CHAPTER VII.

*THREE GENERAL LINES OF REASONING.

We have spoken in a preceding article of the fact that the experience of great interests in the market seems to have crystallized into three general lines of reasoning.

The first is that the surface appearance of the market is apt to be deceptive. The second is that it is well in trading to cut losses short and let profits run. The third is that correctly discounting the future is a sure and easy road to wealth. The problem is how these rules which are undoubtedly sound, can be operated in a practical way.

Let us take first the action of the general market with reference to the time to buy. The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement covering at least four years in its duration.

The day to day movement should be disregarded by everybody, except traders, who pay no commissions. The medium swing is the one for ordinary consideration. The outside trader should not attempt to deal in more than two or three stocks at a time. He should keep a chart of the price movements of these stocks so as to know their swings for months or years, and thus be able to tell readily

*Dow's Theory.

where in the general swing his particular stocks appear to be.

He should keep with his price movement a record of the volume of transactions and notes of any special facts bearing on that property, such as increases or decreases in earnings, increases in fixed charges, development of floating debt, and above all the actual dividend earnings as shown from month to month. He should observe the movement of the general market as indicated by the averages published daily,* as this shows the market more clearly than it is shown by any one stock.

The main purpose of this study is to enable the trader to determine, first, the value of the stock he is in; whether it is increasing or decreasing and, second, when the time. to buy seems opportune. Assuming the thirty day swing to be about 5 points, it is in the highest degree desirable not to buy when three of these points have passed, as such a purchase limits the probable profits to about two points.

It is therefore generally wise to look for a low point on a decline. Suppose, for instance, that Union Pacific was the stock under consideration; that it was clearly selling below its value, and that a bull market for the four-year period was under way. Assuming further that in a period of reaction Union Pacific had fallen four points from the previous highest. Assume earnings and prospects to be favorable and the outlook for the general market to be about normal.

This would be the time to begin to buy Union Pacifics. The prudent trader, however, would take only part of his line. He would buy perhaps one-half of the stock he

*See Wall Street Journal.

wanted and then give an order to buy the remainder as the price declined. The fall might go much further than he anticipated. It might be necessary to wait a long time for profit. There might even be developments which would make it wise to throw over the stock bought with the hope of replacing it materially lower.

These, however, are all exceptions. In a majority of cases this method of choosing the time to buy, founded upon clear perception of value in the stock chosen and close observation of the market swings under way will enable an operator to secure stock at a time and at a price which will give fair profits on the investment.

CHAPTER VIII.

*SWINGS WITHIN SWINGS.

A correspondent asks: "For some time you have been writing rather bullish on the immediate market, yet a little bearish in a larger sense. How do you make this consistent ?"

We get this question in one form or another rather frequently. It denotes a lack of familiarity with fluctuations in prices when viewed over considerable periods. Many people seem to think that the change in prices in any one day is complete in itself and bears no relation to larger movements which may be under way. This is not so.

Nothing is more certain than that the market has three well defined movements which fit into each other. The first is the daily variation due to local causes and the balance of buying or selling at that particular time. The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. The third move is the great swing covering from four to six years.

In thinking about the market, it is necessary to think with reference to each of these periods in order to take advantage of opportunities. If the main move is up, relapses are speculators' opportunities, but if the main move is down, rallies furnish these opportunities.

*Dow's Theory.

Losses should not generally be taken on the long side in a bull period. Nor should they generally be taken on the short side in a bear period. It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points. It is often difficult to judge whether the end of an advance has come because the movement of prices is that which would occur if the main tendency had changed. Yet, it may only be an unusually pronounced secondary movement.

The first thing for any operator to consider is the value. of the stock in which he proposes to trade. The second is to determine the direction of the main movement of prices. We know of nothing more instructive on this point than the course of prices as printed daily.* The third thing is to determine the position of the secondary swing.

Assume for instance that the stock selected was Union Pacific; that the course of prices afforded clear evidence of a bull market under way; that the high point in Union Pacific thirty days ago was 108; that the price had slowly declined in sympathy with the market and without special new features to 98. The chances would be in favor of buying a part of the line wanted at that price with the intention of buying a little more if the stock had further decline or if the price showed a well defined advancing tendency. It would then be wise to watch the general market and wait for an advance.

A 10-point decline under such conditions would be almost certain to bring in a bull market more than 5 points * See Wall Street Journal.