EXPLANATORY RULES
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Record prices in Upward Trend Column in black ink.
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Record prices in Downward Trend column in red ink.
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Record prices in the other four columns in pencil.
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Draw lines as follows:
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Draw red lines under your last recorded price in the Upward Trend column the first day you start to record figures in the Natural Reaction column. You begin to do this on the first reaction of approximately six points from the last price recorded in the Upward Trend column.
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Draw red lines under your last recorded price in the Natural Reaction column the first day you start to record figures in the Natural Rally column or in the Upward Trend column. You begin to do this on the first rally of approximately six points from the last price recorded in the Natural Reaction column.
You now have two Pivotal Points to watch, and depending on how prices are recorded. When the market returns to around one of those points, you will then be able to form an opinion as to whether the positive trend is going to be resumed in earnest—or whether the movement has ended.
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Draw black lines under your last recorded price in the Downward Trend column the first day you start to record figures in the Natural Rally column. You begin to do this on the first rally of approximately six points from the last price recorded in the Downward Trend column.
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Draw black lines under your last recorded price in the Natural Rally column the first day you start to record figures in the Natural Reaction column or in the Downward Trend column. You begin to do this on the first reaction of approximately six points from the last price recorded in the Natural Rally column.
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When recording in the Natural Rally column and a price is reached that is three or more points above the last price recorded in the Natural Rally column (with black lines underneath), then that price should be entered in black ink in the Upward Trend column.
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When recording in the Natural Reaction column and a price is reached that is three or more points below the last price recorded in the Natural Reaction column (with red lines underneath), then that price should be entered in red ink in the Downward Trend column.
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When a reaction occurs to an extent of approximately six points, after you have been recording prices in the Upward Trend column, you then start to record those prices in the Natural Reaction column, and continue to do so every day thereafter that the stock sells at a price which is lower than the last recorded price in the Natural Reaction column.
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When a reaction occurs to an extent of approximately six points, after you have been recording prices in the Natural Rally column, you then start to record those Prices in the Natural Reaction column, and continue to do so every day thereafter that the stock sells at a price which is lower than the last recorded Price in the Natural Reaction column. In case a price is made which is lower than the last recorded price in the Downward Trend column, you would then record that price in the Downward Trend column.
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When a rally occurs to an extent of approximately six points, after you have been recording prices in the Downward Trend column, you then start to record those prices in the Natural Rally column, and continue to do so every day thereafter that the stock sells at a price which is higher than the last recorded price in the Natural Rally column.
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When a rally occurs to an extent of approximately six points, after you have been recording prices in the Natural Reaction column, you then start to record those prices in the Natural Rally column, and continue to do so every day thereafter that (i.e. stock sells at a price which is higher than the last recorded price in the Natural Rally column. In case a price is made which is higher than the last recorded price in the Upward Trend column, you would then record that price in the Upward Trend column).
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When you start to record figures in the Natural Reaction column and a price is reached that is lower than the last recorded figure in the Downward Trend column—then that price should be entered in red ink in the Downward Trend column.
The same rule applies when you are recording figures in the Natural Rally column and a price is reached that is higher than the last price recorded in the Upward Trend column—then you would cease recording in the Natural Rally column and record that price in black ink in the Upward Trend column.
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In case you had been recording in the Natural Reaction column and a rally should occur of approximately six points from the last recorded figure in the Natural Reaction column — but that price did not exceed the last price recorded in the Natural Rally column—that price should be recorded in the Secondary Rally column and should continue to be so recorded until a price had been made which exceeded the last figure recorded in the Natural Rally column. When that occurs, you should commence to record prices in the Natural Rally column once again.
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In case you have been recording in the Natural Rally column and a reaction should occur of approximately six points, but the price reached on that reaction was not lower than the last recorded figure in your Natural Reaction column—that price should be entered in your Secondary Reaction column, and you should continue to record prices in that column until a price was made that was lower than the last price recorded in the Natural Reaction column. When that occurs, you should commence to record prices in the Natural Reaction column once again.
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The same rules apply when recording the Key Price—except that you use twelve points as a basis instead of six points used in individual stocks.
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The last price recorded in the Downward or Upward Trend columns becomes a Pivotal Point as soon as you begin to record prices in the Natural Rally or Natural Reaction columns. After a rally or reaction has ended you start to record again in the reverse column, and the extreme price made in the previous column then becomes another Pivotal Point.
It is after two Pivotal Point have been reached that these records become of great value to you in helping you anticipate correctly the next movement of importance. These Pivotal Points are drawn to your attention by having a double line drawn underneath them in either red ink or black ink. Those tines are drawn for the express purpose of keeping those points before you and should be watched very carefully whenever prices are made and recorded near or at one of those points. Your decision to act will then depend on how prices are recorded from then on.
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When you see black lines drawn below the last recorded red-ink figure in the Downward Trend column—you may be given a signal to buy near that point.
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When black lines are drawn below a Price recorded in the Natural Rally column, and if the stock on its next rally reaches a point near that Pivotal Point price, that is the time you are going to find out whether the market is strong enough definitely to change its course into the Upward Trend column.
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The reverse holds true when you see red lines drawn under the last price recorded in the Upward Trend column, and when red lines are drawn below the last price recorded in the Natural Reaction column.
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This whole method is designed to enable one to see clearly whether a stock is acting the way it ought to, after its first Natural Rally or Reaction has occurred. If the movement is going to be resumed in a positive manner—either up or down —it will carry through its previous Pivotal Point—in individual stocks by three points, or, in the Key Price by six points.
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If the stock fails to do this—and in a reaction sells three points or more below the last Pivotal Point (recorded in the Upward Trend column with red lines drawn underneath), it would indicate that the Upward Trend in the stock is over.
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Applying the rule to the Downward Trend: Whenever, after a Natural Rally has ended, new prices are being recorded in the Downward Trend column, these new prices must extend three or more points below the last Pivotal Point (with black lines underneath), if the Downward Trend is to be positively resumed.
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If the stock fails to do this, and on a rally sells three or more points above the last Pivotal Point (recorded in the Downward Trend column with black lines drawn underneath), it would indicate that the Downward Trend in the stock is over.
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When recording in the Natural Rally column, if the rally ends a short distance below the last Pivotal Point in the Upward Trend column (with red lines underneath), and the stock reacts three or more points from that price, it is a danger signal, which would indicate the Upward Trend in that stock is over.
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When recording in the Natural Reaction column, if the reaction ends a short distance above the last Pivotal Point in the Downward Trend column (with black lines underneath), and the stock rallies three or more points from that price, it is a danger signal, which would indicate the Downward Trend in that stock is over.
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Chart 1
On April 2nd, prices began to be recorded in Naturall Rally column, Refer to Rule 6-b. Draw black line under last price in Downward Trend column. Refer to Rule 4-c.
Chart 2
All of these prices recorded are brought forth from the prceding page in order to keep the Pivotal Points always before you.
During the period from May 5th to May 21st inclusive, no prices were recorded because no prices were made lower than the last price recorded in the Natural Reaction column. Nor was there sufficient rally to be recorded.
On May 27th, the price of Bethlehem Steel was recorded in red because it was a lower price than the previous price recorded in the Downward Trend column. Refer to Rule 6-C.
On June 2nd, Bethlehem Steel became a buy at 43. Refer to Rule 10-C and D. On the same day, US Steel became a buy at 42J4. Refer to Rule 10-F.
One June 10th, a price was recorded on the Secondary Rally column of Bethlehem Steel. Refer to Rule 6-E.
Chart 3
On June 20th, the price of US Steel was reorded in the Secondary Rally column. Refer to Rule 6-G.
On June 24th, prices of US Steel and Bethlehem Steel were recorded in black ink in the Upward Trend column. Refer to Rule 5-A.
On July 11th, prices of US Steel were recorded in the Natural Reaction column. Refer to Rule 6-A and 4-A.
On July 19th, prices of US Steel and Bethlehem Steel were recorded in the Upward Trend column in black ink because those prices were higher than those columns. Refer to 4-B.
Chart 4
On August 12th, the price of US Steel was recorded in the Secondary Reaction column, because the price was not lower than the last price previously recorded in the Natural Reaction column. On the same day, the price of Bethlehem Steel was recorded in the Natural Reaction column because that price was lower than the last price previously recorded in the Natural Reaction Column.
On August 24th, prices of US Steel and Bethlehem Steel were recorded in the Natural Rally column. Refer to Explanatory Rule 6-D.
On August 29th, prices of US Steel and Bethlehem Steel were recorded in the Secondary Reaction column. Refer to Rule 6-H.
Part of “How to Trade in Stocks” by Jesse Livermore.
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