 104 level was briefly
touched, which is in the objective range. As a result, this stock should now be watched very
closely. It may be nearing the time to eliminate long positions.
The ideas in this tape and others are all basic and vital to success in the market. The
investor who seeks profits without first studying and understanding them is likely to be doomed.
The only thing he has to go on is luck, which is never especially reliable. Knowledge of the
Wyckoff concepts represents the taking of a giant step away from a reliance on luck, but it is just
a beginning. Profits are still not guaranteed. The knowledge contained in the Wyckoff Course
will only be of value when it can be transformed into positive performance. Hopefully these past
several hours of discussions have impressed upon you that the only way to realize an acceptable
level of performance is through practice. The Wyckoff principles are not mechanical tools. They
cannot simply be switched on and off producing a set result. Proper use requires judgment. Its
something like driving a car. A relatively young child likely knows how to get in and start the
engine, but that is probably about all. The car runs, but it doesnt perform. That requires
someone who knows when to put it in gear, when to use the gas and brake and when and how to
steer. Only a small amount of this can be learned from a book, the rest has to come from the
development of judgment gained from continued practice. In many respects the stock market is
much more complicated than your car, therefore it probably will take longer to develop the
judgment required to yield the desired performance. It may take six months or it could take six
years. One thing is certain though, it wont happen if you are unable to accept the validity
of the practice trading experience. Those who insist on fighting this proven approach are
fighting themselves and likely will give up in frustration some day because they are fighting a
battle that cannot be won.
From our standpoint, nothing pleases us more than to see a well thought out, well
documented and ongoing practice trading program. It is generally one of the best signs of a good
student. These individuals know exactly what they did and the details of why they did it. If the
action is successful there is a foundation on which to build repetition after repetition. If
something is unsuccessful there is a clear record from which to find the error and an inexpensive
lesson on what not to do in the future. If you need help in learning the lesson, just let us know.
Throughout history a common response to problems has been to throw money at them. It
hasnt worked very well in history and chances are it wont work for you in the stock market
either. Can you afford this approach? Our guess is, probably not. So, why not do something
that works? Practice trade. There is no better time to start than right now.

Submitted by member Bruce Hands

Revision dates: 7/16/98

Initial release

If you enhance or modify this document, send it back to the rest of us

with the revision history above updated.

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WYCKOFF GLOSSERY OF TERMS PART 1:

Accumulation: from the Supply/Demand perspective is demand coming in to gradually overcome and absorb the
supply and to support the stock at this level.
Automatic rally (AR): Following the Selling Climax one of two things may happen: an Automatic rally (AR) or a
lateral move. This is then followed again by one or two things either a Secondary Test (ST) of the Selling Climax or
a continuation of the down move. To understand this we must go back to what happens on the Selling Climax: The
Selling Climax is caused by panicky liquidation, panicky selling. The price is driven down to far and this creates a
vacuum and as soon as the down move has been stopped the stock should begin to rally. We call this the Automatic
Rally (AR) because it occurs automatically. Generally the (AR) lasts for only a few days to about a week. The rally
may be weak or strong. It may be however, so weak and the supply press on the market so strongly that instead of
being able to rally well the price simply moves sideways for a couple of days, or perhaps for as much as a couple of
weeks and a lateral move will then continue the downtrend. If there is a simple lateral move the stock is FAR MORE
LIKELY to continue the downtrend then if there is a good rally.
Automatic reaction (AR): Following the Buying Climax is the Automatic Reaction: As with the Automatic Rally,
the time factor here is generally measured in days. The extent of the reaction depends on how completely the
demand is exhausted and how extensive the first wave of short selling is. The (AR) will also be limited by renewed
buying buy those who see the reaction as a way of acquiring stock at bargain prices, and by the fact that the
REACTION does not have any significant preparation in advance to sustain it.
Backup to the edge of the creek (BEC): is normally a potential (SOS), after jumping the creek the backup to the
edge is usually the reaction of the jumping of the creek (rally) and comes to rest (find support) above the creek. The
Backup to the edge is normally a potential Last Point of Support (LPS).
Minor Creek: lower branch, The minor creek very often occurs in the lower or the middle part of the T/R
but is still somewhere in the T/R.
Major Creek: upper branch, The jump of the major creek is a larger move and it very often carries the
stock above the old supply levels in the T/R often into new high ground.
Buying Climax (BC): The climax ending an uptrend is called a Buying Climax because it is the end of the
condition where the buying is stronger than the selling. The buying gradually builds up & builds up and finally
comes in with a RUSH and EXHAUSTS itself on the buying climax. The buying climax has increased volume and a
widening spread as it moves up. Following a buying climax one of two things can occur, either a (AR) or a lateral
move. This in turn is followed by one of two things: either a continuation of the uptrend or a Secondary Test (ST). If
the supply is to weak to drive the stock down or demand to strong to allow it to go down instead of having the (AR)
the stock will have the lateral move. Usually however, it will have some form of an (AR). That (AR) may have
increased volume, heavy volume or no volume. It may have wide price spread, or relatively narrow price spread.

Climax: the peak, the extreme or the end of something and as the point of highest dramatic tension or a major
turning point in the action. Some synonyms are: top, pinnacle, height, maximum, consummation,
culmination or turn of the tide. What does a climax do? A climax stops a trend either temporarily or permanently
depending on the subsequent action. A climax is preceded by some sort of a trend.
Creek: relates to the flow of supply across the top of the trading range. The creek itself is a wiggly, squiggly trend
line drawn free hand through the tops of the rallies within that trading range.
Cross or Jump the creek (JAC): either minor/major. To jump (rally) above the creek (drawn trendline) or flow of
supply. This jump or crossing is a Sign Of Strength (SOS). Now where is the creek? After much searching for the
answer to this question Mr. Evens finally reached the conclusion that the CREEK is WHERE the BOY JUMPED.
Applying this to the market, the CREEK is WHERE the VOLUME CAME IN, where the EFFORT the PUSH the
POWER came in. It is important to recognize that there is no one exact way of drawing these creeks. Do some
experimenting with them, you may wish to draw the creek lightly in pencil on your chart and continue the creek as
long as it is useful, then later, either erase the creek, or a branch of the creek, or perhaps remove it from your chart
altogether. However, leave the important creeks on your chart as they can be EXTREMELY HELPFUL in drawing
your attention to the MEETING of supply in a T/R and in assisting in defining the probable extent of the reaction,
that is the BACK UP, which is likely to occur after a possible crossing of the creek. It will be especially helpful in
drawing your attention to situations where a stock falls back into the edge of the creek, because every so often it

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does that and every so often that little old boy scout sort of drowns. Our problem and very often is NOT to drown
with him.
Distribution: from the Supply/Demand perspective, Distribution area is where the Supply overcomes Demand and
stops the upward move and eventually begins the downward move. Distribution refers to the elimination of a long
investment or speculative position and often involves establishing a speculative short position by professional
interests in anticipation of a decline of price. In the distribution area the professional investors or speculators who
had previously had bought stock, sell there stock to the public. The public buys and it generally buys because of
good news of various sorts. Good news on the company, its product, the economy or any news which will entice
untrained people to rationalize there buying decision. The best news of all is the advancing of the price of a stock.
Often the reason that untrained people buy is that they do not want to miss out on the anticipated profits they think
there are going to get as the stock continues to move up. Or they may buy because the stock has reacted a few points
from the top and they think they are getting a bargain. After having sold there long stock professionals have no
reason to support the stock on reactions and so they cancel there bits under the market, they may not only cancel the
bids but they may establish short positions in anticipation of a large decline in price. Distribution is usually
accomplished in a relatively SHORT TIME, Whereas accumulation takes MUCH LONGER, sometimes over many
years. MAJOR distribution occurs in only a few weeks or perhaps a few months very rarely over a several year
period. Distribution is usually characterized by wide price movements and heavy volume and GREAT activity.
Effort versus Result (E/R): if you have an effort expressed the result should be in proportion to the effort. If a stock
has been moving up every day with a two point spread every day with ten thousand shares and it breaks into the high
ground with twenty thousand shares and a half point spread for a couple of days straight we know supply is coming
in and is overcoming the demand. This is an effort that is not having an proportionate result, therefore the stock is
likely to be in trouble and have a reversal in its movement.

Half-way-points (1/2): are used as a measurement of relative strength on a rally or reaction. Example, if a stock
moves from $50 to $56 the distance of six points and then reacts, the half-way-point would be half of that six points
or at $53. Reverse the process for calculating the half-way-point on a rally following a decline. Example, if a stock
moves down from $30 to $21 a distance of nine points. The half-way-point would be at half of that distance and is
$4 points added to $21 gives a half-way-point of $25 . Do not expect the stock or index to go exact half-waypoint at the exact 1/8th. It is sufficient to meet support or supply in the vicinity of that half-way-point. Always
calculate Half-way-points mathematically do not guess, because your eyes will lead you astray.
Ice: The ICE is the FORMER SUPPORT AREA at the BOTTOM of the T/R which BECOMES a SUPPLY AREA.
The ICE is shown by drawing a wiggley trendline across the various support points at the bottom of the range. In a
manner similar to the creek which is drawn through the supply points at the tops of the rallies in the T/R.
Last Point Of Support (LPS): Should have a LACK OF SUPPLY indicated by a RELATIVE NARROWING of
the SPREAD and a DECREASE IN THE VOLUME. The comparison is between the up move constituting the
(SOS) and the REACTION FOLLOWING it, the (LPS). See the Back-up to the edge of the creek. What if the stock
has a possible (SOS) indicated by a widening spread and increasing volume on the move up and is then followed by
good supply on possible (LPS) indicated by wide spread and high volume on the reaction? This CANCELS the
probability of the fist action being a (SOS) and the stock will probably continue in the trading range for additional
testing.
Last Point Of Supply (LPSY): The (LPSY) is proceeded by the (PSY), (BC), (AR), (ST), (SOW) and then the
(LPSY) occurs. The reaction preceding the (LPSY) must be a (SOW). any possible or potential (SOW) must be
confirmed, denied or left in doubt by the SUBSEQUENT rally. If the rally has a relative lack of demand on IT,
generally evidenced by a decreased spread and decreased volume, this would be CONFIRMATION and PROOF of
a (LPSY). However, should demand still be strong on that rally as evidenced by good or increased volume as well as
wide or widening spread, it is usually best to regard such action as a DENIAL of the (SOW) and such action may
well leave the interpretation of the (SOW) and the (LPSY) in doubt. When this occurs DO NOT take a SHORT
POSITION. It is better to miss a move then to run a great risk of being wrong. The (LPSY) rally will often stop just
below the way point. It is NOT particularly important where a (LPSY) stops on the rally, however, it very often
turns in the vicinity of that that way point. There is no one exact point in which to take a position. YOU MUST
judge the (LPSY) as it occurs and attempt to establish a short position as close to the TURNING POINT as possible.
Often you can tie this in with other principles, such as: The meeting of the supply line, The previous supply or
support area and the way point, Very often the (LPSY) will come in the same area as the (PSY) or the (BC).
Law of Cause & Effect (C/E): in order to have an effect you must first build a cause. The effect will be in direct
proportion to the cause and cannot be separated from the cause. Very often the working of this law can be most
easily seen in the figure chart.
Law of Supply & Demand (S/D): When demand is stronger than supply prices will rise. When supply is stronger
than stronger than demand prices will fall.

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Mark-down (MD): from the Supply/Demand perspective is, Supply that is greater than Demand.
Mark-up(MU): from the Supply/Demand perspective is, Demand that is greater than Supply.

Measuring Trends: At SMI we use three methods of measuring trends: Trend lines, which measure the angle, there
are two types of trend lines: the normal use and the reverse use. Thrusts are used to measure each drive up & drive
down. The third measurement is the Half-way-point which is an indication of comparative strength and weakness
and the adequacy of the correction. When placing these measuring methods, do it with a great deal of exactness.
However, do not expect the stock or index to observe or reach them perfectly .
Overbought (OB): the stock or the market goes through distribution.
Oversold: (OS) the stock or the market can go through accumulation.
Position Sheet: A tally sheet showing the trend positions of specific securities. The position within a trend shows
where the price (position) is in the trend.
Preliminary Supply (PSY): is the FIRST important SELLING (or meaningful reaction) which is part of the
distribution area (this indicates the first important wave of supply or selling is being brought to market) and which
comes in to stop the upward trend TEMPORARILY. Usually theres some form of a Buying Climax which stops the
move and that is followed by a REACTION, (PSY), which has pronounced WEAKNESS or volume or preferably
both (wide spread & high volume). The buying climax (BC), is part of the Preliminary Supply (PSY) this
NORMALLY HAS LESS VOLUME THAN THAT ON THE FINIAL BUYING CLIMAX. The price reached on the
(LPSY) after a sign of weakness very often is in the same area reached on the (PSY). Analytically the significance
of the (PSY) is that if the entire area is distribution. That distribution may have begun in the area of the (PSY). Note:
sometimes the (PSY) and the (BC) occur on the largest and longest leg of an upwards thrust of the uptrend.
Preliminary Support (PS): is a form of a selling climax and is an action in which important demand comes in to
stop the down move even temporarily. The first important rally in a downtrend is the (PS) it may occur after the first
oversold condition, and is especially likely as the stock or the market reaches its downside objective. The
importance of the (PS) is as a warning that the end of the down move may be near. The significance of the (PS) is
that if the entire base is accumulation the accumulation may have begun at the (PS) and continued throughout the
base. Preliminary Support and the Last Point of Support (LPS) often occur at the same price level. The (PS) is
sometimes obscured due to the violence of the price action and sometimes it is virtually missing. But usually on
accumulation some form of (PS) is present.
Primary Growth Trend: sometimes it is a downward slanting trend. This is the general direction or rate of growth
the market: an index, a stock, or the economy, or company is taking.
Price/down: There are two ways price can go down: price can go down and have an increased supply meet a
superior force of demand at that point. Or price can go down and simply drift and drift and drift until it stops and
ultimately rallies. Mentioned on tape #2 side B: along with reverse trend lines.
Principle: is a comprehensive and fundamental law, doctrine or assumption. It is an unchanging rule.
Profit/Risk Ratio: Should never be less than 3:1, This means that for every 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 BETTER PRACTICE to LEAVE your STOP underneath the PRIOR
support area and IF NECESSARY GET-OUT BEFORE that stop is reached.

Rally: A short term advance in the price of any securities or class of securities. When rallies, or uptrends are
stronger than the reactions, Demand is stronger than Supply. You will be able to judge the Supply & Demand on
basis of the Price action, Volume and Time. There is a widened spread and an increasing volume on the rallies. On
the reaction there will be decreased volume and a comparatively narrow spread compared to the rally, indicating
less selling on the reaction then there was buying on the upside. In an up-trend you should not have prolonged price
weakness or massive dumping of stocks on the reactions.
Reaccumulation: Takes place within a sizable upward trend when a stock goes into a trading range and in the
process builds a count for a higher objective, usually confirming a prior base count. It goes into a resting stage and
the professionals continue to absorb the supply. Also called a STEPPING STONE.
Reaction: A short term decline in the price of any securities or class of securities. When reactions, or downtrends
are stronger than the rallies, Supply is stronger than Demand. You will be able to judge this on the basis of the Price
action, the Time and the Volume. Volume should remain good, strong, on the downside, the rallies however should

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be relatively weak indicating a lack of Demand. There should not be wide spread or increased volume or sustained
increased volume and it might take quite a bit of time on the rallies. The main point is that you have a unbalanced
condition in the Supply and Demand with Supply good on the downside and a lack of Demand, weak Demand on
the rally.
Secondary Test (ST): Immediately follows the (AR). There should be less selling than on the Selling Climax.
Evidenced by the decreased price weakness, the narrowing of the Spread and especially by the Decreased Volume.
At that point the down move has been stopped. The stock may go through redistribution, accumulation, or a trading
range in which nothing of importance is going on. There may be repeated secondary tests depending upon the
ability of the professionals to absorb the supply and the continued existence of that supply.
Self Reliance: learn to rely on yourself alone. This is a lone wolf business. Learn to make your own decisions,
discuss them with no one. Stick to your guns and follow through until the commitment is completed.
Selling Climax (SC): A situation characterized 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 end of a particular downtrend. This panic selling creates an extreme expansion of the price spread
and an expansion of the volume, this action may occur over one day or over several days. If it does NOT HAVE
THIS IT IS NOT A SELLING CLIMAX. The Wyckoff principle of the selling climax does not always occur at the
end of every decline. All that the (ST) of the (SC) does is STOP the DOWNMOVE.
Sign Of Strength (SOS): is an ACTION which shows that DEMAND is in control. The (SOS) should have GOOD
DEMAND on the UP MOVE, a WIDE SPREAD and INCREASING VOLUME on the UPSIDE. Now let us deal
briefly with the (SOS). The Sigh of Strength and the Crossing of the Creek are often two ways of looking at the
SAME ACTION and the BACK UP to the edge of the CREEK very often is the (LPS) Last Point of Support. This
(SOS) is usually is preceded by a T/R and a stock can continue in a T/R until it either has a (SOW) or a (SOS). The
(SOS) shows that DEMAND is in CONTROL the Price & Volume characteristics are that it has WIDENING
SPREAD and an INCREASE in VOLUME evidence of the good DEMAND. This is PROVEN and followed by the
REACTION to the (LPS), that (LPS) should have a NARROWING of the SPREAD and a DECREASED of
VOLUME compared to the (SOS) indicating the LACK of SUPPLY on the REACTION

Sign Of Weakness (SOW): is an action which shows that SUPPLY is in control. The reaction will decline with a
widening spread, increased price weakness, and increased volume, evidence of increased and heavy selling, this is
BEARISH. The (SOW) is usually proceeded by a T/R. If the T/R was in an uptrend it would have been stopped by
the (PSY), (BC), (AR), (ST). The T/R will end, on the far right hand side, it may end its move with a classic (UT)
or (UTAD) or it may NOT. It may simply have a (SOW) and a (LPSY) with perhaps lower tops and lower bottoms.
Any possible or potential (SOW) must be confirmed, denied or left in doubt by the SUBSEQUENT rally. The
critical thing is NOT HOW FAR the stock rallies, the critical thing is HOW it RALLIES. If it rallies with a gradual
decrease in demand, evidenced by a narrowing spread and decreased volume, and with a lower top this
COMPARATIVE lack of DEMAND would PROVE and CONFIRM that the previous reaction was a (SOW). Thus
DO NOT take a speculative position until you see an (UT) or an (UTAD), or where there is no (UT), the first place
to take a position is on the (LPSY) after the (SOW) and aim to pyramid with the coming trend.
Spring: a spring is a refinement of Mr. Wyckoff s concept of a Terminal Shake-Out and grew out of that concept. A
spring is a penetration below a previous support area which enables one to judge that quality and quantity of that
supply on that penetration. The CRITICAL thing that is shown by the SPRING or the TERMINAL SHAKEOUT is
the AMOUNT of SUPPLY that COMES OUT on the DRIVE to NEW LOW GROUND and HOW WELL that
SUPPLY IS ABSORBED. Remember this vital point, it is important. The main difference between the spring and
the terminal shake-out is how far it penetrates into new low ground. Example: in a $50 dollar stock if the drive into
new low ground is 4 or 5 points and then it turns around, we would call that a terminal shake-out. However, if it
reacted or penetrated or a point, a point or a point and a or a much shorter penetration we would call this a
spring. Additional definitions: As the stock goes into new low ground one of two things will happen. Either
overwhelming supply will come in or no supply. Overwhelming supply is a 1-spring, it is evidenced by a wide open
break in price action and very heavy volume. A 3-spring is with no significant price weakness and low volume on
the penetration into new low ground. There is a very large area between these two extremes. We call these number
2-springs and a 2-spring is very similar to a terminal shake-out in that both have supply and both must be tested by
a secondary test. It is VERY IMPORTANT to understand that there is NO CLEAR CUT LINE of demarcation
between a #1 spring and a #2 spring, a #2 spring and a #3 spring. The CRITICAL FACTOR is NOT the
TERMINOLOGY, the CRITICAL FACTOR is YOUR UNDERSTANDING of the relationship of SUPPLY to
DEMAND in the BASE area and on the SPRING.
#1 SPRING: The #1 SPRING has OVERWHELMING SUPPLY which is indicated by a EXTREME PRICE
WEAKNESS and heavy selling. The PRICE and VOLUME characteristics are that there is a WIDE SPREAD and
HEAVY INCREASE in VOLUME. This is EVIDENCE of an ABUNDANCE of SUPPLY. The stock goes through
the T/R on the DOWN SIDE and continues DOWN until the DOWNTREND can FINELY be HAULTED. If the
stock has been under accumulation, usually it will REQUIRE EXTENSIVE further PREPARATION before the
stock is READY TO MOVE OUT of the accumulation area. Usually however, the #1 SPRING is PRECEDED by at
least MINOR DISTRIBUTION and OFTEN, INTERMEDIATE or MAJOR DISTRIBUTION. The #1 SPRING is

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FAR MORE LIKELY to occur in stocks which are in MAJOR and SUSTAINED DOWNTRENDS then they are to
occur in UPTRENDS. HEAVY SUPPLY and small demand a #1 spring.

#2 Spring: now theres a VERY LARGE AREA in-between the #1 and the #2 SPRING in which there is SOME
SUPPLY. We call this a #2 SPRING. The SUPPLY on the #2 SPRING is evidenced by SOME INCREASE in
PRICE WEAKNESS, in other words SOME INCREASE IN THE WIDENING of the SPREAD as it goes INTO
NEW LOW GROUND and SOME INCREASE in the VOLUME over the GENERAL level of TRADING. SUPPLY
is not absent, it is NOT OVERWHELMINGLY ABUNDANT.
That SUPPLY will either be ABSORBED, in which case it will be a #2 plus SPRING, or a 23 spring, (supply on the
#2 spring itself and then a LACK of SUPPLY on the S/T), or it will not be absorbed and SUPPLY will persist and
persist and persist driving the PRICE DOWN and will have the SAME effect as a #1 SPRING. This alternative we
call a #2 minus SPRING, or a 21 spring, (the weight of SUPPLY is increased & increased until the demand simply
cannot handle it). The #2 minus SPRING has the SAME effect as the #1 SPRING in that the SUPPLY persists and
persists and persists and DRIVES the PRICE of the stock DOWN, DOWN and DOWN until it is finally halted and
has to start a NEW SUPPORT LEVEL all over again. SUPPLY DEMAND is more in balance with a #2 spring,
hence the need for a secondary test. Incidentally the PRICE and VOLUME indications on a #2 SPRING are LESS
LIKELY to be CLEAR CUT then on a #1 spring or a #3 spring. The classic illustrations are FEW and FAR inbetween. This is why it is necessary to STUDY MANY EXAMPLES and to have examples from different periods of
market history.
#3 Spring: The second alternative is that NO SUPPLY is DUMPED on the market. No INCREASE in SUPPLY can
COME OUT on the DRIVE into NEW LOW GROUND we call this a #3 SPRING. The #3 Spring is evidenced by
lack of a INCREASE in the general level of trading. Any INCREASE in volume if at all is very, very MINOR. And
there is a lack of IMPORTANT PRICE WEAKNESS as it goes into NEW LOW GROUND and the SPREAD does
NOT materially WIDEN. Small supply and HEAVY DEMAND a #3 spring.
(ordinary) Shakeout (OS): the DIFFERENCE between the Terminal Shakeout and a ordinary Shakeout is that the
ordinary Shakeout occurs in an UPWARD trend. The Terminal Shakeout occurs at the END of the
ACCUMULATION area and at the END of a TRADING RANGE or a SUPPORT AREA. While the ordinary
Shakeout occurs in an UPWARD trend. An ordinary Shakeout maybe defined as a sharp DOWNWARD THRUST
occurring in an UPWARD TREND without extensive previous preparation. It is executed for the purpose of buying
all the stock possible from WEAK or VULNERABLE holders, it is PRECEDED By an UPWARD move. The
ordinary Shakeout is characterized by PRICE WEAKNESS and usually an INCREASED VOLUME. In other words
a WIDE SPREAD and some INCREASE in VOLUME. However, the VOLUME maybe HIGH, MEDIUM or LOW.
When there is SUPPLY on the Shakeout itself it must be tested by a SECONDARY TEST. The secondary test should
have a NARROW SPREAD and a DECREASED VOLUME compared to that of the ORDINARY SHAKEOUT.
This indicates that there was less SUPPLY on the secondary test then there was on the Shakeout and the buyers then
KNOW that the stock is AGAIN prepared to MOVE UP with relative SAFETY.
Taking a Position in a Stock: if important accumulation or distribution in a stock is going on it is very difficult to
hide it, this will normally show up on the charts. When it is not clear stay out! When indications are clear take a
position with the timing and the profit risk ratios in your favor. Your first job is to protect your capital, your second
job is to obtain a profit when the risk is in your favor.

Terminal Shake-Out (TSO): is a sharp downward thrust through a previous support area. A spring is a refinement
of Mr. Wyckoff s concept of a Terminal Shake-Out and grew out of that concept. It is executed for the purpose of
buying all the stock possible from weak or vulnerable holders. It is PRECEDED by a TRADING RANGE or a
SUPPORT LEVEL or at the end of ACCUMULATION area. It is FOLLOWED by an attempted to begin the markup
phase of the cycle. The Terminal Shakeout is a drive down through the support level for the purpose of SHAKINGOUT all of the people who can be scared-out or forced out of the market and forced to sell. The CRITICAL thing
that is shown by the Terminal Shakeout is the AMOUNT of SUPPLY that comes OUT on that Shakeout and whether
or not that SUPPLY is ABSORBED. Remember this vital point, it is important.

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Thrust: measures the price progress the stock or index makes on each wave within the trend. The thrust is the price
difference between consecutive tops in up trends, or between consecutive bottoms in down trends. To measure the
thrust we draw a series of horizontal lines at the level the highs and lows are reached on the drives within the trend
and connect them with a vertical line.
Trading Range(TR): a condition characterized by temporary price trends, which are offset by ensuing moves in the
opposite direction, and by a persisting equilibrium in the supply-demand relationship. Behavior of: Generally in the
first part of the trading range the price swings are rather wide. Then in the later part of the trading range the price
action usually begins to narrow down. The stock gets dull. What happens to the volume or the general level of
trading, usually in the early part of this range there is rather high volume sometimes rather erratic volume both the
price and volume action maybe somewhat erratic and very difficult to analyze. Then in the latter part the closer you
get to the end of the trading range or leaving the trading range the volume begins to dry up. As the floating supply or
the flow of orders come into the market and begin to decrease the general level of the daily volume should decrease.
Actually you do not know for certain that the T/R is distribution until it goes through the testing process as in 3 rd
area. the T/R maybe accumulation, distribution, or nothing, nothing being an area in which no one is preparing for a
large move, thus a stock may remain in the T/R indefinitely until it has a (SOS) followed by a (LPS) indicating an
Upward move, or a (SOW) followed by a (LPSY) indicating a Downward move. Furthermore the early part of the
T/R maybe nothing and only the later part of distribution. This is why it is extremely important that you NOT
establish a long or short position in the T/R unless the stock has clear indications of leaving the T/R and beginning a
NEW TREND.
Trend: to have or to take a particular direction, it is the underlying or prevailing tendency of inclination of
movement-a tendency to move in a particular direction. There are three primary types of trends classified as
direction of movement: a upward trend, a downward trend and a sideways trend or treading range. Remember, that
the longer that the trend is in progress and the nearer you are to the end of the trend the more risk attends buying, or
selling short on the corrections around the way area. Your greatest profit potential and your least risk will occur
when the stocks are leaving the accumulation, or distribution areas or are very early in the trend, it is at this point
where your profit risk ratio will be the greatest and you will be able to use liberal stops. A trend may be corrected by
an ordinary shake-out.
Trend lines (TL): in an uptrend the bottom line is called the support line and the top line is called the supply line. In
a downtrend the top line is called the supply line and the bottom line is called the support line. In a trading range the
bottom line is called a support line and the top line is called a resistance line. The breaking of a trend line may result
in establishing a slower or faster trend in the same direction or in a completely new trend. The Supply/Demand
relationship will determine the continuing trend, it can change rapidly and must be watched closely. The price failing
to reach one line in a trend channel during rallies & reactions leaves the other vulnerable to being broken. A helpful
tool to use is to draw an arrow from a stopping point to the trend line to indicate the failure to reach that particular
trend line.
Reverse Trend lines (RTL): There are two kinds of trendlines: the normal use and the reverse use. In the normal
use of trendlines in an upward trend we draw the support line first through two consecutive reactions. The supply
line is drawn second through the rally that is between the two consecutive reactions, and parallel to the support line.
With the reverse use of trend lines used in an upward trend, we draw the supply line first, through two consecutive
rallies followed by a support line drawn second through the reaction that is between the two consecutive rallies, and
parallel to it. In a downtrend using the reverse use of trendlines the support line is drawn first through two
consecutive support points and the supply line is drawn parallel to it through the top of the rally occurring between
those two support points. The importance of the reverse use of trend lines is that it is determined by points a which
the opposition came in to stop the move. The reverse use of trend lines is drawn through where it is stopped, where
the opposition came in and actively stopped the trend, to stop it and reverse it even on a temporary basis.
Later on demand might come in at the same angle to stop the move.
Trends of four primary kinds:
1)
2)
3)
4)

The intraday
The minor
The intermediate
The major

INTRADAY TRENDS: are caused by very small fluctuations those fluctuations occurring within a day.
There maybe several of these occurring within one day. Intraday trends are usually a day or two in duration.
MINOR TRENDS: are made up usually of three or more intraday trends and are moves of up to
approximately ten percent of the price of the stock. Usually they last up to a couple of days to a couple of
weeks and are moves of up to approximately 10% of the price of the stock.
INTERMEDIATE TRENDS: which are made up of three or more minor trends and are movements of
around fifteen to twenty percent of the stock. They usually run for a couple of weeks to a couple of months
and are movements of around 15% to 20% of the stock.

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MAJOR TREND: is made up of three or more intermediate trends and is a movement of over twenty-five
percent of the price of the stock. Usually major trends will last for several months or perhaps much longer
and is a movement of over 25% of the price of the stock.
Upthrust (UT): : An Upthrust is a sharp price movement ABOVE a prior supply level which does NOT HOLD, but
immediately reacts below that previous level. Usually on the Upthrust the spread will be narrow and the volume will
be increased, this is evidence of the supply overcoming demand. Suppose a stock moves up from $50.00 to $51.00
and it takes 10,000 shares to do it and then moves to $52.00 and it takes 20,000 shares to do it. The volume, the
supply has increased in strength relative to demand. If the volume doubles the price progress should be double and
when it does not the inference maybe drawn that the SUPPLY is OVERCOMING the DEMAND. Suppose a stock
moves up one point on 10,000 shares and then moves up a point on 20,000 shares, here the narrowing of the
spread and the supply coming in to overcome the demand is much more emphatic. This usually is what occurs on a
Upthrust. The confirmation that it is an Upthrust is in the promptness and in the manner in which it reacts, it should
react promptly to show that the attempt to leave the T/R on the Upside has failed and generally it will react with
either a lack of demand or with the pressure of supply coming in on the downside. The Upthrust itself is the sign of
weakness (SOW) and the Last Point of Supply (LPSY) all in the same action. It is normally followed by a more
important (SOW) and a (LPSY).

Upthrust After Distribution (UTAD): The Upthrust after distribution is a special type of distribution in which the
stock goes up! Stops going up, builds a cause and then tries to leave that T/R on the upside, fails and then begins the
downtrend. In applying the rules you must use some judgment and some flexibility. The Upthrust After Distribution
is a special market phenomena or a principal which Mr. Evens defined through his Wyckoff studies. Perhaps the
most important problem that you will have with the Upthrust After Distribution (UTAD) is that you must avoid
looking for examples, or expecting examples of the (UTAD) to occur all the time, they simply DO NOT. However
when they do occur the (UTAD) can be an extremely helpful and profitable tool. Let us read the rule itself. After a
stock index or a commodity has moved up, has Climaxed, has then moved laterally and built a POTENTIAL cause
and is then moved into new high ground on a increase in volume and a relative narrowing of the spread to then
return to the AVERAGE level of closes would indicate that the entire lateral level was NOT accumulation, but was
distribution instead. MEMORIZE THIS RULE, in Mr. Evans original rules he stated: it moves sideways for a
period of four to twelve weeks. However, to put these constraints on the rule has proved to limit the understanding
of this excellent rule. Therefore we have modified the rule and have used: The building of a potential cause. The
only other change in the rule is that we now say that it has moved into new high ground on a relative narrowing of
the spread, we have added this word relative because a widening or a narrowing of the spread is RELATIVE to the
VOLUME. The spread MUST BE COMPARED to the VOLUME. Every word in the rules for the (UTAD) had been
designed for a purpose.
Volume: What is the difference between climax VOLUME and that which is known as BREAKOUT VOLUME or
ABSORPTION VOLUME ? Both generally have an WINDENING SPREAD and INCREASED VOLUME.
However, the CLIMAX VOLUME is stopping a trend which is out in open territory and has been in progress.
ABSORBTION VOLUME ( progress/price action & push/volume) however, occurs with a WIDENING SPREAD
and INCREASED VOLUME as the stock is breaking through a previous SUPPLY AREA and is simply absorbing
ALL of the SELLING that takes place as it moves up to NEW HIGH GROUND. This process also occurs in reverse
on the downside.
Volume Off The Bottom: Volume off the bottom is caused by the professional man simply absorbing all the supply
thrown off the market and moving the stock UP. It usually indicates a turnaround.
Wave: Intraday, Minor, Intermediate, Long term, Fluctuations that build-up & build-down and form trends. Actually
every upward or downward swing in the market whether it amounts to many points, or only a few points, or
fractions of a point consists of numerous buying & selling waves. These have a certain duration, they run just so
long as they can attract a following. When this following is exhausted
for the time being that wave comes to an end and a contrary wave sets in. These waves represent the shifting
relationship of Supply to Demand.

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.

Absorption: The reduction of the floating supply caused by persistent longer term buying within a trading

152
range.
Accumulation: The establishment of investment or speculative position by professional interests in
anticipation of an advance in price.
Advance: A rise in price or an upward movement in a stock, index, security, etc.
(Short) Against the Box: 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.
Angle of : That inclination of arising price trend.
Apex: the focal point of converging support and supply lines. (See dead center, hinge, pivot, wedge).
ASE: or AMEX: American Stock Exchange.
Average: a numerical representation which purports to reflect the mean (average) price of a particular
class of stocks.
Averaging: (1) Dollar Averaging: a periodic investing of a definite number of dollars
irrespective of the number of shares involved;
(2) Share Averaging: periodic purchases of the same number of shares irrespective
of the number of dollars required.
(3) Averaging up: periodic purchases on rising scale whose purpose generally is to
permit profits; and
(4) Averaging down: periodic purchases as a price declines, which has the general
purpose of lowering the mean cost of the stock.
Bear: A speculated who concludes that the profitable future trend will be one of declining prices.
Bear Market: A market condition characterized by declining prices.
Board Room: The room in a brokerage house in which stock prices are visually displayed.
Breakthrough: A price movement of above/below a previous supply/support area.
Bulge: A sudden expansion of price or volume. (However, bulge generally is used in reference to
volume.)
Bull: A speculator who concludes A the probable future trend will be one of advancing in prices.
Bull Market: A market condition characterized by advancing prices.
Buying Climax: A situation characterized 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.
Campaign: A organized market operation for the purpose of moving the price of the stock.
Close: The last price of the security, issue, index, etc. For specific time period. Generally, the last price
of the day.
Commitment: A market position in a stock or other trading medium.
Common Stock: 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 liquidation, assets. Common 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.
Composite Average: An index composed of a number of stock which is used to represent the general
market. Normally constructed by adding to prices of a limited but fixed number of stocks, adjusting for
splits, etc., then dividing by the number of stocks making up the average.
Composite Man: The term used to refer to the sponsors or large professional interests in the stock
market, also called composite operator. (See Preface: Explanatory Notes.)
Corner: 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.
Cover: the act of buying a security previously sold short. (See short sale, short covering).
Culminating: The ending of the move.
Day Order: An order to buy or sell which is good only on the particular day on which it is made.
Dead Center: The focal point of converging support and supply lines. (Also, apex, hinge, pivot wage).
Deduction: The form of logic or reasoning which proceeds from the general statement to the specific
case.
Distribution: The elimination of a along investment or speculative position.
Dividend: The payment designated by the Board of Directors to be distributed pro rata among the shares
outstanding.
Down Tick: A transaction with a price lower than that of the last preceding transaction.
Ex-Dividend: (Without Dividend) the condition of the stock in which the purchasers are not entitled to the
most recently declared dividend. (Abbreviated xd).
Figure Charts: A chart of a stock, commodity or index, which takes into consideration price movements
and fluctuations. Volume and regular time intervals are not generally used in the construction of figure
charts.
Floating Supply: The supply of the stock that is normally available for purchase during a given period of
time.
Force Index: An index developed by the stock market Institute to portray the investment factors during
continuous periods of market history.
G.T.C. (Good' til canceled) a customer's order to his broker to buy or sell securities at a specified price.
The order remains in effect until it is either executed or canceled.
Hedge: A condition in which both long and short positions are maintained by the same interests.
High: The highest price of the security, issue, index, etc., for specified time period. Generally, the highest
price of the day.
Hinge: The focal point of converging support and supply lines. (See apex, dead center, pivot, wedge).
Hypodermics: 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.
Index (Price): A statistical instrument which is used to determine the trend of particular class of security.
This is not an average.
Induction: The reasoning process or logic which begins with specific cases and proceeds to a broad
generalization.
Inside Day: A day for which the high and low prices are, respectively, lower and higher than those of the
preceding day.
Institutional investors: Generally, large corporate investors such as banks, insurance companies,
investment trusts, mutual funds, pension funds, colleges and universities, and charitable foundations.
Intermediate Trend: A price movement which has two basic characteristics. These are (a) a move of
approximately 15 % of its value and (b) the duration of two weeks to two months.
Intra-Day Wave Charge: A continuous line chart reflecting the price wings occurring entirely within the
single days trading (IDWC)
Investment position: securities holdings established for investment purposes only.
Law of Supply and Demand: The basic economic law used to explain the cause of all price changes.
Limit Order: An order to buy or sell only at a specified price or at one more favorable than the specified
price.

154

Line of Least Resistance: The trend of security prices, whether it be advancing or declining.
Liquidation: The process of converting securities and/or other property into cash.
Locked-In: The psychological state of mind which exists when an individual believes that he cannot
afford to liquid a security position.
Long: The ownership of securities.
Long-sale: The sale of along security position.
Long Terms: Financially, it is considered to be a five-year investment; the tax definition is six months.
Low: The lowest price of the security, issue, index, etc., for a specific time period. Generally, the lowest
price of the day.
Maintenance Margin: The minimum margin required in order to maintain a previously established
position.
Margin: The amount of money deposited by a customer when he uses credit to buy securities, the
balance being financed or advanced by the broker.
Mark-Down: A sustained downward price movement.
Market Order: An order to buy or sell at the best price available at the time the order is received at the
appropriate trading post.
Mark-Up: A sustained upward price movement.
Momentum Index: An SMI index to measure speculative market forces.
NYSE: New York Stock Exchange.
Odd Lot: An amount less than the established round lot for any class of security.
Option: A contractual right to buy or sell a security at a specified price within the specified period of time.
Optimism Pessimism Index: 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.
Overbought: A condition in which the supply - demand relationship for a particular class of securities is
such that normal equilibrium between economic forces exists only at a price below that at which the
current trades are being made.
Oversold Line: In a downtrend, a line drawn through a point of support parallel to that trend' s supply
line.
Pivot: the focal point of converging support and supply lines. (See apex, dead center, hinge, wedge).
Position: Holdings of securities, whether long and / or short.
Position Sheet: A tally sheet showing the trend positions of specific securities.
Preferred Stock: 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.
Preparation: Transactions designed to affect the supply/demand relationship for a security in order to
facilitate its future price move.
Pressure: Sustained selling of a security.
Primary Distribution: The initial liquidation of along position.
Process of Rotation: 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.
Puts and Calls: Options 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.
Pyramid: The use of accrued profits to enlarge a speculative position.

155

Rally: A short-term advance in the price of any securities or class of securities.

Reaction: A short-term decline in the price of any securities or class of securities.
Round Lot: A unit of trading. On the New York Stock Exchange the unit of trading is, generally, 100
shares in stocks and $5, 000 par value in the case of bonds.
Secondary Distribution: The liquidation of a long security position occurring after primary distribution but
prior to the next mark-down phase. A plateau in a big down move.
Securities: Stocks, bonds, commodity futures contracts, or other issues which may be traded.
SEC: The securities and exchange commission established in 1934 by Congress to regulate the
investment industry.
Security Position: Securities held long and/or short by investors and/or speculators.
Selling Climax: A situation characterized 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.
Shakeout: A deliberately forced price reaction, whose purpose is that of stimulating public selling in order
to facilitate the accumulation of speculative positions.
Short Covering: Buying the stock to eliminate or close out a short position.
Short Position: Securities and/or commodity future contracts sold short.
Short Sale: sale of a borrowed stock by a person who believes the price will decline. I.e. you instruct
your broker to sell short 200 shares of XYZ. Your broker borrows the stocks so he can deliver the 200
shares to the buyer. The monetary value of the shares borrowed his deposited with a lender. You are
later required to cover your short sale by purchasing the same amount to return to the lender.
SMI: Stock Market Institute, Inc.
Speculation: To assume a market risk and expectation of gains; especially, to buy or sell in expectation
of profiting from market fluctuations.
Springboard: 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 mark-down period.
Stop Limit Order: an order to buy or sell which becomes a limit order as soon as the stock's price
reaches or sells through a specified stop price.
Stop Order: 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.
Straddle: Going long in one security or option and short in another.
Strength: A security or class reflects strength when it's price shows the ability to advance.
Strong Technical Position: Condition in which normal available demand exceeds floating supply.
Supply Line: In a downtrend in line connecting at least two important points of supply.
Tape Reader: A person trained to determine the characteristics of market fluctuations, using data which
he derives from the ticker tape.
Technical Position Barometer: A chart which graphs the number of stocks in the various positions as
determined by the Wyckoff Position Sheet.
Technical Rally: A technical rebound. A part of the typical selling climax. (Automatic rally)
Technical Reaction: Opposite of technical rally -- part of the typical buying climax. (Automatic reaction)
Technometer: An index developed by the Stock Market Institute for the purpose of indicating normal
extremes in the supply -- demand conditions.
Terminal Shakeout: A sharp down with thrust through a previous support area. Executed for the purpose
of buying all the stock possible from weak or vulnerable holders.

156
Terminal Thrust: A temporary bulge through the top of the trading range which fails to hold.
Thrust: The price difference between consecutive tops in uptrends or between consecutive bottoms in
downtrend's.
Thrust Movement: 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).
Trade: To buy or sell stocks, securities, options, etc.
Trading range: A condition characterized by temporary price trends, which select techno-m offset by
ensuing moves in the opposite direction, and buy a persisting equilibrium in the supply -- demand
relationship.
Trans-Lux: Equipment for optical viewing of stock sales.
Trend: The line of least resistance. It is the direction in which a price is moving.
Trend Barometer: A statistical tool which is portrayed graphically and consists of the Momentum Index,
the Force Index Technometer. This was Developed by the Stock Market Institute.
Trend Charts: These are charts which graphically depict the trend of the market, in index, or an individual
stock.
Turning Point: The place at which a security price trend reverses its direction.
Upthrust: A sharp price movement above a prior supply level, which does not hold, but immediately
reacts below that previous level.
Vertical Line Charts: charts which graph the volume, high, low, and closing prices for the day, week,
month, or year of any security or class of securities.
Warrants: Rights to buy a stock a specific price. generally, issued for longer periods of time than ordinary
stock subscription rights.
Weakness: The ability of price to decline.
Weak Technical Position: A condition in which normal available demand is exceeded by the floating
supply.
Wedge: The focal point of converging support and supply lines. (See apex, dead center, hinge, pivot.)
Whipsawed: A situation in which a speculator is repeatedly wrong the matter what he does. It usually
results from buying at the Thompson's selling at the bottoms.
Up-Tick: A transaction with the price is higher than that of the previous transaction.
Zero-Minus Tick: The transaction price identical to the preceding price (S.) which itself had been a downtick.
Zero-Plus Tick: A transaction price identical to the preceding price (S.) which itself had been up-tick.

157

FROMALVIN&BETTENELSONPHONENO.8477248793JUN.2E2E92eg:42RMRI
FAX
TO:Fred

Phone
FaxPhone
CC:
IDate6/29/98
Numberofpagesincludingcoversheet10
FROM:AlvinANelson
44ParkDrive
Glenview,IL600252721

Phone
FaxPhone8477248809
REAMRKS:Foryourreview

Fred,
HerearesomenotesItookfromtheWyckoffmanualsandtapesforyourreview
Al

WyckoffNotesFromTapes
IntradayMoves:
VerySmallfluctuationsoccurringwithaday(needtapereader'stechniques)

MinorMoves:
Threeormoreintradaytrendsthatlastacoupleofdaystoacoupleofweeks.
Magnitude10%.

IntermediateMoves:
Threeormoreminortrendslastingacoupleofweekstoacoupleofmonths.Magnitude
of15%20%.

MajorMoves:
Threeormoreintermediatetrendslastingseveralmonthstoseveralyears.Magnitude
over25%.
TheEndOfaDownMoveandStanofTradingRange:
1.PreliminarySupply
2.BuyingClimax
3.AutomaticReaction
4.SecondaryTestoftheLow

TerminalShakeout:
Deep,sharpbreakthroughprevioussupportleveldesignedtoslakestockoutofweak
bands.

Spring:
Short,sharpbreakthroughformersupportlevelwithpurposeofshakingoutstock
fromweakhandsandseeingwhatvolumeofstockisavailable

No.1Spring.
Widepriceswingonheavyvolume.Supplyisincontrol.Mostprevalentindown
moves.Possibleshortsaleonrallyafterthespring.

No.2Spring;
Mediumlevelofpricespreadandmediumvolume.Bullishsign,hiltbecauseofthe
volumeonthedownsidethelowwillbetestedagain.Thereshouldbegooddemandon
therallyoffthebottom.Iflesssupplyshowsuponthesecondarytestofthelow
buy.ifmoresupplyshowsupwaitforfurthertests.

No.3Spring.

158

Verysmall,ifany,pricedropbelowformerlow.Lackofincreaseinnormalvolume
levelbelowsupport.Thisspringlowdoesnothavetobetestedbecauseprofessionals
knowverylittle,ifany,stockisleftinweakhands.Buyonthespring.

UpThrustsandUpThrustsAfterdistribution:
Distributionisusuallyaccomplishedinarelativelyshorttime,whereas,
accumulationtakesmuchlongeroftenmanyyears.Majordistributionoccursovera
fewweekstoafewmonths.Theactionischaracterizedbywidepricemovement,heavy
volumeandgreatactivity.

TakeAShortPositionOnly
1.OnanUpthrustorUpThrustafterdistribution.
2.Onlastpointofsupplyafterasignofweakness

HowToTakeASpeculativeposition:
1.Determinethetrendofthegeneralmarket
2.Classifystocksbytheirrelativestrengthorweakness
3.Analyzethestocksmostlikelytomovewiththemarketandpicktheonesmost
likelytodobetterthanthemarket.

QuestionsAboutIndividualStocks
1.Whichdirectionisthestockgoingtomove?
2.HowSoonisitlikelytomove?
3.Howfarwillitprobablymove?(point&figurechart)
4.Takeactionnow?
5'Wait&watchforpointtotakeaction
6.Removestockfromconsideration&lookforothers

EstablishaPositionForAnUpMoveOnSpringBoardatRightHand
SideofTradingRange
1.OnaNo.3Spring
2.OnaNo.2Springoritstest
3.ATerminalShakeoutoritstest
4.AbackupToTheEdgeoftheCreek
5.OnLastPointofSupportafteraSignOrStrength
6.ifastockisinanuptrendbuyonnormalcorrection,usuallyaroundthehalfwaypointor
onanordinaryshakeoutoritstest.

CloseCutYourLongPosition:
1.WhenstockreachestheobjectivebuiltbyCauseintheoriginalaccumulation.
2.Asstockreachestheobjectiveoftheareaofreaccumulation
3.AttheappearanceofPreliminarySupply
4.OnaBuyingClimax
5.OnashorteningofPriceThrust(bigvolumebutlittlepricemove)
6Reachingamajor"HalfPoint"rangeoranoverboughtcondition
7ReachingofaSupplyLine

TakingaShortPositionOnaDownMove
1.TakeashortpositiononanUpThrustoranUpThrustafterdistribution
2.OntheLastPointOfSupplyafteraSignofWeakness
3.wbenastockisinadowntrendyoucantakeashortpositiononanUpThrustora
normalcorrectionaroundtheHalfWayPointofthelastdownmove

WhereToCloseCutYourShortPosition
1.Whenthestockreachestheobjectivebuiltbythe"Cause"intheoriginalareaof
distribution.
2.Whentheobjectiveofanareaofredistributionismet.
3.AtthepointofPreliminarySupport
4.AtaSellingClimax
5AshorteningofPriceThrustonthedownside
6ReachingmajorHalfWayPoints
7AtaSupportLineoronanOverSoldcondition

Risk/RewardRatio
1.NevertakeapositionwithlessthanaOnetoThreeRisk/RewardRatio
2.AlwaysuseaStopLossOrder(placedatsametimeyonplaceyourbuyorder)to
limitriska
specificamountinlinewithyourRisk/RewardRatio
3.HowtoplaceStopLossOrder
a.Placejustbelowfull$figureonlongside(277/8)
b.Placejustabovefull$figureonshortside(281/8)

159

InplayingforarallylookattheRisk/Rewardratiojustlikeyonwerelookingtobuy
intoanewstock.

ProfitGoalsForDifferentTypesOfTrading
LongTernPositions:
50%profitobjectivepertradePositionsheldformorethanayear.Oneroundof
tradesperyear.

IntermediateTermPositions;
Profitgoalof20%to40%withpositionsheldfrom4to6months.Possibletodo
3roundsoftradesin1year.

ShortTermPositions;
Shorttermprofitobjectivesneednotbemorethan10%to20%withpositions
heldonlyforafewweeks.Possibletodo12roundsoftradesinthe1styear.

WyckoffPrinciples
TheLawofSupply&Demand:
Ifaninvestorwantstoexchangehisdollarsforsomeoneelse'sshares,butcanonly
getthosesharesbyofferingmoredollarsthandidthepreviousbuyerandifheis,in
fact,willingtooffertheincreasednumberofdollars,thepriceofthestock
increasestoabsorbtheextradollars.Inthiscase,itissaidthatthedemandis
greaterthanthesupply.
Ontheotherhand,iftheinvestorwantstoexchangehissharesfordollarsandwill
acceptfewerdollarsthanthesellerbeforehimtoaccomplishhisobjective,theprice
ofthestockwillbereduced.Inthiscase,itissaidthatsupplyisgreaterthan
demand
TheLawofCause&Effect:
Inorderfortheretobeaneffectthatshowsupasachangeinthepriceofastock,
theremustfirstbeacause.Theeffectrealizedbyacausewillbeindirect
proportiontothatcause.Togetanimportantmove,oreffecttheremustbean
importantcause.Thesearenotbuiltfromonetrade,butrathertaketime,sometimesa
longtime,todevelop.Generallythesecausesarebuiltduringanimportant
shiftinwhoisholdingthestockThemostimportantflowofsharesisthe
onethatoccursassharesleavethestronghandsoftheprofessionaltradersandgoto
theweakerhandsofthegeneralpublic
Theknowledgeabletraderwillgowiththeupwardtrendaslongaspricescontinueto
moveupeasily.Atsomepoint.priceswillbegintoencounterresistanceandthe
professionalusesthisbuyingasanopportunitytoliquidatehisholdings
TheLawofEffortvs.Result:
Theresultiswhathappenstothestockprice.Itisthevolumethatproducesthe
effortthatachievestheresult.Withoutefforttherecanbenoresult.Whenthe
amountofeffortandtheextentoftheresultarenotinharmony,somethingiswrong.
AnypositionsheldwhenthissituationexistsarepotentiallyindangerTheymaynot
beliquidated,buttheyshouldbeprotected
Example:
Asthestockadvances;theamountofeachsuccessiveadvance
decreases.Thevolumeontheotherhandincreasessteadilythroughoutthefour
daysThisresultsinaclearcaseofaneffortwithoutacorrespondingresult.It
producesawarningofpotentialtrouble

TheNineBuyingTests
1.Tobecertainthepreparationinthetradingrangethatleadstotheperceived
buyingopportunityisinfactaccumulation,thedownsideobjectiveoftheprevious
tradingrangemustbeaccomplished.
2.Thepriceandvolumeactionofthestockmustbebullishbeforetakingalong
position.Thatisvolumeshouldincreaseonralliesanddecreaseonreactions.This
actiondoesnothavetoappearthroughoutthetradingrange.Afteranimportant
decline,itisnormalforearlyrallies&reactionstocarrysomeofthenegative
qualitiesofthepriordownmoveHowever,ifthetradingrangeisaccumulation,this
patternwillstopUntilthisswitchtoabullishpattern,nobuyordersarewarranted.
3.Unlessthetwocriticalpointsofstoppingactionarepresentpreliminarysupport

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&sellingclimaxnobuyingisjustified.Manystrongmovesovershootthedownside
objective.Therefore,itisnotcorrecttobuyjustbecausethepricereachesthe
objective.Theremustbeaclearerindicationthepriormoveisoverandthisis
providedbytheprocessoffirstmeetingpreliminarysupportandthenexperiencinga
sellingclimax.
Exception:
Inmajorbullmarkets,oneperiodofaccumulationandadvancecanbe
followedbyanotherperiodofaccumulationleadingtoafurtheradvance.Thebeginning
ofthesecondperiodofaccumulationbeginswithpreliminarysupplyandabuying
climaxinsteadofpreliminarysupportandasellingclimax.
4.ThestockmustbestrongerthanthemarketThismeanstherelativestrengthindex
mustbeshowingastrongpicture.Thestrongstockadvancesbyagreaterpercentage
thanthegeneralmarketonralliesandretreatsbyasmallerpercentageonreactions.
5Aslongasthesupplylineofthedowntrendremainsunbrokennobuyordersare
warranted.Oncethatlineispenetrated,however,thefixtureofthedowntrend
becomesmoredoubtful.Themorepenetrationsthatoccur,themoredoubtfulthedown
trend'sfuturebecomes.Thesupplylinemustbetotallydestroyedbeforeanylong
positionscanbetaken.
6.&7.Inorderforastocktobeconsideredagoodbuy,itmustdemonstratehigher
highsandhigherlows(stairsteps)Astockthatmovesfromaspringsituation,up
throughasignofstrength,backtoalastpointofsupport,jumpsthecreek,andthen
successfullybacksuptotheedgeofthecreekisproducingtheidealexampleof
highersupportsandtops,
8.Ifastockistobeconsideredforalongposition,itmusthavebuiltabase.Just
becauseastockhasstoppedgoingdowndoesnotmeanitisreadytogoup
Rememberthelawofcauseandeffect.Ifaworthwhilebaseisnotinplace,along
positionisnotjustified.Thebaseiseverythingthatgoesintothemakeupofthe
accumulationphaseandpartofthatisthepoint&figurecount.Whatconstitutesa
worthwhilebasedependsonyourinvestmenttimeframe.Ashorttermtraderneeds10%to
15%,anintermediatetradersneeds20%to4004andalongtermtraderneedsover50%.
9.Theestimatedprofitinthestockbeingconsideredmustbeatleast3timesas
largeastheriskofputtingontheposition.Theestimatedprofitcomesfromthe
point&figurecountTheriskiscalculatedbyhowfarbelowyourentrypricea
logicalstoplossordercanbeplaced.Aproperstoplossordermustbeplacedjust
belowanimportantsupportlevel.Ifyoucan'tsetaproperstoplosspointandstill
preservea3to1riskrewardratio,don'tmakethetrade.
Note:ifastockpassesall9ofthebuyingtests,itisapotentialbuy.Thisassumes
italsopossessesadequatepotentialtomakeaworthwhilemove,andislocatedinone
oftheprimarybuyingpositions.Allofthesequalificationssignificantlylimitthe
numberofstocksthataresuitablefortradingatanyparticulartimeEvenso,the
numberwillalwaysbelargeenoughtosatisfyeventhelargestamountoffunds.

TheNineSellingTests
1.Tobeconsideredasashortcandidate,astockmustreachitspreviously
establishedupsideobjective.Thisprovidesanindicationthatthepriorupmoveis
over.Distributionleadingtoaneventualdeclineisthenpossible.
2.Thepotentialshortsalecandidatemustalsoexhibitbearishornegativebehavior.
Thisisdeterminedbythepatternofpriceandvolumeaction.Inordertobe
consideredbearish,volumemustincreaseonreactionsinpriceanddecreaseon
rallies.Thisindicatesagreaterinterestinthedownside
3.Theremustbeanindicationbythepriceandvolumeactionthattheperviousup
moveisover.Thistestissatisfiedbythedevelopmentofpreliminarysupplyanda
buyingclimax.Inthoseinstanceswhereaphaseofdistributionanddeclineis
followedbyaredistribution,whichislikelyinveryweakmarkets,thereisno
preliminarysupplyandbuyingclimax.Thisprecludesthepassingofthissellingtest,
butdoesnotstandinthewayoftakingashortpositionifallotherqualifications
aremet
4.Thestockmustbeweakerthanthemarketasindicatedbytherelativestrength
index.Inthiscase,thecomparisonmadebetweenthegeneralmarketindexandthe
priceactionofthestockwillrevealapatternofresponsivenesstoreactionsand

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resistancetoralliesthatexceedsthatofthegeneralmarket.
5.Beforeanyshortpositionisestablished,itisnecessarythattheupwardstrideof
thepreviousuptrendbebroken.Thismeansthatthesupportlineofthetrendmustbe
decisivelypenetrated.Inaddition,itisdesirablethatanyattemptsbythepriceto
reenterthetrendchannelbeturnedback.
6.&7Astockmostshowapatternoflowertopsonralliesandlowersupportson
reactionstobeseriouslyconsideredasashortsalecandidate.Thispatterndoesnot
havetobeevidentthroughouttheentiredistributionphase.Itmust,however,bein
evidencejustbeforetheshortsellingpositionisestablished.Thispatternindicates
thatsupplyisexceedingdemand,whichisnecessaryifasignificantdeclineisgoing
todevelop.
8.Hasthelateralmovementortradingrangebuiltaworthwhileamountofdownside
potential?Thisisanotherimportantpointthatmustbemetbeforeanyshortposition
istaken.Inconsideringthesignificanceofthepotential,usethesameguidelines
usedforlongpositions.Shorttermopportunitiesneed10%to15%potential,
intermediatepositionsfrom25%to40%,and50%ormoreforlongtermopportunities.
9.Thefinalsellingtestistocomparetheprobableprofittotheriskindicatedby
positioningoftheinitialstoplossOrderabovethepurchaseprice.Itmustbeno
lessthanthreetoone.Ifthestoplossordercannotbeproperlypositionedwiththe
resultbeingthatthepotentialprofitisatleastthreetimestherisk,somethingis
wrong.Noactioncanbetakeninthatstock.

Note:
Thegreatestdegreeofconfidenceinashortpositionexistsifallthesellingtest
arepassed.Failuretopassevenonetestcreatesadoubtthatmaybeconsidered
reasonenoughnottoact.Tryingtoweighthesellingorbuyingtestastoimportance
isnotadvisable.Thereisnowaytodeterminehowmuchmoreimportant,ifatall,one
testisthananother.Tryingtorankthetestscanleadtotakingapoorposition.It
nevermakessensetotrybargainingwiththemarket.Themarketwillinvariablywin.
Thebuyingandsellingtestsarepresentedintheordertheyareforareason.Thisis
thenormalsequenceinwhichastockwillattempttopassthem.Thereisanother
approachthatcanbeused.Generallythemostdifficultteststopassinvolvethe
potentialandthestop.Canastopbeproperlypositionedandstillmaintainatleast
theminimumacceptableprofit/riskratio?
Thefactthattwotestshelptopreventsomanypotentialproblemsisnoreasonto
avoidbecomingfamiliarwiththeothertests.Atsomepoint,astockbeingconsidered
foratradeprovidespositiveanswerstoallthesestests.Thisisnotanautomatic
greenlighttothetakingofaposition.Thenormalorderinwhichalltheothertests
tendtobepassedindicatesthatthepositiveresponsetothelasttwoverifiesthe
desirabilityofaction.Theproblemwiththisisthattheothertestsdonothaveto
bepassedintheusualorder.Asaresult,thepassingofthelasttwotestsmaynot
proveanything.whentheyarepassed,thewisetraderwillthenchecktomakesureall
theothersarepassedaswell.

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Submitted by Mike Ellis

Wyckoff Important Points

SECTION 1...............................................................................................................................................2
SECTION 2...............................................................................................................................................3
SECTION 3...............................................................................................................................................4
SECTION 4...............................................................................................................................................5
SECTION 5...............................................................................................................................................6
SECTION 6...............................................................................................................................................7
SECTION 7...............................................................................................................................................8

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SECTION 1
1. Richard I. Wyckoff, through long experience, developed a method of judging the stock
market by its own action.
2. A speculator uses intelligent foresight in buying or selling stocks. To sell or buy stocks
otherwise is gambling.
3. You must learn to determine the position and probable future trend of the market. To do
this, you must learn the Wyckoff principles then devote time to applying them in your
market operations.
4. 1hroughout this course we will help you to develop independent judgment and selfdiscipline so as to become an intelligent, scientific and successful trader and investor.
5. An important point to learn early is that when in doubt - do nothing. Wait and see.
6. By conscientious application of the Wyckoff principles. you should strive to be right most
of the time - but realizing that many times you are going to be wrong.
7. Plan your own stock market activities like you would any campaign.
8. The Wyckoff Method of trading in stocks is a logical five-step approach to stock market
investing/speculating.
9. The Pre-Trade Analysis Record is a check-list which should be used prior to making any
decision to trade.
10. The Performance Game is practice trading experience in a simulated real-life market
situation.

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SECTION 2
1. The future course of the market may be judged by its own action.
2. The action of stocks reflects the effect of the forces which
dominate them.
3. Volume of stock changing hands in each transaction is important.
4. The Law of Supply and Demand governs all price changes.
a.
when demand is greater than supply prices rise.
b.
when supply is greater than demand prices decline.
5. The trend (up or down) is the line of least resistance.
6. Minor and major turning points and points where the price breaks through the opposition
are the critical moments in all phases of the market.
7. In the market it is most important to operate with the proper principles.
8. The Trend Letter" was published in 1911 by Richard D. Wyckoff.

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SECTION 3
1. The purpose behind Wall Street and the market is to finance businesses.
2. Some securities are good - others are not so good.
3. Seasoned securities are those on the market for a long time and with established earning
power and value.
4. Tape and chart reading helps us to relate price movement and volume to the future
course of stocks.
5. Always strive to select the most promising issues.
6. Study charts with the purpose of judging the behavior of the stock and the motives of
those who dominate it.
7. Prices reflect strengths and weaknesses of stocks.
8. Important facts for operations in the market are:
a. price movement
b. volume
c. relationship of price movement to volume
d. time for each movement.
9. When trading, ignore all tips rumors. and other inside information.

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SECTION 4
1.

Most principal moves in the market are caused by large interests.

2.

Charts are graphic representations of stock transactions.

3. Charts have great value in determining the position and probable future trend of the market or an individual
stock.
4.

To study charts, look for the motives behind the action which the chart portrays.

5. The WSMI (Wyckoff Stock Market Institute) recommends three types of charts: Vertical Line Charts, Figure
Charts, and Intra-Day Wave Charts.
6.

Vertical line charts show the high, low, and closing prices as well as the volume.

7.

Volume and price movement provide the greatest aid in:

a. determining the direction of coming moves.
b. deciding when to buy or sell.
c. knowing when a stock is on the springboard.'
d. knowing when a move is culminating.

8.

On figure charts. a person is able to detect accumulation and distribution from the general formations.

9. Horizontal formations on the figure chart indicate the probable direction and approximate number of points a
stock should move.
10. Horizontal formations on figure charts are of value in determining:
a. how far a stock should move.
b. when it meets opposition.
c. the trend.
d. when a stock is on the springboard.'
11. Figure Charts only take into account whole number fluctuations.
a. A 3-point figure chart disregards all reversals less than three whole digits.
b. A 5-point figure chart disregards all reversals less than 5 full digits.
12. The 1-pt. figure chart indicates immediate objectives; whereas the 3-pt. figure chart is used as a guide to the
general trend.

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SECTION 5
I. Every upward or downward swing of the market Consists of numerous buying or selling
waves.
2. The degree of success or failure of buying or selling waves indicates whether the market
is growing stronger or weaker.
3. In buying stock look for the down waves in the market and in your stock.
4. The waves provide clear indications of the relative changes of supply and demand.
5. To be able to determine the turning points is the mark of the ability of a good trader or
investor.
6. It is important to master the ability to:
a. determine the final tops of bull markets and intermediate or minor up moves.
b. determine the final bottoms of bear markets and the intermediate and minor down
moves.
7. Cover your shorts and go long at the bottom of a panic.
8. Sellout all long stocks and go short at the top of a boom.
9. Control your emotions.

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SECTION 6
1. Our trend chart of a general market index is the medium through which you are able to
study larger waves of the market.
2. The Intra-Day Wave Chart enables you to detect the approaching turning points of the
large waves generally two to four days in advance.
3. Group charts or the Position Sheet enable you to determine which groups are the most
advantageous for trading.
4. Aim to trade in harmony with the trend of the market.
5. A
a.
b.
c.
d.

minimum recommendation of chart records are:

the Wyckoff Wave and Optimism-Pessimism
vertical line charts of 10-25 stocks
figure chart of 25-100 stocks
the Intra-Day Wave Chart (IDWC)

6. Weekly and monthly vertical charts are not sufficiently sensitive to permit accurate
timing but may be used in combination with daily vertical line charts and figure charts to
give meaningful indications.
7. Weekly and monthly vertical line charts are of value for their long range background.

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SECTION 7
I.

The most important aspect to know about the market is the trend.

2. Our aim is to operate in harmony with the trend.

3. The Wyckoff Wave is a market index, which reflects the movement of the market leaders.
4. A selling climax is caused by panicky unloading of stocks by the public (supply) which is
matched by buying (demand) of:
a. experienced operators
b. large interests
c. short covering by bears who sense a turn.
5. An abnormal increase in volume is characteristic of a selling climax.
6. After a technical rally, if prices hold around or above the climax lows on shrinking
volume. Then we have an indication of support and the completion of liquidation
7. Three possible buying opportunities to establish a long position are:
a. after the completion of a selling climax.
b. after completion of a secondary reaction where the selling pressure is being lifted as
shown by closes for the various days.
c. when the index breaks into new high ground. (The last is the least satisfactory since
the risk would not be at a minimum.)
8. When the trend is doubtful take a neutral position.
9. To limit risks. Place stop orders below the previous support points in long trades.
10. Bullish behavior is often accompanied by higher tops. Higher lows. And higher closes in
combination with gradually increasing volumes.
II. Absorption rather than distribution may be observed by:
a. Volume remaining low on reactions or possible tapering off
b. Price movement restricted to a narrow range as compared to a halfway reaction
c. Volume consistently building up, or there is a lifting of support points.
12. Large volume with no further material gain is an indication of distribution.
13. Increased public participation creates active demand (of a poor quality) which facilitates
selling (supply of a good quality) by large. interests.
14. At the top of a rally or up-trend, close out your long positions and seek those stocks in
the weakest technical position to establish short commitments.
15. Hypodermics is the sudden run-up of prices on expanding volume created by large
interests. It may be an indication of a turning point.
16. Sharp acceleration of a downward movement often creates an over-sold condition.
17. Declining markets are normally accompanied by lower volume than advancing markets,
except perhaps at times of active liquidation.
18. A sudden or abnormal increase in volume, appearing after a given price movement has
been in progress, usually indicates the end or the approaching end of that particular
movement. However. if this occurs when the price breaks through a defined trading range.
this probably indicates a continuation of the movement in the direction of the break-through.
19. A
a.
b.
c.

common sequence in market fluctuations is:

selling climax
a: buying climax
technical rally
or
b: technical reaction
secondary reaction.
c: secondary rally

20. Risks are greatly increased by:

a.failure to liquidate promptly on early warnings of danger to bull position
b.refusal to place stop orders on long commitments

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c. purchasing of issues when prices are up and the public is buying emotionally.
21. The market seldom runs continuously in one direction for an extended period of time
without some type of reversal.