"The object of reading the tape is to ascertain, first, how and,
next, when to trade -- that is, whether it is wiser to buy than
to sell. It works exactly the same for stocks as for cotton or
wheat or corn or oats.
You watch the market -- that is, the course of prices as
recorded by the tape with one object: to determine the direction
-- that is, the price tendency. Prices, we know, will move
either up or down according to the resistance they encounter.
For purposes of easy explanation we will say that prices, like
everything else, move along the line of least resistance. They
will do whatever comes easiest, therefore they will go up if
there is less resistance to an advance than to a decline; and
vice versa.
Nobody should be puzzled as to whether a market is a bull
or a bear market after it fairly starts. The trend is evident to
a man who has an open mind and reasonably clear sight, for it is
never wise for a speculator to fit his facts to his theories.
Such a man will, or ought to, know whether it is a bull or a
bear market, and if he knows that he knows whether to buy or to
sell. It is therefore at the very inception of the movement that
a man needs to know whether to buy or to sell.
As a matter of fact, millions upon
millions of dollars have been lost by men who bought stocks
because they looked cheap or sold them because they looked dear.
The speculator is not an investor. His object is not to secure a
steady return on his money at a good rate of interest, but to
profit by either a rise or a fall in the price of whatever he
may be speculating in. Therefore the thing to determine is the
speculative line of least resistance at the moment of trading;
and what he should wait for is the moment when that line defines
itself, because that is his signal to get busy.
selling had been stronger than the buying and a reaction in the
price logically followed. Up to the point where the selling
prevailed over the buying, superficial students of the tape may
conclude that the price is not going to stop short of 1 So, and
they buy. But after the reaction begins they hold on, or sell
out at a small loss, or they go short and talk bearish. But at
120 there is stronger resistance to the decline. The buying
prevails over the selling, there is a rally and the shorts
cover.
The public is so often whipsawed that one marvels at their
persistence in not learning their lesson.
Eventually something happens that increases the power of
either the upward or the downward force and the point of
greatest resistance moves up or clown -- that is, the buying at
130 will for the first time be stronger than the selling, or the
selling at 12o be stronger than the buying. The price will break
through the old barrier or movement-limit and so on. As a rule,
there is always a crowd of traders who are short at 12o because
it looked so weak, or long at 13o because it looked so strong,
and, when the market goes against them they are forced, after a
while, either to change their minds and turn or to close out. In
either event they help to define even more clearly the price
line of least resistance. Thus the intelligent trader who has
patiently waited to determine this line will enlist the aid of
fundamental trade conditions and also of the force of the
trading of that part of the community that happened to guess
wrong and must now rectify mistakes. Such corrections tend to
push prices along the line of least resistance.
And right here I will say that, though I do not give it as
a mathematical certainty or as an axiom of speculation, my
experience has been that accidents -- that is, the unexpected or
unforeseen have always helped me in my market position whenever
the latter has been based upon my determination of the line of
least resistance. Do you remember that Union Pacific episode at
Saratoga that I told you about?"
