Timing is the key-and the price-motion model described in this chapter is the key to timing! Chapter One presented an mvestment philosophy which is practical, and capable of producing very large yields on invested capiXel-pwvided transaction-timing accuracies of very high order can be achieved. Such accuracies simply are not possible using traditional approaches to mvesting.

SOMETfflNG NEW AND UNCONVENTIONAL IS REQUIRED

Only two basic reasons are advanced in traditional approaches for the price motion of stocks:

1. Random events causing individuals and groups to make buy and sell decisions at unpredictable times.

2. What investors think the impt of various "fundamental" factors may be on the price of a stock.

By their nature, random events cannot be of aid in the prediction of price changes. Foreseeable fundamental factors can theoretically help. In fact, researching these is the traditional approach. This whole field has been thoroughly plowed for many years by many competent people. It is highly unlikely that really significant transaction-timing improvement is achievable by going back over this well-trampled ground. If we are to achieve the needed help, it must come from another quarter entirely-and it will therefore be unconventional in nature.

This chapter supplies a third major reason for the price gyrations of stocks. For convenience we will call it "X motivation" for the present. It is the existence and nature of this factor upon which transaction-timing improvement depends, for it is the "something new and unconventional" that is required!

The material in this chapter does not constitute proof of the existence of the phenomena discussed. This will be developed bit by bit in later chapters in sufficient depth to satisfy most individuals. Where more rigorous evidence is needed, but would distract from the main theme (which is apphcations), references will be made to the Appendix at the appropriate times. With this in mind, let us state the objectives of the current chapter:

• To define the nature of price motion. The statements of fact then become an explanation or "model" of price change on which all specific timing methods will depend.

• To present simple graphical and visual demonstrations of key elements of the price-motion model. This is done for two reasons:

1. To provide you with enough evidence of model credibility to permit acceptance of the existence and nature of "X motivation" etfects so that you can make use of it without doubt or mental reservation.

2. To demonstrate for you the first of several graphic and visual techniques that you must learn to use later for yourself.

It should be borne in mind that something vastly unusual is necessary for our purpose. Some of the conclusions reached will appear strange indeed to persons versed in the traditional approach to socio-economic world-of-finance type problems. Such readers are strongly urged to reserve judgment until the entire story is unfolded. "The proof of the pudding is in the eating," and you will find that the methods described work!

WHAT MAKES PRICES CHANGE?

Decisions. Prices change because stock owners decide to buy or decide to sell at a specific time. Which way prices move when buyer and seller face each other (through exchange representatives) depends on how strongly the buyer feels about buying in relation to how strongly the seller feels about selling. But decisions in themselves are effects-not causes. Something causejan investor to decide to sell-and at a particular time at that.

The cause of decisions is "motivation." If a stockholder decides to sell for no other reason than to raise money to remodel the house, the motreation can be classed as random in nature. Millions of investors deciding to buy or sell for reasons unrelated to the current or possible future price of a stock cause price changes due to random motivation.

The magnitude of all such "randomly-motivated" price motion amounts to no more than two %! This statement is the first element of our price-motion model-and wffl appear incredible to many. Accept it for the moment, for it is a demonstrable fact. And it is one you must keep firmly in mind as you trade and prices vary in an apparently random manner.

THE IMPACT OF HISTORICAL EVENTS

One of the major misconceptions that must be dispelled is the conviction that large-scale historical events dominate market activity. From all sides we are continually presented with this or that national or worid event which is credited as the cause of current market behavior. In Chapter Nine it is shown that the facts just do not fit the conviction! And if you believe that they do, you are effectively prevented from applying a profit-optimized trading philosophy.

As a singular example, consider the case of the traumatic assassination of President Kennedy. It is to be hoped that you were not one of those who sold at a loss during the 15 minutes of panic following the announcement Beginning immediately thereafter, the market (as measured by the Dow-Jones 30 Industrial Average) climbed in nearly unbroken manner from the region of 710 to that of 1000!

The impact of wars, global financial crisis, and all other similar events on market price action is utterly negligible! This statement is tlie second element of our price-motion model.

THE SOURCE OF TRENDS

Historical events represent only one type of so-called "fundamental" motivation for the buying or selling of stocks. At least three other categories require consideration for our model:

• Events which can be anticipated and which influence the outlook for entire industry groups.

• Events which can be anticipated and which influence the outlook for a single issue.

• Events (usually associated with a specific company) which cannot be anticipated.

Foreseeable fundamental events influencing investor thinking regarding industry groups and specific issues account for 75% of the price motion of stocks. The effect is long-term, smooth, and trend-like in nature.

Unforeseeable fundamental events influencing investor thinking principally with regard to single issues add "specific randomness" to stock price . . The rate of occurrence is small, but the effect can be large and sudden.

These two statements are the third and fourth elements of the price-motion moel and can use amplification. Unlike historical events, investor motivation stemming from fundamental factors affecting group and individual issues does influence price-motion to a large extent. The effect is of the nature of an underlying trend which is relatively smooth and slow to change direction-if the factors involved are foreseeable. If not, the impact can be large and swift; this is the principal reason for the need of "profit-preservation" type action signals. Unfortunately, the underlying fundamental trend is of little use for our , except to accentuate price moves due to "X motivafion."

"X MOTIVATION "-AND WHAT IT DOES TO STOCK PRICES

The forgoing price-motion elements must be understood and used in successful trading-but they have virtually nothing to do with specific transaction timing! The bulk of the remainder of this chapter will have to do with that price element which does have to do with timing-namely: "X motivation."

First of all, discard any reservations you may have regarding choice of names. The all-important effect to be described exists and can be used-regardless of what causes it, or what it is called. The choice of the classical symbol of the unknown, "X," is simply based on the fact that only theories exist regarding the cause. That the effect is present and useful is not theory-and can in fact be proven beyond all question!

23% of all price motion is oscillatory in nature and semi-predictable! This is the result of "X motivation"-and the statement constitutes the fifth tenet of our price-motion model. The oscillatory motion involved is not simple-in fact it is extremely complex. Fortunately for our purposes, a few outstanding traits characterize it sufficiently to establish utility. We must now state and fully understand the impHcations of these traits. The description of oscillatory or "cyclic" price action will be referred to as the "cyclic moder-which in turn is one element only (though a very important one) of the overall price-motion model.

It is absolutely essenrial to your further progress that you gain a complete and fundamental grasp of the cyclic nature of this 23% of all price action! The facts are straightforward and simple-but elemental in their significance.

HOW CYCLICALITY EXPRESSES ITSELF IN THE MARKET

Let us first clarify what we mean by "oscillatory" or "cyclical." When a quantity starts low, rises smoothly and without interruption to a high-then descends in the