Direction

"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?"