VERTICAL CHARTS
As we have seen from preceding studies, the four principal phases of a market campaign are: (I) Accumulation, (II) Marking Up, (III) Distribution, and (IV) Marking Down.
When a stock is in phases (I) or (II) it is said to be in a bullish position and when in phases (III) or (IV) it is in a bearish position. Or, its behavior may be such as to indicate that there is no active interest in it, that is, no campaign is underway or in preparation, in which event its position is neutral.
Our object is to determine the technical position of all of the stocks in our list, that is, which of the above three positions each may be in, and to just what degree. For this purpose we have to deal with three basic factors: (1) Price Movement, (2) Volume, and (3) The inter-relationships between Price Movement and Volume.
Under the heading of Price Movement we have such collateral or related influences as:
(A) Comparative Strength and Weakness.
(B) Previous Points of Support and Resistance.
(C) Rate of Acceleration, or Angles of Advances and Declines — Trend Lines
(D) Shake-outs, Terminal Thrusts, Oversold and Overbought Conditions.
Thus, from our analysis of Price Movement alone, we are able to gain much valuable information concerning the present technical position and probable trend of each stock.
However, the Volume, on intensity of trading, may exert an important confirmatory, modifying or contradictory influence upon the indications given by the price movement.
The Volume factor is vital in:
(E) Identifying Buying and Selling Climaxes.
(F) Judging the Quality of supply and demand around previous points of resistance and support, or around previous supply and supporting levels. (G) Judging the Quality of supply and demand (pressure and support) as the Price approaches established trend lines.
(H) Identifying Shake-outs, Terminal Thrusts, Overbought and Oversold Positions.
(J) Identifying Zones of Accumulation and Distribution; and Judging when a stock is drifting, i.e., when it is in a Neutral Position or in a prolonged Trading Range wherein alternating rallies and reactions tend to neutralize each other.
(K) Determining whether a trading range represents Absorption (new demand) in preparation for a further advance; or Renewed Distribution (new supply) in preparation for a further decline.
(L) Judging the Character of the Action when a stock reaches indicated minor and major objectives up or down. From the Inter- relationship between Price Movement and Volume, we are able to judge: (M) When a move is Beginning and When it is Culminating, thus determining the best Time to Act.
From the above we see how vital it is to study volume behavior and why vertical charts aid us to increase the percentage accuracy of our deductions.
Vertical charts record Volume as well as Price Movement. Hence they enable us to study all three of the basic factors mentioned above.
We wish to emphasize here how volume studies and the factor of comparative strength and weakness aid us to judge WHEN a stock is ready to move and WHEN it has completed its preparation for a move. The skillful trader and investor, by exercising patience and avoiding commitments in stocks until they are thus ready to move, materially increases the percentage of accuracy of his trades, reduces the risk of loss and, above all, avoids being tied up in stocks which will not move even in the strongest bull market. Failure to recognize the vital importance of proper timing and proper selection of stocks is probably a more productive cause of disaster to the majority of investors than any other.
Few people understand how to read vertical charts properly. That is decidedly to your advantage because if you will take the time and trouble properly to learn the principles outlined herein, you will be playing the game as large operators do — with and not against the insiders; and against instead of with, the public and the vast majority of uninformed traders.
Furthermore, you will be able to develop that flexibility of mind and capacity to anticipate the changes from strength to weakness and weakness to strength which occur at vital turning points, before the change of trend has developed to such an extent that you are no longer able to buy or sell with close stops. Operating in the way herein advocated, using good judgment, you should find that even though three out of five of your commitments may be started in-correctly and result in loss, you will still be able to make substantial profits because on the three losing trades your loss will have been limited to very small proportions; whereas, on the two successful ones you will let your profits run until you have extracted the maximum possible gain. Thus, even though your judgment might prove to be only 40% accurate, still with proper limitation of risk, logical timing and careful selection, it is no exaggeration to say that you should be able to secure a net return of from 20% to 45% or more per annum on your capital.
IMPORTANT POINTS
1. The four principal phases of a market campaign are:
a. accumulation b. marking-up c. distribution d. marking-down.
2. Three basic factors needed to determine the technical position of a stock are:
a. price movement
b. volume
c. the inter-relationships between price movement and volume.
3. Price Movement Reflects – Comparative strength and weakness, Points of support and resistance, Trend lines & shake-outs, Overbought-oversold positions.
Volume Reflects – Buying and selling climaxes, Quality of supply and demand at support and resistance points, Quality of supply and demand approaching trend lines, Shake-Outs, Overbought-oversold positions, Accumulation-distribution.
Inter-relationship of Price Movement & Volume Reflects – Beginning of a move, Culmination of a move, When to buy or sell.
4. Vertical charts aid in determining the probable direction of a future trend.
5. A stock which remains dull and inactive tends to discourage traders, causing them to close out their positions.
6. A selling climax is generally followed by a secondary reaction.
7. When the stock is not acting right – get out!
8. If the market is advancing one should generally be unwilling to take a short position.
9. Weakness in a stock may be indicated by the inability to develop rallying power after returning to a former support.
10. Following a terminal shake-out there is likely to be a persistent mark-up to ‘lock in’ shorts and ‘lock out’ potential buyers.
11. High volume on a sharp mark-up need not be a buying climax, but may be caused by traders accumulating stock through prior resistance points; sometimes called absorption volume.
12. Traders often distribute their holdings on a reaction from a high level.
13. A technical rally following a decline is characterized by constant volume and a gain of approximately one-half the decline.
14. Dullness in volume following climactic volume is an indication that one phase of a campaign is culminating and another phase is beginning.
15. Using good judgment and accurate timing you should be able to make substantial gains on your capital.
16. If a group of issues is preparing for an advance, seek those issues which show more strength than weakness.
17. Diminishing volume and a narrow price range at the top of a rally indicates a lessening of demand.
18. Some conditions which may mark a preparation for an advance are:
a. decline from a high point
b. narrow price swings and persistent support at the bottom
c. small daily volume
d. sufficient time to tire weak holdings, and
e. ability to hold support.