BASIC LECTURE NUMBER ONE

PHILOSOPHY, HISTORY AND BASIC CONCEPTS

This is Lecture One of the Stock Market Institute’s Basic Series of Lectures. In
the future these lectures will be referred to as “The Basic Series” to
differentiate them from others that are part of other SMI programs.
These lectures are part of your Wyckoff Course and are to some extent another way
of presenting the art of speculation. The purpose of these lectures is to
supplement the written course, to present later refinements and to aid you in
learning and in integrating the principles into a full understanding of how the law
of supply and demand relates to the stock market.
In this series there will be extensive discussions of individual principles.
Whenever possible we will cover only one main subject on each tape. However in
some lectures there will be combinations of subjects. That simply cannot be
helped. In reality the principles all relate to one another in an orderly process.
It is difficult and sometimes impossible to study a principle or market phenomenon
in complete isolation.
In this lecture we will present some of the philosophy, history and basic concepts
of the Stock Market Institute and the Wyckoff Course. Perhaps the most important
concept for you to understand is our corporate purpose. SMI is a private business
school teaching stock market science and technique and the art of speculation. We
also function as a service bureau, offering essential data for technical stock and
market analysis. We are a teaching institution and a service bureau; education and
services. Education comes first and is our primary concern at this time.
Let’s look for a moment at how and where does the Wyckoff Course fit into the stock
market. There are generally two basic methods of stock analysis, the fundamental
approach and the technical approach. The fundamental approach deals with balance
sheets, profit and loss statements, estimates of management, new products, etc. and
attempts to relate these to current and future value of an individual stock.
Fundamentals can be and are often used very satisfactorily for long term moves,
often lasting many years in duration.
These fundamentals are one step removed from price and the further you get away
from dealing with the price of the stock itself, the more difficult your analysis
problem becomes. The most serious defect of the fundamental approach is the
absence of “importance of timing.” Timing is extremely important in the stock
market. There is a good time to buy a bad stock and there is a bad time to buy
what has been a very good stock and usually by the time the changed condition of
either the stock or the general market has shown itself in the fundamental news and
statistics, the best time to make your purchase or sale (has) already past. This
is one of the reasons why people get locked into so called good stocks for many
years without realizing any profit.
The technical approach deals with the price of the stock itself and regards the
stock as a separate commodity, subject to the laws of supply and demand. There are
two main branches in technical analysis, a mechanical approach and a judgment
approach. Let’s deal with the mechanical approach first.
The commonly accepted grandfather of the mechanical approach (is) Schabacher, who
wrote a very thick volume during the 1920’s after comparing thousands of mechanical
chart patterns described in such descriptive terms as head and shoulders, double
top, triple top, gap, pennants and so forth. He has been widely copied and many
students have been exposed to this approach before becoming a Wyckoff student.
Our approach to the stock market is best described by the course title, “A Study of
Stock Market Science and Technique and the Art of Speculation.” It is a complete,
thorough approach in the understanding of how to make money in the stock market;
how to accumulate it and how to multiply its value. This came from the old time
professional stock speculators. There is a world of difference between theory and
practical experience and the Wyckoff Course is based directly upon the practical
experience of an outstanding professional stock market operator, Mr. Richard D.
Wyckoff.

A BRIEF HISTORY OF THE WYCKOFF COURSE

Mr. Wyckoff was experienced and qualified in every important area of the stock
market: Founder and publisher of the then prestigious “Magazine of Wall Street,”
stock market advisor to thousands, author of numerous articles, editorials and
books based upon personal experience and his association with such famous
speculators as Harriman, Keene and Livermore and with other leaders of finance
during his era; Richard D. Wyckoff tells us in his own words: “By taking the best
of what forty years in Wall Street have taught me and preparing it for others so
that it can be readily absorbed and applied, I will be creating something that
should aid in establishing a new standard of practice in the public’s stock market
operations. I do not claim any monopoly of stock market knowledge, but up to this
time, no one else seems willing to be so frank in offering to the public the most
intimate knowledge of the inner workings of the stock market.” Thus with forty
years of study and personal experience, Mr. Wyckoff crystallized his knowledge into
one writing and published “The Richard D. Wyckoff Course in Stock Market Science
and Technique.”
Since then, The Stock Market Institute, formerly known as Wyckoff Associates, Inc.,
has continuously endeavored to preserve the value of this course. As new
principles have been discovered, they have been added to the time tested laws upon
which the curriculum is based. The same watchfulness (is) applied to new
techniques of market operation. These are being reviewed and developed as time,
regulations and market conditions change. Our knowledge and educational program is
in a continuous state of evolvement and has been enhanced with each management
succession.
When death came to Mr. Wyckoff in 1934, Mr. Robert E. Stanlaus assumed the
responsibility to continue to offer the public specialized education in the stock
market science and technique. He expanded the program with material (that) he and
Mr. Wyckoff had written since the original printing.
In 1951 Mr. Robert G. Evans began his career as the promulgator of the Wyckoff
Course. Mr. Evans has made considerable contributions to the benefit of all
students of market action. They are most notable in the further development of
technical analysis, market psychology and philosophy. His unique talent in using
analogies to explain various market phenomena and principles (has) become an
inseparable part of the Wyckoff Course.
Lloyd I. Andrews was selected in 1967 to continue SMI’s leadership in educating the
public in a true understanding and knowledge of stock speculation. Mr. Andrews
placed emphasis in the development of a structured educational program to enhance
and speed up the learning process. He has expanded the SMI with both experienced
educators and market speculators. Today SMI proudly offers over seventy-five years
of continuous study in stock speculation; a proven product, professionally prepared
and presented by a uniquely competent staff of principled people.
It is our experience that you will discover you have no need for anything more of
any other technique than Wyckoff and should you use other techniques along with
your Wyckoff Course, it can hurt you. This is a very difficult thing for many
students to accept because most students, prior to their Wyckoff experience, have
tried to learn about the market by picking up an idea here, picking up an idea
there, trying them out and if they show reasonably good results, using them. Often
these people become intellectual gimmicks collectors. Forget it! It will cost you
money, much money. You have enrolled into a proven, time tested program. Please,
discipline yourself to learn it (and) practice it as taught. Don’t return to a
trial and error approach.
Actually there are many good things written in books, but often they are mixed up
with other ideas and concepts which are not valid. It is a long, costly and
difficult process to determine what is valid and what is not. At SMI we have
already sifted out what is good and useful and after thorough testing have
incorporated it in the Wyckoff Course; it has already been done for you.
Actually, many things which we read or hear about simply are not reliable. For
instance, occasionally you will read, “the short interest is the highest in
history,” and this is interpreted as being very bearish. This high short interest
may be perfectly natural because of the increased and increasing number of stocks
which are outstanding and are traded. Again, you may read that “the market went
down today, but it was on less volume and therefore that is perfectly normal.” In
fact, there are times when it is perfectly normal for the market to go down with
somewhat decreasing volume and that can still be bearish, depending upon the
circumstances. You see, very often the basic assumption that is made is completely
wrong and that leads to disaster. Again, you may have read that “a gap is always
filled.” Sometimes it is many years before a gap is filled. There is still a gap
on “Chrysler” at 25/8 which was established in 1932. Do you want to wait for it to
be filled? Many are never filled. When a gap is filled, it is accidental or
incidental to the movement of the stock. If a principle is to be a principle, it
must work in all markets to be valid and reliable. The Wyckoff Course is based upon
principle and laws. It is valid! It is reliable!
SMI believes that there is a very definite distinction between short term trading
compared to trading important accumulation or distribution areas for intermediate
and major moves. The short move trading often requires what is essentially a tape
reading technique and a special understanding of the market. Trading the major
accumulation or distribution areas for a larger move is more readily understood.
For most students it is more profitable and it is the method of operation which
should be learned first. It is the basic method discovered and practiced by Mr.
Wyckoff. This is described very well in the text in sections 9, 10, 16, and 17 and
is summarized in section 21 of the Wyckoff Course. This type of operation lends
itself readily to long term capital gains which under current tax laws is a vital
concern to many of our students.
To trade a major accumulation or distribution area, you must have a large count, a
sign of strength and a last point of support. We would like to emphasize this
essential strategy, that you must have a large count, a sign of strength and a last
point of support! Stay out of the stock until it is on the springboard! We will
emphasize this repeatedly and illustrate it in later tapes. This is the precise
area where accumulation is being completed and an attempt is being initiated to
begin the mark-up process.
Now, just what do we teach and what can you learn at SMI? We teach the science,
the technique and the art of speculating in the stock market. Let’s review the
definition of these three terms.
1) Science: Knowledge of facts and laws arranged in an orderly system. This is
precisely our endeavor. Our study of stock market science provides a careful
insight into the sociological and psychological aspects of market operations. We
study the characteristics and habits of the individuals and groups participating.
We probe why the varying mental attitudes of these groups have an effect upon stock
prices and how the character of the market is influenced by psychological
conditions. Further, we expect the student to discover the importance of his
mental attitude and the effect it will have on his degree of success. Through
continuous practice trading, he will learn that disciplined application of
knowledge can overcome the common obstacles caused by one’s hopes and fears and
(by) one’s timidities and obstinancies.
2) Technique: Method or way of performing the mechanical details of an art or
science. Our approach to the stock market requires up to date records prepared
from the factual data of daily price action and volume of sales as compiled by the
principle stock exchanges. Vertical line and figure charts are constructed for a)
the individual stocks of particular interest; b) carefully selected indexes of
leading groups and c) sensitive indexes reflecting the condition of the general
market. From these we are able to make a serious and instructive study of the
action of the stock together with the action of other stocks of a similar character
and finally, the action of the market as a whole. Our students are schooled in the
techniques we believe are essential to technical analysis.
3) Speculation: Buying or selling where there is a large risk with the expectation
of making a profit from future price changes. We believe speculation is an art and
a science whose fine points may be readily learned by those who will apply
themselves to their studies. To become successful one must operate in the style of
the men who have proven their expertise. Learning the modus operandi of these
astute gentlemen will assist the student in developing this professional attitude
toward the stock market. Each student must learn to understand the meaning of
these definitions as well as the Wyckoff principles through systematic study. Then
it’s practice. Practice trading to test his understanding of their application and
to determine how he can best operate with them. Then, when ready, he will begin to
speculate with his capital.
It is important that we have a common language. In Volume Two of the course we
have included a glossary of terms. Whenever you are uncertain as to the exact
meaning of a term, we suggest that you refer to the glossary. If you find a term
that is not explained there, refer to your dictionary or ask us for our definition.
Occasionally a term will be used in a special way with a special meaning of SMI.
This arises out of our special usage and understanding of the market. It is often
helpful for a student to relate the technical terminology, that is the language of
analogies being used, down to whatever he does in his daily life. This may help in
using the principles and may prevent them from being purely abstract ideas. An
illustration of what we mean can apply to the term “selling climax.” Knowledgeable
speculators understand “selling climax” to be the phenomenon which occurs after a
stock has been going down, down, down and has reached the point where panic selling
begins to set in leading to a dumping of stocks by people who bought at higher
prices. This panic selling creates an expansion of the price spread and an
expansion of volume. The price weakens at an increasing rate. The price
characteristic is that it sharply increases at the point where “they,” the
professionals come in and absorb this panic selling: The down move is over and the
stock begins to rally. We call this action a “selling climax.”
The Wyckoff principle of a selling climax does not always occur at the end of every
decline. In other words, not all declines end with a selling climax, but when it
does, when you can identify it clearly, it is a principle. We can have a common
understanding that this is the principle of the selling climax and act and operate
accordingly. The principles do not change. However, they may manifest themselves
in many ways and where the price and volume will be different on each occasion.
It is very important to realize that the Wyckoff Course is based upon sound
principles. A principle has been defined as a comprehensive and fundamental law,
doctrine or assumption. It is an unchanging rule. Prove your principles. Learn
how the principles tie in with each other and learn to anticipate which principle
is likely to occur following the current unfolding picture of market activity.
Build your analysis on principles, not upon your feeling about the stock, not on
your hopes, dreams and wishes. That which is built upon principle is sound and
will last.
The Wyckoff Course is based directly upon the law of supply and demand and the law
of cause and effect. The law of supply and demand says, when demand is stronger
than supply prices will rise. When supply is stronger than demand, prices will
fall. The law of cause and effect says, in order to have an effect, you must first
build a cause. The effect will be in direct proportion to the cause and cannot be
separated from the cause. Very often the working of this law can be most easily
seen in the figure chart which sometimes has been called the cause and effect
chart. This is because to have a very large move, you must first build a cause of
a count. A stock, in order to have a major move, a large, large move, thirty,
forty, fifty percent or more usually goes through some form of accumulation or
preparation. This will show up on the figure chart as a large count.
We sometimes use a third law in our work and that is the law of effort versus
result. It is most readily seen in the working of the Optimism - Pessimism Index
and in the upthrust after distribution. The basic concept is that, if you have an
effort expressed, the result should be in proportion to the effort. In the
Optimism -Pessimism Index we have the phenomenon of the divergence and the
inharmonious action in which an effort on the part of either the Wyckoff Wave or
the O.P. Index is expressed and the other Index does not respond. Something may be
wrong and we’d better find out what is wrong and what to do about it.
In the case of the upthrust after distribution; if a stock has been moving up with
a two point spread every day with 10,000 shares and it breaks into the high ground
with 20,000 shares and a 1/2 point spread for a couple of days straight, we know
supply is coming in and is overcoming the demand. This is an effort which is not
having a proportionate result. Bulls have been buying stock and have not been able
to move the price when it should be at a critical point in the movement of the
market and therefore the stock is likely to be in trouble and have a reversal in
its movement.
As indicated previously, we teach the science, the technique and the art of the
stock market and the mechanics of the use of charts. We have found that there are
some suggestions which can be quite helpful in keeping your charts. First, always
keep your charts neat. Keep your charts as clean, neat and orderly as possible.
Once you have them organized this way, mark all indications on the chart, such as
trend lines, half-way points, climaxes, etc. We suggest that you keep your charts
in black ink, either using felt or ball-point pens. Put the temporary indications
in pencil and when you are completely certain of the calling and the identification
of the principles, then you may wish to change them to ink. Mark the important
indications in ink, but mark the relatively unimportant indications in pencil. You
may wish to erase the unimportant trend lines and other things later as the action
unfolds.
Start your charts on the same point on the page. This is very helpful technique.
Also, use the same volume and price scale for similar priced stocks whenever
possible. This eliminates posting a chart that you may have on a double or
quadruple scale as a single scale chart. This can be quite frustrating and lead to
market losses.
When analyzing, spend your time where it is most likely to pay off. If you have to
search for something, usually it is not worth finding on the charts. Often the
best situation will be obviously good almost at a glance. There are some
situations in which you will not be able to understand what is going on. Very
often no accumulation or distribution or anything of importance is going on in the
stock at that time. It is simply drifting with no large interests and sponsors
interested and no one preparing a campaign in it. In other stocks, you will be
able to determine what is going on, however you will not be able to take a trading
or investing position largely because the profit - risk ratio is not in your favor;
it is simply too risky: Or at times you may wish to stay out of the market because
of price or volume action which is somewhat obscure. To a large extent a student
should stay out of these first two types of situations. The third type of
situation is where you do understand what is going on and the move indicated is
large enough to give you a good risk. Analyze it thoroughly. Time your commitment
as well as you can and take your position. As soon as you have finished taking
your position, review it and then follow it through until you finally close it out.
It is often very helpful to write down what you think as you are analyzing or
perhaps to make notes on the charts. This is a way you can check your work later
and you will not lose track of your ideas. Writing down the main points of your
analysis forces you to organize logically and you are less apt to miss important
details. We have found it especially helpful to analyze the Wyckoff Wave in
writing every week. Also, it is helpful to write out your analysis of an
individual stock before taking a position in that stock. Prove to yourself (that)
you are making the correct decision. Be sure before you act.
Now for some comments on taking a position in a stock. If important accumulation
or distribution in a stock is going on, it is very difficult to hide it. This will
normally show up on the charts. When it is not clear, stay out! When indications
are clear, take a position with the timing and the profit - risk ratio in your
favor. Your first job is to protect your capital! Your second job is to obtain a
profit when the risk is in your favor.
If you are afraid to be wrong in the stock market you will have a very difficult
time because each time you take a position either in a practice trade or with the
bulk of your cash, you run the risk of being wrong. Very often we find that a
newer student has the majority of his initial trades wrong with losses. It is
better to take your losses with practice then to risk the bulk of your capital. A
funny thing about being wrong or being afraid to be wrong is that our ego normally
reacts to protect us from being wrong. Often we will rationalize, twist the truth
and in fact would rather lose money than to admit we are wrong.
Build on your profits and on the knowledge that you do have. Minimize the losses!
Learn what you can from your mistakes and try not to repeat them. This is a lone
wolf business. After having seen some bad experiences of students who were tempted
to work with others in the market, we recommend that you learn to rely on yourself
alone and when you have problems, discuss them only with an SMI staff instructor.
If you know another student you may wish to discuss principles. Never, but never
discuss trades! Learn to keep quiet. Very often another person will take the
opposite point of view and throw you off. Unconsciously, he may do this so that he
can be right and you be wrong: This is a professional malpractice which some
people do unconsciously and it is especially easy to do in the stock market. Learn
to make your own decisions. Discuss them with no one. Stick to your guns and
follow through until the commitment is completed.
We have often found that no two people trade the same. Quite by accident, a number
of years ago we found that three people in our office were trading the same stock.
The stock happened to be “Chrysler.” The first person had a capital gain of about
25 points and was attempting to obtain a much larger move. He was also attempting
to obtain a long term capital gain taxwise. However, he had diagnosed that
“Chrysler” was going to have a reaction of 10 to 12 points. He decided to ride
that reaction out in order to obtain the long term capital gain. The second man
diagnosed that the stock was going to go down and took a short position for about
10 points. The third man had had no previous interest in “Chrysler,” but as the
stock moved down to the end of the reaction he bought. The principles are the
same. It is the same stock, but three people operated in it differently. No two
people have the same character, personality or necessarily the same objectives.
You must define how you will operate through systematic practice trading and cash
trading.
In dealing with your broker it is often very helpful for you to have an
understanding of his functions and of your functions. Essentially he performs
three functions. One is to keep a record of your transactions and maintain your
account, another is to execute your buy (and) sell orders promptly and as
accurately as he possibly can and third, to provide you with factual information
when requested. Your function is to analyze and select stocks. You will have to
ask your broker to do what you want; to take your orders, to execute them, but to
give you no advice or other information unless asked for. If you need stock
quotations, you can arrange to get them through your broker’s secretary. We have
found that many students prefer to have a broker who is not located in the same
town. This eliminates overly frequent contacts and the inadvertent influence of
the broker on them. Again, one of the basic reasons for taking the Wyckoff Course
is to learn to operate based on your own judgment. We maintain that you can
operate independently and confidently with your Wyckoff principles. Ignore news,
tips, rumors, etc. Often news times the market; moves and motivates the neophyte
to do something: Usually it is to lose (his) own money. Often it gets you to act
irrationally. The stock moves down and then the bad news comes out on it. The
stock moves up, or we might say it is moved up and then the good news comes out.
The time to take your position, a short position, (is) before the stock is ready to
go down on the springboard and the time to take a long position is on the
springboard just before an important move up. You can learn to diagnose this from
market action alone.
The basic method of analysis we teach at SMI is spelled out in section 9, page 1,
paragraph 1. It reads as follows: “After we have determined the position and
probable trend of the general market and have examined the action of the various
groups to see which are most likely to go with and to lead the market as a whole,
we must single out those individual stocks which are in the best position for our
purpose, which is to operate in harmony with the indicated trend.” Restated, the
three strategic principles are: 1) He determines the trend of the market; 2)
Compares for strength and weakness and then;
3) Analyzes the individual stocks. Why? First you determine the trend of the
market, using the Wyckoff Wave, in order to go with the market. To buck the trend
of the market usually leads to extra problems or loss. Second, you compare for
strength or weakness (in order) to eliminate the obvious losers and to select those
stocks most likely to lead the market in the coming move. Third, you analyze an
individual stock to determine if it is ready to move. It must be on the
springboard.
In summation, you do not need to learn and know everything about the market in
order to make money. To begin to operate in the market it may be sufficient to
learn one or two important techniques, but learn them well. Apply them
systematically time and time again whenever the opportunity arises. You may make
only a few trades in a year and still have unusual profits. How? By trading for
the larger moves, keeping the profit - risk ratio well in your favor, a bare
minimum of 3 - 1 and by not risking all of your funds on one stock.
Few students appreciate the Wyckoff Course as they really should. Many at first
think they know as much about the market as we do. This is simply not true. In
learning to operate with the Wyckoff principles well, you will be operating as a
professional. There are relatively few real professionals in the market. There is
a somewhat larger number of reasonably good amateurs, but very few professionals.
You can be among elite. We hope you will learn this knowledge systematically,
apply it with diligence and discipline and begin receiving an increasing profit
from your efforts. By the time you have learned to operate profitably in the
market, you will have paid a rather modest price. The highest price you will have
to pay is in the time, the effort and the persistent dedication to learning and to
testing your knowledge. By that time you will have become a special person with a
special, most unusual and unique understanding of the stock market.
In succeeding tapes we will be referring to many of the refinements, analogies and
principles embodied in the Wyckoff Course. We will use some classic examples and
some oddball variations to drive specific points home. Perhaps the most important
thought or admonition which we can possibly put on any of these tapes is this; that
you regularly review your written three volume text along with these lectures.
These principles soon will slip away unless you keep reviewing and renewing your
knowledge. Read and re-read your text. Then practice, practice, practice and
practice some more the analysis and charting exercises included throughout your
course of studies. We have found the better students study it systematically,
learn it, practice it, rely on it exclusively and apply it, often to their great
and astonishing profit. This same success can be and should be yours.