Chapter Seven of The Sign of Four begins with Watson escorting Miss Morstan home and then meeting with Holmes in Pinchin Lane, as previously agreed. Throughout the rest of the chapter, there are a number of key events which contribute to Holmes making his great hypothesis about the murders.
First of all, Holmes traces the murderer's footsteps to ascertain how he gained access to Sholto's bedroom. Next, he employs a sniffer dog called Toby to track the scene of creasote which Holmes found on a handkerchief. This takes Holmes and Watson on a "six mile trudge" across London but it yields important results.
After these two events, then, Holmes delivers his hypothesis to Watson. This is a turning point in the novel because it demonstrates Holmes's powers of deduction and drives the plot to its great climax. As he explains to Watson, Holmes has now fathomed that the "wooden-legged man" is, in fact, Jonathan Small, whose name appeared on a map that Miss Morstan had in her possession. From his foray on the roof, Holmes deducts that Small needed the help of another man to ascend Sholto's house and that it was this man, Small's associate, who committed the crime.
Armed with his thorough understanding of what has passed, Holmes now warns Watson of the potential dangers of locating Small and his associate. He asks Watson if he has his pistol while preparing his own revolver for action. By this time, the dog, Toby, has completed his journey across London and this sets the scene for the next chapter of the book and, more importantly, the pursuit of Jonathan Small.