CHAPTER FIVE Volumes and Their Significance

AS the whole object of these studies is to learn to read what the tape says, I will now explain a point which should be known and understood before we proceed, otherwise the explanations cannot be made clear.

First of all, we must recognize that the market for any stock - at whatever level it may be - is composed of two sides, represented by the bid and the asking price. Remember that the "last sale" is something entirely different from the "market price." If Steel has just sold at 50, this figure represents what has happened. It's history. The market price of Steel is either 49 1/8@50 or 50@50 1/8. The bid and asked prices combined form the market price. This market price is like a pair of scales, and the volume of stock thrown out by sellers and reached for by purchasers, shows toward which side the preponderance of weight has momentarily shifted. For example, when the tape shows the market price is 50 1/8, and the large volumes are on the up side.

500 @ 50
1000 @ 50 1/8
200 @ 50
1500 @ 50 1/8

In these four transactions there are 700 shares sold at 50 versus 2500 bought at 50 1/8, proving that at the moment the buying is more effective than the selling. The deduction to be made from this is that Steel will probably sell at 50 1/4 before 49 7/8. There is no certainty, because supply and demand is changing with every second, not only in Steel but in every other stock on the list.

Here is one advantage in trading only the leaders: The influence of demand or pressure is first evidenced in the principal stocks. The hand of the dominant power, whether it be an insider, an outside manipulator or the public, is shown in these volumes. The reason is simple. The big fellows cannot put their stocks up or down without trading in large amounts. In an advancing market they are obliged to reach up for or bid up their stocks, as, for example:

1000 @ 182 1/8
200 @182
1500 @ 182 1/8
200 @ 182 1/4
3500 @ 182 3/8
2000 @ 182 1/2

Take some opening trades and subsequent transactions like the following:

200... 47 1/4

100... 45 7/8

100... 45 7/8

1900... 46 3/4

100... 46 1/8

100... 46

100... 46 5/8

100... 46

600... 45 7/8

100... 46 1/2

200... 46 1/4

500... 45 3/4

100... 46 3/8

100... 46 3/8

200... 45 5/8

600... 46 1/4

11 A. M.

100... 45 1/2

100... 46 1/8

300... 46 3/8

100... 45 5/8

600... 46

100... 46 1/8

400... 45 7/8

100... 45 7/8

100... 46

100... 45 3/4

200... 45 3/4

100... 45 7/8

400... 45 5/8

100... 46

100... 46

100... 45 3/4

Here the opening market price was 46 3/4 bid @ 47ź asking, and the buyers of 200 shares "at the market" paid the high price. All bids at 46 3/4 were then filled. This is proved by the next sale, which is at 46 5/8. The big lots thereafter are mostly on the down side, showing that pressure still existed. The indications were, therefore, that the stock would go lower. A lot of 1900 shares in some stocks would be a large quantity; in others insignificant. These points have a relative value with which traders must familiarize themselves. Volumes must be considered in proportion to the activity of the market, as well as the relative activity of that particular issue . No set rule can be established. I have seen a Tape Reader make money by following the lead of a l000 share lot of Northwest which someone took at a fraction above the last sale. Ordinarily Northwest is a sluggish investment stock, and this size lot appeared as the fore-runner of an active speculative demand.

Now let us see what happens on the floor to produce the above-described effect on the tape. Let's prove that our method is correct.

A few years ago the control of a certain railroad was being bought on the floor of the New York Stock Exchange. One brokerage house was given all the orders, with instructions to distribute them and conceal the buying as much as possible. The original order for the day would read, "Take everything that is offered up to 38".

38 was about 3 points above the market of the day before. This left considerable leeway for the broker to whom the buying order was entrusted. He would instruct his floor broker as follows: "The stock closed last night at 35. You take everything offered up to 35 1/2 and then report to me how things stand. Don't bid for the stock - just take it as it is offered and mark it down whenever you can". In such a case the floor member stands in the crowd awaiting the opening. On the markets open the chairman's gavel strikes and the crowd begins yelling. Someone offers "Two Thousand at an eighth." Another broker says "Thirty-five for five hundred." Our broker takes the 2000 at an 1/8 then offers one hundred at one-eighth himself, so as to keep the price down. Others also offer one or two hundred shares at 1/8, so he withdraws his offer, as he wishes to accumulate and only offers or sells when it helps him buy more, or puts the price down.

The buyer at 35 has 300 shares of his lot cancelled, so he alters his bid to "thirty- five for two hundred." The other sellers supply him and he then bids "7/8 for a hundred." Our broker sells him 100 at 7/8 just to get the price down. Someone comes in with "a thousand at five." Our broker says, "I'll take it." Five hundred more is offered at 1/8. This he also takes.

Let us see how the tape records these transactions:

Open 35

2000 @ 35 1/8

200 @ 35

100 @ 34 /7/8

100 @ 35

500 @ 35 1/8

The day trader interprets these transactions: Opening bid and asked price was 35 1/8 someone took the large lot (2000 shares) at the high price. The two sales following were in small lots, showing light pressure. The 100 @ 35 after 34 7/8 shows that on the 7/8 bid -5 ask market the buyer took the stock at the offered price and followed it up by taking 500 more at the eighth. The demand is dominant and it does not matter whether the buyer is one individual or a dozen, the momentary trend is upward.

To get the opposite side, let us suppose that a manipulator is desirous of depressing a stock. This can be accomplished by offering and selling more than there is a demand for, or by coaxing or frightening other holders into throwing over their shares. It makes no difference whose stock is sold; "The Lord is on the side of the heaviest battalions," as men used to say. When a manipulator puts a broker into a crowd with orders to mark it down, the broker supplies all bids and then offers it down to the objective point or until he meets resistance too strong for him to overcome without the loss of a large block of stock. The stock in question is selling around 80, we will say, and the broker's orders are to "put it to 77." Going into the crowd, he finds 500 wanted at 79 7/8 and 300 offered at 80. Last sale, 100 at 80. "I'll sell you that five hundred at seven-eighths. A thousand or any part at three quarters," he shouts. "I'll take two hundred at three-quarters," says another broker. "A half for five hundred," is heard. "Sold!" is the response. "A half for five hundred more." "Sold 1" "That's a thousand I sold you at a half. Five hundred at three-eighths!" "I'll take a hundred at three-eighths," comes a voice. "You're on!" is the reply. "Quarter for five hundred." "Sold!" is the quick response.

His pounding of the stock would reveal itself on the tape as follows:

Open 80

500 sold@ 79 7/8

200 sold@ 79 3/4

1000 sold@ 79 ˝

500 sold @79 ź

If he met strong resistance at 79 it would appear on the tape something like this:

1000 sold @ 79

500 sold @ 79

800 @ 79

300 @ 79 1/8

1000 @ 79

500 @ 79 1/4

200 @ 79 1/2

showing that at 79 there was a demand for more than he was willing to supply. (For example: There might have been 10,000 shares still wanted at 79 which is more than he could supply). Frequently a broker meeting such an obstacle will leave the crowd long enough to phone his principal. His departure opens the way for a rally, as the stock is no longer under pressure, and the large buying order at 79 acts as a back log for floor traders. So those in the crowd bid it up to 79 1/2 in hopes of scalping a fraction on the long side.

Take another case where two brokers are put into the crowd - one to depress the stock and the other to accumulate it. They play into each other's hands, and the tape makes the following report of what happens:

Open 80 1/8 - 80

200 @ 79 7/8

1000 @ 79 7/8

200 @ 79 5/8

500 @ 79 3/4

300 @ 79 3/4

1500 @ 79 1/2

500 @ 79 1/4

100 @ 79 1/8

Were we on the floor we should see one broker offering the stock down, while the other grabbed every round lot that appeared. We cannot tell how far down the stock will be put, but when these indications appear it makes us watch closely for the turning point, which is our time to buy. The Tape Reader does not care whether a move is made by a manipulator, a group of floor traders, the public or a combination of all. The figures on the tape represent the consensus of opinion, the effect of manipulation and the supply and demand, all combined. That is why tape indications are more reliable than what anyone hears, knows or thinks.

With the illustration of the pair of scales (supply & demand) clearly implanted in our minds, we scan the moment by moment transactions of the tape, mentally weighing each indication in our effort to learn on which side the tendency is strongest. Not a detail must escape our notice. A sudden demand or a burst of liquidation may enable us to form a new plan, revise an old one or prompt us to assume a neutral attitude.

These volume indications are not always clear. Nor are they infallible. It doesn't do any good to rely upon the indications of any one stock to the exclusion of the rest. There are times when certain stocks are run up, while volume indications in other active stocks show clearly that they are being distributed as fast as the market will take them. This happens frequently on a large or small scale. Especially is it apparent at the turning point of a big swing, where accumulation or distribution requires several days to complete.

Volumes can be studied from the reports printed in the Wall Street Journal, but the real way to study them is from the tape. If you are not able to spend five to seven hours a day at the tape while the ticker is in operation, you can arrange to have the tape saved for you each day. The tape can then be studied at leisure. In studying under these conditions let it be on as small a scale as you like, but make actual trades with real money.

There are times when the foregoing rule of volumes indicates almost the reverse of what we have explained. One of these instances was described in our last chapter. In this case the transactions in Reading suddenly swelled out of all proportion to the rest of the market and its own previous volume.

700... 143 5/8

500... 143 3/4

5000... 143 5/8

1700... 143 3/4

200... 143 5/8

4300... 143 3/4

3700... 143 7/8

100... 144

12 P.M.

5000... 144

1300... 143 7/8

3000... 144

5000... 144 1/8

2100... 144 1/4

2200... 144 1/8

3500... 144 1/4

4000... 144 3/8

3000 144 1/4

2500... 144 1/8

3500... 144

400... 144 1/8

1000... 144

500.... 144 1/8

1100... 144

2000... 143 7/8

2500... 143 3/4

1000... 143 5/8

Notwithstanding the predominance of apparent demand, the resistance offered (whether legitimate or artificial) became too great for the stock to overcome, and it fell back from 144 3/8. On the way up these volumes suggested a purchase, but the tape showed abnormal transactions, accompanied by poor response from the rest of the list. This smacked of manipulation and warned the operator to be cautious on the bull side. The large volume in Reading was sustained even after the stock reacted, but the large lots were evidently thrown over at the bid prices. On the way up the volumes were nearly all on the up side and the small lots on the down side. After 144 3/8 was reached the large lots were on the down side and the small lots on the up.

It is just as important to study the small lots as the large lots. The smaller quantities are like the feathers on an arrow - they indicate that the business part of the arrow is at the other end. In other words, the smaller lots keep one constantly informed as to what fraction forms the other side of the market. For example: During the first five trades in Reading, recorded above, the market quotation is shown to have been 5/8@3/4; it then changed to 3/4@7/8 and again to 7/8@4. On the way down it got to be 4@1/8, and at this level the small lots were particularly valuable in showing the pressure that existed.

Stocks like Union, Reading and Steel usually make this sort of a turning point on a volume of from 25,000 to 50,000 shares. That is, when they meet with opposition on an advance or a decline it must be in some such quantity in order to stem the tide. Walk into the hilly country and you will find a small river running quietly on its way. The stream is so tiny that you can place your hand in its course and the water will back up. In five minutes, it overcomes this resistance by going over or around your hand. You fetch a shovel, pile dirt in its path, pack it down hard and say, "There, I've dammed you up". But you haven't at all, for the next day you find your pile of dirt washed away. You bring cartloads of dirt and build a substantial dam, and the flow is finally held in check. It is the same with an individual stocks or the market. Prices follow the line of least resistance. If Reading is going up someone may throw 10,000 shares in its path without perceptible effect. Another lot of 20,000 shares follows; the stock halts, but finally overcomes the obstacle. The seller gives another order - this time 30,000 shares more are thrown on the market. If there are 30,100 shares wanted at that level, the buyer will absorb all of the 30,000 and the stock will go higher; if only 29,900 shares are needed to fill all bids, the price will recede because demand has been overcome by supply.

It looks as though something like this happened in Reading on the occasion referred to. Whether or not manipulative orders predominated does not change the aspect of the case. In the final test the weight was on the down side.

The public and the floor traders do not stand aside while the manipulator is at work, nor is the reverse true. Everybody's stock looks alike on the tape. The following is a good illustration of E. H. Harriman's work at an important turning point in Union Pacific:

When a stream breaks through a dam it goes into new territory. Likewise the breaking through of a stock is significant, because it means that the resistance has been overcome. The stronger the resistance, the less likelihood of finding further obstacles in the immediate vicinity. Dams are not usually built one behind the other. So when we find a stock emerging into a new field it is best to go with it, especially if, in breaking through it, it carries the rest of the market along.

While a lot can be learned from the reports printed in the daily newspapers mentioned above, the moment by moment transactions & trades as they appear - is the only real instruction book. A live tape is to be preferred, for the element of speed with which you receive the information is of no small concern. The comparative activity of the market on peaks and breaks is a guide to the technical condition of the market. For instance, during a decline, if the ticker is very active and the volume of sales large, voluntary or compulsory liquidation is indicated. This is emphasized if, on the subsequent rally, the tape moves sluggishly and only small lots appear. In an active bull market the ticker appears to be choked with the volume of sales poured through it on the advances, but on reactions the quantities and the number of impressions decrease until, like tile ocean at ebb tide, the market is almost lifeless.

Another indication of the power of a movement is found in the differences between sales of active stocks, for example:

1000 @ 180

100 @ 180 1/8

500 @ 180 3/8

1000 @ 180 1/2

This shows that there was only 100 shares for sale at 180 1/8, none at all at 180ź, and only 500 at 3/8. The jump from 1/8 to 3/8 emphasizes both the absence of pressure and persistency on the part of the buyers. They are not content to wait patiently until they can secure the stock at 180ź; they "reach" for it. On the opposite side this would show lack of support.

Each indication is to be judged not so much by rule as according to the conditions surrounding it. The tape furnishes a continuous series of motion pictures, with their respective explanations written between the printings. These motion pictures of the market are in a language which is foreign to all casual investors but understandable to the professional Tape Reader.

A number of people who have read previous editions of this book have been misled by the apparent ease with which some kinds of markets may be read by means of the volumes. They have erroneously come to the conclusion that all one has to do is sit beside a ticker and observe which side the volumes are on - the buying or the selling side. This is a mistake. Under the old exchange rule a buyer who desired to influence the market in an upward direction could bid for 10,000 shares or any other very large quantity, and no one could sell him any less than the quantity bid for, unless the buyer was willing to take it. Under the present rules, the buyer is obliged to take any part of 10,000 shares, or whatever quantity he bid for if he does not specify all or none to his broker. This revision of the rules, and the other restrictions against matched orders, manipulations, etc., eliminates a very large number of transactions in big quantities at the advanced or the decreased price. It was an old trick of Harriman's and some of the old Standard Oil party, as well as other minor manipulators and floor traders, to make these bids and offers in round lots and have some one else supply or take them for its effect on the market. But the change in the rules has greatly reduced the volume and decreased the value of these indications. Hence, while they are still very suggestive to an observant tape reader, and while the principle is unchanged, it will not do to depend on them entirely.

The volumes which we have been discussing are least liable to mislead when manipulation prevails, for the manipulator is obliged to deal in large blocks of stock, and must continually show his hand. A complete manipulative operation on the long side consists of three parts: 1) Accumulation, 2) marking up, and 3) distribution. In the case of a shorting operation - the distribution comes first, then the mark down and the accumulation. No one of these three sections is complete without the other two. The manipulator must work with a large block of stock or the deal will not be worth his time, the risk and expenses. The Tape Reader must therefore, be on the lookout for extensive operations on either side of the market. Accumulation will show itself in the quantities and in the way they appear on the tape. He does not buy it at once, because it may take weeks or months for the manipulator to complete the accumulation of his line, and there might be opportunities to buy cheaper. By holding off until the psychological moment he forces someone else to carry the stock for him - to pay his interest. Furthermore, his capital is left free in the meantime. When the marking up begins he gets in at the commencement of the move, and goes along with it till there are signs of a halt or distribution. Having passed through the first two periods, he is in a position to fully benefit by the third stage of the operation. In this sort of work a figure chart, which I described in another chapter, will help the trader, especially if the manipulative operation is continued over a considerable period of time. It will give him a bird's-eye view of the deal, enabling him to drop or resume the thread at any stage.