Extension Course For Trading Commodities

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Traders' Masterclass
PICKELL AND DANIEL
EXTENSION COURSE
FOR TRADING
COMMODITIES
Mark W. Pickell
D. M. Daniel
Introduced and edited by

Donald Mack
An imprint of Pearson Education

London • New York • San Francisco • Toronto • Sydney
Tokyo Singapore Hong Kong Cape Town Madrid
Paris Milan Munich Amsterdam
CONTENTS
The Traders' Masterclass Series xv

Editor's Introduction xvii
Introduction to First Edition xxv
1 THE RELATIVITY OF PRICES 1

The Law of Price Relativity 4
The General Trend of Commodity Prices 8
Inflation 14
This lesson is built around our "All Price Curve" theory. But it goes much
further, revealing things we never before have made public. It analyzes the
various kinds of inflation, natural and unnatural, gives valuable historical
records of fact, with causes leading up and effects following inflation. This
lesson is placed early in the Course so that students may better cope with
current conditions.
2 THE LAW OF SUPPLY AND DEMAND 19

The Primary Price Law 23
First work of the Course is a thorough grounding in fundamentals. When
you get through Lessons 1 and 2, you will have some very valuable infor
mation available for immediate use. In addition you will have some very
valuable records of prices and production for future reference.
3 THE DOW THEORY APPLIED TO GRAIN 47

The Three Market Movements 49
The Potent Price 50
The "Line" or Congestion 50
Averages Must Confirm Each Other 51
Reactions Are Sharp 51
Action Following Panics 52
Market Like a Pendulum 52
Speculation in General 52
Manipulation 53
Your Greatest Speculative Enemy 55
Dow Theory Applied to Grain 58
CONTENTS
The oldest of recognized and accredited methods of forecasting stock

prices and business trends.
4 GREGORY KING'S LAW OF PRICES AND HISTORICAL EFFECTS

OF HIGH AND LOW PRICES 63
The Money Theorists 72
Practical Application of King's Law of Prices 75
This is the oldest price law specifically applying to grain, having first been
published in 1669. It contains some object lessons in price analysis that are
not only as true today as they were when King gave them to the world,
but are highly important for any man dealing in grain.
5 DAILY ACTION 81
A Mechanical Method of Market Analysis 95
Definitions 96
Following the grounding in fundamentals, the study is started off with the
technical picture itself. This naturally starts with the action of the market
and the signals generated.
6 TRENDS 99
The Movement Graph 102
The "Coil" Formation 108
Market Weights 112
Definitions 112
Conclusions 113
The turning of the trend is the start of all market operations. It is of vital
importance for the farmer, for the grain dealer, or processor, and for
the trader.
7 AVERAGES 115
Get-Away Gaps 124
Life in all phases is a succession of Averages. The insurance companies
base all of their operations on averages. And a thorough understanding of
averages in the markets will reveal many things of vital importance.
8 OBJECTIVES 127
The Circumscribed Objective 135
Market Scale Weights 139
Scale Weights 140
CONTENTS
In this, we will reveal for the first time the "Circumscribed Objective"
which combines both time and distance in the market. Other resistance
levels, methods of calculation of runs, etc. will be explained carefully.
9 CYCLES AND THE WEATHER 141

Ember Days 148
Summary 154
The Figure Chart 154
Market Scale Weights 156
Cycles in the weather, in stocks, and in grain will be analyzed carefully.
Along with this will go instruction in reading the weather map. The indi
cations will be pointed out that forecast long hot spells, rains, cold waves,
etc. The run of cycles through the weather will be traced, and then
through the grain markets. Important "time" days in the market will be
gone into carefully, with the major and minor time cycles.
10 SEASONAL TRENDS IN GRAIN PRICES 159

The Seasonal Grain Cycle 161
Post-World War Markets 168
Relationship of Cash and Futures Markets 168
Actual Tops and Bottoms on Wheat 170
Conclusions 172
"The Voice From the Tomb" days for buying and selling grain will be ana
lyzed. There are years when these work excellently. At other times the
market completely ignores them. Reasons will be shown, and the conditions
cited when one may expect the seasonal trend to occur in the markets.
11 EXAMINATION 175
Business Indices 178
Reference List of Analysis Factors 179
Lesson 11 will be devoted to a review and examination on previous
lessons. Students will be given markets to analyze and forecast, based on
their previous learning. We will grade these papers and give personal
instruction where it is needed. Students will be shown just what the mar
kets did that they are asked to analyze. While this will be a general
examination, students will be given work for submission during the
Course so we may see that they are "getting" what is being taught.
-xi-
CONTENTS
12 CORN 183
The Dominating Market Influence 187
Time and Distance of Extremes and Runs 194
A Most Important Time of Year 196
Top and Bottom Formations 200
The Law of Supply and Demand will be explained in relation to the com
market, with facts and figures on production and consumption and their
analysis. Figures will also be given for past markets so that students will have
a picture of the market before them for reference. Peculiarities of the com
market will be analyzed carefully and its seasonal and short-term cycles will
be investigated. Special attention will be devoted to determining when to
consign and when to sell track and keep protected.
13 OATS AND BARLEY (AND ANSWERS TO EXAMINATION

QUESTIONS) 201
Price Characteristics 203
Conclusion on Oats 206
Barley 207
Answers to Examination Questions 210
Farm usage, movement to market, commercial usage, beverage usage,
carry-over, exports, international trade, world production - these things
will all be analyzed carefully, giving the student a background of facts and
figures, together with an analysis of the trading peculiarities of each grain.
14 BUSINESS FUNDAMENTALS AND GRAIN PRICES 217

The Division of Labor 224
Here will start an analysis of the influence on grain of the actual industrial
activity. The influence of the Stock Market, of production of steel, etc., will
be gone into carefully.
15 THE BASIS OF PROSPERITY AND ADVANCING PRICES 229

New Inventions 234
Building and Business 235
The Record 236
Fundamentals of the Depression 238
Then Came the Turn 239
The Building Deficit 239
It Forecasts the Future 240
Activity in another important phase of industry will be analyzed carefully,
with data present on the influence of building on grain prices and general
commodity prices. You will be surprised.
- Xll -
CONTENTS
16 CHANGING ASPECTS OF AMERICAN

INDUSTRIAL ECONOMY 243
We Become an Exporter 246
A Changed Economy 248
We Are Not Independent 249
Changed World Conditions 251
The Roosevelt Trade Policy 254
Conclusions 255
While you may not be able to spend $200,000 a year for information as
did the big trader referred to in the Introduction to the Extension
Course, you can fit yourself to grasp the fundamentals in their relation
ship to the market.
17 THE BUSINESS CYCLE AND THE BUSINESS INDICES 257

The Business Cycle 261
Prosperity 262
The Decline 264
Depression 266
Recovery 267
A Business Index 269
This will be a general summary of the business indices, the Stock Market,
foreign exchange, etc.
18 GRAIN TRADING METHODS OF BIG OPERATORS 271

A Plan of Operation 280
Inside Information 281
In this for the first time in history, we will reveal the exact net position at the
end of each day of one of the very largest traders, show just where and when
he bought or sold, his gross profits or losses and name that trader. This study
will carry his operations through the entire life of a major future. We will also
delve into the trading methods of other large traders, using official figures of
their individual position, and showing their methods of accumulation and
distribution. From this you will glean ideas of methods of operation that
should be invaluable.
19 TRADING METHODS OF BIG OPERATORS (CONTINUED) 289

Characteristics of His Trading 296
Suggested Method of Trading Operations 298
Trend Lines 301
The Progressive Average Trend Line 305
CONTENTS
The whole Course is pointed toward these last few lessons. After the
thorough grounding in the fundamental statistics of grain, the relativity
of prices, the effect on grain of general business activity and the meth
ods employed by big operators, the whole study is summed up in
practical suggestions.
20 SUGGESTED METHOD OF TRADING OPERATIONS 309

Margins 311
Steps in Trading 314
Crop Scare Bull Markets 316
Types of Grain Markets 316
Trading in Various Types of Markets 318
A research into past markets showing the actual results that should be
expected by this method of grain trading. Its profits, its losses, its benefits,
its dangers - these will all be analyzed fully in an effort to ground the stu
dent in work of preparation for dealing with current markets.
21 APPLICATION OF TRADING METHODS 323

How Should Profits be Used? 331
Stop-Loss Orders 336
22 TRADING IN A NARROW MARKET 341

In this, we will again go back into history, giving you the basis for an
analysis and then ask you to apply the information previously learned to
that market. Again we will go over your papers carefully to see whether
you have grasped the things taught.
23 MAY WHEAT AND THE BANKING HOLIDAY 357

Application of trading methods to more markets.
24 AN ERRATIC WHEAT FUTURE IN AN UNUSUAL MARKET 371

Bids and Offers 379
Minimum Prices 381
Index 389
-xiv -
THE TRADERS' MASTERCLASS SERIES
Great investment advice is a rare and timeless commodity.

The Traders' Masterclass series brings to the market a set of classic
texts from the "golden age" of technical analysis - timeless trading
wisdom, laying the foundations on which a growing body of
investment literature has been built.
These original works from the pioneers of technical analysis con
tain uniquely insightful lessons, winning formulae and trading
tactics that can be put to use in any market, at any time.
Generations of investors may come and go, but the nature of spec
ulation remains the same. For investors and market students alike,
these masters represent the original formulae for trading success.
Some of these works originally took the form of correspondence
courses, and have never previously been published as books, while
others have existed only as rare manuscripts, available to just a
handful of traders with the determination to track them down.
Over a twenty-year period, an experienced US trader and
renowned investment book expert, Donald Mack, selected and
tracked down these classics so that modem investors might benefit
from their advice. Each book in the Traders' Masterclass series has
been introduced and annotated to aid its application in today's
markets. To the trading community these manuscripts will be rare
and valuable sources of wisdom.
-xv-
EDITOR'S INTRODUCTION
Every once in a while a book comes along that makes an impression in its field
of specialization that leaves a path so strewn with gems of wisdom in that field
that we who are closely involved in its area of influence can only inadequately
express our admiration of its great merits. However, in the light of whether a
work has achieved greatness or not, time itself neither judges nor denies this, it
just leaves to the Fates its lasting destiny which can range from the totally for
gotten all the way to great acclaim. So it is that when we meet the outstanding
coverage this Pickell-Daniel Course gives to the field of Commodities and
Futures, the writer of this Introduction certainly will put himself at the fore
front in giving this masterful classical work the honor it deserves. This he does
with the extra note that even with the first two chapters being more than out
dated by the passage of time, the balance of the Course suffers not the least
from this slight deficiency.
Some years ago as an exercise of the intellect, which could also be described
as taking on a mental obstacle course, I made the decision to see if I could
make a case for Fundamental Analysis in the stock market. With my being a
dedicated and firm believer in that which today is as far removed from
Fundamental Analysis as one can possibly go, that being the school of analysis
we call Technical Analysis, it was an extremely difficult task to undertake. I
believe I approached this exercise with a full display of fairness by assuming as
neutral a position as I was able to take. It was an absolute necessity to do this
as earlier in my research, for effective market knowledge to invest and trade, I
had totally thrown out all aspects of Fundamental Analysis as basically ineffec
tual. More than anything I found it very nebulous analytical work with the
methodology requiring more the prerequisite of luck in its future projections
than any great forecasting skill.
The key comparison in this investigation of Fundamentals came down to the
thing absolutely required in investing and trading, and that is precision in mea
suring price movements and pivot points, notably the use of the Fibonacci
Summation Series and the Golden Ratio of 1.618 which so many times gives
very accurate measurements. Fundamental Analysis by its very nature has to
broadly rely on extrapolation of currently known basic facts derived from a

company's accounts and on opinions and raw projections to try to determine
that company's future prospects. My earnest decision on the Fundamentals in
the Stock Market versus the Technicals had to be decided in favor of the
Technicals. The Fundamentals depended too much on the analyst's luck of the
draw, or more factually on the Law of Averages where only the very, very few
of those who are at its high end reap the rewards. It all then slackens off dra
matically as the Average's curve moves further and further from the fortunate
few of the time to the great bulk of practitioners who basically come down to
the one real factor that they have to turn to - guessing.
Please observe in the preceding material on the Fundamentals versus the
Technicals that all the references have been made with respect to the applica
tion of these two disciplines to stock markets and to stocks. As Fundamentals
are basically concerned with a specific company's prospects, this point brings
up an obvious comparative question "Do Fundamentals also apply to
Commodity Futures which are a grouping of Grain and non-Grain products
with nothing in their makeup at all connected with company accounts?". The
answer here is affirmative in the fullest. There definitely is a distinct difference
between Stocks and Commodities when it comes to their Fundamentals, espe
cially when looking at the Grains. The question then arises as to why should
this be so?
Well, as stated, stock fundamentals are solidly tied to a company's accounts,
even if many times they are misleading or slanted with omissions, of a com
pany's business numbers past and present. Taking these same figures, figures
which are always there, a company's future prospects results have to be
expressed in expected and hoped for share prices that can only be projected at
best and for time periods that can range from the respectful to the totally
unfounded. However, when it comes to the fundamentals to do with Grains
and non-Grains that are actively traded in speculative futures markets, the
same word 'Fundamentals' bears no resemblance to when its usage is applied
to stocks. The big difference here is very simple, futures fundamentals are
always reflective of one major factor in their existence - Supply and Demand -
and what we know as company fundamentals do not figure in here at all.
When Supply is deemed to be greater than Demand, or estimated rightly or
wrongly to be so in a particular year, prices have nowhere to go but down
wards, and when Demand is greater than Supply, the opposite holds true with
prices basically rising. So many commodity fundamentals can come into play
under these circumstances that on their own or in conjunction with one or
more others, they are still such formidable forces that even technical analysts at
times have to give into some serious considerations here.
Thus it is that this Pickell-Daniel Course battles it way through important
commodity fundamentals. These have to include things such as the effects of
inflationary/deflationary monetary factors; government's agricultural policies;
legal restrictions; and bureaucratic interference in the exercising of certain con
trols designed to keep down or build up land production. Then there is always
fickle weather, which very much qualifies as a fundamental here, which can
undo, or partially undo, and more times than not most likely will undo so
much of every bit of planning that has been worked out for the planting, grow
ing, and harvesting of tradable crops such as Wheat, Com, Soybeans, Oats,
Rye, etc., and non-Grain agriculturals such as Cotton, Canola (Rapeseed), Rice,
etc. So important is what the weather will be like in the growing and harvest
ing seasons each year (for obvious reasons), that it cannot be ignored.
Specialized weather forecasters, for good reasons, see their services called upon
time and time again. Any good book on agricultural futures will have some
decent coverage on this weather factor and this Course will certainly not be
found to be backward in this department.
So, while this Course is strongly given over to the technical side, it cannot and
does not avoid coverage of the fundamental side of speculating in Futures. On
balance though, the technical side is still much the more important of the two
as the fundamentals, for all their importance, still lack the essential guidelines
the speculative investor absolutely needs in their investment timing. There is
just no substitute for the Technicals that are needed to be put into place to
really fine time the buying and selling engendered. It is with this particular
theme especially where this Course comes into its own with a combination of
very advanced Technicals, especially several of which have escaped the atten
tion of users of the Technicals today.
We meet the first technical material in the Course in Chapter 3 where the
Authors bring in a unique stock market approach that some of today's
advanced Futures technical analysts might initially find incredulous when they
for the first time see its application described in this Course. Historically, when
we turn to the most honored, the longest enduring, and still today one of the
more steadfastly followed of all stockmarket methodologies, many reading this
Introduction will know that I can only be talking about one very special market
approach - the Dow Theory. Still a powerful tool to be reckoned with, the Dow
Theory remains the oldest recognized and accredited method of confirming
and forecasting stock movements and business trends. Knowing this approach
-xix-
is so closely associated with stocks and their indices, its inclusion in this
Commodities Course without further awareness must most naturally bring out
the question as to just what is it doing here then?
Well, as I have hinted above, surprisingly there really is a very important tie-
in with some commodities, and as will be seen, it so very interestingly comes to
the forefront with Wheat and Com as its finest example. As this particular sub
ject is studied, there are good reasons that the authors present it in the fine
detail that they do, for it is something that has escaped the attention of all the
commodity books that I know of from the past 40 years. Further details on just
how the application of Dow Theory tenets can be applied to Commodities will
naturally be found in the text that follows, specifically in Chapter 3 and in later
Chapters. The recommendation from this quarter is to at least give them some
consideration and examination.
But to give at least a short insight into this particular subject, those who are
well-steeped in the Dow Theory as applied to shares will know that one of the
most famous and most referred to of its tenets is the confirmation of the Dow
Jones 30 Share Industrial Average (DJIA) by the Dow Jones Transportation
Average (DJTA) in any major move (or the other way around). A side note is
called for here on the DJTA for at the time this Course was written, this same
Average was called the Dow Jones Railroad Average (DJRA). However, things
have a habit of moving on and with the 'airplane' supplanting a great deal of
what the railroads used to carry; in more recent times the DJRA has been
altered with the addition mainly of airline stocks to its constituents to reflect
the changes over the years. Nevertheless, if there should be any question, the
confirmation meanings are still there, and the two current Averages have defi
nitely not lost their punches in their interactions.
As a further explanatory note on this subject, the thinking behind the compari
son of the two Averages shouldn't prove any problem for those new to the Dow
Theory. The major word in the DJIA is the word "Industrial" for as U.S. industry
advances or declines in its business activities, the shares in the companies listed
on the New York Stock Exchange (NYSE) move in their mysterious ways
upwards, downwards, or sideways. Now as most industrial activity has to rely
on the basic services as rendered by all the transportation companies in concert,
a rise or fall in this activity (and generally this shows up independently of the
DJIA in the DJTA) can be taken as a sign of some future market movement.
For example, say that when we see the breaking of the former all-time High
by DJIA, we also see the DJTA breaking its former all-time High, this is confir
mation and a positive sign of future movement for both Averages. However,
-xx-
say the DJIA breaks its former all-time High, but the DJTA. does not do like
wise. It could just as easily perhaps be standing still or even heading lower at
the time. Historically this is definitely a non-confirmation and definitely a time
for more intensive market analysis. Keeping these very well-known compar
isons of movements of the DJIA and the DJRA (at the time) in mind, it would
appear that thoughts were generated initially by Mr. Picked, Mr. Daniel, or
someone who they were associated with, that similar comparisons could be
made between two related commodities. What appears to have been a natural
conclusion back then, has understandably been missed in our more computer
ized ways of thinking. However, this possibility of using the Dow Theory
Confirmation Principle and applying it to Futures certainly did not escape the
uncomputerized in the backwards(?) 1930s and 1940s.
When it comes to applying the Dow Theory to Commodities, obviously it is
not always easy to find two individual Futures that are so interrelated that the
movement of one can be found to also have meaning in the movement of the
other. But in this rarely considered analytical approach, the awareness of these
possibilities as brought out in this Course makes for an interesting line of
developmental thinking. Following this line of thinking, there just might be a
hidden key producing extra meaning to a minority of alert traders who have
the insight into the possibilities here. One pair of Futures contracts, not to be
missed, that certainly have been and still are worthy of joint exploration are
Silver and Gold. There are others, and as the Course points out, the splendid
possibilities in Futures interrelationships should not lay unexplored. As the
Authors say: "If a trader were to confine his activities to trades made only
when the confirmation of a movement is given by both Wheat and Com, it
should make him most excellent profits. This confirmation by the Com of the
Wheat trend and/or the WTieat of the Corn Trend is undoubtedly the surest
and safest indication of trend that there is. The records speak for themselves."
Moreso with Commodities than with stocks, economic and financial price fac
tors are a much more integral part of their movement fluctuations in both the
fundamental sense and the technical sense. Following the first four chapters of
the Course, the next five very interestingly are devoted to charts and the meth
ods of reading these charts. And in keeping with the highest of respect for the
technical thinking of the great market masters of the Golden Age of Technical
Analysis, 1922 to 1957, Messrs. Pickell and Daniel keep up the tradition by
giving us a numbers of technical concepts that will be newer and as such, more
modem than some of the material in the latest TA book published last month.
An example of their more up-to-date than today's technical knowledge can be
-xxi-
seen in the coverage given in Lesson 5 to the technical implications of Outside

Days, Inside Days, Turn-Up Days, Turn-Down Days, Narrow Days, and Triple
Reverse Days (easier to see now that we have real-time charting through com
puter power). And this material on technical indications is only a sample of
more to come in the following chapters.
As it all comes together here, it really backs up this writer's contention that
we who are always seeking to expand our technical knowledge have so much
more to gain, generally speaking, from the magnificent minds behind the TA
classics of yester-year than much that is available today. Yes, we cannot help
but acknowledge that in themselves there will always be current reading very
worthy of studying for any new technical concepts they may contain. After all
no one writer or group of writers and no specified age has or ever will have a
monopoly of technical ideas, but having said that, the richness of the material
from the "Golden Age" is still so full of technical creativity, in no way should it
be missed or neglected.
There is one precept that I never tire of trying to put across to readers of the
Introductions that I write for all the books and courses that comprise the two
Series, the Traders' Masterclass Series and the Investment Greats Series, that are
currently underway in conjunction with the publishers, the Financial Times
Prentice Hall company. And that precept is that with all the classics that we are
re-publishing, and for any other book that the reader especially thinks well of,
that these books should be read and re-read time after time. One very good
reason for noting this is that in this re-reading, it seems one thing one question
always comes up at least once, and many times more than once, during the
reading. And that question is: "How did I miss that in all my previous re-
readings?" So here I am writing this Introduction and going through the text
when in Chapter 6 I come upon this statement - "Congestions come at price
areas that have not been previously worked." Certainly an interesting observa
tion that I had previously missed and now one I will now have to check out
along with you market students who have also had your curiosity aroused to
further investigate this observation.
Also worthy of checking out in this Chapter will be the Double Spread
Bottom and the Check Top, formations not noted elsewhere that I can recall
and good examples of the type of post-1929 evolutionary observations that in
the research that came out of this classical period, we see advancement after
advancement over and over again.
Chapter 8 is titled "Objectives", and the techniques here should prove of great
interest and value in conjunction with the age old problem of trying to deter-
- xxn -
mine beforehand the probable extent of the next intermediate and/or major
move to come. Ever since speculative markets have been around, forecasting
future price movements have been the order of the day and the biggest of chal
lenges for every level of market participant. We all could easily throw up our
hands in desperation because any attempt to predict the unpredictable is
bound to be a frustrating exercise, but that is no reason not to pursue the possi
bilities at any time. Not for the authors here to evade the problem, and really
the answers they present have a great deal of promise, especially the
"Circumscribed Objective". The Circumscribed method of determining objec
tives uses arcs and angle lines in a very special way that sees them drawn from
one outstanding point to another outstanding point on the chart. This method
ology is sure to bring about a great of experimentation by many readers after
they get into it, and all this writer can say is that it won't be a waste of time.
There are so many more aspects of this Course that we could cover in this
Introduction, it is extremely extensive, but with the start given here we'll let the
balance of the material unfold as it is reached. However, the reader should cer
tainly meet much that will interest them, instruct them and enthrall them as
they go through the full Course at their leisure. Some of the non-technical mate
rial will be found to be dated, but that is more the general nature of Futures, as
against stocks, and this cannot be avoided for they do have a relatively short
fixed contract life whereas shares by their nature are open-ended until other
market influences exert any structural changes. Nevertheless, it really is the
technical aspects and expressed thinking that makes up this Course that, in
turn, makes it a welcomed addition to this Traders' Masterclass Series.
Donal Mack
Series Editor
E-mail: Dmackl44@aol.com
INTRODUCTION TO FIRST EDITION
A SOUND BASIS FOR DEALING IN GRAIN
In the Fall of 1932 a group of men were seated in a brokerage office at

Springfield, Illinois, when one of Chicago's largest traders, en route to shoot
ducks around Beardstown, walked into the office. He was a friend of the
broker at Springfield, and immediately became the center of all interest as he
was recognized as one of the most capable grain traders in the country.
After general introductions, a young man spoke up and asked, "Mr. Howell, I
am long 20 thousand wheat. What do you think of it?"
"What do you do?" asked Mr. Howell after looking the young man up and
down.
"I am a farmer, own 360 acres of land out here."
"Where do you get your information?"
"Oh, here in the brokerage house and out of the papers."
"Young man, I spend $200,000 a year for my information. I sit on several
Boards of Directors so I can get the inside of the business situation. I have my
own reporters in all branches of business and I get cables frequently telling me
of crop conditions abroad. I have men who do nothing but analyze business
and grain news for me. And I am on the exchanges personally watching the
men and the news. Yet it is most difficult for me to trade profitably. What busi
ness have you, not trained in speculation, with no idea as to what causes the
price swings - what business have you to be trading at all?"
The following is another true instance showing the basis of operations of big
traders. This is from the story signed by James A. Patten, and printed a few
years ago in the Saturday Evening Post. It contains a world of wisdom for the
man who will learn.
"One of the fundamental traits of my character," said Mr. Patten, "is a habit of
relying on my own judgement once it is formed. If all the traders in the Wheat
Pit were selling when I believed there was going to be a shortage of wheat, I
would buy and not be changed by their clamor.
"This does not mean that I have ever been afraid to alter an opinion once
formed. There have been times when, discovering I was wrong, I have run like
-xxv-
a scared cat. But if I have valued my own opinion it has been because of the
trouble to which I have gone, as a rule, before forming it.
"When I have made trips through the fields of grain, I have gone not as an
expert. I do not regard myself as an expert. Any good farmer knows as much
about growing crops. Some of them know more. But the farmer is occupied
with one farm, and I think, instead, of tens of thousands of farms.
"That is what I mean by information. But there is a lot of it. The price in
Liverpool, the temperature in France, rust in Australia, war in the Balkans, rains
in the Argentine, drought in Texas. There may be 10,000 such scraps of informa
tion in a man's head before he evolves for himself a sound opinion, and then
maybe that opinion will have as its foundation a single authenticated bit of news.
"On the New York Stock Exchange, when you trade, you frequently encounter
smoke screens. You need inside information. In buying wheat, com, or oats, there
is no such thing as inside information. The facts are there for anyone who can
interpret them."
And now for one final quotation from another large and successful trader. This
one is taken from an article written by the late Arthur Cutten, and published in
the series appearing over his name in the Saturday Evening Post in 1932.
In referring to a certain incident that occurred in 1926, he said, "I was carrying a
big line of wheat - bigger, I suppose, than that of any other individual trading in it
anywhere, but in my opinion, not too big. I could pay for what I had. That day the
market was strong. May wheat was selling at $1.66 a bushel. I had bought most of
mine when it was selling for less than $1.50. Events were justifying the judgement
of conditions I had formed months before when I had taken my position."
Again in that same series, "The wheat pit is a sounding board. The gossip of
the world is hurled in and out of there with a speed that would make a news
paper office dizzy."
And finally, "Speculation was the elemental driving force that caused this
nation to spread itself - the first to do so in all history - far across a continent. It
was speculation that built our railroads, created our system of long-distance
communications, applied power to all our tasks and reared cities that astound
the Old World. Speculation is a larger part of our genius than we realize.
"I am a speculator. I say it as simply and as proudly as another might say he
was a merchant or a soldier or an explorer. We who are speculators have a right
to be proud of our calling when we understand it. In all civilized communities
speculators have been of immeasurable value to the development of civilization.
Statements like these from men who have devoted their lives successfully to
trading in grain are extremely rare. Studies of the methods of trading are even
-xxvi-
more rare. The Law of Supply and Demand is quoted glibly - but there are
very, very few men who could prove in black and white that there is such a
law, or that it actually does function in governing prices. The causes of price
swings are little understood by even most of the men in the terminal markets,
and certainly not by either the general public or most politicians.
The Pickell-Daniel Extension Course of Grain Market Analysis will endeavor to
reveal some of the underlying causes of grain price swings, and the methods
used by big traders in following them. It was written not so much with the
hope that from it others may some day explain the workings of the market to
the general public and thus remove the market as a political football, but more
particularly for the personal benefit of you students who are willing to take the
time and give this interesting and profitable subject the study it deserves.
The entire theme of the course may be taken from the quotations from those
three greatest traders of all history. To summarize them:
To trade successfully requires a foundation of fact on which to base an opin
ion. Note that the first trader quoted says he spends $200,000 a year for
information and sits on Boards of Directors for the purpose of knowing the
inside conditions of business. Note that James A. Patten, valued his own opin
ion because of the "trouble to which he had gone, as a rule, before forming it."
Note that Mr. Cutten said, "Events were justifying the judgement of conditions
I had formed many months before when I had taken my position."
It is, of course, impractical for the majority of traders to spend $200,000 a year
for information. Yet not one of these three men started into the grain business
with a cent more than any student of this course. And none of them had access
to the written word of those who had studied the markets before them.
Mr. Patten declared that there is no such thing as inside information in trad
ing in grain. It is a positive fact that the system of news gathering which has
made the grain pit a "sounding board which sends the gossip of the world
through with such a rapidity that it would leave a newspaper office dizzy"
makes it impossible to long conceal from the most remote hamlet the funda
mental facts and factors which so change supply or requirement that the price
is affected. What news is withheld temporarily is immediately reflected in the
market action if it is of consequence.
We have so stressed these references from the world's three outstanding grain
traders - Mr. James A. Patten, Mr. Arthur Cutten, and Mr. Thomas Howell -
because they started in with little and not only made millions, but retained
them. They made their money and kept it by a study of business fundamentals in com
bination with grain conditions and then traded in the market as the results of these
- XXVll -
studies indicated which way the market should move. In doing that they performed
a service to the farmer, to the grain handlers, and to the nation. What they have
done, you can do.
YOUR FUNCTION IN THE MARKETS

Before going into methods of price anticipation, let us get clearly just what part
the trader plays in it. Let us analyze his legitimate, economic function. Let us
see just why Arthur Cutten said, "I am a speculator. I say it as simply and as
proudly as another might say he was a merchant or a soldier or an explorer."
To understand the function of a trader, either on the long or buying side of the
market, or on the short or selling side, first consider the economic function of
the market itself and particularly of the price.
When America was first settled, practically all the grain produced was con
sumed by the grower thereof. Gradually, as the machine age made its first steps,
towns and villages grew up. Barter was resorted to where money was not avail
able. As the young men of the day followed Horace Greeley's advice and went
westward, there began a gradual opening up of the great central grain belt. Up
until the Civil War, however, business was highly localized, with such trade from
east to west as there was being carried on mainly by a few boats.
THE START OF FUTURE TRADING

During the Civil War the Federal commissary department wanted to contract
for grain supplies ahead. This was a natural desire, as they must necessarily
keep their budget balanced so that food supplies would be available when
needed. Grain dealers, not feeling at all sure as to how much could be deliv
ered, hesitated to make such forward contracts. So men of money who had
faith in the west and were excited by the rapidly advancing prices of the time,
agreed to make delivery of grain at a future date, confident that they could
purchase it from the warehousemen or farmers. This was the start of trading in
Futures Contracts. It was done at the request of the United States Government.
The development of railroads and the refusal of many soldiers to return to the
farms after the Civil War brought the development of cities like Chicago, New
York, Pittsburgh, and other commercial and industrial centers. A smaller per
centage of the people were left on farms; and with the advent of the reaper
fewer men per farm were required.
This presented a new problem. Transportation was still primarily by boat from
Chicago eastward to the industrial centers and the Lakes were frozen for several
- xxviii -
months a year. The problem was not only to buy and store the grain until needed,
but to pay the farmer such a price that he would be encouraged to produce more,
while at the same time the warehouseman did not pay so much but what he could
profitably ship eastward in the Spring the grain stored in the Fall.
The speculator who had undertaken to deliver to the United States
Government grain desired at a future date now found a new use for his ser
vices. He bought contracts from the warehouseman at Chicago on the
speculation that by the time Spring rolled around he could dispose of that
grain eastward at a profit. If one speculator found that the conditions had
forced a price decline to a level where he could not carry the contract further,
he sold his contract to a new speculator.
Baltimore, with its 59 mills, was the center of the milling industry at that time,
with Philadelphia and Richmond also having mills run by waterpower. Oswego,
N.Y., had access to wheat from Canada, Illinois, and Michigan. Should conditions
be such that the operators of these mills feared for their supplies the next Spring,
they could go direct to some warehousemen, or failing in that, to some speculator
who would take a contract to deliver so much grain to them after the opening of
navigation. Thus there grew up a practice of these traders not only buying or sell
ing for future delivery, but the time of that delivery was a natural growth.
Contracts were made for delivery at harvest in the southern states, at harvest in
the northern states, at the close of navigation, or the opening of navigation. The
July, September, December, and May contracts were natural contracts.
The dealers in these contracts enabled the warehouseman to pay as much for
grain that was going to be stored as he paid for grain going into immediate
consumption. The cost of carrying the grain from one contract to another was
generally added, with the May showing a premium over the December, the
December over September, and the September usually over the July, Through
the sale, the warehouseman was relieved from risk. With his sales contract he
could go to the bank and borrow practically the full sale price of the contract,
thus having money with which to pay the farmer.
Had it not been for that ability to pass on the risk, warehousing of grain would
have been the most hazardous business imaginable. It is said that the average
commission house changes its entire list of speculative clients once in about every
five years. Were the elevators not able to hedge their purchases, they, too, would
inevitably have had an average business life of not over five years - or else the
spread between what they paid for grain to store and the selling price of grain for
immediate consumption would need to have been widened out materially.
So the buyer of futures contracts performs a service to the farmer, which
means to a tremendous percentage of the people, also to the elevator ware
-xxix-
houseman, and to the millers, and he performs a service thereby to the nation.
He may well say with Arthur Cutten, "I am a speculator. I say it as simply and
as proudly as another might say he was a merchant or a soldier or an explorer."
The function then of the members of the grain exchanges is to find a market
for that grain which the farmer cannot himself use or sell direct to some imme
diate consumer. If the exchange member cannot sell this grain to an ultimate
consumer, he sells it in the futures market.
THE ECONOMIC FUNCTION OF THE PRICE

The function of the price is primarily two-fold. First is to move into consump
tive channels the grain which the farmer will not himself use. The second
economic function of the price is to adjust the supply to the requirement. All
things else connected with the price are merely by-products. It is well to know
positively and to keep clearly in mind the two economic functions of the price
- first to move the offered grain into consumptive channels by taking it direct
to someone who will use it, or else to someone willing to hold it until it is
needed and second, to regulate the supply to the requirement.
The economic function of the grain trader is three-fold: (1) to assist in carrying
the grain until it is needed; (2) to assist in providing a market for all grain offered;
(3) to assist in determining a price that will regulate the supply to the requirement.
And in the performance of that third function of the grain trader, it is appar
ent that the task of putting the price to a level that will increase consumption
and reduce production when the supply is excessive is just as important and
just as highly beneficial to farmers and to the nation over a period of years as is
the task of helping to advance the price by being willing to buy at increasingly
high prices when the supply is short and it is necessary to conserve the sup
plies and induce greater production.
Therefore it is self-evident that the grain trader who, after a careful analysis of
the conditions, decides that the price is at such a level that consumption will be
curtailed and supply increased, and therefore determines that lower prices are
justified by coming conditions - it is self-evident that the trader who sells short
under those circumstances is performing just as vital an economic service as he
who buys the grain offered for future delivery in times of scarcity. One needs
look back only to the disastrous conditions of 1929-33 in the grain markets -
with the distress to farmers and to the nation because of tremendous surplus
supplies in the export countries as compared with the needs of the import coun
tries - to see that a price level which will keep an equilibrium between supply
-xxx-
and requirement is of the most vital importance. And the trader who assists in
preserving such a price level is performing an economic service to farmers, and
to his nation - and should make excellent profits for himself in doing so.
The purpose, aim, and ambition behind the Lessons of this Course is to assist
traders in determining first what is a balance between supply and requirement;
second, how to determine whether the price has discounted bullish or bearish
conditions; and third, how to determine when and at what price levels to make
the trades that will assist in maintaining that balance and at the same time
make a profit for the men that make them.
In presenting this material, it will be necessary to study the relationship
between Business and Grain prices, between Securities and Grain prices,
between Grain prices and other commodity prices, and between grain supplies
and their prices. Also, it will be necessary to study the habits of traders, the
methods employed by such big successful traders as those quoted at the first of
this Introduction, so these may be emulated, and, last but not least, the story
told by the price movements themselves.
There is one statement we would like to make in presenting this Course, and
that is that no conclusion is drawn that has not withstood at least the test of 25
years' time. Some of the conclusions given were first published 250 years ago.
They apply equally well now as they did then! Most of the conclusions were
first reached 25 years or more before the time of the market used to illustrate
them! In other words, we have tried to give in this Course the things that have
been proved sound by the test of time.
It would be impossible to keep the records up to the minute. While it might be
more desirable to bring the illustrations “up to date," yet up to date today is
history tomorrow. Hence we have continued to use figures compiled when the
Course was first written. We are firmly of the belief that students who go
through the old markets and master the principles taught, and then who make
graphs and records of the most recent market, will find themselves much better
able to cope with the markets of the future - the ones on which their money
backs their learning - than if we were able to take the very latest markets and
show what should have been done, and when. So our final recommendation, in
this introduction, is that you first master the text matter as illustrated by mar
kets of the past. Then bring your records up to date in the futures that have
expired and will expire.
This means WORK. And we spell it with capital letters. The man who gets the
most benefit out of this Course through the years to come will be the man who
gives it the most application and intelligence.
-xxxi -
Lesson 1
THE RELATIVITY OF PRICES
■ The Law of Price Relativity

■ The General Trend of Commodity Prices
■ Inflation
On February 1,1920, after World War I, a certain quantity of 106 commodities

was selling for $20.66. On January 1,1921, exactly the same quantity of precisely
the same commodities could have been purchased for $10.62, or almost half of
what they would have cost eleven months earlier. On December 1, 1925, that
same quantity of commodities would have cost $14.40. But before gold standard
was abandoned on March 1 of 1933 one could have made that purchase for only
$6.35. Thus it will be seen that while the value of the dollar as compared to gold
remained constant, the purchasing power of the dollar fluctuated extremely
sharply. This phenomenon is nothing new in American history. Back in 1750
that same quantity of goods could have been purchased for about $3.50, but in
1790 it would have cost right around $20.00. In 1795, $8.35 would have been suf
ficient to make the purchase, while in 1814 the goods would have cost about
$15.00. By 1850 those same goods could have been purchased for $8.50, while
during the Civil War they would have cost around $16.00.
The rise and fall of the purchasing power of the dollar is just as vital a factor in the trend
of commodity prices as is the change in supply and requirement. While the wheat price, or
the com price, or other commodity price must adjust itself to the changing state of supply
and demand, it must also adjust itself to the constantly shifting general level of commod
ity prices. At times this latter influence is of far more power than the former.
In a graph, called "A Century of Business Progress," the lower part is devoted
to a record of the trend of general commodity prices. Each per cent of change in
that commodity price trend is equivalent to a little more than one cent on
wheat and slightly less than a cent on com. This commodity index shows 1910
to 1914 as 100. The,average price of wheat during those years was $1.05.
In this graph, it is to be noted that from 1834 to 1837, or a period of practically
three years, the general level of commodities advanced from 96 to 138. This
would be equivalent to an advance of approximately 45c a bushel in wheat. In
other words, if wheat in 1834 was selling at $1.00 a bushel or its normal rela
tionship to this Commodity Price Curve, it would have been necessary for
wheat to sell at approximately $1.45 in February of 1837 to have brought the
same quantity of other commodities in exchange for a bushel that it would
have brought in 1834.
From 1837 there was a decline for approximately seven years until the general
commodity price level was down at an index figure of 80. Thus wheat could
have declined from $1.40 a bushel to approximately 80c a bushel and still have
brought as much of other commodities in exchange as it would in 1837. From
1843 there was a slow but steady advance to approximately 100 in 1847, fol
lowed by a decline to 1851, a new advance to 1857, and a decline to 1861.
-3-
EXTENSION COURSE FOR TRADING COMMODITIES
In 1861 the general commodity index reached a low level of approximately 84.
Then, from 1861 to 1864, during the Civil War, there occurred an advance in the
commodity index to a level of approximately 230. For a bushel of wheat to
have brought as much of other commodities in 1864 as it would have brought
in 1861 at a price of approximately 86tf a bushel, the 1864 price of wheat would
necessarily have been around $2.40 a bushel.
That this general change in the level of all commodity prices has a direct and
powerful influence on the trend of wheat prices in their relationship to all
prices is a foregone conclusion; also that a close relationship between the gen
eral trend of wheat prices and of the price curve of all commodities is readily
apparent. Wheat rises above and falls below the All Commodity Price Curve,
but invariably the two curves come back together. What is more, the area of
wheat prices above the commodity curve is approximately equal to the area
below that curve.
History also shows that the wheat price trend remains in one general direc
tion usually for a period of three to four years and sometimes much longer
than that. As a matter of fact, the actual relationship between wheat and gen
eral commodity prices may be summed up as follows.
THE LAW OF PRICE RELATIVITY

Prices of staple commodities have a common relationship that is preserved so
long as the Supply approximates the Demand, and toward which at all times
they tend to draw.
The price of a commodity is high or low only as its power to purchase other
commodities is relatively high or low. When Supply exceeds Demand, then the
price of that commodity tends to fall below its common or normal relationship
to the general level of commodity prices. Conversely, when Demand exceeds
Supply, then the price of that commodity tends to rise above its common rela
tionship to other commodities; and, especially in speculative commodities, to
follow most closely the fluctuations of the commodity with which it is most
nearly interchangeable in use.
The further prices are from their common relationship to other commodities, the more
drastic will be the movement when supply draws nearer to demand.
Expanding on that definition a little, we go back to the statement of the father
of economics, Adam Smith, who in 1775 declared "that the value of any com
modity to any person is equal to the quantity of labor it enables him to
purchase." Ordinarily, it takes about three bushels of wheat to purchase a pair
-4-
of shoes - and so long as the export surplus of wheat in the world is approxi
mately in conformity with the import requirement, and shoe supplies are
normal, it will make little difference to the farmer whether the selling price of
wheat is $1.00 a bushel, 50c a bushel, or $1.50 a bushel. He will find that it will
cost him the three bushels with which to purchase the shoes. The value of that
wheat to him is its ability to purchase the labor of others.
When he can get those shoes for two bushels of wheat, he knows that wheat is
high in price. But when he must pay four bushels of wheat for the shoes, then
he knows that wheat is low in price.
This relationship holds good not only for wheat, but for other basic commodi
ties that are not a natural monopoly. During World War I, for instance, there
was a great demand for copper with which to make shells for guns. The price
rose to around 28c a pound for copper as compared to pre-war levels of
approximately 10c a pound. This was an advance of practically 300 per cent.
Thus with the excessive Demand, which was far above the Supply, the price of
copper rose above its normal relationship to other commodity prices. Then
came the break of 1921 and copper went down to 12c while general commodi
ties came back to 120. The decline in copper prices comparatively was much
greater than that of general commodities.
The same thing happened in oil, rubber, and a number of other commodities
including grain, the demand for which was greatly increased by the necessity
of imports during the war. Other commodities like building materials, for
which the demand was slackened during the war, did not advance nearly as
far. When the break came, these highest commodities broke more rapidly than
did either the general level of commodities or the lower priced commodities.
Conversely, in March of 1933, the wheat price was only about 44 per cent of
normal. In the advance which occurred from March to July of 1933, wheat went
upward more than 120 per cent while the general level of commodity prices
advanced approximately 65 per cent. Some of the high-priced commodities
showed practically no advance whatever. "The further prices are from their
common relationship to other commodities, the more drastic will be the move
ment when Supply draws nearer to Demand."
It is, of course, obvious that the various groups of commodities did not
remain in any one relationship for very long. The condition which may affect
the level of grain prices may not affect the level of building material prices in
like proportion. Yet it is a positive fact that the change in price level of com
modities affecting any large percentage of the workers in the United States, or
of the world, will immediately affect too in greater or lesser degree the com
modities of the balance of the workers.
-5-
There is also an international relationship between commodity prices.

Commodities, like the action of water, seek their natural level. Unlike water,
however, commodities run "uphill." That is, they seek the market of the world
paying the highest price. This automatically brings prices of the world into
general accord.
As is stated, these groups of commodities composing the index of commodity
prices vary in their trend of movements. Table 1.1 shows the thirteen groups
made up of 106 individual commodities that we use as our commodity index,
based upon 1909-13 as 100 or a "normal" relationship. This index is based on
Bradstreet's "Commodity index" which may be secured monthly from Dim
and Bradstreet's "Monthly Review" (published at 209 Broadway, New York, for
$5.00 per year). The various groups given herewith are published each month
and we show them on the first of January for seven years.
Table 1.2 shows the average of these groups monthly from 1909 to 1913. To
change the quoted figures which are in dollars, as shown monthly by
Bradstreet's, to an index figure with 1909-13 a starting base, and thereby elimi
nating the seasonal trend or variation shown in this 1909-13 average, divide
the current monthly price by the price quoted for the corresponding month
during 1909-13. Thus the quoted average price of Breadstuffs for September 1,
1933 was $0.1021. The 1909-13 average price of Breadstuffs for September 1
Table 1.1 Groups of commodities in percentage of 1909-13 as 100
Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Sept 1

1927 1928 1929 1930 1931 1932 1933 1933
Breadstuffs 123 137 127 126 87 71 54 105

Livestock 123 131 137 127 121 94 52 49
Provisions 162 158 157 142 117 94 82 89
Fruits 131 152 128 152 127 125 112 104
Hides and Leather 117 158 156 129 94 75 57 90
Textiles 123 143 132 116 94 71 65 108
Metals 151 134 127 113 80 65 61 104
Coal and Coke 192 178 178 159 158 153 135 157
Oils 150 179 164 155 131 116 96 126
Naval Stores 234 168 174 156 135 116 111 117
Bldg. Materials 163 145 164 151 134 119 120 133
Chemicals, Drugs 181 154 138 136 131 129 128 130
Miscellaneous 170 168 152 140 119 78 72 99
-6-
Table 1.2 1909-13 monthly average price by groups
Jan Feb March April May June
Breadstuffs .10026 .10164 .10276 .10174 .10648 .10588

Livestock .3895 .3882 .3991 .4216 .4183 .4051
Provisions 2.2691 2.2227 2.1999 2.2239 2.1846 2.1417
Fruits 1.909 1.996 1.941 1.920 1.879 1.943
Hides, Leather 1.2120 1.2060 1.1930 1.1900 1.2020 1.2160
Textiles 2.5437 2.5406 2.5334 2.5176 2.5141 2.5182
Metals .6799 .6713 .6607 .6665 .6727 .6789
Coal and Coke .0068 .0067 .0065 .0064 .0064 .0062
Oils .3860 .4003 .4007 .4007 .3981 .3992
Naval Stores .0903 .0942 .0951 .0968 .0883 .0809
Bldg. Materials .0812 .0839 .0822 .0824 .0824 .0817
Chemicals, Drugs .6360 .6344 .6343 .6344 .6352 .6234
Miscellaneous .3716 .3635 .3633 .3496 .3497 .3503
July Aug Sept Oct Nov Dec
Breadstuffs .10524 .10030 .09722 .09728 .09782 .09912

Livestock .4028 .4031 .4115 .4121 .4099 .4112
Provisions 2.1586 2.1754 2.2388 2.2858 2.3287 2.3684
Fruits 2.036 1.992 2.048 2.171 2.126 2.020
Hides, Leather 1.2195 1.2225 1.2200 1.2295 1.2395 1.2410
Textiles 2.5193 2.5250 2.5233 2.5363 2.5542 2.5827
Metals .6639 .6564 .6789 .6765 .6795 .6847
Coal and Coke .0063 .0064 .0066 .0067 .0069 .0070
Oils .4012 .4002 .3993 .3959 .3888 .3812
Naval Stores .0823 .0846 .0899 .0906 .0908 .0891
Bldg. Materials .0816 .0802 .0813 .0820 .0813 .0807
Chemicals, Drugs .6211 .6216 .6248 .6237 .6231 .6261
Miscellaneous .3400 .3545 .3590 .3623 .3644 .3630
was $0.09722. Dividing the figure for September 1, 1933, by the September 1,
1909-13 average would give an index figure of 105. In other words, according
to Bradstreet's compilations of the average price of No. 2 Red Wheat, No. 2
Yellow Com, No. 3 White Oats, No. 2 Barley, Rye, and Winter Wheat straight
patent flour per barrel, the average price on September 1,1933 was 105 per cent
of its price on September 1, 1909-13. The various commodities composing this
index are listed in Table 1.3.
-7-
Table 1.3 The 106 commodities, divided into 13 groups, composing Bradstreet's Commodity Index
on which the "All Price Curve" is based
Breadstuffs
Wheat No. 2 Red Winter Barley No. 2 (Milw.)
Com No. 2 Yellow Rye, Western
Oats No. 2 White Flour, Straight, Wmter
Livestock
Beeves, best nat. steers (Chic.) Hogs, prime (Chic.)
Sheep, prime (Chic.) Horses, Av'ge. com., to best
Provisions and Groceries

Beef, carcasses, (Chic.) Cheese; choice east foty.
Hogs, carcasses, (Chic.) Mackerel No. 2 shore
Mutton, carcasses, (Chic.) Codfish, fcy., large
Milk (N.Y.) Coffee, Rio. No. 7
Eggs, state fresh Sugar, stand, gran.
Bread (N.Y.) Tea, Formosa Oolong, sup.
Beef, family Molasses ex. fcy.
Pork, new mess. Salt, fine dom.
Bacon, short ribbed smoked Rice, dom. (Honduras)
Hams, smoked Beans, marrow pea (N.Y.)
Lard, mid. west, steam Peas, choice (N.Y.)
Butter, crmy., state, best Potatoes, eastern
Fresh and Dried Fruits

Apples, state Lemons, choice
Peanuts, fcy. Va. in hull Raisins, layer
Currants, new, dried
Hides and Leather
Native Steer Hides No. 1 Union middlebacks

Hemlock pkr. Mid. No. 1 Oak, scoured backs No. 1
Raw and Manufactured Textiles

Cotton, middling uplands Flax, New Zealand, spot
Wool, fine unwashed comb. (Bos.) Print cloths, 27 in., 64s
Wool, half-block unwashed comb. Stand, sheetings, brown
Hemp, Manila Ginghams, dress
Jute, average of grades Cotton sheetings
Silk, Jap. Double ex. cracks
8-
Table 1.3 Continued
Metals
Iron ore, old range, Bess., Hem'te Structural shapes (Pitts.)
Pig No. 2x foundry, east (N.Y.) Silver, com. bars (N.Y.)
Pig No. 2 foundry, south (Birm.) Copper, electrolytic (N.Y.)
Billets, rerolling Lead, pig, west
Steel rails, O.H. Tin, pig, spot (N.Y.)
Tinplate, American (Pitts.) Quicksilver (San Fran.)
Pig, Bessemer
Coal and Coke

Anthracite, Stove sizes (N.Y.) Conn'ville coke furn. short
Bituminous f.o.b. (W. Va.) Chic. Southern coke, foundry
Mineral and Vegetable Oils

Petroleum, crude Cottonseed crude, prime
Kerosene, refined Castor No. 1
Linseed Dive, Malaga
Naval Stores
Rosin, good strained (Savannah)
Turpentine, mach., reg. (Savannah)
Tar, Kiln, New York.
Building Materials
Brick Hudson River hard Glass, window, 10x15 box
Lime, Mason's standard Yellow Pine, dimensions 12x12
Cement, domestic Timber, W. Va. spruce
Nails, wire, Pitts. Fir. 2x4
Chemicals and Drugs

Alum potash Sulphuric add, 66 degrees
Bicarbonate soda, Am. Phos. rock, unground
Borax, refined Alcohol, ethyl, 190 proof
Carbolic acid Opium, cases
Caustic soda 76% Quinine, domestic
Nitric add, 42 degrees
Miscellaneous
Hogs, Pacific, choice Ground bone, bulk
Rubber, PI. sm. sheets Hay, prime (N.Y.)
Tobacco, med. (New) Burley Cottonseed (Houston)
Paper, news, roll, spot
-9-
The natural price of any commodity is a price that is neither more nor less
than sufficient to pay for the rent of the land, the wages of the labor, and the
interest in the capital employed in raising, preparing, and bringing this grain to
market according to their natural rates. When the price of any commodity is
low according to its normal relationship to other commodity prices, then the
natural inclination of the producer is to take so much of his capital, and so
much of his labor, and so much of his land out of the production of that low-
priced commodity and turn to the production of higher priced commodities.
This is in conformity with the Law of Supply and Demand. The economic func
tion of the price is thus to regulate the Supply to the Requirement.
And, may we emphasize that although commodity prices as groups or as
individuals may through various causes get out of alignment with other grains
or commodities, yet as was stated in the definition of the Law of Price
Relativity, they are always tending back toward that natural relationship and
toward the natural price.
For practical application then, one should watch carefully for the indication of a "top
formation" (as will be outlined in detail in later Lessons) when the price is high, and
should utilize such indications not only for short sales but also for insisting upon pay
ment of outstanding bills created by the promise of reward from those producing the
commodity highest in price.
Conversely, when the market is very low in price, then one should watch for the indica
tion of the "bottom formation, "particularly when the com verifies the wheat formation
and/or wheat verifies the com formation according to the "Dow Theory" which will be
explained in Lesson 3, and also if industrials and rails form bottom formations and verify
each other that their trend is also upward. Under such circumstances one would be justi
fied in making comparatively heavy purchases of the commodity lowest in price. One
would also be justified in going into debt to accumulate those commodities and in extend
ing credit to those possessing such commodities that could be sold on a higher market.
Remember always that when the supply comes into accord with the requirement, the
movement in price of the lowest priced commodity will be the most drastic.
THE GENERAL TREND OF COMMODITY PRICES

We have called attention in the forepart of this Lesson to the changes in general
levels, usually lasting for more than a year, in general commodity prices. This
is a subject being studied more recently than ever before in history. Theories on
it clash. There are some who maintain that the supply of gold in the world, or
in the country, is the complete and controlling factor in changing the general
- 10-
price level. There are others who violently disagree with this theorem. The
authors of this Course have been, and still are, primarily "fundamentalists" on
business. We said before gold was completely abandoned as a monetary base,
that there still would be wide fluctuations in the general trend of commodity
prices. This will be analyzed more completely in the Lessons devoted to the
influence of business fundamentals on commodity prices, and particularly the
influence of business activity which affects a large percentage of the workers of
a nation or of the world.
There are, however, some facts and factors in the National monetary standard,
gold production, and international price relationships which should be known
by every student of the markets. We present some of these facts and factors
herewith and have endeavored to sort out what we believe are the vital factors
from the purely theoretical.
1 A country that is engaged in international commerce must keep its money

stabilized to facilitate exchange of goods.
2 An import country can, through tariff or through money control, move its
price level within its own borders at will.
3 A nation off the gold standard can, by revaluing its money in relationship
to gold, move its own price level almost at will in relation to other coun
tries that are on a gold or fixed money basis.
4 There are two kinds of inflation. First is through credit expansion such as
loans by banks, and partial payment plans, etc. Second is through cur
rency inflation.
5 Inflation is one method of lowering debts.
Discussing these items in the order of their appearance, the assertion No. 1 is
readily self-apparent. There are two parts to any export sale of goods. First is the
meeting of competition in the price of that particular commodity, and second is
the transferring of money or credit from one nation to another. It is thus readily
apparent that when the money of one country has fluctuated rapidly, then the
importer must not only figure whether the offering price is the lowest at which
he can secure the same quality of goods, but also whether or not the money will
fluctuate in value before payment for these goods can be made so that he would
still be buying the same quality of goods at the lowest price. For the develop
ment of international trade a country must have a money that is stable in value
and which will create confidence in buyers and sellers everywhere.
The second statement is also obvious. When a country utilizes more of a com
modity than it can produce, then through tariffs it can so elevate the price of
-11-
the needed imports that the price level within its own boundaries will rise to
that level. Germany did this on wheat. Similarly, through revaluing its money
in relationship to other money of the world it can either elevate or lower the
price level within its own boundary.
It is to be noted that statement No. 3 limits the ability of one country to move
its price level at will, but only in terms of a relationship with other countries
that are on a gold or fixed money basis. We express this as a belief. It seems
apparent that where one country has a surplus of any goods - such as most
countries do have for one commodity or another - then if all countries simulta
neously went off the gold standard and broke up the international relationship
between their moneys, the effort of one country to elevate its own commodity
price level in relationship to other commodity price levels, or even to former
relationships prevailing within its own boundaries, must be checkmated.
It is interesting to note that gold has been revalued in the United States but
four times since we became a nation. Alexander Hamilton first defined the
dollar in 1792 as being 24.75 grains of gold which was equivalent to a price of
$19.35 per ounce. In 1834 the gold content of the dollar was fixed anew at
23.023 grains of gold, with the price therefore raised to $20.69. In 1837 the
amount of gold was re-fixed at 23.22 grains, which lowered the gold to a price
of $20.67 a fine ounce.
We abandoned the gold standard temporarily during the War of 1812, during
the Civil War, and again in April of 1933. Each time the market price of gold
advanced rapidly and commodity prices also advanced.
Dr. George F. Warren and Dr. F.A. Pearson of Cornell University have devel
oped the theory that "wholesale prices are controlled directly by the ratio of the
world's monetary gold stock to the world physical volume of production." In
their book, Prices, they present a graph showing that there is a relativity in the
trend of these curves, one of gold production ratio and the other wholesale
prices. They assert as a "fundamental law of prices that if world monetary gold
stocks increase faster than production of other commodities, prices rise.
Conversely, when gold stocks increase less rapidly than the production of other
commodities, prices fall. When commodity prices depart from this long-time
ratio they ultimately return to it."
In a talk delivered before the International Apple Association in Chicago some
years ago, Dr. Pearson declared, "The relative supply of gold affects the purchas
ing power of gold in exactly the same way and by practically the same amount
that the supply of hay, oats, com, hogs, and cattle affect their purchasing power.
There is one difference. Gold is so easily moved that the value of it is about the
-12-
same regardless of location. However, in the case of com, a high supply affects
prices far from market more adversely than it affects prices near trade centers.
"The price on a bushel of wheat varies from day to day, and the value of a
bushel of wheat, that is, the purchasing power of wheat - the amount of com
modities, taxes, debts, and services for which it will exchange - also varies
from day to day. Although the price of an ounce of gold was fixed at $20.67 per
fine ounce, the value of gold varies, that is, the amount of goods and services
that an ounce of gold will exchange for, varies from day to day. With rising
values for gold and a fixed price for gold, dollar prices of commodities decline,
so long as the country remains on the gold standard. Therefore, our dollar is
fixed as to weight and variable as to value. We never have had, and it is practi
cally impossible to have, a measure of value that is stable as to weight of a
single commodity and at the same time stable as to value. From 1929 to 1932,
the value of gold rose 46 per cent. History has never before recorded such a
spectacular rise in the value of gold in so short a period of time."
Being fundamentalists, we cannot entirely subscribe to the Warren-Pearson
theory. We note, however, that to protect themselves they have thrown in a
safeguard, saying, "When commodity prices depart from this long-time ratio
they ultimately return to it." It is to be noted that the gold production ratio
declined from 1920 to 1928. We say without rancor that it was near 1920 that
Prof. Warren turned bearish on business and commodity prices. Had one fol
lowed his theory with his dollars he would have entirely lost out on the
greatest era of prosperity and one of the biggest bull markets in stocks, with an
appreciable bull market in grain, that this country ever saw - that from 1921 to
1929. Therefore, it is our belief that one may accept the gold theory only as a
factor but not as a dominating factor in the trend of commodity prices. And
that is the thing in which students of this Course are interested.
Gresham's "Law of Money" states that a poorer money always drives a better
money into hiding. Thus, whenever a nation abandons the gold standard,
those with dollars based on a fixed value of the gold in those dollars immedi
ately transfer the dollars into commodities. It is our belief that this primary
influence of money on the commodity price level in one country is based largely upon
the international commerce of that country. If the goods of the country are on an export
basis, and that country should abandon the gold standard, which would in effect raise
the price of gold, then the commodities of that country must advance in almost exact
ratio to the decline of the money of that country in order that the prices quoted on its
commodities for export would maintain the same value in the foreign country that they
had prior to the gold standard abandonment.
This applies particularly where the nation intends to return to a fixed money
-13-
basis eventually. A change in the fundamental situation of Supply and Demand

would cause a greater or lesser change in addition to the change of money
value as the conditions of Supply and Demand would otherwise warrant.
On September 21,1933, in his "Review," the English grain statistician, George
Broomhall, said, "Winnipeg October wheat is selling at 68c compared to 51c a year
ago. While wheat has advanced 33 per cent the dollar has lost 25 per cent on the
Pound, so one offsets the other. No. 2 Manitobas in Liverpool are selling today the
same price as a year ago viz. 26/6 per quarter. Importers are in a good position to
buy wheat from a country which has the currency pegged to the dollar as the price
of wheat in the foreign currency is no higher than a year ago although domestic
prices in the exporting countries might have advanced considerably."
INFLATION
"There are two kinds of inflation. First, credit inflation and second, currency
inflation." In this Lesson we will confine ourselves to the effect of currency
inflation on the general commodity price level, reserving the study of credit
inflation for the Lessons devoted to fundamental business factors.
The foregoing discussions show rather conclusively that when one country
abandons the fixed value of its money, and particularly where that fixed value
is its exchange value for gold, commodity prices within that country have a
tendency to elevate themselves in the money of that country as compared to
the money of other countries. Where general commodity prices of the world
are declining, the commodity prices in the country abandoning its former
value of money have a tendency either to work sidewise or to move in almost
direct ratio to the change in their own money relationship to other money and
commodity prices of the world. Where general commodities are advancing, the
prices in the "inflating" country rise much faster than in other countries as the
money in the inflation country depreciates.
The greatest measures of the percentage of inflation day by day are the quota
tions of the dollar in terms of the most stable of foreign countries, and the
various commodity indices. Of these, Moody's "Daily Commodity Index" is
probably published more generally than any other. One should also watch gov
ernment statistics (Dun and Bradstreet's "Monthly Review") of the amount of
money in circulation in the United States, and the general stock of money of
the United States (same source).
To the countries embarking on inflation, two things will seem apparent. First
will be that commodity prices are advancing, and second that other countries
-14-
of the world are cornering gold and charging high prices for it. The general
public will not attribute the advance in commodity prices to the decline in their
own money value. To them the dollar remains a dollar.
General commodity prices do not usually advance as rapidly as the value of
their money declines. This does not apply, however, to speculative commodi
ties, which anticipate the changes of the future.
Inflation is the pumping of credit more rapidly into business than business can
use it. As is stated under Gresham's Law, the advent of this cheaper money
drives good money into hiding, with the result that almost invariably in past
periods of inflation, there have been booming markets and violent speculation.
Money decreases in value during the period of inflation, and physical prop
erty with a tangible value and some semblance of actual usage or perpetuation
increases in value in proportion. Therefore, in time of actual inflation and par
ticularly in money inflation, money should never be allowed to remain in cash.
Ignorance of this basic fact causes those with money to lose much of its value.
George Cary Eggleston, in his work A Rebel's Recollections describing the inflation
conditions in the Southern Confederacy toward the end of the Civil War, said in
part, "Money was so easily got, and its value was so uncertain that we were never
able to determine what was a correct price for anything. We fell into a habit of
paying whatever was asked, knowing that tomorrow we would have to pay more.
"Speculation became the easiest and most natural thing imaginable. The spec
ulators saw no risks of loss. Every article of merchandise rose in price every
day. And to buy anything this week, and to sell it next week, was to make an
enormous profit quite as a matter of course.
"A facetious friend used to say prices were so high that nobody could see
them and that they got mixed for want of supervision. He held, however, that
the difference between the new and the old order of things was a trifling one.
'Before the War,' he said, 'I went to market with the money in my pocket and
brought back my purchases in a basket; now I take the money in a basket and
bring the purchases home in my pocket.'"
This order of things in the southern states, where there was no chance of the
defeated Confederacy redeeming the script it had issued, was duplicated in
Germany and Russia following the first great War. Those who converted their
money into commodities found they could resell those commodities for many
times more than the original purchase price. Those who permitted their money
to lie idle in the bank found that so far as purchasing power was concerned,
where they had had dollars prior to the inflation they now had pennies.
Instead of the profits going to savers during inflation, they go to the spenders.
-15-
The only way to "beat" inflation when it actually occurs is to convert money into
commodities. It is the time for going into debt and by far the easiest way for the
average man to create debt is by the purchase on margin of stocks or commodities.
The prime cause of monetary inflation is debt. The usual excuse given for
inflation is to place the value of commodity prices back to the level at which
they were when a National debt of huge proportion, such as is invariably
incurred during a great War, is contracted. The debt is contracted in dollars (or
francs, or pounds, as the monetary unit of the nation may be) and is usually
incurred when commodity prices are at high levels due to the maladjustment
of business as a great portion of the workers are destroying instead of creating.
The end of the War brings these workers back to construction, satisfies sooner
or later the deficit in supply, and lowers the general commodity price level. The
result is that it takes far more bushels of grain and/or more hours of labor to
pay off the incurred debt during the time of low commodity prices than it
would have taken when the debt was incurred.
The inflationist does not worry about the low price level because, other things
being equal, a nation can adapt itself to any price level and be as well off as
before. As was stated at the beginning of this Lesson, the true price of any com
modity is its exchange value for other commodities, and not for dollars. But the
inflationists do worry about the contracted debts. They endeavor to mark
down those debts by increasing the number of dollars that commodities and
labor will bring. The excuse invariably is that the commodity price level should
be re-elevated to the level it was when the debt was first incurred. Thus, from a
practical standpoint, inflation is a method of scaling down debts.
There is a question whether or not France after World War I did not deliber
ately elevate its commodity price level to 700 per cent so that its people, by
getting far more francs than normal for a given labor, could thereby pay heav
ier taxes in francs than usual, and the government thereby was able to reduce
the debt incurred in francs during the War with the new franc whose purchas
ing power was lowered to about one-quarter to one-fifth of its purchasing
power at the time the War debt was incurred.
The great danger of inflation is that once it is launched, it cannot be stopped.
The only thing that stopped the inflation of the Southern Confederacy scrip,
the German Mark, and the Russian Ruble was the refusal finally of men with
tangible assets to extend credit based on the inflated money. The opportunity
to borrow, to go into debt, was finally ended. In the frenzied inflation that fol
lowed the French Revolution in the 1790s a cartoon declared, "Credit is Dead.
The paid debtors have killed him."
-16-
The extent of the inflation depends upon the willpower of those launching it.
That it can be stopped prior to complete destruction of National credit was
proved by the fact that France, which abandoned gold and inflated from 1922
to 1927, finally went back on the gold standard. Its commodity prices again
moved in accord with world commodity prices except that they were on a level
within their own boundary that was based on the new value of the money
instead of the old.
-17-
I
Lesson 2
THE LAW OF SUPPLY AND DEMAND
■ The Primary Price Law

The difference between civilization and savage is bread. So long as man was a
nomad, he remained uncivilized. But when he began the cultivation of wheat for
bread, then he settled down. Wheat is grown in the temperate zones. With the
cultivation of wheat came the necessity of protecting the home against changes
in the weather. So from a skin tent, man progressed to a hut and then to a house.
With the house came domestic utensils and other gradual steps to the civiliza
tion we know today. So it might well be said that wheat is the father of civilization.
As civilization developed, there came with it a gradual centralization of
people into family groups, tribes, cities, and nations. The needs of the people
expanded as their learning progressed. It was found that some sections of the
world were able to produce the metals and minerals needed for development
and manufacture of the mechanical necessities. Other sections were particu
larly suited to the growth of products from which clothing was manufactured,
while still others were adaptable primarily to the production of wheat.
Gradually there grew up a national and international commerce of the prod
ucts from one for those of another producer. And it has been found that the
prosperity of the world is not only dependent in large measure on this
exchange of goods, but on the normal exchange of these goods.
One of the first products exported in volume from the United States was
wheat. Much of the debt incurred in development of this nation was paid for
through our exports of wheat to the countries which supplied us with the finan
cial and mechanical necessities for its development. In Canada, a population of
10 million, consuming about 95 to 110 million bushels of wheat annually, raises
an average of around 350 million bushels of wheat annually. The prosperity of
Canada depends primarily upon the selling price of wheat. Argentina exports
huge quantities of wheat, as does Australia. And Russia endeavored to pay for
the vast supplies of machinery and equipment necessary under its plan of
development by the exportation of wheat and other commodities.
Thus it can be instantly grasped that the economic prosperity of a vast percent
age of the Earth's surface is wrapped up primarily in the production and sale of
wheat. As a matter of fact, there are more people engaged in the production of
wheat in the world than there are in any other one industry or occupation.
The importance of wheat is not alone confined to the export countries of the
world. Canada, for instance, is primarily a wheat producer and not an indus
trial nation. It buys those mechanical necessities from other countries. The
number of farms in Canada reporting ownership of a tractor in 1921 was
43,578. During the next ten years this increased to 97,176. The number of farms
in 1921 with gasoline engines was 136,632, and this number had expanded in
-21-
1931 to 155,655. The great development of Canada during those years opened
up a tremendous market for binders, threshers, and other implements of farm
ing. In addition, there was a huge demand for other mechanical apparatus,
most of which was manufactured outside the boundaries of Canada. One farm
out of every 3.11 in 1931 had a telephone. One out of six had a radio. One out
of 8.18 had water piped through the kitchen. And one out of 20.17 had water in
the bathroom. Canada's favorable trade balance, brought through the produc
tion and sale of wheat, enabled its people to make huge purchases from the
industrial countries of the world and thus helped spread prosperity.
It is thus apparent that the favorable trade balances and purchasing power of
Canada, as well as Argentina, Australia, Russia and the Danube, are dependent
in large measure on the returns from wheat. And their purchases, together with
those of American farmers, are what absorb the surplus of manufactured prod
ucts from the industrial centers and nations. Their purchasing power is
dependent on the selling price of their product and the selling price is depen
dent on the Law of Supply and Demand.
What is the Law of Supply and Demand? "Supply" in an economic sense means
the quantity of commodities or service offered for exchange at a given time and
place and at a given price. "Demand" indicates the effective desire to exchange
money or its equivalent for the Supply; and, like Supply, always refers to a
given time, place, and price.
Three fundamental tendencies govern.
1 When Demand exceeds Supply the price tends to rise. Contrarily, when
Supply exceeds Demand, then the price tends to fall.
2 A higher price is likely to bring about a smaller Demand, and sooner or
later, a larger Supply. Conversely, a lower price is likely to bring about a
greater Demand, and sooner or later, a smaller supply.
3 The price tends toward the level at which the quantity demanded is equal
to the quantity supplied.
Of course, various causes under various conditions will at times offset these
tendencies; but in a free and unrestricted market, they will be found to apply.
A fourth factor in Supply and Demand is of extreme importance. In consider
ing the Law of Supply and Demand, not only must the relationship of Supply to
Requirement be taken into consideration, but also the relationship of the place to the
general level of commodity prices.
That briefly defines the Law of Supply and Demand. In its practical application,
note particularly that "Demand indicates the effective desire to exchange money
-22-
or its equivalent for the Supply." Wheat is raised to sell. Its value to its pro
ducer rests upon the quantity of other goods or services that it will bring in
exchange. Therefore, while there may be a social demand among the unem
ployed of this nation, or the heathen Chinese, or the peasant of Russia for
wheat, yet in an economic sense this social demand does not become economic
demand until there is the effective desire to exchange money or its equivalent
for the supply. This is emphasized to guard you against the social clamor that
"there is no such thing as over-production of grain." The market of wheat is an
economic problem and from an economic viewpoint we are concerned only
with the effective Demand.
THE PRIMARY PRICE LAW

One of the first economic laws is that "the demand for the tenth bushel brought
to market determines the price for the other nine." It is obvious, then, that the
demand for the surplus produced in an export country must, in a free and
open market, set the price for the quantity consumed at home. This readily
explains why a protective tariff in an importing country can be effective, while
such a tariff in an exporting country will prove of no benefit to the producers.
The problem, then, in practical application of the Law of Supply and Demand, is to
strike a balance between import requirements and export surpluses to see whether
prices should rule "high" or "low." The method of determination of such "high"
or "low" prices was discussed in Lesson 1, entitled, "The Relativity of
Prices." But it is to be seen under the definition of the Law of Supply and
Demand that two things must be considered viz. "the relationship of supply
to requirement," and the relationship of the price to the general level of com
modity prices."
In this Lesson, the purpose is to place you in position to form a conclusion as to
whether or not fundamental conditions indicate an advancing or declining market.
Accompanying this Lesson are a number of Pictographs on wheat. You should
study them carefully and construct Pictograph 2.1 showing the price of wheat
with general commodity prices from 1923 to 1936 inclusive and then, from the
sources enumerated and the following instructions, bring this Pictograph up to
date. It will show you more of the Law of Supply and Demand in actual opera
tion than anything we could say and will give you a working picture of the
market of the current time and its activities during these recent years. Should
you care to dig out the prices and statistics necessary to bring the Pictograph of
wheat from 1896 up to date, we feel certain that you would benefit very materi-
-23-
Pictograph 2.1 Price of wheat with general commodity prices 1923-36
Million bushels
ally from this research and place yourself in position to analyze the market
more carefully for the future. It would take too many tables, however, to give
you the information necessary for you to construct such a Pictograph for your
self, and the other one will serve a very useful purpose. In fact, from a practical
viewpoint, the one from 1923 to 1936 is probably the more valuable and so we
are giving you the information from which to compile it.
The first step, of course, is to get the statistics on total wheat production by
countries. These figures can be secured from the U.S. Department of
Agriculture Year Book, current copy of which can be secured without cost from
your Senator or Congressman. However, we would recommend that you order
from the Superintendent of Documents, Washington, D.C., the Year Book for
every third year back to 1923. Thus you would get the 1936, 1933, 1930, 1927,
and 1924, or a total of five books which will cost you $1.00 each, as well as the
ones since 1936. They will give you the corrected latest figures for each year,
and you should always utilize the figure for the year desired as published in
the last book available.
In this, we would suggest that you copy the figures given from those books in
a manner similar to those given herewith, on to a sheet similar to that of a fair
sized ledger. Do not write any figures into that ledger page in ink for
production more recent than four years. Our experience shows that as the vari
ous countries make a census, or check actual disappearance from one year to
another, they will alter their estimates of production. Also, figures on imports
and exports are changed somewhat as later material arrives. We have found
that one is reasonably safe in any figure over four years old, but not under that
time. The current figures, however, are the present market influence.
Current figures are secured from "Foreign Crops and markets," issued weekly
by the Bureau of Agricultural Economics of the Department of Agriculture at
Washington and sent without charge to those who can show that "it will be
used for the general good." You can probably get on this list. You should also
have the monthly "World Wheat Prospects" issued by the same organization.
In the Pictograph of wheat prices and fundamentals from 1896 to date*, the
first curve is that of world wheat supply. This is secured by adding the World
Visible Supply on August 1 to the crop of the following countries - United
States, Canada, Austria, Bulgaria, France, Germany, Hungary, Italy, Poland,
Spain, United Kingdom, Rumania, Czechoslovakia, Yugoslavia, India, Japan,
China, Morocco, Tunis, Egypt, Algeria, Argentina, Australia, and Chile. The
* Unfortunately this Pictograph became separated from the Lesson material and did not survive over
time.
-25-
Russian exports are added to this total, these being estimated at the start of the
year and revised as conditions demand.
The lower part of this curve is the difference between that total Supply and
the Visible of the next August 1, and gives a good idea of the annual world dis
appearance or consumption.
The countries used are not all of the countries of the world. When the original
of this Pictograph was constructed, around 1923, those countries were the ones
which sent out regularly their estimates of crops. Were we to reconstruct it, we
might drop the estimates of Chile and China and substitute those of Greece,
Finland, Denmark, and Sweden as given in Table 2.4 on page 36. Instead of just
the World Visible of August 1, we would prefer to use the Table 2.3 record of
carry-over as of July 1 (see page 35). However, that record is not available back
to 1890, and a more true picture would probably be given by the Visible as it is
more consistent over the years.
The prices used in the construction of this Pictograph are May wheat from
January 1 to May 31; July wheat from June 1 to July 31; September wheat from
August 1 to September 30; and December wheat for the rest of the year, all
Chicago prices. The figures on population are secured from the Bureau of the
Census, Washington, D.C. The General Average of Commodity Prices is that of
Bradstreet's Commodity Index as given in Lesson 1. Details of its conversion to
wheat price equivalent will be explained later in this Lesson.
In the Introduction to this Course, the statement was made that "the economic
function of the price is to regulate the Supply to the Requirement and to move
that Supply into consumption." If proof of this function were needed, this
Pictograph furnishes it.
Note that although there were wide swings in this Supply from year to year,
causing wide variations in the price movements, there was always a carry-over
in the Visible, and that Visible did not vary a huge amount from year to year
until the Federal Farm Board, by fixing the price, interfered with the economic
functioning of the marketing machinery in 1929. In other words, so long as the
price was free to perform its economic function, the Supply was regulated to
the Requirement, or the Requirement to the Supply, and that Supply was
moved into consumption.
The population of the United States has increased at just about the same ratio
as that of the world. So this really gives a comparison of world wheat produc
tion and world population. Note that they have ascended, over the years, at
almost precisely the same rate. In fact, that population curve, using the years
1909 to 1913 as a normal relationship between production and population, has
served as the norm during all of the years. When the Supply was below
-26-
normal, then the price would rise high as compared to general commodity
prices. But when the Supply was large, the price dropped low as compared to
the General Commodity Price Curve.
During the War years, when men were destroying instead of producing, the
Supply dropped far down, and they fixed the price - a maximum price that
there was no difficulty in maintaining. After the War, the Supply went back to a
normal basis as calculated from the population trend, and for the years from
1924 to 1928 the market worked back and forth across the General Commodity
Price Curve. Supply and Demand were in equilibrium, and so was the price.
Then came the abortive attempts to fix prices, and the Supply immediately rose
to levels very high as compared to the population trend, with the result that
prices went very low not only in actual cents, but as compared to General
Commodity Prices. It is the Law of Supply and Demand in actual operation.
One characteristic that should be noted is that in years when the Supply is
low, such as 1897,1904,1924, etc., the market advanced ("bulled") in the Fall of
the year, but the highest prices were recorded after January 1. The market was
a purchase on breaks until the turn of the year. The exceptions to this are 1934
and 1935 when the huge carry-over acted as a damper on prices. An attempt
was made each year to make new highs after January 1, but the market fell a
little short. The principle still holds good, however, that in a year of short
crops, when business is good and commodity prices are trending upward, the market
is a purchase on breaks up until January 1 at least.
Another characteristic is that when the trend of commodity prices in general
is downward, then the market will make its high on the crop early in the
season and follow the rest of the commodities downward. And when the
supply exceeds the indicated requirement, with that supply either above the
trend of population or above a comparative basis as will be explained in this
Lesson, then the advances in the Fall are small and the price trends downward
not only to discount the relationship of Supply to Demand, but the declining
tendency of other commodity prices. Good examples are afforded by the mar
kets of 1920-21 and 1929-33.
The conclusion is that wheat, early in the crop-year, discounts the changing
conditions of Supply and Demand, and then places itself in position to follow
the general trend of commodity prices. This tendency should be allowed for in
all commitments.
You can see from the above how important it is that you have a big
Pictograph that you yourself can keep up to date. So we are giving you the
methods of constructing one. Figures for the years of World War II were not
-27-
available up to 1948, and may not be for some time, if ever. Students, however,
should construct a graph from the records so that the methods are clear to
them, with the principles and lessons taught.
Tables 2.1 to 2.7 at the end of this Lesson (see pages 34-41) provide the data
necessary to construct this Pictograph. As for paper, in all of our work we use
either a roll or a single sheet ruled 16 squares to the inch such as the sample
shown. It can be secured from Keuffel and Esser of Chicago or we can supply
it, the price being $2.50 a dozen sheets.
In the construction, start first with the import countries, details of which are
shown in Tables 2.1, 2.2, and 2.4. Table 2.4 shows the European countries uti
lized for the estimate of production or crop in Table 2.1. Figures are shown for
1930 to 1932 inclusive. We would recommend that from the Year Books you
work out the details to show similar itemization for all of the years from 1924
to date. If you can do it for those back years, then you can go ahead for future
years. And the work with those back years will familiarize you with the
records so the figures of the future will "mean something" to you.
In laying out the work, we use one of the little vertical lines for each month.
Thus a year would occupy three-quarters of an inch of space, and one of the
sheets will give you room for the record from 1924 to 1943, with room for fig
ures. And you can get three of the graphs on the same sheet, up and down. For
the scale of the figures, we started with 1,700 (million bushels) and deducted 30
for each heavy line, (quarter-inch, or four small lines) down the column, carry
ing it down to 800 (million bushels).
The first curve to construct is that of Table 2.1, the crop of the European coun
tries. Then you can draw the "Trend of Supply" curve through this curve of
actual supply, starting both curves from the center of the year as it is really a
crop-year record of supply from July 1 to July 1 instead of a calendar year. You
will note how this curve of "Trend of Supply" bisects the curve of the actual
"Crop". It should continue to do this, and here you must use your best judge
ment of the trend, based on the population curve, knowledge of financial
conditions, trend of consumption, etc.
Next, draw in the curve from the figures of "Supply" shown in Table 2.1.
This curve is the sum of the crop plus the actual imports each year. It shows
how much wheat these import countries of Europe have actually been using
over the period of time. Inasmuch as the difference then between the top
curve and the lower is the actual imports, draw a line as shown at the start of
the crop-year from the upper to the lower curve, and print on it the actual
imports of the year.
-28 -
Then draw in the curve of "Needed Imports," of Table 2.1, which on

Pictograph 2.2 is marked "Secular Trend of Supply" This curve bisects the
curve of actual supply. So if Europe is to continue eating as much wheat as it
has on the average of the past few years, then its new imports should be the
difference between its actual crop of the year and this "Secular Trend of
Supply" or "Needed Imports."
For the requirements of the ex-European countries, it is a little more difficult
to arrive at a figure. On Table 2.4, it is to be noted that a number of these coun
tries grow no wheat at all, or in such small quantities as not to be noted. China,
however, is probably the largest grower of wheat in the world; but no reliable
figures on its crop are available. Yet its takings are frequently very important,
and will increase particularly in years of very low prices. But even then there is
a large volume of imports for which no record of distribution is available. This
varied, as you can see from Table 2.2, from 51.1 million bushels in 1925-26 to
222.8 in 1930-31. In our calculations, we usually use the average of the past five
years, together with such reports as are available in trade circles. BroomhalTs
Com Trade News of Liverpool is probably the best trade source of information
on world import requirements.
For the construction of a Pictograph of these requirements for ex-European
countries, we start with a low of 50 (million bushels) and add 12 million, using
the same single line for each month as in the import countries so that the
Pictographs go under each other according to years. We carry it up to 290 mil
lion. Then the curve is drawn in from the record of "Ex-Europe Net Imports" as
shown in Table 2.2. To get an idea of the secular trend of this curve, we take the
average of the past five years and carry it as a dotted curve. The estimate of
actual needs for this year is based on this average and the trade reports.
The sum of these two estimates of "Europe Needed Imports" and "Ex-Europe
Needed Imports" gives the "Total Needs," figures for which are given in Table
2.2, utilized in Pictograph 2.1 of Wheat Price, General Commodity Prices,
Export Surplus, Exports, and Import Requirements. The Table of "Actual Net
Imports" of Table 2.2 supplies the figures for the "Exports" of that Pictograph.
It is to be noted that there is a very strong tendency for the actual imports to
follow this curve of theoretical import needs or requirements. In 1928-29, with
prices very low and import requirements also low, these foreign countries
took more wheat than was indicated they would need. In fact, in most years
the curve of actual imports is between that of the export surplus and the
import requirements. But the actual imports - which of course equal the actual
exports - tend to follow far more closely the trend of the "Needed Imports"
-29-
Pictograph 2.2 Wheat imports of European countries
Million bushels
than of the available surplus. This is very important in forming a conclusion

on the price trend.
For the construction of the Pictograph of the situation in the Export Countries,
reference is made to Table 2.3. These countries are listed in Table 2.6, and simi
lar tables should be prepared for all of the years from 1924 for as far as records
are available so that you will become thoroughly familiar with them. Figures
can be secured from the Year Books, with current figures through the Chicago
Journal of Commerce, the weekly Foreign Crops and Markets, and the monthly
World Wheat Situation. Let us impress upon you that these figures should be
watched and kept up to date. Failure to do so simply lays you wide open to the
drawing of wrong conclusions from the market action.
In Table 2.3 is shown first of all the crop of these export countries listed in
Table 2.6, plus the July 1 carry-over there listed. This gives the Supply, which is
the top curve of Pictograph 2.2. The net exports as figured for each year as in
Table 2.6 are shown as a straight line drawn down from the curve of Supply,
and the ends of these lines connected as shown. From this curve is deducted
the carry-over on the next July 1. The difference is, of course, the domestic dis
appearance in the export countries.
It is to be noted that this disappearance is rather consistent through the years.
It has shown a gradual advance as population of these export countries has
increased. In some years, like 1930-31, when there was a short com crop in the
United States, the disappearance is increased as wheat is fed to animals. But
the trend of its usage has been fairly steady.
The carry-over has, of course, varied widely. During the years particularly
from 1928 to 1934, European crops were being increased in an effort to get
them on a self-sustaining basis and to offset the threat of the Canadian Pool
and the Federal Farm Board to force high wheat prices, and the acreage of the
export countries was being increased (the peak was reached in 1930) to take
advantage of the expected higher prices; then the Supply went so far above this
domestic usage plus a normal carry-over of around 300-325 million bushels
that the exportable surplus was huge. But Europe did not need the wheat - and
the low prices of that time prevailed. We figure the "Exportable Surplus" as the
approximate difference between the average of domestic usage and a normal
carry-over of around 300-325 million bushels.
This "Export Surplus" is then placed on the graph with the "Import
Requirements" and the actual "Exports." Thus we have the basis of determin
ing whether the import nations will need more or less than the export countries
can reasonably be expected to furnish. "When Demand exceeds Supply, the
-31-
price tends to rise," says the Law of Supply and Demand quoted on page 22.
But when Supply exceeds Demand, then the price tends to fall. So we construct
the balance of Pictograph 2.1 to see what actually happens.
In this Pictograph, we use the Chicago May Wheat Future prices from the
first of August to the last of May. That future runs for the longest time of any,
and is probably the favorite of traders for that reason. Trading in it is started
right when the bulk of world marketing is on, and lasts until the new crop is
the dominating influence. As for trading, it is best to use the December future
from about August 1 until November 1-15; but the May carries on and gives a
good picture of the market action through the year, with the highest crop
prices frequently being recorded in it. On the other hand, the September
future, which expires as the Spring wheat crop is being marketed, carries the
bulk of the hedges from both the Winter wheat and Spring wheat crops It usu
ally goes as low or lower than the other futures. So the combination gives you
a picture of the market through the year, and usually gives the highest and
lowest prices made.
In construction of the graph, first put in the low prices month by month, con
necting them to show a continuous curve. Then do the same for the highest
prices of each month. If you wish, you can fill in between as we have done.
For the general average of commodity prices, we used Bradstreet's
Commodity Index, shown in Table 2.8. This index was started many years ago,
before most of the others originated, but was dropped, so in constructing your
own graph to carry forward it would be better to use that compiled by the
Bureau of Labor Statistics, Washington, D.C., with 1910-14 as 100. It can be
secured from them.
That index from 1924 to 1936 is shown as it actually is released, and as it
would be if converted into an index using 1909-13 as 100. The average of that
index from 1909 to 1913 was $9.9244. The index on January 1, 1937, was
$11,1360. Dividing the 11.1360 by 8.9244 would give 124.7. In other words, the
index on January 1, 1937, stood at 124.7 per cent of the level it averaged from
1909 to 1913, so if a bushel of wheat were bringing as much of other commodi
ties on January 1 as it averaged bringing from 1909 to 1913, it would have
needed to be selling at 124.7 per cent of its 1909-13 price. That price was $1.05 a
bushel at Chicago, and 124.7 per cent of that would be $1,309, or $1.31.
So there we have the basis of constructing a Pictograph of the most important
fundamentals of the wheat market. It will demonstrate that not only is there a
Law of Supply and Demand but that it actually does function; that there actu
ally is sense to the cents of grain prices. Furthermore, it will show you when
-32-
Pictograph 2.3
prices are exceedingly high or exceedingly low, and give you the background
for trades to take advantage of these long price swings from the extreme highs
to the extreme lows, or vice versa.
As we go through the Lessons to come, we will learn the refinements of how
to take advantage of the situation shown by this Pictograph. We will watch,
when the price is low, for the formation of a "Bottom" so that purchases can be
made with a minimum of risk. We will watch for the "Dow Theory applied to
Grain" to start in operation, as will be taught in the next Lesson. We will calcu
late the objectives indicated by the price itself as well as whether conditions of
Supply and Demand warrant a movement from the "low" level to one "high"
as compared to general commodity prices, or vice versa.
But let us impress on you that you will get out of this Lesson exactly what you
put into it. If you would utilize it to the fullest advantage, send now for those
books of past records. Get on the list to receive current information from the
sources given. Then construct the Pictographs as outlined. Learn this first step first
- and be in a position then to appreciate the later Lessons to the fullest extent.
Table 2.1 Import countries (Europe) (million bushels)
Trend of Needed Actual

Year Crop Supply Imports Imports Supply
1924-25 799.6 1,430 631 534.4 1,333.8

1925-26 1,000.0 1,470 470 614.7 1,614.1
1926-27 853.1 1,500 647 639.4 1,485.4
1927-28 909.7 1,510 600 647.2 1,557.0
1928-29 1,031.0 1,510 479 639.9 1,670.9
1929-30 1,134.6 1/515 381 524.4 1,580.3
1930-31 899.0 1,520 621 583.2 1,480.5
1931-32 957.1 1,520 563 600.6 1,557.8
1932-33 1,182.8 1,522 340 459.4 1,642.3
1933-34 1,267.2 1,525 258 395.2 1,657.2
1934-35 1,179.4 1,530 351 373.0 1,533.0
1935-36 1,160.9 1,535 380 357.5 1,514.3
1936-37 992.0 1,535 522 ? ?
-34-
Table 2.2 Europe and ex-European imports (million bushels)
Europe Ex-Europe Ex-Europe Total Actual

Year Needed Needed Net Needs Net
Imports Imports Imports Imports
1924-25 631 180 229.6 811 784

1925-26 470 179 51.1 649 666
1926-27 647 178 208.5 825 857
1927-28 600 177 151.0 777 799
1928-29 479 176 275.9 655 941
1929-30 381 175 117.5 556 642
1930-31 621 174 222.8 795 806
1931-32 563 173 198.9 736 799
1932-33 340 172 167.7 512 628
1933-34 258 172 146.6 430 541
1934-35 351 172 168.5 523 556
1935-36 380 172 134.5 552 526
1936-37 522 172 ? 694 ?
Table 2.3 Export country surpluses (million bushels)
Trend domestic
Carry- Usage Plus Export
Year Crop Over Supply Normal carry-Over Surplus
1924-25 2,130.9 289.7 2,420.6 1,775 645.6

1925-26 2,146.9 239.1 2,386.0 1,845 541.0
1926-27 2,339.2 277.9 2,617.1 1,925 692.1
1927-28 2,441.7 322.2 2,763.0 1,960 803.9
1928-29 2,777.6 400.8 3,178.4 2,000 1,178.4
1929-30 2,184.1 599.8 2,783.0 2,025 758.9
1930-31 2,643.0 585.5 3,228.5 2,050 1,178.5
1931-32 2,538.9 653.7 3,192.6 2,025 1,167.6
1932-33 2,339.8 676.2 3,016.0 2,000 1,016.0
1933-34 2,155.1 798.9 2,954.0 2,000 954.0
1934-35 1,956.4 764.3 2,720.7 1,975 745.7
1935-36 1,999.0 558.3 2,557.3 1,960 597.3
1936-37 2,103.4 422.7 2,526.1 1,950 576.1
-35-
Table 2.4 Sample of how your "Ledger of Statistical Facts" should look
Import nations (in thousand bushels)

Country 1930-31 1931-32
Crop Imports Supply Crop Imports Supply
Austria 12,008 16,763 28,771 11,009 14,080 25,089

Belgium 13,236 45,159 58375 13,817 47,921 61,738
Czechosl. 50,606 13,056 63,662 41,232 20,495 61,727
Denmark 10,216 11,410 21,626 10,053 17,344 27397
Estonia 1,635 880 2315 1,738 520 2,258
Finland 1,210 4,878 6,088 1,121 4,197 5,318
France 228,105 44,784 272,887 264,117 80,762 344,879
Germany 139,217 30,028 169,245 155346 21,961 177307
Greece 9,709 24,081 33,790 11,225 23,941 35,169
Ireland 1,092 19,007 20,099 781 19,902 20,688
Italy 210,071 83,579 293,650 244,415 33,485 277,900
Latvia 4,062 1,790 5,852 3388 790 4,178
Netherlands 6,055 35,402 41,457 6,751 31,065 37,815
Norway 720 8,275 8,995 592 8,887 9,479
Spain 146,700 *156 146,544 134,427 2,484 136,991
Sweden 20,819 5,407 25387 17,033 6392 23,625
Switzerland 3,605 18389 21,994 4,045 21,102 25,147
U.K. 39,960 220385 260,345 35,896 245,111 281,007
Europe 899,026 583,273 1,480,504 957,189 600,639 1 ,557,827
Export nations 421
Brazil 30,708 31395

China 21,961 65,482
Japan 29,537 17390 46,927 30,892 22385 53,277
Egypt 39,753 9,675 49,428 46,073 7,675 53,748
South Africa 9,297 3,058 12355 13,713 1,805 15318
Cuba 4,560 4,227
Netherlands Indonesia 4301
Syria-Leb. 168 314
New Zealand 751 700
Indo-China 981 924
Ex-Europe 89,252 139,138
Europe 583,273 600,639

Exporters 421
Accounted for 672,946 739,777

Unaccounted for 133370 59,802
Reported exports 806,516 799£79
’Exports
-36-
Table 2.5 Import nations (in thousand bushels)
Country 1932-33 1933-34

Crop Imports Supply Crop Imports Supply
Austria 12,193 13,381 25,574 14,615 10397 25,212

Belgium 15,376 41,063 56,439 15,067 42,755 57,822
Czechosl. 53,737 7,190 60,927 72,896 * 264 72,632
Denmark 10,997 12,089 23,086 11343 11,976 23319
Estonia 2,085 3 2,088 2,451 1 2,452
Finland 1,483 4,146 5,629 2,460 4,239 6,699
France 333,524 38,877 372,401 362330 18,152 380,482
Germany 183,830 8,759 192389 205,920 * 4,456 201,464
Greece 17,067 19,517 36384 28385 11,919 40304
Ireland 831 18,439 19,270 1,983 19,183 21,166
Italy 276,922 13,159 290,081 298348 8314 306,862
Latvia 5,292 5,292 6,725 * 489 6,236
Netherlands 12,837 26,451 39,288 15325 24,077 39,402
Norway 749 8,234 8,983 755 8357 9312
Spain 184,207 8,244 192,451 138,235 . 77 138,158
Sweden 26,500 3,617 30,117 26337 1,799 28,136
Switzerland 4,001 19,285 23,286 4,957 17378 22335
U.K. 41,253 216,977 258330 58,725 216,118 274,843
Europe 1,182,884 459,431 1,642,315 1,267,257 395,265 1,657,296

Export nations 899
Brazil 30,473 33386

China 51,255 47,177
Japan 31,336 3,739 35,075 40,410 3,768 44,178
Egypt 52,586 580 53,166 39,961 211 40,162
South Africa 10,627 199 10,826 11,762 . 92 11,670
Cuba 3,860 3,620
Netherlands Indonesia 3,599 3,621
Syria-Leb. 1,574 1377
New Zealand 1,418 388
Indo-China 770 791
Ex-Europe 97,467 94,739

Europe 459,431 395,265
Exporters 899
Accounted for 557.797 490,004

Unaccounted for 70,308 51,921
Reported exports 628,105 541,925
’Exports
-37-
Table 2.6 How your "Ledger of Statistical Facts" should look
Export Nations (in thousands of bushels)

1933-34
Country New July 1 Supply Next Net Home
Crop Carry-over Carry-over Exports Use
Algeria 31,988 31,988 12,435 19353

Argentina 286,120 96,000 382,120 141,000 144,849 96,271
Australia 177,338 71,000 248338 102,000 86309 59,829
Bulgaria 55,453 55,453 3,000 4,769 47,684
Canada 269,729 238,000 507,729 222,000 198,234 87,495
Hungary 96356 96356 4,000 29,615 62,741
India 352,875 352,875 1300 351375
Morocco 28,902 28,902 28,902
Poland 79,883 79,883 1303 78380
Rumania 119,072 119,072 230 118,842
Russia (1,018,893) (1,018,893) 33,787 (985,106)
Tunis 9,186 9,186 770 8,416
U.S.A. 551,683 393,980 945,663 288394 25307 631,762
Yugosl. 96,584 96384 4,000 839 91,745
Totals 2,155,169 798,980 2,954,149 764,394 540,547 1,682,995

Afloat 44,000 48,000 -4,000
Europe Exports 5378
Net exports 541,925
1933-34
Algeria 43328 43328 13,444 30,084

Argentina 240,669 141,000 381,669 103,000 186,228 92,441
Australia 133394 102,000 235,394 69,000 111,628 54,766
Bulgaria 39395 3,000 42395 42395
Canada 275,849 222,000 497,849 226,000 168,660 103,189
Hungary 64,824 4,000 68,824 4,000 12,499 52325
India 351,456 351,456 2318 349,138
Morocco 39,683 39,683 39,683
Poland 76,440 76,440 3,619 72,821
Rumania 76353 76353 3,425 73,128
Russia 2,088
Tunis 13,779 13,779 4,268 9311
-38-
Table 2.6 Continued
Export Nations (in thousands of bushels)
Notes: While we keep a record of Russia, the only totals used are those of its exports. In 1934-35,
the United States imported 14,069,000 bushels. This was added to the table of imports under the
heading "Export Nations" as shown on tables of "Import Nations". The exports under "Afloat"
are the difference between the supply afloat on July 1 this year and last. If wheat is taken from
that afloat, thereby decreasing that quantity during the year, it is added to the Net Exports -
which balance the Net Imports. But if the supplies afloat increase during the year, it is just that
much accounted for in the exports that does not have to be included in the quantity
"Unaccounted For".
-39-
Table 2.7 May and September wheat prices
-40-
Table 2.7 Continued
Month 1932 1933 1934 1935
-41-
Table 2.8 Bradstreet's Commodity Index*
Month Index Per Cent Equal Index Per Cent Equal

1909-13 Wheat 1909-13 Wheat
1924 1925
Jan 1 $13.27 148% 155.4* $13.93 156% 163.8*
Feb 1 13.19 147 154.3 13.88 155 162.7
Mar 1 12.89 144 151.2 13.83 155 162.7
Apr 1 12.65 143 150.1 13.68 153 160.6
May 1 12.55 141 148.0 13.31 150 157.5
June 1 12.29 138 145.0 13.61 152 159.6
July 1 12.22 137 143.8 13.85 155 162.7
Aug 1 12.62 141 148.0 14.24 160 168.0
Sept 1 12.80 145 152.2 14.08 158 165.9
Oct 1 12.99 146 153.3 14.15 158 165.9
Nov 1 13.34 150 152.5 14 31 160 168.0
Dec 1 13.52 151 158.5 14.40 161 169.0
1926 1927
Jan 1 14.01 157 164.8 12.81 144 151.2

Feb 1 13.72 154 161.7 12.51 140 147.0
Mar 1 13.39 150 157.5 12.55 141 148.0
Apr 1 13.10 147 154.3 12.53 140 147.0
May 1 12.86 144 151.2 12.44 139 146.0
June 1 12.75 143 150.1 12.42 139 146.0
July 1 12.73 142 149.1 12.38 139 146.0
Aug 1 12.64 141 148.0 12.58 141 148.0
Sept 1 12.69 142 149.1 12.90 145 152.0
Oct 1 12.78 143 150.1 13.26 148 155.4
Nov 1 12.73 142 149.1 13.39 150 157.0
Dec 1 12.78 143 150.1 13.53 152 159.6
1928 1929
Jan 1 13.57 152 159.6 12.96 145 152.2

Feb 1 13.52 151 158.5 12.98 146 153.3
Mar 1 13.34 149 156.4 13.00 146 153.3
Apr 1 13.41 150 157.5 12.86 144 151.2
May 1 13.43 150 157.5 12.67 142 149.1
June 1 13.19 147 154.3 12.54 139 145.9
July 1 13.14 147 154.3 12.48 140 147.0
Aug 1 13.19 148 155.4 12.63 141 148.0
Sept 1 13.28 149 156.4 12.65 142 149.1
Oct 1 13.12 147 154.3 12.70 143 150.1
Nov 1 13.01 146 153.3 12.40 139 145.9
Dec 1 13.14 147 154.3 12.23 137 143.8
* The actual Bradstreet Index is carried out to four decimal places. For saving of space, we show
only the two decimal points.
-42-
Table 2.8 Continued

1909-13 Wheat 1909-13 Wheat
1930 1931
Jan 1 $11.67 131% 137.5* $9.50 104.0% 109.2*
Feb 1 11.51 129 135.4 9.30 102.5 107.5
Mar 1 11.22 125 131.2 9.16 103.0 108.0
Apr 1 11.18 125 131.2 9.22 100.0 105.0
Mar 1 10.93 122 128.1 8.91 97.0 102.0
June 1 10.77 121 127.0 8.64 98.0 103.0
July 1 10.56 119 124.9 8.77 98.0 103.0
Augl 10.44 117 122.8 8.79 99.0 104.0
Sept 1 10.42 116 121.8 8.49 95.0 100.0
Oct 1 10.29 115 120.7 8.29 93.0 98.0
Nov 1 10.05 112 117.6 8.08 91.0 95.5
Dec 1 9.83 106 111.3 7.91 88.0 92.4
1932 1933
Jan 1 7.73 87 91.3 6.79 77.0 81.0

Feb 1 7.52 84 88.0 6.53 73.0 76.6
Mar 1 7.31 83 87.0 6.35 71.0 74.5
Apr 1 7.15 81 85.0 6.53 73.0 76.6
May 1 6.91 78 82.0 6.98 78.0 81.9
June 1 6.68 76 80.0 8.02 90.0 94.5
July 1 6.72 76 80.0 8.33 94.0 98.7
Augl 6.79 77 81.0 9.00 101.0 106.0
Sept 1 7.17 81 85.0 8.99 101.0 106.0
Oct 1 7.27 82 86.0 9.05 101.0 106.0
Novi 6.96 79 83.0 8.84 99.0 104.0
Dec 1 6.88 78 82.0 8.81 98.0 104.0
1934 1935
Jan 1 8.83 99 104.0 9.49 106.0 111.0

Feb 1 9.01 101 106.0 9.78 110.0 115.5
Mar 1 9.26 103 108.0 9.79 109.0 114.4
Apr 1 9.16 102 107.0 9.66 109.0 114.4
May 1 9.15 102 107.0 9.79 110.0 115.5
June 1 9.14 102 107.0 9.90 111.0 116.5
July 1 9.23 103 108.0 9.84 111.0 1165
Aug l 9.47 104 109.0 9.91 112.0 117.6
Sept 1 9.48 106 111.0 10.00 113.0 118.6
Oct 1 9.46 106 111.0 10.17 114.0 119.7
Nov 1 9.28 104 109.0 10.28 115.0 120.7
Dec 1 9.49 104 109.0 10.40 116.0 121.8
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Table 2.8 Continued

1909-13 Wheat 1909-13 Wheat
1936 1937
Jan 1 10.36 116 121.8 11.13 125.0 131.0
Feb 1 10.02 113 118.6 11.23 125.6 132.0
Mar 1 9.91 111 116.5
Apr 1 9.85 110 115.5
May 1 9.81 110 115.5
June 1 9.73 109 114.4
July 1 9.85 110 115.5
Aug 1 10.14 113 118.6
Sept 1 10.19 114 120.0
Oct 1 10.27 115 121.0
Nov 1 10.22 114.5 120.0
Dec 1 10.78 121 127.0
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Pictograph 2.4 Wheat export countries
Million bushels
Lesson 3
THE DOW THEORY APPLIED

TO GRAIN
■ The Three Market Movements

■ The Potent Price
■ The "Line" or Congestion
■ Averages Must Confirm Each Other
■ Reactions Are Sharp
■ Action Following Panics
■ Market Like a Pendulum
■ Speculation in General
■ Manipulation
■ Your Greatest Speculative Enemy
■ Dow Theory Applied to Grain
THE DOW THEORY APPLIED TO GRAIN
Lesson 2 was devoted to an exposition of the Law of Supply and Demand, the
fundamental foundation of all price movements. Lesson 3 will be devoted to an
analysis of one of the oldest, most "honorable" methods of chart reading ever
devised - and although it was originated primarily for Securities we will show
its very practical application to grain.
The "Dow Theory" was evolved by no less a person than the founder of the
nation's leading financial paper, The Wall Street Journal. As a matter of fact,
Chas. H. Dow, the man for whom the theory was named, never offered it as a
theory of price prediction. He originated the Dow-Jones stock average which
was the first average price for various stocks ever developed in this country.
This average, which at that time consisted of a combination of Rails and
Industrials, was first compiled in 1897, and Dow died in 1902. Yet the principles
he laid down in that brief opportunity of study have stood the test of the market action
ever since that date.
It remained for his successors, S.A. Nelson, and particularly William Peter
Hamilton, Editor of The Wall Street Journal from 1903 to his death in 1929, to
carry on the work and develop the theory first laid down by Dow.
Furthermore, it was Hamilton himself who made practical application of this
theory for years in forecasting the trend of the Stock Market until those fore
casts were looked upon as one of the most interesting parts of this recognized
leading financial paper.
Shortly after Hamilton assumed editorship of The Wall Street Journal, the fol
lowing editorial appeared (September 17,1904).
THE THREE MARKET MOVEMENTS

"We have often pointed out that there are three movements in the market
which are in progress at one and the same time. These are, first, the day-to-day
movement resulting from the operations of the traders, which may be called
the Tertiary Movements; second, the movement usually extending from twenty
to sixty days, reflecting the ebb and flow of speculative sentiment which is
called the Secondary Movement; and third, the Main Movement, usually
extending for a period of years, caused by the adjustment of prices to underly
ing values, usually called the Primary Movement. It is a very important thing
to determine in which direction the Primary Movement is taking place, as this
is the movement that concerns investors."
At the last of that editorial, Hamilton threw in a reference to the production of
gold, which was discussed in Lesson 1. He said, "It must further be remem
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bered that the continued increase in the production of gold is a most powerful
factor, which cannot fail to be felt in the future as making for higher prices of
securities other than those of fixed yield."
THE POTENT PRICE

In laying the foundation for a study of the averages - and we accept it for the
study of price movements in grain as well - Hamilton said (November 29,
1910), "In these discussions the idea is to accept the average as the sum of all
the influences either way, and to discuss the price movement purely on previ
ous experience as shown by the figures over a long period of years."
Again (January 5, 1911), "We prefer to neglect volume and the character of
trading in these studies, believing that the average itself, being absolutely
impartial, makes allowances for these factors as well as for the chapter of acci
dents, the conditions of trade, the tone of the money market, and the temper of
the speculating public and even the character of the investment demand. There
is nothing in the averages to dogmatize about. They are an immensely valuable
guide when studied over long periods in the past. They frequently give useful
indications of the tendency of the market's short swing. For day-to-day trading
they are not only valueless, but would probably be dangerous as well."
These statements, written prior to 1914, so adequately and completely sum
marize our own thoughts based primarily on market observations since 1920
that we present them to you verbatim, giving Hamilton full credit. Not only
does he summarize his observations concerning the three stages of the price
movements, but also read the following excerpts from his editorials discussing
the various phases of the market and the movements that can be anticipated.
In an editorial appearing June 1,1911, he said, "These prices for three months
had hung somewhere about mid-way between the low point of last December
and the high point of last February. On previous experience a movement out of such
a rut either way would mean ultimately a change of considerable importance."
THE "LINE" OR CONGESTION

Again (July 14,1911), "A long line, such as the averages have described in the
past six weeks, may even, with a limited volume of business, be taken as indi
cating one of two things. Either stocks have been successfully distributed at the
new high level, or an accumulation has been in progress sufficient in the aggre
gate to warrant the assumption that a strong section of opinion believes prices
should work higher."
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This establishes the reference to a "Line" in the market. It may be otherwise

termed a "congestion", and in the later Lessons we will analyze its characteris
tics to determine whether it is a "Top" or a "Bottom."
AVERAGES MUST CONFIRM EACH OTHER

In the issue of March 7,1912, Hamilton disclosed the second important part of
the theory. He wrote, discussing a market that had been "making a line" since
November 9 of the preceding year, "On one occasion the railroads, but not the
industrials, looked like they were getting out of the groove, and sold below 115.
Had this occurred simultaneously with a downward movement of the industrials, people
who judge the market by the record of the averages, compared over a long
period of years, would have said that the signal had been given for a broad general
decline. The industrials, however, gave no confirmation to the movement. The
railroad stocks almost instantly rallied, and since that date both averages have
been well within the old range, giving little indication of future tendencies.
"It will be observed that the average price of the industrials is closely
approaching the limit of the groove on upper side. If, for instance, their position
was firmly established above 83, while the railroad stocks confirmed by moving above
119, unquestionably the advent of a further upward movement broadly affecting the
whole market would be indicated.
"Periods of rest in the stock market (and we would add also in grain) may be
as significant as periods of activity." So the principle of the theory is estab
lished that the averages must confirm each other.
Before going into a practical study and application of this theory, let us get
some more advice and observations from this great observer and writer,
William Peter Hamilton. Let us scan his views on various phases of the market.
REACTIONS ARE SHARP

In his issue of March 19,1910, he said, "Long experience, which can be verified
from the averages, teaches that in a broad bull movement, of a kind that lasts over
a year or more, the advance is slow compared to the sharpness of the occasional
reactions. In the same way, in a bear market, sharp recoveries are in order."
On April 16,1906, "Tested over a number of years, the averages show that the
decline after a long advance is about half recovered, and that the market then
backs and fills between the old low and that point until a new impulse devel
ops." Later this was changed to a forty per cent recovery.
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On May 2, 1906, "In practice it is found that very sharp breaks have quick
recoveries." He repeats this on August 8, 1907, saying, "It is characteristic of a
bear market that the rallies are always sharp."
ACTION FOLLOWING PANICS

Discussing markets following panics, Hamilton's editorial said, "After a real
stock market panic, as distinguished from a severe decline, the average price
has always shown a regular movement, in which approximately 40 to 60 per
cent of the decline is recovered, and subsequently lost as the stock bought to
protect on the panic comes out. The market then comes to rest exactly as a pen
dulum would, and all that is indicated is a period of unimportant fluctuations
until an absolutely new impulse is given."
MARKET LIKE A PENDULUM

Going further with the discussion of markets in congestion, he wrote (April 16,
1910), "When the market is waiting for a new impulse, the movements of the day
become important. We may use once more the well-worked simile of the pendu
lum because it fits this method of studying the market movements as nothing
else does. Each recurring swing takes a smaller segment of the arc until the pen
dulum reaches equilibrium. Obviously, the market awaits a new impulse.
"What follows also is that such a market becomes thoroughly sold out. As the
traders say, it has not 'bulled easily', and consequently the professionals sell it
short, feeling safe in the absence of any aggressive bull leadership. In the same
way, inactivity tires out the bears. No broker likes 'sleeping accounts,' and
finally the market gets in such a position that a very little impetus will start it
one way or the other."
On July 12,1907, Hamilton said, "It may be broadly said that after tangible
fluctuations, two failures to pass the old high will establish the presumption of
a bear market."
SPECULATION IN GENERAL
Speaking of speculation generally, Hamilton said (June 29, 1906), "Speculation
is essential not merely in the market for stock but in any market. Somebody
must take chances. The pound of coffee sold across the counter contains greater
or less profit to the retailer as he judges the wholesale market correctly. Every
market must therefore adjust itself not merely to present conditions but to
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future conditions. In this respect, stocks are like any other commodity, but they
cover so wide a range of interests that a general movement in them may, and
frequently does, reflect a change in general conditions outside.
"In this respect the Wall Street market is something of a ration barometer. It is
the constant phrase of the street that a movement is over 'when the news is
out.' Stockholders and intelligent speculators operate not on what everybody
knows, but on what they alone know or intelligently anticipate. We have often
had the spectacle of a general decline in the market, only followed six months
afterward by a contraction in business, or a general advance in the market
anticipating by equal time improving industrial conditions not then obvious.
"It is the business of Wall Street to sell securities to the public. Wall Street
anticipates that when the business improvement it expects matures, the public
will take stocks off its hands. This is really what establishes a bull market.
Favorable conditions inside and out of Wall Street act and interact until the
necessary impetus for a stock boom is developed."
MANIPULATION
In the issue of February 26, 1909, Hamilton said, "Anybody will admit that
whole manipulation is possible in the day-to-day market movement, and the
short swing is subject to such an influence in a more limited degree, the great
market movement must be beyond the manipulation of the combined financial
interests of the world. No combination could possibly succeed in influencing
the market over such a movement."
Gradually, then, we get into the practical application of the Dow Theory, which
Hamilton of The Wall Street Journal developed. First, there is the Line of conges
tion - which may be either accumulation or distribution. Right here let us repeat
the advice given by the famous Joe Leiter - "Never trade in a congestion. You
can't get it out until it is ready to get out. Wait until it gets out - and then go with
it." In later Lessons the best indications we have been able to discover of a
market that is about to go into or out of a congestion will be analyzed.
It is to be noted that these quotations from the editorials of William Peter
Hamilton have all been taken from issues of The Wall Street Journal prior to
World War I. He continued to discuss and expand on this theory until his death
in November, 1929. In his last observation, appearing in the issue of October
26, 1929, he wrote, "So far as the barometer of the Dow-Jones Average is con
cerned it has been clear since last Wednesday (October 23) that the major
movement of the market has turned downward." It was a fitting finale for this
great observer.
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About the only change we can note in his writings from 1920 on was to give a
little more importance to the volume of trade as the market moves out of con
gestion. It is to be noted that he likens a market while in congestion to a
pendulum swinging in its arc, with the movements gradually decreasing as the
market awaits a new impetus to take it on its course. When this new impetus
comes it is desirable that it should be of a nature to increase the volume of
trade. Bull markets are built on excitement, while Bear markets are the result of
despair. Therefore, at the first movement of the market out of congestion, it is
desirable that the excitement of the upward movement should bring such an
increase in volume of trade as to absorb all new selling and carry the market
aggressively into new high ground. This immediately gives the Bull confidence
in his position and encourages him not only to make new purchases for himself
but to encourage others to make purchases. "Individual trades were lost sight
of in the big volume of trade." Such a market observation, coming from the pit,
is music to the ears of the Bull when the market starts upward.
On the other hand, the decline from the congestion should be of such a nature
that there is real liquidation of long holdings and in such volume that new
buying will be discouraged until the liquidation has run its course, while short
sellers will be attracted by the weakness following the period of stagnation.
This very important subject will be covered more fully in the discussion of
"Tops" and "Bottoms."
Summarizing the main points of the Dow Theory, they are as follows.
1 Following a period of congestion lasting from twenty days to three or four

months, if the Rails and Industrials then both make new prices in the same
direction out of the congestion, the indications are that the market will run
in that direction. This rule is not infallible. (That is Hamilton's interpreta
tion. We will expand and we believe improve a little on this theory in later
Lessons.)
2 The main movement of the market, or Primary Trend, will occupy a year
or more. A Secondary Movement in which the market will lose from 40 to
60 per cent of its Primary Movement will come as a usual thing. This
Secondary Movement usually occupies a time from twenty to sixty days,
with the break, or the rally, as the case may be, usually being very rapid.
3 The daily fluctuations become important primarily as they finally present a
picture which has forecasting value. They are frequently contradictory and
the man who attempts to play for them usually has a short life as a trader.
4 The more rapid the movement, the more difficult it is to forecast.
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Now study the Pictograph of Industrials and Rail Stocks from January, 1919, to
September 16,1933.* We have noted that all of the editorials from which the Dow
Theory is deduced are dated prior to World War I which started in 1914. The
period of intervening time and the tremendous international changes that have
occurred since that date would give this theory an opportunity to become imbal
anced if it were not sound. Our illustration in actual practice of the theory is of
markets occurring ten to twenty-five years after the quoted editorials were written.
In this Pictograph of Industrials and Rails we have indicated the principal
"Lines" made by the market during 15 years shown by a dotted line from one
end to the other of the Line. Many extremely interesting facts and factors are
brought out by a careful study of this Pictograph. Let us go through it quickly.
The first Line made was the latter part of November, 1919. Rails had already
made a Line during the middle of that year and had broken down out of it, but
the Industrials ran on to new highs in November of 1919. Thereupon they
turned over and broke sharply while the Rails made a new Line. In January of
1920 the Rails and Industrials confirmed each other, both breaking out into
new lows below the Line.
YOUR GREATEST SPECULATIVE ENEMY

Here let us issue the first warning concerning your greatest enemy in the
market and its interpretation - yourself. After a break from 120 to 104 in
Industrial stocks, your natural inclination would be to believe that the market
was a purchase rather than a sale. Yet after the confirmation of this theory by
the Industrials and Rails both selling out of the down side of their congestions,
and especially with the completion of what we shall later show was a good
"Top" formation by the Industrials, that market average broke an additional 37
points and went downward for eighteen months.
It is to be noted that starting in March of 1920 there was a rally of 13 points in
the average. Prior to that the market had broken from a high of 120 to 92, or 28
points. Forty per cent of 28 points would be a rally of 11 $ points to which the
market would be entitled in its Secondary Movement. The actual rally, as
stated, was 13 points. It would be the point of wisdom, then, to become scepti
cal of a further advance beyond the 40 per cent limit and to watch for a new
point for selling. Thus if one could not get in as the market completed its Top, a
new opportunity would be given on the rally.
* Editor's note
This Pictograph was lost over the course of time.
-55-
The second Line in which the Industrials and Rails confirmed each other was
built in 1921. From that Line the Industrials advanced 33 points to the high
made in March of 1923. In that particular market it might be that one would
have been forced to take a loss on some of his Industrials in as much as the
markets in the latter part of 1922 both went into congestion and broke out of it,
but the resulting decline was very limited. The Industrials turned from a
November Bottom to go on and make a new high, but the Rails held back.
Then in the first months of 1923 they both made a new Line from which the
Industrials broke 15 points.
In the rally from the 1921 Bottom to the 1923 high, the Industrials and Rails
gave the confirmation for an advance when the Industrials crossed 72 in 1921
with a good volume of trade. The advance was from 64 to 105, or 41 points.
Forty per cent of 41 points would be 161 points. In the break from March of
1923 to November of that year the Industrials broke from 105 to 86 or a dis
tance of 19 points. There they put in a new congestion and worked sidewise in
a Line until June of 1924. While the industrials had made a fair advance, the
Rails really did not clear the shoulder of June, 1923, and the signal for the
renewed of the Bull movement really was not given until November of 1924.
From the Line built during 1923 and 1924, Industrials advanced 54 points and
the Rails 31 points.
In the latter part of 1925 the two groups of stocks put in a new Line and the
Industrials broke 16 points out of it.
The first shoulder, from which one should start calculations as to the first dis
tance of the break, was that at 115 made in September of 1924 after two
months' reaction. The distance from 115, that September low, to 160, the
August high of 1925, was 45 points, of which 40 per cent would be 18 points.
The actual break from 160 points to 135 was 25 points, which was 55 per cent of
this last movement. There the market put in a perfect Bottom formation and
turned around to advance.
The real confirmation of a further big Bull movement was given in August of
1926 when both the Rails and Industrials broke into new highs. The Industrials
thereupon turned to have the 40 per cent reaction, but the Rails refused to
break. Then the Industrials again turned and when they again crossed the top
of the Line they started on an advance that carried them on a 225 point
advance to the Top in 1929 while the Rails advanced 76 points. The only time
during that tremendous advance when there might have been a question as to
the trend was in the beginning of 1929 when both the Rails and the Industrials
broke out of a congestion on the down side - but they immediately came back
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into congestion, then in July gave the confirmation for a renewal of the advance
which carried the Industrials from 332 to 386, and the Rails from 270 to 291.
The decline started with the completion of a Top, and the confirmation of the
Industrials and Rails was really a marvelous verification for the theory first
seen by Charles H. Dow between 1898 to 1902 and developed by William Peter
Hamilton from 1903 to his death which occurred almost simultaneously with
the completion of the Top on the market in 1929.
The first break that came with the verification of the averages in 1929 went for
a distance of 121 points in the Industrials and 39 points in the Rails. This break
was from 396 for the Industrials to 218 or a distance of 178 points from the Top.
Forty per cent of that break would be 71 $ points. The rally from November,
1929, to April of 1930 went to a distance of 79 points or 47 per cent of the break.
Once more we call to your attention that the real break in the stock market did not
come until after the confirmation of the Top by the Industrials and the Rails. This break
came only after a previous break from 386 to 338 on the Industrials. The usual trader
would hesitate to sell after such a break - yet when the Rails and the Industrials con
firmed that the Top had been made, there was an immediate further break of 121 points
on the averages for the Industrials.
After the rally from November of 1929 to April of 1930, the Industrials and
Rails again put in big major Top formations and gave the indication that the
decline was to continue. After the completion of the Top in 1930 the Industrial
stocks broke an average of 220 points. At no time during all of that decline did
these averages indicate by confirming each other that the turn had come. In early 1931
the Industrials had a big rally and they went above a point made by the rally in
November of 1930. But the Rails held back and refused to confirm the turn of
trend. Thereupon the decline was renewed.
The first confirmation that a turn was coming was given during the latter part
of 1932 and early in 1933 when Rails began building a Line at the price level of
24 to 30 and the Industrials congested between 54 and 68. The latter part of
April, 1933, they confirmed each other that the trend was upward and an
advance of 35 points followed for the Industrial average. The July, 1933, high
was approximately 106, or 54 points above the March low of approximately 53.
Forty per cent of that would be 21$ points. In the rapid break which followed
the July high, the Industrials broke from 107 to 85 or 22 points.
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DOW THEORY APPLIED TO GRAIN

Pictograph 3.1 shows the practical application of the Dow Theory to the grain
market, using wheat and com as the basis for the interpretation. In this, the
"current" Future or one nearest to delivery date is utilized. Thus, starting the
first of January, the movements are recorded of the May future until its expira
tion on the last trading day of May. Then the July futures are utilized until their
expiration, then the September futures, and the year is ended with the
December from the first of October on. Details of preparing this graph will be
explained in succeeding Lessons.
This graph presents a most interesting picture, and is one that we will use fre
quently during this Course. For this immediate Lesson the discussion will
center primarily on the application of the Dow Theory to grains.
When trading in futures of wheat and com was resumed on July 15, 1920,
having been suspended during the War, the market immediately broke from
275 on wheat to 207J. Then came a sharp rally and the first Line made by wheat
and confirmed by com becomes immediately apparent. The trend was indi
cated as downward when the price of 236 on wheat was broken, and the
market broke 1161 points or cents from there to 119J. Then the May future of
1920 again made a Line which was confirmed by the com. Wheat advanced
from 150 to 187, while com held back.
The next Line made by the wheat and confirmed by the com was in the latter
part of 1921. When the confirmation was given in January of 1922 by both
wheat and com going above their congestions, wheat advanced 35 cents a
bushel. Then followed a brief congestion with both wheat and com breaking
out of it on the downside. Forty per cent of the distance from 1491, the 1922
high, to the January low of 199 i, would be 19 f On the break the market came
211 cents. This was somewhat indicative that on the advance which followed
the market might resume its Bull trend. However, the wheat failed to make
new highs and the com failed to advance practically at all. In May of 1922, the
wheat again went into congestion and broke out, declining to 98 cents. During
this decline the com worked sidewise and never went into new lows below its
April Bottom. Then in August, September, and October of that year the markets
again made a Line, both sold into new highs and wheat advanced 18 cents
while com went up 26 cents.
Then followed a movement which comes occasionally in the grain markets
where wheat congested and went out on the down side during the middle part
of 1923 while com held, and in fact continued to advance until April of 1924.
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Pictograph 3.1 The Dow Theory applied to grain
Causes of this will be studied later. It was an "unnatural" movement, and did
not extend far.
The next Line put in by the wheat and com was in March, April, May, and
June of 1924. The two grains confirmed the upward trend in June of 1924 and
after the confirmation was given, wheat advanced a total of 99c a bushel.
It is to be noted in August and September of that year that the wheat market
declined, but that the com market did not confirm at any time that wheat was
reacting, that a Top had been made.
The next Line was made in February and March of 1925, with wheat breaking
41 cents and com 32 cents after the confirmation was given.
We have drawn in the various Lines made by wheat and com from July 15,
1920 to September 15,1933. This is a record of fourteen years applying the prin
ciples outlined for stocks approximately ten to fifteen years before these actual
markets occurred. It is not necessary for us to analyze each movement shown
here. The student will get more benefit by studying through each one for him
self and noting the extent of the advance or decline after the confirmation was
given by both grains that a movement had started. But it is highly important
that we draw some conclusions from this record for your practical application
to grains.
1 The best movements either on the Bull side or the Bear side result when
the trend is verified by both wheat and com.
2 As in the stock market, wheat will usually have a reaction of 40 to 50 per
cent, if the movement is upward, or a rally of 40 to 50 per cent if it is
downward, this being the Secondary Movement of the Primary Trend.
3 As in stocks the Primary Movement of grain will usually extend a year or
longer, the grain adjusting itself in its price level to the new level of com
modity prices.
The total movements shown on wheat alone where the com confirmed the
action of the wheat during this period of 14 years was 647 points or an average
of 43 points or cents a year. If a trader were to confine his activities to trade made
when the confirmation of a movement is given by both wheat and com, it should make
him most excellent profits.
This confirmation by the com of the wheat trend and/or the wheat of the com trend is
undoubtedly the surest and safest indication of trend that there is. The records speak
for themselves.
Later Lessons will expand on the interpretation of the indications given by the
market during its congestion, the price objective, the influences which change
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the general trend of commodity prices in the Primary Movement, and further
indications of the start of these major movements on which the making of for
tunes is possible. These are the movements for which our method of trading
(Lesson 19) is designed. In Lesson 18 the activities of big traders will be studied
when these confirmations are given. We want you to get a part of that 43 points
average a year, with a good volume when the move comes.
In concluding this Lesson let us state as our frank belief that students have
been given enough in these three Lessons alone to profit hugely from them. We
expect every one of you to watch for this indication of the trend, the indication
confirmed by both wheat and com, when the fundamentals of Supply and Demand also
verify the trend and to ride such a market to excellent profits many times in the future.
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Lesson 4
GREGORY KING'S LAW OF PRICES

AND HISTORICAL EFFECTS OF HIGH
AND LOW PRICES
■ The Money Theorists

■ Practical Application of King's Law of Prices
GREGORY KING'S LAW OF PRICES AND HISTORICAL EFFECTS OF HIGH AND LOW PRICES
In June of 1933, Royal Munger, Financial Editor of the Chicago Daily News, Nat C.
Murray, one of the leading grain statisticians of the age, and Mark W. Pickell, co
author of this Course, were driving home from a meeting of the Grain Market
Analysts Club, of which Mr. Pickell was president. The conversation naturally
dwelt on economic subjects and Mr. Munger made the statement, "There has not
been a book on economics worth reading that has been written since prior to the
War." To this statement Mr. Murray heartily agreed.
J.W. McCulloh, one of the most consistently successful traders on the Chicago
Board of Trade, told his son at Cornell University that if he wanted an easy
course, to take economics. "No matter what the subject may be, get up and
give a good exposition of it on one side and you will find professors right
within this university who will agree with you."
That may be a rather severe indictment of much of the modem work on eco
nomic topics. Nevertheless there were so many extremely divergent opinions
during the early Forties that in this Course we sought to go back and pick out
things from the past which have stood the test of time. We have quoted from
Adam Smith, Father of Economics, who wrote about the same time the
Declaration of Independence was being signed. We have quoted from the
works of William Peter Hamilton, in his market observations from 1903 to 1911
- and proved them with markets occurring from 1919 to 1933.
In this Lesson, we are going back still further into antiquity, quoting what was
undoubtedly the first arithmetical law of prices ever given that pertained pri
marily to the grain market. But in presenting this law, we will quote at length
from a lecture delivered in Worcestershire College, Oxford University, in 1887.
That lecture was delivered by Mr. James Thorold Rogers, Professor of Political
Economy at Oxford University, and of Economical Science and Statistics at
King's College, London.
There are a number of reasons for quoting this lecture. In the first place, it
deals specifically with the subject of this Course, the rise and fall of grain
prices. In the second place, this lecture, which was delivered in 1887, analyzed
effects on prices of changing money standards - a subject which was particu
larly prominent during the period from 1920 through 1933, and which will
undoubtedly continue to be important indefinitely. The lecturer, James Thorold
Rogers, according to his own statement, went far back into economic history to
prove his points. And the things he discovered during the research of price
changes from the 15th century to the 19th century are as true now as they were
then. In fact at the end of this Lesson we will prove the points not only in
Gregory King's Law of Prices, but those in other observations of Rogers on
general commodity price movements.
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Before launching into this quotation of James Thorold Rogers, let us call to
your attention the really beautiful wording of that lecture. You may find it nec
essary to reread some of the passages before fully grasping them. In fact the
whole quotation will withstand much study. Other parts of the lecture are nat
urally common-place and you will, from your own memory, verify them. Let us
emphasize to you that the observations made in this lecture, when taken in conjunction
with the material of the three preceding lectures, give a groundwork that can be applied
in an extremely practical manner to the markets of the present, and those that will pre
vail in the future.
In his lecture, Mr. Rogers said, "When I was drawing up the list of lectures
which I proposed to give in the present term, I very much hesitated before I
concluded to put down that which forms my subject today. The range of the
subject is very great, the factors are very copious and intricate, the subject from
the historical point of view is yet so utterly unknown, and the evidence is so
remote and so near, that I might well despair of giving you a clear and con
nected outline of the elements from which to make economical inductions and
historical interpretation. But on the other hand, the topic is of such great and
general importance, the issues which it raises are of such profound signifi
cance, the interests which it treats are so valid and vital, and the future it seeks
to penetrate by the evidence of the past is so immediate, so full of menace and
withal so obscure, that if I am able to throw any light on the situation, I should
be lacking in that courage which one who has special knowledge ought to
show, if he thinks he can elucidate a grave social problem.
"As on other occasions, I shall but say of preface to what I have to say, to state
as clearly and concisely as I can, what are the principles on which high and low
prices depend, or in other words, the laws and causes which induce them, and
in what manner these causes which should be dominant are modified by other
causes or conditions, the true force or influence of which must be if possible,
weighed and distributed.
"And here I may observe, 1, that there is no part of political economy in
which the metaphysical method which you can get up in your text books is
more misleading and delusive than it is on this subject, where the only safe
course is to collect and estimate facts, and 2, that variations of high and low
prices, which a century or more ago would have excited little or no attention,
and caused little alarm, in our day, when production and trade are so sensitive
and complicated, rouse the greatest apprehensions and exercise the attentions
of the most laborious and acute investigators into economical phenomena and
economical agencies.
-66-
"Now there is one law of prices which you must know and understand before
you can make the least progress in interpreting the simplest problem. It is known
to some economists, I do not say all, for it is more unaccountedly neglected or
obscured in most treaties on the subject, as Gregory King's Law. Gregory King
was Lancaster Herald (advisor to the king) in the latter part of the 17th century.
Struck, as I do not doubt, with the extraordinary fluctuations of price, particu
larly in the price of wheat, which characterized the 17th century, and being a
man of really statistical mind - that is one able not only to collect figures but to
interpret related figures - he stated it in this form, and you will remember that I
have often referred to it: 'We take it a defect in the market may raise the price of
com in the following proportions (by com is meant wheat):
Defect Above the common rate

1- tenth raises the price 3-tenths
2- tenths raises the price 8-tenths
5- tenths raises the price 45-tenths'
"And from this, King draws some highly practical conclusions from the free
trade practices of the Dutch. It will be observed that King merely takes the
price of com, and that although he gives its proportion in an arithmetical form,
he intends to imply no more than a principle, which experience may modify.
Let me try to draw out in a form of economical rule or rules the important
canon of prices which was suggested two centuries ago, as I have seen it veri
fied in the long research which I have given to the subject.
1 The price of any article in demand, but at present in defect, raises in price
by a different ratio from that ascertained amount of the deficiency; and, e
converso, the price of any article in demand but at present in excess, falls in
price by a different ratio from that indicated by the ascertained amount of
the over-supply. By the expression "ascertained amount" I do not intend
that the quantity shall be exactly measured. It is sufficient for the illustra
tion of the first rule that it should be a sufficiently apprehended fact.
2 The operation of the above law is always most dominant in articles of
prime necessity in which no notable economy can be made without suffer
ing on the part of the people when supply is short, and no notable
increase of consumption can be expected when the quantity is in excess of
supply. If the article is relatively perishable, the phenomena increase in
intensity on either side.
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3 If, in the scarcity or excessive plenty which prevails, as the case may be,
there are several kinds for same articles, which ordinarily stand in a cer
tain ratio to each other, and can be used interchangeably, the rise of prices is
increased, in the event of a scarcity, in what has been heretofore the cheapest form;
and conversely in a time of over-supply the greatest fall is in what has
heretofore been the dearest. This rule will require a little explanation.
Roughly speaking, under ordinary circumstances, wheat, barley, and oats
stand in the ratio 100, 73, and 50. Now in times of scarcity 73 and 50 will
rise more than 100 does; and if there will be a fall in prices owing to exces
sive supply, 100 will fall more than 73 and 50 do. This rule is of the
greatest importance in practice, and in a rough manner is seen, though
none too clearly, by practical men of business.
4 If the articles in question are more or less of voluntary or optional demand and the
supply be in excess, prices tend to fall to money values which come very near the
margin indicated by the cost of production; but if the demand be in excess,
profits rise considerably, and production and trade are active. I state this
law, which is accurate enough when other prices are nominal, but is apt to
be powerfully affected under the pressure of such especial circumstances
as I shall have to refer to hereafter. If the use is entirely voluntary, the phe
nomena are intensified; if the option is exercised in the direction of a
practicable economy of uses, they are less powerfully exhibited.
5 High prices in articles of necessary use consequent upon scarcity, natural or
artificial, diminish the purchasing power of exchanges, and do not increase
the amount of employment. High prices consequent on demand in voluntary
articles can be increased indefinitely, increase profits, and increase wages.
Low prices in articles cf voluntary use do not, especially when labor or employ
ment is greatly distributed, lower wages, so long as the producer does not or
cannot diminish the output. If the demand for labor is urgent and the supply is
scarce King's Law applies to labor as fully as to any commodity. The working of
this law is exceedingly obscure but very real.
"Now, these are the principal, I will not say the only, but the most practical of
the laws, rules, or canons, which may be deduced from King's statement,
which in the form of a question is, according to his figures, as follows: Why is it
that a deficiency of food to the extent of one-half an average supply raises the
price of the actual supply nine times over the common price? I will candidly
say that I have never recorded such a price. The highest I have noted was in the
year 1315, which was five times for wheat. (Editor's note: Charles D'Avenant,
writing on King's Law in Political and Social Works, published in 1681, says, "We
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GREGORY KING’S LAW OF PRICES AND HISTORICAL EFFECTS OF HIGH AND LOW PRICES
have had outrageous famines in England, and in Edward Ill's reign, com did
once rise to 13 times the common value".) But, as I have already stated,
Gregory King's proportion, though undoubtedly sound in principle, is hypo
thetical in form. I am indebted to King for the principles of the general law
governing prices; the canons which I have given you are inductions from my
own researches, inductions which I intend to the best of my power to illustrate.
"But I must now proceed to the next part of my economical inquiry. Three causes
apart from those laws which I have already given tend to depress or raise prices;
one in the course of economical history to raise them, two others to depress them.
"The three causes are the plenty and scarcity of gold and silver, for the last
300 years the elevating cause of prices; the diminished cost of production; and
the diminished cost of freight. These causes are dominant. The general causes
of price changes I have given above, as you will see, are exponents of immedi
ate phenomena, and the three causes are operative over permanent or at least
continuous phenomena. We shall be on the way to interpreting the facts, past
and present, which I have to lay before you.
"You will remember too, that the laws and causes are disparate, but co
ordinate (separate but connected). The laws which I have quoted, insofar as
they have had materials to work on and opportunity for activity, have affected
prices or money values, and in the absence of money, exchange values, from
the days of the Pharaohs to the days of the Coburgs. But the causes have been
especially dominant during the last two centuries.
"When I speak of the plenty of gold and silver I am referring to the case of
either of these materials being legal tender to any amount that is compulsorily
acceptable in liquidation of contracts to the exclusion of the other, or which is
an exceedingly rare case, adjusted in value to each other in so exact a propor
tion that the recipient of the sum is indifferent whether he receives the one or
the other. Now this equivalence may be discovered and affirmed as a commer
cial fact, or it may be to some extent the creation of law. In order to make this
dear, I will illustrate it from the annals of the English currency.
"In 1257 it is said that Henry HI issued a gold currency in the proportion of 10
to 1, and that on the remonstrance of the London dtizens he took it back at a
discount of 2$ per cent or at 9 J to 1. In 1262 he bought gold for making into
plate at 91 to 1; Thirty years later Edward, his son, bought gold ingots at 12 to
1; the object being to decorate the crosses which he set up in memory of his
wife, Eleanore of Castile. During the 14th, 15th, and 16th centuries when a gold
coinage was circulating in England, the ratio varied from 10 j to 11f. In the 17th
century it was about 15 to 1 and the ratio was liable to considerable fluctua-
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tions. In the 18th it was over-valued and as a consequence silver, the over
valued currency, disappeared. The ratio was altered, and a limit put to the legal
tender of silver. In 1819 the market rate was 15 i to 1, at which it was under
valued, and gold disappeared from France. Then the Latin Union was formed,
and the issue was regulated.
"But the Californian and Australian gold discoveries led to the over-valuation
of gold, and silver began to disappear. Recently silver has been demonetized,
except for change in Germany, Italy, the United States and France, the last two
practically though not theoretically. The present ratio is nearly 221 to 1. (Note:
remember Bryan's campaign for "16 to 1" about the time of this lecture.)
"These alterations of proportion are wholly due to the use of gold as currency.
Except in Italy, a gold currency was unimportant up to the 17th century, when
the American supplies came. The present fall is due to the cessation of silver
coinage. If Austria and Russia were to retire their forced paper currencies, and
adopt a legal tender silver currency, and if China were to issue a silver currency,
the price of silver would rise, if not to its old proportion, to something very
much nearer it than it is likely to be unless such expedients are adopted. If you
leave off using any article hitherto in demand, either by finding a cheaper substitute for
it, or by discounting it wholly or in part, my first law of prices at once applies. Prices
decline. Now the governments of Germany and Italy adopted a dearer substitute
for silver, and lost a great deal by the operation; the former a considerable part
of the indemnity which it extorted from France after the war of 1870.
"The other two (diminishing) causes of price changes are slow in coming
into operation. There is very little evidence that in any department of human
industry, improvements in the process of production diminishing cost are
traceable. For centuries, abundant evidence shows that no such improve
ments were made. I will mention two instances in which distinct progress
was made and is traceable in diminishing prices. These, the most marked
examples which I have seen, are paper and glass. There is not, I believe, any
information in existence as to what improvements were made. But when
prices begin to rise, the money value of these two articles is either stationary
or sinks. It is certain that the demand did not fall off, and when prices were
rising all around, the fact that any alteration in the price of these two articles
was in the direction of cheapness is a proof which no direct testimony would
strengthen. (Note: automobiles also were reduced in price during the period
from 1905 to 1933, due to economics in production.) Diminished cost is exhib
ited in several ways:
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1 It may be that less time is required in order to bring the thing into a mer
chantable condition, for the saving of time is a saving of interest, risk and
profit. Thus in the breeding and management of animals, the agriculturist
whose skill shortens the time to one-third in which his stock is brought to
market, gains at first the whole profit of his economy, till the skill being
diffused among all farmers, his advantage is absorbed in rent.
2 It may be that what has hitherto been intractable by any known laws of
nature is found to yield on the discovery of a new law to which it is
amendable. Such was the case with those iron ores which contained phos
phorous, arsenic, and sulphur, and were of no economic value until the
discovery of Bessemer's converter process. In general nothing has been
more noteworthy than the economy of what has been conceived up to a
certain time to be mere waste.
3 It may be that the economy is in the processing. At present by the
improvement of furnaces, a ton, say of pig iron, requires not more than
one-third of the coal or coke that it required twenty years ago in order to
make it merchantable.
4 It may be in the manipulation of the product. It is not easy to define raw
materials. Under certain circumstances what seem to be finished goods
are raw materials for another product, if they are required in order to
achieve a future economic result. Clothing in a waxwork exhibit are raw
materials; to most of us they are finished goods which have a final and no
ulterior use. But the processes by which products are handled for one
stage or another of a merchantable article are the subject of incessant
improvement and modification.
"Now in all these four forms of diminished cost, and I am far from having
exhausted them, no appreciable development has been or could be traceable
until comparatively recent times.
"Improvement and economy in the cost of freight is also a matter of very
recent experience. When after the year 1600, the English East India Company
was formed, it took more than two years to double the Cape (of Good Hope,
Africa, to India) to collect a cargo of goods and return. At the present time the
journey backward and forwards is achieved in two months. But it is not only
accomplished in one-twelfth of the time, but with much greater safety, and
with less than one-twelfth of the relative cost. Means, too, have been invented
by which the market may be visioned and anticipated, balances due from
either side, constantly in old times transmitted at great risk and cost, are writ
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ten off against each other and by monetary communications. Navigation, once
a knack, is now an art; the astronomer, the meteorologist, the physicist, have
been pressed into the services of trade, and the man who at first sight is merely
a student of knowledge for the sake of it, is constantly discovering and arrang
ing facts, which the economist who interprets results instead of being engaged
in barren speculation, discovered to have played their part in reducing the cost
of production and exchange. For as I have said more than once, though the
power of man to appropriate the forces of nature is necessarily limited, no one
knows, and no one will ever know, what those limits are.
"Now I know that much of what I have just said is part of the commonplaces
of industrial history of which you may read much. But I do not propose to
trouble you with the status of what I may call the saving of waste and friction.
It will be clear that what I have dwelt on has its past in that machinery of pro
duction and trade, the concrete illustration of which is high and low prices, the
interpretation of which is the object I have before me.
THE MONEY THEORISTS

"When the facts come before them and are examined and submitted, the first
impulse I have seen even in those who should be better informed, is to assign
high and low prices to the excess and defect of the precious metals. In a time
when no substitutes for money had been discovered, and no efficiency in the
operation of exchange been dreamed of, the plenty and scarcity of money had a
far more direct effect on prices than it has in more recent times. There is no
doubt that one rise in prices for example was affected between 1541 and 1582,
and another between 1583 and 1642, and a third of far smaller significance
between 1643 and 1702. But it is certain that the first modification was due to
the currency and certain peculiar facts connected with it; the second was due to
the influx of the precious metals, and speaking generally, to that alone; while
the third was a much more complicated one, and can be referred to only doubt
fully and slightly, to currency influences at all.
"A country which does not produce the precious metals itself procures them
by the operations of foreign trade. Now England, until the rise in prices at the
beginning of the 17th century when it is unquestionable that the supply came
from the New World, supplied itself, with silver, as I have told you in a previ
ous lecture; for silver is rarely found in Europe, except in conjunction with
lead, and England did not, if we can trust the accounts given of its trade,
import lead at all, but on the contrary was a source of supply to the western
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part of Europe. From this country, western Europe and in particular France and
the Low Countries procured the main of their supplies. The superficial gold
supplies of the British Islands was probably large in pre-historical times, espe
cially in Ireland, where the use of gold ornaments was very general, as the
collections of the Royal Irish Academy show. The circulation of gold was, how
ever, trivial, and remained trivial until the 17th century, all European countries
using a silver currency. Some even used a bullion of mixed metal local cur
rency, an abomination which circulated up to fifteen years ago in Germany and
Switzerland. The gold currency of Italy in the 13th and 14th centuries was
chiefly if not entirely drawn from Byzantine reserves.
"I purposely at this stage entirely ignore the effect of paper currencies; such as
existed, at the epoch when the cheapness of money affected prices, were local
and were limited to the operations of merchants. It was not until after the
Restoration that the circulation of goldsmiths' notes was general, and then was
only general in London. The denomination of the notes was high and remained
high. So little profit indeed was derived from them by private bankers, the suc
cessors of the London goldsmiths, that at a doubtful period in the middle of the
18th century these bankers retired their notes, as in effect since 1844 private
bankers who retained the right of issue have nearly retired theirs also. To all
practical purposes, then, the circulation of the public was, and remained, met-
alic, from the earliest date of recorded economical history down to the great
event which I referred to in an earlier lecture, the suspension of cash payments,
when a perfectly new departure was made.
"England, then, from early times down to the beginning of the 17th century,
got and did rely on its own resources for its own supplies of currency, and
though as I have stated, a restraint was put on the export of precious metals, it
is obvious that if it were the interests of the merchant to export, there was no
machinery in existence that could hinder him.
"Now up to the time of the great Plague the average price of lead for the pre
vious 90 years was 53s3d the fother. After the Plague, for 50 years it was
128s4d. But during the next 140 years it was 73s9d, and the price was declining
during the early part of the 19th century. Now cheap lead implies a more abun
dant supply of silver, and, of course, if a foreign market was ready to take off
an excess of product, it would do so without prices being heightened, had the
silver as the law intended found no exit from England. The further evidence of
the effect on prices is conclusive on the subject. There was a regular out-flow of
silver from England and into western Europe until the new source of supply
from Mexico and Peru made the cost of English silver too considerable for its
profitable extraction, at least for a time.
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"Now the value of the precious metals at the place of their origin depends upon
the cost of the production, just as the value of everything else does. It is pre
sumed that the people will not undergo the severe and dangerous work of
mining unless they get the compensation which is anticipated by all industrial
agents. But here we should remember that another principle comes in. Those
callings in which exceptional profits are a characteristic, i.e. profits depending
greatly on chance, are exceptionally attractive. The more tickets, says Adam
Smith, a man takes in a lottery, the more certain he is to lose. But the fact that one
man has drawn a great prize in a lottery attracts many who certainly will not; for,
says the same astute author, people always think their own good fortune and
their own abilities at least equal to that of their neighbors. Longer experience of
mankind than most of you have has convinced me that Smith's observation is
sagacious and accurate and you need not think yourself cynical if you hold the
same opinion. Now this gambling spirit operates powerfully in mining.
"But in countries which do not produce the precious metals, the value depends
on the cost of acquisition, i.e. on the cost of the commodity against which they are
exchanged. Of course, in no exchange can you separate the cost of acquisition from
the cost of production, but in the exchange of goods, against gold and silver, the
acquisition is more obvious than that of production. Now the difference between
the cost of the article produced and its exchange may be low and its exchange may
be high. The cost at which Phillip II of Spain procured the precious metals, in his
Plate fleet, was low, for they were procured by a tax on the mine adventurers, who
were permitted to wear out the native population by compulsory labor.
"Insofar as the Dutch and English appropriated these treasures by privateer
ing, the cost of acquisition was comparatively low. But they were chiefly
exchanged against goods purchased or procured by the Amsterdam merchants
in Cadiz and Seville. Except for the privateering, insofar as the English traded
with Holland or Spain, no portion of the treasures of the New World would
have entered into English currencies. Still, from the beginning of the 17th cen
tury, the English have imported gold and silver bullion, and have done it by
their trade. The home supply of silver became insignificant. Now it is plain that
the country which procures the precious metals with the greatest ease can always
obtain them in the greatest plenty, and if nothing intervenes to obviate such a result,
will insofar as prices are affected by the precious metals exhibit the highest average
prices at least in articles of unrestrained import.
"But there is a case which checks the likelihood of a high level of prices in a
country whose trade gives it a great control over the supply of gold and silver
which are produced and exist. This is the amount of foreign debt which is held
by the exchanging or importing country. If a country, say England, has made
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great loans to other countries it has generally created the loans by export, and
when lending is brisk the export trade is active. But it receives the interest on
its loans by imports, especially of raw materials, and when the indebtedness is
heavy the debtor country is forced to press the produce by which it liquidates
its liabilities on the importing or creditor country. The effect of this operation
may be to induce the phenomenon of continual over-supply, and with it the
excessive cheapening of materials. This result is aggravated if the debtor and
exporting country adopts a protective tariff, for by this policy it curtails its own
power of exchange, and is constrained in order to meet its obligations to force
on the market a larger amount of its own goods. I mention this here because it
has its effect on the circulation of money. It is of greater significance still when
one considers its effect on the progress of young countries.
"No country takes more money than it needs for purposes of circulation and
for the support of its paper substitutes. It is quite likely that it knows with so
much exactness that the want can be supplied by discretion, that the banks can
leave the adjustment of currency in circulation to the bullion merchant who
watches the ebb and flow of national money with the intelligence and acute
ness which comes from experience. But the function of the bullion dealer is
after all that of a middleman only and the circumstances must be provided
before the middleman can intervene.
"Now I cannot help but think that a country which has not only an active
trade but is an extensive creditor of other countries has, by virtue of the other
position, a far larger power over international money than one which is not in
this position and that it was, in the first place, the magnitude of its trade, and
in the next, the enormous amount of foreign debt which it holds, which made
and will continue to make London the monetary center of the world, and able,
with the least possible rise in the rate of discount, to attack the store of interna
tional money most effectively.
"I have now, I trust, stated with sufficient distinctness the laws which govern
prices, and have indicated how useful they are. They are, you understand,
those which effect temporary exaltation and depressions as scarcity and plenty
characterize supply. The other causes of high and low prices are permanent in
their character, and may have a long, perhaps an enduring, effect on societies."
PRACTICAL APPLICATION OF KING'S LAW OF PRICES

And now for the practical application of the observations made in the 17th cen
tury by Gregory King, and the later principles evolved by James Thorold
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Rogers, whose rank as an economist is almost equal to that of the father of eco
nomics, Adam Smith.
We have quoted in detail from Rogers because the principles he lays down,
particularly concerning the effect of money on price levels, and the effect of
international trade, were a major factor from 1929 through 1936. Abandonment
of the gold standard by most of the countries of the world, and the revaluation
of the value of their money by Italy and France, have for precedent these obser
vations from Rogers. Also the effect on the price level of wheat, of the efforts of
Argentina, Canada, and particularly Russia to liquidate their debts to England
and Europe through the forced sale of wheat, are matters of record. The obser
vations of Rogers also throw light on the changed status of the American
nation from a debtor to a creditor nation.
In the application of King's theory we go back to the definition of the
"Natural Price" which is the price that returns to the producer the rent of his
land, the cost of his labor and interest on his investment at the natural rate.
This is the "common rate" outlined by Gregory King, and from which he drew
his conclusions concerning the ratio of price change to production change. In
our practical application of it we simply assume that over a period of years the
price of wheat will, in a free and unrestricted market, especially in a country
capable of producing a surplus, maintain itself in its normal relationship to
other commodity prices. In other words, the "common rate" of the exchange of
a bushel of wheat for other commodities is its natural rate.
Rogers says that Gregory King did not intend to make a definite measurement
of the supply to determine that it was a certain arithmetical proportion above
or below normal. Rather, he said, "Gregory King's proportion though undoubt
edly sound in principle is hypothetical in form." We have found, however, that
more or less definite measurement of the supply as compared to a normal may
be made by taking the total production of the 25 major countries of the world
and comparing that actual production, or rather the total available supply, with
the recent averages of that supply.
In Table 4.1 we simply take the reported production by countries, and add the
actual exports from Russia during recent years inasmuch as its production and
home consumption are so variable and figures are not available promptly. Then
add the world reported visible supply, August 1st of each year, as reported in
the Chicago Journal of Commerce, for a total supply. Then to determine a
"normal" supply for the year, we take the average of the last five years includ
ing the current year. Also, the average of the past two years preceding the
current year. Then these averages are averaged. We assume, in doing this, that
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Table 4.1 Effect of Supply on Price
World U.S. Commodity Wheat Price to

Crop Wheat Wheat Price Curve Price Curve %
Year Supply Supply at at at at
High Low High Low High Low
1908-09 95% 95% 9 7c 91c $1.35 84c 139% 92%

1909-10 108% 99% 109c 105C 1.19 93c 109% 88%
1910-11 107% 94% 99c 100c 1.05 84c 106% 84%
1911-12 107% 96% 109C 101C 1.19 85c 109% 84%
1912-13 104% 111% lllc HOC .95 83c 85% 75%
1913-14 102% 113% 101C 109C 1.00 82c 99% 75%
1914-15 97% 118% 114c 101C 1.67 76c 146% 65%
1915-16 108% 122% 129c 136c 1.38 99c 107% 73%
1916-17 91% 80% 178C 162C 3.25 142c 183% 87%
1917-18 87% 75% Fixed Prices
1918-19 98% 117% Fixed Prices
1919-20 100% 118% Fixed Prices
1920-21 100% 99% 247c 129c $3.10 119c 125% 92%
1921-22 105% 96% 135c 133c 1.50 98c 111% 83%
1922-23 100% 100% 159c 142c 1.29 98c 91% 69%
1923-24 110% 95% 155c 150c 1.13 96c 72% 64%
1924-25 96% 103% 164c 144c 2.06 102c 125% 70%
1925-26 100% 86% 170c 168c 1.00 133c 111% 79%
1926-27 104% 103% 146c 149c 1.37 129c 93% 86%
1927-28 104% 108% 159c 158C 1.72 121c 108% 76%
1928-29 112% 110% 148c 146c 1.46 93c 98% 63%
1929-30 99% 109% 148c 134c 1.48 98c 100% 73%
1930-31 108% 100% 127c 107c .99 58c 78% 54%
1931-32 105% 100% 95c 100c .68 44c 71% 44%
1932-33 98% 99% 98c 82c .56* 41 *C 57% 50%
1933-34 92% 95%
Notes: Wheat price is approximate price in round figures. The price shown for the Commodity
Curve is the price at which it was when the corresponding high or low price of wheat actually
was made. This accounts for the "high" of the Commodity Price Curve being sometimes lower
than the "low". It is to be noted that generally speaking, the World Supply of wheat is die domi
nating influence on the price, with exceptions when conditions within the U.S. are of sufficient
variation from normal to force more or less independent price action.
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the world, and particularly the buyers and sellers of grain, judge the current
supply from the supply that has been available during recent years.
This method of computation, however, will not make due allowance for
changes immediately following a series of large productions, unless the perma
nent consumption of wheat in the world increases correspondingly. One must
still weigh the exportable surplus against the import requirements. The supply
of wheat actually consumed in the world has increased steadily for as far back
as records are available, and there is no record to show that low prices over a
period of years have greatly diminished either the planted acreage or the actual
production. Instead as the supply increased, so the consumption increased.
This is an observation particularly appropriate to the condition of increased
supply prevailing from 1927 through 1933. But for 1932 and 1933, one must
take into consideration not only the actual total supply, but the rotation of
export surplus to import requirement as outlined in Lesson 2. In fact, in practi
cal application these two methods of analysis of Supply and Demand must be
combined in study.
By applying this method of arriving at a normal supply, and by making a
comparison of the wheat price to the Commodity Price Curve, we find that the
ratios of price movement to supply and requirement as evolved by Gregory
King back in the 17th century apply strikingly during this modem age 250
years later.
Summarizing, it is of the utmost importance to remember that the price
lowest in level will advance at the most rapid rate. That observation by King,
and dwelt upon by Rogers after his study of prices from 1400 to 1887, is
embodied in our Law of Price Relativity. It should also be remembered that
when there is a defect in the harvest and the price is low from a previous over
supply, then the price must rise from its low level to one high in price as
compared to the general average of commodity prices. Or, conversely, when
the price is high from a previous shortage or deficit in the crop, and the suc
ceeding supply is large then the price will fall to a level low as compared to the
general level of commodity prices. And in that movement, the proportions out
lined by Gregory King will be found to apply to an astonishing degree.
Therefore, when the price is low, particularly for both wheat and com, and
these two commodities form a Line or a congestion and close in new highs
above that congestion, then one may logically assume that the movement has
started back toward the Commodity Price Curve, particularly if the relation
ship of export surplus to import requirement seemingly indicates that there
will be a deficit in the supply. And the advance above the commodity curve can
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be expected to follow the general proportion outlined by Gregory King.

Conversely, when the price of com and wheat are both high, and there has
been a congestion, one can logically anticipate that the movement of the price
will be back toward the Commodity Price Curve and as far below it as the ratio
of supply to requirement indicates according to King's ratios.
Thus we lay down the fundamental bases of the big swings in grain prices
and in general commodity prices. The next Lessons will be devoted to the
details of anticipation of these movements because it is on these big move
ments, from very low to very high prices, or from very high to very low prices,
that the fortunes in the grain markets are made.
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Lesson 5
DAILY ACTION
■ A Mechanical Method of Market Analysis

■ Definitions
DAILY ACTION
Lesson 1 was devoted to the Relativity of Prices, and in that Lesson it was
pointed out just as emphatically as possible that prices which are lowest in
relation to other commodities will rise the most drastically when Supply draws
nearer to Demand.
In Lesson 2 it was proven definitely and positively that when the Supply is
deficient the price has a tendency to rise above its normal relationship to the
average of general commodity prices. Conversely, when the export surplus
exceeds the import requirements, then the price has a tendency to stay below
its normal relationship to other commodities, and the market is a sale when it
gets relatively "high" in price.
In Lesson 3 it was shown that when wheat and com have both been in con
gestion over one price level, and then both sell into new highs, past history
shows that a good advance will usually follow.
In Lesson 4 it was brought out that the price of any article in demand - or of
common usage - rises by a different ratio than the amount of the deficiency of
that article with a defect of 10 per cent in the supply causing a price advance of
30 per cent "above the common rate," while a defect of 20 per cent raises the
price 80 per cent.
These four principles properly applied are all that anyone need know about
prices. In fact, they are the soundest principles possible. The next Lessons will be
devoted to an exposition of their proper use.
In this Course we are aiming constantly toward the plan of trading, of utiliz
ing the markets for profit. In laying out the Course, we have devoted these first
four Lessons to a general exposition of the theories underlying the causes of
price changes. The next six Lessons will be devoted to methods of analyzing
the Price, getting in position to utilize the principles of the first four Lessons.
Then, after a study of the feed grains, we will investigate further causes of the
change in general price levels with their resulting changes in grain price levels.
After that will come the study of the action of the bigger traders - and then
back to the general plan of trading.
Let us impress upon you the desirability of becoming thoroughly grounded in
the reading of the market chart. But let us also state that we do not regard it as
absolute. It is as necessary, in our opinion, in market operations as the Daily Cash
Journal or a cash register is in the conduct of your business. But the man who
operates only on the basis of the graph is as lazy or as incompetent as the man
who keeps no other records for his business than those shown by the cash register.
William Peter Hamilton, Editor of The Wall Street Journal, accurately described the
market graph when he declared that while the daily movements may be misleading,
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they must be recorded and watched because, "out of the seemingly contradictory move
ments develops a pattern easily recognized as having a forecasting value."
He also expressed his contempt for the strict chart trader by saying, "The man
who played the stock market on the averages from day to day, ranking his
occupation no higher than that of the punter of Monte Carlo, would be no
better than the gambler with a system, whether he bases his conclusions on the
averages or not, and would meet a like fate, sooner or later."
It is because we concur in absolutely every bit of that statement that we com
bine in this Course the fundamentals on grain and business and the charts and
methods of reading charts. In likening the Stock Market Averages to a barometer,
Hamilton declared, "What the barometer needs, of course, is expert reading." We
will proceed to analyze methods to develop that "expert reading."
The primary purpose in keeping graphs of the market is to see at a glance
exactly what the market has done in its price action not only during the current
day but in the past. With the graph the start of a movement may be noted more
quickly; objectives calculated; and resistance points in the market as set up by
previous work may be noted.
The first step, of course, in preparing a graph of the market is in the securing
of paper. The writers of this Course use a very good grade of graph paper. This
paper comes in rolls and also in sheets, size 18 by 23 inches. For the record of
the past years, in which com and wheat are kept on the same graph, with the
future nearest to delivery being recorded, it is necessary or at least desirable to
have a space of considerable magnitude. We have this graph of wheat and com
from the time trading was resumed on July 15, 1920, to date. It ranges from a
price of 20$c to $2.75. For the purpose of recording the congestions or "Line" in
conformity with the Dow Theory applied to grain, it is, of course, not only nec
essary, but invaluable. We roll this graph for past years, having about three
years in view, on a wall space, covered with wall board about six feet square.
For the individual future we use one sheet for each future. By turning the
paper lengthwise, there is sufficient room to record the entire life of the future
and still permit ample room for the method of anticipation known as the
"Circumscribed Objective" which will be discussed in Lesson 8. For the use of
this method it is highly desirable that the graph paper be of exact measure
ment, with the larger and smaller squares being in exact accord.
It is, of course, entirely optional with the student as to the kind of graph paper
he utilizes. But for best results the foregoing statement as to absolute accuracy
in the spacing of the lines is a necessity. This high-grade paper can be secured
from Pickell-Daniel, 176 W. Adams St., Chicago, $2.50 for twelve sheets, 18 x 23
postpaid. Any other paper of similar design is perfectly all right.
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DAILY ACTION
In preparing graphs of the market, the first record to be kept is, of course, that
of the daily range. By this is meant the high and low for the day, recorded with
a line extending from one extreme to the other, and with a dot showing the
closing price. Illustration is given in Pictograph 5.1. Incidentally, we have
found after years of experiment, that this small-size graph paper is more practi
cal, even though it is a little harder on the eyes, than a graph paper of wider
dimensions, because a greater range can be recorded and one is not so fre
quently bothered by the necessity of pasting on additions to the graph. At that,
however, one may expect the market to run off the graph paper at times.
In Pictograph 5.1 it is to be noted that we utilize the distance from one heavier
line to the next as one cent in the market price quotation. The lighter lines
Pictograph 5.1 December wheat 1933
This graph is of December wheat, for dates given, and shows a method of keeping daily range
-85-
divide the cent quotations into quarters and the eighth quotations naturally
come in the spaces between the quarter lines. The closing quotation on wheat
or com, and particularly on wheat, is usually a "range quotation," that is a
close with a spread of one-eighth to one-half or even more. Usually, we record
simply the average of the quotation for the close. Each day's market range
occupies a single perpendicular line always working toward the right.
Let us make here the first practical observation on the daily range - the wider the price
spread at the close, the more likelihood there is that trading was active on that close and
the probabilities are that such a wide close as three-eighths cents and more on wheat will
be followed by an active market the next day.
The second observation, frequently very important in scalping operations, is that
where the opening of the market is on both sides of the close of the previous day, then
one may usually expect that the market of the second day will sell both higher and
lower (or lower and higher) than that opening quotation which "covered" the previous
close. Thus, if the close is at, say, a range of i to $ (it makes no difference what
the full cent figure may be) and the opening the next day is £ to £, then after the
market sells higher than the opening or to $ or above, in the great majority of
cases it will come down and sell at £ or lower. Conversely, if after such an open
ing the market sells through the low price of the opening range, or below the £
figure, it will in the majority of cases turn around and sell higher than the high
(1) of the opening range. This observation will frequently keep a trader from
selling near the low for the day, or buying near the high. Its percentage of accu
racy runs probably 90 per cent.
In recording the daily price range, we do not keep the opening quotation on the
graph of the daily range. Rather, we keep it on an arithmetical record of the market
for the day as it is observed on the blackboard, gotten by telephone, or by radio.
By recording the closing, and then noting the opening, we see whether or not the
above general rule can be expected to apply in that particular day's market.
A third observation on the daily range is that when the market at 12:00 noon
is higher than the market at 10:00 o'clock in the morning, then usually the close
of the day will be at least as high as the 12:00 o'clock market and higher than
the 10:00 o'clock market. Should the market turn over during its last 1£ hours of
trade, it will usually come back up to the 12:00 o'clock quotation either the next
day or the day following. Conversely, when the 12:00 o'clock market is lower
than the 10:00 o'clock market, the close will usually be lower than the market
of 10:00 o'clock. Should a rally come in the last few minutes of trading, a break
can usually be expected the next day or the day after, that will bring the market
back to that 12:00 o'clock quotation.
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DAILY ACTION
For the purpose of study, so that you may learn to analyze the markets of the
future and utilize the methods taught herein, we show herewith (Table 5.1) the
opening, high, low, and closing prices of the May wheat future from June 26 to
October 21, inclusive, of 1933. We suggest that you make a graph of this market
as it will be used in the next few Lessons for purposes of illustration. Make
also pictographic records of a similar nature of the current markets so that you
can observe in them the things learned from the Course.
Probably the most important individual day is what is termed a "Turn-Down
Day" or a "Turn-Up Day." This comes after the market has been moving in one
direction for some little time or distance. In it, for a Turn-Down Day, the
market opens within the range of the previous day, and preferably lower than
the close of the previous day, sells into new
highs, and then turns to close lower than the TURN-UP DAY
opening of that day's market and also lower

than the close of the previous day. It is not
entirely necessary in this day, however, that it
should open within the range of the previous
day, or lower than the previous day's close. On
July 18, 1933, it is to be noted that the market
sold into higher ground than on the 17th, and
then turned to close lower than its opening and also lower than the previous
day's close. It was an indication that a turn was coming, particularly after
"gaps" had been left in the previous advance and that advance had been very
sharp and extended.
By "gaps" we mean that the low of one day was higher than the high of the previous
day's range, such as had occurred in this particular advance in the markets of the
14th, and 15th, also the 8th and 10th, also the 1st and 3rd of July, and the 29th of
June and 1st of July. These "gaps" will be apparent to you on your graph.
Generally speaking the market is a good mason, or carpenter. It will not leave
many such holes in its market structure and will usually come back to fill them
up. The fact that it goes so fast that it does not fill in all of the interstices of its
market structure is indicative that soon a reversal will come. This reversal will fre
quently be foretold by such a Turn-Down Day as that of July 18,1933. Students will
be given additional grain futures to graph as the Lessons proceed and this obser
vation should be checked and the student should thoroughly familiarize himself
with it. It is one of the best observations for telling when a market is nearing the end of a
precipitate advance (or decline) and therefore where the student should protect
profits jealously and be prepared to turn with the turn of the market.
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Table 5.1 May wheat future 1933
Date Opening High Low Close
June 26 94i 99} 94} 99-99}

June 27 101-02 106} 101 105-105}
June 28 101-100 104 99} 99}
June 29 99} 101} 97} 100-99}
July 1 103}-104 104} 103 103}-}
July 3 106}-107 108} 106} 108-7}
July 5 109—} 109} 106} 106}-}
July 6 106}-06 108} 105} 107}-}
July 7 109-} 110} 106} 106}-}
July 8 106 108} 105} 108}-}
July 10 108J-07 110} 107} 109}-}
July 11 HI-} 114 111 113}-}
July 12 112}-13 115} 112} 114}-}
July 13 115}-} 115} 113} 113}-14
July 14 113}-13 118 112} 118-17}
July 15 119}-} 123} 118} 122}-}
July 17 123 127} 122} 126
July 18 127}-08} 128} 123} 125}-25
July 19 124}-} 125 112 113-14
July 20 112-110} 116 97} 100-01
July 24 103-01 103 100 100
July 25 100}-01 103} 100} 101}-}
July 26 104}-05 107} 104} 107}
July 27 113 115 110} 114}-15
July 28 112-110} 113 109} 109}
July 29 107}-06} 108 104} 104}
July 31 102}-101 102} 99} 99}
Augl 104} 104} 104} 104}
Aug 2 109} 109} 104} 108-}
Aug 3 107-06} 109} 106} 109-08}
Aug 4 106}-} 107} 105 105}-05
Aug 5 105-04} 105} 103} 105}-}
Aug 7 105}-05 106 104} 105}-05
Aug 8 105-05} 106} 103} 105-}
Aug 9 105}-} 107} 105} 107}-}
Aug 10 107}-08 109} 106} 107}-}
Aug 11 106}-} 106} 102} 102}
Aug 12 99} 99} 99} 99}
Aug 14 99} 99} 99} 99}
Aug 15 99} 99} 99} 99}
Aug 16 94} 94} 94} 94}
Aug 17 89} 99} 89} 97-96}
Aug 18 97-97} 98} 91} 91}
Aug 19 91}-92} 96 91} 95}-}
Aug 21 95}-96} 96} 93} 94}-95}
Aug 22 94}-} 97 94} 95}-}
Aug 23 96 97} 95} 95}-}
Aug 24 95-94} 96} 93 93}-93
-88
DAILY ACTION
Table 5.1 Continued
-89-
In the market of September 11, there is OUTSIDE DAY

a good example of a Tum-Up Day, this
particular Tum-Up Day also being
what is termed an "Outside Day." It is
sold outside the previous day's range, sell
ing both lower and higher than that
previous day's range, and closing
strong back upward into the price
ranges that had prevailed during the
market from the 17th of August to that
Tum-Up Day of September 11,1933.
Eight market days after this Outside Day of September 11 occurred another
Outside Day, that of September 19th. This was followed by an Inside Day on
September 20,1933. An Inside Day is of course one that sells within the range of the
previous day. Eight days after this Inside Day of the 20th came another Inside Day,
that of September 28th. These Inside or Outside Days will very frequently follow each
other eight to nine days apart. This observation will
frequently enable the trader to anticipate a turn INSIDE DAY
in the market, particularly if an Outside Day is

"in line," the market has been selling downward,
and on this eighth or ninth day it sells lower than
the previous day's range. Should it then turn,
and sell above the closing price of the previous
day's range, one should watch most closely for not
only a Tum-Up Day, but also an Outside Day that
would signal a reversal in trend.
Conversely, if after a market has been advancing and an Outside Day is "in
line" and on this eighth or ninth day the market first sells higher than the pre
vious high, and then turns to sell below the closing price of the previous day as
well as the opening of this eighth or ninth day, one should watch most closely
for an Outside Day which would also be a Turn-Down Day and the start of a reversal
in market trend.
Another general observation which will be found to occur frequently and
which may be the signal end of an advance (or a decline as the case may be) is
an Outside Day closing at its extreme, such as that of the 19th of September,
1933. In this particular instance, the market had been advancing and then on
the 19th it first sold lower than the previous day's range and then turned to
sell higher and closed at the extreme high of the day. On the face of it, there
-90-
DAILY ACTION
was very good buying at the close of that day's market. Should that buying
have come from the covering by those who had sold short (see definitions at
end of Lesson), then their very covering would weaken the technical position
of the market because the buying power that would be expected from their
covering had been expended by that very covering. So, unless that buying was
renewed immediately the next day with new investment buying which would
carry the market on upward and attract still more buying, the market position
would be greatly weakened from the fact that the shorts had covered. One
who was "long" grain should on the night of the 19th of September have
placed stops at least below the low of that day's range and have been pre
pared to raise his stop-loss or selling order up closer to the market if the
buying which had characterized the close on the 19th was not resumed imme
diately in the market of the 20th.
It may be taken, then, as a general observation that where there has been an
advance in the market and an Outside Day comes with the close full at the top of the
day's range, then one should guard jealously the profits which are his from purchases
made at a lower level and give the market a chance to show that the buying will
continue before making new purchases. The closing of a market at the extreme high
of an Outside Day after an advance is frequently more of a signal of weakness and that
the end is approaching than it is of great strength in the market. Conversely, the close
of the market at the extreme low of an Outside Day after the market has been
declining is frequently a signal that the end of the decline has been reached or
is rapidly being approached. Such a close, and such a day, coming after an
extended decline, is frequently caused by the final throwing overboard of grain
that has been purchased at higher levels; and therefore its sale to new buyers at
the much lower levels relieves the market of its dangerous weakness because
of the weight of this distressed grain hanging over it. Its absorption at the
lower level by new buyers who have new margin to back up their purchase at
the lower levels strengthens the technical position of the market.
Another action of the market within the day is what is termed as a "Triple
Reverse Day," an idea of which action can be gleaned from the accompanying
illustration. By a Triple Reverse is meant a market which reverses its first movement
three times. In the illustration, one of which closes down and the other up, it will
be noted that the first one initially sells higher after the opening, then reverses its
trend to sell lower than the opening, then again reverses to sell into highs for the day,
but ends up by selling into new lows. The converse, of course, applies when it
closes at the Top. It is very evident in such a market that a sharp conflict is in
progress between the buyers and sellers. After the market has been advancing,
-91-
and puts in such a Reverse Day closing at the

bottom, the fact that the selling has exceeded the
buying after two sharp successive battles fre
quently indicates that the turn has come and the
trend is starting downward.
These Reverse Days will come more fre
quently, however, in Bottoms (that is when the
market has been declining and is making a
congestion or Line preparatory to an advance)
than at the Tops. It is observed that in this kind of a market there would be a big
volume of trade because of the distance covered during the day, and when this
kind of market is observed it is very frequently an excellent indication that a low
is being made and an advance will soon follow.
Frequently this Triple Reverse Day will also be either a Turn-Up Day or a
Turn-Down Day, and an Outside Day in addition.
There is one more day within the Daily Action scope to which your attention
should be directed. It is termed a "Narrow Day" and although it may have a
rather narrow range, its appearance is something which calls for caution rather than
aggressiveness in a market position.
The theory on which the Narrow Day derives its importance is as follows.
After a market has been in congestion for some time and then starts out of it, the same
news, accompanied by the same aggressive buying, should continue immediately there
after, with sufficient power to carry the market well above its congestion, get it
into a running advance, and thereby attract purchases to itself. We have
stressed before, and will stress again repeatedly, that Bull
markets are based on excitement. Therefore, when the market
is out of its congestion, but refuses to run and instead simply
hangs back in a narrow range, it is apparent, first that the
aggressive buying has failed to follow through on the advance
and/or that the early buying was merely covering by shorts
who were scared of their positions. And with that covering
having been concluded, the market has lost its Bull flavor.
Such a day was that of September 20,1933. Following as it
did the big Outside Day closing on the top on the 19th, it was especially signifi
cant that the buying power was temporarily exhausted. The break followed.
Similar Narrow Days will frequently occur on the lower side of a congestion. Bear
markets are generally based on despair - the opposite of excitement - and when
the market starts out on the Down Side from its congestion, the first movements
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DAILY ACTION
should be such as to cause real liquidation at the same time it encourages believ
ers in lower prices to sell more grain short. A Narrow Day, coming just when the
real liquidation should start, frequently discloses that the selling by distressed longs at
the Bottom of the congestion has been absorbed by new buyers in such quantity that
further liquidation is immediately stopped and those who have sold short are
driven to cover their purchases, thereby helping to elevate the price.
In the Daily Action of the market it is very proper to include the action of the
market on Saturday and Monday. In considering this, it must be appreciated
that with a new crop of wheat maturing somewhere in the world every month,
and with each day of the year seeing the wheat of some major country devel
oping toward maturity, there is always the possibility that nature during a
period of 24 hours may strike in such a way as to change sharply the potential
situation of Supply and Demand. When this time period is extended to
36 hours, the possibilities of damage are increased just so much further. Thus
the period of closed markets from Saturday noon until Monday morning causes many
traders to close out their trades over the weekend.
On the other hand it sometimes causes others to make commitments anticipating that,
over the extended period, additional news of a nature prevailing on Saturday will
cause the market to start on a decided movement. For instance, if late news of
Saturday confirms to a degree sufficient to cause an advance the news of say
Wednesday, Thursday, and Friday that the crop in Kansas is badly in need of rain
and further deterioration might be expected unless it comes, then the buyers
during those last days of the week might make purchases with the expectation
that the weather of Saturday afternoon and Sunday would be such as to cause
the expected deterioration. This, with shorts covering for fear of that news, might
-93-
carry the market up to a strong close on Saturday. Usually in such cases, the market
on Monday will open very near to the point where it closed on Saturday. But should the
news on Monday morning be such that the ideas of the buyers are changed or
that the sellers reinstate their sales to such an extent that the buying is taken care
of, and the market turns down with the high of Saturday and Monday being at approxi
mately the same price, it is one of the best indications from Daily Action that a turn
in trend has come. Usually it will last through the markets of Tuesday and
Wednesday, and sometimes for a very extended reversal of trend.
And, of course, the converse of the above applies when the market has been
declining during the week, closes low on Saturday, but on Monday, after an
opening near the Saturday close, it turns around and starts upward. It will very
frequently continue in that direction long enough and far enough for good
profits to be made. The logic of the movement is seen from the aforegoing
description. Table 5.2 shows a typical Saturday-Monday Bottom from which a
big advance came.
There are times, however, when third action of the market on Saturday is
especially significant. This applies particularly when the market has been in
congestion, awaiting the new incentive that would carry it out for a good run,
and the interest in the market has been rather stagnant. In such markets, the
general tendency of the traders is to even up on Friday instead of waiting for
Saturday. Should the news of Saturday be such as to indicate that over the
weekend there might be developments which would change the news and
bring action out of lethargy, the market very frequently indicates it on Saturday
near the close. This indication might be of damage to come to the crop and the
market closes very strongly. Then, as is said above, it can usually be expected
that the market of Monday will open near the close of Saturday. Should the
news over the weekend be in accordance with that of late Saturday, and suffi
ciently bullish to generate new buying, then the market of the week following
will frequently start on a running advance.
Conversely, a change in the news showing improvement in crop conditions or
the failure to develop of some news that the Bulls have been counting on to
help them in their position might bring a start of such liquidation toward the
close on Saturday, carrying the market down toward the bottom of its conges
tion. Unless a decided change comes into the picture over the weekend and the
market put in a Saturday-Monday Bottom, the liquidation would be renewed
on Monday with the starting of a real downward movement.
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DAILY ACTION
As is said, this indication comes best from a market that is in congestion. It

calls for alertness on the part of the trader, first to get in if the market actually
does start on a good movement, but second, to prevent taking any loss of con
sequence and to go with the market in case of a Saturday-Monday reversal. It is
a place which calls for judgement - but it is also a place offering excellent prof
its to the man with that judgement.
A MECHANICAL METHOD OF MARKET ANALYSIS

In the succeeding Lessons we will give you any number of various factors for
observation similar to those concerning the Daily Action described in this
Lesson. In order that you may become thoroughly familiar with them and not
overlook any of them, we outline herewith a mechanical method of making an
analysis of the market action. In this, a weight is assigned to each of the factors.
A "Market Analysis Sheet" should be ruled off, with each factor that we give
being listed. Not all, of course, will apply every day. But you should go down the
list to see if they do apply and then place their "weight" on the "scale" or market
analysis sheet. These weights should be placed in the column labeled "Bull" or
"Bear" on the side of the market where they fall. Thus, if there was a Turn-Up
Day in the market coming at the end of a decline, we would place a weight of
four points on the Bull side of the market analysis similar to the way you would
place a weight of four pounds on the scale beam if you were endeavoring to
weigh a quantity of grain. If this special Turning Day was also an Outside Day,
we would put an additional five points on the Bull side. If, in addition, it were a
Triple Reverse Day, we would put five more points on the Bull side. And if that
Turn-Up Day were on Monday, with its low near that of the low of Saturday, we
would give it an additional weight of five points. Thus, this single Turn-Up Day
might assume a weight of 19 points in the market scale.
Then we would go on through the analysis of the factors to be described in
later Lessons, strike a balance of the Bull and Bear weight - and it will be found
surprising how accurately this analysis will forecast the trend of the market.
In considering this Daily Action one must always base judgement as to
whether the weight is to be placed on the Bull side or on the Bear side by the
direction of the closing price of the day. Thus, an Outside Day closing near the
top would naturally have its weight thrown on the Bull side of the market. The
following table lists the factors discussed in this Lesson with the weight in the
market scale which we assign to them.
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POINTS
1 Tum-Up Day or Turn-Down Day 4
2 Outside Day 5
3 Inside Day near probable Top or Bottom 5
4 Narrow Day 8.5
5 Triple Reverse 5
6 Saturday, a very strong day or new high prices 5
7 Saturday and Monday high (or low) at near same price,
with close in opposite direction 5
DEFINITIONS
A "Bull" is one who believes that the market is going higher. A "Bear" is one
who believes the market is going lower. A Natural Bull is one who trades only
on the buying side of the market. A Natural Bear is one who prefers the selling
side of the market.
A "Long" is one who has bought a contract for delivery of a specified amount
of grain at a specified future date. A "Short" is one who has sold, without first
possessing it, a quantity of grain for delivery at a future date.
A "Future" is a contract for delivery of a specified amount of grain on a speci
fied market during a specified month. Thus if you buy 5,000 bushels of May
wheat at Chicago at 90 cents, you are "long" that quantity of grain. That is, you
agree to accept and pay for at the rate of 90 cents a bushel in Chicago, during
the month of May, 5,000 bushels of wheat of contract grade, accepting it at any
time during a business day of May that the seller of that contract desires to
render it to you, and at any public storehouse in Chicago where, according to
the rules of the Board of Trade, such delivery may be made. "Except as other
wise provided, delivery on contracts may be made by the delivery of registered
warehouse receipts issued by warehouses which have been declared regular by
the Board of Trade." Under certain specifications deliveries may be made in
grain cars within the Chicago shipping district. The seller of the futures con
tract has the option of delivery of the following grade of wheat at the contract
price - No. 1 Hard Winter wheat; No. 2 Hard Winter wheat; No.l Yellow Hard
Winter wheat; No. 2 Yellow Hard Winter wheat; No. 1 Red Winter wheat. No. 2
Red Winter wheat; No. 1 Northern Spring wheat. Or he may deliver the follow
ing varieties at the following differentials: No. 1 Hard Spring wheat at 2c per
bushel over contract price; No. 1 Dark Winter wheat at lie per bushel over con
tract price; No. 1 Dark Northern Spring wheat at le per bushel over contract
price; No. 1 Dark Hard Winter wheat at le per bushel over contract price.
-96-
DAILY ACTION
On the com futures contract, No. 1 mixed corn and No. 2 mixed com are
delivered at the contract price. No. 1 White com, No. 2 White com, No. 1
Yellow com, and No. 2 Yellow com are deliverable at per bushel over the
contract price. No.3 White com, and No. 3 Yellow com, are deliverable at 2c
per bushel under contract price and No. 3 mixed com at 2$c per bushel under
the contract price.
No. 1 and 2 Rye are deliverable on futures contracts at the contract price, No.
2 White oats are also deliverable at the contract price with No. 1 White oats at
$C per bushel over contract price and No. 3 White oats at l£c under the contract
price. In all cases the seller has the option as to kind or variety of grain he will
deliver according to these specifications, and the place of delivery within the
prescribed warehouses.
A "Stop-Loss" order is an order that is to be executed at a specified price,
higher than the market if it is a stop-loss order to buy, lower than the current
market if it is a stop-loss order to sell. Thus, if the market were at 95 and you
entered a stop-loss order to sell at 93, you would automatically limit a loss if
you were long at a higher figure or preserve a profit if you were long at a lower
figure than the 93. Or, it might be an order that would put you short the market
in expectation that once that much of a break had come, liquidation would set
in and drive the market into additional stop-loss orders to sell which would
carry the decline further. Conversely, a stop-loss order to buy at 97 when the
current market is at 95 might (1) limit a loss on short sales made at a lower
figure, (2) preserve a profit on sales made at a higher figure than the 97, or (3)
make you long grain on expectation that additional buying orders would come
from either shorts or new buyers if there was that much of an advance, either
of which you would expect to advance prices still further.
"At the Market" is an order to buy or sell at the prices prevailing in the
market at the time the order is entered.
"Liquidation" is the term used to indicate selling of long grain, and generally
refers to those with a loss in their holdings selling out to limit that loss.
"Short Covering" designates the buying by those who have sold grain with
out having the actual commodity to deliver. This is applied particularly to
those who buy to take or limit a loss. The old "saw," used by Bulls to discour
age short-selling, is, "He who sells what isn't his'n, must pay the price or go to
prison." To which the Bears could aptly reply, "He whose grain must liquidate,
has the Poor House as his fate." But the wise trader will take the old "saw' as
his guide. "He who fights and runs away will live to fight another day."
"Small losses, big profits" is the motto of this Course.
-97-
Lesson 6
TRENDS
The Movement Graph

The "Coil" Formation
■ Market Weights
■ Definitions
■ Conclusions
TRENDS
The turning of the trend should be the start of all market operations. And market oper
ations should be continued in a manner that will steadily increase profits so long as the
trend continues in that one direction. This is vital.
In Lesson 3, the Line created by the market in congestion was studied briefly in
connection with the Dow Theory In Lesson 5, the Daily Action and its indica
tions were analyzed. Now, let us go into the characteristics of these congestions.
To begin with, let us again liken the market to a good mason or carpenter - it
usually builds solidly. In Pictograph 6.1 study the points of congestion during
the years from 1920 to 1933. Note, for instance, that during 1925 there were two
points of congestion - first from $1.75 to $2.00, and second from $1.40 to $1.60.
In 1926 the market worked thoroughly the price range from $1.55 to $1.75 -
between the congestions of 1925; and when it broke down out of this 1926 con
gestion, it moved clear down through the lower range of the 1925 congestion
and worked, during 1926 and 1927, the price area from $1.25 to $1.50. During
1928, 1929, and 1930, the price area from $1.00 to $1.35 was worked carefully
and thoroughly - each new congestion being over a price level not previously
worked. In the decline of 1930 there were continual rallies to rework each
eighth cent from $1.00 downward to 70c.
The Daily Range graph, consisting of the future nearest to delivery for the
period from 1931 to 1933 shows that practically every eighth cent of price level
was worked repeatedly between 68c and 42c, one congestion of one future
being at a price level left "vacant" by previous futures. Thus, in 1931, the July
future worked for two months in the price range from 55c to 60c. The
September future worked thoroughly from 50c down to 45c. The December
future worked from 51c to 55c. The May future of 1932 worked from 54c to
59c. And so on over to the December future of 1932 which congested from 2{
months from 42c to 46c while the May future of 1933 worked and worked in
the price level from 46JC to 48 Jc. It was a thorough job. When the market got
ready to leave that price area, it had a solid foundation from which to rise.
So it may be said that congestions come at price areas that have not been previously
worked. This holds good also within the individual futures.
This is a very important market observation, particularly where there have
been a number of small, close congestions over price levels close to each other.
When the market starts moving through them it will usually clear the outermost point
of these congestions before it stops.
-101-
THE MOVEMENT GRAPH

For convenience in recognizing the formation made in congestions - which
have definite forecasting value when properly drawn - a secondary graph,
termed the "Movement" graph, is made from the prices recorded in the Daily
Range graph plus intermediary movements of the wheat market of If or more
made during the day. On com the one cent movements should be recorded.
Those who are not near the market quotations, where price movements within
the day may be watched or learned, can secure a minute-by-minute record of
the fluctuations from the Chicago Journal of Commerce which also has other
records of business that will be analyzed for use in this Course.
As stated, the movements recorded in this graph are those of \\<t or more on
wheat. Thus, in the May (1933-34) wheat quotations given in Lesson 5, the first
day's range was from 94J, its opening, to 99±. So, to start the graph, a line
would be drawn upward from 941 to 991, as shown in Pictograph 6.2. The next
day the market opened at 101-102 and sold on up to 104; then, during the day,
it broke to 1011, and again turned to sell at 1061 and closed at 1051- In as much
as the break from 104 to 1011 was \\t or more, the Movement graph is turned
downward to record this action, and then turned upward to 106f From 1051,
the close of the 27th of June, the May future opened off to 100 and then rallied
to 104, which movements are recorded on the Movement graph, going down
ward from 1061 to 100, upward to 104, and then down to the close that day at
991. This will give an idea of the process in constructing the Movement graph.
The general rule is to record all fluctuations of 11 or more, whether made
within the day or in days following each other. But when there are two or more
days in which there is not a movement of 11c, then the time spent in that
narrow range should be recorded by a movement on the graph.
Pictograph 6.2 shows the Movement graph taken from the Daily Ranges on
the May future of 1933-34 given in Lesson 5. Study it until you get the idea
thoroughly. The rule is (a) keep the movement going in one direction until
there is a reverse in trend of 1 Jc or more, whereupon the Movement graph is
likewise to be turned. But (b) if there are two or more days of trading within a
narrow range that does not make a reverse of 1 lc, then the graph should be
turned to indicate the time spent in that range. Similar graphs should be drawn
of the current market futures, such as appear, usually on Saturday, in the
Pickell-Daniel Daily Bulletin.
Incidentally, we endeavor to utilize only one perpendicular line for each day's
movement of the Movement graph, similar to the use of one line for the day's
range. This gives a better idea of the actual amount of time spent in making the
-102-
(
Pictograph 6.1 Congestion price levels in wheat at Chicago from 1920 to 1933
Pictograph 6.2 Movement graph of May wheat at Chicago from price

ranges given in Lesson 5
- 104-
TRENDS
Pictograph 6.2 Continued
various formations which have a forecasting value. It must be understood,

however, that these movements should be put in, no matter how much or how
little time is spent in making them.
The important thing in the construction of the Movement graph is to show the
important movements and particularly those which assume a forecasting value
by conforming to some form of Top or Bottom formation as described herewith.
As one records on a graph the daily range of a grain future it will be found
that eventually the market will move itself into certain formations which are
105-
continuously repeated as the futures

come and go. In Lesson 5 the daily
ranges were shown of the Chicago
December wheat future of 1933 in its
movement from the 25th of April to
Left Shoulder -
the 10th of June. Pictograph 6.3 shows
the movements of lie or more during
that period of time. If that Movement
graph is inverted as shown on the
right, it will be seen that it has a for
mation somewhat similar to the head and two shoulders of a man. Turned
upside down, as it is here, the graph will be seen to have a left shoulder formed
by the movement C-C-C, a head by the movement C-B-A, and a right shoulder
by the movement A-A-A. As shown herewith, the formation is similar to those
which occur frequently in the market when it is making a Top. On the bottoms,
a very similar movement frequently occurs, correspondingly to a man standing
on his head. As shown, the movements in that case would be with what is
termed the left shoulder of a bottom at a-A-a, the
head at B, and the right shoulder at c-C-c. It is to be
seen on Pictograph 6.3 that the left shoulder really
is in the form of a "V" consisting of the movement
from 77 f to 73 f to 78 i on the December future. This
is shown on the graph as the movement a-A-a. The
head would also be a "V" movement from a-B-c
and the right shoulder of this Bottom formation
would be the movement c-C-c. In other words this did not become a completed
Bottom formation until the final movement C-c (76{ to 81) had been put in and the
market had closed above the high of both the left shoulder and the right shoulder.
Thus we see that the type of Bottom formation which is more frequently
formed in the market than any other consists of three "V"s forming a left
shoulder, head, and right shoulder, with the close above the high points of both
the left shoulder and right shoulder. Normally those high points of the shoul
ders should be at practically the same price range. Where the right shoulder
extends for 2 to 4 cents above the high of the left shoulder, it is usually an indi
cation that a new congestion will follow. Should the right shoulder fall short of
being as high as the left shoulder, however, then the formation would assume
more of the aspects of a "coil" which is described on Page 108 and would be
equally as favorable an indication as that of the Regular Bottom formation.
- 106-
TRENDS
Pictograph 6.3 Movement graph of December wheat made from Daily

Range graph shown in Lesson 5
81 _
80 _
79 _
78 _
77 _
76 _
75 _
74 .
73 _
72 _
71 .
70 .
69 _
68 _
These same remarks apply equally as forcibly to the Regular Top formation
which normally assumes the proportion shown herewith.
Occasionally such a Regular Top or Bottom formation, after having put in the
three "V"s for the left shoulder, head, and right shoulder, will add an additional
"V", this 4th "V" extending below the low of the
Right Shoulder and possibly below the head on Head
Right Shoulder
Left Shoulder
a Bottom formation, or above the Right
Shoulder and possibly below the head on a
Bottom Formation, or above the Right Shoulder Close
and possibly above the head on the Top Regular Type "Top"
-107-
formation. This is known as a "Cut-Out" move

ment and, where there is a good volume of
trade, such a "Cut-Out" is not only vicious, but
its reverse after cutting out the right shoulder
as shown at C is particularly powerful. It can be Regular Bottom With Cut-Out
seen that a congestion similar to the regular for
mation might lead many investors to believe that the market was preparing for
higher prices, and they would be preparing for higher prices, and they would be
prepared to make purchases, and would in fact make some of those purchases.
Then a dip down to destroy or break out the previous low resistance point of the
decline might catch stops and cause those who had been bearish previously to
resume their selling operations. If, after having caught those stops on long wheat
and also causing additional short sales to be made, sufficient buying came into
the market to turn it upward quickly, it can be seen that the additional shorts
must cover their purchases while the longs who had sold out would necessarily
be forced to run after the market if they were to reinstate their holdings. Should
the news and the buying which caused the turn from the "Cut-Out" continue in
the market, then it can be seen that the additional new buying from "sold-out
longs" and the short covering by those who sold on the break would give an
impetus which could carry the market sharply higher. Add this to any funda
mental basis of higher prices and a good movement will result. Where we give a
weight of 10 points in the market scale to the Regular Bottom formation, and
continue that weight on the Bull side until an opposing formation is put in, we
give the Regular "Cut-Out" formation a weight of 15 points.
THE "COIL" FORMATION

If you will put in the Movement graph of May wheat from
the 11th of September to the 5th of October, 1933, quotations
for which are given in Lesson 5, you will see that it has a
movement like that shown here. In its main movements, 1-
2-3-4-5-6, it is to be noted that the market gradually coiled
up in closer and closer in its congestion, with the breaks not
going as deep as the previous breaks, and the rallies not
going as high as the previous rallies. The rule in such a for
mation is that whichever one of the outstanding points is
first broken will indicate the direction of the movement -
and it will usually be a very good movement. In this partic
ular instance May wheat broke from 951 at (6) to 711.
-108-
TRENDS
This is an excellent example of what is known as the Coil Top (or Bottom). In
it, as shown, the market movement gradually draws to a point as the buyers
and sellers become equally divided. Then the new impulse which carries the
market out of its congestion will very frequently cause buyers
to liquidate and sellers to renew and increase operations if the Coil Top
movement should first start downward, or sellers to cover and
buyers to pyramid on a scale upward (see definitions at end of
Lesson) if the movement should be upward over the first shoul
der of the Coiling formation. In the practical operation it would
be the point of wisdom when once a shoulder is cleared, to
make a trade, but to place a stop-loss order that would take you out and
reverse your position if the market turned over and the opposing extremity is
passed. Thus, in the example of the Coil Bottom shown herewith, the moment
the point "A" is passed, purchases would be in order on the expectation that
the points at "C" and "E" would be broken. Immediately upon making the
purchase as "A" is broken, an order would be placed to
sell short double the quantity bought if the market should
turn over and break out the point "B". In the Coiling for
mation of the May future (see Pictograph 6.3) it is to be
noted that the point 5 was broken at A. Stops on the sale
made when that point went out should have been placed
at just above point 6. It is to be noted further that the
market rallied to B from A, then broke to C, and rallied to
D, cutting out the high point at B but not the high point at 6. The moment C
was broken one would be justified in lowering stops on sales to just above D,
on the theory that the movement D was a "Cut-Out," and once C was broken
the points at A, 3, and 1 would also go out.
Let us emphasize that this Coiling formation, while not as frequent in the market as
the Regular Top or Bottom formation, is one from which some of the most rapid move
ments come. It also affords the benefit usually of a very close stop-loss order.
Because of the drastic movements which usually result
from such Coiling formations, we award a weight of 15
points in the market scale for either a Coil Top or Bottom,
and this weight is continued in the balance until an oppos
ing formation is put in.
The reverse of the Coil is called a Broadening Top or
Bottom. This movement is rather unusual in the market and
also unsatisfactory because by the time the market has Broadening Bottom
-109-
passed the point "A" in the example of a Broadening Bottom

shown herewith, it has dissipated a considerable amount of the
buying power due to short covering in its rally from "B."
Nevertheless, once the market closes above the point "A" in the
Bottom formation, or below the point in the Top formation, one
must consider the trend as having been established, and the
news and buying which caused the rally from "B" and closed the
market above "A" in the Bottom formation, or broke it from "Y" to close it below
"X" in the Top formation, will usually be sufficient to continue the market in that
direction. Because of the extent to which it must first move before clearing its
congestion, we award a weight of only 4 points in the market scale.
This, of course, is maintained in the balance until it is demonstrated that the
market cannot continue in the direction of its start, such demonstration being
shown by an opposing type of Top or Bottom formation as the case may be.
If one were to turn a Broadening Top or
Bottom at an angle of about 45 degrees, he
would have what is known as a Descending or
Drooping Bottom, and/or an Ascending Top. In
other words in this type of Bottom the angles A-
B-C form a series of pointed stair-steps. Like in
the shoulders of the Coil Top or Bottom, once
one of those shoulders is broken, the market
will very frequently continue right on upward
until all of the other shoulders or steps have
been broken out. Usually, the market will have a reaction after reaching near
the point "A" in the example of a Descending Bottom to a level somewhat near
to "X," and then turn, close above "A," form a Regular
Bottom formation, and proceed to break out points "B",
"C", and "D." But experience has shown that if it does not
have the reaction, as shown at "X," but continues right on
up to break out point "B," it will thereupon usually con
tinue the advance until points "C" and "D" are broken and
the advance will continue, or the market will remain at a
price level approximating the level of point "D" until new
or opposing forces exert an influence strong enough to turn Ascending Top
it downward again.
The converse would, of course, apply on a Top formation which breaks out at
point "N."
-110-
TRENDS
One other type of Bottom or Top formation is a fre

quent occurence in the market, and that is the "Double
Spread or Check Top" (or Bottom). In this type of for
mation, the market at "B" will decline to approximately
the same level as the point "A" in the example of a
Double Spread Bottom, or "Y" will advance to the
approximate level of "X" in a Top formation. It was to Double Spread Bottom
this type of movement that William Peter Hamilton
referred when he said, in Lesson 3, "It may be broadly said that after tangible
fluctuations, two failures to pass the old high will establish the presumption of
a Bear market." An example of this type of Top is shown in
December com from the 30th of August, 1933, to the 18th of
September. When, on the 18th of September, the December
com closed at 55, after having endeavored to break out the
high of 561 (B) made on August 30th, the presumption was
that lower prices would follow. This actually occurred as is
shown on the graph. The lower part of that graph shows a
Check Top
good Bottom with a type of Cut-Out.
This gives you the types of congestion most frequent in
the market. The Daily Ranges within these congestions are frequently very con
tradictory, and as Hamilton declared years ago, the public or majority usually
is wrong in its beliefs.
This does not always follow, however. In analyzing the methods of big traders
later in the Course, it will be shown that they are very frequently short when
the low of the market is made, or long at the very top of the market. This, how
ever, is in part due to their method of operation. On the other hand, the general
public is very frequently 100 per cent right on the market as it is making a
Bottom, with Commission House books showing the public as long in the
market. Also at the Top, the general class of speculators will frequently be
found short, and they will ride down with the early break. The trouble is that
before the market has gone very far, they will cover their shorts and start pur
chases. On the advance out of the Bottom, they will sell out what they were
long and start going short too soon, with the result that they are run in and
their original profits on the long side lost. Experience has shown that the big
reason why the general public does not make good profits in the market is that
they cannot adjust themselves quickly enough to anticipate a complete change
in the price level due to changing conditions of fundamentals, either of grain or
of business and general commodities.
-Ill-
Let us state emphatically in closing this Lesson, that once a Top or Bottom formation
is complete, one should play that direction of the market with the assumption that a big
movement is in process and that the forces which turned the market definitely to estab
lish a trend will continue, with the market gathering power as the movement develops.
Let us also repeat here the observation of William Peter Hamilton, that "peri
ods of rest in the market may be as significant as periods of activity." They
must be recorded carefully and followed with an open mind because from the
congestions will come a formation similar to one of the foregoing descriptions, which
has definite forecasting value.
The market price is established in the trading centers as the sum of, or influ
ences of, both buyers and sellers. It mirrors the thoughts of men engaged in
producing, distributing, processing and/or consuming grain all over the
world. It records the ideas of these buyers and sellers as to the value of the pre
sent compared to the future. Particularly in a congestion, one should maintain
an absolutely open mind, prepared to go with the market in the direction the
market itself indicates is to be its future trend.
MARKET WEIGHTS
POINTS
Regular Top or Bottom formation 10
Regular Top or Bottom with "Cut-Out" 15
Coil formation 15
Descending or Ascending Top or Bottom 5
Double Spread or Check Top or Bottom 7
DEFINITIONS
"Buying on a Scale Up or Pyramiding" is the accumulation of additional grain
futures contracts as the market advances instead of waiting for a break on which
to make the additional purchases. It is a type of purchasing method best utilized
as the market clears a congestion and establishes a trend by closing above that
congestion. The assumption is that once the congestion is cleared, the advance
will continue. Therefore additional purchases may be made as the market proves
itself by actually advancing. Remember always that Bull markets are built on
excitement. The greater the excitement, the more buying the market will attract.
Hence, so long as that excitement continues, and particularly in its first stages,
the more purchases one can make in the initial stages of the advance.
"Buying on a Scale Down" is a systematic method of making purchases on
each cent to five cents of decline. If pursued after there has been a decline, it is
-112-
TRENDS
done on the expectation that a turn in trend will come, and the low purchases
will be just that much more advantageous than purchases made only after the
Bottom has been declared. This type of buying, however, is safest after a Bottom
has been declared and on a reaction after the market has made its initial advance. As is
explained herewith, once a Bottom has been declared the market will usually
either advance or will work for sufficient time at the high of the congestion to
put in an opposing formation (Top). Thus, the market will usually rally after its
first break following the close out of a congestion. On this break, particularly as
the market nears the objectives designated to be made, the method for calculat
ing which will be outlined in succeeding Lessons, buying on a scale down is
reasonably safe. No rule can be given as to just how broad a scale to use. This
must be governed first by the amount of margin available and second by the
previous activity of the market. Thus, in a market that is moving at the rate of 2
to 5 cents in price range each day, the scale would naturally be broadened out
to wider ranges than if the daily ranges were only 11 cents or less.
"Selling on a Scale Down" would naturally be the reverse of "Buying on a
Scale Up" and the reverse comments would apply. Likewise, "Selling on a
Scale Up" would be the reverse of "Buying on a Scale Down."
CONCLUSIONS
When the price is low, when the conditions of Supply or Requirement are
changing to reduce that Supply or increase the Requirement, when the market
goes into congestion and forms one of the Bottom formations and then com
pletes this Bottom by closing above the high points of its shoulders - buy wheat,
and particularly if the com movement verifies that of wheat.
Conversely, when the price is high, when the conditions of Supply or
Requirement are changing to increase the Supply or decrease the Demand, the
market goes into a congestion and forms one of the Top formations and then
completes the Top by closing down below the low points of its shoulders - sell
wheat, and particularly if the com movement verifies that of wheat.
Once such a position has been taken, do not be shaken out of it until the market
itself shows positively and conclusively that it cannot continue the trend in
which it has started.
In this, we again warn that your greatest enemy in the market is - yourself.
-113-
Lesson 7
AVERAGES
■ Get-Away Gaps
AVERAGES
If there is one thing above all others that we are endeavoring to do in this Course
of Grain Market Analysis, it is to show the sense to the cents of grain prices.
For years the grain trade in general has quoted glibly that grain prices were
made by the Law of Supply and Demand, and let it go at that. We have seen from
the research work of James Thorold Rogers that the value of money is sometimes
quite as influential in establishing the general price level as is the actual relation
ship of the Supply to the Requirement. We have studied the assertions of Dr.
George F. Warren and Dr. F. A. Pearson that gold is the dominating influence.
There was actual demonstration in the markets of 1933 that money values did
exert a tremendous temporary influence on commodity prices. For instance, on
October 25, 1932,161 French francs would have purchased 1,000 lbs of cotton at
the quotation of 6.32 cents for the Chicago December future. On October 25,1933,
165 francs would still have purchased 1,000 lbs of cotton at the quotations of the
December futures despite the fact that that future was quoted at 9.70 cents or an
advance of 3.38 cents or more than 50 per cent above the year previous.
The reason for this was the change in the value of the franc when quoted in
American money. In 1932 both the franc and the dollar were on a gold basis. In
1933 America had abandoned a fixed gold basis for its money. Our price of
cotton had advanced, but the price of that same cotton in the French franc was
practically unchanged. In later Lessons it will be shown conclusively, however,
that gold is not the complete dominating influence even on the general levels
of commodity prices. And we have already proved conclusively that the rela
tionship of Supply to Requirement is the dominating influence of grain prices
in comparison to general commodity prices within a nation.
As is stated, we have endeavored to take the mystery out of the causes of
grain price fluctuation. We are attempting to give students the basis of an
analysis so that they may know exactly what they are doing, and why.
In going further with this analysis of the market itself it is well to remember
always that the price is determined by purchases and sales made by humans.
Being human, they have human instincts. One of those instincts is self-
preservation. Another, particularly in markets, is greed.
There is nothing quite so removed from personal interest as a trade in the
grain market. If you were to have inside information that a big factory was to
be built on a certain site, you might feel some scruples against endeavoring to
purchase that property from your best friend to make a profit on a resale. But if
your investigation convinced you that prices of wheat were going up, while
your best friend was equally convinced that prices were going down, and you
bought in the market at the same time and price that he sold, you would have
-117-
no feeling whatsoever that if you were right, you had taken his money. It is this
disinterested, impersonal action by the individual traders which is the greatest
safeguard of speculation and which always in a free and open market causes
the price to reflect more truly the conditions of Supply and Requirement than
any other method ever devised.
In going further with this price analysis, let us remember that the buying
and selling are done by those humans who have the characteristics of self-
preservation and greed. Generally speaking, the traders are comparatively few
and far between who are willing to take a position until either time or the
market convinces them they are wrong. They want their trade to show them a
profit right from the time it is executed. This trait completely characterizes "the
crowd." It is this desire for quick profits which differentiates the average trader
from such men as the late James A. Patten, whom we again quote. He said,
"One of the fundamental traits of my character is a habit of relying on my own
judgement once it is formed. If all the traders in the Wheat Pit were selling
wheat when I believed there was going to be a shortage, I would buy and not
be changed by their clamor." But the "crowd" will not so hold to an opinion.
From a practical viewpoint, then, the first step in the further analysis of the
congestion is to see whether or not the recent trades show a profit or a loss. In
Lesson 5, the daily ranges on December wheat for 1933 were quoted from the
25th of April to the 10th of June. Let us go through that market and analyze it.
First, however, let us state that in making the technical analysis of the forma
tions in a congestion, the Daily Action, as well as the averages which will be
analyzed in this Lesson, one should base one's conclusions on that future in
which there is the greatest volume of trade. Figures on the open interest can be
secured daily in the Chicago Journal of Commerce. But in this instance, for study,
we will make the analysis as of June 5th, in the December wheat future for which
the quotations are given. Before going into these additions and divisions of
market factors, it is easiest to convert the fractions into percentage figures as
follows: i = .125; i = .25; | = .375; * = .50; | = .625; * = .75; \ = .875.
On Pictograph 7.1, showing the movement of that future while it was working
out a Bottom formation, it is to be noted that the December future broke from a
high of 791 at B on June 2nd to a low of 761 at A on June 5th. The average of that
high and low was 77f and the market on the 5th closed at 77\-\, or just a trifle
above that average. So the buyers at the end of those three days in which the
Movement graph had made its least downward turn to put in the low of the
right shoulder of the Bottom formation had just a little advantage over the sell
ers. In our market scale, we would award a weight of 5 points to the Bull side of
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AVERAGES
Pictograph 7.1 Movement graph showing basis of determining averages
the scale pan for the market having closed above its Last Straight Average. A
very small margin on which to figure, it is true, but it was a bullish indication.
It is also to be noted that there had been considerable work in that price level
previously, with the market rising and falling several different times between
79 j (F) and 76 j (A). The average of that extreme high at F and the low of the
recent work at A was 77\-\, and the market closed right on that price level. In
the total of trades from those two extremes, neither the Bulls nor the Bears had
the advantage on the close of the market on the night of the 5th. Therefore, in
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the technical weighing of the market, no weight would be placed in the scale
pan or on the scale beam for this "Average Previous to the Last Straight
Average." Had the close been an eighth higher, a weight of 2.5 points would
have been placed on the Bull side. Had that close been an eighth of a cent
lower, that weight would have been placed on the Bear side.
That takes care of the last trading average and the trading of the average of
the movement previous to the last. Now let us take the average of the last three
movements. This would be the movement from 791 (D) to 76 \ (C) to 791 (B) to
761 (A). We might get this by taking the average first from 791 (B) to 761, then
761 (c) to 791 (B) and the average from 791 (B) to 761 (A). But exactly the same
result would be secured if instead of three additions and division, we made
only one of each. In our calculation we would put the figures down as follows:
79.50
76.87
76.87
79.12
79.12
76.62
467.62 divided by 6 = 77.93
The close on June 5th, being at 77\-\, was -h of a cent lower than this "Last
Triple" average, so a weight of 2.5 points would be placed on the Bear side of
the market.
There had been previous fluctuations just prior to that last Triple Average, in
which the market had broken from 791 (F) to 771 (E) and then rallied to 791 (L>)
again. In order to take in that additional activity, we simply add on that move
ment to the previous average, for the "Combination" Average of all of this
recent work. The figures then taken would be:
79.50
77.25
77.25
79.50
79.50
76.87
76.87
79.12
79.12
76.12
781.12 divided by 10 = 78.12
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AVERAGES
Thus the Combination Average of this most recent work would be 78 i and the
close on the 5th being below that would throw 2.5 points on the Bear side of
the scale inasmuch as the market was below its "Combination" Average.
It is to be noted, however, that this particular market had been in congestion
since the first of the month of May. During that time it had sold as low as 71 $
(G) and as high as 79{ (F). The Straight Average of the entire congestion was
the average of those two outstanding points which was 75 f The close on June
5th was 77i which was above this average, and 2.5 points would go on the Bull
side of the market analysis.
The Big Triple Average of that congestion would be the movement from the
low of May 3rd at 73f (I) to the high of the 12th at 781 (H), to the low on the
22nd, at 71$ (G), to the high on June 1, of 79$ (F). The average of this would be
found as follows:
73.625
78.875
78.875
71.50
71.50
79.50
453.875 divided by 6 = 75.62
Inasmuch as the market on June 5th, the day we are analyzing, had closed
above that Big Triple Average, a weight of 2.5 points additional would be
placed on the Bull side of the market scale.
This takes care of most of the trades; but there had been a considerable
number of fluctuations within that congestion, and so to be sure that we take
them all into consideration, a Big Combination Average is taken, including all
of the movements of the Movement graph. These points, and you may trace
them on the Movement graph, together with their averages, are as follows:
77.25 77.62 75.62 73.75
73.37 77.62 77.75 73.75 79.50
73.37 73.62 77.75 79.50 76.87
77.62 73.62 71.50 79.50 76.87
77.62 78.87 71.50 77.25 79.12
75.12 78.87 76.50 77.25 79.12
75.12 75.62 76.50 79.50 76.12
2,600.52
divided by 34 = 76.48
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Inasmuch as the market closed above the Combination Average of all of the
trading within this congestion, on the close of June 5th, an additional weight of
2.5 points is added to the Bull side of the scale.
It is thus to be seen that the idea of analyzing the averages within the conges
tion is to see just as nearly as possible how the traders stand at the time of
analysis. Do the buyers on the average have more of a profit than the sellers?
Do the sellers have more of a profit than the buyers? The general rule is to take
the average of the last movement of the market for the first average - and this
is given double the weight of the other averages. Then, the average of the prin
cipal movement previous to the last is also taken, it also being 2.5 points in the
scale weights. Then to get the average within the last congestion, or within the
last general trading, the last three principal movements should be averaged.
Where the market is within a congestion, the current market as compared to
the average of that entire congestion is given a weight, this Combination
Average being awarded 2.5 points. Also, the average of the three principal
movements within that congestion should be analyzed, as well as the average
of all of the movements within that congestion.
It can readily be seen that these various averages will frequently counter
balance each other so that while the market might be above the Last Straight
Average, it could be below the Last Previous Straight Average. Or the Triple
Average might offset the Combination Average, etc.
Summarized, these Averages and their weights in the market scale would be
as follows:
Last Straight Average 5.0 points

Previous Straight Average 2.5 points
Last Triple Average 2.5 points
Last Combination Average 2.5 points
Big Straight Average 2.5 points
Big Triple Average 2.5 points
Big Combination Average 2.5 points
On the Movement graph in Pictograph 7.1 these may be identified as follows:
Last Straight Average, movement from B to A.

Previous Straight Average, movement from F to A.
Last Triple Average A-B, B-C, and C-D.
Last Combination Average, movement A-B-C-D-E-F.
Big Straight Average, movement from G to F.
Big Triple Average, movement I-H, H-G, G-F.
Big Combination Average, all movements of congestion.
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AVERAGES
When a market has left a congestion, all averages except the Last Straight
Average and the movement previous to the Last Straight Average are dropped
from the analysis. Thus, after a market has advanced out of a congestion, it will
require additional Bull weights to keep the analysis showing that the advance
should continue. Conversely, if it breaks out of the lower side of the congestion,
it will require additional Bear weights to keep the analysis indicating lower
prices. Obviously, however, a market advancing out of a congestion will be
above the Last Straight Average and the Last Previous Straight Average, which
would throw a combined weight of 7.5 points on the Bull side. And it must be
remembered that once a congestion is cleared, the weight assigned to the
Bottom formation or Top formation, as the case may be, is retained in the
analysis until an opposing Top or Bottom formation is completed.
Now, then, let us go back through Lessons 5, 6, and this much of Lesson 7,
and see just what weights we would have to place in the market scale in the
analysis of this December future on June 5th.
Weights Bull Bear
Tum-Up Day 4
Saturday-Monday Bottom 5
Above Straight Average 5
Last Straight Average 0
Below Last Triple Average 2.5
Below Last Combination Average 2.5
Above Congestion Average 2.5
Above Congestion Triple Average 2.5
Above Congestion Combination Average 2.5
21.5 5.0
Thus, in the analysis from these factors alone the Bull side would have 21.5
and the Bear 5 points. So far as formations are concerned, this particular
market had not yet completed a Bottom formation, so that weight would be left
out of the analysis, the formation weight being governed by the previous Top
or Bottom that had been completed. In this particular case the market was
above a major Bottom of regular formation and a weight of 10 points would be
maintained on the Bull side. This would give the market a total weight from
these factors alone of 31.5 points to 5 in favor of an advance. (There were, how
ever, other bearish factors, not listed, to be studied later.)
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GET-AWAY GAPS
In Lesson 5, attention was called on Page 87 to "gaps" in the market. It was
emphasized that the market is a good workman, and will usually fill up all of
these gaps before leaving a congestion. In other words, it builds a solid founda
tion on which to advance. The fact that the gap is there and will usually be filled
up prior to the market leaving, with the price working and reworking each eighth
cent quotation within the congestion range, has no special significance as an indi
cator of change in the technical position, or of probability of change in trend.
But when a gap comes as the market is leaving a congestion it is an entirely
different indication than where that gap is left within the congestion. Very fre
quently such a gap will not be closed until considerable time has elapsed.
Possibly it will not be closed until a complete cycle is made in the trend of gen
eral commodity prices or of the grain market movement itself.
It has been repeatedly stated that the market within a congestion awaits a
new impetus to carry it on its course. The fact that it is in congestion demon
strates that ideas and buying of those who believe in higher prices are
effectively counterbalanced by those who believe in lower prices. The fact that
this impetus comes so decisively as to cause the market to jump out of the congestion
indicates that a most decisive movement should follow.
Should it be upward, then a very material advance should be expected.
Should it be downward, a sharp decline should be anticipated.
It would be extremely improbable that those who were short in the conges
tion would all cover their sales on the first day that the market advanced out of
the congestion. And the very fact that the advance was so sharp would cause
those who had been Bulls during the congestion to add very strongly to their
line on a scale up. Furthermore, the very fact that there had been such a sharp
advance after such lethargy as markets sometimes show while in congestion
would attract new buying from those who had stood aside awaiting the new
indications. Therefore, while this movement is somewhat unusual in the
market, the fact that it came should be accepted without expectation that the
gap would be filled immediately. On the contrary, one would be justified in
concluding that this gap might not be filled for a considerable period of time.
As for the market declining out of a congestion and leaving a gap, it must
always be remembered that the volume of open speculative long trades in the
market far exceeds the volume of open speculative short sales. The reason for
this is that the operators of terminal elevators (and of many mills) in most
instances make it an invariable rule that the moment grain is purchased from
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AVERAGES
the farmer it must be sold immediately. As a matter of fact, the buying price of
that grain is determined primarily by the price at which it can be sold immedi
ately. If the grain purchased from the farmer directly or indirectly through his
local elevator station cannot immediately be sold to an exporter, a flour buyer,
or some other consumer, then the elevator operator or miller will immediately
sell an equal quantity of futures contracts against the purchase. He is not
interested in a speculative profit, but in a very small merchandising profit. It
may be only an eighth or a fourth of a cent. He makes his money on the
volume of his turnover as well as his profits from cleaning, grading, and
mixing the grain or storing it if he be an elevator operator. Therefore, a big
share of the sales in the futures market as reported in the Open Interest figures
by the Grain Futures Administration daily represents the sales by these termi
nal elevator operators, mills, and country elevator operators against actual
purchases of actual grain itself.
No one can know precisely how big a share of the actual Open Interest (which
shows only one side of the trade, either purchases or sales) represents actual
hedge sales and how much represents speculative short sales. Even on the 1st
of July, when the Government gives an estimate of the amount of wheat in
country mills and elevators, terminal mills, terminal elevators and flour stocks,
no one can possibly know how much of this is actually hedged. Neither could
one arrive at a definite estimate even if one knew exactly what percentage was
hedged. The reason for this is that under prevailing regulations (effective
during 1933 as this is written) the Government requires that each Clearing
House member of the Board of Trade reports only its net position. There are
some such members who not only operate terminal elevators but also operate a
speculative department of their business, devoted to speculative trades by out
side clients. It might be that the actual net position of these clients was to be
long, say, a million bushels of wheat. The house itself might have a million
bushels of wheat in store and each bushel of that wheat was hedged. The books
of that house would show that its sales against its actual holdings of cash
wheat were counterbalanced by the actual long position of its speculative
clients. Therefore, its net position would be neutral in the market. Or, it might
have a net long position from its clients of two million bushels, a net short posi
tion of its hedged grain of one million, and one million additional speculative
short interest on its books. Its net position would still be neutral and it would
so report to the Grain Futures Administration.
Therefore one cannot form any positive conclusion from the Open Interest fig
ures of the total volume of speculative short sales in the market. It must,
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however, be very materially less than the long interest because the speculative
longs must be of sufficient number to absorb the hedges against grain in store.
This observation is particularly important when the market has been in con
gestion and then suddenly declines with a jump which leaves a gap between the
high of that "get-away" and the low of the day previous. Such a gap immedi
ately increases the loss of all those who have purchased during the congestion
or at price levels above it previously. Self-preservation being the first law of
nature as well as of speculative traders, and particularly speculative houses, the
first thought of these latter two is to protect themselves. Under the rules, the
house is permitted to sell out any account not adequately margined. Experience
has taught that breaks are more rapid than advances. Therefore, the brokerage
houses are more quick to call margin should there be a sudden decided down
turn than they are in case of an advance. Furthermore, the fact is that because
the buyers must be sufficient in number to absorb the hedges, most of their
clients are Bulls in the market. So there is a greater chance of a greater number
of these clients being unable or unwilling to put up additional margin than if
the market has advanced out of a congestion. We again stress that "Bear mar
kets are built on despair." Therefore, the fact that the market leaves a congestion
with a gap is indicative that it may go for a considerable distance and that the
gap on the break-away may be left for a considerable time.
This analysis of the Daily Action, particularly within the congestion, of the
Saturday-Monday indication, of the various types of Tops and Bottoms formed
within the congestion, of the indication given by the close above or below the
average within the congestion, and of the rapid movement desirable in the
market as it leaves that congestion, fairly well covers the discussion of market
congestions. As was said at the beginning of Lesson 6, the turning of the trend
as the market starts out of a congestion should be the start of all major opera
tions. And those operations should be continued in a manner that would
steadily increase profits as long as the market continues in one direction out of
that congestion.
The next step in consideration of the market analysis is in determining the
price objectives toward which it is logical to anticipate the market going. Where
should you begin to accept profits? This will be analyzed carefully and thoroughly
in the next Lesson.
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Lesson 8
OBJECTIVES
■ The Circumscribed Objective

■ Market Scale Weights
■ Scale Weights
OBJECTIVES
On April 16,1906, William Peter Hamilton wrote in The Wall Street Journal (Lesson
3, page 51), "Tested over a number of years, the averages show that the decline
after a long advance is about half recovered, and that the market then backs and
fills between the old low and that point until a new impulse develops."
In Lesson 6 it was pointed out that markets usually congest over a price area
that previously has not seen considerable trading. Combining these two obser
vations gives a method of determining objectives which works out exceedingly
well in actual practice.
On Pictograph 8.1 of wheat prices from 1920 to 1935 shown herewith, it will
be observed that when the market advances from a point far below a previous
congestion, it will usually advance to the lower part of that congestion and
there have a good reaction if not a definite turn in the trend. This is particularly
true where the lower part of that price level is also 40 to 60 per cent of the dis
tance from the previous major high to the previous low.
Even where there is no previous congestion, the market will usually "recog
nize" by rather sharp and possibly extended fluctuations, the general area of
the half-way average from the last major low to the last major high.
Let us go through this graph of wheat prices from 1920 to 1935 and study the
averages that it made and the reaction points.
The "cash" future, or future nearest delivery, of wheat in 1920 started trading
at $2.75 and broke from that price level to a low of $1.19. That decline lasted
from July, 1920, to May of 1921. It was accompanied by a general decline in the
average of commodity prices. You can see also, in Table 4.1, that world wheat
supplies of that year were just normal, while U.S. supplies were only 99 per
cent of normal. The daily graph of May wheat of 1921 shows that an excellent
Bottom formation was put in, in April and May. Pictograph 3.1 shows that com
verified the upward trend of wheat. The Straight Average between the July,
1920, high of $2.75 and the May, 1921, low of $1.19 was $1.87. On the advance,
May wheat of 1921 went to $1.87 exactly.
In 1922 the wheat market again completed a Bottom formation, turning the
trend upward, and this trend was verified by the com market. The Straight
Average from $1.87 to the low at 98c from which the market made the run that
year was $1,421. Wheat advanced to $1,491, going into a "thin" spot, or an area
that had not seen much trading, left in the decline of 1920-21.
During the latter part of 1922, wheat and com again verified each other that
the trend was upward. The Straight Average from the 1922 low of 97\t to the
major top at $1,491, made in the Spring of that year, was $1.23f. The market
advanced to $1,281, going up to the low point of the congestion earlier in the
year that was made when the Spring Top was put in.
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Pictograph 8.1 Wheat prices from 1920 to 1935
OBJECTIVES
The high from which that market broke was $1.27$, going down to 96 cents in
February of 1923. The Straight Average of these two prices was $1.12$. In the
advance in 1923 the market went to $1,141.
It is to be noted that in the work of 1922 and 1923, wheat had put in a good
congestion, thoroughly working the price level between $1.49 and 96 cents. It
had also put in a "Check" Bottom formation, the 1923 low coming back to
check the low of 1922.
In June of 1924 there was a sudden rather sharp change in fundamental busi
ness conditions as well as those in grain. The United States had succeeded in
getting into international effect the "Dawes Plan" and had started loaning
money to Europe by the hundreds of millions of dollars. This money was uti
lized in part to purchase our surplus goods from factories. In grain, the
government crop report of June showed a sharp reduction below expectations
and news began to come of the short crop in Europe. The figures for that year
(Tables 2.1, 2.2 and 2.3) showed import requirement that year of 811 million
bushels and an export surplus of only 645.6 million. The total supply was only
96 per cent of normal. It has been pointed out to you previously that a short
crop in Europe is much more bullish on the market even though the export
countries have plenty of wheat available than if the supply of European coun
tries is large and the export countries have short crops.
In that particular year the European countries, noting their own short crop,
immediately began buying against prospective needs. As a result, when the
Minor Bottom was confirmed by July wheat of that year closing above $1.07
and the com above 80c, the market immediately ran to the low point of the
congestion made in the Top of 1922. From there, a reaction came. The Straight
Average of the high at $1.38 and the low at $1.02 would be $1.20. The market,
on its break, came to $1.19. Thereupon it turned and closed above the 1922
high of $1.49$.
We have given you the method of determining objectives by taking the
Straight Average. Now comes another method - that of putting the extent of
the decline on top of a high for an objective during an advance, or putting the
extent of an advance below a previous low for an objective in a declining
market. The decline from the 1922 high of $1.49$ to the 1923 low of 96 cents
was 53$. Adding this distance to $1.49$ gives an objective of $2.03$. The
1924-25 Bull market went to $2.05$.
Halfway back from the $2.05$ to the low of $1.01 from which this market ran
is $1.53$. On the break from $2.05$ the market went to $1.51 and turned to rally
to $1.71. It then broke to $1.36$, blending with the com Top made in that price
level at the time wheat made its high of $2.05$.
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In later Lessons it will be shown that the futures blend. This market gives a
demonstration of the blending of prices of the various grains. Thus a fourth
method of determining objectives is set up. First, we have noted the market
working to the nearest extremity of previous congestions. Second, the market
recognizing by reactions and frequently by a turning of the trend, the Straight
Average between the outstanding highs and lows. Third, we have the objective
of the distance of a break added to the high point for an objective in an advanc
ing market; or the distance of an advance subtracted from the bottom of a low,
for an objective in a declining market. The fourth method of determining an
objective is the major high established by com for the objective toward which
wheat should decline. And still a fifth objective would be a previous low point
by which the market might make a Check Bottom, or a previous high point by
which it could make a Check Top.
On Pictograph 8.1 it is to be noted that we have placed numerals showing the
average between the major highs and lows and the actual price made by the
market in its movement. It is well for you to study these latter figures closely to
grasp fully the idea of just how precisely the market may be expected to make
its average. Practical problems of presenting these to you force the use of a big
graph reduced to small proportions. We suggest the use of a magnifying glass
to aid in its study. The objectives shown by the averages up to 1925 have been
reviewed. Going ahead from there, we note that the average of the movement
from $1.36$ (the low of April, 1925) to $2.02, the March high, was $1.69$. The
market in May recognized that $1.69$ objective almost precisely, with a break
of more than ten cents from it before going on to $1.74.
The low of October of that year on the cash future (that is the one nearest to
delivery) was $1.33$. The previous high was $1.67. The distance from $1.67 to
$1.33$ is 33$ which added to $1.67 would give an objective of $2.00$ after the
market had advanced from $1.33$ and closed above $1.67. The market, how
ever, lacked 10 cents of reaching that objective at $2.00$, the high being $1.90$.
Halfway back to the Bottom at $1.33$ from that 1926 high of $1.90$ would be
$1.62. The market went down to $1.55 before having a rally. Then it bottomed
at about $1.54 in April 1926. Halfway from $1.54 to $1.90$ would be $1.72$ -
and in the rally of May, 1926, the market went to $1.76$.
The distance from $1.54 to $1.76$ is 22$ points. Subtracting that from $1.54
would give an objective of $1.31$. In the decline of the July future in 1926 it
went to $1.30$.
The average of $1.30$ and $1.76$ is $1.53$. On the advance in July of 1926 the
market went to $1.58$. From there it broke to $1.29. The average between $1.58$
and $1.29 would be $1.43$. In October the market rallied to $1.46$.
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OBJECTIVES
The advance in January and February, 1927, from $1.32 to $1.43 practically
made the average back from the January low of $1.32 to the December high of
$1,501. The decline of 12 cents from $1.42 in February of 1927 to $1.30J in April of
that year put on top of the $1.43 would give an objective of $1.55. In the advance
in May of that year the market went to $1.53. In the decline from that price level
the market went down to work at a level below the previous congestion. It could
not make the distance from $1.32 to $1.53 put on the Bottom of $1.32.
During that decline of 1927 from $1.53 to $1.32 the market had had a good rally
from $1,361 to $1.43. The first estimate of an objective would be derived from the
first outstanding shoulder after the Bottom is made. In this instance the distance
from $1.43 to $1.22 was 21 cents. Adding this to $1.43 would give an objective of
$1.64. In the advance of 1928 the market reached a high of $1,611 in May. This
was also square into the congestion of 1926. In the break from that price level the
market again did not put on the full distance of the advance from the February
Bottom of $1.28 to $1,611. Rather, it contented itself with declining to a very low
level, in conformity with Gregory King's ratios, and worked over a price range
not previously covered. In the advance from the low point of $1,061 made in
September of 1928, the market went to a high of $1.29 in February of 1929. The
Straight Average from $1,061 to the 1928 high of $1.61 would be $1.34.
The market started on that advance to $1.29 from a right shoulder at $1.13.
That was an advance of 16 cents. Deducting this run gives an objective of 97c.
On the break into June of 1929 the market went to 931.
On the advance which came with the great decline in crop condition of
Canada during June and July of 1929, together with the voting of 400 million
dollars to the Federal Farm Board, the market advanced into the low points of
the Top congestion of 1928. It also just reached the Commodity Price Curve as
can be seen on Pictograph 2.1.
Then it congested between that high of $1,481 and the high made in February,
1929 of $1,331, wheat and com putting in Top formations, closing down out of
them and the big Decline was on. It can be noted that in May of 1930 the wheat
rallied from the level in which com had made its Top in August and September
of the previous year (see Pictograph 3.1). The rally, however, was short-lived
and not verified by com. So the market turned and continued on its break.
In 1929 wheat had rallied from 931 cents to $1,481, a distance of 55 cents.
Subtracting this from 931 gives an objective of 381 cents on the low side and the
low on wheat actually made was 41J.
In 1931 the government took all wheat offered on May contracts, with that
future expiring at 831 cents. After the May future had gone off the board July
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wheat declined to a low of 44}. Then came a rally upon news that the Russian
crop was very short and Russian exports would be curtailed. The average
between 83} and 44} is 63}. In the rally the market went to 68 }.
Any number of instances could be given in the market movement of 1931 and
1932 to show the recognition of the averages by reactions in the market. These
are unnecessary, however, as the instances given should be sufficient to prove
that averages are recognized.
When the market in April of 1933 completed its major Bottom and this was
verified by the com, a very rapid advance followed. The price area below a
dollar had been worked very thoroughly, and, true to conformity with the the
ories expounded in previous Lessons, the market did not stop running until it
had reached the heart of the congestion area of 1928 and 1929.
In figuring an objective for this price advance the average of the low at 411
and the three previous outstanding Tops are taken as a basis of calculation. The
low from which the advance started was 411 cents. The last previous high of
major importance was the 1929 Top of $1,481. This gave an objective average of
95 cents. The market had a 9 cent break from 961, then it closed in new highs.
The next average would be that from $1.65 to 41 cents of $1.03}. The market
closed above this on the advance indicating renewed strength. The next objec
tive was the average from 411 to the 1926 high of $1,901, or $1.16. The actual
high made by the cash future was $1,171 with the close at $1.16. Had the
market been able to close strong above that price objective, we would have fig
ured another price objective at $1.23f, the average of the distance from the 1925
high of $2.05} to 411 cents.
After having made the $1.17} the market turned over and started to break. The
real low from which this advance started was made in February, 1933, at
46 cents. The average of 46 and $1.17} is 811. On the break from the July, 1933, high
of $1.17} the market came to 81 cents and rallied to 93} cents. The distance from 81
to 93} cents is 12} cents. Subtracting that from 81 cents gives a new objective of 68 }
cents. On the break in October of 1933 the market went to 67} and turned for a
very sharp rally extending more than 20 cents before a reaction came.
It is thus demonstrated conclusively that markets do usually have a very
sharp reversal of trend when (1) the Straight Average between two major out
standing points is reached; (2 ) when the distance from a high to a following
low is put on top of the high in an advance, or the distance from a low to a fol
lowing high is put on the bottom during a decline; (3) when the outer-most
point of a congestion is reached; (4) from a major high of com establishing an
objective for wheat on a break; and (5) a previous important high or low point
may be "Checked" for a "Check Bottom."
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OBJECTIVES
When any of these Important Price Levels is reached by the market, a weight of
15 points is placed in the scale pan on the opposing side to the trend in which
the market has been moving. Thus, if the market has been advancing and
reaches a Straight Average from its last important low to a previous high point
from which the break came, a weight of 15 points is put on the Bear side of the
market scale. This will offset the weight of the market Bottom formation and
have a tendency to even up the market balance. In other words, a trader should
look for a turning of the trend in that general price level.
THE CIRCUMSCRIBED OBJECTIVE

This interesting method of arriving at definite price objectives is based on the
pure mechanics of markets. It is unique in several respects but especially so in
that it can be applied at any time or place in the market or to any stock or com
modity on which daily quotations are available. Experience has shown,
however, that its greatest value lies in the measuring of the extent of outstand
ing movements some of which take several years to be completed.
And after all it is on these larger movements of the market and from an accu
rate knowledge of the direction of the broad general trend of prices that
successful traders make their money and big business planning must be based,
and not on the little day-to-day fluctuations which are only incidental to the
general price movement as a whole.
As you know, it is essential to success in life for one to have a definite objec
tive toward which to strive, and to set up another goal immediately that one
has been reached. So is it also an essential to successful trading that one has
one's mind on a definite price objective in order to keep from being swayed
this way and that by the conflicting news which may come into the market
from day to day and week to week.
Thus having in mind a definite price objective, arrived at by applying the best
known methods, does not mean that one can force the market to reach that
price objective any sooner than it is logical under existing circumstances for it
to do so. But it does require those two essentials which all successful traders
and businessmen possess, that of patience and unswerving faith in one's
deductions, once a decision is made. This means, of course, after applying to
the problem all the methods one has learned to use. This faculty was the secret
of Mr. Patten's success, yet he stated that he had "run like a scared cat" when
he found he was wrong. This we doubt happened to him very often, because of
the care he used in reaching a decision.
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The "circumscribed" method of determining objectives is one of utilizing arcs

and angles, the arcs as well as the angle lines being drawn from one outstand
ing direction point to another outstanding reactionary point of the market.
The graph paper used in utilizing this arc-angle method of arriving at a circum
scribed objective is of the type described on Page 84, Lesson 5, each square up and
down representing ic, and longitudinally each square a market period of one day.
For the axis of the arc you use the point preceding the most recent one. Thus
in an up market it would be as shown in illustration No. 1 and for a down
market as per illustration No. 2.
1 Marking point of 2
compass starts here
The angle line is drawn at exactly the same degree from B to C as the market
moved from A to B in an up or a down market. The point at which this angle
line cuts through the arc is the objective indicated.
Thus, in December wheat of 1933 shown herewith on Pictograph 8.2,
December wheat had advanced from 841 on September 8, to 97J on September
19. The market thereupon put in a "Narrow Day" (the 20th) and broke sharply
away from the top.
The reaction from that point is characteristic of a market making a Top or
Bottom and from it comes most of the secret of success of this circumscribed
method of determining objectives. When the market is making a Top or Bottom it
should get away rapidly from the extreme high or low.
The advance from the 8th of September at 841 to 97\ on the 19th of that month
consumed twelve days, inclusive. The easiest way to determine how to draw
the angle line from 97J to where it circumscribes the arc at "Y" would be to
place a dot at 841 over sidewise ten lines from the 8th of September to the per
pendicular line on which the market of the 19th was recorded. Then with a
compass, one point of which is on this dot at 841 on the line of the 19th, mea
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OBJECTIVES
sure off the distance on the graph to the low point of the market also at 843 on
the 8 th. Then turning the compass around to the point at 84$ an equal number
of days to the right of that dot at 84$ and on the same lateral line, draw an
angle line (X-Y) from that point (at 84$) to the high of 97$ made on the 19th.
Extend this line on downward. Then with the stationary point of the compass
at 84$ (the low of the 8 th), place the other end of your compass at 97$ and draw
an arc of which the distance from 84$ to 97$ would be the radius. This are will
intersect the angle at 73$ - and automatically set that up as an objective to
which the market should go. And, theoretically, that objective should be made
to the exact fraction of a cent on the day indicated.
As may be seen this system is designed to combine both time and distance in
the market, which is the goal of all mechanical market predictive methods. The
theory is that the market will either make the price objective indicated, or spend
the time within the radius of that arc. Its originator termed it, "The Definite
Extent and Periodic Relationship." It is not a law. Webster defines a law of phi
losophy and science as "a statement of order or relation of phenomena which, so
far as known is invariable under the given condition." We state frankly that this
method of arriving at an objective through circumscribing the objective, using
therefore the outstanding points of the market, does not invariably give the same
result. Therefore it cannot conform to a scientific definition of a law.
But in a running market, and particularly where the market gets away from its
Top or its low point very rapidly, this method is excellent to utilize in conjunction
with the five methods previously outlined in determining an objective. Our
experience has shown, however, that the definite price objectives which this
method so designates are more dependable than the time elements involved by
the length of time covered by the diameter of the arc. And we wish to empha
size that the great value of this system lies in noting the rapidity with which
the market gets away from its outstanding point.
It must be obvious, of course, that a slow, creeping market will destroy the
effectiveness of this method. And a market may congest during all of the
length of time circumscribed by the arc - and then when it is beyond the con
fines of this arc, react rapidly to reach the price objective first indicated.
As stated, the value of this method consists primarily in utilizing the speed
with which the market gets away from an extreme point. Usually on a break the
decline for the first two or three days will stay below the angle line drawn off the
top as shown at X-Y in Pictograph 8.2. On an advance, it will stay above the
angle line drawn in a similar manner. Thus in the illustration the angle line
drawn off the bottom of the 11th of September, equal distance from the high of
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Pictograph 8.2 December wheat of 1933
the 31st of August would show that the advance from the 11th to the 19th was so
much more rapid than the decline from the 30th of August to the 11th of
September that at no time was the market below the angle line A-B. It not only
made the objective indicated where the line A-B bisects the arc A-C, but it went
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OBJECTIVES
almost precisely to the top of that arc A-C within the arc. Then it turned and
broke rapidly, the break staying below the angle line X-Y indicating that it was
really a turning point in the market and that there was a possibility of the objec
tive made by the intersection of the angle line X-Y on the arc X-Z being reached.
In this instance the market went through the objective several cents.
In theory the market should make the price shown, where the angle line cir
cumscribes the arc and on the day designated. Should, however, this not
transpire, the objective changes each day to the point on the arc where it
crosses each succeeding day as shown on the graph. We state that this method
has proven more dependable in measuring the distance a market will travel
rather than the time it will consume in doing so, because we have seen many
instances when a market will consume in congestion the entire period covered
by the arc and then "step out" to make the price objective shown after working
sideways clear on the outside of the arc. In other words, although the time
limits shown have apparently been consumed, the extent of the movement
shown may still be made.
It is to be noted that the objective determined by this method would be some
what similar in result to method No. 2 of page 134 of this Lesson, whereby the
objective determined in a decline is calculated by taking the distance from a
high point to a previous low point and subtracting it from the low point, or the
objective of an advance is calculated by taking the distance from a low point to
a previous high point and adding it to the high point. This circumscribed
method is much more rapid in calculation, however; it furthermore gives angle
lines with which to gauge the relative speed of an advance or a decline - a
most important market observation. It also gives some semblance of a time
limit on the objective.
MARKET SCALE WEIGHTS

In utilizing the methods of determining objectives in the market scale for weigh
ing the market, a weight of 10 points is put on the scale the moment that a
Bottom or a Top is completed. This weight is put on for "distance unfinished to
an important price level or objective." But the moment the general price area of
an important price level is reached, a counteracting weight of 15 points is put on
the scale pan in the opposite direction to that in which it has been travelling.
Thus, if the market makes a Bottom, thereby automatically setting up a price
objective at a higher level - and one should assume first that it will reach a
price half-way back from the last low to the previous important high point -
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then a weight of 10 points would be put on the Bull side of the scale pan. This
would be in addition to the weight given for the Bottom formation and for the
market being above its last Straight Average and Previous Straight Average.
(All other weights for averages would of course be dropped from the market
scale as per Lesson 7.) But the moment that the market reaches an objective
determined by (1) the Straight Average between outstanding high and low
points; (2) the nearest extremity of a previous congestion; (3) the placing of the
distance from the most recent high point to the previous low point on the
Bottom for an objective in a Bear market, or the distance from the most recent
low to a previous high point on top of the high point for an objective in an
advancing market; (4) a previous major Top of com for an objective on wheat
in a declining market; (5) a Circumscribed Objective; and/or (6 ) a Figure Chart
objective (as will be explained in Lesson 9) - when any or all of these objectives
are approached a weight of points is immediately put on the Bear side in such
an advancing market.
That weight, for "distance finished to an important price level or objective," is
kept on the scale balance until the market has a reaction of considerable pro
portions in that price level, and either puts in an opposing formation (a Top
after an advance, or a Bottom after a break) and completes it by closing out of
it, or else it has a reaction and then closes in new highs above the high point of
the advance to the important price level or price objective (or closes in new
lows on a decline).
SCALE WEIGHTS
POINTS
Distance Unfinished to an Important Price Level or Objective 10
Distance Finished to an Important Price Level or Objective 15
Important Price Level or Objective Recognized by Reaction
and then Closed in New High (or Low) Prices 5
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Lesson 9
CYCLES AND THE WEATHER
■ Ember Days
■ Summary
■ The Figure Chart
■ Market Scale Weights
It was Mark Twain who declared that although everyone is continually talking
about the weather, no one ever does anything about it.
The annual grain market price is determined more by the weather than by
any other one factor.
Since time began, man has endeavored to forecast the weather. The stars have
been read; the temperature of the ocean and the movement of the ocean cur
rents have been gauged; the thickness of fur on wild animals has been noted;
and the early drying out of cockle-burs - these and many other methods have
been utilized in endeavoring to anticipate well in advance the heat waves,
drought, excessive rainfall, early frosts and snow. The grain trade is more inter
ested in the weather than any other group of business because the weather can
make a short crop on a big acreage, or make a big crop on a short acreage.
R.O. Cromwell, one of the private reporters, declared to us that, "The average
man in observing a crop condition would become very bullish expecting far
above normal destruction from conditions that careful observation would
show as only normal. Under ideal conditions the yield per acre of wheat would
be double the average yield that is actually harvested."
In Washington the Weather Bureau has a group of scientists who are con
stantly checking and rechecking figures, endeavoring to look further into the
future with weather forecasts. If any new idea on such prognostications is
given any great amount of publicity, these scientists immediately make their
own investigations and check carefully for many years back to determine the
accuracy of the method. C.A. Donnell, rotating chief of the Weather Bureau at
Chicago, declared to us in 1933 that they have checked hundreds upon hun
dreds of methods and so far have found nothing that is safe beyond about a
24-hour forecast. "Our 24-hour forecast," he said, "is around 80 per cent accu
rate. Our 48-hour forecast is around 70 per cent accurate, while the weekly
weather outlook is only about 50 per cent accurate."
That weekly outlook is developed primarily from cables and telegrams
received from outlying points in the Pacific Ocean, Alaska, and the Caribbean.
And from these cables the probable movements of the alternate high barome
ters and low barometers are traced. In other parts of the world, such as
Argentina and Australia, they seem more able to forecast rainfall for a longer
period ahead. But in this country particularly the rains may come from one of
three directions. Naturally, this makes their forecasting more difficult.
At the same time, while the forecasting is more difficult because of the effect
of various high and low barometers coming in from different directions, it
makes America probably the safest country of the world in which to live. The
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year 1933 saw closer to a crop failure in the United States than ever before in
the history of our nation since it was entirely developed. But at that, we raised
upwards of 3.5 billion bushels of grain and sufficient other new crops so that
even without the tremendous carry-over from previous crops there was no
danger whatever of starvation.
The reason for this is simple. Harvest of our wheat crop starts the latter part
of May in Texas, moves gradually north and east, then northwest, with the last
of the harvesting coming in September. The same climatic condition affecting
one part of the country at harvest or growing time does not affect other parts.
Our rains may come down out of the northwest across the mountains in British
Columbia or Washington or Oregon, move southeast into the great grain belt
and then up the St. Lawrence Valley and into the Atlantic Ocean. Or, they may
move from the lower gulf region into Texas, pick up moisture over the western
part of the gulf, deposit it in the grain belt and move on out through the
St. Lawrence Valley and into the ocean. Or, they may come from the gulf
stream off the point of Florida, sweep through the Atlantic coast line and go
out through the New England States. This general path of the travel of storms
in this nation is shown on Pictograph 9.1.
Contrast this with the condition of Canada. Here the rains almost invariably
come from the northwest, move through the western land and out over the
northeast. Where we have three chances of receiving moisture, they have only
one. The same condition applies in Russia where the grain belt lies east and
west in practically one latitude. The rains that affect one section of their grain
belt also affect practically all of it. The drought which strikes it during the
growing season, or the heavy rains at harvest, will affect a tremendous percent
age of the acreage at one and the same time. That is why Russia has such
terrible famines. It is why the peasants of that nation use the attics of their
houses and bams as a granary and the first grain from the harvest is used to fill
those granaries as insurance against a crop failure next year. This fact also
accounts for small exports from Russia in a year of plenty following a short
crop. The peasants use part of that plentiful supply to guard themselves
against famine during the next year when possibly the rains will fail to come.
In Canada, this one chance for rainfall practically ensures the fact that never
will they be able to support a population that would consume over 50 per cent
of the crop they raise on a ten-year average. A population above that limit
would run the risk of famine during their failures, similar to those of Russia.
The difference between a low barometer and a high barometer is that in a low
barometer the wind goes in a circular movement counter-wise to the move-
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Pictograph 9.1 The usual paths of storms across the United States
ments of the hands of a clocks. In a high barometer, the winds

travel in a circular movement similar to that of the hands of a
clock. Thus, in a low barometer centered, say, in Western Iowa or
Eastern Kansas, the winds will usually pull from the southwest
toward the northeast. Should they contain rain, then the move
ment of those rains will be toward the mouth of the St.
Lawrence, or up through the grain belt.
On July 20,1933, there was a low barometer centered over the
eastern side of South Dakota such as is shown on Pictograph 9.2.
This was pulling winds out of the southwest desert toward the northeast. There
was no rain in those winds. Also, off the Atlantic Coast and extending in as far as
Eastern Tennessee and Western Georgia there was a high barometer with the
winds blowing in dock-like fashion and traveling from the southwest toward the
northeast. Theoretically, this would automatically be an ideal condition to pull
very hot winds into the com belt right at the time when com in Illinois, Indiana,
and Ohio was beginning to tassel. That is actually what occurred.
Predsely the same kind of a weather map prevailed in June of 1933, with the
low barometer at that time hanging for three or four days with a center around
Western Iowa and pulling the hot winds without rain up out of the southwest
ern desert, as at the same time a high barometer centered over northern
Mississippi was pulling those winds from the southwest to the northeast.
That condition of the weather map will usually prevail during a period of
intense heat over the grain belt. The high barometer will center over the south
east, with a low barometer over the western section of the country, both pulling
hot winds from the great American desert in the southwest. Where they come
at a critical time in growth, low yields and higher prices usually follow.
To get these winds up into the northwest the weather map will usually show
a low barometer centering over western Saskatchewan, with a high barometer
in the central part of the United States. Accompanying these climatic condi
tions will frequently be intensely hot weather in the California desert and a low
barometer centered in Washington and Oregon to pull the hot winds from the
section of the United States that normally is well above 100 during the summer
months, into the various grain belts.
Conversely, it is usually the high barometer accompanied by good wind
velocity, located over the Spring wheat states, which pulls the cold weather
down from the Alaskan territory into the grain belt. Usually in the Pacific
northwest over the Aleutian Islands to the southwest of Alaska a low baromet
ric pressure prevails practically all winter. When this low barometer passes
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Pictograph 9.2 How a low barometer over the northwest, with its winds moving counter-wise to the clock,
combined with a high over the southeast to pull hot winds out of the southwest into the Illinois-Indiana corn
belt right at tasseling time
inland, it usually means a period of mild weather over the United States,
coming in over our Pacific northwest, with rains and snow in Canada's north
west. This moisture will reach the grain belt about three to four days after it
starts inward from Alaska. In the winter time, however, a high pressure area
from out of the Arctic Ocean will usually drive this low barometer out to sea
and keep it there. And so long as the barometer remains high over that far
northwest, fair weather will prevail over the grain belt with cold winds being
pulled down by the dock-like motion of the winds in the high area. It is when
there is such a low barometer over the northwest, and it is suddenly and
quickly driven out to sea by a high barometric pressure, that the frosts come in
the Canadian and northwestern wheat belt.
Some of the coldest waves come from a low barometric pressure over the
lower point of Hudson Bay. This is almost directly north of the Indiana-Illinois
line, and it can be readily grasped that as the winds move counter-wise to the
dock in the low pressure area, they would come down out of the Hudson Bay
territory and into the central part of the United States. A combination of a high
and low that brought a sharp drop in temperatures to levels abnormally low
for the season is shown on Pictograph 9.3.
As a usual thing these high and low barometric pressures will follow each
other in their course out of the United States over the St. Lawrence Valley to the
northeast. As the winds shift in those pressure areas, so we get a shift in the
temperature. Where there is a rather wide variation between the pressure in a
high or low barometer, high winds usually result. For instance, if the low has a
density of 29.0, centered over Oklahoma, and there is a high of 30.7, say, over
western Canada, there is usually a bad storm, frequently a cyclone. Where high
winds without rain would do damage to the growing crops, it becomes a
market factor.
EMBER DAYS
In grain trade cirdes the long-range weather forecasts made by the late John F.
Barrett were more respected than any other forecasts ever made. Possibly the
reason for that was that Barrett was willing to back them up with his cash either
in purchases or sales of grain or actual wagers on the accuracy of those forecasts.
Barrett never revealed publidy the complete details of how he made his fore
casts. Those directly and indirectly affiliated with him have made private
comments, however, and together with his public statements concerning his
method we deduce that the method he used was approximately as follows.
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Pictograph 9.3 The Weather Map of November 14,1933, showing how a high in the northwest brought cold
winds down from the Arctic Circle, and a low over the northeast also brought these winds down out of
Hudson Bay to give the United States temperatures far below normal
The Catholic and Episcopal Church calendars show certain days during the
year as "Ember Days." As nearly as we can deduce the method used by
Barrett, he watched very closely the weather conditions prevailing during each
of those three days. He took the rainfall at as many points as possible, noted
the barometric pressure prevailing and its location, and from that data forecast
the type of weather that would prevail during the next three months or until
the next set of Ember Days. Thus, if the weather map during those three days
showed low barometers without rain in the southwest, he would deduce that
the counter-clockwise movement of the winds engendered by the low barome
ter would pull warm waves out of the southwest, but without rain in those
waves. In other words, he would anticipate that temperatures above normal,
but with little moisture, would prevail during the following three months. If
those low barometers contained moisture, however, and similar lows came
over the northwest with moisture, with a high barometer thrown in on the
alternate day, he would anticipate a normal seasonal temperature with normal
or above normal rainfall. If high barometers prevailed particularly over the
northern sections, pulling cold winds from the north down over the grain belt
with their clockwise movement, he would anticipate a period of cold weather
above normal during the following three months.
So far as we know he was the originator of this method of forecasting and it
became famous primarily because of the money that he won in wagers on its
accuracy. We do not know that it has been checked by anyone with records of
former years to establish a percentage of accuracy for it. It is presented more as
the basis of some future research than as a method of forecast.
Pictograph 9.4 shows the movement from the high to the low points of the
temperature at Des Moines, Iowa, from the middle of March to the first of
September, 1933. It is to be noted that there is a more or less regular rhythmical
swing from these periods of comparatively high temperatures to those of com
paratively low temperatures. They may be said to move in cycles, but with the
time of the cycles varying.
Likewise, the grain market moves in cyclical waves. Like the weather, at times
these cycles are extremely regular in their movements.
Some time ago Mr. K.S. Crittendon, who has made a very careful study of
such things, wrote to us to say, "Over a period of between six and seven years,
which I consider long enough to obtain a very fair percentage, consecutive
closings up will run about as follows:
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Pictograph 9.4 The rise and fall of temperatures during the Summer
months of 1933 at Des Moines, Iowa
Up And Down
1 day 397 times 1 day 365 times

2 days 143 2 days 161
3 48 3 64
4 38 4 37
5 19 5 15
6 7 6 10
7 2 7 2
8 1 8 1
9 1
"From this you will see that through five consecutive closings in one direction
the percentage of decrease is fairly regular. This check does not include con
gested markets, but is taken in more or less the clearly running markets.
Incidentally, I have found it of material advantage to watch the consecutive
closings after three days, as you will note how enormous is the percentage of
closings that reverse in one to three days."
From this, one should anticipate a reversal of trend even though it be tempo
rary in the market, when it shows four days of continuous higher closings
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counting from the lowest close to the highest in the series. In the analysis fac
tors, we would place a weight of five points on the reverse side of the market
scale when such higher closings are continuous.
Going into longer cyclical movements of the market, there are various cycles
which will occur and recur. We state frankly in presenting them to you, how
ever, that they should be utilized only as a guide of observation and we doubt
the advisability of making trades based on them.
Sometimes you will find a market that will run consistently for seven days,
eight days, or nine days from one low point through a Top and to another low
point. At times this cycle is widened out to fifteen, sixteen, or seventeen market
days. These cycles will recur with extreme regularity - but about the time you
make a trade on them they will go "haywire." As is said, they should be uti
lized primarily as a guide of observation. Your commitments should be based
on other factors than these alone. We think so little of them as a definite fore
cast that we do not give them any weight in the market scale. There is no
question, however, but that the market does move in these waves or cycles,
and that at times they are extremely regular.
It is important to note that many Tops and Bottoms of the month will be made
during the first three or four market days of the month. By and large we would
say that more "permanent" Bottoms or Tops from which come extended runs
are made right at "the first of" the month than at any other time in the month.
There is a certain amount of psychology in this because not only does it so
happen that the crop harvest usually starts around the first of each month, but
the statistical data both on grain and business are gathered at the first of the
month. The private crop reports come on the first of the month with the govern
ment reports on the 9th or 10th. Reports on business turnover such as pig iron
production, unfilled orders for steel, automobile production, profit of corpora
tions, and other data begin to come during that first week of the month. If those
in position to secure advance information on these reports learn that they are to
show an improvement in business conditions, these traders are very liable to
make purchases that will advance the stock market and this will automatically
improve general sentiment. The traders are dependent upon the latter reports to
generate sufficient public interest and purchases of securities that the early
buyers may unload their purchases if they so desire. That is where "inside infor
mation" on securities is needed. It is the reason why James Patten (see
Introduction) said, "In trading in securities, you need inside information."
There is little question but that what the largest traders know in advance, the
private reports will show. It costs a grain house from $25,000 a year upward to
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gather crop reports from which to make the estimates issued monthly. Those
houses are in business to make money through commissions. It is decidedly in
their interest to keep their clients advised as to crop prospects. The larger the
trader, the more he desires complete information. The late Arthur Cutten, for
instance, declared that you could study the prices all you pleased, but if you
were wrong on the fundamentals you would be wrong on the market. We
concur in this belief. That is why so much of this Course is devoted to study of
the methods of analysis of the fundamentals.
But there is very little possibility that anyone can know in advance what the
government reports will show - and they are the reports on which the world
bases an opinion of the size of grain supplies. In the first place, there is a very
heavy fine plus a term in prison for any reporter divulging this information in
advance. In the second place, the crop reporters of the Department of
Agriculture are locked into a room with a United States Marshall on the inside
of the only exit, and one on the outside of that door. Those who are permitted
to enter as the report is being compiled are not permitted either to leave the
room or send out any message of any kind until after the Secretary of
Agriculture or the Assistant Secretary releases the report at 3:00pm,
Washington time. And in compiling the reports each state is taken separately,
analyzed from the reports gathered, (1 ) from farmers; (2 ) from county agents
who also have farmers report to them; and (3) from state reporters who make
personal inspections of each section and have their county reporters and their
local farmer reporters in each township.
Of these three reports, those of the state reporters are given by far the most
weight - and they come in sealed envelopes that are not opened until after all
the reporters are gathered about the table and the doors are locked. Then, after
inspecting all of the various statements from the three sources, each of the
seven or more Crop Reporters assembled to compile the estimate makes his
own estimate of the size of the crop within that state. These are usually aver
aged, and in case of dispute the Chief Crop Reporter makes a final decision.
The estimates for the various states are then totalled, which gives the total for
the nation. It must be obvious that even the reporters themselves cannot know
what that total will show until after the final compilation.
The statement is frequently made by the uninformed that some big trader had
advance information as to what the reports would show. You may rest assured
that he does not have any more of an advance idea of it than you do.
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SUMMARY
Weather has more control over yield per acre than man, and at times may offset all
of man's efforts to increase or decrease the size of the crop. Under normal condi
tions the relativity of the wheat or com price to the general level of commodity
prices is determined within the year by the relationship of the total supply to the
requirement. Therefore it is vital to successful trading that the effect of the weather
on growing crops be watched and anticipated just as far in advance as is possible.
This Lesson gives, in a general way, the things we have found practical in
reading the weather map, and anticipating its changes. Copies of the weather
map may be obtained from the Post Office at no charge if they are to be posted
for general observation, and many commission houses send out an analysis of
the various high and low barometric pressures before the map comes from the
printers. On the floor of the Board of Trade there is always a crowd around the
big map as the reports are received and sketched in, especially during an
important crop-growing season.
The cycles in the weather have been noted, and they may be anticipated to a
certain degree. We have also noted that a sharp drop in the temperature at The
Pas, northern Manitoba, Canada, will usually precede by about 24 to 48 hours a
similar drop in temperature in the grain belt.
The cycles in the market have also been noted, but with the warning that they
should be utilized more as guides than as forecasts. And the fact that markets
make permanent highs and lows near the first trading days of the month has
been duly emphasized. We also desire to note with some emphasis that a rever
sal of trend will usually come around the 15th to 17th of the month. Thus, if the
market has been advancing, it will usually have a two-day or more break starting
the 15th to 17th of the month and frequently it is quite an extended reaction. The
same, of course, applies to rallies when the market has been breaking. In this, in
the market scale, we would place a weight of 5 points on the opposite side of the
market scale and keep it there until either an opposing Top or Bottom formation
has been completed or the market has had its reaction and then turned to close in
new prices in the direction of the initial movement.
THE FIGURE CHART

Besides the methods outlined so far for arriving at objective points in the
market where one should consider accepting profits and/or at which to antici
pate that the market will go into congestion to prepare its formations for the
next movement, we wish to outline another interesting theory.
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This is called the Figure Chart. It is based upon the number of times a market
in congestion works over a given price. The theory is that the longer a market
stays in congestion, the further it will travel when it leaves that congestion.
In other words, this is a method of measuring the extent of the speculative force
which has accumulated in a market that has been working back and forth during
a longer or shorter period of time, over a given price level in congestion. By the
extent of the speculative force accumulated in a congestion is meant the open
interest, which in the event of an advance is the short interest plus the new
buying that comes in to help put the market up to an objective on the up side, or
a long interest that sells out on a decline plus the short selling that causes the
market to run its course to make the objective on the down side. The objective in
either case should be verified by the other methods given in Lesson 8 .
To construct a chart of this nature, all that is necessary is to put in a figure as
shown each time the market passes a given price by selling to or above the even
cent just above, then back to or below the even cent just below, or vice versa.
It is important here to note that the market must sell a full cent or more
higher or a full cent or more lower than a given figure or figures before that
figure can be put in.
For the practical application of this method of determining a price objective,
consider Pictograph 9.5 showing the movements of May wheat at Chicago
from August 17 to October 8,1933. The detailed movement in the latter part of
October is shown in Pictograph 6.2.
Figure Chart of May wheal August 17 to October 8,1933 inclusive
103
102 2
101 1 1 1
100 0000
99 9 9 9 9
98 8 8 8 8 8 8
97 7 7 7 77 7 7 7 7 7 7
96 6 6 6 6666 6 6 6 6 6 66 66
95 55555555 5 5 5 5 555555 55
94 4444 444 4 4 4 444 4444444 4
93 3 3 3 3 3 3 3 3 3 3 3 3 3 3 33
92 2 2 22 222 22 2 2
91 1 11 11 1 1 1 1
0 0 0 0 0 0
9 9 9
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Pictograph 9.5 Movement graph showing May wheat at Chicago, 1933
103
The complete Figure Chart shown by that movement of May wheat during
August, September, and early October would be as shown in Table 9.1 and in
this, to save space, we omit the "90" and simply put down the unit of 90c made
by the market.
It is to be noted that the market crossed and recrossed the price level of 94c 22
different times during this congestion. That, according to the figure chart,
would give a price objective 22c above or below that price level, which ever
way it went out of the congestion. On the "down" side that would set up an
objective of 72c. The market actually went to 71 ±C.
In the market scale, when that objective as shown by the Figure Chart is
reached, a weight of 15 points is put in the balance on the opposite side to that
in which the market has been running.
MARKET SCALE WEIGHTS

POINTS
Figure Chart Objective Reached 15
Market closed higher or lower four days in row 5
Market has been running to the 15th to 17th of month 5
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In the Movement graph (Pictograph 9.5) it is to be noted that the future

declined from the high point shown here of 103, through 102, 101, 100, and on
down in a vertical drop to 89 f On the Figure Chart each cent (even cents only
are put in on that chart) is put in down to 90c. For the "89" figure to have been
recorded it would have been necessary for the market to have sold down to or
below the even price of 89c. The next movement shown on the Movement
graph is from 891 up to 99 i. So, the movements recorded would be as follows:
It is thus to be seen that each even figure or cent of the advance or decline is
placed in the Figure Chart, and that the price is not considered as being a cent
until the market has gone the full cent beyond the last even figures. In other
words, fractions of a cent are not recorded.
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Lesson 10
SEASONAL TRENDS IN GRAIN PRICES
■ The Seasonal Grain Cycle

■ Post-World War Markets
■ Relationship of Cash and Futures Markets
■ Actual Tops and Bottoms on Wheat
■ Conclusions
Many years ago, so the 'legend' goes, some employees of Mr. T.E. Wells,
President of the American Cereal Co., were going through his desk after his
death and they came upon a card on which was written:
The discoverers of this notation were quite excited about the discovery as Mr.
Wells had been very successful in his business. They passed the notation around
to friends and gradually it became known as "A Voice From The Tomb."
Now on what fundamental facts or factors were these dates based? The crop
year starts on July 1st for wheat, and October 1st for com. That is, the move
ment of grain from farmers to terminal markets gets under way at that time,
and most calculations are based on the crop year for wheat from July 1 to July
1, and for com from October 1 to October 1. In analyzing the dates outlined
in "The Voice From The Tomb," we will therefore start with the first of the
crop year for wheat, July 1. Going through the various months we find the
following facts and factors which undoubtedly had been observed by
Mr. Wells; and he had probably also noted from a study of prices the average
of price movements.
THE S E A S O N A L G R A I N C Y C L E
July Buy wheat July 1st
A Millers laying in supplies of wheat from first run. Harvest conditions dis
counted by previous decline of market as traders sold out long holdings
because the crop was actually made. Also the first hedging has, by July 1, had
its effect on the market. When the United States market is on an export basis
and world supplies are normal, foreigners place heavy orders in the market
for delivery starting July 1, and sellers of these orders start purchasing.
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B Hot weather of July and August, and rainfall during those months, is very
important on growth of Spring wheat. A decline of the market from good
conditions in June is usually followed by an advance as the weather cycle
turns from rainfall to dry and hot weather.
August Sell com August 10th

A The most critical time for com growth is during its tasseling time in late
July and early August. Hot, dry weather during that period can greatly
damage the crop. An advance during that critical growth time will usually
be followed by a decline as the weather cycle turns and the bullish condi
tion is discounted by the price.
B European wheat production reports give first reliable indication of the size
of their new crop.
C The seasonal low on rye usually comes in August and September.
D August sees the start of the marketing of Spring wheat.
E Chicago receipts usually reach their peak for wheat in August.
F The peak farm marketing of oats comes in August.
G The average of prices of oats over past years shows the seasonal low in
August and September.
September Sell wheat September 10th

A The peak hedging pressure from the northwest and from the Canadian
northwest comes shortly after the 10th of September, with a heavy move
ment of wheat to the sea-board in an effort to move as much of the
Canadian and our Spring wheat crop as possible prior to the freezing of
the lakes. The foreign crops are also being harvested and foreign buyers
are usually very sluggish in their purchases.
B Seasonal low on oats and rye usually comes in September with the peak
farm marketing of rye. The peak of Spring wheat marketing usually
comes in that month also, and the practice in the northwest is to hedge
every bushel as it is purchased from the farmers. This practice is much
more general there than through the Winter wheat sections of the country.
Where the farmer desires to store his grain, the practice has been that the
elevator operator would receive the grain, send it on to market and as it
was disposed of, the operator would be held until the final settlement was
made with the farmer. This practice has a bullish effect on prices during a
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time of advancing markets at harvest in the northwest and also if there

has been a big decline in the price and farmers feel that they might as well
hold on as sell at prevailing price levels.
October
A Peak Canadian wheat movement is on, and peak Chicago rye receipts
come in this month.
B October and November are the critical months of the crop growth in
Argentina. They correspond to our April and May in Winter wheat.
C Revised reports come from Europe together with the peak of their movement.
D The preliminary wheat estimates are given on the Canadian crop by their
government.
November Buy wheat November 28th

A Canadian movement is practically finished by that date, with the
Argentine exports at their low point of the crop year. Visible supply in the
United States starts decreasing normally during the first few weeks of
November, and removal of hedges gives a buying power to the market.
B Com visible is at the low point of the year under normal conditions, with
the oats visible at the peak in November.
December
A Lake navigation closes around December 5th.
B Argentine and Australian wheat marketing starts, with these shipments
steadily increasing until February. It takes about six weeks for boats to go
from Argentina and Australia to consuming centers in Europe, so the
ocean supplies of wheat steadily increase to a peak in March.
C Rye visible usually reaches its peak in December.
D Farm marketing of com is at its peak during that month.
January Sell wheat January 10th

A Argentine wheat begins moving heavily in January, arriving in Europe in
February with their peak load being put on the ocean early in March in an
effort to market it prior to competitive marketing of the Indian crop in
May and the U.S. wheat movement in July.
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B Com generally makes its seasonal low during December or January, with
Chicago com receipts at the peak.
February Buy wheat February 22nd

A Thawing and freezing damage reports start coming around the middle
February, with March showing the amount of abandoned Winter wheat
acreage and first estimate of Spring wheat acreage.
B The market by that time has discounted the Argentine-Australian wheat
movement and after Washington's birthday their competition in the world
market begins to diminish.
C The pre-Spring movement of com is at its peak, with renters endeavoring
to clean up remaining supplies prior to moving; and other farmers market
com preparatory to paying taxes.
March Buy com March 1st

A Com visible usually reaches its peak in March, with Spring work starting
in the fields. This automatically dries up the market movement, with
demand continuing prior to the coming of grass.
B Private reporters give their estimate of farm reserves of grain, with it then
being possible to arrive at a rough estimate of consumption during the
first nine months of the crop year and the quantity available for consump
tion and carry-over during the balance of the crop year.
April
A India harvests its wheat crop, and Argentina harvests its com crop.
B Lake navigation is opened, with usually a fair rush of grain eastward and
a sharp reduction in the visible supply.
C Crop reporters tour the southwest looking for damage. Big volume of
trade comes when markets are advancing; and crop reporters are first sent
to points reporting the most damage.
D The average of the years shows April and May register the high prices
for wheat.
E First Spring Government Estimate on Winter Wheat Crop is released, with
estimates of Farm Reserves of wheat, com, and oats.
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May Sell wheat May 10th Sell com May 20th

A Damage to the growing wheat crop is fairly accurately gauged by the 10th
of May, and the news henceforth lacks some of the exciting qualities
almost necessary in Bull markets. "Bull markets are built on excitement."
B Com planting is usually finished around the 20th of May, and any bullish
ness indicated by an acreage reduction is discounted. Also, farmers have a
breathing spell during the first days of June, between com planting and its
cultivation, and this is utilized for the marketing of com, the extent of this
marketing depending upon the outlook for new crops.
June Buy com June 25th

A By the above date the Spring marketing movement is over, the Spring
rains have come, and under seasonal conditions there has been a reaction
as fields green up and assume their prettiest picture. The old com supplies
are nearing their minimum, with rapid decrease under normal conditions
in the visible supply; and the hot weather through which the growing
com must pass is just ahead of the market.
It must be recognized that such a market calendar as the above must be

taken only as a general guide which can be expected to function only during
a series of years when Supply and Requirement are fairly well in accord and
business is stable.
The seasonal trend of wheat prices shows a normal August Bottom, a rally to
October with a slight decline to the middle of November, an advance to the
middle of February, a reaction into March, and then an advance to a peak in
May. In com the seasonal trend is an advance from a January low to a first high
in May, a reaction to June and a seasonal high in August. This average of price
movements is based on the average of grain movements from 1886 to 1915 (see
Pictograph 10.1). Later years are analyzed later in the Lesson.
But during those years the major advances and declines of general commod
ity prices and of grain prices described in Lesson 1 very frequently set at
naught such a seasonal calendar of price movements as described above. It is
far more important in our opinion to note the trend of that major cycle of
market price movements than it is to note the seasonal calendar, although in
the market scale we arbitrarily allow a weight of five points on the side of the
market on which the seasonal calendar says that the market should move.
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Pictograph 10.1 Average annual price trend in per cent (basis, average
cash price from 1886 to 1915)
Wheat Corn
In seventeen of the thirty years from 1886 to 1915 during which there was a
short wheat crop following a large one, the wheat market advanced from a
low in January to a high in May, broke until July, and advanced to a peak in
December. Using the average of this price movement as 100 per cent, the
market advanced from 94 in January to 101 in May, broke to 96 in July, and
advanced to 105 in December. This movement is shown on Pictograph No.
10.2, Graph 1, herewith. In com, when there was a passage from a big crop to
a short crop, the average price movement advanced from a low of 93 per cent
(of its average price for the year) in January, to a high of 106 per cent in
August and September, and then held steady during October, November, and
December at levels slightly under those of August and September. This is
illustrated on Graph No. 2.
In thirteen of the thirty years from 1886 to 1915 there was a change from a
short wheat crop to a large one. In those years the average of the price move
ment was as shown on Graph No. 3, in which the market made a temporary
high in February, at about 108 per cent of its average price for the year,
declined to 107 in March, advanced to 110 in May, and then declined steadily
during the balance of the year to bottom at 91 in November with a rally to 92 J
in December.
In sixteen of those thirty years the com crop showed a passage from a short
crop to a large one and the movement of the price is depicted on Graph No. 4.
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Pictograph 10.2 Average price movement in transition from large to a

short crop
Wheat 1 Com 2
Wheat 3 Com 4
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In it the market advanced from 102 per cent of its average price for the year, in
February, to 107 in May, worked at 106 in June, July, and August, and declined
during the balance of the year to 96 in December.
POST-WORLD WAR MARKETS

The foregoing discussion covers a long series of consecutive markets between
1885 and 1915. In the series of years between 1920 and 1935, there was a slight
variation of this, but nothing of consequence. In these later years, the average
low price of cash wheat was made in October instead of August, the change
undoubtedly being due to the increasing importance of Spring wheat as
grown in the U.S. and Canadian northwest. And there was an actual differ
ence of 27a bushel between the very lowest price paid, in the average of
those years, for contract wheat at Chicago in October, and the highest price at
which contract wheat averaged selling the following May. But that cash con
tract price included premium wheat and in some years a particular ear of high
protein wheat might sell 25 to 50 cents a bushel above the general average of
wheat or above the futures.
Furthermore, although the highest prices during those years averaged coming
in May, there were nine of the fifteen years when the highest price on the crop
was made prior to the first of January. So had one blindly shut one's eyes and
bought cash wheat in October and held until the following May, one would
probably have lost instead of gained.
If one had bought May wheat at the average price of the contract in October, the
month when the market averaged making its low, one would have bought it for
$1.10 a bushel. And had one held until the following May and sold out at the
average price of that month, one would have sold for $1.11 J. In other words, one
would have had 1 a bushel for one's trouble on the average in 15 years of mar
kets. So it appears obvious that something more than the seasonal cycle of price
movements must be utilized if you are to take advantage of the movements that
come in the market. We will study this a little more closely after considering
some other seasonal aspects and the relationship of the cash and futures markets.
RELATIONSHIP OF CASH AND FUTURES MARKETS

Bids on grain to the country from the terminal market are offered on the basis
of the future nearest to delivery. During years of normal supplies, the cash
wheat is at a discount under the futures, the average from 1920 to 1929 show
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ing a discount of 8 c in August, with a gradual narrowing of the spread from

then on until in May the cash averages selling at a premium of 4<t over the May
futures. So the deferred futures, in normal years, are at a premium which
reflects this normal advance in the cash wheat. Thus the December future
would be at a premium over the September to reflect the diminishing supplies
of wheat as the season rolls on, and the May at a premium over the December.
In years of big supplies in the United States, these discounts of the cash under
the futures widen out. In other words, the futures reflect not only the carrying
charge but also the anticipated change in condition, due either to the effect of
low price on acreage or to Nature reversing herself and sending a low yield
instead of the high yield that brought the big supply.
In years of drought or short crops, however, the reverse condition exists.
Due to the shortage, cash wheat rules high as compared to the futures,
sometimes even during the period of heaviest marketing. Cash dealers,
apprehensive over their future supplies, buy early so they may supply their
trade. Premium wheat, or wheat of high protein content, sells very high as
compared both to the future nearest delivery and to the average wheat
of the crop.
In such years, the December future will frequently sell at a discount under the
September, which had sold at a discount under the July. And the May future
may sell at a discount under the December. But as the September future
expires, the December will pick up where the September left off, provided the
actual shortage exists in the world supplies. And as the December expires, the
May will usually pick up and carry on. We call to your attention the statement
on Page 27 of Lesson 2 that in the years of short supplies the highest prices are
usually recorded after the 1st of January, provided that the trend of general
commodity prices at that time is upward.
But as time for delivery on the May contract nears, a change appears pro
vided the new crop prospects are improved and the promise is for a normal
crop or above the next crop year. In that event, the high premiums for the
cash wheat as compared with the May future have a tendency to disappear,
when trading in the July is at a much reduced figure. There is a decline in
flour sales as dealers prefer to await the new crop, and so move all of their
old supplies into consumption. Also, farmers and elevators, as well as mills
and terminal elevators, desire to move their old crop supplies into con
sumption rather than carry it over to be sold in competition with the new
crop supplies. This has given rise to the old saying, "Beware of the tail end
of a short crop."
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ACTUAL TOPS AND BOTTOMS ON WHEAT

In the years from 1920 to 1933 wheat declined from a price for cash contract
wheat of $3.50 a bushel in January, 1920, to a price for the cash grain future of
98c made on November 4,1921. From that price level the market advanced to a
high on February 27, 1922 of $1,491, returned to $1.49J on April 22nd of that
year and from that price broke to 971c on August 21st. An advance then started
which ended at $1,281 on December 19th, 1922. The market held at somewhat
lower levels, returned to $1,271 on April 26,1923, from which price it declined
to 96c on July 28, 1923. From that low the market advanced to $1,101 on
October 8 th, 1923, then declined to $1.00l on December 26th, 1923. (The move
ments may be followed on Pictograph 8.1. Quotations given here are exact to
the eighth cent, with the date of the high or low.)
May wheat in 1924 reached a peak of $1,131 on February 5th, and declined to
a Bottom on March 28th of $1,001. From that extreme low the May future
advanced to $2,051, that price being reached on January 28th, 1925. From that
level the market broke to $1,361, reaching that price on April 3rd, 1925. It
rallied to $1,741 on May 19th, and the trend was then down to $1,331 on
October 3rd of that year. After the Bottom was completed at that time, wheat
rallied to $1,901, that price being reached on December 30,1925. The trend was
then down to $1.29, that price being reached on September 4th, 1926.
The next peak was reached on October 23, 1926, at $1,461 and the next
trend was sidewise to downward to a low price of $1,301 made on April 13,
1927. The next advance carried wheat to $1,561, being made on May 31,
1927. From that level the market declined to $1,191 on October 24,1927, put
in a Bottom and advanced to $1,711 on May 1st, 1928. Then it declined to
$1,061 on September 10, 1928, and the next movement was upward to
$1,291, that price being reached on February 15, 1929. It thereupon declined
to 9310, that price being made on May 31,1929. Next advance was to $1,481,
the cash future recording that price on August 1, 1929. The next trend of
wheat prices was decidedly downward to a low of 441c, that price being
reached on October 5, 1931. A rally to 681c followed, being registered on
November 9, 1931. The trend then was downward to a low of 41 lc on
November 25, 1932. The next trend was up to a high of $1,171 on July 18,
1933, with a break following to 671c on October 17, 1933, the last outstand
ing low as this is written.
Thus it is seen that the actual dates of the important highs and lows during
the years from 1920 to 1933 inclusive have been as follows:
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Highs Lows
Date Price Time of Date Price Time of
Advance Decline
in Months in Months
Jan 1920 Nov 4, 1921

Feb 27, 1922 Aug 21, 1922
Dec 8, 1922 July 28, 1923
Oct 8, 1923 Dec 26, 1923
Feb 5, 1924 Mar 28, 1924
Jan 28, 1925 Apr 3, 1925
May 19, 1925 Oct 3, 1925
Dec 30, 1925 Sept 4, 1926
Oct 23, 1926 Apr 13, 1927
May 31, 1927 Oct 24, 1927
May 1, 1928 Sept 10, 1928
Feb 15, 1929 May 31, 1929
Aug 1, 1929 Oct 5, 1931
Nov 9, 1931 Nov 25, 1932
July 18, 1933 Oct 17, 1933
It must be perfectly obvious from these actual movements of wheat during

those fourteen years (and the same will be shown in the movement of com in the
study of that cereal in Lesson 12) that any attempt to define the extent of time of
a major Bull or Bear market must lead to an entirely erroneous conclusion. Thus,
we see that the advances in wheat of appreciable extent might last for only one
month or ten months. The declines might last for 1 4 months or 26 months.
In considering the extent of time in those declines as compared to the
advances, one must consider also that during those years from 1920 to 1933 the
world was getting off a price level dictated by the abnormal conditions of war
to a level dictated by peace conditions. Going back to the years from 1886 to
1915 it is seen that in seventeen of thirty years the market advanced from
January to December, while in only thirteen of the thirty years did it decline
from January to December. It would be perfectly logical to assume therefore
that as world wheat supply becomes more closely adjusted to requirement in
the years from 1933 forward, the advances may be equally as long in period of
time as the declines have been during the period from 1920 to 1933.
In this record showing fifteen Bottoms from which the market advanced,
eleven of them were made during the last six months of the year. Of these, the
earliest was made on July 28th. It is important to note that in all of those
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declines the market had been declining during the movement from a large crop
to the movement of another large crop. Where the low was made in the Spring
of the year, it was made right at the time when bad damage reports were
coming from the Winter wheat sections, in three of the four Spring Bottoms. In
other words, those Bottoms were made in March and April. The fourth Spring
Bottom was made in May, from news of deterioration of the Canadian crop.
The high prices were about evenly divided between the first six months of the
year and the last six months. It so happens that in these years under discussion,
the trend of world wheat production was upward, increasing much more
rapidly than consumption could absorb it. Therefore, as the market advanced
into the Spring months the market topped for declines due to increasing sup
plies caused in part by increasing acreage. And precisely the same observation
may be made concerning the Tops which were made in the last six months
of those years.
Where the market advanced during the crop growing season of either this
country or other countries, it was found after the excitement of that deteriora
tion had waned that despite the deterioration in the countries from which the
news came on which the market advanced, the acreage and carry-over of other
countries was so increased that still the world had supplies sufficiently large to
fulfill all needs. The only exceptions one can draw to this are the years 1925-26.
At that time a short world crop in 1924 was again followed by a short crop in
1925 and only a normal crop in 1926.
CONCLUSIONS
The conclusions one may make from the study of the seasonal trends and other
movements of grain prices are as follows.
1 During a period of time when world supply and requirement are fairly
well in balance and the indications are that this equilibrium will be main
tained, one may logically anticipate that the market will move fairly well
in accord with the average of price movements over a long period of
years. The buying and selling dates as outlined in "A Voice From The
Tomb" might be expected to be complied with to a reasonable degree.
2 World supplies, however, are more or less constantly shifting, and Nature
seldom sends the same kind of weather two years in a row. Varying cli
matic conditions will affect production variously. For instance, in France
they normally have too much rain, while in Spain they have too little rain.
A season of drought will give France an above normal yield per acre of
wheat, while at the same time it will give Spain a short crop.
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3 It is far more important to watch the changes of Supply and Requirement,

and the general trend of commodity prices as forecast by not only the
changing relation of Supply and Requirement but also the general activity
in business, than it is to watch the calendar for buying and selling dates.
"Bull markets are built on excitement." "Bear markets are built on despair."
When business is active or when there promises to be a relatively small
exportable surplus as compared to import requirements in the world, then wheat
prices will advance through the crop movement season just as rapidly as they
will at any other time of year. But when conditions appear to be favorable, with
the promise that the Supply will exceed the Requirement and business activity is
at a low level, then grain prices will decline right in the face of a steady removal
of hedges as the quantity of grain in the visible supply diminishes.
Therefore, we go back to the major cycles of commodity prices as a better
guide to general price movements. We go back to the Law of Price Relativity
and watch for a Bottom when the price is low and facts or factors are avail
able that would bring excitement into the market; or we watch for a Top
when the price is high, conditions favorable, the Stock Market shows no great
anticipation of an upward swing in business, and wheat and com verify each
other that the trend is downward.
Naturally this makes more important the study of the relativity of wheat
prices and stock market trends and the study of wheat and general business
factors. After an analysis in the next few Lessons of the characteristics of coarse
grains, this subject of business indices will be studied as a final preparation for
going into the practical application of the studies presented in this Course.
Let us remind you that the next Lesson is an examination of students. In it
you will be given a market to graph, business factors current at the time of that
market, and you will be asked to make an analysis of this market and what one
might logically conclude would follow. That is the only way we may have of
knowing whether or not the material we are endeavoring to present is so given
that you may understand it and utilize it in a practical way. We suggest, there
fore, that you review the Lessons so far received and if there is any point in
them not clear to you that you make note of it and ask for further explanation
after you send in your answers to the examination questions.
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Lesson 11
EXAMINATION
■ Business Indices
■ Reference List of Analysis Factors
EXAMINATION
As Abraham Lincoln did not say, "You can fool all the people some of the time,
and some of the people all of the time, but he who invests his money in grain,
or trades in the market and fools himself by forming an opinion before making
a thorough market analysis, is just a plain damn fool."
In preparing for this examination we would suggest, if you have not recently
done so, that you review lessons to date, especially those which have to do
with the making of graphs, and the factors you have been given so far which
carry a given weight in making an analysis.
After you have made this last review of your Lessons as suggested, put away
your books and all previous references to the Lessons. This is not a school
examination where you might want to write something on your cuff. Rather it
is a preparation for investing your own money.
To start with, we wish you to make a chart using the high, low, and closing
prices of a wheat market as given on the last two pages herewith. Do not even
try to guess what actual future this is. (In fact, we doubt that you could, as we
have changed somewhat the dates and the prices.) But it is an actual market.
1 Make a graph of that market.

2 Analyze it from the factors you have so far received, as of Lesson 10. To
assist you in your analysis a weight sheet of analysis factors so far pre
sented is given herewith.
3 Describe the type or types of Top or Bottom formation put in by this market.
4 Fundamental business facts and factors of that time are also given,
together with the Commodity Price Curve on wheat and the particular
news of the moment in the market. Make a forecast of this market as of
November 20th, giving (a) major objectives; (b) important price levels
from which you would anticipate that the market would react, with rea
sons; (c) objectives shown by the Figure Chart; and (d) your opinion as to
whether or not under the circumstances given one would be justified in
making heavy trades or whether one should proceed cautiously; (e) state
the objective or objectives shown by the Circumscribed method. Also state
the price level in a general way through which the angle line or lines of
the Circumscribed method should be projected.
5 Point out to us either on the graph you send or with the dates and prices,
the movements from which you took your averages, your Head and
Shoulders, or other movements of the various formations, and the points
at which you would place the compass in prescribing the arc from which
to get the Circumscribed objective.
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Do not look back in your Lessons to check your answers before you have
sealed and addressed your analysis paper to us. But we would advise that,
after having sealed the Lesson, you then go back and study the various points
which are brought up by this examination and then rewrite, if necessary, what
you should have answered and check that answer with the correct interpreta
tion as will be sent to you with Lesson 13. And if there are any parts of the
Course on which you would like further information, make your request at the
time you receive the correct analysis.
You may either send us a graph of the market together with your forecast, or
simply write out your forecast and the reason why you have arrived at your conclu
sions. We would prefer the former.
Please get your answer to this practical problem in to us within one week
after receiving this examination. A Pictograph showing exactly what the
market actually did will be sent to you with Lesson 13.
General Commodity Curve -

August 1
September 1
October 1
November 1
Building Permits - August

September 1
October 1
November 1
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EXAMINATION
News of the day

Crop news was very bullish with the crop of a major export country showing
deterioration; otherwise, the crop of the import countries was larger than the
year previous and near a peak level up to that time. Stacks at the beginning of
the period quoted were in a reaction (downward). The trend of business is
depicted in the business indices.
REFERENCE LIST OF ANALYSIS FACTORS

POINTS
1 Turn-Up Day or Turn-Down Day 4
2 Outside Day 5
3 Inside Day near probable Top or Bottom 5
4 Narrow Day 8.5
5 Triple Reverse Day 5
6 Saturday, a very strong day or new high or low prices 5
7 Saturday-Monday Top or Bottom 5
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8 Regular Top or Bottom Formation 10

9 Regular Top or Bottom with Cut-Out 15
10 Coil Formation 15
11 Descending or Ascending Top or Bottom 5
12 Double Spread or Check-Top or Bottom 7
13 Last Straight Average 5
14 Previous Straight Average 2.5
15 Last Triple Average 2.5
16 Last Combination Average 2.5
17 Big Straight Average 2.5
18 Big Triple Average 2.5
19 Big Combination Average 25
20 Distance Unfinished to an Important Price Level 10
21 Distance Finished to an Important Price Level 15
22 Important Price Level or Objective Recognized by Reaction and then
closed in New Highs 5
23 Market has closed higher or lower four days in row 5
24 Market has been running to 15 to 17th of month 5
25 Market has Bottom made in first four market days of month 5
2.6 Seasonal trend according to calendar 5
Table from which to make graph
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EXAMINATION
-181 -
-182-
Lesson 12
CORN
■ The Dominating Market Influence

■ Time and Distance of Extremes and Runs
■ A Most Important Time of Year
■ Top and Bottom Formations
CORN
The grain produced in largest quantity in the United States, but with a smaller per
centage coming to market than any other grain with the exception of oats, is com.
This grain is almost entirely a domestic commodity, on the average. Back in
the years from 1888 to 1905, this country was a rather heavy exporter of com,
with total shipments in 1889 amounting to 213 million bushels, or 10.3 per cent
of the crop. That, however, was before Argentina developed as a com country.
Since 1900, the starchy, hard Argentine product has all but replaced American
com in export markets. Nowadays, if we send out 25 million bushels in a year,
we consider it as a rather big year for exports. And in the drought years of 1934
and 1936 we imported heavily.
In a compilation showing com utilization in 1910-14 and 1924r-29, sent to us
by Dr. O.C. Stine of the Division of Statistical and Historical Research, Bureau
of Agricultural Economics, U.S. Department of Agriculture, the following dis
position of the com crop is shown:
Com utilization, 1910-14 and 1924-29
Percentage of Crops
Usage 1910-1914, 1924-29,
Inclusive Inclusive
Per cent Per cent
Consumed by Horses and Mules on Farms 17.4 13.9
Cattle on farms 16.2 19.3
Hogs on farms 36.8 41.6
Sheep on farms 1.0 1.0
Poultry on farms 9.0 10.4
Livestock not on farms 7.0 2.5
Industrial-Commercial usage 9.0 8.8
Exports 1.7 0.8
Families on farms 1.2 1.0
Seed 0.7 0.7
100.0 100.0
The average crop from 1924 to 1929 was 2,685,770 bushels, so the disappear
ance by groups and consumption per animal at this rate would be as follows:
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1924-29 Average Consumption Consumption

Number Animal or Use % Bushels Per Animal
20.783.000 Horses-Mules 13.9 373,322,000 17.96bushels

58.062.000 Cattle 19.3 518,353,000 8.92
56.051.000 Hogs 41.6 1,117,280,000 19.93
42.444.000 Sheep 1.0 26,657,000 .63
441,280,000 Poultry 10.4 279,320,000 .63
Livestock not on farms 2.5 40,286,000
Industrial and Commercial 8.8 229,680,000
Exports 0.8 2,088,000
Farm family usage 1.0 26,857,000
Seed 0.7 18,270,000 .17bushels
per acre
It is interesting to note that with the decline of horses on farms from 18,848,000 on
January 1,1920; to 12,163,000 on January 1,1933, there was a theoretical decline in
demand for com amounting to 120,062,000 bushels at this rate of consumption.
Theoretically, one should be able to take these figures of consumption by vari
ous classes of users and work out what would be a normal supply for each
year. But those estimates are only averages, and com consumption per animal
varies not only according to the price of com itself but also according to the
prices of the livestock to which it is fed and the scarcity or surplus and prices
of other feeds and grains.
It has been our practical experience that these estimates will not "work out" in
actual practice. By that we mean that if one were to make these estimates year by
year on the basis of the above requirement, and then check with the actual
supply, the price would not rule above the general average of commodity prices
consistently when this method showed a Supply below Requirement, nor would
it rule low consistently when the Supply was larger than indicated needs. And
our studies are to find a practical way of anticipating price movements.
Many years ago, when he was with the Crop Reporting Board of the U.S.
Department of Agriculture, Mr. Nat C. Murray made an estimate of the farm
usage of com. His analysis at that time was that horses averaged eating 57
bushels, hogs 11 bushels, and cattle 9 bushels. This is quite a sharp difference
from the 1924-29 average consumption, and those compiled in the 1940s, the
Murray figures being taken prior to the World War. But application of these fig
ures gives a practical idea of whether the price for the year (or until a new crop
assumes dominance as the market influence) should rule high or low as com
pared to the general level of prices for the year.
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CORN
THE DOMINATING MARKET INFLUENCE

Our experience indicates that in calculating the price dictated by current condi
tions, buyers and sellers consider not only the changes for livestock, the
relationship to other markets of the world, and the inter-relationship with
other grains, but also particularly the size of the supply as compared to recent
years, and the actual disappearance of com as compared to the usual rates of
disappearance in percentage compared to normal or average rates.
In this latter the economic function of the price, namely, to regulate the Supply
to the Requirement and to move that Supply into consumption, must be consid
ered. There is 100 per cent of the Supply. If the consumption is at the average rate
per quarter, then with a normal Supply the price should, theoretically, rule at a
normal level compared to general commodity prices. If the rate of consumption
is larger than normal, so much so that if continued it should show an actual
deficit in the Supply, then of course the price would need to advance until the
consumption were cut down. But if the rate of consumption is such that there
would promise to be a decided increase in the carry-over with no prospect of an
increase in demand, then naturally the price would need to decline to a level that
would discourage production and encourage consumption.
As a specific case in point, in the short-crop year 1936-37, the total Supply of
com on farms in the visible, and from the new crop, estimated as of October 1,
was 1,435,669,000 bushels as compared with a 1926-35 average Supply of
2.264.898.000 bushels. This was a Supply well below the averages as corrected
for changes in livestock, and the price early in the crop year went upward to a
comparatively high level to discount the condition.
Now, the average disappearance of com between October 1 and January 1
during the ten years from 1926 to 1935 inclusive was 855,779,000 bushels, or
37.7 per cent of the Supply. The disappearance between October 1, 1936 and
January 1,1937, was 612,440,000 bushels, or 42 per cent of the available supply.
But there had been drastic liquidation of hogs and cattle, and the price was
about 140 per cent of its normal relation to the general average of commodity
prices. So the com market backed and filled during the three months to April 1.
On that date the private crop reporters of Chicago released estimates showing
only 381,000,000 bushels of com on farms. Adding this to the visible supply of
11.946.000 bushels would give a total of 392,946,000 bushels, and indicate a dis
appearance of 430,283,000 bushels during the preceding three months, or
1.042.723.000 bushels during the first six months of the crop year. This was 72.6
per cent of the total Supply where the average disappearance in the preceding
- 187-
ten years was only 63.8 per cent. Further study of those figures showed that the
October-January disappearance was 72.2 per cent. If the rate for the last six
months were to continue at 72.2 per cent of this ten-year average, it would call
for consumption of 449,163,000 bushels with only 392,946,000 bushels available.
Obviously, from these figures the market price had not yet performed its eco
nomic function of regulating the Requirement to the Supply, even though it
was at a comparatively high level. The result of this condition was an advance
from 120 i to 1331 on May com in four days following the release of these esti
mates. And at the high point, May com was 164 per cent of its normal
relationship to general commodity prices, the highest level corn had gone
between that date and the War.
The above specific instance of cause and effect gives the method of analyzing
the fundamentals of com prices. The following method and the accompanying
tables give the data which students should bring up to date from their Year
Books. Analysis of the price would be, generally speaking, similar to that for
wheat, given in preceding Lessons, except that little attention would be given
to Turning Days or to nearby averages. But the com market puts in the same
types of Top and Bottom formations, makes its averages, its Circumscribed
objectives, etc. in a manner similar to wheat. Other characteristics of the price
action will be discussed later in the Lesson.
The first step in the analysis of the com market is of course to get the "big
picture" - to see whether the fundamentals are such as to warrant the price
ruling high or low as compared to general commodity prices. So first of all,
Table 12.1 shows the numbers of livestock on farms on the first of January each
year from 1921 to 1937, with the average number for each five years inclusive
and the average of the two years just preceding the current year.
In this, it is the hogs on farms on January 1,1937, that eat most of the com of the
1936-37 crop. So you would take the number for the January 1 after the harvest of
the preceding harvest for your calculation. And our experience shows that traders
or buyers and sellers look more to the near past than to the distant past for their
guidance as to the size of the Supply as compared to the Requirement. So in an
analysis of the crop of 1936-37, you would take the five-year average from the
number of animals on farms for the years 1937-1936-1935-1934-1933 inclusive.
For the com supply, it would be the years from 1936 to 1932 inclusive. For the two-
year average preceding the current year, it would be the years 1935 and 1934.
In Table 12.2, these averages of the changes in livestock are corrected for
the amount of com they would consume at the Murray figures of 57 bushels
per horse or mule, 11 bushels per hog, or 9 bushels per cow. Thus, on
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CORN
January 1, 1925, the number of hogs estimated on farms was 55,769,000

head. This was 5,874,000 head less than the average number there had been
on farms from 1925 to 1921 inclusive. At 11 bushels per head, this would
call for a reduced consumption of 64,614,000 bushels of com. That year, the
number of horses on farms was 1,329,000 bushels less than the average of
the five years, and at 57 bushels per animal this would call for reduced con
sumption of 75,753,000 bushels.
On mules, there was an increase of 76,000 head over the two-year average,
which at 57 bushels per animal would call for increased consumption of
4.332.000 bushels of com.
For cattle, there was a decrease of 3,302,000 head from the five-year average,
which at nine bushels per head would call for reduction in consumption of
29.718.000 bushels.
The combined changes would show a reduced demand for com, as compared
with the five-year average, amounting to 165,753,000 bushels due to changes in
livestock on farms.
A similar process of analysis is gone through in correcting the average supply
of com for the last two years preceding the current year, for changes in live
stock demand as shown for the last two years preceding the current one. This
analysis is shown in Table 12.3.
Then in Table 12.4, the com crop, the amount on farms on October 1, and the
Visible Supply of that date are shown first, to get the total Supply. The Supply
is then averaged for the last five years inclusive. For instance, for the years
1920-24 inclusive, it averaged 2,992,321,000 bushels. But we have seen that,
due to decreases in numbers of livestock on farms, there would be a lessened
demand totalling 165,753,000 bushels from this five-year average. That would
bring it down to 2,826,568,000 bushels. The average Supply of the two years
preceding the current year was 2,791,299,000 bushels. But, due to changes in
livestock on farms, it would be necessary to reduce this by 210,598,000 bushels,
so the two-year average Supply corrected for changes in livestock on farms
would total 2,508,701,000 bushels. The average of the two-year average and the
five-year average, each corrected for changes in numbers of livestock on farms,
would total 2,703,684,000 bushels.
Now, it can be seen from Table 12.4 that the actual Supply available that year
was only 2,398,236,000 bushels. This was materially under the theoretical
"normal" as arrived at above. So, the economic function of the price being to
regulate the Requirement to the Supply and move that Supply into consump
tion, high prices for the year were a necessity.
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Table 12.1 Livestock on farms 1921-37
5-Year Average Inclusive 2-Year Average Preceding

Jan 1 Hogs Horses Mules Cattle Hogs Horses Mules Cattle Hogs Horses Mules Cattle
1921 58,711 19,134 5,586 67,184

1922 59,355 18,564 5,638 67,264
1923 68,447 17,943 5,702 66,156
1924 65,937 17,222 5,730 64,507
1925 55,769 16,554 5,758 62,150 61,643 17,883 5,682 65,452 67,192 17,584 5,716 65331
1926 52,055 15,840 5,733 59,148 60,312 17,224 5,712 63,645 60,853 16,888 5,744 63328
1927 54,408 51,145 5,679 56,872 59325 16340 5,720 61,766 53,912 16,197 5,745 60,649
1928 60,617 14,495 5,504 55,676 57,757 15,851 5,680 59,670 52,231 15,492 5,706 58,014
1929 57,410 13,897 5,390 57,410 56,051 15,186 5,613 58,251 57312 14,820 5391 56,274
1930 55,705 13,742 5,382 61,003 56,039 14,623 5,537 58,021 59,013 14,196 5,447 56343
1931 54,835 13,195 5,273 63,030 56395 14,095 5,445 58,798 56357 13,819 5386 59,206
1932 59,301 12,664 5,148 65,770 57,573 13398 5,339 60380 55,170 13,468 5327 62,016
1933 62,127 12,291 5,046 70,214 57,875 13,158 5,248 63,485 57,068 12,929 5310 64,400
1934 58,621 12,052 4,945 74,262 58,118 12,789 5,159 66,856 60,714 12,477 5,097 67,942
1935 39,004 11,861 4,822 68,529 54,775 12,412 5,047 68,361 60374 12,171 4,995 72,238
1936 42,837 11,635 4,684 67,968 52318 12,101 4,929 69,397 48,812 11,956 4,883 71390
1937 42,774 11,527 4,603 66,676 49,058 11,928 4,839 69,543 40,772 11,749 4,753 68371
Table 12.2 Corn corrections for livestock changes - 5-year averages
Hogs Horses Mules Cattle

No. on farms * or - 5 year At 11 Bushels *or-5Yr Bushels * or- 5 Yr at 57 * or- 5 Yr at 9 Bushels
at 57 Bushels
1924-25 55,769 - 5,874 - 64,614 -1329 -75,753 * 76 * 4332 -3302 -29,718 -165,753
1925-26 52,055 - 8,257 - 90,827 -1384 -78,888 * 21 * 1,197 -4,497 -40,473 -208,991
1926-27 54,408 - 4,917 - 54,087 -1395 -79315 - 41 - 2337 -4,894 -44,046 -179,985
1927-28 60,617 * 2,860 * 31,460 -1356 -77,292 -176 -10,032 -3,994 -35,946 - 91,810
1928-29 57,410 * 1,359 * 14,949 -1,289 -73,473 -223 -12,711 - 841 - 7369 - 78,804
1929-30 55,705 - 334 - 3,674 - 881 -50,217 -155 - 8,835 *2,982 *26,838 - 35,888
1930-31 54,835 - 1,760 - 19,360 - 900 -51300 -172 - 9,804 *4,232 *38,088 - 42376
1931-32 59,301 ♦ 1,728 * 19,008 - 934 -53,238 -191 -10,887 *5,190 *46,710 * 7,290
1932-33 62,127 * 4,252 * 46,772 - 867 -49,419 -202 -11,514 *6,729 *60,561 * 45,400
1933-34 58,621 - 503 - 5,533 - 737 -42,009 -214 -12,198 -7,406 -66,654 -126,246
1934-35 39,004 -15,771 -173,481 - 551 -31,407 -225 -12,825 * 163 * 1,467 -216,394
1935-36 42,541 - 9,777 -107,547 - 464 -26,448 -244 -13,908 -1,184 -10,656 -158,559
1936-37 43,000 - 6,058 - 66,638 - 128 - 7,296 -139 - 7,923 -3,043 -27387 -109,244
* Means plus
- Means minus
Table 12.3 Com corrections for livestock changes
2-Year Average
Hogs Horses Mules Cattle Total
*or- At 11 Bushels * or- At 57 Bushels * or- At 57 Bushels * or- At 9 Bushels
1924-25 -11,423 -125,653 -1,030 -58,710 4 42 4 2394 -3,181 - 28,629 -210398

1925-26 - 8,798 - 96,778 -1,048 -59,736 - 11 - 627 -4,180 - 37,620 -194,761
1926-27 * 496 * 5,456 -1,052 -59,964 - 66 - 3,762 -3,777 - 33,993 - 92,263
1927-28 * 7386 * 81,246 -997 -56,829 -202 -11,514 -2338 - 21,492 - 8389
1928-29 - 102 - 1,122 -923 -52,611 -201 -11,457 41,136 * 10,224 - 54,966
1929-30 -3308 - 36388 -454 -25,878 - 65 - 3,705 *4,460 -140,140 - 25,831
1930-31 -1,722 - 18,942 -624 -35368 -113 - 6,441 *3,824 * 34,416 - 26335
1931-32 * 4,131 -145,441 -804 -45,828 -179 -10,203 *3,754 * 33,786 * 23,196
1932-33 * 5,059 * 55,649 -638 -36,666 -164 - 9348 *5,814 * 52326 * 62,261
1933-34 - 2,093 - 23,023 -425 -24,225 -152 - 8,664 *6320 * 56,880 * 968
1934-35 -21370 -235,070 -310 -17,670 -173 - 9,861 -3,714 - 33,426 -296,027
1935-36 - 6,271 - 68,981 -319 -18,183 -198 -11,286 -3,117 - 28393 -127,043
1936-37 * 2,228 * 124308 * 51 * 2,907 - 53 - 3,021 -1,871 - 16,839 * 7355
* Means plus
- Means minus
Table 12.4 Total supply of corn 1920-36
Com
Crop On Farms Oct Supply 5 Yr * or- Needs 2 Yr * or- Needs Average
Oct 1 Visible Ave Livestock Ave Livestock 2 & 5 Yrs
1920 3,070,604 204,613 7387 3,282,804

1921 2,928,442 351,299 11,765 3,291306
1922 2,707306 242,817 12,206 2,962,329
1923 2,875,292 149,386 2,052 3,026,730
1924 2,223,123 167,959 7,154 2398,236 2,992321 -165,753 2,826368 2,791,299 -210398 2380,701 2,703,684
1925 2,798,367 126,482 5,470 2,930319 2,921,802 -208,991 2,712,811 2349307 -194,761 2,354,446 2333,678
1926 2346,972 262,910 17381 2,827,263 2,828,975 -179,985 2,648,990 2301,074 - 92,263 2,408,811 2328,900
1927 2,616,120 191,679 23,687 2,831,486 2,802,807 - 91,810 2,710,997 2,672,669 - 8389 2,664,080 2,687,538
1928 2,665,516 87331 6,791 2,759,838 2,749,428 - 78,804 2,670,624 2381346 - 54,966 2326380 2398,602
1929 2321,032 146,719 4,197 2,671,948 2,804,170 - 35,888 2,768,282 2,640,868 - 25,831 2,615,037 2,696,659
1930 2,080,437 131,845 4,684 2,216,966 2,661300 - 42,376 2,610,124 2393374 - 26335 2386,739 2392,931
1931 2373,265 160,460 5301 2,739,026 2,643,852 * 7,290 2,651,142 2300,734 * 23,196 2323,930 2,487,536
1932 2,926,871 250,978 18,458 3,196307 2,716,817 * 45,400 2,762317 2326,851 * 62,261 2389,112 2375,664
1933 2396325 316,108 57303 2,769,936 2,718,836 -126394 2392,442 2,750,068 * 968 2,751,036 2,671,739
1934 1,478,027 264,873 60,073 1,802,973 2345,041 -216,246 2328,795 2,661,698 -296,027 2365,671 2397,233
1935 2391,629 61,656 3,215 2,356,500 2372,948 -158359 2,414389 1,937,276 -127,043 1,810,233 2,112311
1936 1326,627 173,770 3,773 1,704,170 2365,877 -109,244 2,256,633 1,884,628 * 7355 1,892,183 2,074,408
* Increase of livestock
-Decrease of livestock
To study the adjustment of the Supply to the Requirement, Tables 12.5, 12.6,
and 12.7 are shown. These are compiled from the quarterly releases by the gov
ernment Crop Reporting Board of the amount of com on farms, as well as from
the trade reports of the Visible Supply, and the estimates of the new com crop.
As in Table 12.4, the total Supply is shown in Table 12.5. Then in January the
estimate of farm reserves plus the visible on January 1 is added to give the
remaining Supply available. This is deducted from the total Supply at the start
of the year, the difference of course being the disappearance for that quarter. It
is to be noted that the October-January disappearance is the heaviest, the
reason being that then the Spring and Fall pigs are mostly still on farms. This
actual disappearance can be checked against the average for that period.
Should it be so far excessive that if continued there would not be enough to last
through the year, then of course it would be evident that the price had not yet
caused a readjustment and still higher prices would be necessary to bring this
about. But if that disappearance were running at such a rate as to ensure
plenty, and particularly if the indications from hog marketing, cattle marketing,
prospects, for Spring pigs etc. were such as to indicate a reduction in the con
sumption, then one would be justified in watching for a Top on the market,
particularly if the price were at a high level.
These figures should be placed in your "Ledger of Statistical Facts" and
brought up to date and kept up to date. You should remember always the saying
of Arthur Cutten that you may study the prices all you wish, but if you are
wrong on the fundamentals you will be wrong on the market.
TIME AND DISTANCE OF EXTREMES AND RUNS

A check through the market reveals the following extremes over a number of
years and the length of time taken in the movements from high to low prices. It
is to be noted that, like the movements of wheat as shown in the Table on page
171 of Lesson 10, there is no regular time cycle to the price movements. The
decline may last from one to nineteen months without a definite turn. Or the
advance may last from 1J to 7 or more months.
It is to be noted that of the 21 low prices recorded in this compilation, the low
was made ten times in October, November, or December. Of the 19 high prices
recorded, ten were made in July, August, or September.
In Pictograph 10.2, Graph 2 showed the transition price from a large to a short
com crop, while Chart 4 showed the transition from a short to a large crop.
Pictograph 10.1 showed the average of com price movements during the year.
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CORN
Table 12.5 The movement from high to low prices
- 195-
On Pictograph No. 1 of Lesson 12 herewith,* the year 1927 gives about as clear
a picture of the average price movement for the year as any other, while the
years 1924 and 1925 depict very clearly the com price movement from a large
to a short crop and then back again to a large crop.
A MOST IMPORTANT TIME OF YEAR

While the actual movements of the com price show a seasonal Bottom
during the last months of the calendar year, we wish to call emphatically to
your attention the number of times on Pictograph No. 1 herewith that the
high or low for the entire year will be made by the May future right near the very
first trading days of the year. Those from 1924 to 1936 are shown. But the
record is as follows.
In 1921 May com on the first trading day of the year ranged from 74i to 75f
Then came a congestion of 11 trading days in the price level from 731 to 751,
the market closed down out of its congestion and the trend was downward
during practically the entire year.
In 1922 the low price for the year was made the very first trading day of the year.
In 1923, the first day's trading on May com ranged from 72 to 69 i with a close
at 70. Then followed seven days of congestion and the low of 69\ held until the
24th day of December.
In 1924 May com made the low for the entire year on the first trading day of
the year.
In 1925 the low of January 5 held for an advance which held until a major Top
was formed and the trend turned definitely downward. The market never
closed below the low that was made the third trading day of the year until it
had completed that major Top.
In 1926, the high recorded by the current future was made on January 9th,
which was the sixth trading day of the year.
In 1927, the low made on the second trading day of the year held for two
months. But when the market closed below that low it broke 10 cents a bushel
and the trend was downward until both wheat and com had put in excellent
Bottom formations. And once the January congestion had been cleared, with
the market closing above it, the first of January low was not broken during the
balance of the year.
In 1928 the market made a low on the second trading day of the year below
which it did not close until August.
* This Pictograph was lost over the course of time.
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Table 12.6 Com as grain (1)
10-Yr Grain Oct 1 Visible Grain Jan 1 Visible Supply Oct-Jan Apr 1 Visible Supply Jan-Apr
Crop Farm Supply Farm Disappear Farm Disappear
1926 2,140,207 262,910 17,381 2,420,498 1,459,153 34312 1,493,665 926,833 870,624 47,244 917,868 575,797
1927 2,218,189 191,679 23,687 2,433,555 1,446,780 27,034 1,473314 958,741 715,281 43,856 759,137 714,677
1928 2,260,990 87,531 6,791 2,355,312 1,435,316 17,146 1,452,462 902,850 780,896 34,150 815,046 637,416
1929 2,135,038 146,719 4,197 2,285,954 1389,764 7,643 1397,407 888347 750,223 23,532 773,755 623,652
1930 1,757,270 131,845 4,684 1,893,799 1,118,424 15,451 1,133,875 759,924 625,086 20348 645,634 488,241
1931 2,227,881 160,460 5,301 2,393,642 1356349 11300 1367,649 825,993 913,666 21,911 935377 632,072
1932 2,572,102 250,978 18,458 2,841,538 1,813,479 28,985 1,842,464 999,074 1,128,122 35,180 1,163302 649,162
1933 2,109,292 316,108 57,303 2,482,703 1,433,740 66,694 1300,434 982,269 841,498 62,787 904,285 596,149
1934 1,146,684 264,873 60,073 1,471,630 836,482 41330 877,812 593,818 136337 19,775 456,112 399,235
1935 2,005,482 61,656 3,215 2,070,353 1,404,621 7,702 1350,610 719,743 776,112 7,200 783312 567,298
1936 1,258,126 173,770 3,773 1,435,669 810,087 13,142 823,229 612,440 412,000 11,946 423,946 399,283
'Figures are in millions

Table 12.7 Com as grain (2)
July i Visible Supply Apr-Jan Oct 1 Visible Supply July-Oct Disappear

Farm Disappear Farm Disappear Crop Year
1926-27 444,058 34,427 478,485 439,383 191,679 23,687 215,366 263,119 2,205,132
1927-28 291,791 16,088 307,879 451,258 87,531 6,791 94,322 213,557 2,344,233
1928-29 396,267 12,748 409,015 406,031 146,719 4,197 150,916 258,099 2,204,396
1929-30 349,481 6,825 356,306 417,449 131,845 4,684 136,529 219,777 2,149,425
1930-31 312,389 7,197 319,586 326,048 160,408 5,301 165,709 153,877 1,728,090
1931-32 527,374 15,964 543,338 392,239 250,978 18,458 269,436 273,902 2,124,206
1932-33 627,998 46,140 674,138 484,851 316,108 57,303 373,411 300,727 2,463,814
1933-34 470,355 35,351 505,706 391,418 264,873 60,073 324,946 180,760 2,150,596
1934-35 207,770 7,696 210,155 247,800 60,696 3,215 63,911 146,244 1,409,562
1935-36 392,181 7,301 399,482 383,830 173,770 3,773 177,543 221,939 1,988,989
'Figures are in millions

CORN
In 1929 the low made on the third trading day of January held for a 12 cent
advance. Then came a break after a good Top formation had been completed.
And the market went equally as far below the first of January price as it had
gone above. Then a new Bottom formation was put in and there came an
advance to a high at the usual seasonal time. The market ended the year about
where it began.
In 1930 the high made on the first trading day of January was never closed
above until there had been a decline of approximately 20 cents a bushel and the
market had put in a very good Bottom formation along with a Bottom forma
tion in wheat.
In 1931 corn made a Top right at the beginning of the year, with the high of
January 7 (the fifth trading day of the year) holding for the entire year.
In 1932 com never closed above the high that was made on January 7th,
which was the fourth trading day of the year.
In 1933 the high established on the ninth trading day of the year held until after
the banking moratorium. But once the market had closed above that high and
completed a Bottom formation along with wheat, a very big advance came.
In 1934, there was first a downward movement into the congestion of the pre
vious December, and then a turn. Once the market got above the 1st of January
congestion it was strong all year.
In 1935, there was a false movement downward then an advance to check the 1934
high. Then the trend turned downward and continued until the end of the year.
In 1936, a high was made on the fourth trading day of January that held for
about three months. But when this high was broken, no new low was made
during the entire year. It is interesting to note that in this 1936 market, when
the high of 1935 was broken, the market then proceeded to break out the highs
of 1934, 1930, 1929, 1928, and 1927, and the 1937 market's first movement was
to the congestion of the 1925 Top. This was done, due to the acute fundamental
condition, and went upward to these levels despite the fact that general com
modity prices were much lower than they had been in 1925. The price simply
responded to economic law and moved to perform its economic function.
So we observe that the high or low for long movements either in time or in price fre
quently comes in com right at the very beginning of the calendar year.
The May com future almost invariably sells at a premium over the December
future and these futures do not blend in anything like the same surety as do the
wheat futures. Whereas in wheat there are only two instances in all of the years
from 1920 to 1937 inclusive where the May wheat future did not sell, at some
date after January 1, at the price at which the preceding December future had
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expired, there are any number of instances where the May future did not blend
with the expiring price of the December com. And while we can find no record
of the December wheat future failing to blend with the expiring price of the
September future, we find a number of instances where the December and
September com futures failed to blend. This latter is undoubtedly due to the fact
that the September com future is of the old crop while the December is of the
new. While the December com future may lack several cents of selling up to the
expiration price of the September, the May com future after the first of January
may fail by several cents of selling to the expiring price of the December.
But if May corn congests in a narrow range during the first few market days of
January and then closes below that congestion, we find no record during the years from
1920 to 1933 inclusive where it failed to sell down to the expiration price of the
December com future. This is an important market observation as it will very fre
quently put you into the market for a good scalping play at least, and
sometimes for a long movement.
TOP AND BOTTOM FORMATIONS

The individual futures of com will very frequently and in fact most generally
make almost as perfect Top and Bottom formations as will wheat. They have a
tendency, however, to be more flat on the Bottoms. The characteristic of the com
market, however, is persistence in going in the direction that it starts. It is really less
likely to put in a Bottom formation and then reverse it than is the wheat
market. Also, its reactions are not likely to be so frequent or so large. Whereas
normally wheat will react after closing four days in one direction, com might
put in six or eight, or nine upward or downward closings, and it would indi
cate nothing at all unusual. As a usual thing, when com goes into a congestion
and then closes clear above that congestion or below it, a movement of fair pro
portions and sometimes extended proportions can be counted on to follow.
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Lesson 13
OATS AND BARLEY

(AND ANSWERS TO EXAMINATION
QUESTIONS)
■ Price Characteristics
■ Conclusion on Oats
■ Barley
■ Answers to Examination Questions
OATS AND BARLEY (AND ANSWERS TO EXAMINATION QUESTIONS)
PRICE CHARACTERISTICS
Oats frequently are a leader in market indications. The volume of trading is
usually comparatively light, and for that reason they will frequently reflect the
actual cash situation more quickly than either wheat or com. These latter com
modities must overcome any cross-currents of a strictly speculative nature
before they finally reflect the actual situation of present and prospective Supply
and Demand. Oats will, therefore, frequently give the indication of a coming
advance in other markets by turning strong first, or they may refuse to follow
an advance being led by wheat and com. When oats stop following freely it is
well to consider whether the price change is being caused by fundamentals or
by a speculative move that frequently forces the market beyond the limits indi
cated by Supply and Demand.
The oats formations are much more ragged than those of either com or wheat.
But where they are formed near the same time as those of the two major grains,
and particularly where the low of each grain is made on a different date and
then all three complete a Bottom formation, or where the highs are made on
alternating dates and a Top formation is then completed, the oats movement
will be just as true from that formation as either wheat or com.
Attention has been called to the "blending" of one future of wheat with the
price level of a preceding future, and the habit of wheat congesting in a price
level over which there has previously been little work. While neither oats nor
com futures will blend in such a manner as consistently as wheat, yet the two
coarse grains seek previous "thin spots" over which to congest, in a manner
similar to wheat.
While oats are a substitute for com, and there is a certain affinity between the
trend of the two markets, yet the affinity between the trend of wheat and oats
prices is just as marked if not more so than between com and oats. The reason
for this is undoubtedly that wheat and oats are harvested near the same time.
The growing weather that affects one grain will usually have some effect on the
other, so that a short crop of wheat usually means a short crop of oats also. But
hot weather that strikes com while it is blooming and bums the pollen also will
strike oats while it is in the dough and cause it to shrivel. In that case oats and
com would advance simultaneously.
But in 1922, 1923, and 1927, the mid-Summer weather caused good crops of
wheat and oats, and yet the com supplies were short, as explained in Lesson
12. The result was that while com during these Summer months either
advanced or worked sidewise, both wheat and oats declined.
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Table 13.1 Oats supply and disappearance
The supply and disappearance of oats in the United States from 1945 through 1948-49 was
as follows.
OATS - Supply and distribution, United States by quarters, 1945 through 1948-49
Year STOCKS
and Int. Mills Com Total
Quarter Farm and Elevs. mercial Total Production Imports supply
1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu.
1945-46
July-Sept 207,317 17,492 9,604 234,413 1335,676 13,281 1,783370
Oct-Dec 1,277,410 55,824 43355 1376,789 5,980 1382,769
Jan-Mar 976,631 41,749 46,695 1,065,075 1,721 1,066,796
Apr-June 571,372 30313 23,890 625375 496 626,071
SEASON 207,317 17,492 9,604 234,413 1335,675 21,478 1,791367
1946-47
July-Sept 274,862 13,697 3,153 291,712 1,497,904 104 1,789,720
Oct-Dec 1,147,713 45,484 20319 1313316 234 1313,750
Jan-Mar 892,282 32,992 9,158 934,432 464 934,896
Apr-June 532,895 28,354 6321 567370 122 567,692
SEASON 274,862 13,697 3,153 291,712 1,497,904 924 1,790340
1947-48
July-Sept 257,099 14,175 5,038 276312 1,199,422 32 1,475,766
Oct-Dec 951,716 48,168 26,644 1,026328 112 1,026,640
Jan-Mar 733303 32,651 14,037 779,991 589 780380
Apr-June 405,082 23,030 3388 431,400 926 432326
SEASON 257,099 14,175 5,038 276312 1,199,422 1,659 1,477393
1948-49
July-Sept 169,707 12,132 1,841 183,680 1,493304 2,129 1,679,113
Oct-Dec 1,188,460 44,086 18,902 1351,448 9373 1361,021
Jan-Mar 928377 34,733 11,434 974344 5936 980300
Apr-Jun 578,832 24,155 4315 607,202 1,621 608,823
SEASON 169,707 12,132 1,841 183,680 1,493304 19,279 1,696363
Imports and exports are grain only. Interior mills and elevator stocks include merchant mill stocks.
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Table 13.2 Oats distribution
United States by quarters, 1945 through 1948-49
Year
and Feed and
quarter Exports Seed residual TJ Total
1000 bushels 1000 bushels 1000 bushels 1000 bushels

1945-46
july-Sept 650 5339 400392 406381
Oct-Dec 2,853 5339 309302 317,694
Jan-Mar 10,089 22,157 408,975 441321
Apr-June 4,699 77352 252,108 334359
SEASON 18,291 110,787 1370,777 1,499,855
1946-47
July-Sept 6,212 5,034 564,958 576,204
Oct-Dec 7,081 5,034 267303 279318
Jan-Mar 3,091 20,135 344,100 367326
Apr-June 3,947 70,473 216,960 291380
SEASON 20,331 100,676 1393321 1314,228
1947-48
July-Sept 2,974 5399 440,965 449,238
Oct-Dec 3,066 5,299 238,284 246,649
Jan-Mar 3314 21,194 324,672 349,180
Apr-June 1,941 74,180 172325 248,646
SEASON 11,295 105,972 1,176,446 1,293,713
1948-49
July-Sept 1,617 5399 420,749 427,665
Oct-Dec 7,477 5398 273,702 286,477
Jan-Mar 4,066 21,194 348,038 373398
April-June 3,698 74,179 235,470 313,617
SEASON 17,128 105,970 1,277,959 1,401,057
Imports and exports are grain only. Interior mills and elevator stocks include merchant mill
stocks.
1/Includes oats used for oatmeal which during the War years was estimated at 45,000 bushels.
It seems rather remarkable that Nature has a way of evening things up. Thus,
at the end of the crop year 1920-21, when there had been a big crop and the
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farm carry-over and Visible Supply were comparatively large, Nature sent a
yield per acre that was ten bushels less than the year preceding. Despite the
fact that farmers increased the acreage from 42,726,000 in 1920 to 45,537,000 in
1921, and those farmers carried over 157,314,000 bushels into the harvest of
1921 as compared with 51,778,000 in 1920, yet the short yield caused a disap
pearance of practically the entire surplus so that by 1922 and 1923 the Supply
was not excessive. In 1927 farmers themselves cut down by reducing the
acreage. In 1933 and 1934 a short yield sent into consumption all of the excess
stored up on farms during previous years. "There is a destiny which shapes
our ends, rough hew them how we will."
CONCLUSION ON OATS
1 The old ratio was that oats should be 42c when com was 62c and wheat
$1.05. This relationship between prices has been more or less upset by
World Warn.
2 As a usual thing, the speculative volume of trade in oats is light, and for
that reason it is not so responsive to upturns as other markets. Also, sales
in volume may force more of a break proportionately than in other grains.
Oats are more dependent upon the attitude of the one big industry than
any other grain.
3 Nevertheless, one should keep a graph of the future in which there is the
largest volume of trade because oats will very frequently give the first
indication of the turning of the trend.
4 The Top and Bottom formations will be more irregular than those of either
wheat or com, but where formed in conjunction with Tops or Bottoms of
other grains, the oats will run just as true to characteristics of markets as
the other grains.
5 When supplies are well above the average of consumption, then the price
will usually work down to such a low level that it will not pay farmers to
pay the freight on oats to market in large volume. But where the supplies
are below the average of consumption, then prices may be expected to
work upward toward the ratio of 42-62-105 that was preserved in the U.S.
prior to the World War, or 50 to 100 as noted by James Thorold Rogers in
England in 1887 (see Page 68 , Lesson 4).
6 Usually, however, with normal oats supplies, the price trend will depend
primarily on the movements of com except during the "growing" months
of May and June and early July when it will depend more on the price
trend of wheat.
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7 Because the speculative trade is much lighter than either wheat or com,
orders to buy or sell in large quantity will have much more influence on
oats than on either com or wheat. Therefore when the market turns with
heavy liquidation, the movements in oats are sometimes more vicious
than in other grains, with orders being filled further away from black
board quotations than would seem logical.
BARLEY
Despite the decline in exports of meat products and in horses on farms, acreage
planted to barley in the United States has shown a steady, consistent increase
since 1920. In fact, outside a short period of hesitation immediately following
the enactment of the 18th Amendment, acreage planted to barley has shown a
steady increase since 1900. It grew from 4,545,000 acres at that time to
13,212,000 harvested in 1932. Much of this acreage was formerly used for pro
duction of hay and feed for horses.
Of the various uses for barley, research has been as small as in oats.
Commercially, the most important use outside the dairy districts is for brewery
purposes. In days prior to 1915 it was estimated that of the average crop of 180
million bushels, about 35 million were used for malting purposes. For the crop
year 1933-34 this was exceeded by 15 million.
Maltsters require the very best of barley, and prefer that which is 90 per cent
or more sound, with a test weight of 46 lbs. Although they can and do purchase
barley weighing 42-44 lbs, this must be cleaned to bring the weight up. This
barley must be of mellow texture, as against the hard, flinty types, and can
under no circumstances contain ergot.
Distillers' malt may be of lower grade, poorer barley. In 1915 a total of
2,357,449 bushels of barley malt were used in the production of alcohol and
other distilled spirits. In 1916, it totalled 4,480,598 bushels, and in 1917 it was
4,239,677 bushels due to short com crops.
The Supply and distribution of barley in the United States from 1941 to 1946
inclusive is given in Table 13.3 herewith. You will benefit most by bringing the
figures up to date yourself, from figures to be secured from the Department of
Agriculture in Washington.
As for prices, there are really two prices for barley. One is the price for the
best grade of malting barley, described previously. The other class is for the
price of feed barley. Sometimes a very wide differential separates them.
The barley futures market is based on grades - and these grades may not nec
essarily be malting barley. From 1933 on, the malting market should be
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Table 13.3 Barley - Supply and Distribution, United States, by quarters, July 1941 through 1946
Year Stocks at Beginning of Period

and Commer- Int. Mills Produc Imports Total
quarter Farm dal and Elev. Total tion Grain Only Supply
1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu.
1941-42
July-Sept 55,200 4,931 - 60,131 362,082 75 422,288
Oct-Dec 278,000 6,977 - 284,977 - 734 285,711
Jan-Mar 195,300 10,002 - 205302 - 881 206,183
Apr-June 118,000 8324 - 126324 - - 126324
SEASON 55,200 4,931 - 60,131 362,082 1,690 432,903
1942-43
July-Sept 66350 3,600 - 69,950 429,167 135 499,252
Oct-Dec 330,000 10351 - 340,551 - 5372 345,923
Jan-Mar 234300 10,743 - 245,243 - 4,620 249,863
Apr-June 144,000 6,987 - 150,987 - 16370 167357
SEASON 66350 3,600 - 69,950 429,167 26,497 525,614
1943-44
July-Sept 81,000 9,028 30,494 120322 324,150 17,012 461,684
Oct-Dec 246,000 20388 61,905 328,493 - 6,605 335,098
Jan-Mar 152,800 19,763 44,969 217332 - 3,909 221,441
Apr-June 92,424 10,947 31376 134,747 - 13,089 147,836
SEASON 81,000 9,028 30,494 120322 324,150 40,615 485387
1944-45
July-Sept 48300 6,923 20314 75,937 278361 9315 363,712
Oct-Dec 185,420 26,032 56,100 267352 - 16,088 283,640
Jan-Mar 135300 30,886 47311 213,297 - 2346 215,843
Apr-June 84,870 21,858 35,629 142357 - 9,966 152323
SEASON 48300 6,923 20314 75,937 278361 37,815 392313
1945-46
July-Sept 55,000 14,479 26,492 95,971 263,961 3,746 363,678
Oct-Dec 166,619 22,922 59362 249,103 - 1,484 250,587
Jan-Mar 126,000 21,287 44,717 192,004 - 356 192360 2/
Apr-June 70309 11,300 23,944 110353 - 2/ 60 110,613 2/
SEASON 55,000 14,479 26,492 95,971 263,961 5,646 365378
1946-47
July-Sept 38,700 4,464 15,425 58389 250,820
2/Partly estimated.
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Table 13.4 Barley disappearance. United States, by quarters, July 1941 through 1946
Year Barley disappearance

and Indus- V Exports
quarter trial Seed Grain only Feed 2) Total
1000 bu. 1000 bu. 1000 bu. 1000 bu. 1000 bu.
1941-42
July-Sept 19,463 2,548 550 114,750 137,311
Oct-Dec 15,963 4,458 432 59,556 80,409
Jan-Mar 17,163 7,643 175 54,888 79,859
Apr-June 21,641 17,195 391 17,726 56,374
SEASON 73,641 31,844 1,548 246,920 353,953
1942-43
July-Sept 23,993 2,256 177 132,275 158,701
Oct-Dec 19,606 3,949 84 77,041 100,680
Jan-Mar 19,044 6,769 31 73,032 98,876
Apr-June 21,851 15,232 126 40,120 77,329
SEASON 84,494 28,206 418 322,468 435,586
1943-44
July-Sept 23,518 1,837 118 107,718 133,191
Oct-Dec 21,076 3,215 132 93,143 117,566
Jan-Mar 21,092 5,512 1 60,089 86,694
Apr-June 23,756 12,403 153 35,587 71,899
SEASON 89,442 22,967 404 296,537 409,350
1944-45
July-Sept 27,249 1,490 25 67,397 96,161
Oct-Dec 24,116 2,608 127 43,492 70343
Jan-Mar 23,101 4,471 279 45,635 73,486
Apr-June 24,966 10,060 344 20,982 56352
SEASON 99,432 18,629 775 177,506 296342
1945-46
July-Sept 25,626 1,502 709 86,738 114375
Oct-Dec 21,994 2,629 1,477 32,483 58383
Jan-Mar 21,739 4,507 413 55,148 81307
Apr-June 20,641 10,141 2/ 425 20,817 52,024
SEASON 90,000 18,779 3,024 195,186 306,989
1/ Includes barley used for brewing and distilling, for other malt products and pearled barley.
2/ Residual including small quantities for which data are not available and waste.
2/ Partly estimated.
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governed primarily by the percentage of the barley crop that will meet the
requirements of the brewers, while feed barley will naturally follow in accord
with the grains for which it is interchangeable in usage - namely, oats and com.
Trading in barley futures is more active in Minneapolis than in Chicago - and
very limited in both places. Therefore, trading in such futures is more or less
dangerous. Without a very active public participation in the market, volume is
so small that any trade of size will be executed above the current blackboard
quotation very frequently when it is an order to buy, or the seller will be penal
ized if it is an order to sell, by an execution below current quotations. As for
job-lots, or those of 1,000 bushels, at times the seller must await the discovery
of someone willing to take the other end of the trade. Where there is general
liquidation in other grains, and a limit placed on daily fluctuations, this is an
especially dangerous situation. One may find a profit turned into a big loss
before his order can be executed.
But the general principle of Top and Bottom formations will be found to
apply equally as well in barley as in other grains.
ANSWERS TO EXAMINATION QUESTIONS

The Patron Saint of the economists is said to be the Fire-Fly. With his headlight
where his tail-light should be he has a perfect vision of what he has just gone
through.
If there is anything at all that this Course is designed to teach, it is to look
ahead - not backward. "Where do we go from here?" That is the question of the
market investor. And on the correct answer to that question rests his profits.
In studying past markets such as that given in the examination, with the pur
pose of preparing for action in the current markets, one should endeavor to
project oneself into the spirit of that market. Get the "feeling" just as much as if
that market existed right today, and the analysis you are making was one of the
current market. Learn to look the market in the face and to make your conmitments in
current markets just as you would like to have had the opportunity of making them in
those past markets. For history repeats. The opportunities of the past will come
again in the future.
In that examination you were given a market to graph. So that you might not
be able to locate it immediately, the months of that market were changed, and
the quotations of the Stock Market were dropped a hundred points. The
market given to you to graph occurred in the Spring of 1929. A Daily Range
graph and a Movement graph are shown herewith as Pictographs 13.1 and
13.2. Instead of being the months of August to November, the actual months
were March to June.
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Pictograph 13.1 September wheat futures 1929
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Pictograph 13.2 Movement graph
You were asked to make an analysis of that market as of "November 20th"

which was June 20th. Now, to get the best out of this study, project yourself
into the market as of that date. Note that for at least four months as depicted,
there had been a steady decline in the price. Stocks, as you noted, had been
showing a declining tendency, while Building Permits had dropped below
normal. Sentiment was rather pessimistic as a result of these declines. And as
stated in the notations, world wheat supplies were large.
On the last date given to you, the market had closed upward strongly, having
advanced 8 £c in three market days, and had made an advance of 16{C from the
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low. Would you have cared to buy wheat under such circumstances? Would
you care to buy in the face of such an advance, when for months the market
had been declining? Would it not have been more natural, had you been the
possessor of wheat bought, say, at five cents a bushel lower, to take your profits
and await a break on which to buy more? Would you not have had an inclina
tion to sell the market?
That is what the crowd did. It looked backward instead of forward.
What did the market tell you? First, the price was low as compared with gen
eral commodity prices. To be even "neutral" in price level, wheat would have
had to be selling at $1.46 as of "November" 1 which was June 1. The price on
the 20th was $1.16| on the close. That was only 79 per cent of normal. At its low
it had been only 68 per cent of normal, which is well below the average of
lows. But even that would not be sufficient evidence on which to buy of itself
because there are records (1933) where the wheat price was only 44 per cent
(see Table 4.1) of its normal relationship to the general average of all prices. But a
price level below 70 per cent warns that eventually a Bottom will be made from which
to advance to a normal price level.
And such a Bottom was completed on the 20th, the day of your analysis. The
market had gone into its congestion, "awaiting the new impetus that would
carry it out into a movement." That new impetus had come. The Canadian
crop was going backward extremely rapidly - and nothing so arouses bullish
sentiment in grain as the rapid deterioration of the crop of a major export coun
try. The solicitors around the grain exchange houses are the greatest group of
salesmen in the world. Give them the news on which to work and they will call
every man who has ever made a trade with their house and tell him of the
news and of the rapid fluctuations of the market, with the predictions of higher
prices and their "confidential reports" just coming in. And, as we will show
later on, the big traders, knowing not only these things but having access to the
reports probably before the general crowd, buy as the market advances, thus
keeping it going.
This market, on the 20th, said that the Bulls had whipped the Bears. All who
had sold during that congestion had a loss in their trades. Those who had
bought had profits on which to buy more.
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The market analysis showed as follows:
Analysis of September wheat

June 20,1929
Factors Bullish Bearish
Tum-Up Day of June 18 4

Regular Bottom Formation with Cut-Out 15
Above Last Straight Average 5
Distance unfinished to important price level 10
Market closed higher four days in row 5
Market made Bottom in first four days of month 5
Seasonal trend down, according to calendar 5
39 10
In addition, the market action on the Bottom was splendid. It got away from the
low point rapidly. An angle line is drawn from that extreme low at a degree equiv
alent to the rate of decline from the high previous to the extreme low (or the high
of the market on May 21st at 110$ to the low of the market of May 31, or 100$),
this angle line being "A" on Pictograph 13.1. And as the market moved upward
from its low point, its first advance was inside that line. This showed clearly that
the advance was much more rapid than had been the previous decline. The
market was getting buying. The first rally was entirely within that line.
A second line is drawn off the Bottom at the same angle as the decline from the
May 15th high to the low of May 31st, this being angle B, with a third angle line
drawn off the high of April 15th. In this, at a point on the vertical date line on
which appeared the market of May 31st, but at a point in the market scale at
which the high of April 15th was registered, the number of days was counted
from the date line of May 31st to the date line of April 15th. This was 40 market
days. On that same price line (130$), to the right of the date line of May 31st, a
distance of 40 market days was counted off and the angle line C drawn from
there to the low of the market of the 31st. And it is to be noted that in the decline
from the 7th to the 12th of June the market came right into these two angle lines.
The major angle line is drawn at an angle off the Bottom equal to the angle
from the May 31st low to the high of March 13th. This is angle E, and in com
pleting its Bottom formation the market never once sold below this angle line.
In other words, drastic as was the break from March 13th to May 31st, the
advance from the May 31st low until the market had closed out of its Bottom
congestion on June 20th was even more rapid.
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So the action was right, the time of the month at which the low was made was
right, and the formation was excellent. Then, where should be the logical objec
tive toward which the market should head?
1 The All Price Curve was at $1.46 as of June 1. The wheat price must
advance that far before it would become neutral in relation to other com
modity prices.
2 The Figure Chart showed the price level of $1.11 as having been crossed 12
different times. Counting 12 cents upward with $1.11 as the first figure
would give a Figure Chart objective of $1.23.
3 There were five outstanding points to which the market rallied during its
decline from the first of March to the last of May. These points were 136$,
130$, 123$, 114$, and 110$. With the point of the compass on that high at
110$, and the marking end starting on the May 31st low of 100$, arc "V" is
drawn. This intersects the angle line drawn off those two points at 120$.
That price level is also right into the heart of the congestion of April 22nd
to May 1st, and near the Figure Chart Objective. So it would be logical to
expect resistance in that level, and wise to defer new purchases. In fact, if
the trades were properly divided, some profits would be accepted there in
the expectation that either a reaction would come from in that level, or if
the market closed beyond the arc it would still come back to that price
level to permit purchases. It recognized that price level, but first closed
outside the arc. Forty per cent of the distance from the high made (121$) to
the last outstanding low (109, the low of May 18th) would be a reaction of
5$g, or to 116$. The market came to 116 and turned to rally, then to close in
new highs. Additional purchases were in order.
The next arc was drawn with 114$ as the pivot, and off the low at 100$. This arc,
W, passed the angle line, B, drawn off the same two points, at 127$. That price
was reached, but the market showed continued strength by closing beyond the
arc and objective. Forty per cent of the distance from the high made on this
advance (127$ on July 6th to the last outstanding low at 116 made on June 28th)
was 124. The market came back to 123 and whirled to close strong with an out
side, Turn-Up Day. Purchases were in order on the reaction inasmuch as the
work done during July 3rd to the 6th did not form a Top and more work in that
level was probable even if a Top was to be formed. After the turn with the out
side day on July 11th, it again showed strength on the 12th by closing above the
average of the previous reaction, and on the 13th again closed in new highs.
The next arc was drawn (x) with a pivot off 123$. This intersected the angle C
drawn off the same two points, at 139$, setting that price up as an objective.
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The fourth arc, Y, was drawn from a pivot off the high at 130$, and crossed its
angle line D at 147$. And the major arc, Z, drawn with the March high of 136$
as the pivot, crossed its angle line, E, at 148 $, with the arc Y also cutting across
in that general territory to act as a possible barrier.
The market closed above arc X with its objective at 1391, indicating continued
strength. That price was reached on a straight advance, without anything
resembling a Top formation unless it turned very, very sharply, broke, and
closed below its Last Straight Average which in this case would be the distance
from the high made on that advance and the last outstanding low, which
would be the low of July 11th at 123. This was not done.
Instead, the advance continued to make all of the objectives indicated, and to
reach the All Price Curve almost exactly, it having also shown an advance
during the month of June.
Then, on July 18th, there came a Turn-Down Day, with price objectives
reached. The analysis in this case would read:
Analysis of September wheat,

July 18,1929
Factors Bullish Bearish
Turn-Down Day 4
Distance finished to reach important price level 15
Market above Last Straight Average 5
Market had been advancing to 15 to 17 of month 15
Seasonal trend upward, according to calendar 5
10 34
Forty per cent of the distance from the high of 151 i to the last outstanding low
of 123 would be a break of 11 $< or to around 140. Fifty per cent would carry the
market down to 137$. The reaction came to 137$. Then came an effort to break
into new high ground. But it failed. The highest it could get was 150$, from
which there came a new Turn-Down Day. But after a small break, it again turned
to try for a new high. Again it failed, this high falling even short of the 150$ by $£.
Still a third attempt was made to advance. This reached only 148$ - and William
Peter Hamilton warned us, "It may be broadly said that after tangible fluctua
tions, two failures to pass the old high will establish the presumption of a Bear
market." The Top was completed by the close at 141$ on August 3rd, and the
decline set in. Naturally, the trader would not only sell out any of the remainder
of his long line, but turn and go with the market on the short side.
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Lesson 14
BUSINESS FUNDAMENTALS AND

GRAIN PRICES
■ The Division of Labor

BUSINESS FUNDAMENTALS AND GRAIN PRICES
A correlation of com price movements and the movements of general com

modity prices disclosed the extremely important fact that 70 per cent of the com
price movements are due to the movements of general commodity prices.
Do you get the significance of that? More of the movements of grain prices are
caused by the effort to stay in alignment with general commodity prices, over
the long swings, than are due to grain factors alone.
Some of you no doubt will be anxious in your Lessons to get on to a study of
the price movements. Some of you may even think that all of the discussion of
fundamentals is irrelevant and unnecessary. The above fact that more of the big
swings of grain prices are due to the movements of general commodity prices
than are due to grain factors alone should cause you to desire to learn more of
the causes of the turns in the business cycle, with their effect on general com
modity price levels. We again repeat the admonition of the late Arthur W.
Cutten that, "You may study the prices all you wish, but if you will be wrong
on the fundamentals you will be wrong on the market."
The question to be answered, of course, is which factors have the most influ
ence on the trend of general commodity prices? How may one best anticipate
those movements and thus place himself in position particularly to profit from
the long pull swings of the market?
To throw as much light as possible on the subject, we present herewith
Pictograph 14.1 showing (1) Industrial Production, the record of the activity of
26 different industries as compiled by the U.S. Department of Commerce; (2)
stocks of manufactured goods, or the goods that have been manufactured but
are held undelivered by those industries; (3) stocks of raw materials; and (4)
the prices of finished goods. In this, the years from 1903 to 1925 inclusive are
used as 100. Data for the construction of the Pictograph may be secured from
the monthly Survey of Current Business issued by the Department of Commerce,
Washington, D.C., and kept up to date with this monthly magazine and the
weekly supplements sent with it for $1. 50 a year.
In the construction of the Pictograph, in order to get the index of raw materi
als on the page it was necessary to invert the scale. Where the curve shows a
decline, the stocks actually were increasing, and vice versa. Also, in this one
graph alone, we removed the seasonal trend by the following simple process.
The average index for every January from 1923 to 1925 inclusive was 124. The
January index reported by the Department of Commerce for 1937 was 139.
Dividing 139 by 124 gives an index of 1.12 - the index we use. As you can note
by the following record of the average each month from 1923 to 1925 inclusive,
there is a seasonal trend, with small stocks of raw materials during the
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Summer months, larger as supplies of grain, cotton, iron ore, etc. are piled up
in the Fall and Winter months. We remove the seasonal trend by dividing the
index for the current month by the average index as shown herewith:
Jan 124 April 101 July 80 Oct 129

Feb 120 May 91 Aug 86 Nov 138
Mar 111 June 86 Sept 106 Dec 140
Were an index of the general average of commodity prices placed on this

Pictograph along with the prices of finished goods, it would be found that the
two curves would move practically in accord. Also, were the Stock Market aver
age placed on this graph, it would be found to precede and therefore forecast the
movements of industrial production. In this connection, let us repeat the statement
of William Peter Hamilton as quoted in Lesson 3, to wit:
"The Wall Street market is something of a rational barometer. It is the constant
phrase of the street that the movement is over 'when the news is out.'
Stockholders and intelligent speculators operate not on what everyone knows,
but on what they alone know or intelligently anticipate. We have often had the
spectacle of a general decline in the market, only followed six months after
ward by a contraction in business, or a general advance in the market
anticipating by equal time improving industrial conditions not then obvious."
Thus is established the relationship between the Stock Market and the trend of busi
ness, with its effect on general commodity prices.
Now, let us examine Pictograph 14.1 to see first of all the governing factors in
the trend of Industrial Production, and through that the trend of general com
modity prices which have such an effect on grain.
In 1923, business had been coming out of the slump of 1920-21, and the curve
of Industrial Production had been advancing. But in 1924, the stacks of manu
factured goods began to back up on the warehouse shelves. In addition, stocks
of raw materials began increasing. The buying power of the people was not
sufficient to absorb goods at the rate they were being manufactured. So the rate
of Industrial Production was decreased as offering prices were lowered in an
effort to stimulate purchases.
By the middle of 1924 the rate of Industrial Production had declined far
enough that the goods in the warehouses began to move into consumption. So
the rate of production was stepped upward, with an increase also in prices.
This continued into 1925 when once more the supply of manufactured goods
began to increase, so the curve of Industrial Production declined, and com
modity prices backed off a little with it. But stocks of raw materials were below
normal, and while prices of finished goods hesitated, they did not decline far.
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Toward the end of 1925, with stocks of manufactured goods below normal,
the rate of Industrial Production increased rapidly accompanied by an advance
in the prices of finished goods. But in the early months of 1926, with stocks of
goods again increasing on manufacturers' warehouse shelves, and stocks of
raw materials increasing, business hesitated during the early months until the
lowered selling prices brought an increase in consumption and a decrease in
stocks of manufactured goods. The production again increased.
But this rate of Industrial Production, even with a lowering of the prices of
finished goods, proved too much for consumption, so that stocks of manufac
tured goods in 1927 increased and Industrial Production declined.
In 1928, the rate of consumption had again caught up with the very good
level of production, so this rate of production was increased and prices again
raised on finished goods. The rate of Industrial Production was stepped up
very sharply as consumption proved able to absorb it. But it is particularly to
be noted that stocks of manufactured goods were now getting up to high
levels. It was beginning to be a dangerous situation.
Another situation, which will be analyzed in detail in the next Lesson, was
reaching a climax early in 1929, and that was the ending of the Building Wave
which had been on since 1921. About 50 major industries and more workers are
directly affected by new building than are affected by any other industrial
activity. For nine years they had been employed at a tremendous rate. But in
May of 1929, the new building permits issued dropped below normal. The
Stock Market panic came in October, and business started downhill.
In addition to the ending of the building wave, note that stocks of raw materi
als were increasing to levels 50 per cent more than normal despite the very
high rate of Industrial Production. So that rate of production, toward the last of
1929, began to slump. Prices of goods were dropped, and for a time at the end
of 1929 it looked like the consumers would be able to absorb the goods. But late
in 1929 came the tip-off to what was coming. Despite a declining rate of pro
duction, and despite declining prices at which goods were offered, stocks of
goods in manufacturers' warehouses began to increase, and stocks of raw
materials began to pile up as never before.
Then it became a decidedly stem chase. Prices of goods were steadily
decreased, and the rate of production was steadily cut in an effort to find a
level at which the consumers would absorb the goods offered. But it was not
until 1932, with production at a rate only 60 per cent of normal, and offering
prices only 70 per cent of the levels that had prevailed from 1923 to 1925, that
the consumers were finally able to take the goods at as rapid a rate as they
were manufactured. Then and then only did business turn.
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In 1933, spurred by dollar devaluation and a general advance in commodity

prices as our commodities adjusted themselves under the new conditions to
world commodity prices, there was a spurt in Industrial Production. It went
back to the 1923-25 level. But the buying power of the consumers was not great
enough to absorb this rate of production. Stocks of manufactured goods began
to back up on the shelves. So down came the rate of production again. An
effort was made early in 1934 to increase production, but once more the stocks
of goods began to pile up, and back down came production.
The drought of 1934 played a big part in the recovery. It reduced the supplies
of grain, livestock, and cotton so that the buying power of producers was again
increased. Stocks began to disappear from the shelves, and the rate of produc
tion was again increased. As raw materials continued to disappear through
1935 and 1936 and the buying power of consumers was thereby increased, with
good prices for new production, the rate of Industrial Production steadily
increased despite steadily advancing price levels of finished goods. The result
ing effect on commodity prices was that if a bushel of wheat had brought as
much of other commodities on the first of January, 1937 as it brought on the
first of November, 1936, it would have needed to advance 10c a bushel.
A careful study of this record and of earlier records would indicate that so
long as stocks of goods, both manufactured and raw products, are normal and
Industrial Production increasing, then general commodity prices will advance.
And this has an effect on the prices of grain. Conversely, when stocks of manu
factured goods on shelves are large, stocks of raw materials are large, and the
rate of Industrial Production is downward, the grain prices will also trend gen
erally downward along with general commodity prices.
Thus we see:
1 There is a definite relationship normally existing between the wheat price

and/or the com price, and generally commodity prices, and that relation
ship is preserved so long as the Supply approximates to the Requirement.
2 When business is good and there is a demand for commodities, then the
natural trend of the commodity price level is upward. But when business
is poor, and the production of general commodities exceeds the
Requirement, then the price of those commodities trends downward.
3 The trend of the general commodity price level asserts as great an influence
over grain prices at times as does the relationship of Supply to Requirement.
4 The Stock Market, reflecting the inside knowledge of security holders and
large operators concerning present and prospective industrial activity, will
usually precede and therefore forecast the general trend of commodity prices.
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5 When sufficient excitement is generated that the public comes in to relieve

traders of their securities and grain holdings, and to demand more, then
Bull markets result. This means in itself that the people are prosperous
and have money for investment. With this money, industrial expansion is
made, giving employment to men and machinery.
So a thorough understanding of the fundamentals of business activity will give

the dealer in grain a better understanding and appreciation of the probable
course of general commodity prices for some months ahead, and therefore place
him in a better position to analyze the long-time trend of the grain market.
Therefore, it is desirable in this Extension Course of Grain Market Analysis
to delve closely into various influences on business of the various branches of
that business.
THE DIVISION OF LABOR

A study of economics reveals that business is a natural order and not an acci
dent. Consider the relationship of a pair of shoes to the activity of various
branches of industry. The sale of a pair of shoes involves:
1 The cow-hide or calf-hide from which they are made. Thus the farmer
finds a demand created for one of his products.
2 Movement of the steer or calf from the range, possibly to the com belt and
then to the market.
3 The killing of the beef, the skinning of the hide, its distribution to the shoe fac
tories where the first manufacturing process involves the use of chemicals.
4 The manufacture at the factories of the shoe involving the use of machin
ery which has been transported after having been produced from various
raw materials.
5 Distribution of the pair of shoes to some dealer, usually a wholesaler and
then to a retailer and finally its sale to the user.
Each phase of this production of the pair of shoes involves machinery, coal,
electricity, workmen, middlemen, capitalists, financing, and many other classes
of labor. Thus we find that the production of a pair of shoes gives employment
to men in many branches of industry and finance. The increase or decrease in
the demand for shoes varies the employment of all of these various branches of
manufacture and commerce. So it is that the production of the real necessities
creates a bulwark of trade and commerce which carries on at a not greatly
varying speed during great prosperity or great adversity.
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While some may purchase three or four pairs of shoes and may increase the
number of suits or clothes they own, and/or discard their old apparel more
rapidly during prosperity than during adversity, yet the change in the con
sumption of necessities such as food and clothing is not sufficient in itself to
alter the status of general business prosperity. It does not affect enough people.
Going through the census of 1930, we find the following facts as to division of
labor in the United States - total working population, ten years or over,
48,829,000. Of these, the divisions into branches of industries were approxi
mately as follows:
Number of Per cent of

Workers Total Workers
Agriculture 10,452,000 21.4

Steel 2,546,000 5.2
Building 3,314,000 6.7
Automobiles and Filling Stations 553,000 1.1
Transportation and Communication 3,843,000 7.8
Garages 1,310,000 2.6
Wholesale and Retail 5,314,000 10.8
Clothing 1,861,000 3.8
Slaughter and Packing Houses 137,000 0.2
Bakeries and Food 754,000 1.5
Coal, Oil, and Gas 489,000 1.0
Public Service 856,000 1.7
Professional Services 3,254,000 6.6
Domestic and Personal Service 4,952,000 10.1
Clerical Occupation 4,025,000 8.2
Others 5,468,000 11.3
These are our own calculations based upon State reports of the census as the
figures were being released. Later censuses may change the totals per activity
somewhat but not sufficiently to alter any conclusions drawn therefrom.
It must be at once apparent that the great bulk of these workers are interested
primarily in the production and distribution of necessities. The wholesaler and
retailer must depend in greatest part for the excess or deficiency of demand for
their products upon the prosperity prevailing in the other industries. While
they may perform a service in finding markets and expanding markets, yet it is
really impossible for them to expand the demand for food products beyond the
human capacity. And the possibility of sale of many other commodities is lim
ited by factors more or less beyond their control.
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When America was first settled, practically all of its inhabitants were agricul
turists. And necessities other than what they grew themselves and spun at
home were purchased from England. As a matter of fact, it was the effort of
England to prevent manufacturers in the colonies which really precipitated the
American Revolution. Concerning this, Benjamin Franklin wrote, on a visit to
England, "Not only the interest of a particular body of merchants, but the inter
ests of any small body of British tradesmen or artificers has been found, they
say, to outweigh that of all the King's subjects in the colonies. There cannot be a
stronger natural right than that of a Man's making the best profit he can of the
natural products of his lands, provided he does not thereby hurt the state in
general. Iron is to be found everywhere in America, and the beaver furs are the
natural fur of that country. Hats and nails and steel are wanted there as well as
here. It is of no importance to the common welfare of the empire, whether a
subject of the King's obtains his living by making hats on this side or that side
of the water. Yet the hatters of England have prevailed to obtain an act in their
own favor restraining that business in America: in order to oblige the
Americans to send their beaver to England to be manufactured and purchase
back the hats, loaded with the charges of a double transportation. In the same
manner have a few nailmakers and a still smaller body of steelmakers (perhaps
there are not half a dozen of these in England) prevailed totally to forbid by an
act of Parliament the erection of slitting mills or steel furnaces in America; that
the Americans may be obliged to take all their nails for building, and steel for
their tools, from these artificers under the same disadvantages."
As will be shown a little later in this study, each war has seen the American
nation become a little less dependent upon others for its manufactured prod
ucts. In 1890, there were 41.2 per cent of our people in agriculture. Our survey
shows only 21.4 of the workers of the nation now engaged in agriculture.
Machinery has developed the ability of man to produce more, particularly in
agriculture, per capita of employment and this has released many workers
from the farms. These have gone to the cities and the percentage of filtration
into clerical work has been greater than into industrial work. In 1890 there
were 2.5 per cent of the workers of the nation engaged in clerical occupation. In
1900 this had grown to 4.6 per cent. The 1930 census showed 8.2 per cent in
clerical occupation.
The reason for this study of the various divisions of labor is to bring out that
prosperity means the employment of at least 95 per cent of the population of
the country that is accustomed to being employed, and that the employment of
clerks, the wholesalers, retailers, professional men, domestic and personal ser
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vice employees, and a great percentage of the others, depends primarily upon
the purchasing power in agriculture, steel, building, the automobile industry,
the coal, oil, gas and electric industries, and transportation. Therefore, the busi
ness analyst must look to these indices for guidance as to the future trend of
the stock market which will in turn forecast usually the trend of the general
commodity price level - and that curve has proved its influence on the price
levels of grain.
In considering agriculture, while it is true that 21.4 per cent of all of the work
ers of the nation are affiliated with that industry, yet their interests are not all
alike. The census showed 6,288,648 farms of all types in the United States in
1930. These were classified as follows:
Per cent Per cent of

All Workers
General 1,044,266 16.6 3.5

Cash Grain 454,726 7.2 1.5
Cotton 1,640,025 26.0 5.6
Crop Speciality 431,379 6.8 1.4
Fruit 141,418 2.2 .5
Truck 84,561 13 .3
Dairy 604,837 9.6 2.0
Animal Speciality 479,042 7.6 1.6
Stock Ranch 71,000 1.1 .2
Self Sufficing 498,019 7.9 1.7
Abnormal and Unclassified 672,858 13.7 3.1
100.0 21.4
Thus it is apparent that the farmers are not all affected by the same set of
conditions. There may be over-production in one class of farming and under
production in another. The farmer of one type may purchase the product of
another type. The cattle feeder may be adversely affected by high prices for
feed. Any program or development designed to raise the price of one agricul
tural commodity may not restore prosperity to agriculture as a whole. But, like
the relationship between each of the various industries, prosperity in one line
affecting a goodly percentage of the population will spread its benefits to all
other lines of activity, as a pebble thrown into a pond will send its ripples to
the furthermost bank.
In this lesson the effort has been to show first the general relationship
between the movements of the securities markets, general commodity price
levels, and the grain markets. In preparing to analyze business in an effort to
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anticipate the long trend movement of the market and therefore of commodity
prices, the first necessary step is to analyze the divisions of labor. This has been
done. The next step will be to go into a historical analysis of the graph of a
Century of Business Progress and study therein the reasons behind the waves
of business prosperity and the accompanying advances in commodity prices,
and the waves of depression. We must also study the sharp and decided
change that has taken place in the economic structure of the United States, par
ticularly from an international angle, since the World War. Then we can explore
some of the paths of future business which are offered. By this analysis we
hope that the student may more clearly grasp the significance of the unfolding
economic picture of the future and be in position to profit from it.
{Note: As can be seen by the illustrations, the original of this Lesson was writ
ten about 1934. In 1950 we reviewed it with the idea of making any necessary
changes. But after studying it and studying the developments of business
during the ensuing additional 16 years, we decided that not one word would
be changed. The developments of these past 16 years lead us all the more to
believe that the conclusions of this Lesson are sound.)
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Lesson 15
THE BASIS OF PROSPERITY AND

ADVANCING PRICES
■ New Inventions
■ Building and Business
■ The Record
■ Fundamentals of the Depression
■ Then Came the Turn
■ The Building Deficit
■ It Forecasts the Future
THE BASIS OF PROSPERITY AND ADVANCING PRICES
In studying history, it has seemed to us that the principal causes underlying waves
of business prosperity in the past may be grouped under about seven different
heads. And studying through the records of a Century of Business Progress, we
discern at least one of these factors and usually two or three of them in every
major prosperity wave in the United States during those 100 years. Looking to the
future, there seems little likelihood that any new wave of prosperity will be
founded on any other factor. These factors may be classified as follows.
1 Opening up of new territories, with resulting construction of transportation lines,

new towns, new factories, new stores, new homes. These activities automatically
create demand for men in practically all lines of business and also absorb
the surplus men of the nation. Promise of riches from the new territory,
either from the farms, the forests, or the mines, will lead those with money
to invest it in the development of that new territory. This brings work, cre
ates jobs. And if the territory be large enough and the demand great enough
to absorb the surplus of idle workers, then the increased money placed in
circulation by the development of that new territory will absorb sufficient of
the products of those already employed in transportation, steel, manufac
turing, and other industries to create a wave of prosperity. And, as said, the
larger the developments, the greater the prosperity it will bring.
2 Introduction of new inventions or improvements. Had there been no War, the
period from 1915 to 1925 would undoubtedly have seen a wave of business
prosperity, due to the motorization of the local transportation and the mech
anization of industry. And had there been no financial panic in 1929 there
would undoubtedly have been an agricultural depression in the early 1930s
because of the increase in production made possible by the mechanization
of agriculture. The motorization and mechanization of industry gave work
to those in the mines, in the forests, in the factories. It absorbed the surplus
of men from the farms and in the cities to man the automobile factories,
garages, and filling stations. Coming with the development of the radio, it
made competition keen for men, money, and machinery. This absorption of
surplus labor was enough in itself to create a normal prosperity wave. And
similar waves of industrial activity of the future, creating demand for men,
money, and machinery will serve a similar purpose.
3 Wars invariably result in quickened demand for instruments of destruction and foods
with which to feed the fighters. So long as the engaged nations have money or
credit, they will pay high and higher prices to increase the output of both
food and machinery. One reason why a rather long period of time usually
elapses between major Wars is to restore the credit of those engaged in that
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War. Unless the country is entirely self-sustaining it must purchase the neces
sities of War from neighboring countries, and unless there is a prospect of
being paid for its services, no nation will extend that necessary credit unless it
is itself involved. War is fought on credit where credit is available. When that
fails, then confiscation is necessary - and that is impossible in neutral coun
tries without adding new enemies to the participant.
4 Reconstruction activities are invariably a source of prosperity after every War. Not
only is all attention during the War centered on production only of necessi
ties for winning the War, thereby creating a deficit of many peace-time
necessities, but every War has shown the participant in it how dependent it
is upon foreign countries for its necessities. This has been particularly true
in the United States. The development of the new industries made neces
sary by the War, with their expansion in peace-time activities, together with
the new construction of homes and the factories and stores to supply those
homes for the returned soldiers, usually gives a wave of industrial activity
through demand for the products of the steel industry, and the transporta
tion and building industries, etc., which absorbs the surplus of laborers and
creates sufficient work to bring prosperity.
5 The obtaining of a high price for a big export wheat crop or big cotton crop will
bring sufficient extra money into circulation to start a prosperity wave. If this
combines with other activities as outlined herewith, then the prosperity
wave is expanded. For instance, in 1879 the wheat crop of Europe failed
and we had a big crop that we shipped abroad at high prices. This
brought sufficient foreign currency into the American nation and so liqui
dated our debt incurred during the Civil War that specie payment was
resumed in place of the prevailing green-back currency, and confidence
was restored with a resulting four-year period of business prosperity.
Also, in 1924 the European crop again failed while both the United States
and Canada had reasonably large crops for which excellent prices were
obtained. This resulted in a flood of money into agricultural sections, and
that money was used for the purchase of automobiles and tractors to the
extent that it greatly accelerated the prosperity era that prevailed from
then until 1927 and practically until 1929.
6 Discovery of gold in large quantity. We have given, in Lesson 1, the theory of
those who believe that commodity prices are governed by the quantity of
gold production in relation to industrial expansion. They point to the fact
that the normal increase of industrial expansion in the world is at the
average rate of about 1 per cent annually. This also is about the rate of
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gold production annually. They theorize that when business expands at a

rate more rapid than gold production increases, then the quantity of gold
available on which to establish credit is not sufficient to sustain that quan
tity of business, and therefore it means eventually coming back to the
level of gold expansion. Or, they theorize that when business falls below
its normal rate of expansion but gold continues its expansion, then the
additional credit created by gold will eventually bring the industrial
expansion up to its normal relationship.
Roger Babson founded a business on the Law of Action and Reaction
which Webster's New International Dictionary defines as, "Reaction is
always equal and opposite to action, that is to say the action of two bodies
upon each other is always equal and in opposite direction - Newton's
Third Law of Motion." In other words, Babson's theory is that whenever
business expands above the normal line, there will be an opposite or
opposing movement with a period approximately equal in either volume
or time below the estimated normal. Where the gold theory is that the
business expands because of gold production, Babson's theory is that
there are alternate periods of expansion and contraction according to the
natural law of action and reaction.
Our own theory is that so far as gold production itself is concerned, the
amount of prosperity it brings is in almost direct ratio to the amount of
men, money, and machinery required in its production. Thus the opening
of California brought a rush of the surplus laborers of the nation to that
country and to the construction of transportation facilities, as well as
homes, towns, and factories to supply that development. It is asserted that
as much money actually was spent in developing California as was ever
taken out of it in gold. But the expansion of business due to the develop
ment of transportation facilities from 1849 to 1854 brought an era of
business expansion accompanied by advancing commodity prices. And
this was accompanied by an advance in wheat prices. A similar era of
business expansion came with the development of Alaska.
7 Favorable trade balances in international commerce bring demand for facilities for
production expansion. In Lesson 2, Page 21), the development of Canada as
a market for industrial products was brought out. It was pointed out that
the number of tractors increased 97,176 during the ten years from 1921 to
1930, with similar expansion in other mechanical devices. The reason for
this was the very favorable trade balances due to the tremendous exports
of wheat from Canada at good prices from 1915 to 1930. Britain, with coal
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and iron at home in the British Isles, must depend upon the external
absorption of its manufactured products for its prosperity. To develop this,
British financiers have extended the credit to foreign nations with which
to buy British products. Thus Canadian railroads, stretching from one side
of their continent to the other, have bought most of their rails and train
equipment from England, with money advanced by English financiers.
These financiers have required usually that the goods be sent in British
ships. Little actual money was ever sent, the British financiers merely
establishing credit for the Canadian commercial development. The
Canadians paid for these developments through the sale of wheat to
Britain. Similar aid in developing Argentina and Australia was extended
by the British financiers for the purpose of increasing the factory output of
Britain and its favorable trade balance.
It is in this foreign trade that money can play its part. It is highly desirable
that a nation engaged in international commerce stabilize its money to facilitate
the exchange of goods, as was pointed out in Lesson 1. But where its goods
abroad are not at prices low enough to attract trade, and yet the nation desires
to maintain or elevate price levels within its own borders, it can, by devaluing
its own money in relationship to foreign money, secure in effect the lowering of
the offering price of its own goods to a foreign country, and yet maintain the
offering price to the people within its own borders.
This policy was put into effect in 1931 when Britain abandoned the gold stan
dard. Wholesale commodity prices in the United Kingdom stabilized in 1931
and 1932 as Britain abandoned gold, while commodity prices in the United
States continued to decline. And the same commodities which were offered at
continually lower prices in the United States because of the decline of the
English pound when quoted in American money advanced in England from
September to December of 1931 and stabilized during the greater part of 1932.
While it is true that American prices declined, by control of its own money
quotations in relationship to foreign money a nation might temporarily
advance or lower its commodity prices and thereby expand or contract its
exports. This in turn would bring to that nation greater or lesser prosperity.
NEW INVENTIONS
The extent of the effect of introduction of new inventions or improvements must
depend upon the magnitude of those developments. During the period from
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1866 to 1873 and again from 1879 to 1882, as well as from 1887 to 1893, the great
development of railroads in this country brought an expansion of demand for
materials, machinery, money, and men. Roger Babson, in an historical account of
that development, showed a very close correlation between the industrial activ
ity and the number of miles of railroads constructed each year during that
period. There again, however, was the first factor in our analysis, namely the
opening of new territory with the building of towns, homes, and factories.
During the period from 1920 to 1929 in particular, the mechanization of indus
try and the motorization of local transportation developed an entirely new
industry. It created demand for the construction of all of the parts of an auto
mobile or truck, with their maintenance, and roads on which to operate them.
Coming with the building wave and, as we shall see, the loaning of huge sums
of money to Europe with which to purchase our surplus supplies, it aided in
the prosperity era of that period. Once again, this was entirely separate from
the production or supply of gold.
As a matter of fact, business is not operated on actual quantity of money
available, but on credit. That credit depends upon the outlook for profits, and
wages. A normal volume of business finds the credit at about ten times the
quantity of money available. In 1929 it expanded to about 14 times, and in 1932
it did not exceed six times the quantity of available money.
BUILDING AND BUSINESS

Big cities are now notoriously an accumulation of small cities or communities
and shopping centers. And if you will enumerate the people of the small cities
who are interested in the building, furnishing and equipping of homes, you
name a large portion of those people. There is the real estate man, the financing
agency, the excavator, ditch digger, mason, carpenter, plumber, electrician,
painter, wall-paperer; the lumber yard, coal yard, brick yard, cement dealers;
the furniture manufacturer, stove manufacturer, electrical appliance manufac
turers, the truckers, railroads, steel mills, lumber mills and all of the others
who either produce the goods that go into a home or put it there. Altogether,
we figured there were 17 per cent to 18 per cent of all of the workers of the
nation who were given activity when new building was active.
And those active 17 per cent to 18 per cent of the workers in at least fifty
major industries have a buying power with which to purchase automobiles,
radios or televisions, dish-washing machines, new clothes, etc. Their wives can
buy new clothes, attend the theater, patronize the night clubs, ride in taxi cabs,
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and leave the evening dog at home with the maid while they take the after
noon dog and go shopping. All of which creates work for more people. Thus
the wave of activity created by the building of new homes is similar to drop
ping a big stone in the sea of business. Its effects are felt to the furthermost
shores of that sea.
But when the building wave ends, all of these workers and affiliated indus
tries look in vain for new jobs or new orders. Their buying power is reduced or
eliminated. They in turn must withhold orders, getting along with the old car,
radio and clothes, and their wives must not only discharge the maid but get rid
of the dogs and go back to doing their own hair and nails. Thus the completion
of each house is as though the sun took a little moisture from the sea of busi
ness and deposited it on a mountain top. As more and more of the houses are
completed, this small deposit of moisture congeals into a snow ball that finally
starts down the mountain, gathers other unemployed (snow) in its break,
finally ending up in an avalanche.
Pictograph 15.1 shows activity in building from 1917 through March, 1950. Up
to 1939 this index was based on the building permits in 215 cities as compiled
by Bradstreet's. The seasonal trend was taken out, the value of these permits
was adjusted to allow for changing cost of building, and 1 per cent was added
to the normal for each year to allow for increase in population. But after 1945
the index of permits issued in 215 cities did not tell a true picture because the
building was in the suburbs more than in the cities. So we have gone to the
Bureau of Labor report of the number of building units started each month. It
also is adjusted for seasonal trend and allowance is made for a 1 per cent
increase annually in population.
THE RECORD
When the United States got into World War I, there was no time for building.
The boys were in the Army and all of the materials were needed for production
of weapons of destruction rather than places of permanent abode. So building
activity went down until in December of 1918 it was only 11 per cent of the
indicated normal.
Then the War ended and there was such a shortage of homes created by this
great lack of building that activity immediately started and the index rose
toward the normal. But general commodity prices and the cost of building rose
to such high levels that starting in February of 1920 the building index began to
decline, going back down to 34 per cent of the normal.
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Pictograph 15.1 Activity in building 1917-50
BUILDING
NORMAL
We have heard many statements as to the reason for the great break of 1920.
These have all been theoretical, blaming it on monetary policies, Government
policies, etc., etc. But the facts are that when the workers in War industry were
thrown out of employment by the ending of that War, and the workers in the
fifty major industries affiliated with new building were not given employment
in that activity, unemployment spread rapidly and the break came.
But there was the need for this building, and when commodity prices and
building costs had declined so drastically in 1920 and early 1921, the activity
started anew. By the end of 1921 the index was back to, and had been above, the
normal. Business immediately picked up all over the country and from 1922 to
1929 this nation experienced the greatest era of peace-time prosperity ever in its
history to that time. Commodity prices were comparatively high and fairly
stable. And during that period of seven years not only was there a normal
volume of building but the deficit of the period from 1914 to 1920 was made up.
As a matter of fact, there was some over-building. When we moved into the
office building in 1929 in which we are now located, it was not over 50 per cent
rented. There was plenty of vacant space not only in offices but in apartments
and houses all over the country. So in May of 1929, after having been almost
continuously above the normal for the preceding seven years, the building
index dropped below the normal. The snowball taken from the building sea
and put on the top of the mountain was big enough to start rolling. That was in
May. In October came the panic.
The time lag between the sharp decline of building permits and the break in
business and commodities was just about the same in 1929 as it had been in
1920. In 1907 the index, after having been above the normal practically since
1904, went below the normal in January and the panic came in March.
FUNDAMENTALS OF THE DEPRESSION

The snowball of unemployment kept on expanding from 1929 to 1932. Herbert
Hoover had made things worse by creating the Federal Farm Board early in
1929 with the purpose of artificially holding agricultural prices up. But all he
did was to eliminate the export trade for wheat, cotton, com and tobacco and
leave the nation with big surpluses to be marketed on top of the big crops of
1931 and 1932. Where in 1907 a short wheat crop had raised prices and given
farmers a buying power which soon carried the nation out of its panic and
depression, in 1931 and 1932 the surpluses accumulated by the Federal Farm
Board simply added to the depression when they were thrown on the market.
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Grain prices broke to levels 48 per cent of their natural exchange value for
other commodities, and those other commodities were at depression levels.
And farmers, seeing such low prices for com, figured the only way they could
use it up was to raise more pigs and feed more cattle. The natural result of this
was prices about 50 per cent of the normal in comparison to the prices of other
commodities. The result was the terrible depression of the early 1930s - trace
able directly to the ending of the big building wave.
THEN CAME THE TURN

The droughts of 1934 and 1936 eliminated the grain surpluses and business
gradually turned. A little more activity came in new building, but it was not yet
up to a normal until the start of World War II gave a demand for products of
the American nation, money to its workers and activity to the building indus
try and to the trades. The index rose to a level in 1941 of 116 per cent and was
above the normal during the first seven months of the year.
Then came our entry into World War II. And, like in World War I, the workers
of the building trades were needed for preparation of destruction rather than of
homes. Building activity declined to levels 14 per cent of the normal.
Due to dropping some of the bars on immigration and to a desire on the part
of the boys in the Army to have someone to come back to, there were more
marriages during this War than in any other in history. The result was a huge
increase in the population of the nation, a large proportion of which were chil
dren. The great deficit in building during the War made even more acute the
scarcity of homes for such a rapidly expanding population. And with the
ending of that War in 1945, the workers from the War plants immediately
returned home to employment in the industries directly or indirectly affiliated
with new building.
THE BUILDING DEFICIT

If we figure the need for a normal volume of building from 1941 to date, and
figure that the deficit of 1942, '43, '44 and '45 will be made up at about the same
rate as it was in 1949, then it would take approximately four more years of
building equal to that of 1949 to make up that deficit. We figure that a normal
quantity of home units in all non-farm positions, that is in the cities and in the
smaller towns, from 1942 to 1949 would be about 5,793,000. The actual was
4,368,000. So the deficit was 1,425,000. If this deficit is made up at the normal
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amount of building plus 350,000 units per year, it would carry this building
wave through 1954. Thus there would be eight years of great peace-time busi
ness prosperity from 1946 compared with seven years from 1922 through 1928.
Of course, no one can say for sure that this will be the case. This was written
in May, 1950, so time alone will give the answer. It might be that, like 1920, if
building costs keep on increasing, the builders may decide to wait until costs
are more reasonable. But with the huge population and such a large percentage
of it being so young, there was no question but that the latent potential force of
good business activity was present. So if those who desired to build should
decide that they would wait until costs came down, and the result was unem
ployment which brought about a break similar to that of 1920, then, like in that
period, it should be followed by new activity until the deficit was made up.
And the surest way to bring about just such a condition would be for the
unions to keep on piling up increase after increase in the cost of building
through wage demands.
But so long as this building does continue - and it can be seen that 1950
started off with activity breaking all previous records - just so long will busi
ness be good. And good business will create a demand for commodities of all
kinds including food, both meat and cereals, and hold the general average of
commodity prices fairly stable.
IT FORECASTS THE FUTURE

To us the importance of this record is not only that it gives a factual basis of
background for demand for commodities, goods and services, but the very
nature of the index gives a forecast of future demand. Unless the permit is
issued, no house can be started.
Unless the foundation is dug and the building actually started, there will be
no demand for the services of the carpenter, the mason, the painter, the
plumber, the electrician, etc. The activity from the start of the construction to its
ending is necessarily of such length that even though the number of new
houses started declines very sharply, the old activity will carry on employment
and orders for some time. Therefore the rise or fall of the index showing the
starting of home unit construction should precede and therefore forecast, long
enough in advance, the demand for the commodities, goods and services of
those affiliated with building, that the ending of that demand should be known
far enough in advance so that this ending could be anticipated to a greater or
lesser degree. And because in the past, for as far back as we can get the records,
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that ending of a building wave in peace time has resulted in a crash of com
modity prices accompanying a big increase in unemployment, one should at
that time be short on securities or commodities just as the Bull side of the stock
market is the proper side so long as the building activity continues.
Being fundamentalists, we advocate searching the horizon for indications of
the outlook for each of the seven factors enumerated at the beginning of this
Lesson. When sufficient of them come together to create a demand for men,
money, and machinery, so that those who normally desire work will have it at a
wage sufficient to permit them to purchase the necessities of life and enjoy
some of its improvements, which are first classed as luxuries and then become
necessities, then we have waves of prosperity. When those waves come, it is
human nature to be extremely optimistic that the dead past has been buried
and a new order prevails and will prevail for all time. But the Law of Action
and Reaction, discovered by the great physicist Newton, applies in business as
well as in science, and periods of prosperity have been followed by periods of
adversity for as far back as history records. The only thing stable practically in
the universe is human nature whose greatest vice is greed.
The panorama of business developments is constantly changing. In the next
Lesson we will discuss some of these changes and will give a synopsis of the
most important ones which may play a part in business economy and resulting
price levels in the United States in future years.
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Lesson 16
CHANGING ASPECTS OF AMERICAN

INDUSTRIAL ECONOMY
■ We Become an Exporter
■ A Changed Economy
■ We Are Not Independent
■ Changed World Conditions
■ The Roosevelt Trade Policy
■ Conclusions
CHANGING ASPECTS OF AMERICAN INDUSTRIAL ECONOMY
Note: The following text matter on the above topic was written in 1933. As you
can see, it reviews conditions in America from the time of the Revolutionary
War to the time of the depression in the early 1930s. Since then the world has
gone through its second great war. The impact of that war on European nations
in particular and world economy in general has been simply tremendous.
In the discussion herewith it is interesting but not surprising that many of the
problems confronting the world in 1946 were extremely similar to those con
fronting it in 1921 and in some degree following the Civil War, Revolutionary War,
etc. We believe that you will find this discussion not only interesting but very illu
minative and can see very little to add to it as this review is made in 1950.
In considering the bases of prosperity outlined in Lesson 15, it is well to take
into consideration the changing aspects particularly of the international situa
tion with respect to America and the effect it will have on American economics
of the future.
Quotation was given in Lesson 14, Page 226, of a statement made by Benjamin
Franklin in England prior to the American Revolution as to how the British
manufacturers had succeeded in preventing the colonies from developing their
own factories. The Revolution permitted some development of these factories,
but we read in the work of a contemporary that after the American Revolution
the American markets were flooded with foreign goods. This speech was made
in Congress:
"We did buy, according to the advice of modem theorists, where we could
buy cheapest, and our markets were flooded with foreign goods. British goods
sold cheaper in our seaport towns than in Liverpool and London. Our manu
facturers were being ruined; our merchants, even those who thought to enrich
themselves by importation, became bankrupt; and all these causes together
were so detrimental to agriculture that landed prosperity became very gener
ally worthless and consequently bankruptcy became the general thing among
our landowners."
Discussing this situation, George Washington said, "The great rule of conduct
for us, in regard to foreign nations, is, in extending our foreign relations, to
have with them as little political connection as possible. So far as we have
already formed engagements, let them be filled with perfect good faith. Here
let us stop."
The War of 1812 again gave American industry a chance to develop. During
that War, as during the Revolution, home industries progressed and when the
War ended they were very prosperous. It is said that immediately upon the
close of the War the British merchants dispatched ships to America with goods
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marked at lower price levels than those at which they could be produced in the
American factories. The value of all goods imported into the United States in
1814 was $13 million, but in 1816 it amounted to $147 million. Many of the new
industries created during the War of 1812 passed out of existence.
As a result, the tariff act of 1816 was inaugurated for the purpose of raising
revenue and protecting infant industries. After the panic of 1819 the tariff was
again raised.
It was about this time that Adam Smith began the long program which finally
resulted in the repeal of the Com Laws of England. Those laws had been enacted
by the House of Lords in the 16th century and were designed to protect the grain
grown on the estates owned by the Lords. They prohibited the importation into
Britain of wheat (then known as com) and permitted rather high prices for that
grain in the United Kingdom. That country's population was growing, however,
and its economic development depended primarily upon its exports. Therefore,
the financiers prevailed upon the House of Lords to permit entry of wheat into
Britain in order that the exported products might be paid for.
WE BECOME AN EXPORTER
With the repeal of those Corn Laws in 1840 began exportation of American
wheat, and with that exportation came a movement toward lower tariffs. The
Walker tariff of 1846 made material reductions, placing the tariff on a revenue
basis rather than for protection of industry. In 1858 the tariff rate was 20 per
cent and in 1861 it was 18.1 per cent.
Then came the Civil War in which the American nation went heavily into debt
to England and France. But there was again a development of industry to pro
duce the necessities required for the conduct of the War. From 1790 until 1862
our imports had exceeded our exports in all but 14 years. Our exports con
sisted primarily of cotton and tobacco, these constituting about 60 per cent,
with another 20 per cent made up of foodstuffs. Our imports consisted primar
ily of manufactured goods which we did not know how to make in sufficient
quantities to supply needs. We imported the building materials from which our
great railroad development of that period was made, together with clothing
and any luxuries.
During the period from 1861 to 1868 the Federal and State Governments bor
rowed about $1.5 billion overseas at very high rates. This was utilized not only
for prosecution of the War, but for the development of the railroads during the
period immediately following that War. It was necessary for us to export more
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goods to liquidate that debt. Thus the exports of wheat and com steadily
increased during the period from 1866 to 1900 despite the fact that the general
trend of their price was downward from 1866 to 1895. The economic law cited
by James Thorold Rogers applied to the American nation then just as it did to
Canada and Argentina in the period following 1929. On Page 74 of Lesson 4 the
following is quoted from the lecture by Rogers:
"But there is a case which checks the likelihood of a high level of prices in a
country whose trade gives it a great control over the supply of gold and silver
which are produced and exist. This is the amount of foreign debt which is held
by the exchanging or importing country. If a country, say England, has made
great loans to other countries it has generally created the loans by export, and
when lending is brisk the export trade is active. But it receives the interest on
its loans by imports, especially of raw materials, and when the indebtedness is
heavy the debtor country is forced to press the produce by which it liquidates
its liabilities on the importing or creditor country. The effect of this operation
may be to induce the phenomenon of continual over-supply, and with it the
excessive cheapening of materials."
Prior to the Civil War our exports had amounted to about $10.00 per capita,
with the imports slightly above that. But by 1876, we had increased the exports
per capita to $20.00 while imports remained about constant. Our exports con
tinued primarily of raw materials including cotton, tobacco, crude oil, wheat,
and com. Imports of manufactured goods gradually dropped as industry
began to expand after the Civil War, with gradual increased percentage being
raw products such as sugar, coffee, etc.
So much of our commerce depending upon exports, we were naturally subject
to international economic or political developments. Sudden fear of the finan
cial position of the American Government and the burden being assumed by
its industry caused the British, who had financed the building of the railroads
in the United States immediately following the Civil War, to begin pressing
these securities on American markets. This resulted in the panic of 1873. The
Barings failure in Britain in 1893 brought a repercussion in this country. The
decline of 1839 came primarily from a famine in India which cut down sale of
British goods and thus imports of our cotton. The decline of 1847 followed a
panic in London.
This was the price we paid for the development of the nation. We were a
debtor nation and must export to pay our debt. Our sales depended upon for
eign ability to buy as well as competitive price.
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A CHANGED ECONOMY
World War I brought probably the greatest change in the American economy. Up
to that time we owed Europe huge sums of money. There is little doubt but that
these Europeans had made a systematic campaign to prevent the development of
industry in the United States. Paris fashions were the leaders. Bessemer Steel was
the best. German dyestuffs were the one and only. French wines were par excel
lence. America was told that it could not produce these things and maintain its
high standard of living. Our industrialists were men of production and consid
ered chemistry more or less as something for schools and not for business.
Then came the War and America found itself near to adoption of only white
clothing because of lack of dye stuffs. We found that we could not produce
machines rapidly enough to turn out the necessary War equipment without fine
steels - and Britain needed all of its own products for self-defense. We could not
produce gun powder without nitrates which had to be imported from Chile -
and Germany practically bottled up Chile. We needed camphor from Japan and
our southeastern cotton fields needed fertilizer, the basis of which was potash
which had been imported from Germany and France. We had no substitute for
tin which was imported from Bolivia. Our wool supplies came from Australia,
which was bottled up. Britain owned the rubber plantations.
Then began one of the greatest periods of development in the annals of
American economic history. Foreign patents were seized and the chemists were
set on a pinnacle. They finally developed the secret of dye-making which also
contained the secret of making high explosives. A report of our Alien Property
Custodian, A.H. Palmer, said, "This complexity of the manufacture of dyestuffs
as a business proposition is almost beyond belief. Tens of thousands of distinct
dyes were produced in the German factories and over 900 of these were sold in
appreciable quantities in the American market alone, before the war.
"The natural advantages of the German industry as compared to the industry
of other countries prevented serious competition in Germany itself. The
Government's tariffs and other prices enabled home prices to be kept up. It
was then evidently to the advantage of any manufacturer to produce far more
than he could sell in the home market even if his export trade had to be carried
on at a loss when by doing so he could use a process so economical that his
profits on home trade would be largely increased. Accordingly (after 1904)
German dyestuffs began to appear in every country at prices which domestic
manufacturers could not meet. The inevitable result was that in country after
country the domestic manufacture was destroyed or stifled in its cradle. As
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soon as this had been accomplished, it was no longer necessary for the German
exporters to sell below cost. Prices were immediately raised and handsome
profits realized.
"Up to August, 1914, the American industry in dyestuffs and medicine consisted
of little more than a series of rather small assembling plants. In spite of the fact that
basic supplies were available and that several of the crudes could be secured in
this country under most advantageous conditions, hardly any of the necessary
intermediates were made here and the manufacture of dyes was almost entirely
confined to working upon intermediates imported from Germany.
"In medicine, very little American manufacture existed." Naturally, the War
cut off these sources of supply and, as said, it was necessary to develop them
for the very existence of the country.
In 1930 the Tariff Commission reported, "More than $100 million is now
invested in buildings and equipment (for production of dyes) and a total of
11,390 employees were reported to be engaged in the coal tar chemical industry
in 1930. Most of this development has occurred since 1914, only 528 persons then
being engaged in the manufacture of coal tar chemicals in the United States."
At the close of the World War in 1918, and particularly after the next seven
years, the American nation was probably more independent not only than it had
ever been before in its history but probably more so than any other one nation in
the history of the world. It was practically self-sustaining. It was out of debt; in
fact it had changed from owing other countries probably $5 billion to being
owed three or four times that amount. There are some two billion people in the
world, of which the United States had 130 million within its borders. Yet half of
the business of the world is transacted within those borders. A wall could have
been built around America and still it could have lived comfortably. And with
some readjustments it could have maintained a fair degree of prosperity. It is
practically the only country of the world where this could result.
WE ARE NOT INDEPENDENT

But it is not independent, and such an isolation would for a considerable time
create even worse havoc than actually came from 1929 to 1933. The world
cotton crop from 1923 to 1932 averaged 25,559,000 bales, of which the United
States produced 14,413,000 bales. We export about half of our cotton crop and
so far it has proved impractical for other countries to grow sufficient cotton to
replace us. Loss of that business would create chaos through the southern half
of the United States. The Federal Farm Board, in 1929, tried to fix the price of
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cotton, with the result that our export trade was lost and the effect on the South
was instantaneous and disastrous. The farmers thereafter got extremely low
prices for the cotton, the farm mortgage holders were left without payment,
taxes were unpaid, the railroads lost traffic, the boats lost business, and indus
try both north and south suffered as a result of this loss of buying power.
To fix a price at a high level on cotton in this country with a lower price on
exported cotton would bring retaliatory measures from other countries of the
world who are also in the cotton export business. And unless that step were
accompanied by an effective method of curtailing production, the use of fertil
izer and the opening of new territory, it would expand production to a
disastrous level.
Any planned economy which endeavors to raise the general level of commod
ity prices must meet failure unless it raises the level of all commodity prices.
And any industry which must depend upon exports for disposal of its surplus
cannot have its price regulated for long, even internally, by control of money.
The obvious result must be either retaliatory measures by foreigners as the
monetary control steps affect their own price level or their own export busi
ness, or else a turn to some other country for securing of the supply of that
export product. And there are still millions upon millions of acres of available
land scattered over the Earth's surface whose productivity possibilities have
not yet been touched.
There is little question but that a desire for a large export trade is the greatest
cause of war. The Romans of old destroyed Carthage because it was growing
powerful enough to cut into the Romans' world trade. The United Kingdom
has participated in more wars in more sections of the world than any other
nation primarily because of its export trade. Germany engaged France in war
in 1870 because it needed the Alsace-Lorraine Valley for its industrial develop
ment and natural resources. Following that War, the world was at peace so
long as Germany did not attempt to expand its export trade unduly, and
France was not strong enough to retake the Alsace-Lorraine Valley. But when
Germany began encroaching on British foreign trade, the World War followed.
The above statement is in no sense made as a pacifist argument; it is merely a
statement of fact as we see it from a strictly economic viewpoint. The war, while
it destroyed the industrial power of Germany and took away its merchant
marine, likewise demonstrated to America - which had always been a huge
market for European manufactured goods - that it could produce those goods
just as cheaply with just as high quality and with just as low cost as could the
Europeans and at the same time create employment for its own citizens.
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CHANGED WORLD CONDITIONS

Likewise, the war taught Italy, France and Britain that their national life was
jeopardized by dependence upon foreign countries for food supplies. The first
utterance of Mussolini upon seizing power in Italy was to declare that no
future war must ever find Italy dependent upon a foreign nation for its food
supplies. As a result, he offered bonuses and gave orders for the increase of
wheat acreage so that in the year 1933, aided by good yields, that country was
self-supporting whereas during the years prior to 1914 it was one of the large
wheat importers of the world, taking around 60 million bushels annually.
France put in a similar program with the result that from being an importer of
40 to 60 million bushels annually, by 1933 it had increased acreage to a point
where it had a surplus of wheat above domestic requirement. Germany also
became self-sufficient, thus leaving the importation of wheat to the smaller
countries of that continent.
In America, the change was particularly sharp. While we have had a favorable
trade balance, with exports exceeding imports since 1860 as recorded previ
ously, we always were a dependent nation for manufactured articles, and this
surplus of exports of raw products went toward paying the interest on our bor
rowings and the principal thereof. We continued exporting wheat and cotton in
good volume up to 1927. In the recovery during the early 1920s, however, the
changed aspect of American industry presented a most difficult problem.
Whereas there was a demand for some of our raw products, the other countries
of the world owed money to us and they desired to pay for this in goods. This
could not be done without again destroying the industries that the war had
developed. As is to be noted on Pictograph 15.2, the Stock Market reflected this
condition with a decline during 1923, and building turned downward during
that year. At that time General Charles G. Dawes was sent to Europe as the head
of a commission to revise the economic features of the Treaty of Versailles which
ended the War. One important part of the Dawes Plan in 1924 was that America
was to loan money to Europe for its industrial rehabilitation. As a result, money
from America began to pour into Europe in tremendous quantities.
The ratio of exports to new loans to Europe was as follows:
Year Exports New Loans
1922 $3,832,000,000 $763,627,000

1923 4,167,000,000 420,597,000
1924 4,591,000,000 969,224,000
1925 4,910,000,000 1,976,466,000
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1926 4,809,000,000 1,314,481,000

1927 4,865,000,000 1374,225,000
1928 5,128,000,000 1,578,951,000
1929 5,241,945,000 948,230,000
1930 3,848,000,000 1,107333,000
1931 2,424,000,000 419,835,000
It is thus to be seen that instead of taking imports to offset our exports and
also offsetting those exports by the invisible total paid for the use of foreign
boats, foreign exchange facilities, and foreign travel, we were loaning more
than 25 per cent of the value of our exports each year to these foreign countries.
In addition, our bankers and industrialists were extending long-term credits to
the foreign countries for the purchase of these surplus materials.
We read in the work What Everybody Wants To Know About Money an outline of
monetary problems by nine economists from Oxford, planned and edited by
G.D.H. Cole (Alfred A. Knopf, New York, publishers) as follows: "It is easy
enough to realize that the revival of Europe and above all of German prosper
ity and production between 1924 and 1929 was the result of highly artificial
conditions, and depended upon the continued pouring into Europe of a vast
stream of American Capital."
And we read also in the work of Samuel Crowther, entitled America Self
Contained (Doubleday, Doran & Co. Inc., publishers, Garden City, New York):
"We have never squarely faced the fact that if we sell abroad more than we buy,
we must finance the sales through loans, and also we have never faced the fact
- and neither has any other nation - that if the loans made abroad are used for
productive capital purposes they will result in building up industries abroad
which will make the very articles which the country has been importing. If the
loans are used for non-productive purposes, they will never be repaid. If we
take large imports of manufactured goods in return for large exports, we shall
have to decide what part of our people will give up their jobs and what part
can be shifted to the making of articles for the export trade. That would seem
to be a momentous decision."
Quoting again from the work of G.D.H. Cole of Oxford, we find these state
ments: "Europe during the years between 1924 and 1928 had been building up
its new economic system and re-equipping its industries with the aid of large bor
rowings of capital from the United States. This borrowed money was indeed for
the most part applied to actual productive uses, though some of it was in effect
used to keep up the interest payments on European debts to the United States,
and the apparent solution of the problems of reparations and inter-govemmen-
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tal debts reached after 1924 was in fact no solution at all. Europe was able to pay
America what was owing because America steadily lent Europe more than enough to
meet the bill. In other words, there was no real repayment, but an actual increase
in the burden of debt laid upon the future.
"This, of course, need not have been a real fatal objection if two conditions
had been satisfied. First, if the American money had been effective in so raising
European productivity as to enable the interest charges to be more than met
out of increasing production, and secondly, if the Americans had been pre
pared to receive payment in goods. The first of these conditions was on the
whole satisfied, on the assumption that no new disturbance arose to throw the
European economic system out of gear; but the second was never satisfied at
all, for the Americans were pursuing a policy of increasingly high
Protectionism in the interests of their own industries, so that the United States
was in the wholly anomalous position of being a great creditor country which
aimed at exporting far more than it was prepared to import. As long, however, as
the stream of American capital flowed uninterruptedly into Europe, the absurdity of
the situation was not apparent. For it could always be supposed that at some
unspecified time in the future the Americans would be prepared to receive
payment in European goods, and for the present their preparedness to lend
enabled the European countries to carry on.
"This situation was, however, totally upset by the American boom; for citizens of
the United States, finding prospects of profit in their own industry far exceeding any
thing that they could hope for in Europe, were no longer in a mood to lend their money
abroad. There was accordingly a sudden and sharp fall in the volume of American
capital exports to Europe, and this fall reacted with exceptional severity on the
economic system of Germany, which had been largely rebuilt since 1924 with the
aid of American borrowed money. Only with the aid of this money had Germany
been able to pay reparations in accordance with the schedules embodied in the
Dawes Plan. For a time the dislocating effect of the withdrawal of American capital from
Europe was concealed in a variety of ways. For by various credit expedients, and
above all by replacing long-term with short-term advances, the European coun
tries were able to carry on without disaster as long as the boom lasted, in the hope
that the boom conditions in America would prove to be transient and would give
place before long to a renewal of more normal but still prosperous economic
activity accompanied by a resumption of overseas investment.
"The American slump of 1929 at once destroyed these hopes; for in the face of
the slump, Americans were even less prepared to place their money in long
term investments in Europe than they had been during the boom. There was a
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scuffle for safety among the deflated investors of the United States, and their
conception of safety certainly did not include locking up their money in long
term investments in European countries which were bound to be adversely
affected by the American collapse. For despite the high the American market was of
very great importance to the European countries both directly and because the
Americans imported large quantities of raw produce from countries to which in turn
the European nations sold their industrial exports. The collapse of the American
market meant that the countries which had been in the habit of selling America
their goods lost their ability to pay for imports on anything like the previous
scale, and this reacted at once on the exports of the leading European countries.
It therefore looked unsafe and unprofitable to invest in Europe; and besides,
the Americans, badly tied up at home as a consequence of their own Stock
Market collapse, were engaged in a scramble for liquidity rather than a search
for fresh fields for long-term investment."
It was this effect on America for international trade relationships which
undoubtedly influenced in greatest measure the trade policy adopted by
President Roosevelt upon his accession to office in 1933. It undoubtedly was
the cause of his statement to the International Economic Conference of that
year which so confounded them. The statement was as follows.
THE ROOSEVELT TRADE POLICY

"The sound internal economic system of a nation is a greater factor in its well
being than the price of its currency in changing terms of the currencies of other
nations. It is for this reason that reduced costs of government, adequate gov
ernment income, and ability to service its government debts are all so
important to ultimate stability.
"So, too, old fetishes of so-called international bankers are being replaced by
efforts to plan national currencies with the objective of giving to those curren
cies a continuing purchasing power which does not greatly vary in terms of the
commodities and need of modem civilization.
"Let me be frank in saying that the United States seeks the kind of dollar
which a generation hence will have the same purchasing power and debt
paying power as the dollar value we hope to attain in the near future. That
objective means more to the good of other nations than a fixed rate for a month
or two in terms of the pound or franc.
"Our broad purpose is permanent stabilization of every nation's currency.
Gold or gold and silver can well continue to be a metallic reserve behind cur
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rencies, but this is not the time to dissipate gold reserves. When the world
works out concerted policies in the majority of nations to produce balanced
budgets and living within their means, then we can properly discuss a better
distribution of the world's gold and silver supply to act as a reserve base of
national currencies.
"Restoration of world trade is an important partner both in the means and in
the result. Here also temporary exchange fixing is not the true answer. We must
rather mitigate existing embargoes to make easier the exchange of products of
which one nation has and the other nation has not."
There have been tremendous international economic changes during recent
years as this is written, not the least of which occurred in the relationship of
America to the rest of the world. This change is causing a groping for light
as never before in the history of the nation. The people are studying the
question of money, international trade, and all subjects economic, as they
have not been studied since Adam Smith walked up and down the British
Isles from 1795 to 1825 endeavoring to get the Corn Laws of England
repealed. He was an advocate of free trade because he saw into the future
that Britain must depend for its prosperity upon its ability to sell its goods in
foreign lands at a profit.
CONCLUSIONS
Our conclusions are:
1 The United States will find export trade most difficult because we are
owed by the world, are capable of producing a surplus, and yet refuse to
destroy industries developed during the War period in order to accept for
eign goods in payment for our exports.
2 So long as we must export products of such quantity as cotton, and we
must import commodities such as coffee, sugar, paper pulp, etc., we will
continue to have a certain quantity of foreign business.
3 It is impossible to control prices by control of money where such a large
proportion of the population is dependent upon an export product, and
the price of that export product must be dictated by conditions of world
Supply and Requirement and world trade.
4 That being the case, there will continue to be periods of prosperity and
adversity, and the business cycle will continue as a natural order of events,
with deficits being followed by surpluses and new inventions or improve-
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merits which change the economic course of a nation being followed by

business expansion which will lead to over-optimism and again be fol
lowed by business depression.
Therefore it is highly desirable that those who trade in grain shall study
the business cycle, and keep watch closely of the fundamentals of busi
ness. The next Lesson will develop these points.
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Lesson 17
THE BUSINESS CYCLE AND THE

BUSINESS INDICES
■ The Business Cycle

■ Prosperity
■ The Decline
■ Depression
■ Recovery
■ A Business Index
THE BUSINESS CYCLE AND THE BUSINESS INDICES
We have seen in foregoing Lessons the relationship between general commod

ity prices and the grain market. We have seen how the Stock Market will
usually precede and therefore forecast a turn in trend of the general price level
and how this will influence the general level of grain prices at times as much as
a change in the supply of that grain.
We have looked at some of the changes in American economy since the days of
the Revolution, with just enough of a picture of conditions at the time this is
written to enable students to understand more fully the current economic events.
To place them in still better position to interpret the future conditions, it is
highly desirable that they understand how to construct an index of business for
themselves that will have just as much forecasting ability as is possible, or how
to interpret the other business indices published.
There are almost as many business indices in existence as there are financial
publications or services. Each of them has its merits and all of them have their
demerits. Reference has been made to the Babson Theory that an era of busi
ness expansion above normal will be followed by an offsetting and equalizing
era below normal. The Babson chart shows these eras either above or below the
estimated normal line as being divided into two parts. If there has been an era
of depression and then business turns to above the estimated normal line, it is
taken as a warning signal when the area of the above normal business is equal
to half of that below the normal line. When that halfway volume is established
above the normal, then the theory is that one should gather in his loose ends of
business, insisting on payments of debts, selling out securities that are at all
high in price, reducing inventories to the least possible minimum, and prepar
ing for the next era of declining and low business.
That is a good theory, but the size of the periods of expansion and depression
are not at all uniform in succession. While it is true that over a period possibly
of ten years and possibly it may require longer than ten years, the area of the
volume above the curve will offset almost precisely the volume below that
curve, yet the fact that an era of prosperity lasted for only two years is not at all
a proof that the succeeding era will also last only two years.
The Harvard University Committee on Economics has probably as carefully a
devised business index as anyone. For many years it was considered the stan
dard of the country. Recently, however, less has been heard of it publicly, because
it is possibly a little too complicated. There is no question, however, but that
some of their factors are extremely sound and based on good common sense.
The main component parts of their Business Index were (1) Industrial Stocks,
(2) Commodity Prices, (3) Interest Rates, (4) Bank Clearings. The theory was
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that an advancing Stock Market and low interest rates would precede and
therefore forecast an advance in commodity prices, and an increase in business
would be reflected by an increase in Bank Clearings. Conversely, a falling Stock
Market and high or advancing interest rates would precede and/or forecast a
decline in commodity prices and poor business.
The Stock Market does usually precede the turns of general commodity prices
and therefore forecasts that turn. But that is not always the case. As is pointed
out in Lesson 14, commodity prices peaked in 1925 and it was not until 1929
that stocks peaked.
Also, Bank Clearings, while an excellent index of business, are not entirely
reliable as to the actual volume taking place. Up until 1923 the rise in bank
clearings in the U.S. was fairly indicative of business activity. But from 1923 to
1929 more people opened bank accounts than had ever before had them. The
increase in Bank Clearings was at such a tremendous rate that it must have
exceeded the actual rate of business turnover, large as that was. On the other
hand, from 1930 to 1933 there was a decided hoarding movement in the United
States, and with banks closing right and left and unemployment rather general,
together with the greatly increased service charges of the banks, there is very
little question but that more actual business was done than was disclosed by
the Bank Clearings which dropped so sharply.
As for interest rates, the trend from 1925 through 1937 (time of this writing)
has been for governmental domination of interest rates which means political
control. There is a question whether such artificial control will permit the free
play of Supply and Demand and business judgement to control interest rates in
the future as it has in the past. But there is little question that the interest rates
on three to six months paper, quoted in most financial papers daily, are a good
barometer of the state of mind of those with money to loan. The usual rates
that have prevailed over a number of years, with the normal seasonal trend of
money, are as follows:
Thus, when interest rates are below that, it is somewhat indicative that
bankers and others are easy as to the future, with funds to lend. This, however,
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may be offset by competitive loans from the government or by government

domination. Likewise, interest rates materially higher than this “normal" are
indicative that those with money to loan are apprehensive of the future. But
here again the control of funds by the Federal Reserve Bank may have an influ
ence on money rates. For instance, in 1929, when Call Money on the New York
Stock Exchange was around 15 per cent, and corporations and others were
loaning their money for speculative instead of for production purposes, while
bankers found it much more profitable to place their funds in that speculative
Call Loan Money market than to loan it abroad for continued absorption of the
surplus being produced by American industry and agriculture, the Federal
Reserve did everything in its power to curb that activity. Instead, it curbed pro
ductive activities and brought a crash instead of a reaction.
One might go on through the other business indices of similar nature and
point out deficiencies. As said in the beginning, they all have their merits as
well as their demerits. In presenting to you our method of compiling a
Business Index we have endeavored to make it just as simple as possible, elimi
nating all possible technicalities. But along with it one should consider also the
events which normally occur in the Business Cycle.
THE BUSINESS CYCLE

Efforts have been made by innumerable economists to devise a series of events
which characterize the various stages of the Business Cycle. Commissions have
been appointed by the U.S. Chamber of Commerce to study the question in
conjunction with the Commerce Department at Washington. Books have been
written on the subject, the best one we have yet seen being that of Arthur B.
Adams, Ph.D. (McGraw-Hill Book Co., Inc., New York). Others are numerous,
including The Economics of Recovery by Col. L.A. Ayres of Cleveland, Ohio,
which was published in 1933.
We present herewith the various stages of a Business Cycle prepared by us
after much research since 1922. It shows items of our own observation in two
major depressions and rallies, which have been followed in their sequence, and
historical research discloses they applied very well in other cycles of which
there is adequate record.
The Business Cycle is broken up into four different parts, i.e. Prosperity,
Decline, Depression, and Recovery. Under Prosperity, the following factors
apply, with discussion.
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PROSPERITY
1 Increasing efficiency. This applies not only to methods which are always
devised in periods of depression to decrease cost of production, increase
quantity of output with the same amount of labor, and increase quality for
the price offered, but also to the efficiency of labor itself. A period of depres
sion always weeds out the less skilled employees, and causes those more
skilled to do their work more carefully to retain their jobs. Thus, by the time
the period of recovery has been gone through, efficiency is increased
through manufacture and distribution. This carries into Prosperity.
2 Increasing interest rates. Demand for business expansion calls for more and
more money; and the Law of Supply and Demand applies there just as in
grain prices. As time goes on, bankers and politicians begin to fear for the
permanency of the movement, and so they increase the "rental" price of
money. This is frequently one of the first indications that the end of the
balance in business is within sight.
3 Heavy financing of new corporations. When everybody is making money, with
a demand for more products than can be supplied, naturally the producers
thereof desire to expand their facilities while others will desire to get into
that business. A new company will point to the profits being made by
another company in a similar line of endeavor, and to the profits made by
the holders of the securities of that company. With this sales talk, they will
launch new corporations, and old companies will expand production facili
ties, selling new securities to raise the necessary funds. This must of course
eventually result in over-production, with inability to keep the factory
equipment all employed. That automatically throws a burden on the part
employed, which increases the cost of doing business, and eventually
brings its own result of a decline in business. It is probable that an index
based on new financing of corporations would be an excellent guide to
business. The trouble is that it would lag behind business itself, being great
est right after the peak and lowest right after the low of depression. New
financing must, therefore, be an inverse business index to be a forecast.
4 Declining bank reserves. Prosperity places money into circulation. The
greater the velocity, the less reserve the banks have. This, also, is an
inverse business index.
5 Falling bond prices. When business is good, Stock Market prices advancing,
and optimism is rampant, otherwise conservative investors turn to stocks
as the security offering the greatest returns on invested money. Bonds
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become secondary. Also, shrewd buyers refuse to purchase bonds at the

inflated values of construction which attend a wave of Prosperity.
6 Advancing commodity prices. Naturally, as employment expands and demand
for various products of agriculture or manufacture increases, the prices of
these commodities will advance. Through their advancement they give to
the raw product producers more money with which to purchase the manu
factured products of others and this automatically expands the Prosperity
wave. There are many economists who contend that the only way to con
tinue a wave of Prosperity is to have a slowly declining level of commodity
prices which will automatically prevent over-production and permit work
ers on a salary to continue the purchase of manufactured products. This
theory must of course eventually defeat itself.
7 Extreme optimism. Almost invariably in every wave of Prosperity the men
in the public eye begin to preach that at last they have defeated the big
bad wolf of depression and have routed him permanently. Those inter
ested in the Stock Market and in the flotation of new issues release stories
declaring that instead of stocks selling at a price ten to twelve times their
average earnings in order that the securities holder might receive an
annual rental of around five to six per cent on his investment, stocks
should sell at 20 to 50 times their previous earnings to discount earnings
of the future. The political party in power claims credit for the great era of
Prosperity and makes wild promises for the future if it is retained in office.
Clerks and others invest in securities and grain futures, and on prospec
tive profits they increase their purchases of manufactured goods. This
leads to the next step.
8 Increasing profits. Naturally, with great efficiency and increasing prices of
goods in the inventory, together with the expanding demand, profits
increase inasmuch as labor wages invariably lag behind commodity prices.
9 High Stock Markets. The whole combination of preceding events causes the
public to rush into the market and purchase not only the securities that
Hamilton pointed out (Lesson 3) have been purchased at low prices by
those on the inside, but the public demands more securities and prices go
to comparatively or actually high levels.
10 Over-expansion. There can be only one result of these conditions and that is
a period of over-expansion in factory capacity and over-production in
commodities. This must inevitably lead to the period of Decline.
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THE DECLINE
1 Inefficiency. Man seems to be a rather lazy animal. Possibly the difference
between the very rich and the others is that most of the rich spend then-
birthdays between 60 and 70 at the office working while the others desire to
celebrate. When there is a great wave of Prosperity and it has run for some
time, the factories employ inefficient labor in an attempt to increase produc
tion and to reduce the cost of overheads so that more profits can be made.
As prices rise, poorer quality goods are substituted. The general average of
efficiency is reduced in both labor and quality of goods produced.
2 Financial strain. Business is operated on credit, and a vast business causes a
strain of that credit. A decline in either volume of output or prices of raw
products immediately wipes out the margin of profit, with the result that
money allotted for other purposes must be used as a backlog for the oper
ation of the business itself. This automatically curtails activity in
production expansion or for purchase of other commodities, and this in
turn reduces industrial activity.
3 Declining commodity prices. Finding the demand declining, sales forces imme
diately lower prices in an effort to stimulate that demand. While this may
result in some increased orders, on the other hand it causes inventories to
show a loss and buyers to refuse purchases because their hesitation may
afford them an opportunity to make purchases at a still lower price. This is
cumulative - the further the decline in prices, the more hesitation of buyers.
This automatically curtails production expansion which carries with it reduc
tion or cancellation of orders for production machinery or other facilities.
4 Scandals, crime wave. It is a sad but nevertheless true fact that there has
never been a major expansion of America, such as the building of rail
roads, the erection of huge factories, or offices or apartment buildings, etc.
but that those who supplied the money for these through the purchase of
bonds have almost invariably lost the money they invested during a
Prosperity wave. There is hardly a railroad of the United States but that
has gone through bankruptcy. Most big corporations are an outcome of
bankruptcy proceedings and the Decline after a wave of Prosperity reveals
the lack of judgement of those who floated the securities. They are dis
credited prophets of profit, and those who have invested their money
persecute those to whom they entrusted it. This is human nature. Yet the
nation as a whole benefits from having the facilities built by that money.
The bankruptcy proceedings do not destroy the railroads, the public utili
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ties, or the building whose bonds could not be met. And without the excit
ing lure of quick riches, sufficient money could not be gathered to make the
desired developments. Along with the scandals resulting from these busi
ness and security failures, there are invariably scandals as those in a
position of trust endeavor to use the funds in their control for the recouping
of losses either personal or, in many cases, for the benefit of those who have
entrusted the money to them. Also, crime waves almost invariably follow
declines as incomes of gangsters or others decline and they attempt to
wreak their vengeance on those who still have money.
5 High interest rates. Naturally with the decline in business, those with
money become afraid and demand high rental for it.
6 Falling Stock Market. Leaders who were in position and astute enough to
foresee the advance are very frequently also in position to see the tell-tale
signs of the Decline, by watching such facts and factors as we have
pointed out above; and at the first evidence of the Decline they liquidate
just as quickly as possible. They know that even though that liquidation
may break the market sharply, yet it will be considered a high price later
on if the market really is going into a Decline.
7 Business disappointment. Naturally, with all of the uncertainty, with
increased competition due to over-production through expansion of fac
tory capacity, acreage, etc., the sales managers of business do not find the
demand that they anticipated when their own additions were built. This
leads still further to offering of commodities at lower prices, and to a halt
on further business expansion. With the start of unemployment as this
business expansion capacity is halted, retailers see the first cessation of
sales, and reduce their orders. This also is cumulative because the more
the orders are held up, the greater the unemployment, and so the still
greater effect it has on sales.
8 Liquidation. By the time the foregoing factors have become at all apparent,
the heavy selling of securities, futures, and the call of loans will force such
a quantity of goods on the market that a crash comes.
9 False confidence. Hamilton pointed out, in Lesson 3, that markets will usu
ally rally 40 to 50 per cent after their first break. This comes as a result of
the statements of leaders immediately after the first market crash, telling
the people that the country is sound, it has continuously shown an expan
sion in business, and it has recovered from every other break in history.
There will invariably be many who did not get aboard when the Bull
market was under way, but who "wait for a good big break" on which to
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make their purchases. These, with buying by banks and other institutions
to support the market, bring a secondary advance which will, as we have
seen, carry the market back up toward its halfway average. Thereupon,
the institutions which have supported the market will distribute the secu
rities and commodities they have bought, the market will decline as
Hamilton pointed out, back toward its old low, and "await some new
impetus." If that impetus fails to come, and sales do not increase at such a
rapid rate as to warrant renewal of the production expansion, then buyers
withdraw from the market and the Decline gathers momentum as it rolls
down the hill into depression.
10 Timidity. This general state is characteristic of business men and investors
at this stage. They hesitate to make purchases or to place orders. And so
the cycle rolls into the era of Depression.
DEPRESSION
The factors attending the period of Depression are almost so self-evident that
not much discussion is needed.
1 Low stock prices.

2 Low commodity prices.
3 Unemployment.
4 Interest rates decline.
5 Gold reserves increase. In other words, as the volume of money in circula
tion decreases, the amount of gold in the Treasury Department increases
in proportion to the amount outstanding.
6 Minimum financing. Although periods of adversity have been invariably
followed by periods of prosperity, yet during those periods of adversity it
is practically impossible to get investors to purchase securities for the
development of new projects or to expand facilities already existing.
Rather, those with money desire to hold on to it for a reserve against the
future which looks black in the Depression. Shrewd men utilize the
Depression for the purchase of buildings and factories sold to satisfy
mortgage or bond holders, or the purchase of stocks of companies
engaged in production of necessities which are not in danger of being
replaced by new inventions or other developments. The average new
financing annually in the United States from 1923 to 1933 was around $4.5
billion. In the peak years it advanced to around $7 billion. But during the
Depression of the early 1930s it dropped below $1 billion annually.
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7 Lack of confidence.
8 Many business failures.
9 Below-normal building, steel activity, and low agricultural prices.
10 Bonds at low point.
RECOVERY
1 Bull bond market. The most capable, conservative investors of the nation
are those who make a business of buying bonds. Bank funds are
invested in bonds, as are those of insurance companies, colleges, many
large corporations and others with surplus funds. After a period of liqui
dation, with bankruptcy clearing the air of distressed holdings, the first
inkling of the passing of fear will frequently be the renewal of bond pur
chases by banks which do not deem it necessary any longer to be 100 per
cent liquid, but feel they can invest their surplus in securities that will
return a profit. This, together with the growing scarcity of bonds due to
decline of new financing, will frequently bring an advance in the bond
market as a first indicator of Recovery. This may be offset, however,
where governments take artificial steps to restore Prosperity, selling
bonds to finance their activities.
2 Start of Bull Stock Market. As Hamilton said, and we have already repeated
once, "Stockholders and intelligent speculators operate not on what
everybody knows, but on what they alone know or intelligently antici
pate." Through their own sources of information, through their analyses
of business fundamentals, and through a knowledge of orders placed or to
be placed, they sense the change of activity in industry that will restore
men to work, restore a buying power to the public, restore profits to
industry, and make stocks worth more. It would be well for the student at
this time to reread carefully, in the light of all that has gone before, the
statements concerning the stock market and the averages quoted from
Hamilton in Lesson 3.
3 Low interest rates. Not only do the interest rates continue at low levels, but
bankers ease up in their requirements for loans. This in itself restores con
fidence among business men.
4 High gold reserve. With the demand for money having declined during the
Depression, reserves of gold in the Treasury naturally increase as compared
to the outstanding money. So the Federal Reserve and other banking facili
ties are in position to expand the flow of money into commerce.
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5 Return of faith. The Stock Market is the barometer of business and of public
faith. Though politicians may condemn the market Declines, and socialists
may rave about division of money, yet the public knows deep in its heart
that the great bulk of the men with money in this country have it because
they have the brains to size up conditions and take advantage of them.
Nothing so restores confidence in the future as a Bull Stock Market.
6 Wage readjustments. Wages always lag behind price movements. They are the
last thing to advance and the last thing to decline. That is why inflation
invariably reacts against the wage earner. His cost of living increases at
greater speed than his wages. At the very last of the Depression, usually, the
wage earners will give in and take lower wages. This automatically lowers
the price at which goods may be sold, brings those goods within reach of
the large percentage who have continued employed despite the Depression,
and causes a greater demand for goods from them.
7 Increasing activity in at least two major industries or high agricultural prices.
We have given you the seven fundamentals on which most Prosperity
waves have been built (Lesson 14). Observation has found that it normally
takes renewed activity in at least two of these major factors to restore suf
ficient demand for labor to bring competitive bidding for services and
goods. It is possible that artificial demand for labor and goods sufficient to
restore work to those unemployed may be generated by the government
on borrowed capital. But unless this is reflected by increased activity in
steel output, showing a demand for machinery of various kinds, with
additional buying power restored throughout the majority of industry,
then such artificial stimulation must fall and the country be worse off for
the increase of its debts.
8 Increasing commodity prices. As we have seen in Lesson 14, the advance of
the Stock Market will not go far unless or until there is a turn in commod
ity prices. An advance in commodity prices places the increased buying
power right back "at the grass roots," or with the original producers of
raw products. Inasmuch as a large percentage of the population are
engaged in first steps of production, including agriculture, forestry,
mining, and drilling, a rise in raw products means an increase in purchas
ing power to that goodly percentage of producers. And they are the
largest consumers per capita of machinery and the products of others that
there are. Many economists assert that all that is necessary to restore
Prosperity after a Depression is to restore commodity prices to the levels
at which they were when the average of previous debts were contracted.
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Also, that the cause of Depression automatically is the decline in commod

ity prices. Certainly any great Prosperity must be attended by price levels
that will make production profitable.
9 Quality service. As the inefficient are weeded out during the Depression,
and salesmen strive for increased orders, the quality of goods offered to
the public is gradually increased to tempt purchases. Usually, the very
best bargains are offered, with the most goods for the least money, right at
the beginning of the Recovery period. And with increased sales comes
demand for expansion of production - and we pass into the period of
Prosperity. The cycle is completed.
A BUSINESS INDEX
For a practical guide to business conditions of the present and of the future, we
cannot recommend anything better than the index of Industrial Production,
Stocks of Manufactured Goods and Raw Materials and Prices of Finished
Goods analyzed for you in Lesson 14 when taken together with the Dow-Jones
Averages of Industrial and Rail Stocks.
Generally speaking, these embrace about everything. The outlook for the
future, as based on prices at which investors are willing to purchase stocks, is
all compiled for you. You can study the trend as based on the movements away
from Tops or Bottoms, and the industrials being confirmed by the rails. Then
you have the rate of industrial production, with the rate at which goods are
moving into consumption. This tells you whether the buying power of the
people is keeping pace with the factory production. Stocks of raw materials
also give you the indication of consumption at the same time as they give you
the indication of the buying power of the great percentage of the people who
produce these raw materials.
In addition, we would recommend that you keep the record of building per
mits because of the vast importance of this great industry. And in reading the
business news, the other facts and factors can be noted, such as interest rates,
bank clearings, etc.
But the combination of the Stock Market, industrial production, stocks of
raw materials and manufactured goods, and building permits should keep
you informed of the state of business and give you the basis of judging
whether the trend of commodity prices in general will be upward or down
ward. And that, after all, is what you are interested in, from the viewpoint of
trading in grain.
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With the exception of building permits, these other factors are compiled for
you and are available at very little cost. They can be recorded with a minimum
of effort. And yet they are so comprehensive as to answer all practical require
ments of keeping informed on the fundamentals.
So now we are ready to go back to the grain market itself. And as a means of
preparing you for practical application of the knowledge so far gained in the
Course, we will next study the grain trading methods of big operators.
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Lesson 18
GRAIN TRADING METHODS OF BIG

OPERATORS
■ A Plan of Operation
■ Inside Information
GRAIN TRADING METHODS OF BIG OPERATORS
While scores of books have been written concerning practically every other busi
ness of the world, very, very little insight into the methods utilized by successful
traders in grain is available. Back about 1923, the Federal Trade Commission was
holding a hearing on the wheat "deal" of 1922 at Chicago and had Mr. Herbert
Blum on the stand. Commissioner Thompson among other things asked
"Herbie" - and we will never forget it - "Now, Mr. Blum, will you please tell the
Commission just what is the basis on which you make your trades?"
"Why-why-why," stuttered Mr. Blum.
"Do you just call it intuition?" interrupted Mr. Thompson.
"Yes," said Mr. Blum.
And thus one of the rare opportunities for posterity to find out something of
the methods of a successful trader went glimmering.
Some real research work which throws some light on the subject has been
done by the United States Grain Futures Administration. They have taken vari
ous futures of wheat and com, made an analysis of the open long or short net
commitments of the largest individuals, and also the open net long or short
position of the general Commission House trade. These reports fail to identify
the traders, but call them by number. This, of course, is really the only sane
way a government should handle the private affairs of any of its citizens.
Occasionally, some large trader writes a story in which he reveals something
of his methods. In the Introduction to this Course we quoted at some length
from probably the most illuminating series on grain trading ever written, that
of the late James A. Patten.
In the November 19,1932, issue of the Saturday Evening Post appeared an arti
cle by another large grain trader, "The Story of A Speculator" by the late Arthur
W. Cutten, with Boyden Sparkes. The prime purpose, seemingly, of this article
and the others which accompanied it was to express the contempt in which Mr.
Cutten held government interference in grain trading. In it, however, he made
certain statements which enable us to identify him as one of the eight large
traders whose individual net position daily for the entire life of the May future
of 1926 is analyzed in the U.S. Department of Agriculture Department Bulletin
No. 1479, issued in March of 1928, and entitled "Speculative Transactions in the
1926 May Future, by J.W.T. Duval, Chief, and J. Wright Hoffman, assistant
market specialist, Grain Futures Administration."
In the article appearing in the Saturday Evening Post of November 19,1932, Mr.
Cutten discussed the old, soot-stained, granite building of the Chicago Board
of Trading which stood at the head of LaSalle Street from 1883 until 1929. He
eulogized that building and expressed his regret at seeing it tom down.
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"Yet it really wasn't the old building that I hated to see tom down. It was some
thing vastly more important to the American people which I saw to be vanishing.
My conviction that it was vanishing came on a day in the late Winter of 1926.
"I was carrying a big line of wheat, bigger, I suppose, than that of any other
individual trading in it anywhere, but in my opinion not too big. I could pay
for what I had. That day the market was strong. May wheat was selling at $1.66
a bushel. I had bought most of mine when it was selling for less than $1.50.
"Events were justifying the judgement of conditions I had formed months
before when I had taken my position. By every right of Commerce, I was enti
tled to a profit on my transactions for the risk I had taken. Then I received a
notice to appear before the Business Conduct Committee of the Board of Trade
in the office of the directors.
"I crossed LaSalle Street and entered the creaky, old elevator with its var
nished interior and exposed cable running through holes in the floor. I spoke to
acquaintances, and other men I did not know recognized me. Then I entered
the chamber where had assembled the business conduct committee. I had
known all of its members for years. They were, I think, my friends.
"'Look,' began the spokesman when the door had closed, 'the Grain Futures
Administration has made a complaint that you are carrying too much open stuff.'
"It would be hard for me to make anyone other than a LaSalle Street trader
understand how I felt then, unless it might be some Russian farmer who has
tasted the bitter flavor of government interference in matters which should
not concern it. I suppose I protested vehemently. I remember that one man
there, who was one of the first friends I had gained in Chicago, put his arm
across my shoulders.
'"You ought to sell some wheat,' he said cajolingly, 'for the sake of the Board
of Trade. You know, this committee is the device we settled upon to keep the
government from taking fuller control of the trading in futures. They get the
figures and watch the accounts from day to day.'
"T know all that,' I protested. 'But is there anything criminal in an honest
profit? I'm buying with and risking my own money. Why should I sell before
I am ready?'
'"For the sake of the Board of Trade,' they told me again. What they meant
was that if I did not give in then and there, the bureaucrats who had imposed
the Grain Futures Administration on the grain trade of the nation would
begin to howl for a stricter control by government. I was disgusted and said
so. I guess I swore. But at last I threw up my hands and agreed to sell a part
of my line.
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"The wheat pit is a sounding board. The gossip of the world is hurled in and out
of there with a speed that would make a newspaper office dizzy. Naturally, my
journey to the seventh floor had not gone unnoticed. To those men, to all men in
the grain trade, the fact that Cutten had been called before the business conduct
committee could mean but one thing: I was to be made to unload. It was just sound
common sense to try to beat the Cutten grain to market. I left the room, but already
the market had begun to break. It was off four cents before I got down to the street.
"Before the bell rang for the close of trading in the pits that day, all the grain
in the United States, even that just sprouting in the ground, had become less
valuable to its owners. May wheat had sagged down 7$ cents. It was the gov
ernment that had done this, not speculation."
Now then, turning to Bulletin No. 1479, we find on pages 46 and 47 a record
of the opening, high, low and closing prices of May wheat in 1926, the time
under discussion by Mr. Cutten. The market on March 1st, "a day in the late
Winter of 1926," opened at 165$ to 166. That night it closed at 159 to 158$ or off
just 7# from the high as Mr. Cutten described. On pages 12,13,14, 15,16 and
17 of Bulletin No. 1479, "Trader No. 1" is shown as being long 7,975,000
bushels of a total long position of 12,185,000 bushels of the eight largest
traders. Study of the long position of all these traders discloses that "No. 1"
had continually owned the most wheat futures contracts. Mr. Cutten says, "I
was carrying a big line of wheat, bigger, I suppose, than that of any other indi
vidual trading in it anywhere."
At the opening of the market on March 1st, this "No. 1" trader was long
7,975,000 bushels. The market opened at 166, and closed off 7$0 to 158$. Mr.
Cutten tells us in his article that on the day "in the late Winter of 1926" when
the market did sell off that precise amount, he was called before the business
conduct committee and requested to reduce his line. At the close of trading on
March 1, this "Trader No. 1" had reduced his open interest on the long side
from 7,975,000 bushels to 2,445,000 bushels, a reduction of 5,530,000 bushels.
The evidence is complete as to the identity of "Trader No. 1."
Now then, let us go through the May future of that year from the time trading
in it started on August 12, 1925, to its ending on May 29, 1926, and study the
activity of this "Trader No. 1," who is identified by his own words. In credit to
him, let us state that the study should be a benefit to all other traders.
In this, we will study the position of the market at the time he made his commit
ments, the net amount he bought or sold during the day, and also the amount
bought or sold by other large traders during the market, with the effect such trades
had on the market and also the approximate profit or loss of these various trades.
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Pictograph 18.1 herewith shows the May future of 1926 during its entire life
together with the net position of this "Trader No. 1" during that future. It is
desirable to show the entire future together with his net position for the entire
life of that future. This requires a comparatively large graph that must be
reduced to get it on the paper. In order that students may study it more closely,
we have made other Pictographs of sections of the market for study as to the
condition at the time he made his trades.
It is to be noted in the first place that while the May future came on in July of
that year, no trade in it was made by "Mr. Trader No. 1" until the 18th of
Pictograph 18.1 Showing operation of a large trader in May future of 1926

B
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I
September. At that time he sold 500,000 bushels short. Now what was the posi
tion of the market at the time he made his first sale?
In the first place, the market had a regular Top formation, completed, and had
been declining. In fact, at the time he made his first trade in the May future, the
market was down from a high of 168$, made August 8 th, to 153$. It is unsafe to
draw a conclusion from this one trade alone, because we do not know whether
he also had other open commitments in the December or September futures at
that time. It is presumable that he did have. We only know that he sold 500,000
bushels on September 18th in a market having a range from 152$ to 154$. The
average of the opening, high, low, and closing of that day was 153$ which we
will assume was his average selling price of that wheat. His "P. and S." slip
would show he went short that day 500,000 bushels at a selling price that we
assume totalled $767,500.
The market held for three days in that level and then started to break. On the
24th he sold another 800,000 bushels, making him short a total of 1,300,000
bushels. The market, as can be seen on Pictograph 18.2, broke from an opening
of 150$-149$, to 144$ and closed at 146$-$. The average of the opening, high,
low and closing was 146$, which we will assume was his average selling price
of that 800,000 lot. This sale involved $1,182,000.
Although the market continued to decline, "Mr. Trader No. 1" made no
additional sales until the 13th of October, 1925, when he again sold 800,000.
The market on that day opened at 141 $-142, its low was 141 $, high 145, and
it closed at 143$-144. The average of these prices was 143 which we will
again assume was his selling price of the additional 800,000 bushels. This
involved $1,144,000.
It is to be noted on Pictograph 18.2 that the market on September 22nd started
to break from 155 and it broke to a low of 134| on October 3. This was a break
of 20$£. A 40 per cent rally on that market would have carried the market to
143$. On the 10th it closed at 144. "Mr. Trader No. 1" sold 800,000 the next day,
or after a 40 per cent rally.
On October 14th he sold 200,000 bushels more. The average price of the high,
low, and closing of that day's market was 142$ which we will assume was the sell
ing price of the additional 200,000 bushels which involved an outlay of $284,750.
On October 21, he bought 500,000 bushels. The market average for that day
was 142$, involving an outlay of $713,750.
Now, it is desirable to study through that particular market. Pictograph 18.2
shows the market from the middle of July into the middle of November. It is to
be noted that from the 28th of September up to the time when "Mr. Trader No.
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Pictograph 18.2 May wheat future of 1926, July-October
Check marks (/) show where "Mr Trader No. 1" sold. X marks the days he bought. Note:
these Pictographs are so arranged that the student, by placing them alongside each other,
will have a continuous picture of the market
1" covered the first of his short line, the market had put in the movements of
what could have been a very good Bottom formation. It had declined the 20? a
bushel from the 22nd of September, and then had rallied, with the market of
October 10th closing right on the high of September 30, and lacking only a little
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of completing a Bottom formation. It did not, however, complete the technical

requirement by closing above both the Left and Right Shoulder of that Bottom.
It closed precisely on the Left Shoulder. Students may draw the movements of
this market in a Movement graph, and they will see that it has the possibility of
a Bottom formation with a Left Shoulder at 1-1, the head at 1-2-3, and the Right
Shoulder at 3-3. A close in the clear above the highest "1" would technically
complete a Bottom, turn the trend up, and warrant purchases in the expecta
tion that the impetus which completed the Bottom would continue and
advance the market. However, this Bottom was not technically completed.
Instead, it went into congestion but showed considerable power. The power
was sufficient to cause "Mr. Trader No. 1" to take in 500,000 bushels of his
wheat on the 21 st and evidently watch it closely.
However, inasmuch as the congestion continued for a couple of days longer,
he again sold on the 23rd, this time selling only 200,000 bushels. Evidently he
was "feeling" to see how strong the market really was. The market on that day
opened at 139}-}, sold up to 140} down to 138}, and turned around to close at
139}-}. Its average price for the day was 139} and his sale of 200,000 bushels
involved an outlay of $279,500.
It is to be noted that the next day's market went higher and turned over, but on
the 26th it closed sharply higher again. On the 27th, "Mr. Trader No. 1" started
covering his short wheat. He bought 1,500,000 bushels that day. The market on
the 27th opened at 143-}, sold down to 141}, up to 146|, and closed at 146}-}. Its
average price for the day was 144}, which we will assume is the average price
paid by "Mr. Trader No. 1" for the purchase of 1,500,000 bushels. This involved
an outlay of $2,167,500. It still left him short 500,000 bushels, which was covered
the next day and in addition to covering it, he switched right over and went
long 500,000 bushels. The market on the 28th opened at 145}-} which was the
low for the day, sold up to 149} and back down to 146}-} to close. The average
price of the day was 146} which we will take as the price paid by "Mr. Trader
No. 1" to complete the covering of his short line. He paid $733,750 for this last
500,000 bushels of short wheat which left him even with the board.
A tabulation would therefore show that he sold wheat for $3,657,750 and
bought that wheat for $3,615,000, making him a gross profit of $42,750. Out of
that, he had to pay his commission on the sale of 2,500,000 bushels. Deducting
the tax of which we cannot make any estimate, he would have netted on his
operations somewhere between $35,000 - $39,000. He had involved a total of
$3,657,000. The time of operation was approximately two months.
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A PLAN OF OPERATION
Before going further with this analysis, let us see if we can get any indication of a
studied policy of trading pursued by "Mr. Trader No. 1." We have heard it said
by those who claim they knew Mr. Cutten that his policy seemed to be about as
follows -1 he made an analysis of the situation as he saw it, and made a trade in
that direction; 2 he made no more trades until the market itself showed him to be
right. In other words, according to this informer, he did not fight the market if it
started against him; 3 if the market went in the direction he believed it should go,
then he increased his commitments in the direction that it was going.
For instance, "Mr. Trader No. 1" sold 500,000 bushels short on September 18,
1925 when the market average was at 1531 and did not sell any more until he
had a profit in it. Study of that Bulletin No. 1479 and others similar to it leads
to the conclusion that this is a set policy of many big traders. They make their
money by selling more as the market is declining and continuing to sell so long as the
market declines. As a result, they are short their biggest volume when the market is on
the Bottom. If they see that it cannot decline further, then they cover their short posi
tions and immediately reverse to go with the market.
On the other hand, a study of the trades of the smaller commission firms indi
cates that the smaller traders are the ones who purchase as the market reaches
its low levels and starts to turn. But by the time the market has staged an apprecia
ble advance and the big traders are out of their short grain and starting to accumulate,
the small traders have taken profits and are starting to fight the advance.
A study of Pictograph 18.2 discloses that the market on October 27 closed clear
above the Bottom formation consisting of the Left Shoulder 1-1, the Head 1-2-3,
and the Right Shoulder 3-3, together with the congestion that occurred from the
10th of October to the 27th. Up until that time the trend of the market had been down
ward. Right there it turned upward. An angle line drawn off the Bottom at 1341 and at
the same angle upward as the market declined from the August 8 th high of 1681 is
shown as angle line A on Pictograph 18.1. An arc drawn off the same two points,
using 1681 as the pivot, is shown as arc B. Angle A intersects arc B at 1871, giving
that as a possible objective the moment the Bottom was completed on the 27th.
"Mr. Trader No. 1" covered the balance of his short wheat on the 28th and
went long 500,000 bushels on that date. The average price that day of the high,
low, and closing was 1461. This would involve an outlay of $744,750. No addi
tional purchases were made until the 14th of November, when he bought
2 ,100,000 bushels.
Study of Pictograph 18.2 shows that the market from the 28th of October to
the 14th of November was in a congestion. It did not show a profit on the
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wheat that had been purchased on the 28th until the session of November 13th.
Then, on the 14th, it opened at 148-1, which was the low of the day, advanced
to 1501, and closed at 150f-$. This was a close in new highs, it was time for addi
tional purchases. The 2,100,000 bushels bought by "Mr. Trader No. 1" on
November 14th involved $3,144,250. He was now long 2,600,000 bushels.
News of that time was rather bullish, with the crop in Argentina deteriorating,
and the Stock Market was continuing very strong. New building was "at a pre
mium" and automobile production steadily increasing. The radio was just making
rapid strides and there was a great demand for labor at increasing wages. General
commodity prices were around 155-160 when translated into wheat. The Argentina
news began coming about the middle of November with the United States crop
reporters down there sending daily cables concerning the crop deterioration.
INSIDE INFORMATION
Incidentally, the benefit of inside information in grain might be illustrated
here, and undoubtedly had an effect on the trading of Mr. Cutten at that time.
His offices were at 231 S. LaSalle Street, Chicago, on the same floor as that of
Clement, Curtis and Company. Their expert, Mr. Nat Murray, was in
Argentina at that time, sending cables concerning the crop which "went to
pieces" very quickly when it started. It would seem highly probable that the
commission firm which undoubtedly received a large volume of business
from this trader, who admits in his own article that he had bought wheat
heavily that year below 150, would show him these cables prior to the general
public release. Mr. Murray arrived in Argentina on November 15. The Cutten
purchases had just started.
As is stated above, "Mr. Trader No. 1" was long 2,600,000 bushels on the close
on November 14th. This was a "strong Saturday," with the market again closing
out into new highs. His previous trade showed a profit. On Monday, he bought
450,000 bushels more. The market that day opened at 1501-151, sold down to
1491 and closed at 1491-1. The average for the day of the high, low and closing
was 150 which we will assume was the average cost of this 450,000 bushels pur
chased that day. This would involve $675,000 if that price was paid for the grain.
On the 17th he bought 675,000 bushels more, making him long 3,725,000
bushels. The market on the 17th opened at 1491-1, sold down to 1491, then
turned upward to 1541 and closed at 1531-154, for an average price for the day
of 151 f The purchase of 675,000 involved $1,025,156.25. No purchases were
made on the 18th, when the market reacted and closed lower.
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On the 19th, he bought 1,300,000 bushels. The market on that day opened at
1511—i, up to 155f and closed at 155^-1 for an average for the day of 153|, his
purchase involving $1,993,875,00.
On the 20th, he added another 1,600,000 bushels. The market that day opened
at 1551-157, sold up to 158i and closed at 156^—i, for an average price for the
day of 1561. These 1,600,000 bushels involved $2,504,000.
No additional purchases were made on Saturday the 21st, but on Monday the
23rd November, an additional 400,000 bushels were added to his line. The average
price that day was 157, so that his purchase of 400,000 bushels involved $628,000.
On November 24th he added another 200,000 bushels to his line, bringing his
holdings up to 7,225,000 bushels. The average price for that day being 160, his pur
chase of 200,000 bushels involved $320,000. No additional purchases were made
on the 25th, but on the 27th he bought 400,000 bushels more, the average price of
this market that day being 1621, his transactions involving $650,000.
That made him long a total of 7,625,000 bushels, and not one bushel was added to
his line until his previous holdings showed a profit. This is a rather remarkable illus
tration of "purchases on a scale up." His total holdings, had he paid for them
outright as Mr. Cutten declared in his article that he would have been able to
do, involved $11,664,031.25 exclusive of commissions and taxes. The average
cost of his holdings at that time was $1.53 a bushel. He had accumulated from
500.000 bushels up to 7,625,000 bushels without selling one bushel. And during
the course of that accumulation the market had advanced from 1461 to 1621,
the average price for the day.
On the 28th, he made the first sale, selling 2,200,000 bushels. It is interesting to
note the position of the market at the time he made his first sale. A glance at
Pictograph 18.3 will show that on November 27,1925, the market had come back
up into the top of the congestion from which it declined in August. On the 27th,
it had opened with a wide gap from the close of the 25th, giving an indication
that a reaction was due. After advancing during the day to 164 it had turned over
to close at 161 £ "Mr. Trader No. 1" started selling some wheat on the 28th.
The market that day opened at 160-1601, sold up to 162|, then down to 1581
and closed at 160$—i. The average price for the day was 1601. The net sale of
2.200.000 bushels brought $3,528,250 at that average price. This sale reduced
his holdings to 5,425,000 bushels.
On the 30th he stepped right back into the market, buying 1,700,000 bushels.
The market opened that morning at 157—f, and we would guess that he began
purchasing right on that opening which was the low of the day. The market
turned to advance, reaching 162 and closing at 161J-162. The average price of
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Pictograph 18.3 May wheat future of 1926, December-March
Check marks (/) show where "Mr Trader No. 1" sold. X marks the days he bought. Note:
these Pictographs are so arranged that the student, by placing them alongside each other,
will have a continuous picture of the market
the day was 159$. The purchase of 1,700,000 bushels at that average price
involved $2,711,500.
The advance continued on December 1, and he added another 2,300,000
bushels, the average price for that day being 165, involving $3,795,000. On
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December 2nd, the market opened up two cents a bushel and he refused to
purchase more. However, on the third, he bought another 1,200,000 bushels,
the average price for the day being 170$. This involved $2,049,000. On the 4th,
he added another 200,000 bushels to his line, the average price for the day
being 171J, his purchase involving $343,500. On December 7th, he added
100,000 bushels, bringing his total holdings to 11,125,000 bushels. The average
price on the 5th was also 171 i, his purchases that day involving $171,250. This
was his peak holding. His total holding of 11,125,000 bushels involved
$17,548,641.25 for an average cost of 1571 a bushel. As is said, the last purchase
was on the 7th of December with an average price of 171 i. He had a gross
profit that day of 13# in 11,125,000 bushels of wheat, or a gross "paper" profit
of $1,501,875 in an operation extending from the 28th of October to the 7th of
December. Did he take it? How did he come out?
On December 8th, "Mr. Trader No. 1" sold 400,000 bushels. The market that
morning opened at 1741-173|, advanced to 176f, broke to 170f and closed at
1701-171 for an average for the day of 173. At that price, the 400,000 bushels
brought $692,000. There was evidently considerable selling in the next few
days, with another trader selling 1,500,000 bushels on the 10th, and still
another big trader reducing his open commitments from 3,153,000 to 2,105,000
bushels for a net liquidation of 1,050,000 bushels. This combined assault drove
the market down to close on the 11th at 1641-1. On the 12th it opened at 1651
-166, sold down to 1631, up to 1661 and closed at 166-1651 or just where it
opened. "Mr. Trader No. 1" took advantage of this rally to sell 2,000,000
bushels. The average price for that day was 1651 so that the two million
bushels sold at that price brought $3,317,500.
On the 14th, another 600,000 bushels were sold, the average price for the day
being 1631 at which price 600,000 bushels would bring $983,250. It is to be
noted on Pictograph 18.3 that the market next day opened higher and began
working in a congestion. After the close on December 22, the government
issued its final report on crops and, it so happened, because of a "cheap"
census which did not cover all of the farmers of the country, this report revised
downward the estimate of acreage planted and with it the estimate of the crop
itself. The market opened sharply higher on the 23rd and ran quickly upward.
Incidentally, it is important to note that in the reaction from the high of
December at 177,40 per cent of the distance back to the low at 1431 from which
this advance started would be a break of 13# or an objective of 163f The low
of the market on the 14th was 162f
Also, there was an indication given by the wide "jump opening" on the 23rd that
the market was running toward a final high. Usually, this last advance is very rapid.
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"Mr. Trader No. 1" bought 200,000 bushels on the 26th, making him long
8,325,000 bushels at that time. The market on that day opened at 174—i, which
was its low, and advanced to 180|, closing at 179{-180, for an average price for
the day of 177f, this purchase involving $354,750.
It is to be noted on the Pictographs that the high on wheat of 185} was
reached on the 29th of December within two cents of the objective shown by
the outside arc and angle.
"Mr. Trader No. 1" bought another 800,000 bushels on the first trading day of
the year which was January 4th. Once more we have the sample of his adding
to his line when all of the rest showed a profit. Evidently this was an effort to
put the market out over the Top and start it on a still further advance. The
market that day opened at 181} - 182}, sold off to 180} then turned to advance
to 183}, and closed at 182}-} for an average price for the day of 182}. At that
price the 800,000 bushels involved $1,457,000.
The market, however, refused to advance. Rather, it turned over and started
to congest.
On the 7th, for the first time in all of the operation, we note "Mr. Trader No.
1" abandoning his former policy of buying only when his previous purchases
showed him a profit. He purchased 200,000 bushels. The market that day
opened at 180-}, sold up to 180} and then turned around to break to 176, clos
ing at 176}-} for an average price for the day of 178}. His purchases of 200,000
bushels would, at that price, involve $356,750.
Seeing that the market did not advance, but evidently believing in higher
prices later on, "Mr. Trader No. 1" made no further additions to his line until
the first day of February. It is to be noted that, in the meantime, the market had
broken back into the heart of the previous congestion, and then had turned to
rally. The February 1st market opened at 176-}, sold up to 178} but could not
hold the advance, and turned over to close at 175}-} for an average price for
the day of 176}. On that day "Mr. Trader No. 1" added 100,000 bushels to his
line which at that average price would involve $176,250.
The market, however, as students can easily see had not only made but had
completed a Top formation in the congestion around the first of the year, and
had started downward. The Straight Average from the high of 185}, made on
December 28, to the low of 160} which had been reached on December 21, was
173. The market went below this average and also closed below it, indicating
weakness on January 22nd. On the rally which came from the low of 168} made
on January 25, the Straight Average back to the high at 185} would be 177}. The
market broke this average on the 29th of January but could not close above it.
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On the 1st of February it broke the previous high point of the rally but again it
could not close in new highs. And on the 3rd of March it tried for the third time
to close in new highs but all it succeeded in doing was putting in a Narrow Day.
On the 8th it definitely completed a new Top and started downward. We may
say right here that clients who followed the suggestions made at the beginning
of this Course would have sold out all of their long wheat when the first Top
was completed on December 11th. They would have sold again and started
operations on the reverse side when this new Top was completed at the first of
February. That is the principle we have taught in this Course. Its success in that
market may be judged by the Pictograph of the market which followed.
"Mr. Trader No. 1" was evidently still bullish on wheat. On February 13, he
bought an additional 380,000 bushels with an average price for that day of 167
so that the 380,000 bushels would have involved $643,000.
No additional trades were made then until the 20th of February when 150,000
bushels were sold. The average price for the day was 168£ at which price
150.000 bushels would have brought $252,187.50. On the 26th, an additional
1.680.000 bushels were sold. The average price for the day was 164f at which
price 1,680,000 bushels would have brought $2,765,700. That left him long
7.975.000 bushels and no more trades were made until that memorable day
when the market opened at 166 and closed down 7\<t - when according to his
story, Arthur Cutten was requested by the Business Conduct Committee of the
Board of Trade to sell some wheat.
"Mr. Trader No. 1" on that day liquidated 6,530,000 bushels. At the start of
trading that morning he had been long 7,795,000 bushels. When trading ended
he was long 1,445,000 bushels.
It is interesting to note that the trader with the second largest open commit
ment was short 5,900,000 bushels at the beginning of that day, he having been
short that amount since the 11th of February. He made no additional sales
during the liquidation by "Mr Trader No. 1." The next day he took in 1,500,000
bushels and on the third of March he covered 3,900,000 bushels more.
Another trader was long 2,535,000 bushels when the market opened on March
1st, but he sold that out and at the end of the day was short 1,465,000 bushels.
We can find no record of further important transactions by big traders.
As Mr. Cutten said, it was only natural that other traders should try to beat
the Cutten wheat to market. The remarkable thing to us is that "Mr. Trader No.
1" could liquidate 6,530,000 bushels, and "Mr. Trader No. 3" could sell out
2.535.000 bushels of long wheat plus an additional 1,456,000 bushels of short
wheat, for total net sales for the day of over ten million for these two traders
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alone and yet with a market break of only 7ic. This agrees very closely with an
estimate formerly worked out that the sale of a million bushels in a normal
market will move the market about $ of a cent.
The average price on that market of March 1st was 162f. While Mr. Cutten
stated in his article that the market had broken 4c a bushel by the time he got
downstairs, it does not necessarily follow that even he would wait until after his
visit with the committee before he began selling out his long holdings; 6,535,000
bushels of wheat sold at an average of 162f would bring $10,619,412.50.
That practically ended the activity of "Mr. Trader No. 1" in this future. To con
serve space we simply itemize herewith in Table 18.1 the purchases and sales
made by him, with the average price and the amount involved in order that we
may get to the final analysis of his activities in that future.
It is not entirely the purpose of this Lesson to show how much this trader made
on his operations. Human curiosity, however, causes us to note that during his
operations on the Bull side of the market from the 28th day of October, 1925, to
the 20th day of March, 1926, he bought 16,215,000 bushels for which he paid
$26,014,593,75, if those purchases were at the average price of the day, and sold
them for $26,434,293.75. This is a gross profit of $419,700. At members' rates, the
commission on this, if executed through another broker, would be approximately
$20,000.00. The taxes would be additional. This, together with the gross that he
made on the short side of the market during September and October, would net
him somewhere around $450,000. To do that, however, he was forced to operate
in huge quantities, being long, as we saw, over eleven million bushels at one
time. How much he might have made had the government-forced liquidation
not have come, is, of course, problematical. The trend of the market and of pro
duction from then on makes it a question as to whether or not the government
did not perform more of a service for Mr. Cutten in forcing his liquidation than
otherwise. Students of this Course will recognize instantly the Top formation
which had been formed many weeks previous to his liquidation.
Our objective in presenting this study to you is to reveal some of the meth
ods of those who have been successful in the markets. The method of
accumulation is highly illuminating. We believe, however, that students can
improve on the distribution.
In the next Lessons we will go through this market again briefly and outline a
suggested method of operation in such big markets, with the idea of accumu
lating a good line of wheat when the markets are running, but of protecting
you and still making a reasonable measure of profits when more "normal"
markets prevail with fewer fluctuations.
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Table 18.1 Partial list of trades of "Mr. Trader No. V
May wheat future, 1926

Date Bought Sold Price Purchase Price Sale Price
Oct 28 500,000 $1.46* 733,750.00

Nov 14 2,100,000 1.49i 3,134,250.00
Nov 16 450,000 1.50 675,000.00
Nov 17 675,000 1.51} 1,025,156.25
Nov 19 1,300,000 1.53} 1,993,875.00
Nov 20 1,600,000 1.56} 2,504,000.00
Nov 23 400,000 1.57 628,000.00
Nov 24 200,000 1.60 320,000.00
Nov 27 400,000 1.62} 650,000.00
Nov 28 2,200,000 1.60} $3328350.00
Nov 30 1,700,000 1.59} 2,711,500.00
Dec 1 2,300,000 1.65 3,795,000.00
Dec 3 1,200,000 1.70} 2,049,000.00
Dec 4 200,000 1.71} 343,500.00
Dec 5 200,000 1.71} 342,500.00
Dec 7 100,000 1.71} 171,250.00
Dec 8 400,000 1.73 692,000.00
Dec 12 2,000,000 1.65} 3317300.00
Dec 14 600,000 1.63} 983350.00
Dec 26 200,000 1.77} 354,750.00
Jan 4 800,000 1.82} 1,457,000.00
Jan 7 200,000 1.78} 356,750.00
Feb 1 100,000 1.76} 176,250.00
Feb 13 380,000 1.67 634,600.00
Feb 20 150,000 1.68} 252,187.50
Feb 26 1,680,000 1.64} 2,765,700.00
Mar 1 6,530,000 1.62} 10,619,412.50
Mar 2 100,000 1.58} 158,500.00
Mar 6 100,000 1.60} 160,250.00
Mar 9 1,000,000 1.58} 1381350.00
Mar 10 200,000 1.57} 315300.00
Mar 11 410,000 1.62} 664,71230
Mar 12 300,000 1.64} 493,875.00
Mar 13 100,000 1.65} 165,625.00
Mar 17 100,000 1.62} 162,750.00
Mar 18 400.000 1.65} 660300.00
Mar 19 945,000 1.62} 1339,168.00
Mar 20 210,000 1.58} 332325.00
16,215,000 16,215,000 26,014393.75 $26,434393.75

-26,014393.75
Gross Profit $419,700.00
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Lesson 19
TRADING METHODS OF BIG

OPERATORS (CONTINUED)
■ Characteristics of His Trading

■ Suggested Method of Trading Operations
■ Trend Lines
■ The Progressive Average Trend Line
TRADING METHODS OF BIG OPERATORS (CONTINUED)
In the previous Lesson the trades of a big operator were traced through most of
the life of the May future of 1926. It was observed that this particular trader
was short so long as the market was going down, but the moment it reversed
he changed his position and went with the market, accumulating wheat as the
market advanced so that by the time it got to its high he was long eleven mil
lion bushels with over a million dollars gross profit in it. He remained bullish
until a part of that profit had gotten away, and took out a net of only about
$450,000 from it. During the operation traced, he traded in about 20 million
bushels of wheat.
Now we desire to present the activity of another trader in this same market to
show you a contrast between methods of big traders. This trader, "Mr. Trader
No. 2," operated in the rather astounding total of 66,210,000 bushels of May
wheat from his first operation on August 22,1925, to the last operation we take
into account, made on April 30,1926.
It may be of importance to note that both of these big traders evened up their
accounts in April, or before the contract had gone into the delivery month.
While "Mr. Trader No. 1" was long 1,750,000 bushels as the future became eligi
ble for delivery, he sold out on the 4th of May, and thereafter his only operation
was one sale of 55,000 bushels in which he went short. "Mr. Trader No. 2"
evened up all of his trades prior to the delivery date on May 1, and he also
went short 200,000 bushels on May 1 and then on the 18th he went short
300,000 bushels, covering it on the 20th. "Mr. Trader No. 3" also operated only
on the short side during the delivery month of that future, even though during
the last of the month it staged a very fair advance.
This is brought out to emphasize that these large traders do not care as a
usual thing to take delivery on contracts.
The study of the operations of "Mr. Trader No. 2" are extremely important
because if anything possible could emphasize the necessity of not over-trading,
it should be the operations of this one trader. There is sometimes a disposition
to believe that these large traders are always right, and that they can make the
market do what they desire. Yet, after he had traded a total of 9,400,000 of
wheat between August 22nd and November 12th, the operations of "Mr.
Trader No. 2" showed him a gross loss of $163,875.00 to which should be
added his commissions and taxes.
From the 23rd of November to the 10th of December this trader sold 5,100,000
bushels of wheat. During that time the market advanced from a close of 1551 on
the 23rd, to a high of 177 on the 7th of December. It is easily to be seen, from study
of Table 19.1 showing his actual sales and from Pictograph 19.1 showing the
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Pictograph 19.1 Showing operations of Mr. Trader No. 2 in May 1926

wheat future
market, that his margin requirements would be tremendous to carry this amount
of wheat short on that rapidly rising market. Comparison of his activities during
this period would show that while "Mr. Trader No. 1" was steadily accumulating a
line of wheat, "Mr. Trader No. 2" was just as steadily fighting the advance.
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Table 19.1 Operations of "Mr. Trader No. 2" May wheat future of 1926
Date Bought Sold Price Purchases Sales
Aug 22 400,000 $1.63* $655300

Sept 11 500,00 1.52* 761.875
Sept 14 900,000 1.52* $1,370,250
Sept 21 1,000,000 1.53} 1338,750
Sept 28 1,000,000 1.40} 1,403,750
Oct 2 1,700,000 1.37} 2343,875
Oct 2 1300,000 1.35} 1,766375
Oct 8 5,000,000 1.37} 688,125
Oct 9 4,500,000 1.39* 6,266,250
Oct 22 500,000 1.41 705,000
Oct 23 1,000,000 1.39} 1397300
Oct 24 500,000 1.41 705,000
Oct 29 500,000 1.45 725,000
Nov 6 500,000 1.46} 733,125
Nov 7 1,000,000 1.45* 1,451,250
Nov 9 1,000,000 1.44} 1,446,250
Nov 13 2,000,000 1.47* 2,945,000
Nov 20 300,000 1.56* 469,500
Nov 21 300,000 1.58* 474375
Nov 23 1,200,000 1.57* 1,885300
Nov 25 600,000 1.59* 955300
Nov 27 200,000 1.62* 325,000
Nov 28 200,000 1.60* 320300
Nov 30 25,000 1.59* 39,875
Dec 5 900,000 1.71} 1342375
Dec 7 500,000 1.75} 878,750
Dec 9 600,000 1.71 1,026,000
Dec 10 1300,000 1.70* 2357300
Dec 11 1,375,000 1.66* 2,284,218.75
Dec 12 3,100,000 1.65} 5,134375
Dec 16 3,500,000 1.67} 5,871350
Dec 17 1,500,000 1.69* 2336,875
Dec 18 500,000 1.66} 833,125
Dec 23 1,000,000 1.69} 1,697300
Dec 24 1,000,000 1.72* 1,725,000
Dec 26 1,400,000 1.77} 2,483,250
Dec 28 5,075,000 1.79} 9,122312.50
Dec 29 2,500,000 1.81 4325,000
Dec 30 200,000 1.81} 362,750
Dec 31 800,000 1.79} 1,437,000
Jan 7 2,000,000 1.78} 3367,500
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294-
Table 19.1 Continued
Analysis of "Mr. Trader No. 2" activities
Date Quantity Purchase Price Sale Price Profit Loss
Sept 14 900,000 $1,370,250.00 $1,417,375.00 $47,125

Sept 28 1,000,000 1,538,750.00 1,403,750.00 $135,000
Oct 24 5,000,000 6,954,375.00 6,917,750.00 36,625
Nov 6 500,000 725,000.00 733,125.00 8,125
Nov 9 2,000,000 2,945,000.00 2,897,500.00 47300
Nov 21 300,000 469,500.00 474,375.00 4,875
Dec 12 5,100,000 8,413,968.75 8,535,625.00 121,656.25
Jan 7 12,400,000 21,471,750.00 22,155,000.00 683,250
Jan 28 9,910,000 17,247,106.25 17,446,875.00 199,768.75
Feb 8 6,100,000 10,742,500.00 10,453,875.00 288,625
Mar 4 5,900,000 9,386,125.00 9,974,625.00 588,500 172,625
Mar 22 9,400,000 15,107,375.00 14,934,750.00
Apr 30 7,700,000 12,494,250.00 12,077,750.00 476300
27,601,625.00 27,012,500.00 1,653,300 1,096,875
That this trader was no respecter of market Top formation is brought out by
the fact that he bought wheat from the 11th of December to the 18th, or right at
the time it was having its natural rally after having completed a Top formation.
When his buying stopped, the market turned downward again. Fortunately for
him, the Government report at that time revised acreage and was bullish. He
continued his buying operations on the big jump which came in the market on
the 23rd, and continued buying as the market advanced to its peak on the 29th.
But where "Mr. Trader No. 1" continued long a huge line of wheat, this "Mr.
Trader No. 2" sold out his long wheat early in January and kept on selling as
the market declined.
During the course of his buying operations from the 12th of December to the
7th of January, he purchased a total of 12,400,000 bushels. He had made some
sales, however, so that his greatest long holdings were 8,900,000 bushels, this
peak being reached on the 26th day of December. Starting on the 8 th of
January he sold this wheat and by the 21st of January he was short 9,910,000
bushels. This wheat had all been taken in by the 28th of January. On his long
wheat he made a gross profit of $682,250 and on his short wheat he made a
gross profit of $199,768.
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As has been stated, he covered the last of his wheat on the 28th, taking in
7,135,000 bushels on that day. The next day he turned right around and started
buying, and in five market days had bought a line of 6,100,000 bushels. He made
no trades then for four days, but on the 8 th of February, he sold everything he
had purchased - and took a loss of $288,625 on it. It will be remembered that
"Mr. Trader No. 1" added to his line of wheat on the 1st of February and again
on the 13th. But "Mr. Trader No. 2," evidently seeing that the market would not
advance, took his loss on his long wheat on the 8 th of February and on the 9th
sold 1,500,000 bushels. By the 11th, he was short 5,900,000 bushels which was not
changed in total until the day after March 1st, when the sale of 6,500,000 bushels
by "Mr. Trader No. 1" had assisted in breaking the market 7i cents.
On that operation on the short side of the market from February 9th to the
completion of its covering on March 4th, "Mr. Trader No. 2" took a gross profit
of $588,500.
CHARACTERISTICS OF HIS TRADING

It was a characteristic of this big trader during that market that when he cov
ered his short sales after a profit, he switched right over to the other side and
started buying in a big way. Between March 4th and March 22nd, he had
bought 9,400,000 bushels. It is a rather remarkable thing that it was not until
after he had stopped buying that the market jumped upward. It is also some
what remarkable that on the 12 th, when he sold one million bushels, the
market closed higher than it had the day before. He started buying again
on the 15th, 16th, 17th, and 18th, adding 3,400,000 bushels to his purchases at
that time. But on the 19th, the market cracked, declining from 1661 to 1591, and
the next day he started to liquidate. He took a loss of $172,625 on the purchases
he had bought from the 4th to the 18th of March and then immediately
reversed his position and went short on that break, selling a total of 7,700,000
bushels between the 22nd of March and the 7th of April. But despite those
huge sales the market turned right around to advance with the result that he
was forced to cover after an advance of five cents a bushel. His loss on that
transaction was $416,500.
Thus, a recapitulation of his activities from the 22nd of August to the 30th of
April, during which time he bought and sold 66,210,000 bushels of May wheat
contracts, showed market profits of $1,652,300 and losses of $1,096,875, for a
gross profit of $556,425. From this he would have had to pay commissions of
$82,762.50, and taxes.
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There were eight different days during the life of that future when this one
trader bought or sold more than four million bushels of wheat. Students
should be interested in the accompanying table showing his operations. It
should give them courage - and caution.
During the life of this one future this trader's methods seemed to be about as
follows. He sold on a rally, and took in his short sales on a fifteen cent break,
switching right over to the buying side immediately upon covering his short
contracts. When the market went against him fifteen cents he took his loss and
sold. When it had rallied fifteen cents, he stopped selling and evened up his
trade, taking a loss on his operations. After a further fifteen cent advance, how
ever, making thirty cents upward from the Bottom, he again started selling and
this time did not cover. After another fifteen cent advance he renewed his sell
ing operations. On a fifteen cent break from that price level he started buying
and kept on buying until there had been a fifteen cent rally. Then he started to
sell, liquidating what he was long and going short on the market. On a fifteen
cent break from that high, he again started buying and bought heavily, but liq
uidated with a big loss when the market refused to advance. On a fifteen cent
further break he again started buying, but when the market did not advance he
sold out his purchases and went short. But when the market still refused to
move in the direction he desired, he covered and took his loss.
This movement of fifteen cents in the market is more or less common. Such a
policy as that on which he seemed to operate will, in the ordinary market, be
very successful, just as it was during December, January, and February for him
when he made his profits. A normal run of a wheat market is around fifteen
cents a bushel with a major run around thirty cents.
Contrasting the methods of Traders No. 1 and 2, it is very apparent that "Mr.
Trader No. 1" desired to take a position and retain it until proven wrong. He
was the typical long pull trader.
"Mr. Trader No. 2" was strictly a trader and we have always considered him
one of the shrewdest ever operating in the grain market. His method, however,
would be ruinous to the ordinary trader because few men would be able to
take such a huge loss in cents per bushel on even the quantity in which they
operate and yet be able to come right back and trade at increased volume to
recoup the loss.
Of the two methods of trading we believe that the method of "Mr. Trader No.
1 " is far more suitable for the usual grain trader, with certain variations which
will be expounded hereafter. But again we call to your attention the great
importance, so concretely shown by the activity of "Mr. Trader No. 2," that even
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though you may have a big margin on which to operate, your first trade should
not be in such quantity that your future activity will be at all curtailed or jeopar
dized if you are forced to take a loss in that first, second, or third trade.
SUGGESTED METHOD OF TRADING OPERATIONS

This concludes the study of statistics, business fundamentals, price move
ments, and methods of operators.
At the beginning of this Course it was emphatically stated that, "to trade suc
cessfully requires a foundation of fact on which to base an opinion." During
the Course we first took up the analysis of the statistical factors to give you a
fundamental basis for arriving at an opinion as to whether high prices or low
prices for the year were logical. Next we went into the Dow Theory of price
movements, applying it both to stacks and grain. Then the relativity of prices
was analyzed, with various fundamental facts and factors which have a ten
dency to move the price level higher or lower. Next in line followed the price
analysis in the technical movements of the market together with seasonal
trends, climatic influences and important calendar dates. Then you were given
a method of analyzing business fundamentals to see the influences they would
have on the general trend of commodity prices. Lastly, we studied the trading
methods of big operators who have been successful in making money in the
markets.
During the course of these studies of the various fundamental facts and fac
tors, the following important points were brought out:
1 Large traders make their money and keep it by a study of business funda
mentals in combination with grain conditions, and then trade in the
market as the results of these studies indicate which way the market
should move.
2 Experience has shown that when the import countries have short crops it
is very bullish on the market even though the export countries may have
an ample surplus.
3 The one thing that can elevate the wheat price materially without regard
to the situation of Supply or Demand is a natural or artificial measure that
will elevate the general level of commodity prices.
4 In stocks, the averages of the rails and industrials will confirm each other
in their major movements. In grain, com and wheat will also confirm each
other.
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5 After a period of congestion lasting from twenty days to three or four

months, and then the wheat and com both make and close in new prices
in the same direction out of the congestion, the indications are that the
market will run in that direction. This rule is not infallible.
6 The main movement of the market, or Primary Trend, will occupy a year
or more. A Secondary Movement in which the market will lose from 40
to 60 per cent of its Primary Movement will come as a usual thing.
7 The daily fluctuations become important primarily as they finally pre
sent a picture which has forecasting value. The daily movements
themselves are frequently contradictory.
8 The more rapid the movement, the more difficult it is to forecast.
9 The real break or advance in the market does not come until after the
confirmation that the Top or Bottom formation has been completed, by
both wheat and com closing out of their congestions.
10 If a trader will confine his activities to trades when the confirmation of a
movement is given by both wheat and com, it should make him excel
lent profits. This confirmation by the com of the wheat trend and/or the
wheat of the com trend is undoubtedly the surest and safest indication of
trend that there is.
11 While the wheat price or other grain price must adjust itself to the chang
ing status of Supply and Demand, it must also adjust itself to the
constantly shifting general level of commodity prices.
12 Attempting to guess which way the market is going out of a congestion
has cost more fortunes than it ever made.
13 The further prices are from their common relationship to other com
modities, the more drastic will be the movement when Supply draws
nearer to Demand.
14 When the indication of the trend has been confirmed by both wheat and
com, with the fundamentals of Supply and Requirement also verifying this
trend, and the market is then at a very low price level when the trend is
upward, or a very high price level when the trend is down, then remember
emphatically and precisely that prices of staple commodities have a
common relationship toward which at all times they tend to draw, and the
further prices are from their common relationship to other commodities, the
more drastic will be the movement when Supply draws nearer to Demand.
15 The turning of the trend should be the start of all market operations. And
market operations should be continued in a manner that will steadily
increase profits so long as that trend continues in one direction.
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16 Congestions come at price areas that have not been previously worked.
When the market starts moving through a congestion after having been
out of it, or through a series of congestions that cover a small price
range, it will usually clear the outermost point of these congestions
before it stops.
17 A Top or Bottom formation is not completed until the market has
closed beyond both the Left and the Right Shoulder extreme prices.
Once such a formation has been completed, one should play that direc
tion of the market with the assumption that a big movement is in
process, and that the forces which turned the market definitely to
establish a trend will continue, with the market gathering power as the
movement develops.
18 Once a position has been taken with the trend, do not be shaken out of
it until the market itself shows positively and conclusively that it
cannot continue the trend in which it has started. In this, your greatest
enemy is yourself.
19 The market will in most instances rally after a break of 40 to 60 per cent
of the distance it has advanced in a good movement, or break after a
rally of 40 to 60 per cent of its previous break. If profits are taken after
that much of a rally and your position reversed, it will usually result in
opportunity for a profitable reinstatement. Or, if there is a reaction of
around 50 per cent of a movement, without formation of an opposing
Top or Bottom formation, additional trades may be made with reason
able safety. It is seldom that the market will not rally sufficiently to
permit these new purchases to be liquidated at a profit, even if the
advance does not continue, in a Bull market.
20 After having run from a Bottom formation made well below a previous
congestion, the market will usually have a reaction before going through
a previous big congestion. So profits taken as the congestion is entered
will usually give the trader an opportunity to reinstate at a lower level
and frequently at the 40 to 60 per cent reaction level.
21 Profits taken when wheat declines to a previous important high of com
will also usually permit reinstatement of sales at a higher level.
22 Profits should be watched closely when the market approaches a previ
ous important high or low point, to prevent overstaying the market in
case it makes a "double spread" Top or Bottom.
23 The market will usually recognize by a reaction an objective made by
drawing an arc and angle off two important points. Profits taken in that
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price level will usually give an opportunity to reinstate on a reaction. But

a close beyond that Circumscribed Objective is usually indicative of a
still further movement.
24 It must be remembered that there are twice as many times when the
market will close up one day and down the next as there are markets that
close higher or lower two days in a row. Therefore, when the market has
closed out of a congestion and the next day it turns over, it is no reason
to become extremely suspicious unless the market comes clear back
down into the congestion. Even then, it will frequently turn higher again
after more work near the top of the congestion.
25 The September wheat future will in most instances blend with the price
at which the July expires, the December will usually blend with the expi
ration price of the September, and the May will usually blend with the
price of the December. Where there has been a short crop, however, then
the July will frequently sell well below the May wheat price if the indica
tions for the new crop are favorable for a large production.
26 May com frequently makes the extreme high or low for the balance of
the life of the future right at the start of the calendar year. Where there
has been a congestion during the first trading days of the year and then
the May future closes out above that congestion, particularly if the wheat
future confirms the upward trend, the low made at the start of the year
will frequently hold for a very good movement and sometimes for the
entire year. But where the May com first starts upward after some little
work near the beginning of the year, and turns over to close below the
low point of its first-of-the-year movements, it will almost invariably sell
down to the expiration price of the December com future.
That review gives you the important points for a suggested method of opera
tion. It will be developed in detail in the next Lesson.
TREND LINES
Probably the most common form of "Chart Reading" is that of so-called "Trend
Lines," and the most common type of such lines are those shown on
Pictograph 19.2 herewith. But there are probably as many "fine points" to this
method as there are those who keep such Trend Lines - with each keeper
deciding for himself just what constitutes a "fine point."
The biggest asset we see in the Trend Line is its automatic combination of
Time and Distance. Usually a market, if it is to move any distance, should con
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tinue to move at a net rate of about 1 to a day over a period of time. Of

course, in the wildest markets, the movement exceeds this. But unless a market
can keep moving at this speed or more, the force that started the movement is
not overly powerful. Trend Lines such as those in Pictograph 19.2 herewith,
however, do not make any particular distance allowance, but simply automati
cally gauge it to the speed that has prevailed. So long as that speed is
maintained, of course, the trend will continue in the one direction. When the
speed slackens so the market fails to keep ahead of its Trend Line, it naturally
leads to the assumption that the news which brought the movement has been
discounted. So Trend Lines are of particular value in a running market.
In the Trend Lines shown in Pictograph 19.2, the method is to draw a line
through the outstanding points of the various movements. Thus the first move
ment of the May future of 1936-37 was upward, and Trend Line A is drawn
through the low points of the reactions. In this, as in other types, it is well to
consider that the trend has changed when the market closes the second consec
utive day a half-cent or more below the Trend Line. So in this instance, trend
would change downward on the third day of the week ending August 8 th,
when the market closed at 114 and the Trend Line went through at 114f It had
closed the previous day at 112 with the Trend Line at 114.
On the second day of the week ending August 22nd, the market closed for the
second consecutive day above Trend Line B, which had been drawn off the
high of the movement and the outstanding high of the week of August 15th.
But the next week the market again closed twice consecutively below the Trend
Line D, turning the trend down again.
In the week of September 12, the market turned the trend up, according to the
Trend Line method of analysis. Trend Line E would be drawn off the low of the
week of September 5th and that of September 19th. But in the week of October
8 th the market again closed two days in a row below the Trend Line, and
endeavored to break. The break did not go far, however, the market closing
above the Trend Line F, in the week of October 10th.
It is to be noted how the market followed Trend Line G back upward during
the week of October 24-31, and then how it followed H downward as it slowly
"coiled." When it finally closed twice above line H, in the Saturday-Monday
movement of November 14-16, it went to Line G from which it backed off. But
when it got above Trend Line G again (and was out of its coiling congestion), it
started to run.
It is to be noted that in the first stages of this advance, the market bumped
continually into Trend Line "I" on its reactions, but could not break through.
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19.2 Trend Lines
MAY WHEAT AT CHICAGO 1937

Finally it left the line and ran, dosing back through it again for the second con
secutive day on the 12th of January. Had one made purchases as it dosed the
second day above Trend Line G, on December 1, he would have bought at 121.
Had he held until the 12th of January he would have sold at 134. And he would
have gotten out near the high of the movement and gone short.
A little profit would have been taken on this short sale had it been bought in
when the May had closed for two consecutive days one-half cent above Trend
Line K. When the market got above L, it ran quickly to a new high on the
movement. And purchases made with the closing above K and sold out when
it dosed two days consecutively a half cent below M would have added prof
its. Not much if anything would have been made on this sale, as the market
turned when it bumped into the intersection of Trend Lines G and L. But a
reversal of position with the two-day dosing above N, to be sold out when the
market closed two days consecutively a half cent below 0 , would have
increased the profits.
So it is seen how these Trend Lines do keep the losses down and do keep you
in on a running market. They do allow time for the market to have its reactions
and maintain the trend.
Their weakness lies in the long periods of congestion. They are particularly
poor in years of big world wheat supplies, when the market takes twice as long
as normal to move the same distance. Such markets are characterized by
ranges of less than a cent a day on the average.
There are scores of variations from this method. Some take a running average
of five, seven, or nine days as their Trend Line. That is, they add up the closing
prices of the past nine days, and then divide by nine, to find the average of
those last nine days. In a running market, this average would of course lag
behind the market, giving it a chance to react and still remain above the closing
price average Trend Line. Others vary this with a five-day average, while still
others conservatively take a 15-day average. Still others, to keep the average
somewhat close to the market, take an average of the last seven days and aver
age this average with "today's" closing price. This is an improvement in a
rapidly running market, but in a narrow market would be ruinous.
Probably the best Trend Line we have seen is that sent us by J. A. Pols of
Templeton, Texas. Practically, it works out as a Trend Line drawn at a ratio of one-
third of a cent a day, off the last outstanding point of the market. On graph paper
such as we use, it is a 55-degree angle. It moves at the rate of four cents in 12 days.
His theory of application is that when the market closes a half-cent or more
beyond the Trend Line for two consecutive days, then the trend changes. It keeps
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one closer to the market than most of the other Trend Lines, and yet allows time
for the natural reactions. But we have noted in this, as in all other Trend Lines,
that they seldom show a turn in trend ahead of a formation such as those
described in previous Lessons. And they are not nearly so good in a congestion -
when sometimes everything fails to keep you from taking losses - as the closing
beyond the outermost point of the formation. That is why we use Trend Lines
only as a guide, or checking factor against the material previously outlined.
THE PROGRESSIVE AVERAGE TREND LINE

This method is used in determining when the Minor, Intermediate, and Major
trend changes.
We use the Daily Progressive average trend chart for determining the Minor
trend changes and find that a Three Day Progressive average trend chart, as
described below, works best in determining the Intermediate trend changes. A
19-day period is used to determine the Major trend changes, starting for this
Major trend graph with an outstanding high or low in the market.
Over a long period, a very careful examination was made of the number and
the series of days to be used to determine when the changes in the
Intermediate and Major trends take place.
The principle of the three daily graphs is to combine the markets of Saturday-
Monday-Tuesday, and those of Wednesday-Thursday-Friday. While we use this
method mainly on the "Composite" graph (average high and low of all three
futures), we will illustrate it with the 1937 September wheat future. By giving you
specific instructions and illustrating, you may see just how much value it has.
First trades in the 1937 September wheat future were on Tuesday, December
29th. It being the desire to combine the markets of Wednesday-Thursday-
Friday and those of Saturday-Monday-Tuesday, the range of this first day of
trading is put by itself on the graph.
Range on Wednesday, the 30th, was 1152 to 1141. The average of the high of
the "three" previous days (in this case it was only one day, that of Tuesday)
and the high of Wednesday was 116f The average of the Wednesday low (1142)
and the low of the "three" previous days (in this case 115) was 114f. So the
second line of the graph would be drawn from 1161 to 114|. On Thursday, the
31st, the range was from 1171 to 115f So this high, 1171, is then averaged with
the high of the previous "three" days (1161), and found to be 116.81. So the
graph is brought up to that figure.
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Your record would show as follows:
It is unnecessary either to figure or to put in the average low of the 31st inas
much as it was higher than the low of the 30th. But inasmuch as the high of the
31st was higher than the high of the 30th, it would be averaged with the high
average of the previous "three" days.
Then came the holiday, and there was no Saturday market. On the 4th of
January, Monday, the high was 116f and the low of the day was 114*.
Highest average of the previous three-day period was 116.81, and the high of
the 4th (116 i) would be averaged with this high, getting 116.59. The low of
the 4th, 114}, would then be averaged with the low (114|) of the previous
period, for an average of 114.75. This range would then be drawn in, from
116.59 to 114.75, as the third line of your graph. Next day, the 5th, the high of
the day was 1151, the low 112f. Obviously, the average of 1151 and 116.81
(average high of the previous three-day period) would be lower than the
average of 116} and 116.81. So it is disregarded. But the low of 112| was
lower than that of the previous day so it would be averaged with the low of
the previous three-day period, or 114f, for an average low of 1131. So your
line for this "three-day" period would now be brought on down and would
have a range of 116.59 to 113.50.
The next day, the 6th, being a Wednesday, its high of 1131 would be aver
aged with the high of the previous "three-day" period, 116.59, for an average
of 115.17. The low of 1121 would be averaged with the previous average low
(113.50) for an average of 112.81, and this would form the start of the fourth
line on the graph. Next day the market went up to 1141, which was higher
than the 6th, and so this high would be averaged with the high of the previ
ous three-day average (116.59) for an average of 115.54, and the line for that
4th week would be brought up from 115.17 to 115.54. But on the 8th, which is
the 3rd day of this period, the market broke to 1111, with a high for the day
of 1131. So this low of 1111 would be averaged with the low of the previous
three-day period, 1131, for an average of 112.68, and the line would be
drawn down to that level, giving it a range for this three-day period of
115.54 to 112.68.
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V
On Saturday, January 9th, the high was 113$ and the low 112$. The high of
1131 would be averaged with 115.54, average high of the previous three-day
period, for an average of 114.58. The low of 112$ would be averaged with the
low of the previous three-day period, for an average of 112.46, and this range
(114.58 to 112.46) would form the start of the range for the 5th period. Next day
the high was lower than the high of the 9th, but the low was lower. So that low
of the 11 th at 111 $ would be averaged with the previous low (112 .68 ) for an
average of 112$, and the range line brought down to that figure. On the 12th,
still a new low was made at 111 $ which, averaged with 112 .68 , would bring the
range graph low down to 112.15.
This gives the general idea of the physical construction. The rule is to average
the highest price of the three-day period average, with the high of the current
day. Then average the low for the day with the lowest of the three-day period
average. That gives the start of the three-day range. If the second day goes
higher than the first, then average that high with the average high of the three-
day period and extend your line upward. If it goes lower, then average the low
with the low of the previous three-day period average and extend your line
downward. Repeat operations for the third day, and then start over again.
Usually, in a trend, a line can be drawn along the highs or lows, and it will touch
all of them for the length of the movement. And therein lies the first and foremost
benefit of this method. When the market reaches the line of trend, watch for a reversal.
It is also to be noted that the market will usually put about the same distance
on the Bottom, in a declining market, that it fell short of equalling the previous
high. When it fails to do this, there is usually a turn in the main trend.
Usage of this method is in its infancy; but the indications shown by it have
proved of enough value that we are including it in this Course. Practical expe
rience has shown it as an aid in catching the minor movements in particular,
and it is one more confirmation of the other methods taught in catching the
turning of the trend.
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Lesson 20
SUGGESTED METHOD OF TRADING

' OPERATIONS
■ Margins
■ Steps in Trading
■ Crop Scare Bull Markets
■ Types of Grain Markets
■ Trading in Various Types of Markets
Laying out a method of trading in grain futures is very similar to laying out a
plan of battle on a battle field. It is all right if you have correctly gauged your
own powers and the power of the enemy; but the wise general not only pre
pares his plans of attack but also his best method of retreat in case things go
wrong. And it is only the gambler who stakes everything he has on one battle,
one roll of the dice, one trade in the market. This Course is designed to remove
as much as possible the gamble from trading operations.
MARGINS
The first step necessary is to have the margin ready with which to back the
trade. How much margin? Mr. Cutten, in his article in the Saturday Evening Post
(quoted in the Introduction), said that he was long a line probably larger than
any others, but he did not think he was over-trading because he could pay for
what he had bought.
We asked a solicitor for a Board of Trade House how much margin a man
should have on which to operate in the grain market, and he said, "It is my
experience as a solicitor, after having handled grain accounts for more than ten
years, that most traders meet with failure because of over-trading. The usual
brokerage house margin requirements may answer the purpose of safety from
a brokerage point of view, for the time being; but they are in my opinion utterly
inadequate for the business of speculation over a period of years.
"With fifty cents a bushel margin, one can approach the business of grain
speculation with equal chances of making money at it, like in any so-called
legitimate industrial or commercial enterprise. To put it in a concrete example,
a man with a capital of $5,000 should under no circumstances make his initial
trade to exceed 10,000 bushels. In this case he is protected for 50 cents a bushel
and the market can go considerably against him before his mental equilibrium
is disturbed by a broker's request for additional funds to protect the trades.
This is important because nothing beclouds the judgement of market condi
tions more than marginal worries.
"If the initial trade is made favorably and the market moves in the direction
contemplated, one can then add to his holdings. It seems conservative to add at
the rate of 5,000 bushels for every ten cent move, thus conforming to regular
requirements on paper profits."
Referring back to the operations of "Mr. Trader No. 2," we saw that he took a
loss of $163,875 and still had margin enough to sell five million bushels while
the market was staging a twenty cent advance.
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There is nothing wrong with trading on margin. Practically every business is

run on margin. Grocers take 30 to 60 days in which to meet their bills, with the
goods moving into consumption during that time. Houses are bought on
margin. So are cars, furniture, and many other commodities. Farmers who con
demn speculative trading on margin go to their banker and have him finance
the purchase of cattle for feeding.
But it must be remembered at all times that the margin called by the broker is
the minimum margin required. Some forget that the broker and the banker are
not going to take a loss on the trading. The trader, when he purchases a con
tract for 5,000 bushels of wheat, is liable for the full purchase price.
We know a trader who, some years ago, bought "bids" for next day, with a
$10 bill, and those bids were good for five cents a bushel. With the $250 made
off those bids, he bought bids for not only the next day but the next week. The
bids next day were good, and he took advantage of the bids to sell wheat that
next day at the bid price buying offers as protection. The market continued to
break violently, and within two weeks had gone down so far that this trader
had run his $10 bill into $10,000. But, like a man rolling dice, he kept on pyra
miding until he soon was back to where he had started from.
In starting your operations, first make up your mind what you want to do. If you
wish to gamble like the above trader, you do not need this Course. Like that
trader, we forecast without hesitation that although you may make a fortune
by being fortunate enough to strike a market that runs and runs in the direc
tion you are trading, and your pyramids will mount rapidly in profits, you will
not keep it long. The success of that venture will so turn your head that you
will think, like "old Hutch" back in the days of history, that you make the
market instead of the market making you.
That man, B. P. Hutchinson, one of the greatest characters ever in the history of
grain trading, once waited ten years before taking a definite stand in the market
and accumulating a long line of wheat. In the meantime, his analysis indicated that
only scalping markets would prevail, and he traded accordingly. At last he saw
conditions shape for a big advance, he accumulated a line, cornered the market
and had the pleasure of sitting in a chair on the edge of the old wheat pit and forc
ing the shorts to come up, one at a time, and buy their wheat at $2.00 a bushel. But
it so turned his head that he thought he was king. And he died a pauper.
If you expect the grain markets to pay your salary, then you should have as
much capital for investment as you would expect to put into any other business.
We would say that $10,000 would be the minimum requirement for a man who
expected to devote all of his time to the business. His logical, reasonably safe
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I
earnings above that point would increase with the capital he had for investment.
As a minimum requirement, we would recommend 35c a bushel behind each
initial trade, and a minimum of 30c a bushel behind each additional trade.
Thus, a man with $10,000 capital would be justified in purchasing a maximum
of 28,000 bushels of wheat when/as/if his analysis convinced him that the time
was ripe for the start of operations. Before he would be justified in adding
another 5,000 bushels his original purchase must show him a profit of $1,500 -
and then the market again indicate that it was a purchase.
We have indicated 30c as a normal run in the market. Let us work out a theoret
ical volume of trade from $10,000 as working capital, always with the idea in
mind that if the trade did not prove profitable and the trader was compelled to
take a loss and await a new indication, he would have money with which to get
back into the market. In this theoretical case, however, we will assume that the
trade is successful and that the market does move on out, advancing to full 30c.
Initial margin of $10,000 at 35c a bushel would margin purchase of 28,000
bushels. Minimum requirement for additional purchases of 5,000 bushels, $1,500.
Average
Margin
It advance on 28,000 bushels, paper profit of $ 280.

2c advance on 28,000 bushels, paper profit of 560.
3c advance on 28,000 bushels, paper profit of 1,120.
4c advance on 28,000 bushels, paper profit of 1,400. B*5M 34c
5c further advance on 33,000 bu., profit of $1,650. B 5M 33c
4c further advance on 38,000 bu., profit of 1,520. B 5M 33c
*B = Buy
Gross profits on this accumulation would be as follows:
30c gross on 28,000 bushels 8.400.00

25c gross on 5.000 bushels 1.250.00
20c gross on 5.000 bushels 1,000.00
15c gross on 5.000 bushels 750.00
Gross Profit $12,150.00
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There is very seldom a single year when a 30c run will not come. If a trader
can break even in his other trades, and yet get on that one nm when it comes,
he will have doubled his capital. If he pays himself a salary of $10,000 a year he
would still have near 10 per cent made on his capital after paying commissions.
With a capital larger than $10,000, profits would naturally have increased.
Below $10,000 capital, the theoretical profits would be decreased. With a capital
of only $1,000 it would be necessary for the trader to wait for a ten cent
advance on his initial purchase of 4,000 bushels before justifying the addition
of another thousand, etc.
Our main purpose in giving you this theoretical scale is to implore you to
trade conservatively. If you have only capital enough at the start to trade in job
lots, then trade in job lots. If you have the capital to trade in 5,000 bushels, then
trade in 5,000 bushels. If you have sufficient to make heavier purchases, then
make those purchases. But champagne cannot be constantly drunk on a beer
salary. We are firmly convinced - in fact have definitely proven - that conserva
tive trading will make excellent interest on the investment if the same
intelligence is applied to it that there is to any other business.
As a final statement before going into the actual trading itself, let us make this
observation just as emphatically as we possibly can: keep your trading to yourself.
Do not talk about it. The moment you do, you become a marked man. If you
appear successful, you will be hounded by others who will want you to handle
their funds or endeavor to follow your advice. And about the time you make
up your mind to close out a trade, either accepting profits or taking a loss, you
will not be able to find them or to persuade them to do likewise. You will be
blamed for their losses.
Also, do not go into joint accounts or trade on other people's money. Such
actions almost invariably result in loss of friendship, if not of actual dollars,
due to mental stress and over-eagerness because of a desire to show the other
party how good you are, or your inability to persuade them to do what your
judgement dictates.
The best answer we ever heard to the general query of "What do you think of
the market?" was, "I think it will fluctuate."
STEPS IN TRADING
The first thing to do in carrying out any operation in the grain market is to
make just as complete a survey of fundamentals and technical conditions as is
possible. The business situation should be analyzed first to see not only the
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current activity of industry but to look just as far into the future as is possible.
The stage of the business cycle should be analyzed with factors which would
move business forward in that cycle or hold it stationary. By that, we mean the
trend of conditions which would create work for men, money, and machinery
or throw them into further idleness. We have endeavored to give you a method
of analyzing these basic factors with the sources of information from which
current data may be secured.
The future trend of these activities can be foretold in part by the action of the
Stock Market, the leadership in Washington, and the level of prices prevailing
for raw products. In this we once more call to your attention that wheat is one
of the greatest international products of commerce; and high wheat prices in
the export countries will increase purchases of foreign made goods, while low
prices will decrease those purchases.
The second step is to familiarize yourself thoroughly with the fundamental
grain statistical situation. And we have also given you facts and factors from
which to work, with Pictographs showing the previous effect on prices of
deficits and surpluses in the export countries and in this nation. Comparatively
low prices may be expected so long as the export countries have more for sale
than the import countries require and there is no indication of a readjustment.
High prices almost invariably prevail when the export surplus is not equal to
the normal import requirements. These high prices, however, may trend down
ward if commodity prices generally are in a downward trend.
Ability to anticipate the changes in Supply and of general commodity price
trends means the ability of the market trader to anticipate grain price trends.
To assist in this we have given you as complete information concerning the
reading of the weather map and other methods of weather forecasting as we
feel safe in presenting. In addition to this, many statistical services, such as the
Pickell-Daniel Services, maintain a regular flow of crop reports during the
important growing seasons, and the commission houses with private wires
extending through the wheat belt make a speciality of gathering such informa
tion while other houses send travelling crop reporters to make personal
inspections. This vast news-gathering organization affiliated directly or indi
rectly with the Board of Trade ensures that no important crop information
anywhere in the world will long be kept a secret.
It is in order that you may have a basis for analyzing this crop information in
an intelligent way that we have gone so fully into the production, local con
sumption, and surpluses of wheat in the various countries of the world.
The changes actually reported in world grain production are not overly large in
number. We have given you the sources of information, and 15 to 20 minutes
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work upon receipt of the Weekly "Foreign Crops and Markets," the monthly
"Crops and Markets," and the monthly "World Wheat Outlook" will keep your
information up to date so that you will have a very close idea of the fundamen
tals on which after all the price must be based. This, together with your analysis
of the business situation, will give you a basis for forming an opinion not only of
the trend of the market but also of the type of market to be anticipated.
In this, it is just as important to be able to anticipate a running advance or
decline or a market which moves very slowly and spends most of its time in
congestion as it is to anticipate the trend itself.
CROP SCARE BULL MARKETS

Generally speaking, the period from the 1st of March to the middle of May is
the time when greatest increase is shown in wheat prices. This is the period
when our own southwestern wheat crop is developing, and the Spring wheat
of the United States and Canada is going into the ground. When Winter wheat
has gone into the Winter in poor condition, the keen solicitors affiliated with
exchange houses continually pound this fact home to their clients all during
the Winter. They keep pointing out the possibility of a price advance due to
this condition. Then, if the late Winter and early Spring months are unfavor
able for wheat development and the market starts upward, almost invariably
there will be a rush of traders to buy wheat. And even the most confirmed Bear
will not stand in the road of a crop scare Bull market.
Should this condition continue with a Bull market due to unfavorable condi
tions in the Spring wheat territory, and the market advances into May and June
or July, almost invariably there will be a severe decline in prices amounting
approximately to a major movement during the late Summer months. There
are times when European crop conditions will also be poor, with the result that
the market will turn upward again after its first sharp break to the 40 or 50 per
cent average of the entire movement.
The Argentine crop and that of Australia become of sufficient importance to
start a major Bull market only where there is a very close adjustment between
the export surplus and the estimated import requirements.
TYPES OF GRAIN MARKETS

Generally speaking, when grain supplies are excessive, the Stock Market, busi
ness situation, and commodity price curve show no definite and decided trend,
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and there are no positive indications of a decided change in production due to

the deterioration of the crop of a major country, prices can be expected to
spend considerable time in congestion. Runs then of 7\ to 15c are about all that
can be anticipated, and even where there is a definite Top or Bottom formation
the trader should accept profits on at least half his line whenever an important
price level is reached.
It must be remembered also that the market spends about 75 per cent of its
time in congestion and that while the natural inclination of most traders is to
anticipate a runaway market, about seven times out of ten the market will turn
around after having gotten right to the edge of its congestion price level. For
that reason, we again state that you should be in position to take 50 per cent of
your profits at least, whenever an important price level is reached.
It must also be remembered, however, that whenever the wheat price is at a
level 70 per cent or less of its average relationship to the general level of com
modity prices, there is always the probability that a Bottom formation once made
will carry the market upward to that general price level. There were never 24
consecutive months from 1870 to 1929 in which the wheat price did not sell at a
price level equal to the commodity price curve. Government interference upset
this from 1929 until 1933 when they again crossed each other.
To illustrate, the average price of wheat from 1909-13 at Chicago was $1.05. We
have already shown you how to reduce Bradstreet's Commodity Index to a per
centage basis of 1909-13 level. Suppose that your calculation showed that
commodity index at 100 per cent of the 1909-13 level, yet the wheat price was
only 70 per cent of that or around 75 to 80c a bushel, the Stock Market was
strong, the business index was advancing, and the wheat market had completed
a technical Bottom, the odds would be extremely favorable for wheat to advance
to the commodity price curve. Therefore, under the conditions above stated, one
would be justified in making his initial purchase when the Bottom was com
pleted and in hanging on to the great bulk of that initial quantity with a steady
accumulation as previous purchases showed profits, so that by the time the price
had risen to the commodity curve, he would be long his greatest volume.
Conversely, when the wheat price is 125 per cent or more of its normal relation
ship to commodity prices, a Top is formed and particularly if the Stock Market
also has formed a Top and the wheat Top is confirmed by that of com, one would
be justified in selling at the time the Top is formed and adding to those sales as
profits from the initial sales accumulate. In this, one must always remember that
there will almost invariably come the rally of 40-50 per cent of the break and that
this rally will normally come from an important price level.
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TRADING IN VARIOUS TYPES OF MARKETS

Generally speaking, then, markets may be classified about as follows:
1 A crop scare market, starting from a low level of prices in which the market
will continue to advance as long as the bullish indications are present or
possible. This type of market will come usually between February 1 and
May 15. In it, the price will frequently advance to the general commodity
price level, and if there is any indication of a deficit in the surplus coun
tries as compared to import requirements or a deficit in the United States
as compared to normal consumption, the market will usually extend
beyond that commodity curve. This type of market will usually be accom
panied by a Bull Stock Market and advancing commodity prices generally.
In it, (a) one should retain at least 50 per cent of his initial purchase until
an opposing top is formed and completed indicating positively that the
advance cannot continue; (b) he should buy more (provided his marginal
requirements will allow it) when the market has its first reaction extend
ing 40 to 50 per cent of the initial advance; (c) should the market close in
new highs after this initial reaction, he should add still more to his line of
purchases; (d) if the ensuing advance carries the market 10 to 15tf a bushel
and reaches any one of the five Important Price Levels enumerated on
Page 134 of Lesson 8, he should take profits on at least 25 per cent and
possibly 50 per cent of his holdings, this depending largely upon the
importance of the price level, and the length and time of advance; (e) on a
new break to a new important price level, the sold-out holdings should be
reinstated, but this time after an advance back to the previous high level
the trader should be alert to protect his new profits. In case of a close in
new high levels, however, one is justified in expecting a continuation of
the advance with additional purchases in the market; (f) in case of the
completed formation of a Top, he should immediately sell all long hold
ings, and start a new line of operation on the Bear side of the market,
trading conservatively at all times.
In a crop scare market we do not advise selling short at any time until
the market itself has proved positively that it cannot continue the
advance. While natural reactions will come and the daily action will be
such as to lead many to the conclusion that the market is not going to con
tinue its advance, yet experience has shown that he who takes a profit
awaiting a reaction is usually left waiting, and when the reaction comes
and he purchases wheat, he makes a purchase of the wheat which traders
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"No. 1" and "No. 2" and others of similar caliber have purchased at mate
rially lower levels and are now selling out preparatory to taking the
reverse side of the market.
2 The second type of running market is the liquidation after a big advance.
This usually comes from a level high in price and/or when the crop has
developed to such a stage that further damage will be negligible. It must
also be remembered that traders of the type of "No. 1" and "No. 2" desire
to liquidate their holdings while public interest is still at a high point and
will absorb that selling without material declines. But when the public
finally awakens to the fact that the market is high in price and that the
deterioration has stopped due to the maturity of the crop, it will endeavor
to liquidate rapidly itself and the breaks are rapid and deep. From such
drastic liquidation there is almost invariably a rally that is almost as sharp as was
the decline. This usually comes from an "Important Price Level."
Such a type of market is extremely dangerous in which to operate and
one should become strictly a trader for the immediate profit. After the
rally from such liquidation, always remember that the market will almost
invariably work between the low point of the break and the high point of
the initial rally and will gradually calm down and resume its trend
according to the physical conditions of Supply and Requirement. The
illustrations of the market in January, February, March and April of 1926,
given in Lessons 18 and 19, are typical of this type of liquidating market.
3 The business liquidating market. This market comes when business passes out
of the era of Prosperity into the era of Decline. Like in all other liquidating
Bear markets, and as is pointed out in the description of the various phases
of the Business Cycle (Lesson 17), there is usually the rally of 40 to 50 per
cent after the first wave of liquidation, due to false confidence generated by
forced optimism of political and financial leaders. In this type of market it
must always be remembered, however, that business men and other specu
lative traders now need the money for the protection of their own business
that they formerly utilized in grain trades and stock purchases. Therefore,
the grain market will decline further than would otherwise be expected. It
will discount the further decline of general commodity prices.
In this type of market, after the 40 to 50 per cent rally and then the
market closes in new lows, additional sales are logical just as the cumula
tive purchases are logical in a crop scare Bull market. It is of extreme
importance in a business liquidation market to remember that general commodity
prices are seeking a new level of prices below the level to which the public has for
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merly become accustomed during the era of Prosperity and that this decline in
commodity prices will influence grain prices to seek lower basic levels.
4 The recovery price trend. This condition is the reverse of that in the "business
liquidating" price trend. The forces which turn the general commodity price
level upward to values above those to which people have become accus
tomed in the era of Depression will influence grain prices also. Even though
the fundamental conditions do not show any material alteration, yet in the
eyes of the trading public Bull news will assume a new importance while
bearish news will be disregarded. Therefore, as the market reacts after
having run to important price levels, additional purchases are in order with
new purchases again when the market has closed in new price levels above
the high of its previous reaction.
And we cannot emphasize too strongly that where the stock market is
advancing, business conditions show improvement, the general trend of
commodity prices is upward, and wheat has formed a Bottom at compara
tively low price levels, one should trade with the idea that grain as well as
other price levels are going higher than the levels that have prevailed
during the Depression and that the only way to beat inflation (whether it
be monetary inflation or inflation through credit expansion in a natural
business way) is to convert money into commodities which are to be
reconverted into money at the higher levels.
5 The other type of market is that where the price level in grain is compara
tively neutral, there is a balance between Supply and Requirement with
no particular indication of a shortage and still no indication of a huge sur
plus, business conditions are rather stabilized, and the Stock Market gives
no evidence of a decided trend. Such a market should be accepted at its
face value and while one should retain at all times a part of his initial
trade made after a Bottom or Top has been completed until an opposing
formation is completed, he should take care to liquidate a goodly percent
age of those holdings as an important price level is reached or the market
has had an advance or break of approximately 15c a bushel. In this type of
market particularly it is most desirable to remember that markets spend
about 75 per cent of their time in congestion and that these congestions
come at price levels not previously worked.
In closing this Lesson, let us again caution you to look the market in the face
and make your commitments in current markets without prejudice or bias but
on the basis of your careful analysis of the fundamentals of grain, business, and
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the price, having confidence that movements of the future markets will be as
regular as those of the past.
In the next Lesson we will go again through some of the markets of the past,
analyze them to see the type of market most likely, and the best method of
operation with the results from applying the principles taught here.
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Lesson 21
APPLICATION OF TRADING
METHODS
■ How Should Profits be Used?

■ Stop-Loss Orders
APPLICATION OF TRADING METHODS
In Lesson 20, a general method of trade was outlined covering various types of
markets. Methods were also given for making the analysis to determine the
type of market which may be generally anticipated. In the suggested outline of
trading methods the following items have been laid down as the ideal.
1 Sufficient margin should be provided at the start of the operation so that

in case the market does not move as anticipated the trader will not so
jeopardize his entire capital that he cannot get back into the market. If the
market does not move out of its Top or Bottom formation, as anticipated
when the initial trade is made, then the trader should stand aside before
his margin is endangered in any way and await a new indication of a start
of a movement.
2 In a crop scare market or a passage of business from an era of Depression
into the periods of Recovery and Prosperity, during which there is almost
invariably a general rise in commodity prices, the main plan is to accumu
late an increasing line as profits are shown in the initial purchase that is
made when a Bottom formation has been completed. This line is to be car
ried until the market has proven positively that it cannot continue the
advance but has completed a Top formation. In a liquidation market,
either from a high level after a major Top has been completed or during
the passage of business from an era of Prosperity to the periods of Decline
and Depression, the general plan of operations would be to increase the
line of short sales as profits accumulate, always remembering in both the
advance and the decline that the market will usually have a reverse of
trend amounting to 40 to 60 per cent of its initial movement.
3 The third type of market is that which comes when supplies are excessive,
there is no definite trend to the securities market, and no outstanding factor
in business development. It is the slow, congestion type of market. In it, the
general plan of procedure is to work primarily with the market in the direc
tion indicated by its Top or Bottom formations, but accepting at least 50 per
cent of available profits when an important price level is reached and either
making an independent sale for the anticipated reaction when the trend is
upward, or awaiting a break before reinstating the purchases. For use in this
type of market we will give a trading rule in the next Lesson.
Now then, to bring out more clearly these suggested types of operations, it is
desirable that we go back over some old markets and demonstrate by making a
theoretical purchase or sale as the market indicates. In this of course we have the
advantage of being able to look ahead and see what the market actually did.
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Therefore, we must project ourselves as much as possible into the actual condi
tions which prevailed at the time the trade would be made and conform without
fear, favor, or forward look to the results thereof, according to the specifications
laid down in Lesson 20, and the various reasons for those specifications as out
lined in previous Lessons. In this at all times the first consideration is protection
of the initial capital and the second is the increasing of that capital as rapidly as
conservative trading methods in the prevailing market will permit.
Let us now go back to the market given in the examination of Lesson 11, and
apply the principles of Lesson 20 to it. In that market, as can be seen by the
Pictograph 13.1 of Lesson 13, reproduced herewith as Pictograph 21.1, the
September wheat future of 1929 completed a Top formation on March 22 (given
as August 22 of the table in Lesson 11). It is to be noted that the market that day
closed downward more than 3c a bushel.
Now the question arises as to how one can tell when the market is going out of
the congestion and therefore purchases or sales would be reasonably safe before
the close so that one need not wait until the very closing quotations before taking
a position. The only method we know of is that of the time indication given on
Pages 86 and 87 of Lesson 5. On Page 86 of that Lesson, it is pointed out that
"when the 12:00 o'clock market is lower than the 10:00 o'clock market the close
will usually be lower than the market of 10:00 o'clock. Should a rally come in the
last few minutes of trading a break can usually be expected the next day or the
day after, that will bring the market back down to the 12:00 o'clock quotation."
Thus if a 12:00 o'clock market is well out of the congestion and lower than the
10:00 o'clock market, one is usually safe in making a sale at that time on the
assumption that the decline will continue and the market close out on the lower
side of the congestion. That is not always the case, but is the nearest mechanical
indicator that we know. In this market of the September future of 1929, then, one
would have been justified in making his first sale at the closing congestion which
was 1281, or higher had the 12:00 o'clock indication justified it.
We will assume that the trader had $10,000 with which to start his trading
operations and for the purpose of this study will assume that 28,000 bushels
had been sold at that closing price of 1281 on March 22,1929. This would have
involved a total of $35,875, with the trader protected by 35c a bushel margin.
Now, according to the theory laid down in Lesson 20, one would not be justi
fied in making new sales until he had a profit of at least 4c a bushel in his
initial trade and the market indicated that it was a sale again.
The trader in this instance would undoubtedly have had some bad moments
during the first half of April. The market kept on declining to 122 during
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Pictograph 21.1 September wheat future 1929
March and then turned around to rally and put in the formations of what could
have been a very fair Bottom. A close study of the quotations for April 12th and
13th will disclose, however, that the market at no time closed in new high
ground out of that Bottom formation. The Straight Average from the low of
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124f made March 26, to the high of 135$ made March 2, was 130$, and on the
rally in April the highest the market reached was 130$, this being on April 13th.
It could not hold the rally, however, and closed back down within the price
range of the previous day. The trend was not turned upward.
On April 22nd, the market closed at 120$-| - a close in new lows after the
rally of 50 per cent. A new sale of 5,000 bushels would be in order, we assum
ing that the trader did hesitate just a little bit to make the new sale on the 50
per cent rally of the 15th even though such a sale would be indicated and par
ticularly after the sharp break of the 16th which more than lost in one day what
the market had gained in 6 $ days trading previously.
An angle line, drawn off the high of April 15, and downward at an angle
equal to the advance from the low of 122|, made April 4th, to that high of
130$ made April 15 would show that the market was sharply below this angle
line. Incidentally, here is one place where these angle lines are of particular
benefit and that is to indicate the comparative rapidity with which the market
gets away from an extreme point, particularly where that point is at or near
an important price level. In this particular instance, the market had rallied to
its Straight Average after having completed a Top, and then in that market of
April 16th broke away from that average very sharply. The indications were
that the high of 130$ would hold for a continuation of the decline and new
low prices. But, to be conservative, we will assume that the trader refused to
make a new sale until the market had shown its weakness by closing in new
low ground. This came, as previously stated, on the close of the market of
April 22nd.
Then, as can be seen by following Pictograph 21.1, the market held and
worked in that level, putting in a first-of-the-month high and closing again in
new lows on the 4th day of May. Incidentally, this was a weak Saturday. New
sales were in order on the close and we will assume that the trader was on the
job to sell at the closing quotation. The sale of these 5,000 bushels at 119$, aver
age of the closing price of that day, would involve $5,968,75. This sale of 5,000
bushels brought the total sales to 38,000 bushels. The selling price was
$47,862.50. Had this wheat been bought in on the close of the 4th at 119}, it
could have been purchased for $45,362.50, leaving a gross profit of $2,500.
Adding the $10,000 original margin would give $12,500 back of these sales of
38,000 bushels which would equal 32}e per bushel margin. This would con
form to our requirements of marginal safety laid down in Lesson 20.
Now, we come to the first point at which one should begin to think about
taking some profits. We have previously advised how to draw the angle line off
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of the high at 130$, and at the same angle as a line drawn upward to 130$ from
the low of 122f made on April 4th. An arc should also be drawn off those two
points using the low of April 4th as the pivot point and extending downward
from the high of 130$. That arc would bisect the angle line at about 117$, while
the full distance of the rally from 122$ to 130$ (or 7$c) taken off the low of 122f (a
method of calculating an objective given in Lesson 8 ) would show an objective
around 115. There was no indication whatever that a Bottom had been formed,
and even though a rally might come from around those price objectives, indica
tions would be that new lows would be made even though it were only for the
Head of a Bottom formation. Therefore, while one would hesitate to make new
sales even though his previous trades had shown sufficient profit to warrant it,
yet one would hardly be justified in taking in his short commitments.
The rally did not come until the market had broken to 112$. It extended to
155$, this price being reached on May 9th, when a big Outside Day saw the
market again close in new low prices. Inasmuch as the previous sales showed
sufficient profit, new sales of 5,000 bushels would be in order on that closing
price which averaged 111 f. This involved $5,581.25.
A rally came, starting from 110 j, and carrying back to 114$, and on the 17th
the market again dosed in new lows at 109$-$. However, the market had not
gone far enough yet to justify further sales by giving the necessary marginal
requirements, and it was not until the market of the 27th, when wheat dosed at
105$-$, that new sales would have been warranted. A sale of 5,000 bushels at
105$ would have involved $5,275.
In Lesson 8 , Page 133, the current future of this market was analyzed and it
was shown that the market had an objective of 97 c on that current future but
on the break it had gone to 93$. We have also called to your attention in Lesson
19 that a normal major run on the market is 30c. In the break from 130$ on
April 15, to 100$ on May 31st, the market broke exactly 30c. Bradstreet's
Commodity Index on May 1, 1929, was at 142 per cent of the 1909-13 average.
Multiplying the price of wheat ($1.05) of this 1909-13 average by 142 (the com
modity price level on May 1,1929) would give $1.49 as the price level at which
wheat should have been were it bringing as much of other commodities as it
averaged bringing from 1909 to 1913. $1.00$ is just 67 per cent of $1.49. The
average low of wheat as compared to the commodity level is 65 to 70 per cent.
Therefore, it would be sound speculation to take in at least 50 per cent of the
sales when this general price level was reached. This decision would be aug
mented by the Inside Day which the market put in on June 1. It would be logical
to anticipate a rally from that general level with three different "Important
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Prices" reached. One should have placed himself in position to take advantage of
the anticipated rally to sell more as the market approached the 40 to 50 per cent
average of its last movement, which would mean a rally of 12 to 15c.
Total sales up to that time had amounted to 48,000 bushels. Assuming that we
took half of our profits on the close of June 1st, and keeping the round lots
together, we assume that 25,000 bushels were purchased on the close of June
1st at 102^. This would involve $26,105.
The market, on June 7, rallied to 115, or within i of a cent of the Straight
Average from 1001 to 1301. There it turned down, and refused to close above
that average. Had it done so, and gone above the Left and Right Shoulders of
the possible Bottom formation, made the latter part of May and early June,
then the whole position would have been reversed. But as it was, new sales
would have been justified. It is to be noted, however, that the market had ral
lied extremely sharply, being within the angle lines drawn off the low of the
break and had gotten away from that low in a manner similar to markets
making a permanent and final Bottom. Therefore, we would proceed with cau
tion, being ready to take profits on a further break or reverse the position if
necessary. Therefore, we assume the sale of only 5,000 bushels on the 8 th, sold
at the closing price of that day or 113 f This would involve $5,681.25.
Now, after the fluctuations from the 8 th to the 19th, and particularly the close on
the 19th above a congestion, one would have been entirely justified in taking in all
short wheat at least, even though he did not go long at that price level. It is to be
noted that the market was still above the angle line E, drawn off the March top as
shown in Pictograph 21.1. But we are assuming for the purpose of this study that
the trader did not cover his short commitments until it was apparent on June 20th
that the market would close above and complete this Bottom formation. Total sales
up to this time had been 53,000 bushels, of which 25,000 had been bought in. On
June 20th, one would buy in the remaining short interest of 28,000 bushels, and we
assume that this was purchased at the closing price of the 20th or 116$. This would
involve $32,690. The total purchases cost $58,795 while the sales had aggregated
$64,399.25. This would give a gross profit of $5,604.25, from which the commis
sions on 53,000 bushels plus the tax would have to be deducted.
In this we have endeavored to stay just as close to the mechanical method
suggested as it was possible to do. If you will check back through Lesson 20,
and through the previous Lessons, you will see that not one step proposed here
was taken except in conformity to methods previously outlined. While there
are many traders who would have made far more than this amount on their
operations, yet the main objective of this Course is to teach conservative trad-
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ing wherein the capital is not unreasonably endangered, and yet the profits will
be commensurate with the risk involved.
HOW SHOULD PROFITS BE USED?

This brings up the question as to what should be done with the profits made in
speculative trading. Should they be placed right back in the market and operations
increased? Here are a gross of $5,624.25 theoretical profits which should have been
taken out of that decline under such a method of trading. Should the capital now
be raised to $15,000 and the operations be continued on a larger scale?
In this Course so far, reference has been made to five of the largest traders
ever operating on the Chicago Board of Trade. One of them, a man who cor
nered the market and made the shorts come up to his knee and buy in what
they had sold, finally died broke because he did not put away part of his prof
its but turned from a conservative, capable trader to a plunger. One of the
other traders was more or less of a plunger, but he had one infallible rule
which ensured that he would never want during his life. That rule was
designed, so we were told, by his father, who was an astute judge of this son.
He made the son agree that 50 per cent of all profits ever taken out of the
market would be placed in a trust fund and used for the purchase of United
States Government Bonds. This trader so arranged it that he himself could
never touch the money from that fund. We recommend pursuit of a similar policy,
namely that 50 per cent of your profits be set aside for the purchase of bonds and the
building up of an estate.
On June 20th, the market having closed above both the Left and Right
Shoulders of its Bottom formation, the technical trend was turned upward. The
trader, therefore, should have assumed that the same forces which advanced
the market and completed the Bottom formation would continue it upward.
The proper procedure was to cover all short wheat and start an initial opera
tion on the Bull side of the market. With the additional $2,500 as half of the
profits made on the Bear side, sufficient margin would be available for the pur
chase of 30,000 bushels.
The method of drawing the arcs and angles off the Bottoms, with their resulting
price objectives, was outlined in Lesson 13, Page 214. The "overall" objective
shown by the point at which angle E bisects arc Z in Pictograph 21.1 gives an
objective of 148f This was also right in the level of the general commodity price
curve; and with the news starting to turn bullish, one should plan his operations
so that he would be long his major line when and if this objective was reached. In
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between the dose at 116$ and that objective, however, there were a number of
important price levels where one would be justified in expecting a reaction. The
first of these would be where the arc V intersected the angle line A which would
be around 120$. This was in the heart of the previous congestion that had
occurred at the last of April, and one would hesitate to make new purchases until
it was seen how the market acted upon reaching that level.
Observation of Pictograph 21.1 will show that the market did react from in
that level, breaking from 120$ to 166, this low being reached on June 27th.
However, margins were such that new purchases could not be made on this
40 per cent break. It was not until the market closed above the previous high of
121$, on July 2nd, that additional purchases would be justified. The closing
price that day was 122$ - $ and we will assume that 5,000 bushels were added
to the line in that price level. The original purchase of 30,000 bushels at 116$
would involve $34,987.50. The addition of 5,000 bushels at 122$ would involve
$6,143.75.
The next objective would be where the angle line B intersected the arc W at
127$. Inasmuch as this was also near the high of 130$ reached in April one
would be justified in taking some profits at that price objective in anticipation
of a reaction. But inasmuch as there was no indication of a Top formation, and
even if there was a reaction one could logically expect new highs to be made,
the main purpose of such sales would be to place oneself in position to pur
chase more on the expected reaction. Therefore, it would seem sound
speculation to sell not over 5,000 bushels and to retain the bulk of the holdings
in the hope that a reaction would simply be a normal corrective movement and
that the advance would continue. Sale of 5,000 bushels at 127$ would involve
$6,362.50. This would mean a gross profit of $218.75 and leave the trader long
30,000 bushels at 116f
Now then, with the market having gone on to close in new highs above the
objective given by the intersection of arc W and angle B and with no semblance
of a Top formation, a 40 per cent reaction would be all that one would be justi
fied in anticipating. This would be 40 per cent of the distance from the high of
129$ made July 6 , to the low of 116 from which the rally started. This would be
a break of 5$i2 from 129$ or an objective of 124. How much would the trader be
entitled to purchase at that price level and still have the average of 33 to 34*
back of each trade? We assume that 30,000 bushels were bought at 116$, with
$12,250 back of them. This would give an average margin back of each trade of
40$C. 30,000 bushels with our minimum requirement of 35c a bushel would
involve $10,500. This would still leave $2,000 additional. In addition, the 30,000
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bushels bought at 116 f would, at 124, show a paper profit of 7$c per bushel for
a total of $2,212.50 paper profit. Adding $12,000 of margin money originally
had would give $2,412.50 as margin back of new trades and still leave them
margined an average 33c, with the bulk of the purchases bought materially
lower than the price at which the additional purchases were made. This would
leave sufficient margin for the purchase of another 10,000 bushels on the break.
The price of 124 was reached on July 11, the market that day going on down
to 123. And we will assume that 10,000 bushels were purchased at 124 which
was 40 per cent of the advance. This would involve $12,400. On July 13th, the
market closed at 134$, giving 10c additional paper profits on the latest pur
chase with additional paper profits on the early purchase. The trader would
now be long 40,000 bushels which had cost $47,387.50. Had he sold out those
40,000 bushels on the close of the 13th at 134$, they would have brought
$53,650, or a gross profit of $6,262.50. To margin the 40,000 bushels at 34c a
bushel would have required $13,600. Of this, we had $12,500 original margin
and $218.75 gross profit on the one lot of 5,000 bushels bought at 122$ and sold
at 127$. So we would have approximately $5,000 of additional paper profits
with which to make new purchases. However, we doubt that it would have
been conservative speculation to have made additional purchases at that time
even though under similar circumstances Mr. "No. 1" would undoubtedly
have added to his line. Normally, with the March high of 136$ being
approached, a reaction from in that level would be expected. While there was
absolutely no indication whatever that the advance was culminating, it would
seem conservative to have waited for some kind of reaction.
It did not come, however, the market opening up two cents a bushel the next
day and closing 8 c a bushel higher. It was an extremely rapid advance and one
would be justified in accepting a part of his profits in anticipation of a reaction
from the next important price level. Angle Line C intersected arc X at 139$, and
we believe it would have been good speculation to accept some profits at that
price level. It was reached on the 15th. We will assume for the purpose of this
study that the 10,000 bushels bought at 124 on the 17th were sold at the indi
cated objective on the 15th. Sale of 10,000 bushels at 139$ would bring $13,950.
The market, however, did not react except for one day, and it is doubtful
whether the average trader, even though rather skilled, would have purchased
on that reaction of 4c a bushel. According to our method, there would have
been no indications given that the market was a new purchase except possibly
by the fact that it had closed above the arc X both on the 13th and the 15th. On
the 17th, it again was very strong, running to 149$ and closing at 149$-148f.
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This was clear through the major objective of 148$. Inasmuch as it was also
right at the All Price Curve, we believe that conservative speculation would
have justified selling at least half of the remaining holdings on the market at
that major objective of 148$, even though the market itself gave no substantial
evidence that the run was culminating. But it had advanced from 123 to 150 in
seven market days and that is far more rapid than even the largest Bull mar
kets maintain. Therefore we will assume that without stretching one point of
the method that has been taught in this Course, the trader sold 15,000 bushels
at 148$ on July 17th. This would bring $22,218.75.
The advance continued to 151$ on the 18th and then the expected reaction
came. Forty per cent of the distance from 123 to 151$ would be a break of 11 $e
or to around 140. At that point additional purchases would be justified. It is to
be noted, however, that the market broke away from its high even more
rapidly than it had advanced, indicating that there was tremendous profit
taking, and a possibility of this high holding. The angle lines drawn downward
from the high of 151$ and at the same angle as the advances from the various
reactionary points on the road up from 100$ to 151$ would show that in the
break of July 19th and 20th, the market was below all angles. Therefore, while
purchases would be justified on the 40 per cent break on the theory that the
market would get its rally from down in that general level and approach the
old high, one would hardly be justified from a conservative viewpoint in
making purchases to the full limit of his available margin.
We believe that with the commodity price curve having been reached, the
market having made its major objective, and having broken away from the Top
at such an acute angle, reinstating of purchases so that the original line was
held would be all that was justified. So we are assuming for the purpose of this
study that on July 20th, 15,000 bushels were purchased at the 40 per cent reac
tionary point of 140. This would involve $21,000.
The market went on with the break of 137$ and then turned to rally again to
150$, this price level being reached on July 26. A reaction came from that high to
144| on the 27th, but on the 29th it again sold up to 150$, this being the second
effort to break through the old high. We remember the statement of William
Peter Hamilton that, "Two failures to break an old high after appreciable fluctua
tions gives the presumption of a Bear market." Therefore new purchases would
be withheld until the market proved its power by closing in new highs.
The market, as can be seen in Pictograph 21.2, went into further congestion
and completed a Top formation. This was completed by the close at 138$ on
August 5th.
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Pictograph 21.2 September wheat future 1929
Immediate sale of all remaining long wheat and a reversal to the other side of
the market would be indicated. 30,000 bushels would therefore be sold at 1381
to even up the position. If sold at 1381, the low of the closing price on the day
the market completed its Top, this would bring a total of $41,475.
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In this operation on the Bull side of the market, starting June 20th and ending
August 5th, a total of 60,000 bushels would be bought and sold. The purchase price
would total $74,531.25 and the sale price $84,006.25 for total gross profits of $9,475.
After paying commissions and taxes, we will assume that $4,500 is put aside
in the fund to build up an estate and $4,500 placed in the fund for further oper
ations. This would bring this speculative fund up to $16,750, which at 35« a
bushel would now margin 47,000 bushels. Desiring to be conservative rather
than otherwise, we would now sell 45,000 bushels at 138L
STOP-LOSS ORDERS
The question arises as to the point at which we would get out of this trade if it
went against us. Usually, where the market has closed out to complete a Top or
Bottom formation, the second day will see a very sharp continuation of the
movement. The forces which have taken the market out should keep it going.
1 In most instances the market will not again sell above the high of the day
on which it closes out its Top formation. This rule is not infallible, how
ever, and depends to some extent on the length of the movement
necessary to complete the formation.
2 The first indication of strength in a Bear market is a close above the
Straight Average of its last movement. This would be half the distance
from the low made as the market closed out of its congestion to the high
of the Right Shoulder of the market when a Top has been completed.
3 Certainly, one should not stand on his commitments if the market, after
having completed by closing out of a Top formation, turns around and
closes above the high of the Right Shoulder. While a Cut-Out Movement
will very frequently come in the market, this will almost invariably come
prior to the completion of the formation by its close beyond the outermost
points of the Left and Right Shoulders.
Those three general statements must be the only basis one can legitimately give
for placing of a stop-loss order when an initial stand is taken as a Top or
Bottom formation is completed. The actual placing of the order must be left to
the judgement of the trader - and that judgement must be based primarily on
the events of the market itself. The general rule is to place a stop only when
you feel insecure in your position. The guiding rule is that the initial margin
must not be so jeopardized but that you can come back into the market again in
good volume when the market again indicates that it is a purchase or sale.
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In this market of August 5, 1929, the market broke rapidly and without any
reaction whatever. In Pictograph 21.2 it will be seen that an angle line downward
off the high of 1501 (made July 29) and at the same angle downward as the
market advanced from the low of 141 (made July 24) intersected at 1311 an arc
drawn with 141 as the pivot and off the high of 1501. This was also into the high
of the congestion of April. It was therefore an important price level from two dif
ferent angles and inasmuch as the initial sale has been made at a comparatively
low level, it would be sound speculation to take in at least half of the sale and
await the 40 to 60 per cent rally which could be anticipated from somewhere
down in that level, before reinstating the sales. Therefore, an order would be
placed to buy 20,000 bushels at 131 $. This order would be filled on August 6 th.
Then began a series of movements in congestion - but it is to be noted on the
Pictograph that the market, while it went below the low of August 6 th, did not at
any time close in new low ground until the rally of August 17,18, and 19th came.
Half of the break from the high of the Right Shoulder at 148$ to the low of 129$
made August 14th would be a rally to 138|. Inasmuch as the market could legiti
mately rally back to the low points of the Shoulders of its congestion without
materially changing the trend, orders to sell at the halfway average with expecta
tion that the market might continue on would be entirely in order and sound
speculation. Also, the fact that the rally came right at the middle of the month
would be considered a bearish factor. It would therefore be legitimate to sell
20.000 bushels again at the Straight Average of 138$, thus making the trader short
a full line of wheat again.
It is to be noted on the graph that the market went up to the low point of the
Left Shoulder of its Top Formation and then turned over to decline. It failed,
however, to go down and close below 129$, the low on the break. Therefore, no
new sales would be authorized.
This was the last of August, with the September future going into delivery
month on the first of the next month. Inasmuch as the general volume of trade
deserts the cash future prior to delivery date, and one may be penalized by
technicalities, we advise covering all trades at least by the last day of the month
prior to delivery date. In this case, we would arbitrarily buy in all wheat previ
ously sold, using the closing price of 134$ on August 31 as the buying price.
In this operation on the short side during the month of August a total of
65.000 bushels would have been sold for $89,962.50. The purchase price of this
wheat was $86,706.25 for a total gross profit of $3,256.25.
On the first operation on the Bear side of the market, sales were made at six
different times between March 22nd and June 20th. On the operations on the
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short side of the market a gross profit of $5,604.25 would have been indicated.
In the operations on the Bull side of the market from June 20th to August 5th
purchases were made at four different times, gross profits on this operation
theoretically being $9,475. In the operations on the short side of the market
from August 5th to August 31, sales were made at two different times with
gross profits of $3,256.25. Thus, trades were indicated only at 12 different times
between March 1 and August 31, in the life of this one future. Had they been
made in the quantity specified and on those dates, a gross profit of $18,335.50
would have been netted, with only $10,000 as original capital. This is a good
rate of interest on the investment in any business.
In the trades suggested here, we believe that each and every one of them has
been made only in conformity with theories taught in this Course. It is to be
noted emphatically that these theories do not include endeavoring to anticipate
every day-to-day rally or reaction in the market. The old adage "A man never
went broke taking profits" was devised primarily for the benefit of the broker
age houses. In the application of the suggested methods, 180 per cent gross
profits would be made on the invested capital in six months. During the course
of those operations, while there might be times when one would desire to be
very close to the market, in almost every instance the trade could have been
anticipated several days in advance and planned for. This method is so
designed that the trader could continue attending to another line of business.
In applying it, he must first overcome his own inclination to grab a penny
profit the first time it is available. He must overcome his desire to anticipate
which direction the market is going out of its congestions. There were two or
three times in this market where it looked very much as though a Top or
Bottom formation was going to be completed opposing the one then in force.
Patience in awaiting that completion - in letting the market itself tell you what it
was going to do - was in this case usually rewarded by additional profits on
your initial commitment.
Now the question arises as to whether or not this method might not apply in
this particular market but fail in others. We refer you to Pictograph 5.1 of
Lesson 5 showing the wheat market from 1933. There were times and there will
be times when the market will put in a Top or Bottom formation and then turn
around and break it out, which is the reason why we suggest the good margin
back of each trade so that when this time comes you can take your loss but still
have sufficient left with which to get back into the market. But in the great
majority of cases when a Top or Bottom is completed, the same impetus which
brought the completion of that formation will carry the market on for a good
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run on which profits can be accumulated. The times are exceedingly rare when
the market will start on one of those runs without first putting in a formation
which will have forecasting value according to the methods outlined herewith.
And in the majority of cases the distance between the point at which you
would make a sale when a Top is completed and the point at which you would
buy in all of your short wheat when an opposing Bottom is completed is such
that profits will be shown.
In the next Lesson we will go through a wheat future in which there was compar
atively little action. We will go through one of the futures of the Depression era.
We will analyze the various facts and factors prevalent at the time and the market
activity and indications, applying the methods taught herewith to that market. In
it, we will give you a rule which may be applied during congestion markets.
As an examination - which our Index calls for, for the next Lesson - we ask
you now to go through the Pictograph of the May wheat future of 1926 (Lesson
20 ) and make theoretical trades in that market using the principles taught in
this Course. Endeavor to project yourself into that market as you would have
were you actually making those trades at that time. Lay a sheet of paper over
the forward part of that market so that you cannot know precisely what comes
next. Base your analysis on the fundamentals taught. Use any theoretical
amount for margin that you desire; we suggest in this case that you make it in
conformity with the size of your own pocketbook. This will be excellent study
for you and will give you an indication as to whether you desire to utilize these
methods in actual practice.
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Lesson 22
TRADING IN A NARROW MARKET

In Lesson 20, where the various types of markets are described, it is pointed
out that when business conditions are poor, and when supplies of grain are
excessive, with the price at low levels, then unless there is a definite indication
of a change in supply such as a big crop scare of a major nation with possibili
ties of a complete readjustment, markets will frequently move sluggishly and
spend much time in congestion. When this occurs one is justified in adopting a
different method of operation than he pursues in a running market. In this, we
do not advocate going directly against the trend even though one does antici
pate that the movements will be slow and that more money can be made by
scalping than by accumulating a long line for the purpose of making a reason
ably large profit per bushel on a large number of bushels.
For the purpose of clarifying a suggested method of operations, we will
assume that the market is declining out of a Top formation and that the client is
starting out with $10,000 which would margin 28,000 bushels if the trader kept
our minimum of 35c a bushel back of each trade. We will assume, for the pur
pose of the illustration of this rule, that a Top is completed. The procedure from
then on would be as follows:
1 Sell half a line, or in round numbers, 15,000 bushels.

2 (a) Enter an order to sell 5,000 bushels at ic above the high of the previous
day's high point; (b) in case that order is filled and the market continues to
advance, enter an order to sell another 5,000 bushels at 1 of a cent above the
high of the next day's market. Or in case the market closes higher each day
for four consecutive days (counting the lowest close as one closing quota
tion) then sell 5,000 bushels at the closing quotation or at the opening next
day if higher than the close on the day of that 4th upward closing.
3 (a) When the order has been filled selling the first lot of 5,000 bushels,
enter an order to buy in that 5,000 bushels ^C below the low of the day
prior to the day on which the sale was made; (b) where (b) of Paragraph 2
is filled, enter an order to buy 5,000 bushels at i of a cent below the low of
the market previous to the day on which (b) of Paragraph 2 were sold.
4 Where the market closes lower for four consecutive days, buy in all short
wheat sold as in methods (a) and (b) of Paragraph 2, staying short the ini
tial 15,000 bushels that were sold when the formation was completed.
Now then, let us go through a market and see just how this method of opera
tion would work out, its dangers, and its theoretical profits.
First, let us point out that this rule is based on the Table on Page 151 of Lesson
9, showing that the market will usually reverse after three or four days of higher
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closings; second, on the fact that if one enters an order to sell at J cent above the
previous day's high, this does not necessarily mean that he will sell at the high of
the market so that an order to sell a new unit at a $ cent advance above the high
of the day on which he made his first sale will very frequently place two to five
cents between the points at which he makes the sales, and he will be selling on a
rally. The third basis of this method is that the market, even in slow congestion
markets, will almost invariably form a Bottom of forecasting value before the
trend is definitely turned. The fourth factor in this method is that if your judge
ment of the market should be in error and the force which completed the Top
should be such that it will go for a further distance than your judgement of the
business fundamentals, grain statistics, and the market itself would indicate, you
will still have a chance for profit from the initial trade made at the time the for
mation was completed. As a fifth determining factor for following this type of
trading we point out that markets under the conditions of excessive Supply and
poor business conditions will more frequently complete a Top or Bottom forma
tion and then reverse than where business conditions are volatile, there is a big
trade, and the markets are active.
Let us go through the May wheat future of 1932 and apply this method of
trading to see what its result would be. Pictograph 22.1 of this future is given
herewith and so arranged that the student may place Pictographs A and B
together to get a complete picture of the market.
It must be remembered at all times that we will endeavor to project ourselves
into the market as it was at that time, looking forward at what was to come
instead of backward at what actually did come.
That future came on in August of 1931. Studying first the business conditions,
the commodity index for August 1, 1931, showed 98.7 per cent of the 1909-13
average, it having risen from 97 on May 1, but having dropped from 104 on
January 1, 1931, and 131 on January 1, 1930. Exports on August 1, 1931, were
just 100 per cent of the estimated normal, but had shown a downward trend
since the first of the year as well as in the year previous. Pig iron production
was 60 per cent of normal, which was the lowest it had been since 1921. New
building was 48 per cent of normal, which was the lowest it had been since
1921. The Business index on August 1, 1931, was 76 per cent of normal com
pared with 86 per cent on the first of that year, 113 per cent on January 1,1930,
and 139 per cent on January 1,1929. The Stock Market was trending downward
with no indication as yet of a Bottom formation.
Carry-over of wheat on July 1, 1931, was 652,875,000 bushels, which was a
steady increase from supplies prevailing during the years 1924 to 1929. United
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Pictograph 22.1 The May wheat future of 1932
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Pictograph 22.1 Continued
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States crop for the year was 900 million bushels and that of Canada, 321 million,
with the Danubian countries having a good crop, but acreage in Argentina and
Australia showing a rather sharp reduction from the year previous. Russia, how
ever, was rapidly increasing its acreage. It was apparent even in August of that
year that even though the crops of Argentina and Australia might be small, the
export countries would have at least a billion bushels for disposal.
The crop of the import countries was rather mixed. France had a big crop, as
did Germany and Italy. Egypt also had a larger crop than the year previous,
while japan's crop was normal. Indications from the crop were that the import
requirements would slightly exceed the requirements of the crop year 1930-31
when they had totaled 661,862,000 bushels {see Table 2.1 opposite Page 34,
Lesson 2). It was apparent from a study of these figures that export surplus
would far exceed the import requirements even though the crops of Australia
and Argentina might be complete failures.
May wheat traded in congestion from the 1st of August to the 25th of that
month. During that time it had been in more or less of a coil formation, as can be
seen on Pictograph 22.1. On the 25th of August it closed out of this congestion at
56tf, indicating the sale of 15,000 bushels at 56 which would involve $8,400.
Immediately upon the close of the market on the 25th, an order would be
entered to sell 5,000 bushels at 57j which was j cent above 56 f, the high of the
market on the 25th. The next day, the market sold at 57 j so that this order
would be executed at 57This would involve $2,856.25. After the close on the
26th, an order would be entered to sell 5,000 bushels more at 58 i, which was i
of a cent above 57 \ which was the high of the market on the 26th. Also, the
trader would stand ready to take in his entire short line if the market closed
above 58 \ which was the high of the first Shoulder of the coil formation. Also,
he would enter an order to buy 5,000 bushels at 54? which was 1 cent below
55 i, the low of the day on which the sale was made at 57f
As can be seen, the market on the 27th was an Inside Day, with a high of 57.
After its close, or on the morning of the 28th, an order would then be entered to
sell 5,000 bushels at 57 j which was j cent above 57, the high of the 27th. The
order to buy 5,000 bushels at 54 j would remain.
The market on the 31st reached 541, the buying spot. The purchase at that
price would involve $2,737.50. After the close of that day a new order to sell
5,000 at 56 or j cent above the high of 551 of the 31st would be entered. This
order, however, would not be executed. These orders (to sell at 1 cent above the
high of the previous day when the trend is down or to buy at j cent below the
low of the previous day when the trend is upward) are day orders only.
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An angle line drawn off the high of 59} (made August 11th) and at the same
angle downward as the market advanced from 56f (the low of August 6 th) to
the high of 59} would intersect an arc drawn off those same two points at 53}.
Therefore, an open order would be placed to buy in half of the short commit
ments of the initial trade at 53}. This would be on the theory that in such a slow
market one could expect a rally of 40 to 50 per cent at which this quantity could
be resold. In this particular instance the market continued to decline to 53}, in
fact going on to 52}, without at any time selling } cent above the high of the
previous day. Inasmuch as we were short only 15,000 bushels and there was no
indication as yet of a Bottom formation, we would buy in only 5,000 bushels at
53}. This order would be executed on September 2nd and would involve
$2,693.75. It would leave us still short 10,000 bushels.
Now, we are short only a part of the initial trade. We would endeavor to rein
state this short sale at the halfway point back to the last important high,
keeping this trade separate from the other orders to sell at } cents or } cents
above the high points of previous days. The Straight Average from the high of
the Right Shoulder of 53} to the low of the break of 52} would be 55} split.
Therefore, we would enter an open order to sell 5,000 bushels at 55}. Each day,
however, we would enter an order to sell 5,000 at } cent above the previous
day's high point. The first sale of this type would come on the 11th at 55} or }
cent above the high of 54| made on the 10th. This would involve $2,756.25. An
open order to buy in that purchase would be entered at 53}.
The order to sell 5,000 at 55} would be executed on September 15th. This
would involve $2,787.50. An angle line drawn off the high of 56} (made the
15th) and at the same angle downward as the advance from 53} (the low of the
4th) to 56} would intersect an arc drawn off those two points at 51}. Also, an
angle line drawn off 56} at the same angle downward as the advance from 52}
(the low of September 8 th) to the high of 56} would intersect an arc drawn off
those two points at 51 f This would give a double important price level right
around 51} and an order would be entered to take in 5,000 bushels at that price
level. It would offset the fact that the market had closed in new low levels at
that price. The order to buy in 5,000 at 53} would be executed on September
19th, while the order to buy 5,000 at 51} would be executed on the 21st. The
first purchase would involve $2,656.25 while the second would involve $2,575.
Half of the distance from 56} (high of the 15th) to the low of the 21st at 50}
would be 53} where a new open selling order to sell 5,000 bushels would be
entered to replace that part of the initial sale that had been bought in. Also each
day an order would be entered to sell 5,000 at } cent above the previous day's
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high. The first of these orders to be filled would be at 53 i on the 23rd when
5.000 would be sold at 53i On that same day the sale would be executed of the
5.000 bushels at the halfway average of 53$. It would involve $2,656.25 while
the sale of 5,000 at 53 i would involve $2,662.50.
An order would be entered to buy 5,000 at $ cent below 51$, the low of the
22nd. This would be an open order. Also, an order would be entered to buy
5.000 at 46*, the point at which an angle line drawn off 541 at the same angle
downward as the advance from 501 would intersect an arc off those same two
points. The order to buy 5,000 bushels at 511 would be executed on September
30th. It would involve $2,562.50.
It is to be noted that the market on the 4th had gone f cents above the high of
53f made on the 23rd. However, our order to sell the second lot of 5,000 bushels
would be at 1 of a cent instead of 1 cent and this order would not be executed.
Following on down, we note that the market on the 3rd of October closed in
new low ground below 501. One would be entirely justified under those cir
cumstances in selling an additional 5,000 bushels inasmuch as the objective
indicated was at 46*. The sale of 5,000 bushels at 491 would involve $2,493.75.
Orders would be entered immediately to buy in this quantity also at 46*.
It is to be noted that the market did not continue the decline. Instead of that it
had declined during the first three days of the month and then turned to close
above the high of the first of the month and also above a Bottom formation that
was small and made with only minor movements, but nevertheless a Bottom
formation. This close on the 8 th was at 52J and the entire short interest should
have been bought in and position in the market reversed.
Discussing that Bottom formation, it is to be noted that the Left Shoulder was
formed by four days of work in a narrow range which did not equal 1 Jc. However,
the rule given to you in Lesson 6 , Page 102, says, "When there are two or more
days in which there is not a movement of 1 \t, then the time spent in that narrow
range should be recorded by a movement on the graph." Experience has shown
that very frequently in these narrow markets the price movement will not equal
1 but sometimes those narrow fluctuations form the Shoulder of a Top or Bottom
which has forecasting value. Therefore, it is necessary to put them in. In this case,
when the market closed above 531 it had completed a Bottom formation which
automatically forced the covering of all short sales and the reversal of position.
We had sold a total of 45,000 bushels and had bought in 25,000 bushels which
left us short 20,000 bushels. This would be bought at 52$, the close of the
market on October 8 th. It would involve $10,575. The total purchases during
the course of these short operations would involve $23,800 and the sales would
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involve $24,612.50, leaving a gross profit of $812.50 from which the commis
sions on 45,000 bushels would have to be deducted.
On October 8 th we would buy 15,000 bushels, desiring at all times to be
conservative. The purchase price would be 52J. Immediately thereafter we
would start entering orders to purchase at 1 cent below the low of the previ
ous day. We would also enter an order to sell 5,000 bushels of the initial
purchase at 50 per cent of the distance from the low of 481 to the previous
high of the future at 59 This would be at 541 and this order would be exe
cuted on October 10th. The 5,000 bushels at 54i would bring $2,712.50 while
the initial purchase of 15,000 bushels at 52J would involve $7,931.25. Upon
execution of this order a new order would be entered to buy 5,000 at one-half
of the distance from the high on the advance back to the low at 48 J. This
order would never be filled.
The first order increasing the purchases would be filled at 56, the low of
October 23rd, which was {<L below the low of the market of October 22nd. An
order would be entered to sell these 5,000 bushels at 581. It would be executed
on the same day as the purchase. On October 24th the market closed in new
high ground in the future with no indication whatever that a Top was being
formed. New purchases would be in order, and one would be justified in re
instating the quantity to bring the total holding back to the amount of the
initial purchase of 15,000 bushels. This would be 5,000 bushels. Also, inasmuch
as the first purchases now showed a good profit and the market had closed in
new highs out of a congestion, additional purchases were justified. We assume
the purchase of 10,000 bushels at 61J which would involve $6,125.
The major arc of this market, drawn with 591 as a pivot and off the low of 48i
would be clear inside the angle lines drawn with those two same points as a
basis. This would not show an objective for that reason. It would show, however,
that the market was advancing at a sharp angle and indicated a running market.
On October 27th, the market again closed in new highs after a reaction. An
additional purchase of 5,000 bushels would be indicated, we assuming that this
quantity was added at 62 i, the close on that day. This would involve $3,125.
It might be of interest to note that in that particular market Liverpool was
leading the way. Russia had previously been exporting very heavily but it sud
denly announced that there would be no more exports from Russia. Liverpool
buyers immediately stepped in to cover their requirements inasmuch as
Australian advices were also rather mediocre.
On the 30th of October the market again closed in new highs after a conges
tion and destroyed any possibility of a Top formation being completed without
considerably more work. Inasmuch as we had started out conservatively in the
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first place, there was ample margin available for the purchase of 5,000 bushels
upon this close in new highs. This would be added at 64$, the close of the
market on October 30th.
It is to be noted that the market had changed from a congestion type to a run
ning market and we would consider it good judgement on the part of the
trader to drop the scalping operations and pay strict attention to the major
movement of the market. He would therefore automatically stop entering his
daily orders to purchase at $£ below the low of the previous day. This would
have proved costly on the market of November 4th, when an order to buy at
65$ or $c below the low of the previous day would have given a purchase at the
extreme low of the market. However, we believe that such action would be
conservative trading. The market on November 4th closed in new highs after a
congestion, this being an Outside Day, closing at the Top. This was one indica
tion of weakness, but inasmuch as previous trades showed good profits and a
rally could be expected even though the market sold off from that level, addi
tional purchases of 5,000 bushels would be in order. We assume this purchase
at 691, involving $3,481.65.
Now then, what objective would one figure in a market of this kind? The angle
lines would not give a new objective after the May wheat had closed in new
highs on the future on October 24th inasmuch as the market was clear out of the
arcs made from the same points as these angle lines. Neither would the figure
chart method show an objective anywhere near the level of the market.
Therefore, we go back to the "overall method" outlined in the second paragraph
of Page 132, Lesson 8 , "that of putting the extent of the decline on top of a high
for an objective during an advance," and also look for congestions in previous
markets where it would be logical for the market to encounter resistance.
The high made on August 11th was 59$ while the low of October 5th was 48$.
This was a decline of 11 cents. Adding this to 59$ would give an objective of
70$. Furthermore, looking back to the December future of 1930 (see Pictograph
8.1, Page 130) we find the price level of 70$ as being right in the heart of a con
gestion occurring at the last of 1930 and the first of 1931. Therefore, we would
enter an order to take profits on at least half of our outstanding commitments
at 70$. We were long 35,000 bushels and inasmuch as there was no possibility
of a change in Argentina or Australian harvests causing a scarcity of export
wheat as compared to import requirements, and the market at 70$ would be
into an important price level from two different angles, we would take profits
on 20,000 bushels. This would bring $14,150 and the order would be executed
on the 5th of November.
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The market went on to 72 before having a reaction. Inasmuch as there was no

Bottom formation made and a rally to around previous highs could be
expected even though a Top was to be formed in here we would be justified in
adding on to our purchases on a break. Fifty per cent of the advance from the
last low of 65$ to 72 would be 68 $, so an order would be entered at that price
level to buy an additional 5,000 bushels. This would involve $3,443.75. The
order would be executed on the 6 th of November.
It is to be noted from Pictograph 22.1 that the market rallied to a new high but
turned over and could not close in new high ground. Instead it went into con
gestion and, as may be seen by the Movement graph, it put in a Top formation.
This was completed by the close at 66 on the 12th of November. We would
therefore sell out all long holdings and go short at that price level. We were
long 20,000 bushels and this would be sold at 66 for $13,200.
In this operation from the 8 th of October to the 12th of November, total pur
chases had been made of 50,000 bushels costing $30,131,25 and they were sold
for $32,975, giving a gross profit of $2,843.75.
Having completed the transaction on the long side we now take the short side
as the market completes a Top formation. The question there is how much we
should sell with the available margin which would now be a little over $11,500
if half of the profits were placed in the trust fund. It was a running market but
the Top had been made at a price level low compared to general commodity
prices. While this Top was being made because of the great excess in available
surplus wheat from export countries as compared to import requirements, and
the news of the day from Argentina and Australia was good while the Stock
Market and business showed nothing of an appreciable gain, the initial sale
was made at a comparatively low level and therefore we believe it would have
been good speculation to sell less than the full line and wait for the rally of 40
to 50 per cent before making additional sales. Therefore, we sell only 20,000
bushels at 66 for a total of $13,200. The market turned to rally from 61 j. The
high had been 73 and it had had a break of 11 f cents. Forty per cent of this
would be a rally of 4f cents which added to 61$ would give a rallying point of
66 . Half of the break from 73 to 61$ would be 67$. Inasmuch as no Bottom for
mation had been made, we enter an order to sell 5,000 at 66 and 5,000 at 67$.
The order to sell 5,000 at 66 would be executed on the 17th. The order to sell
5,000 at 67$ would not be filled. The 5,000 at 66 would sell for $3300.
On November 20th the market again closed in new lows and additional sales
would be warranted. These would be made at 61, and 5,000 sold at that price
level would involve $3,050.
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An angle line drawn downward off the high of 66 f at the same angle as the
advance from 61 f to 66 } would intersect an arc drawn off the same two points
at 56i This price level was also right at the high of the rally of September 15th
and was getting down toward the low level at which the Bottom had previ
ously been made. So we would contemplate taking some profits in that price
level. An order would be entered to buy half of the outstanding short sales at
561. This order would be filled on the opening of the 27th. These 15,000 bushels
would be bought for $8,437.50.
This market broke from 661 to 54$. The Straight Average would be 60|. The
break itself was 111c and 40 per cent of that would be a rally of 41, which added
to 541 would give a 40 per cent objective of 591. An order would be entered at
both 591 and 60f to sell 5,000. The lower order would be executed on the 2 nd of
December and the sale of 5,000 bushels at 591 would involve $2,975. On
December 9th the market again closed in new lows at 54 f and 5,000 bushels more
would be sold at that price level, this involving $2,731.25. At the same time an
order would be entered to buy in 50 per cent of the total short interest at 501, the
point where an angle line drawn off the high of 591 at the same angle downward
as the advance from 59 i to 54$ would intersect an arc off those two points. The
price level would also be in the Bottom congestion made in October and would
justify taking in at least 50 per cent of the outstanding short interest.
However, the market did not reach this level. Instead, it turned around and
advanced and then went into a congestion within the previous price range.
From the 22nd of December to the 15th of January the market worked in a
narrow range and although one would be entirely justified in going back to the
scalping rule, and in this case it would have made some profits, we will
assume for the purpose of this study that the trader simply waited patiently for
the market to give some new indication as to what it was going to do.
This indication came on the 16th of January when the market closed above the
December-January congestion which was in the form of a Coil and a Regular
Bottom. Therefore, all short sales would be taken in on the close of January 16, at
59f, and the position reversed at that price level. We were short 25,000 wheat at
that price level and its purchase at 59$ would involve $14,781.25. In the transac
tions on the short side of the market a total of 40,000 bushels had been sold for
$25,256.25 and bought in for $23,218.75, giving a gross profit of $2,037.50.
Inasmuch as the market had closed above a Bottom formation, but this close
was near a previous high point of the congestion which had extended two
months, there was a possibility that resistance would be encountered in the level
of that old high; and, therefore, instead of buying a full line of wheat, only half a
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line or 20,000 bushels would be purchased. This purchase, made on January 16,
at 59$ would involve $11,825. On the 18th the market closed above the previous
congestion at 60* and an additional purchase of 5,000 bushels would be in order.
This would involve $3,043.75. Then the market fell back down into the conges
tion and worked in the thin spot made by the market of the 16th. Fifty per cent of
the distance from the high of 61$ (made January 18) to the low of 55$ from which
the rally started would be 58$. An additional purchase would be in order at that
level involving $2,925. This would make us long 30,000 bushels or a full line,
with orders to sell it all out if the market closed below 55$.
The market broke to 56$ on the 27th and then turned to rally back to 61$ or to
"check" the previous high of 61$. If it now closed below 56$ we would automat
ically reverse position inasmuch as it would then have a Double-Spread Top.
The value of waiting for that close was shown on the 10th of February when
the market came down to 56$ but turned to close at 57$. Then it hopped up
rapidly, closing in new high at 62$ on February 13th. However, our previous
purchases did not show us sufficient profits to warrant additional purchases.
The market then went into another long period of congestion with a very
narrow range and having absolutely no forecasting value in any of its move
ments. The congestion was of a Coil type and finally on the 15th of March it
closed out on the down side of that Coil. The close was at 58 and we would
automatically sell out everything we were long and take the reverse side of the
market. We had bought 30,000 bushels for $17,793.75 and sold this out for
$17,400, taking a gross loss of $393.75. Reversing automatically to the Bear side
of the market we would again sell only 20,000 bushels on the 14th at 58, reduc
ing the quantity sold because of the extremely low level of prices at that time.
Inasmuch as the general commodity price average was at a level equivalent to
around 90tf a bushel for wheat and this price was below 60g, we would be
watching more for a point at which to take the long side than we would to take
the short side. Nevertheless, the market said it was going downward and we
would accept it at its face value.
An angle line drawn downward from the high of 63 at the same angle as the
advance from 56$ (the low of February 10th) to 63 (the high of February 19th)
would intersect an arc drawn downward off those two points at 52$. Inasmuch
as this was also down into the low points of the October congestion from
which a natural rally would be due anyway, we would enter an order to take
half of our profits at this price level. No new sales would be indicated until this
order was executed on March 28th. The 10,000 bushels bought at that price
level involved $5,212.50.
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The market turned from 52 and on the 2 nd of April it dosed above the Shoulders
of a Bottom formation which is easily recognizable in the Movement graph. This
dose was at 56 j and we would automatically take in the other 10,000 short wheat
at this price level and switch over to the long side. The purchases at that price level
would involve $5,637.50. In the operation on the short side we had sold 20,000
bushels for $11,600 and bought it in for $10,850, giving a gross profit of $750.
Inasmuch as the market was still in a big congestion with crop reports indicat
ing very fair crops and all indications pointing to an ample surplus to supply
all import requirements, we would again be conservative in our purchases and
purchase only 20,000 bushels on the long side of the market at the dose of 56}
on April 2nd. This would involve $11,275.
The market went on upward the next day to 57} and then turned over to
break. Fifty per cent of the distance from 57} to the low of the Right Shoulder at
53} would be 55}, and we would enter an order to buy 5,000 more at that price
level. It would be executed on April 6 th, involving $2,775. The market then
broke to 52} on the 8 th, but turned around from there and on the 11th closed in
new highs after its reaction, the close being at 59|. New purchases would be
indicated and 5,000 bushels at that price would cost $2,981.
An angle line drawn upward off the low of 53} (made April 8 th) and at the same
angle upward as the decline from 57} (made April 4th) would intersect an arc
drawn off the same two points at 60}. Inasmuch as this price level was also right
at the heart of the congestion of the market in February and March, orders would
be entered to take profits on 50 per cent of the holdings at 60}. This would be an
order to sell 15,000 bushels and would be executed on April 12th. The sale of
15.000 bushels at that price level would bring $9,131.25. The market thereupon
went into congestion and on the 16th completed a Top formation, closing that day
at 59. We would automatically sell all long holdings and go short. The 15,000
remaining long wheat sold at 59 would bring $8,850, making the total sales of
30.000 wheat traded in during this operation on the Bull side cost $17,031 and
they sold for $17,981.25. This would give a gross profit of $950.25.
We would once more take the short side with only 20,000 bushels at 59, this
sale involving $11,800. On the 28th the market again closed in new lows after a
reaction but inasmuch as it was just two days before we would have to get out
of this future and the market was right down into the heart of the previous con
gestion, no additional sales would be justified in this future. On the 30th we
would buy in the short 20,000 bushels on the close. This would be made at 54|
and would be made for $10,925. Inasmuch as the sale had been made at $11,800
and the purchase at $10,925, the gross profits on this transaction would be $875.
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In the operations during the life of this future we would have traded in a total
of 235,000 bushels. The gross profits on this transaction would have been $8,269
and the one loss would have been $303.75. This would have left a gross profit of
$7,965.25 from which commissions and taxes on the 235,000 bushels would have
had to be paid. We have endeavored to follow without fear or favor the method
taught in the previous Lessons and to be conservative at all times. We do not
believe that the trades suggested here were other than one would have made
had he followed the methods taught in this Course. Yet, in a market where most
of the time was spent in congestion, a very fair net profit would have been
returned and a far greater return would have been made on the invested money
than we believe could have been made in any line of industrial or mercantile
business during that period. In fact, most businesses lost money that year.
Now, for your examination, we again ask that you go through the market of 1926
and make an analysis similar to this showing the points at which you would make
purchases or sales according to the methods taught, and give the reasons for those
trades. Return this to us just as quickly as possible so that we may see just how
completely you have grasped the ideas presented. As you will note in the index of
Lessons given immediately after the Introduction to this Course, our last Lesson is
to include a personal letter to the students. In this we desire to point out your mis
takes - and the only way we have of knowing where they are is the answers you
give to the examination of Lesson 11 and the above assignment. Therefore, if you
desire this personal analysis of your ability, the more thoroughly you go into this,
the more completely can we see just what you need.
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Lesson 23
MAY WHEAT AND THE BANKING

HOLIDAY
MAY WHEAT AND THE BANKING HOLIDAY
On the theory that the best practical way for you to understand and appreci
ate the points brought out in previous Lessons of this Course is to go over
actual markets and apply the theories, we present herewith a study in the
May wheat future of 1933. Trading in this future was started in August of
1932. It was on the board at the time of the 1932 election and also was the
dominant future at the time of the Banking Moratorium from March 3rd to
March 16th of 1933 (see Pictograph 23.1). It witnessed the abandonment of the
gold standard by the United States Government and a complete change in
administration leadership in Washington.
These studies of the last few Lessons will completely lose their value to you
unless you check on Pictograph 23.1 and in the business reports the actual
conditions prevailing at the time trades suggested are made. It is our purpose
in presenting these markets to give you a picture of the theories taught,
placed in actual operation, and a basis for placing those theories into opera
tion in future markets.
Trading in the May wheat future of 1933 started publicly on the second day of
August, 1932. At that time the September wheat future had closed above a
Bottom formation and the trend was upward. The September wheat future
advanced out of that Bottom, from the 3rd of August to the 7th of that month,
and in five days' work completed a Top formation to turn the trend back down
ward again. Our study relates particularly to the May future, however, and we
will confine all trades in it to the basis of the theory actually told by that future.
It is interesting and rather important to note, however, that while the May
future in the rally which culminated on the 6th of September had made a high
above the high of August 10th, the September wheat future of that year failed
to break out its previous high point. This was an instance of the "Rocking-Top
Formation" which is particularly powerful. In it, one future goes on to make a
high above a previous high point while the other futures hold back. Some of
the best Tops and Bottoms have been made where the various futures make
their extremes on different dates and also where the high of wheat on an
advance will hold while com or oats go through to a new high over previous
high levels, or vice versa. In this particular instance the May wheat future
made the new high but the best the September future could do was to come
back up for a Check or Double-Spread high, with the September high point
being into the heart of the August Top.
Business conditions of that time were anything but inspiring. Building was at
14 per cent of the estimated normal, pig iron production was 28 per cent,
exports were 84 per cent, and Bradstreet's Commodity Index was 77.2 per cent
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Pictograph 23.1 May wheat 1933
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Pictograph 23.2 May wheat 1933
for an average Business Index of 48 per cent which, with the exception of the
month previous when it was 47, was the lowest level in all of the Decline.
Stocks were advancing as the September wheat future completed its Bottom
but they had not gone far before they also turned over to complete a Top.
The September wheat future indicated a sale on that September rally; and on
the basis of that future itself, one might have been justified in selling the May
wheat on its rally to 65 on the 6th of September.
Yet the first actual sale indicated by this future was when it closed at 55$ on
the 6th day of October. This was 10 cents a bushel down from the high point
but was in new lows after two months of congestion.
Now the question is, under the circumstances prevailing, should one sell a full
line of wheat on this break and play only the long pull method where additional
sales would be made as profits accumulated, or should the long pull and scalp
ing method outlined in Lesson 22 be placed in operation? We would elect to
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pursue the second course for the reason first that the market was at a compara
tively low level, second we were operating on the Bear side of the market instead
of the Bull side from a low price level, and third the price range during the ear
lier part of that year had been comparatively small, with no indication of a
change of sufficient importance to bring about a readjustment of Supply to
Requirement or a major turn in the trend of business and commodity prices.
Therefore, we would sell only 15,000 bushels with our margin of $10,000,
varying this amount of sale according to the amount we had available for mar
gins if the initial sum was more or less than the $10,000. 15,000 bushels sold at
551 would involve $8,362.50. Another reason which would cause us to limit the
sale to this amount would be the fact that an angle line drawn downward from
the high of 65 (made September 6th) at the same angle as the advance from 571
(made August 20th) to 65 would intersect an arc drawn off those two points at
55 f It would be logical, therefore, to expect a rally to come from that price level
and we would hope to sell more on that rally. We would also use the "Scalping
Rule" because of the narrow markets. So at the same time we sold the 15,000
bushels, on that date we would enter an order to sell 5,000 more at 57{ which
was $ cent above the high of that day at 57f
That order would not be filled. Each day, however, we would enter an order
to sell 5,000 bushels at $ cent above the high of the day previous and the first
sale of this character would come at 54$ on October 14th. The sale of 5,000
bushels at that price would involve $2,743,75. We would then enter an order to
buy in this 5,000 bushels at 52$, or $ cent below the low of October 13th.
Thereafter, until this buying order was filled, our next selling order would be
placed at 1 of a cent above the high of the previous day, and one of these orders
would be filled prior to the 24th of the month when the market went down to
52$ and we assume that 5,000 bushels was purchased at that price level. This
would involve $2,637.50.
However, the market that day closed below the low of the congestion which
had lasted from the 7th of October to the 22nd and therefore we would sell
another 5,000 bushels at the closing price which was 53-$. In this instance, we
would have made a little money by not making the purchase at 52$. That pur
chase at 52$, however, was to take in wheat in our scalping trade, while the
scale of 5,000 bushels at 53 was to add to our long pull line of operations. It
made us short a total of 20,000 bushels, and was an entirely separate transac
tion from the scalping trade.
Now then, what objective could we anticipate? An angle line drawn off the
high of 64$ (made August 10th) and downward at the same angle as the
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advance from 561 (made August 3rd) to 641 would intersect an arc drawn off
those same two points at 49 f Therefore, we would be justified in entering an
order to buy in half of our short commitments at that price level, in anticipa
tion of a rally on which to put more out. This order would be executed on
October 26th when the purchase of 10,000 bushels would be made for
$4,987.50. The market came to 491 on that day and turned to rally back above
its objective, giving the appearance that it might rally at least to the Straight
Average of its last movement which would be halfway back from 491 to the
high of the October congestion (made October 14th) at 551. This would indicate
a rally to 52|. So an order to sell 10,000 bushels, replacing the portion of the
long pull trade sold out, would be entered at that price level inasmuch as such
a rally would be from a new low price level and we would be justified in think
ing that a new low would be probable even if the rally came.
At the same time as this order was entered, an order would be entered to sell
5,000 at 511 or i cent above the high of the 26th. This order would be filled on
the 27th and would involve $2,562.50. On the morning of the 28th we would
enter an order to sell another 5,000 bushels at 521 or 1 of a cent above the high
of the 27th, while an open order would be entered to buy 5,000 bushels at 491,
taking profits on that which had been sold at 51k Execution of this order
would be the first one filled, this coming on October 31st when 5,000 bushels
would be bought for $2,456.25.
While the market on the 4th of November closed in new low ground with
very good profits in the wheat sold at 551, it had not had any worthwhile reac
tion and it was declining during the first trading days of the month. This
would preclude any additional sales for the long pull until there had been a
rally of 40 to 50 per cent of the previous movement.
Our order entered after the close of November 3rd or before the opening on
the 4th to sell 5,000 at 481 or \ cent above the high of the 3rd would be executed
on the 4th and would bring $2,425. An open order would be entered to pur
chase this at 461 or 1 cent below the low of 461 reached on November 3rd. On
the 5th and 7th new orders would be entered to make a new sale at 1 of a cent
above the high of the previous day, and on the 7th this order to sell 5,000
bushels at 491 would be executed. This would involve $2,493,75. This would
make us short 20,000 bushels, 10,000 of which would be scalping sales, 10,000
long pull commitments.
The Straight Average from 461 (low of November 3rd) to the high of 551 would
be 51k But it is to be noted that if the market closed above 51 f it would complete
a Bottom formation. Therefore, it would seem like poor speculation after the
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break to the 10th of November to enter an order to sell at 51 i. Timidity would

probably cancel that order inasmuch as there had been a decline for two months
without an appreciable rally. That it would have been profitable is evidenced by
the fact that although the market sold up to 52, it turned around to close at 50$
and broke five cents a bushel from that price level. However, we are assuming an
ultra-conservative position and not recording a sale at that price level.
As the market would stand now, we would have orders in to buy 5,000
bushels at 46| and also 5,000 at 47$, to take profits on the scalping trades.
This second order would be executed on November 18th, purchases of 5,000
bushels at 47$ amounting to $2,870.50. A new order would thereupon be
entered to sell a new lot at $ of a cent above the high of the previous day, but
none of these orders would be executed before the purchase at 46$ on
November 25, this being made for $2,318.65.
New orders would thereupon be entered daily to sell at $ cent above the high of
the previous day and the first trade of this sort would be executed at 49 on
December 1st. This would involve $2,400. The low of the previous day was 46$
and therefore an open order would be entered to buy in this 5,000 bushels at 46.
A new order would be entered daily thereafter to sell 5,000 additional at $ of a
cent above the high of the previous day, and this order would be filled on
December 10th when 5,000 would be sold at 49$ which was $ of a cent above
the high of the 9th. That sale would involve $2,462.50. An open order to buy
this in at 471 ($ cent below the low of the 9th) would thereupon be entered.
It is to be noted that the market again in the work from November 18th to
December 12th put in the possibility of a small Bottom formation which would
have been completed by a close above 49$. The market went to 49$ on the 12th
of December and turned over. Had it closed to complete the Bottom formation
we would automatically have taken in everything we were short and started
operations on the Bull side. As it was, the order to buy 5,000 bushels at 47$
would be executed on December 14th, involving $2,381.25. The order to pur
chase 5,000 at 46 would be executed on December 16th, this purchase costing
$2,300. A new order to sell 5,000 at $ cent above the high of the previous day
would be entered but would not be executed for some time.
Going back now to the rise from 46$ on November 3rd to 52 on November 14,
an angle line drawn downward off the high of 52 and at the same angle down
ward as the advance from 46$ to 52 would intersect an arc drawn off those two
points at 43$. This was an extremely low price for wheat, and common sense
would say to take at least $ of the profit on short sales at that price level. The
market could not go much lower and pay the freight on wheat from the country.
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That price would show wheat as being only 44 per cent of its normal relationship
to other commodity prices. If there ever would be a time when investment pur
chases based solely on the price were justified, that would seem to be one of the
times. However, for the purpose of this study we will go strictly according to the
indication of the market itself and enter our order to take profits on $ of our hold
ings at that price level. However, by this time we were short only 10,000 bushels
and so profits would be taken on only 5,000 bushels. This order would be exe
cuted on December 27th and would be made for $2,193,75 - the lowest price for
which 5,000 bushels of wheat would have been bought since 1850.
A new order would be entered to sell 5,000 bushels at f cent above the high of
the previous day and the first order of this kind would be executed on December
29th at 441, Ibis sale involving $2,243.75. An open order to buy it in at 43$ ($ cent
below the low of the 28th) would then be entered. The next orders to sell on the
rally would be placed 1 of a cent above the high of the previous day and this
order would be executed at 45}, on January 4th, at which price 5,000 bushels
would be sold for $2,293.75. On January 10th, the market closed at 50$ to com
plete a Bottom formation, the Left Shoulder of which would be the movement
from 46$ (made November 25) to 49| (made December 12), the Head at 43$
(made December 28) and the Right Shoulder the movement from 49$ (made
January 9th) to 47f (the low of January 10th), with the close on the 10th being
above the high of both Shoulders. This would automatically force the covering of
all short wheat and transferral of operations to the long side. The purchase of
15,000 bushels at 50$ would involve $7,556. This evened up the trades.
During the course of operations on the short side, sales and their following
purchases were made of 60,000 bushels. These sales were made for $30,637.50
and were bought in for $29,218.75, for a gross profit of $1,416.75 operating on
the short side in one of the lowest markets in modem history and without at
any time being in any way over-extended or using nearly all of the available
margin. In fact, we have purposely throughout these illustrations of market
operations been ultra-conservative for the express purpose of demonstrating
that if one will trade conservatively and go with the market as the market itself
indicates, he can still make excellent interest on his investment and when the
market becomes active he can make real profits.
It is to be noted that while the May wheat future on January 10th, 1933, closed
at 50$ to complete a Bottom formation and turned the trend upward, it would
encounter an important price level around 51 $ to 52. An angle line drawn off
the low of 43$ and at the same angle upward as the decline from 491$ (made
December 12) would intersect an arc drawn off those same two points at 50$.
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The sharpest angle which could be drawn off that low would be one drawn
upward at the same angle as the decline from 47| (the high of December 19th)
to the low of 43J and this would intersect the arc drawn off of 431 with 49 j as a
pivot, at 51 i. But the high of all of this work from the latter part of October was
52, and the probabilities would be that some reaction from in that price would
be probable. Therefore, we would confine purchases, starting a line of opera
tions on the Bull side of the market, to half of a full line and hoping for a
reaction of 40 to 50 per cent on which to add to this line. The purchase of 15,000
bushels at 50 j would cost $7,556.25.
Inasmuch as this Bottom had been made at the lowest level in modem history
and Winter wheat had gone into the Winter in a very poor condition, there
would be every inducement to stay with this line as long as there were any
indications that the Bottom might hold. We would also be entirely justified -
and have ample margin back of it - to make purchases at both the 40 and 50
per cent distances back to the Bottom and then, if these orders were filled, to
start the scalping operations on the Bull side in addition. After the reaction of
the 11th, we would also plan to make additional purchases, provided our
margin permitted it, the moment May wheat closed above 52.
On the rally the market came to 51 i, and 50 per cent of the distance from there
back to the low at 43i would be 47f So an order would be entered to purchase
5,000 bushels at that price and also 5,000 bushels at the 40 per cent reaction level.
There had been an advance of 8f cents and 40 per cent of this would be a break
of 3* cents or to 48f Therefore, we would enter orders to purchase 5,000 bushels
at that price level also. The order to purchase at 48 J would be filled January 13th
and would involve $2,416.75. The order to purchase at 47 j would be filled on the
14th and would involve $2,375. This would make us long 25,000 bushels, so with
the $10,000 original margin plus half of the profits made on the short side of the
market or approximately $600 after payment of commissions, taxes, information
services, etc., we would have almost enough to pay outright for all purchases.
The market went into a congestion which lasted until the 4th day of February
when it closed below the low Shoulders of a Coil formation. Sticking religiously
to our method of operations, we would be compelled to sell out all purchases at
the close of that day which was 46 i, and take the short side of the market under
the assumption that it was going to make the objective of 37\ indicated by the
point at which an angle line drawn downward off the high of 51 \ and at the
same angle downward as the advance from 431 to 51 i would intersect an arc
drawn off those two points. So, we would sell out all long holdings. They had
cost $12,350 and sold for $11,562.50, giving a gross loss of $787.50.
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Inasmuch as the market was at a very low price level and there was a possi
bility of failure to reach the extremely low objective but the market turning
from around its former low, we would sell only 15,000 bushels on the short
side. At 46 i, the closing price on February 4th, this would sell for $6,937.50.
But the market, instead of declining, turned right around to advance. An order
to sell 5,000 at i cent above the high of the 4th would be executed at 47 f on the
6th. This would involve $2,356.25. An order would be entered to purchase that
at 45 i Additional orders would be entered to sell at J of a cent above ensuing
high points of each day, putting the scalping rule into operation, and 5,000 addi
tional would be sold at 491 on February 9th. This would bring $2,456.25 and an
order would be entered to buy it in at i cent below the low of the 8th at 47f This
order would be executed on the 10th, and these 5,000 bushels would be bought
for $2,375. A new order to sell 5,000 at 1 of a cent above a previous high day
would be executed on the 15th when 5,000 bushels would be sold at 481 for
$2,412.50. Orders would be entered to buy this in at 461 arid this order would be
executed on February 25th, the purchase being made for $2,325.
No additional trades would be made until the 3rd day of March when the
market closed above the first Shoulder of a Coil formation which had been put in
from the 4th of February to the 3rd of March. Consulting Lesson 6, Page 108, for
information concerning the Coil, we see the following instructions: "The sellers
to cover and buyers to pyramid on a scale upward if the movement should be
upward over the first Shoulder of the Coiling formation. In practical operation it
would be the point of Wisdom when once a Shoulder is cleared to make a trade
but to place a stop-loss order that would take you out and reverse your position
if the market turned over and the opposing extremity is passed."
Therefore, following that instruction, we would cover all short wheat on the
close of March 3rd and make an initial purchase on the Bull side in anticipa
tion that the impetus which carried the market above the first Shoulders
would be continued.
During the operation on the short side since February 4th we had sold 30,000
bushels and bought in 10,000 bushels of it which left us short 20,000 bushels.
The purchase of this amount at 4 8 t h e high of the closing on the 3rd, would
cost $9,775. Our entire operations on the short side had cost $14,475 and had
been sold for $14,162.25, giving a gross loss of $312.75. This was the second
straight loss, amounting to a gross loss of $1,100.25. But inasmuch as we had
been trading conservatively, with ample margin back of each trade and knew
that this was a speculative market where we were certain at times to be wrong
in our conclusions, we still had ample margin to go back into the market and
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start operations on the Bull side in anticipation that the advance would con
tinue. So the purchase of 15,000 bushels at 48J as a start of operations on the
Bull side of the market would cost us $7,331.25.
Then came the banking moratorium with the exchanges closed and a new
administration coming into power. Winnipeg, during that time, staged an
advance and foreign moneys advanced in exchange value for the American
dollar. History of the days from March 3rd until the 16th of March are available
for those who do not remember the details. Suffice it to say here that when the
market opened again it opened at 53 to 53$, there was little trading during the
May, and it would have been impossible to have made any appreciable quantity
of purchases unless one was extremely fortunate. But the close on that day was
above a tremendous Bottom formation that had been exactly four months in the making.
While the market on that close had left a big gap, we consult Lesson 7, Page 124,
and find the following: "When a gap comes as the market is leaving a congestion,
it is an entirely different indication than where that gap is left within the conges
tion. Very frequently such a gap will not be closed until considerable time has
elapsed. Possibly it will not be closed until a complete cycle is made in the trend of
general commodity prices or of the grain market movement itself."
The fact that this new impetus comes so decisively as to cause the market to jump
out of the congestion indicates that a most decisive movement should follow.
Therefore, we would make a purchase at the first available opportunity, leaving
sufficient margin to make an additional purchase at a reaction of 40 per cent from
the high of the movement to the low from which the movement started. This pur
chase of 5,000 bushels would probably have been made at the average of the
opening on March 17th when the market opened from 55$ to 56$, with 56$ as the
high of the day, and it closed at 53$. The purchase of 5,000 at 56 would cost $2,800.
This advance started from 46$, the low of February 28. That was an advance
of 10i cents and a 40 per cent reaction would be a reaction of four cents so we
would enter an order to purchase 5,000 more at 52$, 40 per cent of the distance
back to the lows and also 5,000 bushels at 51$ which was 50 per cent of the dis
tance back. The order to purchase 5,000 at 52$ would be filled on March 18,
involving $2,625, while the 5,000 at 51$ would be purchased on March 21 and
would involve $2,575. This would make us long a full line and no additional
purchases could be made until these initial purchases showed sufficient profit.
The only stop-loss order on these purchases would be to close them out if May
wheat now closed below 46$, the low from which the rally came.
On April 6, the market closed in new highs above 56$. The question is whether or
not we had sufficient paper profit in the initial purchases, to warrant additional
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purchases. The average price at which these 30,000 bushels were purchased was
51 i and if we had an average of 33 cents back of each purchase it would require
$9,900. In our trades to date we had $10,000 original margin, $1,418.75 gross profit
in the sales up to January 10th, of which $600 would be added to the speculative
account, giving $10,600. Then we had losses of $1,100 which would leave, after
deducting commissions and other incidental expenses, approximately $9,400 for
margin. The close on April 6, at 57{, would give us a paper profit of 6f cents on
30,000 bushels or $1,950. Thus our paper profits would permit us to add 5,000
bushels to the accumulated line. This would cost $2,881.25.
Now then, what objective could one anticipate on this market? These are cal
culated on Page 134 of Lesson 8, showing objectives of 95 cents, $1,031, and
$1.16. On the May future, however, the first objective shown was where the
angle line drawn upward off the low of 501 (made March 22nd) and drawn
upward at the same angle as the market declined from 561 (made March 17th)
intersected an arc drawn off those two same points at 62 f Inasmuch as this
was also right at the high point of the congestion in August and September, it
would be logical to accept some profits in that neighborhood in the expectation
of reinstating on a break. Inasmuch, however, as the market gave no indication
of having put in Shoulders for a Top, about the best one could logically antici
pate would be a 40 per cent reaction, and therefore a large part of the holdings
would be held. This would also be extremely logical inasmuch as crop news of
the time was extremely bullish, the rails and industrial stocks had confirmed a
Bull movement, and com had verified the upward trend of wheat. Previous
purchases enumerated since March 3rd totaled 35,000 bushels and so we
would take profits on 15,000 of these at 621. This order to sell 15,000 bushels at
621 would be executed on April 18th and would bring $9,318.75.
The market closed above this objective, indicating renewed strength. The
advance continued until the 20th of the month when a reaction of 41 cents
came. The last movement of the market had been from 591 to 69, an advance of
91. Forty per cent of that would be 31 cents break from 69 which would give a
buying point at 651 and an order would be entered to purchase 10,000 bushels
at that price level. Halfway back from 69 to 591 would be 641 and an order
would be entered to buy an additional 5,000 bushels at that price level inas
much as our reduced holdings and the extra profit shown by our initial
purchases would permit us such an addition to the line. The order to purchase
at 651 would be executed on April 22nd and would cost $6,525.
On the 24th the market again closed in new highs at 69| and inasmuch as we
had not been able to get the 5,000 at the 50 per cent reaction point and the
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market indicated by closing in new highs that it was a purchase, we would add
5.000 bushels at that price level. This would cost $3,481.25.
It is to be noted that the market broke from that high, going down to 66 1 and
rallying back up to 68 f If it had closed below 641 it would have completed a
Top formation and we would automatically have been forced to sell out all
long wheat and reverse position. It came down to 65| and then whirled quickly
to close in new highs, again renewing the indication that the advance was to
continue. However, this was the 29th day of April. The May would become a
delivery contract the next day and we would automatically close out all pur
chases on the close of the 29th. It would be logical in this case to switch right
over to the July future inasmuch as the whole market indicated a continuation
of the advance. Had this been done, the trader should by all means so limit his
purchases that he would have back of him the same safety as he would have
had had the May wheat future continued on indefinitely. In other words, as we
will see, good profits were made on this advance. But the market was now well
above its Bottom formation, the advance had been on for two months, and one
would not be justified under conservative trading in making as heavy pur
chases in the July as though he had made his purchases at the much lower
price levels where they were made in the May.
During the course of operation on the Bull side from the 3rd of March to the
last of April we had bought 50,000 bushels and sold out 15,000 which would
still leave us long 35,000 bushels which would be sold at the close of 701 on
April 29th. This would bring $24,762,50. Our total purchases had cost
$28,218.75, and had been sold for $34,081.25, giving a gross profit of $5,862.50.
The total gross profits during the life of this future would thus have been
$7,281.25, from which losses of $787.50 and $312.75 would have to be
deducted, leaving a gross profit of $6,181, from which the commissions of
165.000 bushels would have had to be paid.
In all of this future, in fact in all of the illustration of the trading methods, we
have tried to be ultra-conservative and have indicated trades only where it was
perfectly self-apparent that the method taught in this Course would warrant
such trades. We have gone strictly according to the indication of the market
itself on the basis of the theories laid down. And the net results have shown
that in each and every case a very good profit would be made on the money
invested and at no time would it be any more endangered than if one were in
any other kind of business.
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Lesson 24
AN ERRATIC WHEAT FUTURE IN AN

UNUSUAL MARKET
■ Bids and Offers

■ Minimum Prices
'
AN ERRATIC WHEAT FUTURE IN AN UNUSUAL MARKET
In Lesson 23 the May wheat future of 1933 was shown up to the end of April,
1933. In Lesson 5, Pictograph 5.1 shows the Bottom formation put in by the
December wheat future early in June of that year. The advance from June 10th
to July 18th was the greatest advance of any market between 1924 and 1933.
The December wheat future completed a big Bottom formation by closing at
80£ on the 10th day of June. It ran from there to 124, a straight advance of 43 J
cents. It thereupon turned over and broke to 67 For the purpose of profits,
that advance was almost an open and shut case. The market worked perfectly
normal and one following the method outlined in this Course could hardly
have failed to make profits.
A much more interesting future, considering the violence of the movements,
the unusual events, and the contradictory movements of the market, was the
May future of 1934. While the December future came on the board on the 25th
of April, the May future started trading on the 26th of June. For the sake of
study we will simply pass up the December and September futures and take
up the study of that May future. It combines an opportunity to use about
everything that has been taught in this Course.
Let us digress right here to point out that the May future is a favorite for spec
ulative trading because its life extends for a longer period of time than any of
the other futures. It witnesses the harvest of the soft red wheat crop east of the
Mississippi, the Spring wheat harvest in the United States and Canadian north
west, the making of the crop in Europe, the Southern Hemisphere crop, and the
damage done to the Winter wheat crop as it is planted, goes into the Winter
and to its last stages in the southwest. It is the favorite for bullish operations
not only because of these crop growing conditions but also because if there
should be a real shortage of the wheat crop, with insufficient available for
delivery on contracts, this condition will show up in the May future.
On the other hand, the September wheat future is known as the Bear future
because it culminates right at the time the largest volume of wheat is being
moved from the farms, and the crops of the United States, Canada, and Europe
are being made and harvested. Terminal operators transfer their hedges from
the May to the September future whenever possible and then from the
September back into the May to cut down on commission charges. And the big
traders utilize those futures because of the facts set forth above.
Table 5.1 shows quotations on the May wheat future from June 26 to October 21
inclusive. Pictograph 6.2 also shows these quotations. Pictograph 9.5 shows the
movement from August 17th to October 8th inclusive. And in the Pictographs
herewith the daily range of the May wheat future from June 26th to March 1,
together with the Movement graph for that period, is given for study.
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Pictograph 24.1 Section A of Movement graph of the May wheat future

of 1934
JULY AUGUST SEPT

Lower point of arc ends under the point used as the axis of the arc. That is also the point
used as the basis in drawing the angle lines.
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Pictograph 24.2 Section A of daily range graph of the May wheat future
of 1934
Upper end of the arcs stop directly above the point used as the axis for drawing the arc and
also the basis of the angle lines.
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It is to be noted that while the September and December futures were running
out of Bottom formations, during June and early July, the May future did not
put in a Bottom from which to run. It would have been entirely proper to have
traded in the September and December futures during that period of time
because they had the big volume of trade and it would be the point of wisdom
at all times to make trades in the future with that volume of trading because
this ensures that orders can be filled more closely to the actual market.
Therefore, from the standpoint of good trading, one naturally would have been
long the September or December future and have taken advantage of the
advance during that period of time from the expiration of the May future stud
ied in Lesson 23 to the culmination of the advance in July. But for the purpose
of this study, we desire to point out how one can make profits if he will consis
tently follow the advice laid down and the methods outlined herewith. And so
we take the May 1934 future from the time trading started in it.
It is to be noted that the range graph on June 27th shows a low of 101, a high
of 106| and a close of 105. The market that morning opened at 101 to 102, ran
up to 104 at 9:59, back down to 101 at 11:29, up to 106$ at 1:05, and closed at
105 to 1051. At 10:00 o'clock the market was at 1031 and at 12:00 it was at 101 i
indicating a low close. It closed high, indicating that it would come back down,
according to the 10:00 o'dock-12:00 o'clock rule. The next day it opened off at
$1.00 to 101, then rallied to 104, reaching there at 9:44 and at 10:00 o'clock was
at 102. At 12:00 o'clock it was at 1031, indicating a high close. The close, how
ever, was at 991; and, as can be seen, the movements were such as to put in a
Top formation. But it closed strictly against its time indications.
The question arises then as to how much one would be justified in selling,
with $10,000 as margin. There had been very violent fluctuations, and margin
calls had been increased on the exchanges for protection of the commission
houses. Also, the movements had been so drastic that if one were right, a small
quantity would make a big profit, while if he were wrong his stop-loss order
would be so far away that it would reduce his margin considerably. Therefore,
we assume the sale of only half a line at the close of 991 on June 28th. 15,000
bushels at 991 would bring $14,887.50. This sale would be stopped above the
Right Shoulder of this Top formation - and that stop would be caught on July
1st. The purchase of 15,000 bushels at 102{ would cost $15,618.75. That would
leave the trader out of the market. The market had put in a Top and there
reversed. It had a gap between the low of the first of July and the high of June
29th, and that might be filled. If the market closed below 971, it would com
plete a Top formation with Cut-Out and the sales would be renewed. On the
other hand, if it closed above the high of this formation, it would absolutely
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destroy the formation and give a new objective at 115, the point at which an
angle drawn upward off 97\ (the low of June 29th) and at the same angle
upward as the decline from 107$ to 97f would intersect an arc drawn off those
two points with 106f as the pivot. Also, in case it closed above the high of the
Top formation, it would indicate an exceedingly strong situation because it
would be self-evident that sufficient new buying was coming into the market
to absorb all of the selling and carry the market on higher.
This close in new highs came on July 3rd with the market closing at 107f and
would justify the purchase of 15,000 bushels. This would cost $16,181.25.
We would not buy a full line because the market was getting into important
price objectives enumerated in Lesson 8, and also because of the gaps which
the market was leaving in its daily movements. This was occurring not only in
the May future but in all of the other futures as well. We remember the advice
of William Peter Hamilton given in Lesson 3 that "the more rapid the move
ment, the more difficult it is to forecast." Therefore we would trade extremely
conservatively because, as we have already seen, the first trade indicated
showed a loss of 5* a bushel and we would want to be sure that we would
have sufficient margin available to go right back in, in case we had to take
another loss.
On July 11th, the market again closed in new highs at 1131. This came after six
days of congestion and with an objective at 115. It would warrant the purchas
ing of not more than 10,000 bushels, this amount involving $11,350.00.
There were many gaps in the market now, it was approaching an important
price level, and had gone high in price as compared to general commodity
price levels. So we would be inclined to take a good share of our profits around
the indicated objective of 115. We believe it would be good speculation to
accept profits on at least 75 per cent of all holdings. In fact, the Pickell-Daniel
Bulletin of that time advocated acceptance of profits with a stop-loss order to
protect the balance. Therefore, we assume the sale on July 13th of 10,000
bushels at 115 which would bring $11,500.
The market went on upward, advancing extremely rapidly, and the July
wheat future went through the objective of $1.16 as outlined in Lesson 8. This
was the average of the 1926 high of 190J and 1933 low of 41 $. The July future
reached 117$ and turned over to close at 114$ after sharp fluctuations in that
price level. While as yet there was no Top indicated, it would have been the
part of good speculation to take some more profits and reduce the line still fur
ther because the market was now jumping rapidly, indicating the nm to a
finish, and it had reached this important price objective at $1.16. Therefore, we
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assume the sale of an additional 5,000 bushels at 126 on July 17th, which would
bring $6,300 and leave us still long 10,000 bushels.
On July 15, May wheat had closed at 122 to 1221. On the 17th it opened at 123
to 1231, and sold up to 1271 at 11:30 in the morning. Then it broke back to 1251,
a break of 2{c, this price being reached at 12:44. The close was at 126. The
Movement graph therefore recorded the movement up to 1271 and back to
125f On the 17th it opened at 127\ to 1281 and immediately broke to 125, the
market at 10:00 being at 125 f The decline then continued to 125 at 10:45 but at
11:03 it had rallied 2c to 126, and these movements were recorded on the
Movement graph. The 12:00 o'clock market was at 1251 and the 10:00 o'clock at
1251, indicating a low closing price. It closed at 125 to 1251. Now, this market
had the movements of a possible Top formation and this Top would be com
pleted by a close below 123f
The market of the 20th was particularly vicious but started out very mildly.
Opening at 1241 to 1241, it hung in that price level, the 10:00 o'clock market
being at 1231. The low of the first 30 minutes was at 123, being made at 9:50.
Then the market rallied to 124f, that price being reached at 10:48. From that
level, however, it turned over and sold down to 1211, the 12:00 o'clock market
being at 1221. This was an indication that the closing would be downward, and
inasmuch as this price was below the Low Shoulder of the Top formation, one
would have been entirely justified in taking profits on all of his long holdings
and going short the market. The Pickell-Daniel Bulletin of the 18th had warned
that after a break, the market should be sold on any rally.
Toward the last of that market liquidation set in, the market breaking down to
112, breaking a cent a bushel at a time on occassions. The close was at 113 to 114.
For the sake of this study we will continue to assume that the trade was made
at the closing quotation and assume the sale of the remaining 10,000 bushels of
long wheat at 1131, average of that closing price. This would bring $11,350 and
even up the trades. During the first operations on the Bull side, the gross profit
would be $1,618.75, offsetting the gross loss of $731.25 taken on the sale on July
28th, and give us gross profits of $887.50 in a little less than a month. This was
starting in trading in a green future after the leading future had made an
advance of 15c a bushel from its Bottom formation, and trading conservatively.
We are also assuming that no advantage would be taken of the time indication
for putting out our sale at a price level 8c a bushel higher than the close.
Abandoning the long side of the market with the completion of the Top, we
would sell only half a line short. This would be partly from a continued desire
to be extremely conservative in such a violent market, and partly with a hope
-378-
that the market might rally inasmuch as the May wheat future itself was back
approximately to its halfway average. So we would enter an order to sell 15,000
bushels short on the close of the 18th, and another order to add 5,000 at the
halfway average between the low that day at 112 and the high made the previ
ous day at 128±. Needless to say this latter order would not be filled. Sale of
15,000 bushels at 113 L however, would bring $17,025.
In Lesson 8, discussing this advance in which July wheat went to 117i, it is
pointed out that the Straight Average from 1171 back to the February low of 46C
from which the advance started was 81 f. This would be the big objective
toward which we would expect the market to come on a break. However, it is
to be noted that on the 20th of July wheat rallied to 116 before continuing the
decline. It put in the Shoulders of another Top formation, with the Left shoul
der the movement from 1121 (low of the 12th) to 1151 (high of the 13th) and
back to the 112J (low of the 14th), the Head at 1281 and the Right Shoulder
being the rally from 112 (low of the 19th) to 116 (high of the 20th). Drawing an
angle line downward off the 1281 high and at the same angle downward as the
advance from 1121 (low of July 14th), this angle would intersect an arc drawn
off those two same points at 97\. So an order would be entered to take some
profits at that price level. Inasmuch as we were short only 15,000 bushels and
the trend was down, we will assume purchase of only 5,000 bushels at that
price level, although Pickell-Daniel sent out a telegram at 12:00 o'clock on the
day of that market warning clients to take profits on all short wheat.
The market that day broke to 97} on May wheat, a break of 30? in three market
days. This, as we have previously pointed out, is an ordinary full major run and
was all the more indicative that one should take profits on short holdings.
As has been learned since that market, a part of the tremendous liquidation
was due to the selling out of a long line of wheat held by one New York trader.
For the information of students, inasmuch as this resulted in the elimination of
trading in Bids and Offers on the Chicago market, let us record briefly some of
the causes as we see them.
BIDS AND OFFERS

Indemnities, as Bids and Offers are technically known, are the only real option
traded in on the organized exchanges. Bids are sold at a price level below the
closing price of the day and are good for either the market next day, next week,
or the next two weeks. Offers are at a price level above the closing quotation. The
buyer of Bids at the price level below the closing quotation buys the option of
-379-
making a sale at the Bid price at any time he desires prior to the expiration of
those Bids. The buyer of Offers buys the option of making a purchase at the price
level above the closing market quotations, and can exercise that option at any
time he desires prior to the expiration of the Offers. The seller of Offers would
naturally give to the buyer thereof the right to purchase wheat at the Offer price
or would give to the buyer of Bids the option of selling wheat at the Bid price.
Now, the only protection ever offered to a trader in grain was through the
trading in indemnities. The farmer is offered the possibility of selling a future
contract against his growing grain or buying a future contract against his feed
ing needs. The miller can hedge his purchases of wheat through the sale of an
equivalent amount of futures contracts, or can hedge the sale of flour by the
purchase of an equivalent amount of futures contracts. Likewise the local or
terminal elevator operator can hedge his operations by the purchase or sale as
the case may be of futures contracts. On the other end of those hedges is the
speculative buyer who assumes the risk of ownership. His only protection has
been the purchase of Bids against Long Holdings or the purchase of Offers
against Short Sales on the market.
Unfortunately, however, prior to 1933 this method of protection was never
given the thought on the exchanges that it deserved. While non-members would
be required to post margin before they would be permitted to execute their
option of buying wheat at the Offer price or selling it at the Bid price, and non
members were required to have sufficient margin available if they sold the Bids
and Offers, there was no rule requiring the posting of adequate margin in the
clearing houses if a member of the exchange desired to sell the Bids and Offers.
As a result, one member was said to have sold the daily Bids and Offers in huge
quantities each day and also sold tremendous quantities of the weekly Bids and
Offers. We were told that he sold as high as 15 or 20 million bushels of these
indemnities daily. So long as the market did not go below the Bid price and thus
make it to the advantage of the buyer of the Bids to exercise his option and sell
the market short at this price level, this seller of the Bids made good money. Or,
so long as the market did not advance above the daily or weekly privileges and
make it profitable for the buyer of the Offers to exercise his option and call for
delivery of the wheat at the Offer price, this operator made big money.
It is also understood that he was a consistent Bull in the market and while the
market was advancing and the Offers were frequently good so that he was
called upon to sell wheat at the Offer price, he had purchased it at lower levels
and so was in position to deliver it at the Offer price. However, at the last of
that Bull market in early July of 1933, the advance was so rapid that not only
-380-
were the Daily Offers profitable to the purchaser thereof, but the Weekly Offers
were also good. Therefore, this trader was called upon to deliver the futures
contracts not only at the Daily Offer price, but at the Weekly Offer price. He
did not have sufficient wheat bought at lower levels to cover the requirements
and so was compelled to buy heavily in the market to protect himself as the
Weekly Offers were good at the first of that week starting July 17th.
Then came the turn in the market and on the 19th not only were the Daily Bids
good, but the market was right down into the weekly privileges. As we got the
story, he was long a huge line of wheat to protect himself against the Weekly
Offers he had sold - and then he was compelled to buy more at the price of the
Bids which he had sold good for the market of July 19th. The close on the 18th
was 125 to 1251. After the close on the 18th he sold the option of making sales of
the May future at any time prior to the close the next day at 1201 to 121 f The
market on the 19th went down to 112 and closed at 113 to 114. The seller of the
bids was forced to buy that wheat at 120f to 1211. He was already long wheat to
protect himself against his sale of Weekly Offers. Now he had to sell that all out
and sell the wheat he had taken on option at 120| to 1211.
As stated, this seller of Bids was not required to place sufficient margin back
of his trade to protect it. As a result, some of the houses who had accepted his
order to sell the Bids had to protect them themselves. This required the dump
ing overboard of the wheat bought at the Bid price. Two or three houses
collapsed as a result of this deal and a governmental investigation followed. As
a result of the selling debacle, the exchanges declared a holiday for July 21 and
22. They eliminated trading in Bids and Offers and before the market was
reopened on July 24th, they fixed a minimum price.
MINIMUM PRICES
Now then, it is important to understand about minimum prices. The first
thought of traders after the fixing of minimum prices is invariably that the
fixing of such prices will act as a barrier below which the market cannot go,
and this will automatically bring into the market a rush of buying which will
carry it above the pegged minimum price level. However, the very fact that the
fixing of a minimum price is considered a necessity automatically brings out
the fact that natural conditions would send prices below that fixed minimum
price level if it were an open market. It is an historic fact that a fixed minimum
price will almost invariably prove to be an automatic maximum price in time of sur
plus supplies. Therefore, it is important to remember that when a minimum
-381-
price is put in, the shrewd trader should purchase immediately on the assump
tion that speculative activity will bring about a rally, but on that rally the trader
should take profits, because the same fundamental causes that necessitated the
pegging of the price will bring the market back to that price level.
We see the working out of this rule during the markets which followed the
fixing of the minimum price prior to the opening on July 24,1933. The market
opened higher and then sold off to close at $1.00. The Pickell-Daniel Bulletin
advocated the purchase of wheat in that price level for a rally back to the
halfway average. And in our trade, we are assuming that all short wheat was
bought in at the closing price of $1.00 a bushel on July 24th. Purchases of 10,000
bushels at $1.00 would naturally be $10,000.
From that low the market rallied. The Straight Average from 97\ to 1281
would be 113. The market went to 115. Forty per cent of the distance back to
the Top would be a rally of 12Jc, or to 110. It is perfectly obvious that sales at
110 and 113 would be entirely legitimate according to the method taught in this
Course. It would also be obvious that the market did not break out the lower
Top formation made in the middle of July. And it would, of course, be obvious
that such sales would be extremely profitable.
Study of the Movement graph and the Pictograph would indicate the logic of
making additional sales on August 11th, when the market had closed downward
out of what was practically a Doublespread Top with highs at 109 J and 1091 made
August 2nd and August 10th respectively. The dots on the market of August 12,
14, and 15 indicate the action of the market when it finally came back to rest on the
pegged minimum prices. The officials then "Pulled the Plug" and the market
dropped 5<t a bushel, the maximum fluctuation permitted the next day.
A logical point from which one would expect a rally, according to methods
taught in this Course, would be where an angle line drawn downward off the
high of 1091 (made August 1) at the same angle downward as the advance
from 99j (the low of July 31st) to 109J would intersect an arc drawn off those
two points. This would be at 89 J which was the exact low for the first rally
which came on August 17th. Then followed work in congestion with the
market on September 13th completing a Bottom formation. All short holdings
would naturally have been covered and a long position taken in the market.
Additional purchases would be made on the 16th. On the 20th, the market put
in an Inside Day after having closed at the Top of an Outside Day on the 19th.
This was an indication that a reaction was coming - and it came.
Space will not permit us to go through this market in detail. Pictograph 9.5
gives an objective on the down side of the market in October of 72 cents and
-382-
the actual low was 7l{. This came out of an excellent Coiling formation and
also a Regular Top formation. On the 20th, the market completed a Bottom
which is perfectly obvious. On the 31st it completed a Top - and turned right
around to put it in an opposing Bottom formation.
It will be well for clients to go through this market as a final study prior to
practical application of the principles involved in the previous Lessons.
As a guide to you, we indicate in Table 24.1 the trades which were indicated
by the market itself, with the dates thereof. You should check them through the
graph and determine for yourself just why we indicate sales or purchases at the
specified points, and why we would consider it good speculation to trade in
the amounts specified. We had a definite reason back of each trade and each
amount. For you to be in position to go ahead from here, you should be able to
figure out those reasons.
Thus it is to be seen that during the first eight months of the life of that future
it would have been necessary to switch from one side of the market to the other
ten different times. This is very unusual. In so doing, some losses were neces
sary to accept. But by persistently going with the market in the direction it
indicated, the gross profits far exceeded the gross losses.
One very important point is again emphasized by this market, and that is that
you do not need to make a trade every day to make a profit. Furthermore, every trade
made here could have been determined upon the day prior to making it. And
finally, although the method taught here may require the taking of two or more
straight losses, its persistent use, based on markets for as far back as we can get
records, will in the end yield a profit on the investment.
As a final word in this Lesson and practically in the entire Course, let us sum
marize these last four Lessons as follows.
Lesson 21 went through the "Crop Scare Market" of September wheat in 1929
when the Farm Board was first created and given a fund with which to operate.
Utilizing the principles taught in previous Lessons, and operating strictly
according to them despite Government interference and great congressional
activity, what must be considered as excellent money for the time of operation
and the amount invested would be shown.
In Lesson 22, the May future of 1932 was analyzed. This was in a "Business
Liquidation Market." It was in a market at very low price levels with really a
minimum of activity. It taught the use of the scalping rule.
Lesson 23 showed the culmination of a liquidation market, the greatest crisis in
American business probably ever recorded in past times, and the start of a Bull
market during a period of inflation when old monetary standards were abandoned.
-383-
-384-
Table 24.1 Continued
Gross Profits on Trades $12,556.00
Gross Losses $4,387.75
Gross Profits Before Expenses $8,168.25
Open trades, short 20 at 90} with stop to take out if market closed above 91 i
-385-
Lesson 24 herewith shows activity in a May future that witnessed some of the
most drastic and unusual action ever recorded in markets. For the first time in
the history of the trade, the board of directors of the Chicago Board of Trade
felt the necessity of fixing minimum price limits and of closing the market until
a little of the panic had abated. Mixed in it were crop scares and the coming of
snow to break a drought.
These studies of actual markets have embraced practically every type that one
can conceive. Yet the important thing is that regardless of the growing conditions,
political conditions, market despair, or market hysteria, a strict adherence to the princi
ples taught in these lessons would show the trader a consistent profit.
When the market started on a movement of consequence, he was with it. While he
took profits occasionally, yet so long as the market was going upward in a
decided trend he was long wheat. So long as it was breaking in a decided trend
he was short the market. There were times when he would be "Whip-Sawed" -
indicating the necessity of conservative trading. But out of it all he would
achieve the thing sought: Profits. He would not fight the market, but would use it.
In closing this discussion let us re-emphasize the statement made early in this
Course, that your greatest speculative enemy is - yourself.
The method outlined herewith, the facts and observations made, are the result
of 20 years' study in markets over the 80 years prior to 1933. We are firmly of
the conviction that the application will make excellent profits on the invest
ment. The amount of those profits depends first of course upon the margin
available, but primarily upon the efficiency of the trader himself in application of those
methods.
In closing the Course, let us wish you an active market, small losses and big
profits.
-386-
ERRATIC WHEAT FUTURE IN AN UNUSUAL MARKET
Pictograph 24.3 Section B of Movement graph of May wheat future

nf 1934
-387-
Pictograph 24.4 Section C of Movement graph of May wheat future of

1934
-388-
INDEX
Action and Reaction, Law of 233 uses 207,209 Table

agriculture, number of workers Barrett, J.F., Ember Day method of
employed in 1890 compared weather forecasting 148-150
with 1930 226 bear
American Revolution, growth of home definition 96
industries 245 natural 96
analysis of market, mechanical method bear markets 54,92
95-96 bids 379-381
Argentina blending 203
com 185 Blum, H. 273
wheat crop 316 bond prices, and prosperity 262-263
wheat exports 21 Britain
'at the market', definition 97 abandonment of gold standard 234
Australia sale of rail and trains to Canada 234
wheat crop 316 Broomhall, G. 14
wheat exports 21 building activity 1917-50 235-236,
averages 50,51,118-124,129 237Fig, 238
big triple 121 building and business, influences on
combination 120-121,122 commodity prices 235-241
market scale weights 122,123 building deficit 1940s 239-240
movement graph showing basis of building wave 222
determining 119Fig bull
Straight 121,123,140 definition 96
natural 96
Babson, R. 233,235,259 bull bond market, and recovery in
bank clearings 260 business cycle 267
bank reserves, and prosperity 262 bull markets 54,92
banking moratorium 1933, effect on bull stock market 318
May wheat future 359,368 and recovery in business cycle 267,
barley 207-210 268
acreage 207 business cycle 261-269
prices 207 decline 264-266
supply and distribution 1941-46 depression 266-267,325
208Table prosperity 262-263,325
top and bottom formations 210 recovery 267-269,325
INDEX
Business Index 259-261,269-270 Stock Market as indicator 260

buying dates for wheat and com and supply and demand 4
161-165 confidence, false 265-266
'Buying on a Scale Down', description congestion 50-51,52,53, 54,101,299,
112-113 304, 325,326
'Buying on a Scale Up', description 112 extent of speculative force 155
occurrence 101
Canada price levels in wheat 1920-33 103Fig
development 21-22 see also movement graphs
purchase of rail and trains from copper prices 5
Britain 234 com 185-200,301
rainfall 144 buying and selling dates 161-165
wheat exports 21 market influences, livestock numbers
cash markets, relationship with futures 187-194
markets 168-169 prices
clerical occupation, number of workers movement form high to low and
employed in 1890 compared time of year 195Table, 196-200
with 1930 226 and movements in commodity
Cole, G.D.H. What Everbody Wants To
prices 219,223
Know About Money 252
relationship with oats market 203
Commodity Index 6,7Table
time and distance of extremes and
1924-37 42-44Table
runs 194-196
components 9-10Table
top and bottom formations 200
Commodity Price Curve 78-79
total supply 1920-36 193Table
commodity prices
US exports 185
compared with price of wheat
utilization 1910-14 and 1924-29
1923-36 23,24Fig, 25-28
185-186
construction of graph 28-34
costs, diminished 70-71
and decline in business cycle 264
cotton
effect of dollar purchasing power 3
exports 249-250
factors influencing 219-222
price 250
building and business 235-241
crime 265
money values 117
general trend 8-14 Crittendon, K.S. 150-152
and gold discoveries 233 Cromwell, R.O. 143
and gold stocks 12-13 crop reports 315
influence on com prices 219,223 crop scare bull reports 316
influence on wheat prices 4,223 crop scare market 318-319,325
international relationship 6 Crowther, S. America Self Contained 252
and prosperity 263 Cutten, A.W. xx, xxi, xxii, 153,219,
and recovery in business cycle 273-275,311
268-269 cyclone 148
-390-
INDEX
daily action 83-95 export trade, as cause of war 250

daily action of market 93-95 exports
Saturday-Monday bottom 93-94 cotton 249-250
daily fluctuations 299 review of 18th and 19th centuries
daily range 246-247
recording 86
spread at close 86 farms, classification 1930 227
Dawes, General Charles G. 251 figure chart 154-157
Dawes Plan 251-253 market scale weights 156
deliveries 96-97 France
demand gold supplies 73
definition 22 inflation 16,17
see also supply and demand, law of self-sufficiency 251
depression 238-239,325 Franklin, B. 245
characteristics 266-267 freight costs 71-72
diminished cost 70-71 future trading, origins xxii-xxiv
dollar, purchasing power, affect on
futures contract, definition 96
commodity proces 3
futures markets, relationship with cash
Donnell, C.A. 143
markets 168-169
Dow, C.H. 49
Dow Theory 8,49,53
gaps 124-126
applied to grain 58-61
Germany
summary of main points 54
dye stuffs 248-249
Dow-Jones stock average 49
drought 1934 223,239 gold currency 73
drought 1936 239 inflation 15,16
Dun and Bradstreet gold
Commodity Index 6,7Table influence on market 117
1924-37 42-44Table as means of exchange 69-70,72-73
components 9-10Table revaluation in United States 12
Monthly Review 6,14 gold discoveries
dyestuffs 248-249 and commodity prices 233
and prosperity 232-233
economy, changes after World Warl 248 gold prices, and silver prices 69-70
efficiency, and prosperity 262 gold reserves
Eggleston, G.C. A Rebel's Recollections 15 and commodity prices 12-13
England and depression 266
repeal of Com Laws 246 and recovery in business cycle 267
supply of precious metals for gold standard
currency 73 abandonment 76
examination 177-182 effect on commodity prices 13-14
answers to questions 210-216 abandonment by Britain 234
exchange members, function xxiv abandonment by USA 12,359
391-
INDEX
revaluation of money when nation Southern Confederacy 15

not on 11,12 stopping 17
government reports 153 information sources 315-316
grain exchange members, function xxiv Inside Day, description 90
grain markets, cyclical movement inside information 152,281
150-151,154 interest rates
grain markets, types of 316-320 and decline in business cycle 265
business liquidating 319-320 government control 260-261
crop scare market 318-319 and prosperity 262
grain price level neutral 320 and recovery in business cycle 267
liquidation after big advance 319 inventions, and prosperity 231,234-235
recovery price trend 320 Italy, self-sufficiency 251
graph paper 84-85
graphs joint accounts 314
preparation 84-86
recording daily range 86 King's (Gregory) Law of Prices 67,
purpose of keeping 84 75-79
Gregory King's Law of Prices 67,75-79
Gresham, T., Law of Money 13,15 labor, division of 224-227
Law of Price Relativity 78
Hamilton, A. 12 Leiter, J. 53
Hamilton, W.P. 49-54,65,83-84, 111, line in the market 50-51
129 liquidation, definition 97
Harvard University Business Index livestock numbers
259-261 on farms 1921-37 190Table
hedge sales 125 influence on com market 187-194
Howell, T. xix, xxi long, definition 96
Hutchinson, B.P. 310
McCulloh, J.W. 65
imports, growth 1814-16 246 manipulation 53
indemnities 379-381 margins 309-312
industries, number of workers minimum required 312,313
employed in 1930 225 market, pendulum-like 52
industry, mechanization 231 Market Analysis Sheet 95
inflation 11,14-17 market calendar 161-165
cause 16 market movements
conversion of money into types of
commodities 15,16 Primary Movement 49
credit 11,14 Secondary Movement 49
currency 11,14-17 Tertiary Movement 49
France 16 market scale weights 112,122,123,
Germany 16 139-140,156
-392-
INDEX
markets description 111

conditions required for reversal of market weights 112
trend 134 Regular Bottom Formation
relationship between cash and future description 106
168-169 market weight 112
see also grain markets, types of Regular Bottom Formation with
mechanization of industry 231 Cut-Out, description 108
medicines 249 Regular Top Formation
members of grain exchange, functions description 107
xxiv market weight 112
method of operation, guidelines Top Formation, description 110
298-301 Munger, R. 65
Mexico, silver supply 73 Murray, N.C. 65,186
Monday market 93-95
money stability, and exchange of goods
Narrow Day, description 92-93
11
narrow market, trading in using May
money supply, and prices 72
wheat future 1932 343-356
money values, influence on commodity
natural bear, definition 96
prices 117
natural bull, definition 96
Moody's Daily Commodity Index 14
natural price, definition 76
movement graphs 102,104-105Figs,
Nelson, S.A. 49
106-108
Ascending Bottom, market weight
oats 203-207
112
Ascending Top distribution 205Table
description 110 as market indicator 203
market weight 112 price trends 206
Bottom Formation 106,110 relationship with com market 203
Broadening Bottom, description relationship with wheat market 203
109-110 as substitute for com 203
Broadening Top, description 109-110 supply 1945-49 204Table, 205-206
Check Top, description 111 top and bottom formations 203,206
Coil Bottom, description 109 objective
coil formation 106,108-109 circumscribed, determination
market weight 112 135-139
Coil Top, description 109 prices, need for 135
Cut-Out movement, description 108 offers 379-381
Descending Bottom optimism 263
description 110 Outside-Day
market weight 112 description 90
Descending Top, market weight 112 example 90-91
Double Spreading Bottom, over-expansion 263
-393-
INDEX
Palmer, A.H. 248 reports, government 153

panics, action following 52 reports, private 152-153
Patten, J.A. xix-xx, xxi, 118,152 Rogers, J.T. 117
Pearson, F.A. 12-13 lecture on rise and fall in grain prices
periods of rest 51 65-75
Peru, silver supply 73 Roosevelt trade policy 254-255
Pickel-Daniel Services 313 Russia
Pickell, M.W. 65 inflation 15,16
Pols, J.A. 303-304 reasons for famines 144
post-World War markets 168 wheat exports 21
precious metals, supply and effect on
prices 72-75 Saturday market 93-95
price relativity, law of 4-8 scandals 265
prices seasonal grain cycle 161-168
and money supply 72 Secondary Movement 49,299
need for objective 135 self-sufficiency 249, 251
and supply and demand 67-70 selling dates for wheat and com
prices, minimum 381-382 161-165
Primary Movement 49,299 'Selling on a Scale Down', description
profits, use of 331-336 113
prosperity 325 'Selling on a Scale Up', description 113
characteristics 262-263 short, definition 96
underlying factors short covering, definition 97
favourable trade balances 233-234 silver, as means of exchange 69-70,
gold discoveries 232-233 72-73
high prices for wheat exports 232 silver prices, and gold prices 69-70
introduction of inventions and slump 1929 253
improvements 231,234-235 Smith, Adam 4,65,74,246
opening up of new territories 231 Southern Confederacy, inflation 15
reconstruction activities after war speculation 53-54
232 statistical services 313
wars 232-233 steps in trading 314-316
protectionism 253 Stock Market
pyramiding, description 112 and decline in business cycle 265
as indicator of commodity prices 260
quality of goods, and recovery in and prosperity 263
business cycle 269 stop-loss orders 336-339
definition 97
rainfall storms, paths across USA 144,145Fig
Canada 144 supply
USA 144 definition 22
reactions, sharp 51-52 and demand 67-70,299
INDEX
and prices 67-70,76-79 rise and fall in temperatures summer

supply and demand, law of 22-34 1933 150,151Fig
definition 22 weather forecasts
Switzerland, gold currency 73 accuracy 143
Ember Day method used by
tariffs 11-12 J F Barrett 148-150
territories, new, and prosperity 231 weather map 149Fig
Tertiary Movement 49 wheat
theoretical trading operations 325-331 Bottom Formation 129
trader, function xxii buying and selling dates 161-165
transportation 231 congestion price levels 1920-33
Treaty of Versailles 251 103Fig
trend lines 301-307 December future 301
congestion 304 effect of supply on price 76-79
progressive average 305-307 export country surpluses 1924-37
trends 101-113 35Table
Triple Reverse Day, descripion 91-92 export nations 1933-34 38-39Table
Turn-Down Day, description 87 exports
Turn-Up Day Argentina 21
description 87 Australia 21
example 90 Canada 21
Russia 21
United States Grain Futures imports of European countries
Administration 273 1923-37 30Fig, 34-35Tables,
USA, loan of money to Europe (Dawes 36-37Tables
Plan) 251-253 imports of non-European countries
36-37Tables
wage readjustments, and recovery in May future 301
business cycle 268 May future 1932 345-346Fig
Wall Street Journal 49 trading in narrow market 343-356
war (1812), growth of home industries May future 1933 88-89Table
245 analysis of trading 359-370
Warren, G.F. 12-13 May future 1934
wars analysis of June September prices
export trade as cause 250 374-379
and increase in prosperity 232-233 movement graphs
need for credit 231-232 September-February
Washington, G. 245 387-388Figs
weather 143-154 May future, operations of large trader
high compared with low pressure, in 1926 274-298
wind direction and temperature prices 1920-35 129,130Fig, 131-134
146-148 prices
-395-
INDEX
compared with commodity prices September wheat 1924-36

1923-36 23,24Fig, 25-28 40-41Table
construction of graph 28-34 relationship with oats market 203
export 232 September future 301
May wheat 1924-36 40-41Table Straight Average 129
and movements in commodity supply, effect on price 76-79
prices 4,223 tops and bottoms 1920-33 171-172
-396-

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In an increasingly competitive world, it is quality

of thinking that gives an edge - an idea that opens new

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Under a range of leading imprints, including

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PICKELL AND DANIEL

Introduced and edited by

An imprint of Pearson Education

The Traders' Masterclass Series xv

1 THE RELATIVITY OF PRICES 1

2 THE LAW OF SUPPLY AND DEMAND 19

3 THE DOW THEORY APPLIED TO GRAIN 47

The oldest of recognized and accredited methods of forecasting stock

4 GREGORY KING'S LAW OF PRICES AND HISTORICAL EFFECTS

9 CYCLES AND THE WEATHER 141

10 SEASONAL TRENDS IN GRAIN PRICES 159

13 OATS AND BARLEY (AND ANSWERS TO EXAMINATION

14 BUSINESS FUNDAMENTALS AND GRAIN PRICES 217

15 THE BASIS OF PROSPERITY AND ADVANCING PRICES 229

16 CHANGING ASPECTS OF AMERICAN

17 THE BUSINESS CYCLE AND THE BUSINESS INDICES 257

18 GRAIN TRADING METHODS OF BIG OPERATORS 271

19 TRADING METHODS OF BIG OPERATORS (CONTINUED) 289

20 SUGGESTED METHOD OF TRADING OPERATIONS 309

21 APPLICATION OF TRADING METHODS 323

22 TRADING IN A NARROW MARKET 341

23 MAY WHEAT AND THE BANKING HOLIDAY 357

24 AN ERRATIC WHEAT FUTURE IN AN UNUSUAL MARKET 371

Great investment advice is a rare and timeless commodity.

broadly rely on extrapolation of currently known basic facts derived from a

seen in the coverage given in Lesson 5 to the technical implications of Outside

A SOUND BASIS FOR DEALING IN GRAIN

In the Fall of 1932 a group of men were seated in a brokerage office at

YOUR FUNCTION IN THE MARKETS

THE START OF FUTURE TRADING

THE ECONOMIC FUNCTION OF THE PRICE

THE RELATIVITY OF PRICES

■ The Law of Price Relativity

On February 1,1920, after World War I, a certain quantity of 106 commodities

THE LAW OF PRICE RELATIVITY

There is also an international relationship between commodity prices.

Table 1.1 Groups of commodities in percentage of 1909-13 as 100

Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Jan 1 Sept 1

Breadstuffs 123 137 127 126 87 71 54 105

Table 1.2 1909-13 monthly average price by groups

Jan Feb March April May June

Breadstuffs .10026 .10164 .10276 .10174 .10648 .10588

July Aug Sept Oct Nov Dec

Breadstuffs .10524 .10030 .09722 .09728 .09782 .09912

Provisions and Groceries

Fresh and Dried Fruits

Native Steer Hides No. 1 Union middlebacks

Raw and Manufactured Textiles

Table 1.3 Continued

Coal and Coke

Mineral and Vegetable Oils

Chemicals and Drugs

THE GENERAL TREND OF COMMODITY PRICES

1 A country that is engaged in international commerce must keep its money

basis eventually. A change in the fundamental situation of Supply and Demand

THE LAW OF SUPPLY AND DEMAND