Stock Trading

CHAPTER 10: Various Examples and Suggestions

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RECENT trading observations and experiments have convinced me that it is impracticable and almost impossible to gauge the extent of a move by its initial fluctuations. Many important swings begin in the most modest way. The top of an important decline may present nothing more than a light volume and a drifting tendency toward lower prices, subsequently developing into a heavy, slumpy market, and ending in a violent downward plunge. If it has been moving within a three-point radius and suddenly takes on new life and activity, bursting through its former bounds, he must go with it. I do not mean that he should try to catch every wiggle. If the stock rises three points and then reverses one or one and a half points on light volume, he must look upon it as a perfectly natural reaction and not a change of trend. The expert operator will not ordinarily let all of three points get away from him. He will keep pushing his stop up behind until the first good reaction puts him out at close to the high figure. Having purchased at such a time, he will sell out again as the price once more approaches the high figure, unless indications point to its forging through to a new high level.

(Continued after the box of related articles.)

The more we study volumes, the better we appreciate their value in Tape Reading. It frequently occurs that a stock will work within a three-point range for days at a time without giving one a chance for a respectable-sized ‘scalp’. Without going out of these boundaries, it suddenly begins coming out on the tape in thousands instead of hundreds. This is evidence that a new movement has started, but not necessarily in the direction first indicated. The Tape Reader must immediately go with the trend, but until it is clearly defined and the stock breaks its former limits with large and increasing volumes, he must use caution. The reason is this: If the stock has been suddenly advanced, it may be for the purpose of facilitating sales by a large operator.

The best way to distinguish the genuine from the fictitious move is to watch out for abnormally large volumes within a small radius. This is usually evidence of manipulation. The large volume is simply a means of attracting buyers and disguising the hand of the operator. A play of this kind took place when Reading struck 159 3/4 in June1909. I counted some 80,000 shares within about half a point of 159 - unmistakable notice of a coming decline. This was a case where the stock was put up before being put down, and the Tape Reader who interpreted the move correctly and played for a good down swing would have made considerable money.

We frequently hear people complaining that "the public is not in this market," as though that were a reason why stocks should not go up or the market should be avoided. The speaker is usually one of those who constitute "the public," but he regards the expression as signifying "every outsider except myself." In the judgment of many the market is better off without the public. To be sure, brokers do not enjoy so large a business, the fluctuations are not so riotous, but the market moves in an orderly way and responds more accurately to prevailing conditions. A market in which the general pubic predominates the purchase of individual stocks represents a sort of speculative "jag" indulged in by those whose stock market knowledge should be rated at 1/8’s.

 

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