find a small riverrunning quietly on its way. The stream is so tiny that you can place yourhand in its course and the water will back up. In five minutes, itovercomes this resistance by going over or around your hand. You fetcha shovel, pile dirt in its path, pack it down hard and say, "There, I'vedammed you up". But you haven't at all, for the next day you find yourpile of dirt washed away. You bring cartloads of dirt and build asubstantial dam, and the flow is finally held in check.It is the same with an individual stocks or the market. Pricesfollow the line of least resistance. If Reading is going up someone maythrow 10,000 shares in its path without perceptible effect. Another lot of20,000 shares follows; the stock halts, but finally overcomes theobstacle. The seller gives another order -- this time 30,000 shares moreare thrown on the market. If there are 30,100 shares wanted at that level,the buyer will absorb all of the 30,000 and the stock will go higher; ifonly 29,900 shares are needed to fill all bids, the price will recedebecause demand has been overcome by supply.It looks as though something like this happened in Reading onthe occasion referred to. Whether or not manipulative orderspredominated does not change the aspect of the case. In the final test theweight was on the down side.
Richard D. Wyckoff
The public and the floor traders do not stand aside while themanipulator is at work, nor is the reverse true. Every-body's stock looksalike on the tape.The following is a good illustration of E. H. Harriman's work atan important turning point in Union Pacific:Volume Study in Union Pacific, showing 39,300 shares supplied at149 ¾ to 150, checking the rise:
Richard D. Wyckoff
When a stream breaks through a dam it goes into new territory.Likewise the breaking through of a stock is significant, because it meansthat the resistance has been overcome.The stronger the resistance, the less likelihood of finding furtherobstacles in the immediate vicinity. Dams are not usually built onebehind the other. So when we find a stock emerging into a new field it isbest to go with it, especially if, in breaking through it, it carries the restof the market along.While a lot can be learned from the reports printed in the dailynewspapers mentioned above, the moment by moment transactions –trades as they appear -- is the only real instruction book. A live tape is tobe preferred, for the element of speed with which you receive theinformation is of no small concern.The comparative activity of the market on peaks and breaks is aguide to the technical condition of the market. For instance, during adecline, if the ticker is very active and the volume of sales large,voluntary or compulsory liquidation is indicated. This is emphasized if,on the subsequent rally, the tape moves sluggishly and only small lotsappear. In an active bull market the ticker appears to be choked with thevolume of sales poured through it on the advances, but on reactions thequantities and the number of impressions decrease until, like tile ocean atebb tide, the market is almost lifeless.Another indication of the power of a movement is found in thedifferences between sales of active stocks, for example:1000 @ 180100 @ 180 1/8500 @ 180 3/81000 @ 180 1/2This shows that there was only 100 shares for sale at 180 1/8,none at all at 180¼, and only 500 at 3/8. The jump from 1/8 to 3/8emphasizes both the absence of pressure and persistency on the part ofthe buyers. They are not content to wait patiently until they can securethe stock at 180¼; they "reach" for it.
Richard D. Wyckoff
On the opposite side this would show lack of support.Each indication is to be judged not so much by rule as accordingto the conditions surrounding it. The tape furnishes a continuous series ofmotion pictures, with their respective explanations written between theprintings.These motion pictures of the market are in a language which isforeign to all casual investors – but understandable to the professionalTape Reader.A NUMBER of people who have read previous editions of thisbook have been misled by the apparent ease with which some kinds ofmarkets may be read by means of the volumes. They have erroneouslycome to the conclusion that all one has to do is sit beside a ticker andobserve which side the volumes are on -- the buying or the selling side.This is a mistake. Under the old exchange rule a buyer whodesired to influence the market in an upward direction could bid for10,000 shares or any other very large quantity, and no one could sell himany less than the quantity bid for, unless the buyer was willing to take it.Under the present rules, the buyer is obliged to take any part of 10,000shares, or whatever quantity he bid for if he does not specify “all ornone” to his broker.This revision of the rules, and the other restrictions againstmatched orders, manipulations, etc., eliminates a very large number oftransactions in big quantities at the advanced or the decreased price. Itwas an old trick of Harriman's and some of the old Standard Oil party, aswell as other minor manipulators and floor traders, to make these bidsand offers in round lots and have some one else supply or take them forits effect on the market. But the change in the rules has greatly reducedthe volume and decreased the value of these indications. Hence, whilethey are still very suggestive to an observant tape reader, and while theprinciple is unchanged, it will not do to depend on them entirely.The volumes which we have been discussing are least liable tomislead when manipulation prevails, for the manipulator is obliged to
Richard D. Wyckoff
deal in large blocks of stock, and must continually show his hand. Acomplete manipulative operation on the long side consists of three parts:(1) Accumulation,(2) marking up, and(3) distribution.In the case of a shorting operation -- the distribution comes first, thenthe mark down and the accumulation. No one of these three sections iscomplete without the other two.The manipulator must work with a large block of stock or the dealwill not be worth his time, the risk and expenses. The Tape Reader musttherefore, be on the lookout for extensive“Having detected theoperations on either side of the market.accumulation, theAccumulation will show itself in theTape Reader has onlyquantities and in the way they appear on theto watch its progress,tape. .holding himself inreadiness to take onHe does not buy it at once, because it maysome of the stock thetake weeks or months for the manipulator tomoment the markingcomplete the accumulation of his line, andup period begins.”there might be opportunities to buy cheaper.By holding off until the psychologicalmoment he forces someone else to carry the stock for him -- to pay hisinterest. Furthermore, his capital is left free in the meantime.When the marking up begins he gets in at the commencement ofthe move, and goes along with it till there are signs of a halt ordistribution. Having passed through the first two periods, he is in aposition to fully benefit by the third stage of the operation.In this sort of work a figure chart, which I described in anotherchapter, will help the trader, especially if the manipulative operation iscontinued over a considerable period of time. It will give him a bird'seye view of the deal, enabling him to drop or resume the thread at anystage.
Richard D. Wyckoff
CHAPTER VIMarket Technique
ON Saturday morning, February 27, 1909, the market opened slightlyhigher than the previous night's close.Reading was the most active stock. After touching 123 1/2 it slidoff to 122 1/2, at which point it invited short sales. This indication wasemphasized at 122, at 121 1/2 and again at 121. The downward trendwas strongly marked until it struck 119 7/8, then it followed a quick rallyof 1 1/8 points.This was a vicious three-point jab into a market that was only justrecovering from a decline in early February.What was its effect on the other principal stocks? Union Pacificdeclined only 3/4, Southern Pacific 5/8 and Steel 5/8. This proved thatthey were technically strong; that is, they were in hands which couldview with equanimity a three-point break in a leading issue.Had this drive occurred when Reading was around 145 andUnion 185 the effect upon the others would probably have been verydifferent.In order to determine the extent of an ore body, miners use adiamond drill. This produces a core, the character of which shows whatis beneath the surface. If it had been possib le to have drilled into themarket at the top of the foregoing rise, we should have found that thebulk of the floating supply in Steel, Reading and some others was heldby a class of traders who buy heavily in booms and on bulges. Thesepeople operate with comparatively small margins, nerve and experience.They are exceedingly vulnerable, so the stocks in which they operatesuffer the greatest declines when the market receives a jar. The figuresare interesting:
Richard D. Wyckoff
-------------Points----------
U.P.ReadingSteel
1907-9Advance84¼73¼36¼
Feb, '09Decline12 3/826 3/816 1/2
Per centBreak toAdvance14.733.644.6
The above shows that the public was heavily extended in Steelsomewhat less loaded with Reading, and was carrying very little UnionPacific. In other words, Union showed technical strength by its resistanceto pressure. Whereas Reading and Steel offered little or no opposition tothe decline.Both the market as a whole and individual stocks are to be judgedas much by what they do as what they do not do at critical points.If the big fellows who accumulated Union below 120 haddistributed it above 180, the stock would have broken something likethirty points, due to its having passed from strong to weak hands. As itdid not have any such decline, but only a very small reaction comparedto its advance, the Tape Reader infers that Union is destined for muchhigher prices; that it offers comparative immunity from declines and apossible large advance in the near future.Even were Union Pacific scheduled for a thirty-point rise in thefollowing two weeks, something might happen to postpone the campaignfor a considerable time. But the Tape Reader must work with thesebroader considerations in full view. He has just so much time and capital,and this must be employed where it will yield the greatest results. If bywatching for the most favorable opportunities he can operate with thetrend in a stock which will some day or week show him ten points profitmore than any other issue he could have chosen, be is increasing hischances to that extent.
Richard D. Wyckoff
A long advance or decline usually culminates in a wide, quickmovement in the leaders. Take the break of February 23, 1909:Reading declined from 128 3/4 to 118 and Steel from 46 to 41 1/4 in oneday. Southern Pacific, after creeping up from 97 to 112, reached aclimax in a seven-point jump during one session.Instances are so numerous that they are hardly worth citing.The same thing happens in the market as a whole -- an exceptionallyviolent movement, after a protracted sag or rise, usually indicates itstermination.A stock generally shows the Tape Reader what it proposes to doby its action under pressure or stimulation. For example: On Friday,February 19,1909, the United States Steel Corporation announced anopen market in steel products.The news was out.Everybody in the country knew it by the following morning. TheTape Reader, in weighing the situation before the next day's opening,would reason – “As the news is public property, the normal thing forSteel and the market to do is to rally. Steel closed last night at 48 3/8.The market hinges upon this one stock. Let's see how it acts."The opening price of U. S. Steel was three-quarters of a pointdown from the previous closing -- a perfectly natural occurrence in viewof the announcement. The real test of strength or weakness will follow.For the first ten minutes Steel shows on the tape:200 @ 47 7/84500 @ 47 3/41200 @ 47 7/81500 @ 47 3/4…without otherwise varying. Eighteen times the price swings back andforth between the same fractions.Meanwhile, Union Pacific, which opened at 177 1/2, shows atendency to rally and pull the rest of the market up behind it.
Richard D. Wyckoff
Can Union lift Steel? That is the question. Here are two opposing forces,and the Tape Reader watches like a hawk, for he is "going with themarket" -- in the direction of the trend. Union is up 7/8 from the openingand Southern Pacific is reinforcing it.But Steel does not respond. Not once does it get out of that 3/4 7/8 rut -- not even single hundred share lot can be sold at 48. This provesthat it is freely offered at 47 7/8 and that it possesses no rallying power,in spite of the leadership displayed by the Harrimans.Union seems to make a final effort to induce a following:2000 @ 178 1/2…to which Steel replies by breaking through with a thud:800 @ 47 5/8This is the Tape Reader's cue to go short. In an instant he has putout aline of Steel for which he gets 47 1/2 or 47 3/8 as there are large volumestraded in at those figures.Union Pacific seems disheartened. The Steel millstone is hanginground its neck. It slides off to 178 ¾, ¼, 1/8 and finally to 177 7/8.The pressure on Steel increases at the low level.Successive sales are made as follows.
6800 @ 47 ½2600 @ 47 3/8500 @ 47 1/48800 @ 47 1/8From this time on there is a steady flow of long stock all throughthe list. Reading and Pennsylvania are the weakest railroads. ColoradoFuel breaks seven points in a running decline and the other steel stocks
Richard D. Wyckoff
follow suit. U. S. Steel is dumped in bunches at the bid prices, and eventhe dignified preferred is sympathetically affected.At the end of the two hour session; the market closes at thebottom, with Steel at 46, leaving thousands of accounts weakened by thedecline and a holiday ahead for holders to worry over.It looks to the Tape Reader as though the stock would go loweron the following Tuesday. At any rate, no covering indication hasappeared, and unless it is his invariable rule to close every trade eachday, he puts a stop at 47 on his short Steel and goes his way. (Hisoriginal stop was 48 1/8).Steel opens on the following session at 44 ¾ @ 1/2, and duringthe day makes a low record of 41¼.A number of lessons may be drawn from this episode.Successful tape reading is a study of Force; it requires ability tojudge which side has the greatest pulling power and one must have thecourage to go with that side. There are critical points which occur in eachswing, just as in the life of a business or of an individual. At thesejunctures it seems as though a feather's weight on either side woulddetermine the immediate Critical trend.Any one who can spot these points has much to win and little tolose, for he can always play with a stop placed close behind the turningpoint or "point of resistance".If Union had continued in its upward course, gaining in power,volume and influence as it progressed, the dire effects of the Steelsituation might have been overcome. It was simply a question of power,and Steel pulled Union down.This study of ‘responses’ to stimulation or outside influences onstocks is one of the most valuable in the Tape Reader's education. It isan almost unerring guide to the technical position of the market. Ofcourse, all responses are not so clearly defined.
Richard D. Wyckoff
It is a matter of indifference to the Tape Reader as to who or whatproduces these tests, or critical periods. They constantly appear anddisappear; he must make his diagnosis and act accordingly. If a stock isbeing manipulated higher, the movement will seldom be continuedunless other stocks follow and support the advance barring certainspecific developments affecting a stock, the other issues should bewatched to see whethe r large operators are unloading on the strong spots.Should a stock fail to break on bad news, it means that insidershave anticipated the decline and stand ready to buy.A member of a trading syndicate once said to me:"We are going to dissolve tomorrow."I asked, "Won’t there be considerable selling by people who don't wantto carry their share of the securities?""Oh!" he replied, "we know how every one stands. Probably 10,000shares will come on the market from a few members who are obliged tosell, and as a few of us have sold that much short in anticipation, we'll bethere to buy it when the time comes."This reminds us that it is well to consider the insider's probableattitude on a stock.The tape usually indicates what this is. One of the muckrakingmagazines once showed that Rock Island preferred had been drivendown to 28 one August to the accompaniment of receivership rumors.The writer of the article was unable to prove that these rumors originatedwith the insiders, for he admitted that the transactions at the time werenot fully understood.Perhaps they were inscrutable to a person inexperienced in tapereading, but we well remember that the indications were all in favor ofbuying the stock on the break. The transactions were very large -- out ofall proportion to the capital stock outstanding and the floating supply.
Richard D. Wyckoff
What did this mean to the Tape Reader? Thousands of sharesof stock were traded in per day, after a ten-point decline and a smallrally. If the volume of sales represented long stock, some one wasthere to buy it. If there was manipulation it certainly was not for thepurpose of distributing the stock at such a low level. So, by castingout the unlikely factors, a Tape Reader could have arrived at thecorrect conclusion.The market is being put to the test continually by one element ofwhich little has been said, i.e., the floor traders. These shrewd fellowsare always on the alert to ferret out a weak spot in the market, for theylove the short side.Lack of support, if detected, in an issue generally leads to a raidwhich, if the technical situation is weak, spreads to other parts of thefloor and produces a reaction or a slump all around. Or, if they find avulnerable short interest, they are quick to bid up a stock and drive theshorts to cover. With these and other operations going on all the time, theTape Reader who is at all expert is seldom at a loss to know on whichside his best chances lie. Other people are doing for him what he woulddo himself if he were all-powerful.While it is the smaller swings that interest him most, the daytrader must not fail to keep his bearings in relation to the broadermovements of the market.When a panic prevails he recognizes it in the birth of a bullmarket and operates with the certainty that prices will gradually rise untila boom marks the other extreme of the swing. In a bull market heconsiders reactions of from two to five points normal and reasonable.He looks for occasional drops of 10 to 15 points in the leaders, with a 25point break at least once a year. When any of these occur, he knowswhat to look for next.In a bull market he expects a drop of 10 points to be followed bya recovery of about half the decline, and if the rise is to continue, all ofthe drop and more will be recovered. If a stock or the market refuses torally naturally, he knows that the trouble has not been overcome, andtherefore looks for a further decline.
Richard D. Wyckoff
Take American Smelters, which made a top of 99 5/8 a few yearsago, then slumped off under rumors of competition until it reached 78.Covering indications appeared around 79 1/2. Had the operator alsogone long here, he could confidently have expected Smelters to rally toabout 89. The decline having been 21 5/8 points, there was a rally of 103/4 points due.As a matter of record the stock did recover to 89 3/8. Of course,these things are mere guide posts, as the Tape Reader's actual trading isdone only on the most positive and promising indications; but they arevaluable in teaching him what to avoid. For instance, he would be waryabout making an initial short sale of Smelters after a 15 point break, evenif his indications were clear. There might be several points more on theshort side, but he would realize that every point further decline wouldbring him closer to the turning point, and after such a violent break thesafest money was to wait for an opportunity on the long side.Another instance: Reading sold on January 4, 1909, at 144 3/8.By the end of the month it touched 1311/2, and onFebruary 23rd broke ten points to 118. This was a“Few people aredecline of 24 3/8 points (allowing for the 2 perwilling to go to thecent dividend paid). As previously stated, thestock looked like an attractive short sale, not onlyvery bottom of things.on the first breakdown, but on the final drive. TheIs it any wonder thatconservative trader would have waited for abuying indication, as there would have been lesssuccess is for the fewrisk on the long side.-- the few who areIt is seldom that the market runs more thanwilling to work at it?”three or four consecutive days in one directionwithout a reaction, so the Tape Reader must realize that his chancesdecrease as the swing is prolonged.The daily movements offer his best opportunities; but he mustkeep in stocks which swing wide enough to enable him to secure a profit.As Napoleon said: "The adroit man profits by everything, neglectsnothing which may increase his chances".
Richard D. Wyckoff
I once knew a speculator who bought and sold by the clock. Hehad no idea of the hourly swing, but would buy at 12 o'clock, because itwas 12 o'clock, and would sell at 2 o'clock, for the same reason.The methods employed by the average outside speculator are notso very much of an improvement on this, and that is why so many losetheir money.The expert Tape Reader is diametrically opposed to such peopleand their methods. He applies science and skill in angling for profits.He studies, figures, analyzes and deduces. He knows exactlywhere he stands, what he is doing and why.
CHAPTER VIIDull Markets and Their OpportunitiesMANY people are apt to regard a dull market as a problem for tradingpurposes. They claim: "Our hands are tied; we can't get out of whatwe've got; if we could there'd be no use getting in again, for whatever wedo we can't make a dollar".Such people are not Tape Readers. They are Sitters.As a matter of fact, dull markets offer innumerable opportunitiesand we have only to dig beneath the crust of prejudice to find them.Dullness in the market or in any special stock means that theforces capable of influencing it in either an upward or a downwarddirection have temporarily come to a balance. The best illustration is thatof a clock which is about run down -- its pendulum gradually decreasesthe width of its swings until it comes to a complete standstill, like this:
Richard D. Wyckoff
Turn this diagram sideways and you see what the chart of a stock or themarket looks like when it reaches the point of dullness:
These dull periods often occur after a season of delirious activityon the bull side.People make money, pyramid on their profits and glut themselveswith stocks at the top. As every one is loaded up, there is comparativelyno one left to buy, and the break which inevitably follows would happenif there were no bears, no bad news or anything else to force a decline.Nature has her own remedy for dissipation. She presents thedebauch' with its start, its climax and its collapse, with a thumping headand a moquette tongue. These tend to keep him quiet until the damagecan be repaired. So with these intervals of market rest. Traders who haveplaced themselves in a position to be trimmed are duly trimmed.They lose their money and temporarily, their nerve. The market,therefore, becomes neglected. Extreme dullness sets in.
Richard D. Wyckoff
If the history of the market were to be written, these periods oflifelessness should mark the close of each chapter. The reason is: Thefactors that were active in producing the main movement, with its start,its climax and its collapse, have spent their force.Prices, therefore, settle into a groove, where they remainsometimes for weeks or until affected by some other powerful influence.
When a market is in the midst of a big move, no one can tell how long orhow far it will run. But when prices are stationary, we know that fromthis point there will be a pronounced swing in one direction or another.
There are ways of anticipating the direction of this swing. One isby noting the technical strength or weakness of the market, as describedin a previous chapter. The resistance to pressure mentioned ascharacteristic of the dull period in March, 1909, was followed by apronounced rise, leading stocks selling many points higher.This was particularly true of Reading, in which the shakeoutsaround 120 (one of which was described) were frequent and positive.When insiders shake other people out it means that they want the stockthemselves. These are good times for us to get in.When a dull market shows its inability to hold rallies, or when itdoes not respond to bullish news, it is technically weak, and unlesssomething comes along to change the situation, the next swing will bedownward.On the other hand, when there is a gradual hardening inprices; when bear raids fail to dislodge considerable quantities ofstock; when stocks do not decline upon unfavorable news, we maylook for an advancing market in the near future.No one can tell when a dull market will merge into a very activeone; therefore the Tape Reader must be constantly on the watch. It isfoolish for him to say: "The market is dead dull. No use watching it
Richard D. Wyckoff
today. The leaders only swung less than a point yesterday. Nothingprofitable can happen in such a market".Such reasoning is apt to make one miss the very choicestopportunities -- those of getting in on the ground floor of a big move.For example: During the previous mentioned accumulation inReading, the stock ranged between 120 and 124 1/2. Without warning, itone day gave indication (around 125) that the absorption was aboutconcluded, and the stock had begun its advance.The Tape Reader having reasoned beforehand that thisaccumulation was no small investors game, would have grabbed a bunchof Reading as soon as the indication appeared. He might have boughtmore than he wanted for scalping purposes, with the intention of holdingpart of his line for a long swing, using the rest for regular trading.As the stock drew away from his purchase price he could haveraised his stop on the lot he intended to hold, putting a mental label on itto the effect that it is to be sold when he detects inside distribution. Thushe stands to benefit to the fullest extent by any manipulative work whichmay be done. In other words, he says: "I'll get out of this lot when the bigboys and their friends get out of theirs".He feels easy in his mind about this stock, because he has seenthe accumulation and knows it has relieved the market of all the floatingsupply at about this level.This means a sharp, quick rise sooner or later, as little stock is tobe met with on the way up. If he neglected to watch the marketcontinuously and get in at the very start, his chances would be greatlylessened. He might not have the courage to take on the larger quantity.On Friday, March 26, 1909. Reading and Union were about asdull as two gentlemanly leaders could well be. Reading opened at 1323/4, high was 133¼, low 132¼, last 132 5/8. Union's extreme fluctuationwas 5/8! -- from 180 5/8 to 181¼. Activity was confined to Beet Sugar,Kansas City Southern, etc.
Richard D. Wyckoff
The following day, Saturday, the opening gave every indicationthat the previous day's dullness would be repeated, initial sales showingonly fractional changes.Let’s see… B. & 0., Wabash pfd. and Missouri Pacific were up 3/8 or1/2. Union was an 1/8th higher and Reading 1/8 lower.Beet Sugar was down 5/8, with sales at 32. Reading showed 1100 @132¼, 800 @ 3/8, Union 800 @ 181, 400 @ 181, 200 @ 181 1/8, 400 @181. A single hundred Steel at 45½ 1/8. B& O 100 @ 109 7/8.Marketdead, mostly single 100 share lots…Ah! Here's our cue! Reading 2300 @ 132½., 2000 @ ½, 500 @5/8. Coming out of a dead market, quantities like these taken at theoffered prices can mean only one thing, and without argument the TapeReader takes on a bunch of Reading "at the market."Whatever is happening in Reading, the rest of the market is slowto respond, although N. Y. Central seems willing to help a little – 500 @127½ (after ¼). Beets are up to 33¼. Steel is 45 1/8, and Copper 77 ¼ -afraction better.Reading 300 @ 132/2.Steel 1300 @ 45 1/8, ¼Union 100 @ 181Reading 300 @ 132 5/8Beets 100 @ 33½.Union 700 @ 181½N.Y. Central 127 5/8, 600 @ ¾… 7/8!…There’s some help coming!
Union 900 @ 181½ nowReading 100 @ 132 3/4.Copper 700 @ 71½.Reading 800 @ 132 7/8, 100 @ 133, 900 @ 133, 1100 @ 1/8...Reading 1500 @ 133¼ , 3500 @ 133 ½…not much doubt about thetrend now.
Richard D. Wyckoff
The whole market is responding to Reading, and there is a steadyincrease in power, breadth and volume. The rapid advances show thatshort covering is no small factor.It looks as though a lot of people are throwing their Beet Sugarand getting into the big stocks. St. Paul Copper and Smelters begin tolift a little.Around 11 A.M. there is a brief period of hesitation, in which themarket seems to take a long breath in preparation for another effort.There is scarcely any reaction and no weakness. Reading backs up afraction to 133¼ and Union to 181 3/8.There are no selling indications, so the Tape Reader stands by his guns.Now they are picking up again…Reading 133 3/8, ½, 5/8, ¾…Union 181 5/8N.Y. Central 128½ 1/8, 700 @ ¼,Union 1000 @ 181