Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Analyzing Trends using the Wycloff Method
Wyckoff tells us that the most important thing that anyone can know about the market or an
individual issue is its trend. The trend is most simply defined as being the line of least resistance.
Prices will tend to follow the line of least resistance until there is a significant development in
the action that suggests that a change in trend should be anticipated. A trader can look at the
price of a market or issue and compare it to the price from the previous day, week, month or year
and determine the direction in which it is trending. While this can be helpful in keeping a trader
on the right side of the action, Wyckoff had something more specific in mind for determining the
trend. He provided guide lines as to the proper way to define a trend so that it could be more
helpful in applying the five steps of the Wyckoff Method.
Trends can be defined in three directions and in at least three time frames. There are up trends,
down trends and horizontal trends normally referred to as trading ranges. Trends can be short
term in nature, intermediate term or long term. The time frames that one Wyckoff trader uses to
define the three durations of trends may be different than another Wyckoff trader uses. This does
not necessarily mean that one trader is correctly defining the trends and the other is incorrectly
defining them. The important point is that the trends that are defined by consistent with the time
frame of the market operation that is being undertaken. A short term trader may define the short
term trend as being one that is defined and completed in just a few days. This trader may view
intermediate term trends as being those that are defined and completed over several weeks and
he may look at long term trends as those that last no more than a couple months. The
intermediate term or longer term trader may see the short term traders idea of a long term trend
as being his short term trend. These traders may look at intermediate trends as lasting for several
months and long term trends as lasting a year and more. These traders cannot be faulted for the
different time frames they use to define trends of different durations. A problem only develops if
a trader defines trends in one time frame, but then attempts to operate in a different time frame.
This type of error can be fatal for a market operation.
An up trend in any time frame is defined by a demand line and an over bought line. A demand
line connects the low points of two consecutive reactions of similar significance where the
second reaction low is at a higher level than the first. Finding two reaction lows where the
second is higher than the first is a simple matter. However, some Wyckoff traders who are new
to the approach have difficulty with the idea of similar significance. Looking for reactions that
last for approximately the same number of days or move the price approximately the same
distance can be helpful in identifying reactions of similar significance. While Wyckoff would not
necessarily frown on this approach, he would prefer that the trader identify two consecutive
reaction lows that are both important points in the action. The most important points in the action
for those looking for an up trend are the primary buying opportunities. Combining two of these
to define the demand line of an up trend is seen as being the best approach.
To complete the definition of an up trend, the Wyckoff trader needs to define the over bought
line of the trend. This line is constructed parallel to the demand line. It passes through the top of
the rally or advance that is between the two reaction lows used to define the demand line. A
common error that new Wyckoff traders make in defining the over bought line is to use a top that
comes before or after the two lows used to define the demand line. Making this error will result
in a trend channel that is either too wide or too narrow. The purpose of the over bought line is to
indicate where thrusts in the up trend are likely to end. Defining a trend that is too wide or too
narrow can result in the trader looking for rallies to end higher than is likely or to close out
positions at prices that are lower than necessary.
A down trend is defined by a supply line and an over sold line. The supply line connects the high
points of two consecutive rallies of similar significance where the top of the second rally is at a
lower level than the first/ Wyckoff would prefer that two consecutive lows that are both
important points in the action be used to define the supply line. The most important points in the
action are those that Wyckoff identifies as primary selling opportunities. The over sold line of a
down trend is constructed parallel to the supply line through the low point of the reaction or
decline that separates the two points used to define the supply line. Defining the over sold line
through a point before or after the two points used to define the supply line will result in a
distorted trend.
Normal trend development will have an up trend and a down trend or two trends pointing in the
same direction separated by a horizontal trend or trading range. Trading ranges are defined by a
support level and a resistance level. If a trading range is following an up trend, the resistance
level will be defined first. If a trading range is following a down trend, the support level will be
defined first. The resistance level of a trading range following an up trend is defined horizontally
through the high point of the up trend that is being completed. The support level of this trading
range is constructed parallel to the resistance level and passes through the low point of the
reaction that follows the point used to define the resistance level. The trading range is confirmed
by the rally that follows the low used to construct the support level if that rally respects the
resistance level of the range. The support level of a trading range following a down trend is
defined horizontally through the low point of the down trend being completed. The resistance
level of this trading range is constructed parallel to the support level and passes through the high
point of the rally that follows the point used to define the support level. This trading range is
confirmed by the next reaction if that reaction does not make a lower low than the one used to
define the support leve,
Since the trend is the most important thing that any Wyckoff trader can know about the action of
a market or an issue, defining the appropriate trend or trends for the time frame of the market
operation that is being undertaken is the first thing that a trader should do each time an
assessment of the action is made. A chart that does not have accurately defined trends drawn on
it is unlikely to produce a profit for the trader. Without trend channels, it is not possible to
identify buying or selling opportunities or to properly asses the progress of an existing position.
The trend is your friend as long as you trade in harmony with it.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Primary Buying Opportunities
Test of Springs
After the stock market or an individual issue has been in a spring position and has responded to
the spring with a rally, there is likely to be a test of the spring. The test provides supply with a
second opportunity to come pouring into the market to crush the price and begin a sustained
decline. In these cases, the test is said to have failed.
However, in those cases where supply does not take control of the action, the test is said to have
been successful. These are the tests that Wyckoff traders want to consider buying. As was the
case with the spring position, successful tests of springs are likely to be followed by a rally. Most
of the time, the response to the test of a spring takes the price to a higher level than was recorded
on the initial response to the spring. Sometimes, the higher high is much higher
The quality of a test of a spring and its desirability as an entry point on the long side are
determined by price spread and volume. A high quality test is one that unfolds on narrowing
price spreads and decreasing volumes. The ideal test is one where the average volume as the test
develops is less than the average volume that was seen during the days leading to the spring
position.
The same is true with the price spreads. A high quality test will unfold on price spreads that on
average are narrower than those leading to the spring. A third factor to consider in determining
the quality of a test is where the low point of the test is in relationship to the low point of the
spring. A high quality test will put in a higher bottom than was recorded on the spring.
Not all tests are of high quality. However, not all lower quality tests fail. There are three ways in
which a test can reveal itself to be of questionable quality. One is by making a lower low than
the spring. This is a concern especially for the trader who took an initial position on the spring
because it provides supply with another opportunity to step up and take control of the action.
A test can also be considered to be of lower quality if the average volume on the test is greater
than it was on the development of the spring. The lowest quality tests are those that make a
lower low than the spring and are done on higher volume. As a general rule, these tests should
not be traded. The risk of the test failing is too great if it is of the lowest quality.
With some tests ending well above the low point of the spring while others more nearly reach the
low point of the spring and still others make new lows, it can be difficult to judge exactly where
the test will end and where a position should be established. There are guidelines to consider in
making these decisions. One is the halfway point of the response to the spring. Since it is normal
for a bullish rally to be followed by a halfway correction, the halfway point of the response to
the spring can be used a place to open a position.
Another level to consider is the support level that was sprung. If the price respects that support
level on the test, it is indicating that a position can be justified. A third level of importance is the
support level defined by the low point of the spring. This is the lowest level at which a position
should be seriously considered.
Those tests that are judged to be of lower quality either because of a lower low, higher volume or
both will likely be tested again at a later date assuming they do not fail. These are usually
referred to as being more important tests. Their quality is also determined by price spread,
volume, low point and by a fourth factor. As with the initial test, the Wyckoff trader is looking
for narrower price spreads, lower volumes and a higher bottom on the more important test.
The fourth factor to consider is whether the response to the first test put in a higher high than the
initial response to the spring. The ability to make a higher high on the response to the first test
indicates that the bulls are willing to follow the price higher. If a more important test exhibits all
four factors mentioned, it can be considered to have corrected the problem or problems that were
present on the first test and taking a position can be considered.
The disciplined Wyckoff trader will never take a position without at the same time placing a stop
or buying some insurance. When a position is taken on the test of a spring, it is important that the
stop be placed below the low point of the spring to keep the stop from being vulnerable. If the
potential indicated by the figure chart is not sufficient to allow the stop to be placed below the
low point of the spring, a position should not be taken. The determination as to whether the stop
can be placed below the low point of the spring is based on how many points are being risked
and how many points of potential profit are indicated. At least three points of potential profit
should be indicated for each point that is risked.
Some Wyckoff traders choose to take their full position on the spring. Some choose to take their
full position on the test of the spring. Both groups are taking more risk than those who choose to
take only a partial position on the spring and then adding a second partial position on the test.
The goal is to build a winning position as the action unfolds. After the test of the spring, there
are two additional opportunities that may provide places to add other partial positions.
© The Jamison Group, Inc.: Stock Market Primary Buying Opportunities- Back Ups
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Primary Buying Opportunities
Normal Corrections
Even after an issue or the market has left a trading range to the up side, jumped the creek and
backed up, a Wyckoff trader may still be presented with one more type of primary buying
opportunity. It or they depending on how the action unfolds develop on normal corrections in
the up trend that follows the trading range. Most advances develop as a series of thrusts rather
than one sustained push toward the indicated objective. After each thrust, a correction of that
portion of the advance that has just been completed is likely. If the correction is normal and if
the character of the action during the correction is bullish, a Wyckoff trader is provided with an
opportunity to add to a position that was opened earlier at a lower level, or to take an initial
position if the amount of remaining potential in the anticipated move is large enough to make the
effort worthwhile.
What is a normal correction? A normal correction is one where the price retreats to the vicinity
of the halfway point of the previous thrust to the up side. Over the years, the vicinity of the
halfway point has come to be known as anything between the one third and two thirds point of
the previous advance. If the upward thrust that is being corrected was large, the vicinity of the
halfway point of the thrust is also going to be relatively large. Therefore, the Wyckoff trader
should not mechanically preselect the point in the vicinity of the halfway point that will be the
entry point. Using the one third point can be too high resulting in a position being stopped out
just as it is about to turn and make the anticipated advance. Using the two thirds point can be too
low resulting in potentially good trades being missed. Using the halfway point will usually
result in a position being opened. However, even entering at this relatively safe point can
represent an error in judgment if one critically important factor has not been considered.
The all important factor in determining where in the vicinity of the halfway point that a position
should be considered is the character of the action. If the price is correcting the previous thrust
on wide spread and high volume, it is best to not take a position no matter where the price is in
the vicinity of the halfway point. This combination of price spread and volume is most likely to
be bearish. Taking a long position during bearish action can easily lead to the position be
quickly stopped out. The character of action that the Wyckoff trader wants to see in the vicinity
of the halfway point is action that is most likely bullish. Bullish action is indicated by narrow
spreads to the down side on relatively low or decreasing volume. There are no mechanical guide
lines as to how narrow the spreads have to be or how low the volumes have to be for the action
to be considered bullish. However, if the price is in the zone defined as the vicinity of the
halfway point and the spreads are the narrowest they have been on average during the whole
correction and if the volumes are the lowest they have been during the entire correction, it
usually safe to conclude that the correction is nearing an end.
Another consideration that can be helpful in determining where in the vicinity of the halfway
point to enter a position is the position of the price in the up trend. If the price is at or above the
middle of the up trend channel, it is best to avoid a position. The closer the price is to the
demand line of the up trend channel the more interesting it is for a new position. However, this
assumes that the character of the action is bullish. Bearish action at the bottom of the up trend
channel suggests that the trend is about to be weakened or broken. In these cases, it is best to
look for another trade candidate,
If a position is established in the vicinity of the halfway point, selecting a price at which to place
a protective stop order can be a challenge. Ideally, the initial stop should be placed below the
bottom of the zone defined as the vicinity of the halfway point. However , this is frequently not
possible do to the rule that Wyckoff traders should never risk more than one point for every three
points of anticipated profit. Due to the fact that a portion of the initial up side potential has been
consumed by the time these types of positions are entered, it may be necessary to place the
protective stop within the zone of the halfway point. Since the entry point is also in this zone,
there is a greater risk of being stopped out. Therefore, the trader must feel absolutely certain that
the character of the action is bullish before the position is taken.
Most Wyckoff traders use the vicinity of the halfway point to add to an already wining position
established at a lower level. Wyckoff traders should always strive to build winning positions
rather than averaging in to losing positions. However, the halfway point can also be used if the
trader has for some reason missed out on earlier opportunities. Another time when these types of
positions can be helpful is when positions taken previously in early leaders in an advance have
reached their objectives and funds become available to use for new positions. Sometimes an
advance is large enough to allow for more than one normal correction of a previous advance.
These later corrections of additional thrusts may provide additional entry points.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Buying Tests - Part One
How to Take a Profitable Position in the Stock Market
Wyckoff traders looking for a trading opportunity on the long side have a number of options that
may be employed in an effort to identify the best trade candidates. Using the five steps of the
Wyckoff method and searching for primary buying positions are two options.
A third approach is to use the series of nine buying tests that Wyckoff identifies. Each buying
test is a development in the price and/or volume action that indicates that the price is preparing
for an advance. It is normal for buying tests to be passed over a period of time.
A creek is the zone of resistance usually near the top of a trading range defined by a series of
rally tops within the trading range. It represents an obstacle to up side progress that must be
overcome if the price is going to work out the potential that has been built while the price has
been in the trading range. The price overcomes the resistance with a sign of strength indicated by
a combination of price spread and volume action.
There are three elements to the combination of price spread and volume action needed to
accomplish a jump.
The first element is wide price spreads to the up side over several days as the price passes
through the zone of resistance defined by the earlier rally tops.
The second element is strong closes on those days with the wide spreads. If the price makes a
wide spread to the up side and then closes at or near the bottom of the spread, the indication is
that supply was met and overcame the demand that entered the market and that the price is not
ready to leave the trading range.
The third element is high volume. High volume confirms the sign of strength indicated by the
price action. Most potential jumps will take the price through the resistance level of the trading
range and decisively into new high ground relative to all the action that occurred during the
trading range. However, some will not.
If the trading range is especially wide and most of the rally tops during the range are well below
the resistance level, it is possible for a jump to be accomplished without moving the price up and
out of the range. In those cases, the Wyckoff trader needs to recognize the fact that the resistance
level of the range still represents an obstacle to up side progress that may derail the bullish
scenario from unfolding as anticipated even though there was a jump and a back up. Some
Wyckoff traders elect to avoid these situations due to the higher degree of doubt involved.
The completion of a jump is normally indicated by a dramatic narrowing of the price spreads to
the up side following the wide spreads that moved the price through the zone of resistance.
When this action occurs, the Wyckoff trader knows that the back up is about to begin and that it
is time to start paying close attention to the day to day action so as not to miss the opportunity to
take a position. When the back up begins, the trader needs to identify in advance where it is
likely to be completed. It is impossible to pinpoint exactly at what level the back up is likely to
be completed. The creek that was jumped was defined by a range of values and the area in which
the back up is likely to be completed is defined by a range of values.
The first step in identifying where this range of values is located is to find the halfway point of
the advance that produced the jump. Wyckoff tells us that it is normal for an advance to be
corrected with a reaction to the vicinity of the halfway point of the advance. The halfway point is
likely to be above the zone of values that represent the creek or in that zone. If the halfway point
is above the creek, the back up is most likely to be completed between the halfway point and the
top of the creek. If the halfway point is in the creek, the back up is most likely to be completed
between the halfway point and the low point of the creek.
Those situations where the back up is likely to be completed above the top of the creek are the
best. In those situations where the back up reenters the creek, there is a risk of the price falling
back into the creek resulting in no buying opportunity.
Having an idea in advance where the price is likely to complete the back up is important.
However, the most important factor on a back up is the character of the price and volume on the
back up. If the back up unfolds with the same combination of wide spreads and high volumes
that were present on the jump, there will be no opportunity to take a long position. In these cases,
the price is most likely to fall back into the creek.
All that the potential jump accomplished was to suck in premature bulls and the bearish
character of the back up tends to lock them into positions that probably will not be profitable. A
bullish back up is indicated by narrowing spreads and decreasing volumes as the price reaches
the pre-identified zone where the back is anticipated to end. This combination of where the price
is and how it got there is what indicates to the Wyckoff trader that taking a position should be
considered.
Taking a position on a back up is similar to buying the test a spring or a spring in one respect.
Any position opened on a back up must be protected with a stop. Ideally, the potential up side
objective will be high enough above the entry price to allow the initial stop to be placed below
the support level of the trading range. The anticipated objective must be high enough above the
entry price to allow the initial stop to be placed below the low point of the creek. Placing a stop
so close to the entry price that it is in the creek is an invitation to be stopped out.
Theoretically, taking a long position on the back up to a creek where the jumping of the creek
allowed the price to move up and out of a trading range is the best of all buying opportunities.
This is because it provides the clearest indication that the preparation phase has been completed
and that the price has the strength to overcome all obstacle to up side progress.
© The Jamison Group, Inc.: Stock Market Buying Tests - Part One
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Buying Tests - Part 2
How to Take a Profitable Position in the Stock Market
After an individual stock has completed a stopping action with preliminary support, a selling
climax, automatic rally and secondary test, a Wyckoff stock market trader needs to see the price
demonstrate relative strength. It is most desirable if the stock shows relative strength compared
to other issues in the same stock market industry group and to the stock market as a whole.
There are two ways that a stock
can demonstrate that it is relatively strong. One way is to look at the bigger picture. On the
decline that was stopped by the selling climax, how much down side progress did
the stock make? This should be measured from the top of the previous advance to the bottom of
the decline that has just been stopped.
The measurement should be taken in terms of a percentage not in terms of the number of
points lost. The percentage decline in the individual stock being considered should be compared
to that of other issues in the same group. If an industry group index is available for that industry,
it would be a good idea to compare the performance of the individual issue to that on the group
index.
A similar comparison should be made to a general stock market index. Those stocks that can be
determined to have performed more bullishly on the previous decline relative to other issues in
the group and the general market are most likely to be the best candidates for new long positions.
Relative strength also needs to be demonstrated after a previous decline has been stopped. The
tendency is to assume that the preparation following a decline is going to be for an advance. This
is not always the case. If the price of an individual stock does not continue to demonstrate
relative strength during preparation for its next move, there is a good chance that the move being
prepared will be in the same direction as the previous move. Relative strength in the trading
range that prepares the price for its next move can be identified by comparing the percentages of
the rallies and reactions within the range to those in other stocks in the same industry group and
to the general stock market.
The Wyckoff stock market trader should also consider the character of the price and volume
action on the rallies and reactions during the trading range phase. If the rallies are made quickly
with wide price spreads, increased volumes and strong closes, the action is providing an
indication of strength. These issues are more likely to be better long candidates than those issues
that have to struggle to make their rallies. On the reactions within a trading range, relatively
strong issues will struggle to make down side progress. Their price spreads will be relatively
narrow compared to those during the rallies within the range and their volumes will be relatively
lower. This combination of narrower spreads and lower volumes should make the action during
the reactions appear more laborious.
Wyckoff traders looking for stock trading opportunities on the long side should avoid stocks and
markets that make laborious rallies during the trading range and then give back the ground
gained quickly. This pattern suggests that the sellers are still in control of the action. Traders
should also beware of issues that make both high volume wide spread rallies and reactions
within the trading range. These rapid swings in the trading range are more often an indication of
distribution than accumulation.
When an stock or the market has stopped a decline and moved into a trading range, it is likely
that the previously defined down trend will still be in tact. During this period, the down trend
and the trading range are said to be in competition for control of the action. Wyckoff stock
traders should wait until the trading range has won the competition before seriously considering
an entry on the long side.
The trading range has won the competition when the supply line of the previously defined down
trend has been broken. Many times, there is a particular set of steps that unfold in the action that
lead to the breaking of the supply line. They begin with the price making a small and relatively
insignificant penetration of the supply line. This is said to weaken the line.
On the day or days that this is accomplished, the price will likely spend part of the day above
and below the supply line. The price will likely follow up on the weakening of the supply line
with a move back into the heart of the down trend channel. This provides the price with an
opportunity to demonstrate that the down trend is still in solid control of the action or to provide
an indication that the level of control has been diminished by the weakening of the supply line.
If the degree to which the down trend is in control has been compromised, the next rally should
decisively break the supply line. This is demonstrated by wide price spreads on increased
volumes that result in the entire spread for a day or several days is above the supply line. The
final step in breaking the supply line is when the stock's price reacts back toward the supply line
on narrower spreads and lower volumes and refuses to reenter the down trend channel.
The sixth buying test is met when the stock's price demonstrates the ability to put in higher
supports on rallies. This can be shown by the action within a trading range or after the price has
left the trading range to the up side. Frequently, the rallies and reactions within a trading range
will all be completed near the top and bottom of the range.
The Wyckoff stock market trader should not automatically consider this to be a bearish
indication. It is actually normal action. Some times, the low points of the reactions within the
trading range will put in gradually higher bottoms. This indicates a willingness on the part of
buyers to pay a higher price suggesting that the price is getting ready to leave the trading range
to the up side.
A pattern of higher supports in a trading range and the desirability of seeing the price move into
the primary buying position of a spring seem to be at odds with each other since it is not possible
for the price to maintain a consistent pattern of higher bottoms and still move into a spring
position. The development of a spring position following a pattern of higher bottoms on
reactions does not neutralize the stock's bullish indication of the higher supports. It actually
confirms it by providing supply with one last opportunity to reclaim control of the action. If
supply declines to take advantage of the opportunity, the stock trader can conclude that the price
is ready to make an effort to leave the trading range to the up side.
The test of higher supports can also be demonstrated after the stock has left the trading range to
the up side. Two of the primary buying opportunities develop when the price is passing this
buying test. Both the back up to a creek and a normal correction of a previous advance require a
higher support. The entire definition of and the continuation of a stock's up trend require a
pattern of higher supports. The seventh buying test is a logical follow up to the sixth test. It and
the last two buying tests will be considered in part three of this series.
© The Jamison Group, Inc.: Stock Market Buying Test - Part two
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Buying Tests - Part Three
How to take a profitable position in the Stock Market
Wyckoffs sixth buying test was to look for a pattern of higher supports on reactions indicating
that the bulls are willing to pay gradually higher prices for the shares that they are accumulating.
The sevenths buying test is passed when a pattern of higher tops on rallies is observed. This
indicates that the bears are requiring gradually higher prices before they are willing to enter the
market on the short side.
It also reflects a willingness on the part of the bulls to hold their positions longer before exiting
the market. A pattern of higher tops on rallies can be identified while the price is in a trading
range or after it has left the range and has begun to trend.
A pattern of higher tops on rallies and higher bottoms on reactions is most clearly observed after
the price has left the trading range and has begun to trend. A consistent pattern of higher tops
and higher bottoms is what defines an up trend. Perhaps the most important higher top is the one
that is recorded on a jump across the creek. This is the thrust that propels the price out of the
trading range and on its way toward its objective.
A Wyckoff trader wants to see a pattern of higher tops, but never buys as one is being put in
place. An important rule in Wyckoff is to only buy on reactions and only sell on rallies. If a
position is established on the back up that follows a jump, the expectation is that the next upward
thrust will make an even higher top than was recorded on the jump. As long as the rallies
continue to put in higher tops and the up side objective has not been reached, the position can be
held. Traders should beware of the rally that fails to put in a higher top. When this happens, it is
an indication that the character of the action is changing. When there is a change in character, the
trader should become more defensive in the managing of any position that is held. This can take
the form of raising the stop to a point closer to the current price. It can also take the form of
closing out a portion of an existing position or exiting the position entirely.
Higher tops within a trading range and a consistent pattern of higher tops and bottoms in a range
can signal that the price is getting ready to jump the creek and leave the range to the up side. If a
position is established in anticipation of a jump, the Wyckoff trader needs to be very disciplined
in managing it. If the price does not jump on the next rally or at least continue the pattern of
higher tops within the trading range, consideration should be given to closing the position. If a
position is established after a pattern of higher tops has been identified and the price is still in the
trading range, the trader needs to fell comfortable placing the initial stop below the bottom of the
trading range. The reason for this is the possibility that the price may need to spring the trading
range before it is able to leave the range to the up side. If this happens and the stop has been
placed within the trading range, it will be caught and the position will be eliminated likely at a
loss just before the move that was anticipated actually begins.
The eighth buying test for Wyckoff traders is to identify that a base has formed on a figure chart.
This is another way of saying that there needs to be a trading range following a previous decline.
The trading range or base contains the potential for the next move. Without that potential,
meaningful up side progress is unlikely even if the action in the trading range appears
constructive. There are no rigid rules in Wyckoff as to how large a base should be before
consideration is given to establishing a position. This determination has to be based on the type
of market operation the trader is conducting. Some traders get nervous easily. They are
uncomfortable holding positions for a long time. They do not want to make the extra effort to
defend a position as needed so as to allow a bigger move to be completed. They are looking to
take a smaller profit quickly and then move on to another opportunity. These traders can be
satisfied with a base that only indicates a five to fifteen percent move. Most Wyckoff traders are
looking for an intermediate sized move. These are usually identified as being in the range of
offering a 25% to 40% profit potential. Traders who are looking for these opportunities are going
to be less active. The least active traders are those who require the largest bases before they will
consider taking a position. Usually, these are bases that offer the possibility of at least a 50%
move. Whatever profit potential a trader establishes, it is important that the requirement be met
before a position is established.
The final buying test is one of the most important. Wyckoff teaches traders to never take a
position unless the anticipated profit is at least three times the indicated risk. The figure chart of
the action indicates what the profit potential is, but the trader determines what the indicated risk
is. This is accomplished by the placement of a stop or alternate defensive measure. Some
Wyckoff traders require a higher ratio of potential profit to indicated risk. These traders use
closer stops. Closer stops will limit the potential loss on trades but they increase the vulnerability
of being stopped out. The three to one ratio provides the position with an ample amount of
wiggle room while at the same time providing a high level of protection.
© The Jamison Group, Inc.: Stock Market Buying Tests - Part Three
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Directional Indicators and Timing Tools
Wyckoff traders have several tools that can help them determine the direction in which the
market or an individual issue is likely to move and the likelihood of a change in that direction.
These tools are the Optimism-Pessimism Index (O.P.), Technometer (Tec) and the Force. They
are all derived from the volumes of the intra-day buying and selling waves.
The purpose of these tools is to confirm the indications provided by the price and volume action.
They are not intended to take the place of a regular interpretation of the character of the price
and volume action, the trend of that action or the position of the action in the trend.
Those who attempt to use them in this incorrect manner are embracing an mechanical approach
to Wyckoff. The market may let them get away with this approach for a while. However, the
Wyckoff approach is judgmental and not mechanical. Those who persist in efforts to use these
tools in a mechanical manner will eventually pay a price for their laziness.
Wyckoff tells us that for a move in the market or an individual issue to continue there needs to
be harmony between effort and result. The result is measured by the amount that price moves
from point A to point B. The effort is measured by the O.P. The O.P. moves from point A to
point B by adding the volume in the up waves and by subtracting the volume in the down waves.
As long as the price of an index or an individual issue and its O.P. are moving in the same
direction at approximately the same rate making similar highs and lows relative to previous
highs and lows, the price is likely to continue making progress toward an indicated objective.
Positions taken in anticipation of an objective being reached can be maintained as long as this
harmony exists and new positions can be considered at appropriate points in the action. If there
is a lack of harmony between effort and result, Wyckoff traders need to be more defensive with
respect to existing positions because the lack of harmony suggests a change in the direction of
the price movement. Although these indications can be detrimental to existing positions, they
also represent opportunities to consider positions on the other side of the market.
When effort and result are not moving in the same direction at approximately the same rate, the
condition is referred to as inharmonious action. Inharmonious action can be corrected without a
change in the direction in which prices are trending by either effort or result accelerating to catch
up with the other or hesitating to allow the other to catch up.
If harmony is not restored, there will be a change in the direction in which the trend of the action
is pointed. Some inharmonious actions are obvious and some are not. However, there is one type
of inharmonious action that is especially obvious. It is a divergence.
A divergence develops when the lack of harmony is so great that the price action and the action
of the O.P. do not make new highs or new lows relative to previous rally tops or reaction lows at
the same time. Divergences can be bullish or they can be bearish. They can result from too much
effort for the result, or they can result from too much result for the effort. In each case, the
development of a divergence is a warning of an impending change in the direction of the price
movement.
A bullish divergence develops when the price of a market or an issue makes a lower low on a
current reaction than on the low point of the previous reaction but the O.P. does not make a
similar lower low. A bullish divergence also develops when the O.P. makes a lower low on a
current reaction than on the previous reaction and the price does not make a similar lower low.
Either way, the lack of harmony is so great that the result is likely to be a change in the direction
of the price movement away from the direction in which it was moving when the divergence
developed. Although both types of bullish divergence favor an advance in the price, one has over
time tended to be more reliable than the other in turning the price.
If the O.P. makes a lower low and the price does not, the situation is indicating effort without
result. This is the more reliable bullish divergence. The effort has been expressed but the price
has not responded. Therefore , as the effort is relaxed, the price is likely to move in the opposite
direction. In the other type of bullish divergence where there has already been a result expressed
by the price not supported by the effort, the effort may still enter the market and eliminate the
divergence. Since the effort has this extra opportunity to correct the situation, this type of bullish
divergence is somewhat less reliable in warning of a likely change in direction.
Bearish divergences are measured across the tops of rallies rather than across the bottom of
reactions. As was the case with bullish divergences, there are two types of bearish divergences.
One is where there is effort without result. It is the more reliable type.
There is also the type where there is a result without effort. The effort without result variety is
when the O.P. on a current rally makes a higher high than on the previous rally, but the price
does not. The result without effort variety is when the price makes a higher high on the current
rally relative to the high on the previous rally but the O.P. does not.
Divergences should not be used as timing tools for entering or exiting positions. They provide
warning of likely changes in the direction of price movement, but they do not trigger the change
in direction by themselves. A divergence that develops on one day may widen over the days that
follow resulting in a more extreme divergence providing a stronger warning. Therefore, a
position taken on the first day that a divergent condition develops could be stopped out as the
divergence becomes more extreme resulting in the trader being moved to the sidelines just where
he should actually be taking a position.
The best place to act on the indication of a divergence is when it confirms a primary buying or
selling opportunity. A bullish divergence in combination with a primary buying opportunity is
more likely to produce a change in direction than either the divergence or the buying opportunity
alone. The same is true of bearish divergences in combination with primary selling opportunities.
The development of divergences is not limited to the price action and the O.P. action. They can
also develop between the price action and the Force. The Force measures the amount of volume
in the intra-day buying waves relative to the volume in the intra-day selling waves over a ten day
period.
The primary difference between the Force and the O.P. is that the Force looks at a limited
amount of time while the O.P. does not. As the excess of volume in the up waves grows relative
to the volume in down waves, the value of the Force moves higher. It may move from a more
negative number to a less negative number, or from a negative number to a positive number, or
from a less positive number to a more positive number.
The absolute value of the Force reading is not what matters most. What does matter is how the
peaks and valleys in the Force relate to rally tops and reaction lows in the price. Divergences
develop when the price and the Force do not make higher tops or lower bottoms together. When
this happens, the excess or lack there of in the accumulated up side volume over the down side
volume during the ten day period reaches an extreme that needs to be corrected by a turn in the
direction of the price movement.
The short term excesses mentioned above are a tool that can be used in timing the entry or
exiting of a position or an adjustment in how a position is managed. The Force also provides a
directional indication. If the values of the Force from day to day are posted to a chart, the
Wyckoff trader will note that they tend to trend. This means that there will be periods of time
when there are lower peaks and lower valleys and periods of time when there are higher peaks
and higher valleys. Trend lines can be drawn on a chart of a Force just as they can be drawn on a
chart of the price action. When a tend in the movement in the Force is broken, the indication is
that a change in the direction of the price action should be anticipated. As with the price and O.P.
relationships, the price and Force relationships are most reliable when they confirm primary
buying and selling opportunities.
The Tec is a timing tool only. It indicates over bought and over sold conditions. The Tec
measures a ratio of the volume in the intra-day buying waves relative to the volume in the
intra-day selling waves over a five day period. However, longer time periods can be used to
provide longer term over bought and over sold indications. Theoretically, the Tec reading of a
market or an issue can range from zero to one hundred.
However, neither of these extremes has ever been recorded or is likely to ever be recorded. A
reading of zero would require five consecutive days during which there were only one intra-day
wave per day and only down waves for each of the five days. A reading of one hundred would
require five consecutive days during which there were only one intra-day wave per days and
only up waves for each of the five days. Decades of monitoring Tec readings have revealed that
readings of 50 or higher should be viewed as indicating an over bought condition and that
readings of 38 or lower should be viewed as indicating over sold conditions. A reading of 44.4
indicates absolute neutrality. When an over bought condition is indicated, the price is vulnerable
to down side progress. When an over sold condition is indicated, the price is vulnerable to up
side progress. If an over bought or over sold condition on one day is replaced by a more over
bought or more over sold condition the next day, the vulnerability of the price to a reaction or
rally increases. The degree to which the market or an issue is over bought or over sold does not
provide any indication as to the size of the reaction or rally that is being forecasted. These
indications are provided by figure charts. Although over bought or over sold indications may
develop at any time as the price action unfolds from day to day, those that develop when the
price is in primary buying or selling positions are the most important.
The indications provided by the O.P., the Tec and the Force should be used to confirm the
indications of the price action. They should not be used in lieu of an interpretation of the price
and volume action. Anyone who does so is attempting to use these tools in a mechanical manner
and that will not result in the desired results over time. This warning cannot be stressed to much.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Figure Charts, Counts and Counting
An important part of the Wyckoff approach is the use of figure charts. Figure charts are a tool
that Wyckoff traders can use to compress the action of the market or an individual issue to
provide a perspective that may not be effectively provided by a bar chart. They provide an
insight as to the future level of the market or future price of an individual issue. They can be
effectively used as a supplement to the study of price and volume action and they can be grossly
misused by traders who are caught up in wishing and hoping for things that have little chance of
ever being realized.
Figure charts come in a wide range of shapes and sizes. In order to be a effective tool in a market
operation, a trader must learn how to select the type of figure chart that it best suited for the
chosen type of market operation. To some extent this has to be a trial and error exercise.
However, there are some general guide lines that can prove helpful. The most important of these
is to match the time frame of the figure chart that is used to the time frame of the market
operation. If a Wyckoff trader is focusing on a short term market operation, he is likely looking
for moves in individual issues of ten to fifteen percent in a four to six week time frame. This type
of operation requires a more sensitive figure chart. For moderately priced issues that normally
means a one point figure chart. However, for low price issues, a half point figure chart may be
selected to provide the sensitivity needed to measure the smaller moves that these issues usually
make. For very low priced issues, a Wyckoff trader may even choose to use a quarter point
figure chart. If a trader is operating in an intermediate time frame focusing on twenty-five to
forty percent moves over three to six months, the one point figure chart may still be acceptable
for most moderately priced issues. In this type of operation, a trader might also want to use the
one point figure chart for lower priced issues as well to reduce the sensitivity of the chart
allowing the trader to focus on the more important developments. In a similar manner, the
intermediate trader might choose to use a two point modified or five point modified figure chart
for high priced issues or those that have a history of being especially volatile. The longer term
investor looking for moves of fifty percent or more perhaps lasting as long as a year should focus
on the modified variety of figure chart so as not to be distracted by shorter term developments.
A figure chart will not help a Wyckoff trader assess the quality of the price and volume action of
an issue or a market. Its purpose is to provide a projection of future value. It does this with the
development of a count. A count is a vertical projection based on the horizontal development on
the figure chart produced by the price movement from day to day and in some cases even
intra-day. The count taken at a particular price level includes all of the horizontal divisions on
the chart at that level whether there is a positing in the division or it is blank. As long as the price
trades at or around the level being counted, the count provides a measure of the amount of
potential being built for the advance or decline that will follow. When the price leaves the area in
which the count level is located, the count is actually taken and the target of the anticipated
move is indicated.
The manner in which a Wyckoff trader selects the level at which the potential is measured and at
which the count is taken depends on whether an advance or a decline is anticipated based on the
character of the price and volume action. If the trader is anticipating an advance, a sign of
strength and the last point of support that follows the sign of strength are identified. A sign of
strength may be a spring position and the response to the spring. It could be a jump across the
creek. It might also be a rally within a trading range accomplished on widening price spreads and
increased volumes. In the case of the spring and response, the last point of support is the test of
the spring. For a jump across the creek, the last point of support is the low point of the back up.
If the sign of strength was an aggressive rally within the trading range, the last point of support
will be the low point of the correction that follows the sign of strength. In each case, the
potential is measured and the projection of future value is made from the last point of support.
If a Wyckoff trader is anticipating a decline, a sign of weakness and a last point of supply must
be identified to determined at what level the potential should be measured and the count taken.
Signs of weakness include an up thrust and response, a fall through the ice and a reaction within
a trading range that unfolds on widening spread and increased volume. The last point of supply
following an up thrust and response is the test of the up thrust. The rally back to the ice is the last
point of supply following a fall through the ice. The last point of supply following an aggressive
reaction within a trading range is the high point of the corrective rally that follows the reaction.
If a spring position or an up thrust position makes a small penetration of the support level or
resistance level being penetrated and if the level of volume on the penetration is a small
percentage of the average volume, the indication of strength or weakness and the last point of
support or supply will be represented by the spring or up thrust. In these cases, there may not be
a clearly defined test. Therefore, the trader is justified in measuring the potential and taking the
count from the low point of the spring or the high point of the up thrust. Even if a test is
anticipated, a trader may want to take a count from the spring or up thrust so as to get a more
conservative indication of potential an objective. Wyckoff teaches that the most conservative
count should always be taken first and that the decision to trade or not to trade should be based
on the projection of the most conservative count.
Many times, counts can be broken into phases. Within a trading range, the price may rally and
react several times before the last point of support or supply is reached and the price is ready to
leave the range. If an up count is being taken, the low point of each reaction in the trading range
represents the end of a phase. If a down count is being taken, the high point of each rally in the
trading range represents the end of a phase. In addition to indicating the objective of the entire
count, a Wyckoff trader should identify the objective as each phase is added. This is done
because the reaching of each of these interim objectives is potentially the end of the move. As
each objective is reached, the trader needs to focus on the character of the price and volume
action looking for indications of continuing bullish or bearish action or for a change in the
character of the action. If there is no change in the character of the action, the trader can look to
the next indicated objective. If there is a change in the character of the action, the trader needs to
be more defensive in the management of that position even to the point of closing out the
position even if the maximum objective is much higher or lower.
Frequently as larger long term moves unfold, the price will move into short term trading ranges
along the way to rest following a thrust. Often, these resting spells occur in and around the
objectives of phases in a larger count. These trading ranges build short term potentials resulting
in short term counts that may confirm the objective of the next phase of a larger count. If so, they
are called stepping stone confirming counts. They provide an indication that the move will be
continuing and not ending.
Counts on a figure chart should never be considered to be more than an indication only. Once set
in place, they do not guarantee that the price will reach the indicated objective. Above all else is
the character of the price and volume action. In the final analysis, it determines what is possible
and likely. If a position is held in an issue where the indicated objective is higher or lower than
the current price but there is a change in the character of the action in that issue, the trader needs
to respond to that change in character. The response may be to increase the level of protection.
The response may be to close the trade. Opting to do nothing in response frequently results in
ending up with less than was possible and much less than was anticipated.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading, The Wyckoff Method
Two Goals, Three Laws and Five Steps
Applying the Wyckoff approach to stock market trading can be complicated due to the many
variations in the manner in which stock market action can unfold. However, the foundation upon
which the method is built is quite simple. The foundation of the Wyckoff method consists of two
goals, three laws and five steps all of which can be simply stated in a relatively few words. The
stock market trader or investor who builds his understanding of the Wyckoff approach on this
foundation can become consistently successful no matter how complicated the curves are that the
markets throw at him.
One goal of the Wyckoff stock market trading approach is to make a profit on a consistent
enough basis that exceeds the rewards available from investment vehicles where the return is
absolutely guaranteed and for those profits to exceed guaranteed returns by a wide enough
margin to make the effort worth while. However, this is not the most important goal of the
Wyckoff method. The most important goal is the preservation of capital. Every time the stock
market is entered capital is put at risk. There is no way around this. However, risk can always be
managed. Wyckoff teaches that no position should be taken unless it has a predetermined exit
strategy. The stock market provides vehicles such as stops and options that help manage
risk. One or more of these tools should always be in place when position is taken. Protection of
capital should never be an after thought. Having something in mind to do later if developments
warrant frequently results in doing nothing until the pain of a mounting paper loss becomes
unbearable.
The three laws in the foundation of the Wyckoff stock market trading method are the law of
supply and demand, the law of cause and effect and the law of effort vs. result. The price of
every trading or investment vehicle moves up or down because there is an excess of demand
over supply or supply over demand expressed in the form of urgency to exchange dollars for
shares or contracts or to exchange shares or contracts for dollars. The law of cause and effect
states that the excesses that develop in supply and demand are not random but are the result of
key events in market action or the result of periods of preparation. Wyckoff teaches what these
developments are and how to judge when they are unfolding in time to take advantage of the
excesses in supply or demand that will follow. The low of effort vs. result states that the change
in price of a trading vehicle is the result of an effort expressed by the level of volume and that
harmony between effort and result promotes further price movement while lack of harmony
promotes a change in direction.
The third cornerstone of the foundation of the Wyckoff approach are the five steps. These are the
general procedures that every student of the Wyckoff stock market method needs to employ each
and every time the action of a market or trading vehicle is considered. Here are those five
steps. Determine the trend and position of the market being traded. Determine the relative
strength or weakness of the issue being considered. Select issues that are presenting a cause that
is likely to produce an acceptable effect. Determine the readiness of an issue being considered to
respond to its cause. Time trades in individual issues to anticipated turns in the market in which
they are traded. Learning how to correctly apply each of these five steps is what makes a
successful trader or investor. Most of what Wyckoff teaches is the finer details of applying these
steps.
Once a trader or investor understands the foundation of the Wyckoff approach to stock market
trading and accepts the philosophy that it embraces, he can begin building the knowledge that
can lead to a more successful market operation. In the next installment of this series, a closer
look will be taken at the first step of the Wyckoff stock market method.
© The Jamison Group, Inc.: Stock Market Trading, The Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Why I Trade the Wyckoff Wave
For a few years now, I have only traded 8 stocks. The ones that make up the Wyckoff Wave.
Why, you say? Actually it's easy. Subscribing to the Pulse of the Market and trading the wave
stocks gives me a tool kit that substantially increases my profitability. While I certainly have
made some mistakes and all my trades have not been successful, 2007 has been a very successful
trading year.
By using each stock's Optimism - Pessimism index, (which charts volume) and the Technometer
and Force indicators, I am able to identity, turning points as well as entry and exit points. By
focusing on eight stocks, I also seem to better understand each stocks individual characteristics.
This fact alone, has saved me from making several bad trades.
In his article Trade the Wave in 2008, Craig Schroeder identified 18 times a Wyckoff Wave
stock made a 20% or greater move. While I didn't participate in all 18, I did catch a few and
some smaller moves, rewarded me with some nice profits. These profits would not have been
possible without my comfort level with these eight stocks and the Pulse of the Market data I
receive, by e-mail, every business day. Here are a few examples:
Exxon-Mobile
In August, XOM sprung a trading range created at the 80 ½ level. A little over a week later, it
tested the spring and created a good entry point. A Figure Chart count along the $79.00 level
produced an objective of 92. Five weeks later, XOM reached 94 and eventually reached 95 1/4. I
actually closed my position at 91 /7/8 and was able to pocket a nice profit.
IBM
In 207, IBM presented both long and short trading opportunities. In February, IBM climaxed at
88 ½ and developed a trading range. There was no spring, but IBM did "jump the creek" and
back up to an LPS (last point of support) at 93. There was a positive divergence with the buying
climax that practically screamed, buy me. The figure chart presented an objective of 109. IBM
became overbought and created a negative Optimism - Pessimism divergence at 108 and the
position was closed at 107 ½.. The 14 point gain produced another nice profit a little over a
month. I am not a long term trader, but the indicators from the Pulse of the Market data would
have enabled a longer term trader to ride IBM all the way to it's June high of 118. That's a 25
point move. I could not find a good entry point and did not participate.
An opportunity to short IBM came about in mid-October. After reaching the high described
above, IBM reacted strongly to 102 ½. In hind site, there was a trading opportunity, but by the
time I figured it out, IBM had reacted sharply and it was to late. It then rallied to 119 and created
a new trading range. The range was up thrusted in October and immediately tested 3 days later.
It then reacted sharply and I missed another one. However, a down channel was created and on
Halloween IBM reached an overbought position and condition. In addition, there was a major
negative divergence. I took a short position at 115. This trade would not have been possible
without the Pulse of the Market data. The figure chart showed an objective of 101. A week and a
half later IBM climaxed at 99 3/8. I closed my position at 101 and added to my 2007 profits.
Merrill Lynch
If you are a bear, Merrill Lynch was the year's biggest winner and certainly put some money in
my pocket.
As an aside, a study of Merrill Lynch is a classic example of why the Wyckoff method is so
successful. As it was flirting with the $100.00 mark, MER was touted as part of that bullish
financial sector. However, Wyckoff students saw the buying climax and developing trading
range. Them MER reacted to 51. As it was climaxing, the bad news about the sub-prime
mortgages and the resignation of the CEO hit the street. Of course, by then the smart money had
already taken profits and left the building. As usual, when the bad news hits, the reaction is
usually over.
I took a short position in MER at 94. MER had upthrusted the trading range earlier and the Pulse
of the Market data showed MER to be oversold and having a negative divergence. The fugue
chart presented an objective of 82. MER then fell through the creek and presented an 2nd
objective of 70. MER moved to 70 and I closed my position. It then moved sideways and created
another trading range. It then fell through the ice and I took a position on the rally to the ice or a
LPSY (last point of supply). The objective was 51. I closed out my position at 54. I thought it
was on climatic action, but it turned out to be Preliminary Support. The buying climax came later
at 51, right at the original objective.
As you can see, I am a big proponent of just trading a few stocks and using the Pulse of the
Market tools to create some substantial profits. I spend 2-3 hours each day charting (I draw every
chart by hand) and analyzing the Wyckoff Wave and the associated stocks. I write down a daily
commentary on the wave and each stock. If I had to always be looking for new opportunities, my
analysis time would be reduced and I strongly believe my judgment would not be as good as
with a smaller consistent number.
© The Jamison Group, Inc.: I Traded the Wave
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Price and Volume Relationships
Wyckoff tells us that the most important thing that can be known about the action of a market or
an issue is its trend. Step one of the Wyckoff Method indicates that the position of the action
relative to the trend is also an important piece of knowledge. A third essential element in
developing an analysis of the action is judging the character of the action. The character of the
action is revealed by the relationship between the price action and the volume action. These
relationships either make bullish statements or bearish statements. Each trading session makes
one of these statements. Some are strongly bullish or bearish and some are more moderate.
Occasionally, when the action is an especially sensitive point in its development, the character of
the action on one particular day is seen as being so important in determining how developments
are likely to unfold from that point forward that the day is frequently referred to as being a key
day. However, most of the time, it is an accumulation of bullish or bearish statements over a
succession of days that reveals wether a move in progress is likely to continue or if a change in
direction is likely.
Each day, the price of the market or an issue is likely to move up or down on a close to close
basis. It does so either in a price spread that is likely to be wider or narrower than the day before
and volume that is likely to be either higher or lower than the day before. How these three
variables group themselves together determines that character of the action for that day and
whether it makes a bullish or bearish statement.
If the price spread for a day is wider to the up side leading to a strong close on increased volume,
the advance is said to indicate demand entering. This action makes a bullish statement. If the
same price action occurs on reduced volume, the advance is said to be the result of a lack of
supply. This action also makes a bullish statement. If the price spread for a day is narrower to the
up side, the action makes a bearish statement. If the narrower spread to the up side is combined
with higher volume, the action is said to indicate the meeting of supply. If the volume is reduced,
the action is said to indicate a lack of demand. Either combination tends to work against
additional up side progress. That is why the statements made are considered to be bearish.
If the price spread for a day is wider to the down side leading to a poor close on increased
volume, the decline is said to indicate supply entering. This action makes a bearish statement.
The same price action on decreased volume is said to be the result of a lack of demand. It also
makes a bearish statement. If the price spread for a day is narrower to the down side, it makes a
bullish statement. If the narrower spread is combined with high volume, the action is said to
indicate the meeting of demand. If the volume is lower, it is said to indicate a lack of supply.
Either combination tends to work against additional down side progress. That is why it makes a
bearish statement.
Sometimes there are days that start out as wide spreads to the up side, but end with poor closes.
There can also be days that start out as wide spreads to the down side, but end up with strong
closes. These days are said to include intra-day failures. These failures change the character of
the action from what it might seem to be on the surface. A wider spread to the up side on
increased volume makes a bullish statement because it indicates demand entering if the close is
strong. However, if the close is poor, the indication is that the demand that was present initially
was either withdrawn or overwhelmed by supply. In both cases,the intra-day failure changes the
bullish statement to a bearish statement. However, being overwhelmed by supply is considered
to be more bearish than is having demand withdrawn. Intra-day failures that occur to the down
side on wide spreads and high volumes leading to strong closes change what would otherwise be
bearish statements into bullish statements. In these cases, the indication is that either the supply
was withdrawn or that supply was overwhelmed by demand. Demand overwhelming supply is
said to be more bullish than having supply withdrawn. Trying to interpret the exact meaning of
an intra-day failure can sometime be difficult if the action of the day is only looked at as a
whole. Viewing the intra-day action can assist in determining where the bulk of the volume was
present and that can help with the interpretation.
Knowing what statements the character of the action is making is especially important at and
around primary buying and selling positions. Bullish statements tend to confirm the validity of
buying positions while bearish statements tend to confirm the validity of selling positions. These
confirmations help to reduce the emotional strain that frequently accompanies taking a position.
Knowing whether the action is making bullish or bearish statements day to day after a position
has been established and the price is moving in the desired direction helps the Wyckoff trader
make a judgment as to whether the position is likely to continue moving in the desired direction
and whether it should be held, exited or more securely defended.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Primary Buying Opportunities
Back Ups
If a Wyckoff trader chooses not to open a long position when the market or an individual issue is
in a spring position and makes the same choice or misses the opportunity to enter on the long
side on the test of a spring, there is a third primary buying opportunity that can be used to begin
a campaign. It is on a back up to the edge of a creek.
A creek is the zone of resistance usually near the top of a trading range defined by a series of
rally tops within the trading range. It represents an obstacle to up side progress that must be
overcome if the price is going to work out the potential that has been built while the price has
been in the trading range. The price overcomes the resistance with a sign of strength indicated by
a combination of price spread and volume action.
There are three elements to the combination of price spread and volume action needed to
accomplish a jump.
The first element is wide price spreads to the up side over several days as the price passes
through the zone of resistance defined by the earlier rally tops.
The second element is strong closes on those days with the wide spreads. If the price makes a
wide spread to the up side and then closes at or near the bottom of the spread, the indication is
that supply was met and overcame the demand that entered the market and that the price is not
ready to leave the trading range.
The third element is high volume. High volume confirms the sign of strength indicated by the
price action. Most potential jumps will take the price through the resistance level of the trading
range and decisively into new high ground relative to all the action that occurred during the
trading range. However, some will not.
If the trading range is especially wide and most of the rally tops during the range are well below
the resistance level, it is possible for a jump to be accomplished without moving the price up and
out of the range. In those cases, the Wyckoff trader needs to recognize the fact that the resistance
level of the range still represents an obstacle to up side progress that may derail the bullish
scenario from unfolding as anticipated even though there was a jump and a back up. Some
Wyckoff traders elect to avoid these situations due to the higher degree of doubt involved.
The completion of a jump is normally indicated by a dramatic narrowing of the price spreads to
the up side following the wide spreads that moved the price through the zone of resistance.
When this action occurs, the Wyckoff trader knows that the back up is about to begin and that it
is time to start paying close attention to the day to day action so as not to miss the opportunity to
take a position. When the back up begins, the trader needs to identify in advance where it is
likely to be completed. It is impossible to pinpoint exactly at what level the back up is likely to
be completed. The creek that was jumped was defined by a range of values and the area in which
the back up is likely to be completed is defined by a range of values.
The first step in identifying where this range of values is located is to find the halfway point of
the advance that produced the jump. Wyckoff tells us that it is normal for an advance to be
corrected with a reaction to the vicinity of the halfway point of the advance. The halfway point is
likely to be above the zone of values that represent the creek or in that zone. If the halfway point
is above the creek, the back up is most likely to be completed between the halfway point and the
top of the creek. If the halfway point is in the creek, the back up is most likely to be completed
between the halfway point and the low point of the creek.
Those situations where the back up is likely to be completed above the top of the creek are the
best. In those situations where the back up reenters the creek, there is a risk of the price falling
back into the creek resulting in no buying opportunity.
Having an idea in advance where the price is likely to complete the back up is important.
However, the most important factor on a back up is the character of the price and volume on the
back up. If the back up unfolds with the same combination of wide spreads and high volumes
that were present on the jump, there will be no opportunity to take a long position. In these cases,
the price is most likely to fall back into the creek.
All that the potential jump accomplished was to suck in premature bulls and the bearish
character of the back up tends to lock them into positions that probably will not be profitable. A
bullish back up is indicated by narrowing spreads and decreasing volumes as the price reaches
the pre-identified zone where the back is anticipated to end. This combination of where the price
is and how it got there is what indicates to the Wyckoff trader that taking a position should be
considered.
Taking a position on a back up is similar to buying the test a spring or a spring in one respect.
Any position opened on a back up must be protected with a stop. Ideally, the potential up side
objective will be high enough above the entry price to allow the initial stop to be placed below
the support level of the trading range. The anticipated objective must be high enough above the
entry price to allow the initial stop to be placed below the low point of the creek. Placing a stop
so close to the entry price that it is in the creek is an invitation to be stopped out.
Theoretically, taking a long position on the back up to a creek where the jumping of the creek
allowed the price to move up and out of a trading range is the best of all buying opportunities.
This is because it provides the clearest indication that the preparation phase has been completed
and that the price has the strength to overcome all obstacle to up side progress.
© The Jamison Group, Inc.: Stock Market Primary Buying Opportunities- Back Ups
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Putting It All Together
Part 2 - Existing Positions
Wyckoff traders are always looking for their next potentially profitable trading opportunity.
However, there is nothing more important than the management of existing positions. Part of
putting it all together involves regularly and objectively reviewing the status of every open
position. Regular reviews are easy to do. Objective reviews can be more difficult, however.
Every trader wants to believe that each open position is developing as planned and that the full
measure of profit anticipated will be realized. That is not always the case. Each trading session
provides new information. Sometimes, the new information confirms the trader's expectations
and sometimes it does not. Either way, it may be desirable to make adjustments to existing
positions or to the expectations regarding those positions. The best way to make an objective
evaluation of existing positions is to use the five steps of the Wyckoff method and the buying
and selling tests.
The trend and position of the general market are as important in reviewing an existing position as
they are in considering a new position. Although each individual issue can do its own thing
independent of the market, it is always best to have the market working in favor of an existing
position and not against it. If a position was established based in part on the fact that the market
was in an up trend or down trend, the Wyckoff trader wants to see that trend continue. The same
is true of the trend of the individual issue. If either the market or the issue violates a trend line of
an established trend channel, the trader may want to take a defensive action to better protect the
funds at risk in that position. This is especially true if it is the issue that violates its trend line. If
both the market and the individual issue violate a trend line, the need for some type of defensive
adjustment should be seen as being more urgent. Failure to act in these situations can result in
more paper profits being returned to the market than necessary. Failure to act can even result in a
profitable position going into negative territory.
When an existing position was established, part of the reasons for making the trade was that the
issue be traded was as strong or stronger than the market if it was a long position, or as weak or
weaker than the market if it was a short position. At some point, the relationship between the
market and the issue will change. When a long position is no longer in an issue that is as strong
or stronger than the market, it is time to consider a defensive adjustment. The same is true of a
short position in an issue that is no longer as weak or weaker than the market.
Every existing position has an anticipated objective. Many times, individual issues have several
potential objectives as a result of phases in their counts. The reaching of any objective is
potentially the end of the move. Therefore, if an objective is reached, consideration of a
defensive adjustment to the position is in order. Sometimes, a situation may be encountered
where the general market reaches an indicated objective, but the issue in which a position is held
does not. In these cases, the Wyckoff trader may choose to make no defensive adjustment. This
is especially true if both the market and the issue remain in trends that are friendly to the existing
position. If a defensive adjustment is made, it may be a milder form of adjustment that allows the
position to perform in a profitable manner as apposed to a more radical adjustment that could
limit profits.
In step four of the Wyckoff method, the trader determines an issues readiness to move. This step
is critically important when it comes to existing positions especially if the issue is ready to move
in the wrong direction. What does this mean? If a long position is held in an issue that is in an
over bought position relative to an up trend that is being traded, it is ready to move in the wrong
direction. If a long position is held and the price moves into an up thrust position, it is ready to
move in the wrong direction. If the price is in a potential spring position and a short position is
held, the position is ready to move in the wrong direction. These are just a few situations that can
develop where the Wyckoff trader should consider a defensive adjustment to an existing
position. There will also be times when an issue is ready to move in the direction that favors an
existing position. Obviously, these are the most desirable situations. Even in these situations the
Wyckoff trader may want to consider an adjustment. When the issue starts to move in the
direction indicated, the trader may want to protect a measure of profit already realized.
Finally, the Wyckoff trader wants to time trades in individual issues with anticipated turns in the
market. If the expected turn in the market has the potential to damage a position in an individual
issue, this is a time to strongly consider a defensive adjustment. While this may be the only time
that a trader may want to enter a new position, it should be remembered that it is not the only
time that defensive adjustments should be considered.
When a trader takes a position, part of the decision to enter the trade is based on the passing of
some or all of the buying and selling tests. If not all of the tests have passed when the trade is
opened, it is important that the remaining tests are passed as the action unfolds. It is even more
important that the action does not start to pass selling tests if a long position is held or buying
tests start to be passed if a short position is held.
What is a defensive adjustment? There are several that can be considered. Some are more radical
than others and some are milder. The degree of defensiveness taken needs to fit the situation and
the personality of the trader. If a trend that is being traded is decisively broken or an equally
important opposing trend is defined, the Wyckoff trader will likely consider a radical adjustment.
However, if only a normal correction is anticipated or one has just been completed, the trader
will likely consider a milder adjustment.
The most radical defensive adjustment is to close the position. If the trader feels an
uncomfortable level of uncertainty, this is the best thing to do. Other defensive adjustments
include closing a portion of a trade and maintaining the rest of it. Moving stop orders so as to
reduce the amount of exposure to an unanticipated price move in the wrong direction is another
defensive adjustment that can be made. Never adjust a stop in such a way that the level of risk is
increased. That is reckless not defensive. There are also option strategies that can be used to
make an adjustment. Except when the most radical defense is chosen, a Wyckoff trader may
want to consider a combination of defensive adjustments. The most important thing is that when
defensive action is indicated that some adjustment is made.
Existing positions can be reviewed at the same time as new trade candidates are considered. If
this does not feel comfortable, make the review of the action a two step process. If this is the
procedure that is followed, it is suggested that existing positions be reviewed first. These are the
funds that are at risk. They deserve top priority
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Putting It All Together
Part One - New Positions
Each Wyckoff concept by itself is relatively simple and easy to understand. If concepts
developed in the market one at a time and isolated from all the others, applying the Wyckoff
method would be very easy and all Wyckoff traders would realize a profit from every trade.
Unfortunately, concepts do not develop one at a time and isolated from all the others. There are
always multiple variables to consider that make applying the Wyckoff approach more
complicated than many would like. Managing the potential complexity can be accomplished by
developing a step by step plan and then faithfully following the plan. The plan should begin with
making some choices as to such things as to what general market index to use, what universe of
individual issues to follow, when and how often to review the action of the market and
individual issues and what steps to follow when those reviews are made.
The Wyckoff approach begins with the trader determining the trend and position of the general
market. Therefore, a Wyckoff trader must regularly monitor the action of a general market index.
There is no need to follow more than one market index. Trying to monitor multiple indexes
limits the amount of time that can be spent studying and understanding any one of them. This
can lead to failing to consider important factors. Confusion and uncertainty are also possibilities
if multiple indexes are monitored since they all are seldom saying exactly the same thing at
exactly the same time. This can lead to trading paralysis or to over trading if the trader jumps
from index to index in an effort to maintain a high level of trading activity.
Wyckoff traders tend to experience their best trading results when they limit the number of
issues that they follow on a regular basis. Developing an understanding of how each issue
behaves especially as they approach potential trading opportunities takes time. Therefore,
monitoring many issues will leave relatively little time to devote to each one. This can lead to
oversights or snap judgments either of which can lead to costly trading mistakes. If a narrowly
defined general market index such as the Wyckoff Wave or the Dow Jones Industrials is used, it
is a good idea to consider limiting the universe of potential trade candidates to the components of
that index. The reason is simple. An index can only move from point A to point B based on the
action of its components. If a narrowly defined index is used and judgments concerning its action
are made correctly, the trader has a good chance of finding the individual issues that are most
likely to be the biggest participants in the move anticipated in the index if only the components
of that index are considered. If a trader chooses to use a broadly defined index such as the S&P
500, it is unwise to attempt to examine all five hundred components each time the action is
reviewed. Consider dividing them into relatively small segments and reviewing those segments
on a rotating basis. A computer program that filters out issues based on certain parameters might
be used to limit the number of issues that need to be considered in greater detail. If this is done,
care must be given to make sure that the parameters used for the filtering process are consistent
with Wyckoff concepts.
Every Wyckoff trader should designate a time and a place for reviewing the action of the market.
Most traders are busy individuals with numerous responsibilities and interests competing for a
portion of their discretionary time. A judgment must be made as to where market analysis fits
into those responsibilities and interests. Once that judgment is made, a block of time should be
set aside each day and a set location should be selected at which to study the market. Developing
discipline is an important part of being successful in the market. Making these decisions as to
when and where to study the action of the market is part of that discipline.
When a Wyckoff trader sits down at the appointed time and in the appointed location to make an
assessment of the action of the market and individual issues, there are only a few things that are
needed to make a credible examination of the action. One thing that is needed is a group of
vertical line and figure charts that provide a picture of the action that is consistent with the time
frame of the traders market operation. Adding additional charts to the group on an occasional
basis to provide a picture of other time frames can be helpful especially when a trade is about to
be opened or closed.
The only other things a Wyckoff trader really needs is a list of the five steps of the Wyckoff
method and a list of the buying and selling tests. Using these and these alone will result in an
orderly and disciplined analysis of the action. It is suggested that traders begin their analysis
with the action of the general market. Traders need to look at the action from two perspectives.
One is the perspective of whether to take new positions. The other perspective of what if
anything needs to be done to properly manage existing positions.
If there are no existing positions, step one of the Wyckoff method will indicate what type of new
positions might be considered and whether those positions should be considered immediately or
if additional developments are needed first. If the position in the trend justifies considering
immediate action and the universe potential trade candidates is limited to trading vehicles
derived from the index being analyzed, the trader can skip step two of the method and go to step
three. The trader who is considering positions in individual issues must make a stop at step two.
Whether the market is indicating a trading opportunity on the long side or the short side will
determine how the trader seeking positions in individual issues will apply step two. Wyckoff
tells us to buy relative strength on reactions and to sell relative weakness on rallies. If the market
is indicating an opportunity on the long side, only those issued that have overall been stronger
than the market and that are currently making a reaction should be considered. If an opportunity
on the short side is indicated, only those issues that have overall been weaker than the market
and that are currently making a rally should be considered.
At step three, both the index trader and the issue trader need to determine that the potential that
has been developed meets a predetermined requirement. If the requirement is a ten percent
potential and the potential in place is only five percent, the trading opportunity should be
considered unacceptable and the analysis can stop. If the required potential is in place, both
traders can continue to step four. Generally speaking, index traders can accept a smaller
requirement as to the amount of potential that is in place to justify a trade due to the nature of the
trading vehicles involved than individual issues traders. It should be noted that the individual
issue trader needs to have a requirement as to the amount of potential that is in place for both the
market and the individual issue and those requirements can be different.
At step four, the index trader considers the indexes readiness to move based on the character of
the price and volume action. This involves determining whether the statements made by the price
and volume action during the days leading up to the potential opportunity are consistent with that
opportunity. If the action on a day to day basis has been making bearish statements, but a long
position is being considered, the trader should step back. The index is not indicating a readiness
to move in the desired direction. A similar consideration should be made by the individual issue
trader to those issues that have survived the analysis to this point. Those that are not indicating a
readiness to move in the desired direction should be set aside. The individual issue trader should
also look for primary trading positions among those candidates still in the running. These
together with the character of the action will determine a readiness to move.
The index trader is ready to take a position when step four has been completed. However, before
actually taking the position, the trader should consider the Price/O.P. relationship and any
indications provided by the Technometer and Force. The trader is looking for indications from
these indicators that confirm the wisdom of actually taking the position. If these indicators
provide non-confirming indications, the trader should step back and at least postpone taking the
position. If the O.P., Tec and Force provide neutral indications, the trader may still choose to go
ahead with the trade, but should realize that there is an element of uncertainty that is involved.
The individual issue trader must insist that the confirming indicators for the general market are
actually providing confirmation. Step five tells the individual issue trader to time trades to
anticipated turns in the general market. Confirmation from the Pice/O.P. relationship, and the
Tec and Force are an important part in justifying the anticipation of a turn. If these indicators are
available for the individual issues as will as for the general market, the individual issue trader
wants them to be confirming the wisdom of the trade as well.
Each time either the index trader or the individual issue trader completes one of the five steps,
the appropriate list of buying tests or selling tests should be reviewed and any of the tests that
have been passed at that point should be noted. By the time the trader gets to step five of the
Wyckoff method, the number of buying or selling tests that have been passed and which have
been passed must meet predetermined requirements. The position should at least be postponed.
It might seem that it could take hours to work through all the procedures listed above, but that is
not so. Each step flows easily and quickly into the next. Often just a glance at a chart that has the
appropriate markings on it will indicate that several steps have been completed favorably or not.
If a Wyckoff trader finds that it is taking more than an hour to work through the process
something is wrong. If the trader is an individual issue trader, the problem may be that the
universe of trade candidates it too large. However, it more likely will indicate an unacceptable
level of doubt resulting from a lack of experience, a lack of knowledge or both. In these cases,
any trades under consideration should be limited to practice trades. The exercise will add
experience and knowledge so that the next time an analysis is done there may be no doubt.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Primary Selling Opportunities - Part 3
Rally Back to the Ice
A market or an individual issue provides a Wyckoff trader with a third opportunity to establish a
short position when it makes what Wyckoff traders call a rally back to the ice. In order to
identify a rally back, a trader must first know what ice is. Wyckoff defines ice as a zone of
values defined by the lows of reactions in a trading range. Wyckoff traders will frequently
simplify this definition and equate ice with the support level of a trading range. Normally, this is
acceptable. However, there can be instances where the ice is defined higher up in the trading
range. The determining factor is where the low points of the various reactions in the trading
range are located.
In order for there to be a rally back to the ice, the price must first provide an indication of
weakness by falling through the ice. This is accomplished by wide price spreads to the down side
on high or increasing volumes resulting in poor closes as the price passes through the ice.
Normally, this is accomplished over several days. However, one especially bearish day can
result in a fall through the ice. The Wyckoff trader wants to see the fall through the ice push the
price decisively through and below the ice. This provides the price with the room needed to
make a successful rally back. Traders should beware of those penetrations of an ice level that do
not develop with the price spread and volume characteristics mentioned or do not decisively
break the ice level. These may actually be buying opportunities.
A fall through the ice is the first step in the mark down phase. It comes after the preparation for a
decline has been completed in the trading range. Therefore, the rally back is theoretically the
best place to enter a short position because all of the preparation for the decline has been
completed. Unfortunately, there is no mechanical way to identify exactly where the rally back is
going to be completed and where the absolute best place is to open a short position. However,
there are guidelines that the Wyckoff trader can use to identify a relatively narrow range of
values in which to consider making a trade.
One factor to consider in identifying a spot to open a position is to consider the decline that
produced the fall through the ice and where the bottom of the ice is located. Wyckoff tells us that
it is normal for a reaction to be corrected by a rally equal to half of the reaction being corrected.
Therefore, when the fall through the ice has been completed, the trader should identify the
halfway point of the decline that produced the fall through the ice. Another important level is the
bottom of the ice. When this level is combined with the halfway point of the fall through the ice,
the result is a zone of values. It is in this zone where the rally back is most likely to be
completed. Beware of the rally back that is able to get through this zone. If the price is able to
get through the zone, it is demonstrating a level of strength that should be viewed as being
incompatible with taking a short position.
A second factor to consider in identifying the spot to open a short position is the character of the
price and volume action as the rally back unfolds. Wide spreads to the up side on high or
increasing volumes leading to strong closes is not what the potential short seller wants to see.
Action that has these characteristics indicates strength. It can result in the price rallying back
through the ice and then making a significant advance. When this happens, a shakeout is said to
have occurred. The Wyckoff trader wants to see a rally back that confirms the weakness
demonstrated on the fall through the ice. This is accomplished with a series of price spreads to
the up side that tend to narrow as the rally back progresses. If these price spreads come on
decreasing volumes, the indication is of a lack of demand, which tends to confirm the weakness
seen on the fall through the ice. Sometimes, there will be a surge of volume at the top of a rally
back in combination with a narrow price spread. This should not discourage the short seller from
considering a position. The combination of narrow spread and high volume at the top of a rally
back indicates the meeting of supply and that is an indication of weakness. Supply will be
needed to fuel the decline that is anticipated to follow the rally back.
When a Wyckoff trader opens a short position on a rally back, a protective stop should be placed
at the same time. The trader wants to keep the stop as close as possible to the entry point to
minimize the damage should the action not unfold as anticipated and the position be stopped out.
However, if the stop is placed too close, it represents an invitation to be stopped out. When
selecting the level at which to place the initial stop order, the trader should consider the potential
profit from anticipated and the location of the ice. The stop should be placed above the ice. It
should also be placed such that no more than one point is being risked for every three points of
profit that is anticipated. If these two conditions are met and the entry point has been selected as
suggested, the Wyckoff trader has the odds in his favor and an excellent chance of realizing a
profit.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Selling Tests
Tests of Up Thrusts - Part Two
Most up thrusts are tested. The test of an up thrust provides the Wyckoff trader who established
an initial position on the up thrust with an opportunity to add to that position. For other traders,
the test of an up thrust provides an opportunity to consider taking an initial position. Many
Wyckoff traders prefer to open their initial position on the test of an up thrust. There are two
reasons for preferring the test rather than the up thrust itself. One is that the response to the up
thrust has provided the price of the issue being considered to demonstrate some weakness. The
other reason is that the top of the up thrust has defined a resistance level that provides a measure
of protection against being stopped out.
For the trader looking to take a position on the test of an up thrust, the up thrust is a wake up
call. It alerts the Wyckoff trader that a potential short candidate has been identified. The
response to the up thrust provides the trader with an opportunity to make an initial judgment as
to how much interest there should be in establishing a position when the up thrust is tested. If the
up thrust penetrated the resistance level of an established trading range, the Wyckoff trader
wants to see the response to the up thrust take the price to at least the middle of the trading
range. This is considered a normal response. When a response is normal, it improves the odds of
the test being successful and of a mark down phase following the test. If the price of an issue
under consideration can reach the lower portion of the trading range on the response to the up
thrust, it becomes a better candidate for a trade on the test because it has demonstrated greater
weakness. Traders should beware of the response to an up thrust that is less than normal. These
leave the price with less room in which to complete the test increasing the odds that the test will
not be successful.
The average level of volume on the response to an up thrust is also an important factor for the
potential short seller to consider. If the average level of volume on the response to an up thrust is
equal to or greater than the average level of volume on the rally leading up to the up thrust, the
trader has reason to be especially interested in that candidate because it has provided another
indication of weakness. The Wyckoff trader wants to see the average level of volume on the rally
that produces the test of the up thrust to be less than the volume on both the rally that produced
the up thrust and the reaction that represented the response to the up thrust. This indicates a lack
of buyers and improves the odds of a successful test. There is a situation where high volume on
the test of an up thrust can be a good thing for the potential short seller. If the price rallies into
the test of the up thrust on narrowing price spreads and increasing volumes, the indication is that
supply is present and supply is what is needed to make the anticipated mark down phase be
productive.
At what price should the test of an up thrust be completed? It is not possible for a Wyckoff trader
to pick an exact price at which the test of the up thrust is likely to end. However, it is possible to
identify a range of values where the test is likely to be completed. Frequently, this range of
values is relatively narrow. It is defined by the price of the resistance level that was up thrusted
and by the price that represents the halfway point of the reaction that was the response to the up
thrust. Most but not all successful tests will be completed in the zone defined by these two
levels. Those candidates that fail to reach the zone likely will turn out to be missed opportunities
unless there is some characteristic of the price and volume action that indicates an unusual surge
in supply or lack of demand. Those candidates that overrun the short selling zone should be seen
as being of lower quality. This is especially true if the top of the test of the up thrust is higher
than the top of the up thrust. These poor quality tests have a greater chance of failing and leading
to additional up side progress. Even when they are successful, the Wyckoff trader can feel
confident that there will be an additional test. If that more important test is of better quality than
the first, a position can be taken.
Although the test of an up thrust is not as dangerous a danger point as the up thrust, any short
position established on the test must be protected. If the protection selected is a stop order, the
stop needs to be placed above the high point of the upthrust. How far above the top of the up
thrust is a matter of personal choice. Making the choice should be determined by comparing the
amount being risked to the anticipated profit. Wyckoff traders should never risk more than one
point for every three points of potential profit. Placing a stop just above the top of the up thrust
as some traders do can be just as unwise as placing it too high. A stop that is that close runs a
greater risk of being caught. There is nothing more frustrating than to be stopped out of a
position and then watch from the side lines as the price goes on to do exactly what was
anticipated.
© The Jamison Group, Inc.: Stock Market Buying Tests - Part One
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Primary Selling Opportunities - Part 1
Upthrusts
The Wyckoff approach is not just for the bulls and for advancing markets. It also identifies
primary selling opportunities for the bears in declining markets. These are places in the action of
a market or an individual issue where the price becomes unusually vulnerable to down side
progress. One of these places is when the price enters an up thrust position.
A potential up thrust position develops when the price penetrates a resistance level that was
defined by the top of a previous advance. Theses advances can be short term rallies, intermediate
term swings or major moves. The Wyckoff trader anticipates a response to a potential up thrust
that is proportional to the significance of the up thrust. Potential up thrusts that develop after the
price has been in a trading range for some time are the most interesting because the time spent in
the trading range prior to the up thrust provides measurable down side potential to fuel the
anticipated decline.
Not every penetration of an established resistance level is an up thrust. As with all Wyckoff
concepts, how the action unfolds is as important as the fact that the penetration is occurring.
When the price passes through a resistance level on wide price spread and increasing volume
leading to a strong close and repeats this type of action for several days, that is not an up thrust.
In those cases, the price is breaking out into new high ground. These are very bullish
developments and not ones that should be considered for taking action on the short side.
The penetration that is of greatest interest to the Wyckoff trader looking for an opportunity on
the short side is one that unfolds on narrowing price spread. or at least on spreads that are similar
to those just prior to the penetration. This is important because it indicates to the trader wether
the bulls or the bears are in control of the action at that critical point when the price moves into
new high ground. If the bulls are in control, the price spread widens on the move into new high
ground as the demand to be positioned on the long side swells. If the price spread does not widen
in new high ground or narrows, the indication to the trader is that either the demand that is
present is of poor quality or that supply is in control of the situation. Making a judgment as to
who is in control of the action requires an examination of the level of volume as the penetration
of the resistance level is made.
If the price moves into potential up thrust position on declining volume in combination with
narrowing price spreads or spreads that do not widen, the indication is that the demand is lacking
at a point where it should be abundant and that the quality of the demand that is present is poor.
The lack of quality demand at that critical point in the action tells the Wyckoff trader that up side
progress is not likely to be sustained and that the price is likely to respond to the up thrust
position with a move back below the resistance level. If the price moves into new high ground on
narrowing spreads or spreads that do not widen and volume is high, the indication is that supply
is in control and that up side progress is not likely to be sustained. Here again, the anticipation is
for a response to the up thrust position that takes the price to lower levels.
The response that the price makes to an up thrust position is expected to be proportional to the
amount of potential put in place prior to the up thrust. The full measure of the decline that
follows an up thrust seldom unfolds in one sustained move. It is normally is spread over a series
of declines and corrective rallies. Some of these thrusts and corrections may also develop into
primary selling opportunities. The Wyckoff trader who establishes a position with the price in an
up thrust is entering at a danger point. Therefore, defensive measures should always be taken at
the same time that a short position is established to provide protection against the unforeseen.
Barring the unforeseeable, a trade opened on an up thrust position has the potential to be the
most rewarding.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Primary Selling Opportunities - Part 4
Normal Corrective Rallies
The last type of primary selling opportunity that the market or an issue will present to a Wyckoff
trader is a normal corrective rally. When the price of a trading vehicle leaves a trading range to
the down side, it may move to the indicated down side objective in one sustained decline.
However, these situations are the exception to the rule. Most of the time, the path from trading
range to down side objective is accomplished by way of a series of thrusts and corrective rallies.
The corrective rallies can provide additional entry points on the short side if they are normal and
if the anticipated objective is far enough below the entry price to justify the trade.
Wyckoff identified a normal corrective rally as one that ends in the vicinity of the halfway point
of the previous thrust to the down side. Over the years, the vicinity of the halfway point has
come to be known as anywhere from a one third correction to a two thirds correction. Those
corrective rallies that are completed below the halfway point are seen as being more desirable for
taking a position because they suggest a greater level of continuing weakness than do the
corrective rallies that end above the halfway point. All positions should immediately be
protected with a stop order. If a position is being established below the halfway point, the initial
stop needs to be placed above the halfway point. If it can be placed just above the two thirds
point, that is seen as being more desirable because the stop is less likely to be caught. If the a
short position is being established above the halfway point, the initial stop should be placed
above the two thirds point. Wyckoff traders are reminded to never risk more than one point for
every three points of anticipated profit when placing a stop order. Also remember that stops that
are placed unusually close to an entry price in an effort to minimize the risk are more vulnerable
to being caught.
Selecting a price within the zone identified as the vicinity of the halfway point at which to open
a position should be based on an assessment of the character of the action during the corrective
rally and on any indication that may be provided by the figure chart. Sometimes, the price will
hesitate at the bottom of a downward thrust long enough to build a short term potential on the
figure chart that provides an indication as to where the corrective rally is likely to be completed.
These indications should not be viewed as being automatic selling points. They are indications
only and require confirming price and volume action before a position is actually taken.
In those cases where the figure chart does not provide an indication as to where the corrective
rally is likely to be completed, the Wyckoff trader must relay on making a judgment as to the
character of the price and volume. The trader is looking for that place during the corrective rally
that the price and volume action indicates a withdrawal of demand or the meeting of supply.
These indications are normally provided over a series of days rather than on one key day.
Therefore, hesitating for a few days after the first indication is seen before taking a position is
frequently a good idea because it can provide a better entry price. There is a potential down side
to this hesitation, however, in that it may result in missing the opportunity should the price
suddenly resume down side progress. In these cases, it is best to look for another opportunity
rather than to chase a price lower.
A withdrawal of demand or the meeting of supply can both be indicated by narrowing price
spreads to the up side when the price is in the vicinity of the halfway point. The difference
between the two indications is provided by the level of volume. Narrowing price spreads to the
up side on declining volumes indicate a withdrawal of demand. Narrowing spreads to the up side
on increasing volume indicate the meeting of supply.
Sometimes, a Wyckoff trader can conclude that a withdrawal of demand or the meeting of
supply is indicated at the top of a corrective rally if the price spread is wide. These indications
requires that the close be at or near the low price of the day. In these cases, low volume suggests
that demand has been exhausted and high volume indicates that demand has been overwhelmed
by supply.
Some down trends will have only one normal corrective rally and others may have several. There
is no way to know in advance how many there will be. However, each is a potential entry point
for the short seller providing the anticipated profit meets the traders requirements and the
amount of funds put into that one trading vehicle is not more than the one third of total funds that
Wyckoff suggests be used as a guideline.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis Tools & Strategies
Analyzing the Wyckoff Wave, O. P. Index and Trend Barometer
Since the Wyckoff Wave put in its all time high back in July of 2007, its action has been
dominated by down trends. Three of the down trends are of special interest because they have or
may have an impact on current and future action of the Wave. The most important down trend
was defined off the July high (Column 2).
The second rally top used to define this trend was the October high (Column 9). The parallel
over sold line for this trend was constructed through the August low (Column 4). Since it was
defined, the supply line of this longer term down trend has never been weakened or even
seriously challenged and it is unlikely that it will be in the near future due to the fact that the
current action of the Wyckoff Wave is more than 5000 points below the supply line. The action
of the Wave has had encounters with the over sold line of the down trend.
The action of the Wyckoff Wave first encountered the over sold line of the longer term down
trend in November (Column 12). The resulting penetration of the over sold line produced an over
sold position that needed to be corrected. The correction of an over sold position can unfold as a
period of horizontal action that over time allows the Wave to move back into the down trend
channel.
However, the correction normally unfolds as a rally, which is what happened in this case as the
Wave rallied back to near the middle of the down trend channel (Column 13). With the Wave
solidly back in the middle of the down trend channel, it was free to resume down trend
activity. During January (Column 15), the Wave again encountered the over sold line of the
down trend and entered an over sold position.
This time, the ability of the Wave to correct the over sold line with a normal corrective rally was
less impressive. Instead of moving back to the middle of the down trend channel, the Wave has
moved in more of a horizontal direction clinging to the over sold line. The inability of the Wave
to make the normal corrective rally to the middle of the down trend channel indicates continuing
weakness. It suggests that the bears are content with their short positions and see no reason to be
panicked into a short covering rally. It also suggests that the bulls that have been worn out or
shaken out of the market are reluctant to return. If this thinking among the bears and the bulls
continues, the Wave may continue to move horizontally until a position near the middle of the
down trend channel is reestablished. Other possibilities include a gradual drift lower as the over
sold line moves lower. If the bulls and the bears change their assessment of the action, a normal
corrective rally is another possibility.
In addition to serving as the second point for defining the supply line of the longer term down
trend, the October high (Column 9) also was a factor in defining the intermediate down
trend. The second point used to define this trend was the December high (Column 13). The over
sold line was constructed parallel to the supply line from the November low (Column12). During
January (Column 16), the action of the Wyckoff Wave approached but did not reach the over
sold line of the intermediate down trend. Normal down trend action would have penetrated or
reached the over sold line of the down trend. The failure to reach the over sold line indicated that
the intermediate down trend was in trouble and vulnerable to being broken. It was also a warning
to bears whose positions were based on the existence of this trend to become more defensive in
the management of their positions. As the action of the Wave moved from January into February
(Column 17), the supply line was penetrated. This action weakened the intermediate down
trend. Frequently, down trends are ended with a four step process that begins with the weakening
of the supply line. The second step is for the price to reenter the down trend, but not make a
lower low than the low that occurred before the supply line was weakened. In this case, step two
was completed during February (column 18). Step three is for the supply line to be decisively
broken by a rally that takes out the high recorded when the supply line was weakened. The final
step is for the price to confirm the breaking of the down trend with a reaction that is unable to
reenter the down trend channel. As of the last day posted, the action was working on step three,
but the outcome was inconclusive resulting in a conclusion that the intermediate down trend was
still having an impact on the action.
The third significant down trend since the July high was defined off the highs that were recorded
during December (Columns 13 & 14). The over sold line that completed the definition of this
shorter term down trend was constructed through the low point of the reaction that separated the
two rally tops used to define the supply line. The over sold line of this trend was penetrated
twice during January (Columns 15 & 16). The response to the first over sold position was a
normal corrective rally. The response to the second over sold position was more
impressive. After slightly weakening the supply line and briefly reentering the shorter term down
trend, the supply line was decisively broken (Column 16 & 17). The Wyckoff Wave could have
clearly ended the shorter term down trend by failing to reenter the short term down trend
channel, but it did not. During February (Column 17) the action of the Wave slipped back into
the down trend channel, but did not make a lower low. On the one hand, this action seemed to
confirm the breaking of the short term down trend by failing to make a lower low. However on
the other hand, the action seemed not to confirm the breaking of the down trend by reentering the
down trend channel. Conflicting signals such as these encourage traders to be more
defensive. Since the action of the Wave reentered the down trend, it has been horizontal in
nature and has lifted the Wave out of the down trend channel. As horizontal action continues and
the gap between current action and the supply line widens, it may be concluded that the breaking
of the shorter term down trend has been confirmed even though there was the reentry into the
trend after the supply line was decisively broken.
The three down trends mentioned above are the ones that are having an impact on current
action. However, there have been others that deserve to be noted. After the July high (Column
2), there was a rally to a lower top during August (Column 3) that allowed a shorter term down
trend to be defined. An over sold position relative to this down trend developed at the August
low (Column 4). The correction of the over sold position began the process than lead to the end
of the down trend being confirmed during September (Column 6). Another shorter term down
trend was defined near the end of October ( Column 9) when the Wyckoff Wave rallied to a
lower top relative to the high that had been recorded earlier in October. The Wave has moved
out of this down trend. However, it should be noted that the stopping action was not the more
classic type mentioned earlier.
Although the action since July 2007 has been dominated by down trends, there have been up
trends as well. There have to be up trends for down trends to be defined. The up trends that have
unfolded have all been short term in nature. They have been characterized by being relatively
narrow compared to the down trends discussed earlier and they have been steep. Trends that are
steeply inclined and narrow are difficult for the action to sustain. In this case with the action
dominated by down trends, the short, steep and narrow up trends likely were the result of bears
rotating out of some short positions and bulls rushing back into the market to avoid missing the
next advance and in the process setting themselves up to being shaken out or worn out later. The
up trends that stand out most clearly were defined off the August low (Column 4), the November
low (Column 12) and the January low (Column 16).
Earlier it was noted that in order to have down trends there must be up trends. However, in order
for there to be trends in either direction, there must be trading ranges that provide the potential
that the fuel the advances and declines that lead to up trends and down trends. The trading ranges
that have developed since the all time high of the Wyckoff Wave will be the subject of the
second part in this series.
© The Jamison Group, Inc.: Stock Market Analysis-Tools and Strategies
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis Tools & Strategies
Analyzing the Wyckoff Wave,
O.P. Index and Trend Barometer
Part 2 - Trading Ranges
In order for the action of the Wyckoff Wave to have been dominated by down trends since the
high in July 2007, there has to have been trading ranges in which the Wave was able to build the
potential that has fueled the decline. The most important trading ranges stand out most clearly on
the five hundred point figure chart of the Wave. The all time high of the Wave occurred in
column two of the figure chart. The vertical chart of the Wave shows the July high to be the
beginning of the decline. However, the figure chart indicates that it was also the end of a trading
range that had developed earlier in the year.
It can be argued that each trading session provides a point of interest because it provides a piece
of additional information about the move that is underway or being prepared. This examination
will be limited to three particular points of interest. They are thrusts, inharmonious
actions/divergences and Trend Barometer indications. These three tend to provide the most
useful information as to the character of the stock market action that is unfolding at
the moment or that is likely tounfold in the foreseeable future.
The stock market represented by the Wyckoff Wave seldom moves from point "A" to point "B"
in a straight line. The moves that most traders trade are made up of a series of thrusts. The size of
these thrusts, the amount of new progress that each makes and the extent to which each thrust is
corrected indicate the overall health of an unfolding ove.
Ideally, each thrust in a move would be bigger than the previous thrust, make more new progress
than the previous thrust and correct less than the previous thrust. In reality, this is very seldom
how events unfold. The longer term down trend that has been guiding the Wyckoff Wave since
last July has had three completed thrusts and is working on thrust number four. The first thrust
began in column two of the vertical chart and ended in column 4. After that thrust was
completed, the second thrust began in column nine and ended in column twelve. The third thrust
started in the next column and ended in column sixteen. The current thrust had its beginning in
column seventeen and appears to still be underway.
In most cases, the first thrust of a move will make the largest amount of new progress because it
is starting at the very beginning of the move and is all new ground gained or lost. The first
downward thrust of the Wave in the decline that began last July was 5700 points in round
numbers from its top to its bottom and all of that was new ground gained to the down side. The
second thrust was bigger than the first when measured from its top to its bottom. However, it
only made 800 points of new down side progress after completing a decline of 6100
points. These observations provide several indications. The fact that the second thrust was bigger
than the first suggested that the market became weaker during the second thrust than it had been
in the first. The fact that the second thrust only made 800 points of new down side progress
indicated that the bulls had been able to fight back against the bears on the correction of the first
thrust. They made up almost all of the ground lost on the first thrust. On the correction of the
second thrust. the bulls were considerably weaker than they had been on the first corrective
phase. When the second correction was completed in column twelve, the Wave had recovered
less than half of the ground covered by the second thrust compared to having recovered almost
all of the ground covered by the first thrust. With the second thrust to the down side having been
bigger than the first and with the second correction having corrected a smaller portion of the
thrust before it, the indication as of the high in column twelve was that the market was
weakening and that the decline would likely continue. During the third thrust to the down side,
the Wyckoff Wave made more new down side progress than during the second thrust. This
observation indicated that the Wave was still weak suggesting that the decline was not
over. However, the third thrust and the correction that followed it provided indications that the
Wave was not as weak as it was during the period of the second thrust and its correction. These
indications were made by the fact that the third thrust was somewhat smaller than the second and
by the fact that the Wave was able to regain a larger portion of the third thrust than had been the
case on the correction of the second thrust.
The current thrust of the decline began on February 1. As of March 7, it appeared to be a work in
progress. Therefore, any conclusions as to any indications it provides have to be subject to
change when the thrust has been completed. However, as of now, the fourth thrust has been
substantially shorter than any of the first three and no new down side progress has been
made. The conclusion that comes from these observations is that the Wyckoff Wave is not as
week as it had been during the previous thrusts in the decline. This conclusion suggests that an
important change in character in the action may be developing. Therefore, the bears would do
well to be more defensive with respect to managing existing positions or considering new ones
and the bulls should be vigilant so as not to miss any new opportunities that may be presented
during the weeks ahead.
The thrusts outlined above were all of what most Wyckoff traders would consider to be
intermediate in nature. It should be noted that each of those thrusts was made up of smaller
thrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorter
term trader looking to realize as much profit as possible from each thrust rather than being
content to ride out the entire decline with one set of positions. Due to the process of rotation, the
leaders during one thrust of a larger move may not be the leaders in the next thrust. Studying the
indications from the smaller thrusts within the bigger moves can be helpful when one set of
positions should be replaced by a new set.
Inharmonious actions between the Wyckoff Wave and O.P. Index are always points of
interest. They indicate that there is an unstable relationship between the result expressed by the
Wyckoff Wave and by the effort expressed by the O.P. The indication when one of these
unstable relationships develops is that the Wave is likely to change direction from the direction it
was moving when the inharmonious action or divergence first appeared. Inharmonious actions
and divergences should not be considered to be timing tools. In other words, if one of those
relationships develops today, do not assume that the Wave will respond tomorrow. There is,
however, a general relationship between the magnitude of an inharmonious action or divergence
and the amount of time it will take for a response to begin and be completed. If an inharmonious
action or divergence develops over a long period of time, the response to it is likely to take
longer to begin and complete. Those that develop over shorter periods of time should produce a
quicker response and one that is completed sooner.
Since July of 2007, there have been several cases of inharmonious action or divergence. The first
came in column three of the vertical chart when the Wyckoff Wave rallied to a lower top than
had been recorded during July and the O.P. rallied to a higher top. That divergence was a case of
up side effort unconfirmed by result. It suggested the likelihood of a reaction in the Wave. In that
case, the response was immediate and severe as the Wave declined to its August low. When the
Wave put in its October high in column twelve, it was only 400 points from its July
high. However, the O.P. was approximately 1000 points below its high. This was a bearish
inharmonious action. The response by the Wave was unconfirmed by the effort. The indication
was for a decline in the Wave. In that case, the response also came quickly and it was
substantial. At the November low in column twelve, the Wyckoff Wave was in new low ground
relative to its August low. However, the O.P. was not. In that case, the down side result was
unconfirmed by the effort indicating the likelihood of a turn to the up side by the Wave. As the
Wave was putting in its December high, the O.P. was higher than it had been in October, but the
Wave was not. This was another bearish divergence suggesting that a reaction in the Wave was
likely and it declined to the January low. In the case of this divergence, it should be noted that
the O.P. continued to try to pull the Wave higher into column fourteen. This widened the
divergence and possibly helped the Wave make more down side progress than it might have
made.
Thus far during 2008, there have been additional cases of divergence and inharmonious
action. At the January low in column sixteen, the Wyckoff Wave was in new low ground relative
to its November low and the O.P. was not. This result to the down side was unconfirmed by the
effort and the Wave then responded with a rally to the high on February 1. At the end of
February, the Wave was putting in a lower top relative to the one recorded at the beginning of
the month while the O.P. was making a higher high. In this case, the O. P. had expressed an
effort to the up side that the Wave had not confirmed. The response to that bearish divergence
has lead to where things stand as of March 7. Now there is a bullish inharmonious action and a
bullish divergence. The divergence can be seen by comparing the current position of the Wave
and O.P. to where they were during the middle of February. The Wave is now lower and the O.P.
is not. The unconfirmed result suggests a change in direction. At the same time, there is also a
bullish inharmonious action that can be seen when the current positions of the indexes are
compared to their January lows. The Wave is almost back to its January low, but the O.P. is
not. This is another indication of a likely change in direction
The Trend Barometer is the final point of interest that will be examined. It is the name given to
the Technometer and the Force Index. The Technometer indicates to what degree the market is
over sold or over bought. The Force Index indicates whether the Wyckoff Wave is being
influenced by down side pressure or up side pull.
Theoretically, the Technometer can have values as low as zero and as high as one
hundred. However, neither of those numbers have ever been recorded and it unlikely that either
will ever be recorded. Observations over the past seventy plus years have indicated that the
Technometer spends most of the time below a reading of 50 and above a reading of
38. Therefore, readings at or above 50 are seen as indicating an over bought condition and
reading at or below 38 are seen as indicating an over sold condition. An over sold condition
indicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicates
that the Wave is vulnerable to a reaction. To be more precise, over bought and over sold
conditions indicate that the Wave is vulnerable to corrective action. Most of the time that
corrective action comes in the form of a rally or reaction. However, it can unfold as a period of
horizontal action. As the Technometer moves higher above 50 or farther below 38, it becomes
more over bought or more over sold. That means the Wave becomes more vulnerable to
corrective action. It down not necessarily mean that the Wave becomes vulnerable to a bigger
correction. A figure chart should be consulted to judge what the magnitude of the indicated
correction is likely to be.
Some Wyckoff traders try to use the Technometer in a mechanical manner in an effort to bypass
all of the other concepts that Wyckoff teaches. Traders who fall victim to this trap try to use
Technometer readings of 38 and 50 as automatic buy and sell signals. Traders who use this
approach usually find that the market rewards them for a while. Since July of 2007, there have
been relatively few clearly over sold and over bought conditions. In every case, the market has
rewarded to some degree the trader who has used the Technometer in a mechanical manner
providing the trader was willing to ride out the gyrations that occurred between the entry point
and the point at which the reward was offered by the market. However, it has never failed to be
the case that at some point the market wants to get paid back by those who have used to
Technometer mechanically. In these situations, the Technometer usually tells the mechanical
trader to take a position and then fails to provide an indication to exit the trade until it is deep in
the red.
The Force Index has no limits as to the readings it can reach. Its extremes are determined by the
average level of volume. Higher average volume allows for greater extremes and lower average
volume allows for lesser extremes. There are two ways in which the Force can be helpful in
keeping a Wyckoff trader on the right track. One is by the development of divergences between
the Force and the Wave. The other is by the tendency of the Force to trend.
In column six of the vertical chart, the Force put in a peak as the Wave approached its October
high. In column nine the Wave put in a higher high, but the Force put in a lower peak. This was a
divergence between the Wave and the Force. The up side result on the part of the Wave did not
have enough up side pull from the Force to sustain it. The Wave responded by turning downward
eventually reaching the November low. At the November low there was another divergence. The
Wave made a lower low than it had in August, but the Force did not. In that case, the indication
was that the down side result experienced by the Wave did not have the down side pressure from
the Force to sustain it and the Wave responded with a rally
The Force Index exhibits a tendency to trend. The high in the Force in column one and the high
as the action crossed from column three into four can be used to define a down trend. The down
trend indicated that there was a bearish tone to the action confirming that the short side was the
one to be trading and indicating that some one still trading the log side was likely in trouble. In
column five, the down trend was broken indicating that the bearish tone to the action had ended
encouraging those still short to be more defensive and encouraging the bulls to be more
aggressive. This change in tone occurred as the Wave was recovering from its August low and
moving toward its October high. The tone of the action changed again in column nine when the
up trend in the Force was broken. In that case, the change in tone was indicated just as the Wave
started down from its October high. The tendency of the Force to trend is not a timing tool. It
doesprovide indications as to which side of the market the trader should be trading. As a rule,
traders who are trading against the tend of the Force will end up paying for their mistake just as
those who try to trade against the trend of the Wyckoff Wave are likely to have to pay for their
error.
The points of interest outlined in the third part of this series should be viewed as being secondary
to the character of the price and volume action. They should be used to confirm indications
provided by the price an volume action. Trying to use any of them mechanically in lieu of an
ongoing study of the price and volume will likely lead to unintended consequences.
The effort to leave that range to the up side failed resulting in an up thrust. The high point of an
up thrust is a point from which a down count may be taken. Since there is only one posting at the
40000 level, it appears that there is no potential. Making this conclusion is the result of an overly
mechanical approach to taking counts. Since the July high was an up thrust and an ending action,
it is acceptable to count the potential created by the entire trading range even though there is
only one posting at the high. In this case, it appears that the Wyckoff Wave began moving into
the trading range during May when it first reached the 38500 level in column one of the figure
chart. The potential built during the period from May to July was 4500 points for an objective of
35500. This objective was reached as the Wave approached its August low in column three of
the figure chart.
After the Wyckoff Wave made its initial break to the down side from the July high, it made a
corrective rally that ended at the 38500 level at the beginning of column three. This rally
represented the test of the up thrust. The high point of the rally provided a place to take another
and more aggressive measure of the potential in the trading range. This count began at the top of
the test of the up thrust and extended to the left to where the Wave was rallying into May to the
38000 level in column one of the figure chart. The potential measured by this count was 7000
points indicating a down side objective range of 31000 to 33000. This objective was reached on
the decline to the January 2008 low.
The August low in column four of the vertical chart was the end of the first major thrust of the
entire decline from the July high to the present. Although it was not clearly defined, a trading
range did develop following the August low. If the low in column four was interpreted to be the
selling climax of that phase of the decline, the preliminary support can be seen as having been
met at the low in column three of the vertical chart. If these two points had been defined, the
high as the action crossed from column four into column five of the vertical chart would have
been labeled as the top of the automatic rally making the low in column five the secondary test,
which confirmed a new trading range. Since the action immediately left the range to the up side
after the secondary test, it could be seen as also being a last point of support. Wyckoff tells us
that the maximum count to the up side stretches from the last point of support to preliminary
support. If that rule was used in this case, the result would have been a 3500 point potential at
the 36000 level indicating an up side objective range of 38000 to 39500. The top of the objective
range was reached at the October high.
An up trend was defined on the vertical chart off of the lows in column four and five. This trend
was broken in column six. At the end of that column, the Wyckoff Wave made an attempt to
reenter the up trend that failed. The failure confirmed the breaking of the up trend and began the
defining of the next trading range. The failed attempt to reenter the up trend was used to define
the resistance level of the new trading range and the low in the next column was used to define
the support level. The action in column eight of the vertical chart provided an obvious ending
action in the form of an up thrust of the resistance level. At the end of column three of the figure
chart and extending into column four, the potential for the next decline was established. It was
only 1500 points. However, when the up thrust was tested in column nine of the vertical chart,
the potential had grown to 3000 points for an objective of 36500 to 35000, which was reached
and over run on the decline to the November low.
The character of the trading range that developed during September and October points out the
value of maintaining more than one figure chart. That trading range was relatively short term and
was confined to a relatively narrow range. Frequently, the potential in trading ranges like this
can be underestimated if the figure chart being used is long term in nature as is the case with the
five hundred point chart. Keeping a one hundred point figure chart in addition to the five
hundred point chart provides an intermediate interpretation of the action that can better estimate
the potential developed in shorter term trading ranges.
The next trading range that developed was defined by the November low in column four of the
figure chart and by the December high in column five. After the limits of this range were
defined, the action moved into an apex. The action broke from the apex in column five of the
figure chart as the Wyckoff Wave began its decline to the January low. When the apex was
broken, a new down side potential could have been measured. This count was taken at the 35500
level and indicated an objective range of 29500 to 30500. This objective has not as yet been
reached. It may or may not be reached based on the outcome of the current trading range.
The current trading range was defined by the January low and the February high. It was
confirmed when the February low respected the support level of the range. After a trading range
has been defined and confirmed, the expectation is for an ending action to develop to signal that
trading range action is being completed and to provide an indication as to the direction of the
next move. Thus far, there has been no ending action relative to the new trading
range. Therefore, taking a count in either direction cannot be justified. However, it is acceptable
to periodically measure how much potential might be developing so as to have a feeling as to
how significant the next move might be. If the potential of the current range is measured at its
widest point as of the last trading day in February, the potential could be as much as 8000 points
if it is measured back to where the action was declining to the January low. The potential is
somewhat less if it is measured only since the January low. If the anticipated ending action
relative to the range points to additional down trend activity, the 29500 to 30500 objective range
will likely be overrun by a wide margin. However, if the ending action points to an advance, it is
likely that the lower objective mentioned will never be reached. The objectives that the action in
trading ranges forecast should be seen as being indications only subject to being confirmed or
denied by the character of the price and volume action.
Note: Part three of this series will focus on other points of interest that have developed since the
all time high of the Wyckoff Wave was put in place last July.
© The Jamison Group, Inc.: Stock Market Trading, The Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis Tools & Strategies
Wyckoff Wave, Optimism-Pessimism Index & Trend Barometer
Part 3 - Points of Interest
In addition to helping analyze stock market trends and trading ranges, the Wyckoff Wave and its
related indicators the O.P. and the Trend Barometer provide other points of interest that can be
helpful in determining when to consider taking new stock market positions, how to manage
existing positions and when to consider exiting those positions.
It can be argued that each stock market trading session provides a point of interest because it
provides a piece of additional information about the move that is underway or being prepared.
This examination will be limited to three particular points of interest. They are thrusts,
inharmonious actions/divergences and Trend Barometer indications. These three tend to provide
the most useful information as to the character of the action that is unfolding at the moment or
that is likely to project stock market action in the foreseeable future.
Like the stock market, the Wyckoff Wave seldom moves from point "A" to point "B" in a
straight line. The moves that most stock traders trade are made up of a series of thrusts. The size
of these thrusts, the amount of new progress that each makes and the extent to which each thrust
is corrected indicate the overall health of an unfolding move. Ideally, each thrust in a move
would be bigger than the previous thrust, make more new progress than the previous thrust and
correct less than the previous thrust. In reality, this is very seldom how events unfold. The longer
term down trend that has been guiding the stock market and naturally, the Wyckoff Wave since
last July has had three completed thrusts and is working on thrust number four. The first thrust
began in column two of the vertical chart and ended in column 4. After that thrust was
completed, the second thrust began in column nine and ended in column twelve. The third thrust
started in the next column and ended in column sixteen. The current thrust had its beginning in
column seventeen and appears to still be underway.
In most cases, the first thrust of a move will make the largest amount of new progress because it
is starting at the very beginning of the move and is all new ground gained or lost. The first
downward thrust of the Wave in the decline that began last July was 5700 points in round
numbers from its top to its bottom and all of that was new ground gained to the down side.
The second thrust was bigger than the first when measured from its top to its bottom. However,
it only made 800 points of new down side progress after completing a decline of 6100
points. These observations provide several indications. The fact that the second thrust was bigger
than the first suggested that the market became weaker during the second thrust than it had been
in the first. The fact that the second thrust only made 800 points of new down side progress
indicated that the bulls had been able to fight back against the bears on the correction of the first
thrust. They made up almost all of the ground lost on the first thrust. On the correction of the
second thrust. the bulls were considerably weaker than they had been on the first corrective
phase. When the second correction was completed in column twelve, the Wave had recovered
less than half of the ground covered by the second thrust compared to having recovered almost
all of the ground covered by the first thrust. With the second thrust to the down side having been
bigger than the first and with the second correction having corrected a smaller portion of the
thrust before it, the indication as of the high in column twelve was that the market was
weakening and that the decline would likely continue.
During the third thrust to the down side, the Wyckoff Wave made more new down side progress
than during the second thrust. This observation indicated that the Wave was still weak
suggesting that the decline was not over. However, the third thrust and the correction that
followed it provided indications that the Wave was not as weak as it was during the period of the
second thrust and its correction. These indications were made by the fact that the third thrust was
somewhat smaller than the second and by the fact that the Wave was able to regain a larger
portion of the third thrust than had been the case on the correction of the second thrust.
The current thrust of the decline began on February 1. As of March 7, it appeared to be a work in
progress. Therefore, any conclusions as to any indications it provides have to be subject to
change when the thrust has been completed. However, as of now, the fourth thrust has been
substantially shorter than any of the first three and no new down side progress has been
made. The conclusion that comes from these observations is that the Wyckoff Wave is not as
week as it had been during the previous thrusts in the decline. This conclusion suggests that an
important stock market change in character may be developing. Therefore, the market bears
would do well to be more defensive with respect to managing existing positions or considering
new ones and the bulls should be vigilant so as not to miss any new opportunities that may be
presented during the weeks ahead.
The thrusts outlined above were all of what most Wyckoff market traders would consider to be
intermediate in nature. It should be noted that each of those thrusts was made up of smaller
thrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorter
term trader looking to realize as much profit as possible from each thrust rather than being
content to ride out the entire decline with one set of positions. Due to the process of rotation, the
leaders during one thrust of a larger move may not be the leaders in the next thrust. Studying the
indications from the smaller thrusts within the bigger moves can be helpful when one set of
positions should be replaced by a new set.
Inharmonious actions between the Wyckoff Wave and O.P. Index are always points of
interest. They indicate that there is an unstable relationship between the result expressed by the
Wyckoff Wave and by the effort expressed by the O.P. The indication when one of these
unstable relationships develops is that the Wave is likely to change direction from the direction it
was moving when the inharmonious action or divergence first appeared. Inharmonious actions
and divergences should not be considered to be timing tools. In other words, if one of those
relationships develops today, do not assume that the Wave will respond tomorrow. There is,
however, a general relationship between the magnitude of an inharmonious action or divergence
and the amount of time it will take for a response to begin and be completed. If an inharmonious
action or divergence develops over a long period of time, the response to it is likely to take
longer to begin and complete. Those that develop over shorter periods of time should produce a
quicker response and one that is completed sooner.
Since July of 2007, there have been several cases of inharmonious action or divergence. The first
came in column three of the vertical chart when the stock market reflected by the Wyckoff Wave
rallied to a lower top than had been recorded during July and the O.P. rallied to a higher
top. That divergence was a case of up side effort unconfirmed by result. It suggested the
likelihood of a reaction in the Wave. In that case, the response was immediate and severe as the
Wave declined to its August low. When the Wave put in its October high in column twelve, it
was only 400 points from its July high. However, the O.P. was approximately 1000 points below
its high. This was a bearish inharmonious action. The response by the Wave was unconfirmed by
the effort. The indication was for a decline in the Wave. In that case, the response also came
quickly and it was substantial. At the November low in column twelve, the Wyckoff Wave was
in new low ground relative to its August low. However, the O.P. was not. In that case, the down
side result was unconfirmed by the effort indicating the likelihood of a turn to the up side by the
Wave. As the Wave was putting in its December high, the O.P. was higher than it had been in
October, but the Wave was not. This was another bearish divergence suggesting that a reaction
in the Wave was likely and it declined to the January low. In the case of this divergence, it
should be noted that the O.P. continued to try to pull the Wave higher into column fourteen. This
widened the divergence and possibly helped the Wave make more down side progress than it
might have made.
Thus far during 2008, there have been additional cases of divergence and inharmonious
action. At the January low in column sixteen, the Wyckoff Wave was in new low ground relative
to its November low and the O.P. was not. This result to the down side was unconfirmed by the
effort and the Wave then responded with a rally to the high on February 1. At the end of
February, the Wave was putting in a lower top relative to the one recorded at the beginning of
the month while the O.P. was making a higher high. In this case, the O. P. had expressed an
effort to the up side that the Wave had not confirmed. The response to that bearish divergence
has lead to where things stand as of March 7. Now there is a bullish inharmonious action and a
bullish divergence. The divergence can be seen by comparing the current position of the Wave
and O.P. to where they were during the middle of February. The Wave is now lower and the O.P.
is not. The unconfirmed result suggests a change in direction. At the same time, there is also a
bullish inharmonious action that can be seen when the current positions of the indexes are
compared to their January lows. The Wave is almost back to its January low, but the O.P. is
not. This is another indication of a likely change in direction
The Trend Barometer is the final point of interest that will be examined. It is the name given to
the Technometer and the Force Index. The Technometer indicates to what degree the market is
over sold or over bought. The Force Index indicates whether the Wyckoff Wave is being
influenced by down side pressure or up side pull.
Theoretically, the Technometer can have values as low as zero and as high as one
hundred. However, neither of those numbers have ever been recorded and it unlikely that either
will ever be recorded. Observations over the past seventy plus years have indicated that the
Technometer spends most of the time below a reading of 50 and above a reading of
38. Therefore, readings at or above 50 are seen as indicating an over bought condition and
reading at or below 38 are seen as indicating an over sold condition. An over sold condition
indicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicates
that the Wave is vulnerable to a reaction. To be more precise, over bought and over sold
conditions indicate that the Wave is vulnerable to corrective action. Most of the time that
corrective action comes in the form of a rally or reaction. However, it can unfold as a period of
horizontal action. As the Technometer moves higher above 50 or farther below 38, it becomes
more over bought or more over sold. That means the Wave becomes more vulnerable to
corrective action. It down not necessarily mean that the Wave becomes vulnerable to a bigger
correction. A figure chart should be consulted to judge what the magnitude of the indicated
correction is likely to be.
Some Wyckoff traders try to use the Technometer in a mechanical manner in an effort to bypass
all of the other concepts that Wyckoff teaches. Traders who fall victim to this trap try to use
Technometer readings of 38 and 50 as automatic buy and sell signals. Traders who use this
approach usually find that the market rewards them for a while. Since July of 2007, there have
been relatively few clearly over sold and over bought conditions. In every case, the market has
rewarded to some degree the trader who has used the Technometer in a mechanical manner
providing the trader was willing to ride out the gyrations that occurred between the entry point
and the point at which the reward was offered by the market. However, it has never failed to be
the case that at some point the market wants to get paid back by those who have used to
Technometer mechanically. In these situations, the Technometer usually tells the mechanical
trader to take a position and then fails to provide an indication to exit the trade until it is deep in
the red.
The Force Index has no limits as to the readings it can reach. Its extremes are determined by the
average level of volume. Higher average volume allows for greater extremes and lower average
volume allows for lesser extremes. There are two ways in which the Force can be helpful in
keeping a Wyckoff trader on the right track. One is by the development of divergences between
the Force and the Wave. The other is by the tendency of the Force to trend.
In column six of the vertical chart, the Force put in a peak as the Wave approached its October
high. In column nine the Wave put in a higher high, but the Force put in a lower peak. This was a
divergence between the Wave and the Force. The up side result on the part of the Wave did not
have enough up side pull from the Force to sustain it. The Wave responded by turning downward
eventually reaching the November low. At the November low there was another divergence. The
Wave made a lower low than it had in August, but the Force did not. In that case, the indication
was that the down side result experienced by the Wave did not have the down side pressure from
the Force to sustain it and the Wave responded with a rally
The Force Index exhibits a tendency to trend. The high in the Force in column one and the high
as the action crossed from column three into four can be used to define a down trend. The down
trend indicated that there was a bearish tone to the action confirming that the short side was the
one to be trading and indicating that some one still trading the log side was likely in trouble. In
column five, the down trend was broken indicating that the bearish tone to the action had ended
encouraging those still short to be more defensive and encouraging the bulls to be more
aggressive. This change in tone occurred as the Wave was recovering from its August low and
moving toward its October high. The tone of the action changed again in column nine when the
up trend in the Force was broken. In that case, the change in tone was indicated just as the Wave
started down from its October high. The tendency of the Force to trend is not a timing tool. It
does provide indications as to which side of the market the trader should be trading. As a rule,
traders who are trading against the tend of the Force will end up paying for their mistake just as
those who try to trade against the trend of the Wyckoff Wave are likely to have to pay for their
error.
The points of interest outlined in the third part of this series should be viewed as being secondary
to the character of the price and volume action. They should be used to confirm indications
provided by the price an volume action. Trying to use any of them mechanically in lieu of an
ongoing study of the price and volume will likely lead to unintended consequences.
© The Jamison Group, Inc.: Stock Market Analysis Tools Strategies
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Trade the Wyckoff Wave in '08
Wyckoff traders have a trading tool available to them that is unfamiliar to most traders. Its called
the Wyckoff Wave. The Wyckoff Wave is a narrowly defined general market index designed to
help Wyckoff traders keep in step with the all important trend of the market. Many traders spend
hours sifting through hundreds or even thousands of individual issues trying to find the small
handful that will produce better than average profits.
Seasoned Wyckoff traders know that the Wyckoff Wave is made up of a handful of individual
issues that year in and year out provide many attractive opportunities with no sifting required.
During 2007, the eight components of the Wyckoff Wave provided eighteen opportunities to
realize a gross profit of 20% or more.
Five of the opportunities produced profits of more than 30% and two yielded more than 40%.
While there is no guarantee that the Wyckoff Wave components will duplicate this performance
during 2008, there is reason to anticipate that there will be many similar opportunities. An index
that is the composite of only eight weighted components cannot contain any dead wood. The
components of the Wyckoff Wave exhibit varying degrees of volatility. All eight of the stock in
the Wave had at least one of those 20+% moves and one had five of them. Before sifting through
another mountain of individual stocks, consider an approach that can help minimize effort and
maximize results. Trade the Wave in '08.
As of the beginning of 2008, the components of the Wyckoff Wave are General Electric, Merrill
Lynch, IBM, Exxon, Bristol Myers, Dupont, General Motors and Union Pacific.
The goal in selecting these issues to be the components of the Wave has been to capture a large
portion of the diversity and volatility of the market while keeping the group of issues small
enough so that the Wyckoff Wave trader can always be familiar with exactly what his potential
trade candidates are doing. Those who are routinely attempting to monitor the action of hundreds
or thousands of issues know little if anything about the action of any of them. The Wyckoff
Wave trader can easily keep abreast of the trend, position, relative strength or weakness,
potential and all the factors that the Wyckoff Course teaches are important.
During each twelve month period, the Wyckoff Wave normally makes at least two and
sometimes four intermediate sized moves. During 2007, the Wave beat its normal average and
completed five intermediate moves.
When the Wyckoff Wave signals that it is ready to make a move, the Wyckoff Wave trader
knows exactly where to look for the individual issues that are most likely to participate. Many
times, all eight of the Wave components participate when the Wave makes an intermediate
move. However, the Wave trader can always depend on substantial participation from at least
two or three of the eight. Frequently, those two or three will actually out perform the Wave
making the effort required in identifying them even more rewarding.
Wyckoff Wave traders do not turn to the Wall Street Journal, the TV or the inter-net to get their
information about the Wyckoff Wave and its components. They turn to the Pulse of the
Market. The Pulse of the Market provides price and volume action on the Wave and its
components. It also provides intra-day point and figure change data on the index and
components. In addition, the Pulse of the Market includes indicators unique to the Wyckoff
method. These include Optimisim-Pessimism indexes, the Technometer and the Force. The price
and volume data allows the Wyckoff Wave trader to determine the trend and position of the
index. This is what Wyckoff teaches traders to do in step one of the Wyckoff method. The price
and volume data on the individual components helps the trader determine which components are
in harmony with the market as indicated in the second step of the method. Point and figure
change data is an essential element in working through step three. All of the data is important in
implementing the all important fourth and fifth steps of the Wyckoff Method.
The Wyckoff Wave ended 2007 working on a test of the November low. The test of an important
low or high frequently marks the start of an intermediate move. That means the first meaningful
move of 2008 may already be underway. If not, the preparation for that move is
underway. Either way, some or all of the components of the Wave will participate.
Why not participate along with them and trade the Wave in '08.
© The Jamison Group, Inc.: Trade the Wyckoff Wave in '08
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading Strategies
Step One of the Wyckoff Method
In the Wyckoff Course, Wyckoff teaches that the most important thing anyone can know about a
market or an individual issue is its trend and the position that it occupies in the trend. The trend
is the line of least resistance. It indicates the direction in which the price wants to move. Profits
are more likely to be realized when positions are established that are in harmony with the
direction in which the price has already indicated it wants to move.
Once a trend has been established, the future trend is likely to be the same as the current trend
until the price reaches a position in that trend or exhibits price and volume action that indicates
that a change in the direction of the trend should be anticipated.
Wyckoff classifies trends by the direction in which they point and by the duration for which they
endure. From the standpoint of direction, trends are either up, down or neutral also known
as a trading range. Up trends are best suited for long positions. Down trends are best suited for
short positions. Trading ranges lend themselves to both long positions and short positions
depending upon the position of the price in the trend. Trends come in a wide range of
sizes. Trends can emerge and run their course within the period of one trading session, or they
can last for years. A market or an individual issue will be in more than one trend at any one
time.
For trading purposes, Wyckoff identifies four trends that matter most. There is the immediate
trend, the short term trend, the intermediate trend and the long term trend. When these four
trends are all pointed in the same direction, the price is likely to experience its most dynamic
movement. However, profitable trading can consistently be realized even if all four trends are
not pointed in the same direction.
The key to success is to have the trend that is being traded clearly and correctly defined and to
know at all times where the price is in that trend. Knowing how the other trends are defined and
what the position of the price is in those trends can be helpful because the position of the price in
a trend not being traded can have an influence on the action in the trend that is being
traded. However, positions should be opened, held and closed based solely on developments in
the trend being traded. Wyckoff would frown on the idea of using the fact that the long term
trend is up to justify taking a short term position on the long side, or any other combination of
using the direction of one trend to justify a trade in a different trend.
To be used effectively, trends must be defined correctly. Wyckoff tells us that trends are defined
by two consecutive support points or resistance points of equal importance. An up trend
traditionally is defined by two support points. Down trends are defined by two supply
points. Trading ranges may be defined by support points or resistance points depending whether
they develop after the completion of an advance or the completion of a decline. Support points
combine to form demand line for up trends. Resistance points combine to form supply line for
down trends. In trading ranges, the support points combine to form support levels and the
resistance points combine to form resistance levels. Trend channels develop when parallel lines
are constructed through the appropriate points. The parallel line to a demand line in an up trend
is the over bought line. The parallel line to a supply line in a down trend is the over sold line. In
trading ranges, the parallel line to a support level is a resistance level and the parallel line to a
resistance level is a support level.
Not every position in an up trend is suitable for establishing a long position. It is also true that
not every position in a down trend is suitable for establishing a short position. Trading ranges
may be used to establish either long positions or short positions. Here again, the position in the
trend channel determines whether long or short positions are appropriate. There is one position
in all trend channels that is generally considered inappropriate for establishing positions.
The Wyckoff Course instructs students how to identify what are called primary trading
positions. These are those areas in the various trend channels where the taking of positions is
most advised so as to best limit the possibility of a loss and to best enhance the likelihood of
realizing the maximum profit possible. By limiting trading to these key areas, the Wyckoff trader
can remain true to the duel goals of preserving capital and making a profit.
© The Jamison Group, Inc.: Trade the Stock Market- Step one of the Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading Strategies
Step Two of the Wyckoff Method
Step two of the Wyckoff method is very simple, but yet so very important in achieving
consistent success in the market.
Wyckoff teaches us to always trade stocks that are in harmony with the market. The trend of the
market as indicated by the Wyckoff Wave indicates the line of least resistance. It reflects the
direction in which most of the individual issues are moving. Traders who take positions that are
in harmony with the line of least resistance are more likely to experience positive results than are
traders who try to fight the trend.
It is always better to have the market working for you than against you. There are always
individual issues that make huge moves against the trend, but these are relatively rare.
The odds of finding one of these counter trend wonders are much smaller than are the odds of
selecting an issue that is going to perform as well or better than the trend of the market.
Trading in harmony with the market means taking long positions when the market as measured
by the Wyckoff Wave is in a defined up trend channel. It means taking short positions when the
market is in a defined down trend channel. When the defined trend is neutral or a trading range,
trading in harmony with the market can mean standing aside and let the bulls and bears battle for
control of the action, or consider opportunities on both sides of the market.
However, Wyckoff discourages being in positions on both sides of the market at the same
time. Theoretically, trading both sides at once while the market is in a trading range is possible,
but it is emotionally difficult. Whenever emotions enter the picture, the odds of making costly
mistakes increases. To avoid these errors make a commitment to never be long and short at the
same time.
Just because the trend of the market and that of an individual issue are pointed in the same
direction does not mean that the trader automatically has a green light to take a long position if
the trends are pointed upward or a short position if the trends are pointed downward.
Remember what Wyckoff teaches in step one of the Wyckoff method. Knowing the position of
the price in the trend is as important as knowing the direction of the trend. Situation where the
market and an individual issue under consideration for a long position are both located near the
top of their up trend channels should be avoided in favor of those where the positions are near
the bottom of the trend channels. When short positions are being considered in down trends, it is
best to locate those situations where both the market and the individual issue are positioned near
the top of their down trend channels. If trading ranges are going to be traded, look for those
instances where both the general market and the individual issue are positioned near the very top
or the very bottom of their trading ranges.
An important concept in applying step two of the Wyckoff method is relative strength and/or
weakness. Although most individual issues will be in the same trend as the general market and
many of them will even be in the same position in their trends as the market, not all of these are
the best candidates for new positions. All up trends and down trends are the result of a series of
trusts in the direction of the trend separated by corrections. Some individual issues that are in
harmony with the market from the stand point of the direction in which their trends are pointed
will make relatively larger thrusts and experience relatively smaller corrections than the market
as a whole.
These are the issues that are most likely to have the best potential to produce a profitable
trade. Relative strength or weakness can be measured as soon as the first thrust in a trend has
been completed. This will likely be even before the trend channel has been clearly
defined. Those issues that have made larger thrusts than the market are the ones that should be
watched closely as the prices make their first correction. The issues that have made the largest
thrusts relative to that made by the market and that then make the smallest corrections relative to
the market are most likely to perform well on the next thrust in the direction of the trend. These
are the stocks that deserve the most consideration for new positions. This technique can also be
used later in the development of an advance or decline when there are additional thrusts and
corrections to consider. Those issues that most consistently out perform the market are most
likely to produce a profitable trade.
The concept of relative strength and weakness can be helpful in locating trade candidates when
the market is in a defined trading range. If the market is in a trading range, most individual
issues will also be in trading ranges. However, some will be in up trends and some will be in
down trends. Those that are trending up or down are relatively stronger or weaker than the
market. These are the issues to consider first when looking for new positions. However,
consideration must always be given to the position of the market in its trading range and the
individual issue in its up or down trend. If both positions do not favor the likelihood of a rally or
reaction, opening a position in that individual issue is discouraged. After the stocks that are
trending up or down, attention can be directed to those that like the market are also in trading
ranges. Here again, the positions of both the market and the stock are important issues to
consider before opening a position.
The merits of trading in harmony with the market may seem obvious. However, most traders are
exposed to a stream of market noise from brokers, friends, relatives, co-workers and the
media. This bombardment of frequently conflicting information and misinformation can cause a
trader to get distracted from those things that are really important. Step two of the Wyckoff
method is one of those really important things. It along with the other four steps of the method
are the best foundation on which to build a successful market operation.
© The Jamison Group, Inc.: Trade the Stock Market- Step two of the Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading Strategies
Step Three of the Wyckoff Method
Step three of the Wyckoff method is intended to help traders avoid marginal trades. Wyckoff
teaches us to select only those issues that have built a cause. A cause can be defined in more than
one way.
In step three, Wyckoff is referring to the use of a figure chart to get an indication as to how far
from its current level, the price of an issue is likely to move. This indication is derived by taking
a count on a figure chart.
While an issue is in preparation for a move, its action produces a horizontal formation on a
figure chart. The horizontal formation contains the count. When the price has completed its
preparation and begins to move out of the area in which the preparation was done, the count has
been completed and can be measured. To measure the count, the trader selects the appropriate
price level within the horizontal formation and simply counts the number of horizontal divisions
on the chart beginning at the right side of the formation and ending at the left side of the
formation. The trader counts all the horizontal divisions both those that have a posting in them
and those that do not. The total number of horizontal divisions is the count. It provides an
indication as to how far from the level at which the count was taken the price is likely to move.
If the price leaves the zone of preparation, normally referred to as the trading range, to the up
side, Wyckoff says to add the count to the level at which it was measured to get an indication as
to how high the price is likely to go. If the price leaves the trading range to the down side
Wyckoff says to subtract the count from the level at which it was measured to get an indication
as to how low the price is likely to go.
The anticipated ending point of a move indicated by a count is called its objective. An objective
may be a single level, but is more often than not a range of values referred to as the objective
range. If a count for an advance is taken at the very bottom of the trading range, it will indicate a
single level as the objective of the move. However, if the count is taken at some other level
within the trading range, the result will be an objective range.
This range is determined by adding the count to the level at which it was measured and by
adding it to the lowest level in the trading range. If a count for a decline is taken at the very top
of the trading range, it will indicate a single level as the objective of the move. If the count is
taken at a lower level in the trading range, the result will be an objective range. In this case, the
objective range is determined by subtracting the count from the level at which it was measured
and by also subtracting it from the highest level in the trading range.
Individual issues are not the only place were counts are taken and objectives are measured. They
can also be taken and measured for a general market index. If a trader is operating in the options
or futures derived from an index, it is essential that the trader take a count and determine an
objective for the index that is being traded. When the index reaches its objective range, the move
is likely to end and the position in the derivative trading vehicle can be closed. Measuring counts
and determining objectives on the underlying index usually provides more reliable indications
than does taking the counts and determining objectives on the particular trading vehicle that has
been selected.
Traders who only operate in individual issues should not ignore the indications for the general
market. Situations where both the general market and an individual issue are indicating an
objective above or below current levels are the most desirable. If the market and an individual
issue both have higher or lower objectives, the movement of the market as a whole is likely to
help the individual issue reach its objective. If the general market does not have an objective that
is in harmony with that of an individual issue being considered, the individual issue may still
reach its objective, but the odds of that happening are not as good as they are when the market
has a similar objective to that of the individual issue.
Wyckoff does not provide specific directions as to how large of a count an issue should have to
be considered for a trade. In making this determination, the trader needs to be realistic. If the
trader only wants to hold positions for a short period of time, smaller counts should be identified
with relatively nearby objectives. Identifying much larger counts with much higher or lower
objectives and expecting those objectives to be reached in a short period of time is not
realistic. Traders who are comfortable with the idea of holding a position for an extended period
of time should also be realistic. It is a waste of time and effort for these traders to focus on small
counts and nearby objectives. A trader who is willing to wait for his reward to develop should
demand a larger count and more distant objective before taking a position.
All Wyckoff traders should always remember what Wyckoff says about figure charts, counts and
objectives. They provide indications only. Above all else is the character of the price and volume
action. If it supports the idea of the indications being realized, positions can and should be
held. However, if the character of the action does not support the idea of the indications being
realized, positions should be closed.
© The Jamison Group, Inc.: Trade the Stock Market- Step three of the Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Step Four of the Wyckoff Method
In step four of the Wyckoff Method, Wyckoff tells us to determine a stocks readiness to
move. Taking a position in an issue that has not or has not nearly completed it preparation for its
next move is wasteful and dangerous. It is wasteful in that funds committed to a position that is
not making progress in the intended direction could be better used in a position that begins to
move in the desired direction quickly.
It is dangerous in that time spent waiting for an issue to begin moving in the intended direction is
time during which the character of the action can change making the desired move less likely or
not likely at all.
Determining an issues readiness to move involves two considerations. The first consideration is
the position of the price in its trend. The second consideration is the character of the price and
volume action that has brought the price to its current position.
Wyckoff teaches that there are a relatively small number of what have come to be called primary
trading positions. These are places in the unfolding stream of the action where a worthwhile
move in one direction or the other has a high probability of beginning. There is a set of primary
trading positions that favor the start of moves to the up side and another set that favor the start of
down moves. Those that favor advances are the spring position, the test of the spring, the back
up to the edge of a creek and the normal correction of a previous advance. Those that favor
declines are the up thrust position, the test of the up thrust, the rally back to an ice level and the
normal correction of a previous decline. In each case, the primary trading position represents a
last point of support following a sign of strength if an up move is anticipated, or a last point of
supply following a sign of weakness if a down move is anticipated.
Each primary trading position is worthy of a detailed presentation. In future installments in this
series each primary trading opportunity will be discussed in greater detail. For now, only a brief
introduction of each position will be given.
Wyckoff identifies a potential spring position as a price penetration of a previously defined
support level. For a potential spring position to be worthy of consideration of an entry point on
the long side, the price spreads should narrow on a day to day basis as the price approaches and
penetrates the support level. Generally, this type of price action in combination with declining
volumes results in the highest quality springs. If the price responds to a spring position as it
should with a rally. the response will in the overwhelming number of cases be followed by a test
of the spring. The purpose of the test of the spring is to confirm the bullish indication provided
by the spring. This is accomplished by a narrowing of the price spreads as the price approaches
the low point of the spring. As was the case with the spring itself, a higher quality test generally
results if the test of the spring unfolds on declining volumes. It is also desirable for the low point
of the test of the spring to be higher than the low point of the spring and for the average volume
during the testing phase to be lower than the average volume as the price approached the spring
position.
The jump across the creek is defined by Wyckoff as an advance that takes the price through a
zone of resistance defined by the tops of earlier rallies. The characteristics of a jump are wide
spreads to the up side with strong closes and high volumes. The jump across the creek is not a
primary trading opportunity. However, following the jump across the creek there will likely be a
back up to the creek that can provide a primary trading opportunity. This is the phase in the
action when the price reacts back toward the zone of resistance that was overcome on the jump.
The purpose of the back up is to confirm that the former zone of resistance has been converted to
a zone of support. The confirmation is provided by a combination of narrowing price spreads and
declining volumes as the price approaches the former resistance. The up trend that is defined as
the price of an issue leaves a trading range to the up side will normally consist of a series of
thrusts. Following the completion of each thrust, there will be a corrective reaction. A normal
correction will result if the price returns to the vicinity of the halfway point of the previous
advance. A primary trading opportunity exists if the price approaches the halfway point on
narrowing spreads and declining volumes.
The first primary trading position that is likely to develop on the short side is identified by
Wyckoff as being the up thrust. The price of an issue enters an up thrust position when it
penetrates a previously defined resistance level. A high quality up thrust is one from which the
price begins a prompt decline. A high quality up thrust is one that develops on narrowing price
spreads as the price approaches and penetrates the resistance level. Generally, a high quality up
thrust will also unfold on declining volumes. After the price has responded to the upthrust with a
decline, there will almost always be a test of the up thrust. The test is another primary trading
position for the short side. The characteristics of a high quality test of an up thrust are narrowing
price spreads to the up side on decreasing volumes. It is also desirable for the test to not put in a
higher high than the up thrust and for the average volume as the price makes the test to be lower
than was the case on the up thrust it self.
When the price of an issue leaves a trading range to the down side, there will frequently be what
Wyckoff refers to as a fall through the ice. Ice is identified as the zone of support defined the
bottoms of previous reactions in the action. The fall through the ice occurs when the price trades
through this zone on widening spread and increasing volumes. The fall trough the ice is not a
primary trading opportunity. However, the rally that follows the fall through the ice can develop
into a primary trading position. This advance is identified as the rally back to the ice. The
purpose of the rally back is to confirm that the former support provided by the ice has been
converted to resistance. When this confirmation is in place, the price can resume down side
progress. The rally back that is likely to provide the best entry point on the short side if it unfolds
on narrowing price spreads to the up side and declining volumes as the price approaches the
zone of former support. Down trends that develop as the price leaves a trading range consist of a
series of thrusts and corrections. The correction of each thrust can provide a primary trading
position if it is completed in the vicinity of the halfway point of the previous thrust to the down
side and if it unfolds on declining volumes.
Primary trading positions in individual issues should not be considered to be automatic buy or
sell points. Although most will provide an opportunity to take a profit, there are some that are
likely to be more profitable than others. One consideration that goes into determining which
primary trading positions are better than others is the indication provided by the figure chart of
the issue. Those that indicate the largest potential are likely to provide the biggest
profits. Another consideration that is involved in judging which primary trading positions should
be acted upon and which should not is covered in the fifth and final step of the Wyckoff method.
© The Jamison Group, Inc.: Trade the Stock Market-Step four of the Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading Strategies
Step 5 of the Wyckoff Method
The final step of the Wyckoff method is the one that actually results in a position being
established. Wyckoff tells us to time trades in individual issues to anticipated trends in the
general market. While it is true that there are always individual issues that make substantial
moves in the opposite direction of the general market, most move with the market to some
degree.
By identifying a point in the general markets action from which it is likely to turn in the
direction of an established trend or begin the development of a new trend and taking a position in
an individual issue at that time, the Wyckoff trader has a better chance of realizing a profit from
that position and realizing a better profit than if the position is established in a more random
manner.
The market is most likely to make a turn that can benefit a position in an individual issue if it
located near but not below the demand line of an up trend, near but not above the supply line of a
down trend, or near the support level or resistance level of a trading range.
It is not necessary that the individual issue in which a position is being considered be in the
same position as the general market. It is necessary that the positions of both the individual
issue and the general market compliment each other. For example, the general market may be in
a trading range and positioned in a potential spring from which an immediate response to the up
side is anticipated. If the individual issue under consideration is also in a trading range but is
testing an earlier spring, the two positions compliment each other and a position in that
individual issue is likely to perform better than it might otherwise perform because of the
anticipated turn in the general market.
The general market and the individual issue do not have to be in the same trend to compliment
each other. For example, the general market may be in a trading range and testing an earlier
spring position. The test assuming it has been constructive is a position from which the market
is likely to make an immediate turn.
At the same time, an individual issue that has already begun to trend higher by jumping the
resistance level of a trading range may be backing up toward the former resistance. As the
general market begins to respond to its bullish position, it is likely to help the individual issue
complete its back up and resume up side progress possibly moving into new high ground.
The above examples are both cases in which the individual issue is ahead of the market in the
development of a bullish scenario. These situations should be considered first. The second set
of situations that should be considered are those where the market and the issue are in the same
position that is likely to produce an immediate move at the same time.
The third set of situations that should be considered are those where the general market is ahead
of the individual issue in the development of its bullish or bearish scenario. In the above
examples, the positions of the market and the issue could be reversed and establishing a position
in the individual issue could be justified because the markets position suggests an immediate
turn.
Wyckoff traders have three tools that can assist them in judging whether a turn in the market
should be anticipated. These tools are the O. P. Index. the Technometer and the Force. The O.
P. Index when used in combination with the Wyckoff Wave indicates whether the result
indicated by the Wave is in harmony with the effort indicated by the O.P. If they are and the
market is in a position from which an immediate turn can be anticipated, the harmony between
effort and result is likely help a position in an individual issue perform as anticipated.
However, a lack of harmony between the Wyckoff Wave and the O.P. Index can be even more
helpful in assisting the market make an anticipated turn. For example, consider the situation
where the Wyckoff Wave has previously been in a spring position and is now testing the spring
with a higher potential bottom. If at the same time the O.P. is making a lower low than it did
when the Wave was in spring position, a bullish divergence is in place. The indication is that
there has been too much down side effort for the result. This situation leaves the Wyckoff Wave
more vulnerable to making a turn than one where the Wave and O.P. are in harmony.
Divergences should be used to confirm indications provided by the position of the market.
Divergences that develop when the Wyckoff Wave is not in a position from which an immediate
turn may be anticipated are interesting, but they do not provide a reason to establish a position in
an individual issue.
The Technometer and the Force are like the Wyckoff Wave/O.P. relationship in that they are
intended to confirm an indication of an impending turn by the Wave. If the Wave is in a primary
buying position, it is most likely to make an immediate response out of that position if the
Technometer is indicating an over sold condition at the same time. These situations are when
trades on the long side in individual issues are more attractive. The same is true if there is a
bullish relationship between the Wyckoff Wave and the Force.
Divergences between the Wave and the Force develop in a manner similar to the divergences
that develop between the Wave and O.P. Primary buying or selling positions in the Wave that
develop in conjunction with bullish or bearish divergences between the Wave and the Force are
more likely to result in an immediate turn in the general market than those that develop without
such divergences. The ultimate in confirmation that there is likely to be an immediate turn in the
market is when it is in a primary trading position and all three of the confirmations mentioned
are in place. At that point, a position in an individual issue can be established with the greatest
degree of confidence that it will yield a profit.
© The Jamison Group, Inc.: Trade the Stock Market- Step 5 of the Wyckoff Meth
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Wyckoff Stock Market Selling Tests - Part One
Wyckoff identified nine selling tests. They are developments in the price and/or volume action
of the market or an individual issue that suggest an opportunity on the short side is developing.
As the tests are passed, the odds of a mark down phase beginning increase. When the price
moves into a primary selling position such as an up thrust, test of an up thrust, rally back to the
ice or completes a normal correction, the trader should examine the action to that point to see
how many of the tests have been passed. If all or most of them have been passed, the trader can
take advantage of the primary selling position with confidence that he will be rewarded with an
opportunity to take a profit as the action continues to unfold.
The first thing the trader wants to do is determine whether the up side objective has been
reached. The indicated up side objective is provided by the figure chart. It was set in place
during the trading range that developed before the advance that the Wyckoff trader believes is
nearing an end. The danger in taking a position before the indicated up side objective has been
reached is that the advance may have one more thrust left it that could result in the trader being
stopped out of a position just at the time when it should be entered. There is nothing more
frustrating than to be taken out of a position just before the price goes on to do exactly what was
anticipated. Many times, an up side potential will have more than one clearly defined phase.
Each time the objective of one of those phases is reached, the move is potentially over. However,
the trader should not automatically assume that it is. An indication that the advance has been
completed can be found in the character of the price and volume action.
The second test that the Wyckoff trader wants to apply is to judge the character of the action.
The activity needs to be bearish in order to justify taking a position on the short side. Bearish
activity is indicated by particular combinations of price action and volume. Wide price spreads
to the down side on increased volume leading to poor closes represent bearish activity. The
indication is that supply is present. Wide spreads to the down side on reduced volume leading to
a poor close can also represent bearish activity. These indicate a lack of demand. A lack of
demand is also indicated by narrow spreads to the up side on reduced volume. If narrow spreads
to the up side are accompanied by increased volume, the indication is that supply is present. This
is also seen as being bearish activity. Bearish activity can be present on a day to day basis, or it
can be seen over a series of days that form a reaction or rally within the overall action. It is not
necessary that every day provide an indication of bearish activity. Early in an advance, most
days will exhibit bullish activity. However, as the price reaches or approaches an objective, the
number of days that demonstrate clearly bullish activity will begin to diminish and the number
that indicate bearish activity will start to increase. When this shift is seen, this selling test has
been passed.
The Wyckoff trader also wants to see a clearly defined stopping action at the top of an advance.
This involves four steps. They are the meeting of preliminary supply, a buying climax, an
automatic reaction and a secondary test. As an advance is approaching an objective, a reaction
will develop over several days where the activity is clearly bearish. This is preliminary supply. It
represents the first wave of bulls who bought at lower levels taking their profits. The meeting of
preliminary supply is an early warning that an opportunity on the short side may start to develop
soon. After preliminary support has been met, there will be one more thrust to the up side usually
on wide spread and increased volume into an up side objective. This is the buying climax. It
provides a clearer warning to the potential short seller that an opportunity is beginning to
develop. The stopping action is completed by the automatic reaction and the secondary test. The
automatic reaction is the decline that immediately follows the buying climax. It is caused by the
exhaustion of demand on the buying climax. As the automatic reaction unfolds and the price
retreats from the high recorded on the buying climax, some bulls will be re-energized and will
begin buying again. However, at this point, they will be in the minority. The rally that their
activity is able to accomplish will have less volume than wad present as the price rallied to the
buying climax. It will also tend to have narrower price spreads to the up side and it will put in a
lower top than was recorded on the buying climax. This is referred to as being the secondary test
of the buying climax. It completes the stopping action and allows the price to begin preparing for
the next move.
Although the stopping action at the top of an advance is vital to the development of an
opportunity to begin a campaign on the short side, it does not guarantee that the next move will
be down. In longer term bull markets, there will likely be a series of advances each being
preceded by the stopping of the previous advance. For the Wyckoff trader who is looking for an
opportunity on the short side to know that a resumption of up side progress is not likely, he looks
for the passing of additional selling tests as the action continues to unfold.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Selling Tests - Part 2
Wyckoff teaches that an individual issue should only be considered as a potential short candidate
if it has demonstrated that it is weaker than the market. There are two ways in which an issue
provides this indication. One is based on price action and the other is based on volume. The
Wyckoff trader is looking for those issues that under perform relative to the market on rallies and
out perform the market on reactions.
A trader may wish to make these comparisons by calculating the percentage moves of the market
and the issues being considered. This will eliminate the judgment factor from making the
determination as to which issues are weaker than the market. However, the process of
determining and comparing percentages will be time consuming and will likely limit the number
of issues that can be considered. An alternate approach is to look for those situations where the
individual issue is obviously weaker than the market. If the market rallies to a higher top on a
rally verses the previous rally and an individual issues rallies to a lower top, the individual issue
is weaker than the market. If the market reacts to a higher bottom verses the previous reaction
and an individual reacts to a lower bottom , the individual issue is weaker than the market. An
issue can have the same pattern of lower tops and lower bottoms and still be weaker than the
market. This can be determined by locating the halfway points of the rallies and reactions for
both the market and the individual issues. Even if both the market and an individual issue make a
lower top on a rally or a lower bottom on a reaction, it is likely that one of them will fail to reach
its halfway point or will over run the halfway point by a smaller margin. If the one that performs
in this manner is the individual issue, it is weaker than the market.
The volume factor in determining relative weakness will help to confirm the indication provided
by the price action. If an issue makes a lower top or a lower bottom on a rally or reaction than
does the market, it is providing an indication of relative weakness. If the volume on the rally to
the lower top is relatively lower than that of the market, the indication is of a lack of demand and
that tends to confirm the indication of relative weakness. If the price of an issue is putting in a
lower top on relatively higher volume than the market, the indication is that supply is being met
and that also tends to confirm relative weakness. The level of volume on lower bottoms can also
confirm relative weakness. If the individual issue makes a lower low than the market on reduced
volume relative to that of the market, the indication is of a lack of demand. If the volume is
relatively higher than that of the market, the indication is that supply has been entering the
market.
It is possible for an individual issue to be demonstrating relative weakness when compared to the
market and for the issue to be in an up trend. Wyckoff traders want to avoid these issues. The
trend represents the line of least resistance. It is the most important thing that any trader can
know about an issue. Trading against the trend greatly reduces the odds of realizing a profit.
Wyckoff traders want to be certain that a previously defined up trend has been broken before
considering an entry on the short side. The breaking of an up trend will frequently have four
distinct steps. The first step is an initial weakening of the demand line. This can be observed as a
day or several days where the price action spends part of the time but not all of the time below
the demand line of the up trend. The second step is an effort to rally back into the up trend. This
action can be used to make a further judgment as to the relative weakness of an issue. Those that
rally to a lower position in the previously established up trend are demonstrating a higher degree
of relative weakness. The third step in the process of breaking an up trend is for the price action
to decisively break the demand line. This is indicated by several days where all of the price
action is below the demand line. Those issues that make the most decisive breaks are the most
attractive potential short candidates and among those, the ones with the highest volumes are even
more attractive. The final step in the process is when the price rallies and is unable to reenter the
up trend channel. This confirms that the trend has been broken.
Lower tops on rallies is a necessary test for a potential short candidate to pass before a position
should be considered. They were a factor in determining relative weakness and they were a
factor in breaking a previously established up trend. The Wyckoff trader should also watch for a
pattern of lower tops in trading ranges as the price prepares for its next move. If the price is
making lower tops in a trading range, the indication is that demand is being withdrawn or that
supply is being met at progressively lower levels. This increases the odds that the price will fall
through the support level of the trading range and begin a mark down phase. There is one place
in the development of a trading range where a higher top can be a negative development. That
place is on an up thrust. If the price has been making lower tops on rallies within a trading range
and then rallies above all those previous tops an makes a small penetration of the resistance level
of the range, the action is a potential up thrust. It has likely caused many of those who have
already taken short positions to run for cover. An up thrust leaves the price unusually vulnerable
to down side progress and is a good spot to enter a short position even though it represents a high
top.
When examining the action of an issue to see if it has passed the three selling tests presented
here, it is important that the Wyckoff trader look for indications that are consistent with the time
frame of his or her market operation. Using longer term indications to justify short term trades or
using shorter term indications to justify longer term investments usually will produce
disappointing results. If both shorter term and longer term indications are consistent with the
trade under consideration, the results are likely to be the most satisfying.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Wyckoff Stock Market Selling Tests - Part Three
Moving on to selling test number seven, Wyckoff advises traders to look for a pattern of lower
bottoms on reactions. If the market or an individual issue is making lower lows on reactions, the
indication is that bulls are requiring lower prices before they are willing to enter the market and
that the bears are being rewarded and may continue to be rewarded for entries they made on the
short side earlier. A pattern of lower supports may be identified within a trading range as the
price prepares for a mark down phase, or it may be seen after the price has left a trading range
and is trending lower. Ideally, it will be seen in both places. Within the trading range, lower
bottoms suggests that the price is preparing to leave the range to the down side. After the trading
range, lower bottoms indicates that additional down side progress is possible following the next
corrective rally.
Before any short position is considered, there must be what is referred to as a crown. This is
created by the development of a trading range following an advance. It will present itself as an
obvious period of horizontal action on both the vertical chart and the figure chart. If a figure
chart is being used, the size of the crown will provide an indication as to the down side objective
when the price leaves the range and begins its mark down phase. Wyckoff provides no rules as to
how large the crown must be before the trader considers an entry on the short side. This
consideration is left to the discretion of the trader. In making this determination, the trader
should be consistent with the type of market operation that is being undertaken. If the trader is an
active shorter term trader looking to hold a position from several weeks to a couple of weeks, a
crown that indicates a ten to fifteen percent potential may be seen as being acceptable. However,
if the trader is less aggressive and wishes to hold a position for several months to perhaps as
much as a year, he may want to require that a crown offer a potential several times larger than
the short term trader might accept before entering a position.
The final selling test is to make sure that the position being considered can be adequately
protected with a stop order. Wyckoff tells us to never risk more than one point for every three
points of anticipated profit when placing a stop. Some Wyckoff traders elect to risk less than one
point for each three points of potential profit. This is acceptable. However, the trader needs to
realize that as the ratio of potential profit verses indicated risk is increased, the odds of being
stopped out increase. Therefore, the trader who requires a very close stop may be stopped out so
many times that the total in losses over time is greater than it is for the trader who elects to use a
wider initial stop. The trader who feels the need to use a very close initial stop may be reflecting
a lack of confidence or ability. The cure for this is practice trading. Once an initial stop or any
stop for that matter has been placed, never change that stop so as to increase the size of the risk.
Selling tests should be used in conjunction with primary selling opportunities. This can be
accomplished in one of two ways. The Wyckoff trader may choose to make a list of the tests and
check them off as the market or an individual issue passes each. When all of the tests or a
number of them that has been selected as being acceptable have been passed, the trader should
watch the action closely for the development of a primary selling position. When one is
identified, a positions may be opened with confidence. A trader may also choose to do the
process in reverse. First, find the primary selling opportunity and then back track to see if all or
an acceptable number of selling tests have been passed. If so, the position under consideration
has a good chance of providing the anticipated profit
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Trading Strategies
Step 5 of the Wyckoff Method
The final step of the Wyckoff method is the one that actually results in a position being
established. Wyckoff tells us to time trades in individual issues to anticipated trends in the
general market. While it is true that there are always individual issues that make substantial
moves in the opposite direction of the general market, most move with the market to some
degree.
By identifying a point in the general markets action from which it is likely to turn in the
direction of an established trend or begin the development of a new trend and taking a position in
an individual issue at that time, the Wyckoff trader has a better chance of realizing a profit from
that position and realizing a better profit than if the position is established in a more random
manner.
The market is most likely to make a turn that can benefit a position in an individual issue if it
located near but not below the demand line of an up trend, near but not above the supply line of a
down trend, or near the support level or resistance level of a trading range.
It is not necessary that the individual issue in which a position is being considered be in the same
position as the general market. It is necessary that the positions of both the individual issue and
the general market compliment each other. For example, the general market may be in a trading
range and positioned in a potential spring from which an immediate response to the up side is
anticipated. If the individual issue under consideration is also in a trading range but is testing an
earlier spring, the two positions compliment each other and a position in that individual issue is
likely to perform better than it might otherwise perform because of the anticipated turn in the
general market.
The general market and the individual issue do not have to be in the same trend to compliment
each other. For example, the general market may be in a trading range and testing an earlier
spring position. The test assuming it has been constructive is a position from which the market is
likely to make an immediate turn.
At the same time, an individual issue that has already begun to trend higher by jumping the
resistance level of a trading range may be backing up toward the former resistance. As the
general market begins to respond to its bullish position, it is likely to help the individual issue
complete its back up and resume up side progress possibly moving into new high ground.
The above examples are both cases in which the individual issue is ahead of the market in the
development of a bullish scenario. These situations should be considered first. The second set of
situations that should be considered are those where the market and the issue are in the same
position that is likely to produce an immediate move at the same time.
The third set of situations that should be considered are those where the general market is ahead
of the individual issue in the development of its bullish or bearish scenario. In the above
examples, the positions of the market and the issue could be reversed and establishing a position
in the individual issue could be justified because the markets position suggests an immediate
turn.
Wyckoff traders have three tools that can assist them in judging whether a turn in the market
should be anticipated. These tools are the O. P. Index. the Technometer and the Force. The O. P.
Index when used in combination with the Wyckoff Wave indicates whether the result indicated
by the Wave is in harmony with the effort indicated by the O.P. If they are and the market is in a
position from which an immediate turn can be anticipated, the harmony between effort and result
is likely help a position in an individual issue perform as anticipated.
However, a lack of harmony between the Wyckoff Wave and the O.P. Index can be even more
helpful in assisting the market make an anticipated turn. For example, consider the situation
where the Wyckoff Wave has previously been in a spring position and is now testing the spring
with a higher potential bottom. If at the same time the O.P. is making a lower low than it did
when the Wave was in spring position, a bullish divergence is in place. The indication is that
there has been too much down side effort for the result. This situation leaves the Wyckoff Wave
more vulnerable to making a turn than one where the Wave and O.P. are in harmony.
Divergences should be used to confirm indications provided by the position of the
market. Divergences that develop when the Wyckoff Wave is not in a position from which an
immediate turn may be anticipated are interesting, but they do not provide a reason to establish a
position in an individual issue.
The Technometer and the Force are like the Wyckoff Wave/O.P. relationship in that they are
intended to confirm an indication of an impending turn by the Wave. If the Wave is in a primary
buying position, it is most likely to make an immediate response out of that position if the
Technometer is indicating an over sold condition at the same time. These situations are when
trades on the long side in individual issues are more attractive. The same is true if there is a
bullish relationship between the Wyckoff Wave and the Force.
Divergences between the Wave and the Force develop in a manner similar to the divergences
that develop between the Wave and O.P. Primary buying or selling positions in the Wave that
develop in conjunction with bullish or bearish divergences between the Wave and the Force are
more likely to result in an immediate turn in the general market than those that develop without
such divergences. The ultimate in confirmation that there is likely to be an immediate turn in the
market is when it is in a primary trading position and all three of the confirmations mentioned
are in place. At that point, a position in an individual issue can be established with the greatest
degree of confidence that it will yield a profit.
© The Jamison Group, Inc.: Trade the Stock Market- Step 5 of the Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Bond Index Trading
A Bond Trading Introduction Using the Wyckoff Method
There are times when the action of the stock market is dull providing only marginal
opportunities to realize a profit. There are other times when the action of the stock market is
confusing resulting in an unacceptable level of uncertainty making new positions too dangerous
to consider and existing positions too dangerous to maintain.
During these periods, the Wyckoff trader has two options:
1. The trader can move to the side lines and take a vacation from market activity, or
2. Look to other markets for other opportunities.
The Pulse of the Market provides Wyckoff oriented data on one of these other markets. It is the
interest rate market and the vehicle that provides the basis for finding trading opportunities in
this market is the Bond Index.
The Bond Index was created in 1985 to assist Wyckoff traders in the business of trading treasury
securities locate and manage positions for themselves and their customers.
The Bond Index is a composite picture of the long term, intermediate term and shorter term
segments of the interest rate market. It is defined by the action of the thirty year bond future, the
ten year note future and the five year note future.
These three futures contracts are monitored through out each trading session of the CBOT just as
the Wyckoff Wave components are monitored throughout each session of the NYSE.
This monitoring allows for intra-day buying and selling waves to be determined and for an O.P.,
Technometer and Force to be calculated. With these tools, the Wyckoff trader can apply the five
steps of the Wyckoff method and make intelligent decisions as to when to enter and exit
positions.
There are a variety of ways that the Wyckoff trader can use the Bond Index to take and manage
positions. The simplest way is to actually trade the index itself. This is accomplished by taking
positions in all three components of the index at the same time making all positions of the same
size.
The trader who buys or sells one contract of each of the components of the Bond Index will see
his position change in value by $1000 every time the index moves one point. This approach
allows for maximum participation in the movement of the index. Those who prefer a more
cautious approach can leg into a position.
For example, if the index moves into a potential spring position, a trader might opt to begin
building a position with one five year note contract. Later when the spring is successfully tested,
the trader could consider adding one ten year note contract to his position to enhance his
participation in the movement of the index. A third entry point might develop on a back up to the
edge of a creek allowing the trader to add one thirty year bond contract and fully participate in
the action of the index at a point where the certainty of correctness of the position is the greatest.
In a similar manner, a Wyckoff trader might choose to leg out of a position reducing the odds of
leaving a large portion of the potential profit on the table due to exiting too early or too late.
There are other trading techniques that can be used with the bond index to suit a Wyckoff traders
tolerance for volatility. One possibility would be to establish a position only in the ten year note
contract either all at once, or at three different points. This can be seen as being a middle of the
road approach. It would reduce the volatility of the position somewhat by not taking a position in
the bond contract. However, it would put some of that volatility back into the position by not
taking a position in the five year note contract.
Other combinations of the three components of the index might also be considered. Doubling the
size of the ten year note portion of the position and avoiding the short term or long term portion
of the position would increase or decrease the volatility of the position and increase or decrease
the participation of the position relative to the movement in the index depending upon which
contract was not traded. Another option to consider would be to spread trade the bond contract
and the ten year note contract. Other combinations could also be considered depending upon the
tolerance for volatility of the trader and the degree to which he wishes to participate in the
movement of the index.
Those who have never operated in a futures market should not do so without first engaging in a
period of practice trading. Those who refuse to use the protection of a stop order should never
operate in a futures market period. Futures trades are highly leveraged. They require only a small
percentage of the value of the position to participate.
However, the trader who does not trade defensively could lose all or even more than all of his
initial commitment of funds. These cautionary statements are not presented to scare the trader
away from a trading vehicle that has the potential to be very rewarding. Rather, they are
presented to help prevent the trader from focusing solely on the $1000 per point potential profit
from the movement of the Bond Index and to encourage the use of defensive measures at all
times.
© The Jamison Group, Inc.: Bond Index Trading
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis Tools & Strategies
Wyckoff Wave, Optimism-Pessimism Index &
Trend Barometer
Part 3 - Points of Interest
In addition to helping analyze stock market trends and trading ranges, the Wyckoff Wave and its
related indicators the O.P. and the Trend Barometer provide other points of interest that can be
helpful in determining when to consider taking new stock market positions, how to manage
existing positions and when to consider exiting those positions.
It can be argued that each stock market trading session provides a point of interest because it
provides a piece of additional information about the move that is underway or being prepared.
This examination will be limited to three particular points of interest. They are thrusts,
inharmonious actions, divergences and Trend Barometer indications. These three tend to provide
the most useful information as to the character of the action that is unfolding at the moment or
that is likely to project stock market action in the foreseeable future.
Like the stock market, the Wyckoff Wave seldom moves from point "A" to point "B" in a
straight line. The moves that most stock traders trade are made up of a series of thrusts. The size
of these thrusts, the amount of new progress that each makes and the extent to which each thrust
is corrected indicate the overall health of an unfolding move. Ideally, each thrust in a move
would be bigger than the previous thrust, make more new progress than the previous thrust and
correct less than the previous thrust. In reality, this is very seldom how events unfold. The longer
term down trend that has been guiding the stock market and naturally, the Wyckoff Wave since
last July has had three completed thrusts and is working on thrust number four. The first thrust
began in column two of the vertical chart and ended in column 4. After that thrust was
completed, the second thrust began in column nine and ended in column twelve. The third thrust
started in the next column and ended in column sixteen. The current thrust had its beginning in
column seventeen and appears to still be underway.
In most cases, the first thrust of a move will make the largest amount of new progress because it
is starting at the very beginning of the move and is all new ground gained or lost. The first
downward thrust of the Wave in the decline that began last July was 5700 points in round
numbers from its top to its bottom and all of that was new ground gained to the down side.
The second thrust was bigger than the first when measured from its top to its bottom. However, it
only made 800 points of new down side progress after completing a decline of 6100
points. These observations provide several indications. The fact that the second thrust was bigger
than the first suggested that the market became weaker during the second thrust than it had been
in the first. The fact that the second thrust only made 800 points of new down side progress
indicated that the bulls had been able to fight back against the bears on the correction of the first
thrust. They made up almost all of the ground lost on the first thrust. On the correction of the
second thrust. the bulls were considerably weaker than they had been on the first corrective
phase. When the second correction was completed in column twelve, the Wave had recovered
less than half of the ground covered by the second thrust compared to having recovered almost
all of the ground covered by the first thrust. With the second thrust to the down side having been
bigger than the first and with the second correction having corrected a smaller portion of the
thrust before it, the indication as of the high in column twelve was that the market was
weakening and that the decline would likely continue.
During the third thrust to the down side, the Wyckoff Wave made more new down side progress
than during the second thrust. This observation indicated that the Wave was still weak
suggesting that the decline was not over. However, the third thrust and the correction that
followed it provided indications that the Wave was not as weak as it was during the period of the
second thrust and its correction. These indications were made by the fact that the third thrust was
somewhat smaller than the second and by the fact that the Wave was able to regain a larger
portion of the third thrust than had been the case on the correction of the second thrust.
The current thrust of the decline began on February 1. As of March 7, it appeared to be a work in
progress. Therefore, any conclusions as to any indications it provides have to be subject to
change when the thrust has been completed. However, as of now, the fourth thrust has been
substantially shorter than any of the first three and no new down side progress has been
made. The conclusion that comes from these observations is that the Wyckoff Wave is not as
week as it had been during the previous thrusts in the decline. This conclusion suggests that an
important stock market change in character may be developing. Therefore, the market bears
would do well to be more defensive with respect to managing existing positions or considering
new ones and the bulls should be vigilant so as not to miss any new opportunities that may be
presented during the weeks ahead.
The thrusts outlined above were all of what most Wyckoff market traders would consider to be
intermediate in nature. It should be noted that each of those thrusts was made up of smaller
thrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorter
term trader looking to realize as much profit as possible from each thrust rather than being
content to ride out the entire decline with one set of positions. Due to the process of rotation, the
leaders during one thrust of a larger move may not be the leaders in the next thrust. Studying the
indications from the smaller thrusts within the bigger moves can be helpful when one set of
positions should be replaced by a new set.
Inharmonious actions between the Wyckoff Wave and O.P. Index are always points of
interest. They indicate that there is an unstable relationship between the result expressed by the
Wyckoff Wave and by the effort expressed by the O.P. The indication when one of these
unstable relationships develops is that the Wave is likely to change direction from the direction it
was moving when the inharmonious action or divergence first appeared. Inharmonious actions
and divergences should not be considered to be timing tools. In other words, if one of those
relationships develops today, do not assume that the Wave will respond tomorrow. There is,
however, a general relationship between the magnitude of an inharmonious action or divergence
and the amount of time it will take for a response to begin and be completed. If an inharmonious
action or divergence develops over a long period of time, the response to it is likely to take
longer to begin and complete. Those that develop over shorter periods of time should produce a
quicker response and one that is completed sooner.
Since July of 2007, there have been several cases of inharmonious action or divergence. The first
came in column three of the vertical chart when the stock market reflected by the Wyckoff Wave
rallied to a lower top than had been recorded during July and the O.P. rallied to a higher
top. That divergence was a case of up side effort unconfirmed by result. It suggested the
likelihood of a reaction in the Wave. In that case, the response was immediate and severe as the
Wave declined to its August low. When the Wave put in its October high in column twelve, it
was only 400 points from its July high. However, the O.P. was approximately 1000 points below
its high. This was a bearish inharmonious action. The response by the Wave was unconfirmed by
the effort. The indication was for a decline in the Wave. In that case, the response also came
quickly and it was substantial. At the November low in column twelve, the Wyckoff Wave was
in new low ground relative to its August low. However, the O.P. was not. In that case, the down
side result was unconfirmed by the effort indicating the likelihood of a turn to the up side by the
Wave. As the Wave was putting in its December high, the O.P. was higher than it had been in
October, but the Wave was not. This was another bearish divergence suggesting that a reaction
in the Wave was likely and it declined to the January low. In the case of this divergence, it
should be noted that the O.P. continued to try to pull the Wave higher into column fourteen. This
widened the divergence and possibly helped the Wave make more down side progress than it
might have made.
Thus far during 2008, there have been additional cases of divergence and inharmonious
action. At the January low in column sixteen, the Wyckoff Wave was in new low ground relative
to its November low and the O.P. was not. This result to the down side was unconfirmed by the
effort and the Wave then responded with a rally to the high on February 1. At the end of
February, the Wave was putting in a lower top relative to the one recorded at the beginning of
the month while the O.P. was making a higher high. In this case, the O. P. had expressed an
effort to the up side that the Wave had not confirmed. The response to that bearish divergence
has lead to where things stand as of March 7. Now there is a bullish inharmonious action and a
bullish divergence. The divergence can be seen by comparing the current position of the Wave
and O.P. to where they were during the middle of February. The Wave is now lower and the O.P.
is not. The unconfirmed result suggests a change in direction. At the same time, there is also a
bullish inharmonious action that can be seen when the current positions of the indexes are
compared to their January lows. The Wave is almost back to its January low, but the O.P. is
not. This is another indication of a likely change in direction
The Trend Barometer is the final point of interest that will be examined. It is the name given to
the Technometer and the Force Index. The Technometer indicates to what degree the market is
over sold or over bought. The Force Index indicates whether the Wyckoff Wave is being
influenced by down side pressure or up side pull.
Theoretically, the Technometer can have values as low as zero and as high as one
hundred. However, neither of those numbers have ever been recorded and it unlikely that either
will ever be recorded. Observations over the past seventy plus years have indicated that the
Technometer spends most of the time below a reading of 50 and above a reading of
38. Therefore, readings at or above 50 are seen as indicating an over bought condition and
reading at or below 38 are seen as indicating an over sold condition. An over sold condition
indicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicates
that the Wave is vulnerable to a reaction. To be more precise, over bought and over sold
conditions indicate that the Wave is vulnerable to corrective action. Most of the time that
corrective action comes in the form of a rally or reaction. However, it can unfold as a period of
horizontal action. As the Technometer moves higher above 50 or farther below 38, it becomes
more over bought or more over sold. That means the Wave becomes more vulnerable to
corrective action. It down not necessarily mean that the Wave becomes vulnerable to a bigger
correction. A figure chart should be consulted to judge what the magnitude of the indicated
correction is likely to be.
Some Wyckoff traders try to use the Technometer in a mechanical manner in an effort to bypass
all of the other concepts that Wyckoff teaches. Traders who fall victim to this trap try to use
Technometer readings of 38 and 50 as automatic buy and sell signals. Traders who use this
approach usually find that the market rewards them for a while. Since July of 2007, there have
been relatively few clearly over sold and over bought conditions. In every case, the market has
rewarded to some degree the trader who has used the Technometer in a mechanical manner
providing the trader was willing to ride out the gyrations that occurred between the entry point
and the point at which the reward was offered by the market. However, it has never failed to be
the case that at some point the market wants to get paid back by those who have used to
Technometer mechanically. In these situations, the Technometer usually tells the mechanical
trader to take a position and then fails to provide an indication to exit the trade until it is deep in
the red.
The Force Index has no limits as to the readings it can reach. Its extremes are determined by the
average level of volume. Higher average volume allows for greater extremes and lower average
volume allows for lesser extremes. There are two ways in which the Force can be helpful in
keeping a Wyckoff trader on the right track. One is by the development of divergences between
the Force and the Wave. The other is by the tendency of the Force to trend.
In column six of the vertical chart, the Force put in a peak as the Wave approached its October
high. In column nine the Wave put in a higher high, but the Force put in a lower peak. This was a
divergence between the Wave and the Force. The up side result on the part of the Wave did not
have enough up side pull from the Force to sustain it. The Wave responded by turning downward
eventually reaching the November low. At the November low there was another divergence. The
Wave made a lower low than it had in August, but the Force did not. In that case, the indication
was that the down side result experienced by the Wave did not have the down side pressure from
the Force to sustain it and the Wave responded with a rally
The Force Index exhibits a tendency to trend. The high in the Force in column one and the high
as the action crossed from column three into four can be used to define a down trend. The down
trend indicated that there was a bearish tone to the action confirming that the short side was the
one to be trading and indicating that some one still trading the log side was likely in trouble. In
column five, the down trend was broken indicating that the bearish tone to the action had ended
encouraging those still short to be more defensive and encouraging the bulls to be more
aggressive. This change in tone occurred as the Wave was recovering from its August low and
moving toward its October high. The tone of the action changed again in column nine when the
up trend in the Force was broken. In that case, the change in tone was indicated just as the Wave
started down from its October high. The tendency of the Force to trend is not a timing tool. It
does provide indications as to which side of the market the trader should be trading. As a rule,
traders who are trading against the tend of the Force will end up paying for their mistake just as
those who try to trade against the trend of the Wyckoff Wave are likely to have to pay for their
error.
The points of interest outlined in the third part of this series should be viewed as being secondary
to the character of the price and volume action. They should be used to confirm indications
provided by the price an volume action. Trying to use any of them mechanically in lieu of an
ongoing study of the price and volume will likely lead to unintended consequences.
© The Jamison Group, Inc.: Stock Market Analysis Tools Strategies
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis Tools & Strategies
Analyzing the Wyckoff Wave,
O.P. Index and Trend Barometer
Part 2 - Trading Ranges
In order for the action of the Wyckoff Wave to have been dominated by down trends since the
high in July 2007, there has to have been trading ranges in which the Wave was able to build the
potential that has fueled the decline. The most important trading ranges stand out most clearly on
the five hundred point figure chart of the Wave. The all time high of the Wave occurred in
column two of the figure chart. The vertical chart of the Wave shows the July high to be the
beginning of the decline. However, the figure chart indicates that it was also the end of a trading
range that had developed earlier in the year.
It can be argued that each trading session provides a point of interest because it provides a piece
of additional information about the move that is underway or being prepared. This examination
will be limited to three articular points of interest. They are thrusts, inharmonious
actions/divergences
and Trend Barometer indications. These three tend to provide the most useful information as to
the character of the stock market action that is unfolding at
the moment or that is likely to unfold in the foreseeable future.
The stock market represented by the Wyckoff Wave seldom moves from point "A" to point "B"
in a straight line. The moves that most traders trade are made up of a series of thrusts. The size of
these thrusts, the amount of new progress that each makes and the extent to which each thrust is
corrected indicate the overall health of an unfolding ove.
Ideally, each thrust in a move would be bigger than the previous thrust, make more new progress
than the previous thrust and correct less than the previous thrust. In reality, this is very seldom
how events unfold. The longer term down trend that has been guiding the Wyckoff Wave since
last July has had three completed thrusts and is working on thrust number four. The first thrust
began in column two of the vertical chart and ended in column 4. After that thrust was
completed, the second thrust began in column nine and ended in column twelve. The third thrust
started in the next column and ended in column sixteen. The current thrust had its beginning in
column seventeen and appears to still be underway.
In most cases, the first thrust of a move will make the largest amount of new progress because it
is starting at the very beginning of the move and is all new ground gained or lost. The first
downward thrust of the Wave in the decline that began last July was 5700 points in round
numbers from its top to its bottom and all of that was new ground gained to the down side. The
second thrust was bigger than the first when measured from its top to its bottom. However, it
only made 800 points of new down side progress after completing a decline of 6100
points. These observations provide several indications. The fact that the second thrust was bigger
than the first suggested that the market became weaker during the second thrust than it had been
in the first. The fact that the second thrust only made 800 points of new down side progress
indicated that the bulls had been able to fight back against the bears on the correction of the first
thrust. They made up almost all of the ground lost on the first thrust. On the correction of the
second thrust. the bulls were considerably weaker than they had been on the first corrective
phase. When the second correction was completed in column twelve, the Wave had recovered
less than half of the ground covered by the second thrust compared to having recovered almost
all of the ground covered by the first thrust. With the second thrust to the down side having been
bigger than the first and with the second correction having corrected a smaller portion of the
thrust before it, the indication as of the high in column twelve was that the market was
weakening and that the decline would likely continue. During the third thrust to the down side,
the Wyckoff Wave made more new down side progress than during the second thrust. This
observation indicated that the Wave was still weak suggesting that the decline was not
over. However, the third thrust and the correction that followed it provided indications that the
Wave was not as weak as it was during the period of the second thrust and its correction. These
indications were made by the fact that the third thrust was somewhat smaller than the second and
by the fact that the Wave was able to regain a larger portion of the third thrust than had been the
case on the correction of the second thrust.
The current thrust of the decline began on February 1. As of March 7, it appeared to be a work in
progress. Therefore, any conclusions as to any indications it provides have to be subject to
change when the thrust has been completed. However, as of now, the fourth thrust has been
substantially shorter than any of the first three and no new down side progress has been
made. The conclusion that comes from these observations is that the Wyckoff Wave is not as
week as it had been during the previous thrusts in the decline. This conclusion suggests that an
important change in character in the action may be developing. Therefore, the bears would do
well to be more defensive with respect to managing existing positions or considering new ones
and the bulls should be vigilant so as not to miss any new opportunities that may be presented
during the weeks ahead.
The thrusts outlined above were all of what most Wyckoff traders would consider to be
intermediate in nature. It should be noted that each of those thrusts was made up of smaller
thrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorter
term trader looking to realize as much profit as possible from each thrust rather than being
content to ride out the entire decline with one set of positions. Due to the process of rotation, the
leaders during one thrust of a larger move may not be the leaders in the next thrust. Studying the
indications from the smaller thrusts within the bigger moves can be helpful when one set of
positions should be replaced by a new set.
Inharmonious actions between the Wyckoff Wave and O.P. Index are always points of
interest. They indicate that there is an unstable relationship between the result expressed by the
Wyckoff Wave and by the effort expressed by the O.P. The indication when one of these
unstable relationships develops is that the Wave is likely to change direction from the direction it
was moving when the inharmonious action or divergence first appeared. Inharmonious actions
and divergences should not be considered to be timing tools. In other words, if one of those
relationships develops today, do not assume that the Wave will respond tomorrow. There is,
however, a general relationship between the magnitude of an inharmonious action or divergence
and the amount of time it will take for a response to begin and be completed. If an inharmonious
action or divergence develops over a long period of time, the response to it is likely to take
longer to begin and complete. Those that develop over shorter periods of time should produce a
quicker response and one that is completed sooner.
Since July of 2007, there have been several cases of inharmonious action or divergence. The first
came in column three of the vertical chart when the Wyckoff Wave rallied to a lower top than
had been recorded during July and the O.P. rallied to a higher top. That divergence was a case of
up side effort unconfirmed by result. It suggested the likelihood of a reaction in the Wave. In that
case, the response was immediate and severe as the Wave declined to its August low. When the
Wave put in its October high in column twelve, it was only 400 points from its July
high. However, the O.P. was approximately 1000 points below its high. This was a bearish
inharmonious action. The response by the Wave was unconfirmed by the effort. The indication
was for a decline in the Wave. In that case, the response also came quickly and it was
substantial. At the November low in column twelve, the Wyckoff Wave was in new low ground
relative to its August low. However, the O.P. was not. In that case, the down side result was
unconfirmed by the effort indicating the likelihood of a turn to the up side by the Wave. As the
Wave was putting in its December high, the O.P. was higher than it had been in October, but the
Wave was not. This was another bearish divergence suggesting that a reaction in the Wave was
likely and it declined to the January low. In the case of this divergence, it should be noted that
the O.P. continued to try to pull the Wave higher into column fourteen. This widened the
divergence and possibly helped the Wave make more down side progress than it might have
made.
Thus far during 2008, there have been additional cases of divergence and inharmonious
action. At the January low in column sixteen, the Wyckoff Wave was in new low ground relative
to its November low and the O.P. was not. This result to the down side was unconfirmed by the
effort and the Wave then responded with a rally to the high on February 1. At the end of
February, the Wave was putting in a lower top relative to the one recorded at the beginning of
the month while the O.P. was making a higher high. In this case, the O. P. had expressed an
effort to the up side that the Wave had not confirmed. The response to that bearish divergence
has lead to where things stand as of March 7. Now there is a bullish inharmonious action and a
bullish divergence. The divergence can be seen by comparing the current position of the Wave
and O.P. to where they were during the middle of February. The Wave is now lower and the O.P.
is not. The unconfirmed result suggests a change in direction. At the same time, there is also a
bullish inharmonious action that can be seen when the current positions of the indexes are
compared to their January lows. The Wave is almost back to its January low, but the O.P. is
not. This is another indication of a likely change in direction
The Trend Barometer is the final point of interest that will be examined. It is the name given to
the Technometer and the Force Index. The Technometer indicates to what degree the market is
over sold or over bought. The Force Index indicates whether the Wyckoff Wave is being
influenced by down side pressure or up side pull.
Theoretically, the Technometer can have values as low as zero and as high as one
hundred. However, neither of those numbers have ever been recorded and it unlikely that either
will ever be recorded. Observations over the past seventy plus years have indicated that the
Technometer spends most of the time below a reading of 50 and above a reading of
38. Therefore, readings at or above 50 are seen as indicating an over bought condition and
reading at or below 38 are seen as indicating an over sold condition. An over sold condition
indicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicates
that the Wave is vulnerable to a reaction. To be more precise, over bought and over sold
conditions indicate that the Wave is vulnerable to corrective action. Most of the time that
corrective action comes in the form of a rally or reaction. However, it can unfold as a period of
horizontal action. As the Technometer moves higher above 50 or farther below 38, it becomes
more over bought or more over sold. That means the Wave becomes more vulnerable to
corrective action. It down not necessarily mean that the Wave becomes vulnerable to a bigger
correction. A figure chart should be consulted to judge what the magnitude of the indicated
correction is likely to be.
Some Wyckoff traders try to use the Technometer in a mechanical manner in an effort to bypass
all of the other concepts that Wyckoff teaches. Traders who fall victim to this trap try to use
Technometer readings of 38 and 50 as automatic buy and sell signals. Traders who use this
approach usually find that the market rewards them for a while. Since July of 2007, there have
been relatively few clearly over sold and over bought conditions. In every case, the market has
rewarded to some degree the trader who has used the Technometer in a mechanical manner
providing the trader was willing to ride out the gyrations that occurred between the entry point
and the point at which the reward was offered by the market. However, it has never failed to be
the case that at some point the market wants to get paid back by those who have used to
Technometer mechanically. In these situations, the Technometer usually tells the mechanical
trader to take a position and then fails to provide an indication to exit the trade until it is deep in
the red.
The Force Index has no limits as to the readings it can reach. Its extremes are determined by the
average level of volume. Higher average volume allows for greater extremes and lower average
volume allows for lesser extremes. There are two ways in which the Force can be helpful in
keeping a Wyckoff trader on the right track. One is by the development of divergences between
the Force and the Wave. The other is by the tendency of the Force to trend.
In column six of the vertical chart, the Force put in a peak as the Wave approached its October
high. In column nine the Wave put in a higher high, but the Force put in a lower peak. This was a
divergence between the Wave and the Force. The up side result on the part of the Wave did not
have enough up side pull from the Force to sustain it. The Wave responded by turning downward
eventually reaching the November low. At the November low there was another divergence. The
Wave made a lower low than it had in August, but the Force did not. In that case, the indication
was that the down side result experienced by the Wave did not have the down side pressure from
the Force to sustain it and the Wave responded with a rally
The Force Index exhibits a tendency to trend. The high in the Force in column one and the high
as the action crossed from column three into four can be used to define a down trend. The down
trend indicated that there was a bearish tone to the action confirming that the short side was the
one to be trading and indicating that some one still trading the log side was likely in trouble. In
column five, the down trend was broken indicating that the bearish tone to the action had ended
encouraging those still short to be more defensive and encouraging the bulls to be more
aggressive. This change in tone occurred as the Wave was recovering from its August low and
moving toward its October high. The tone of the action changed again in column nine when the
up trend in the Force was broken. In that case, the change in tone was indicated just as the Wave
started down from its October high. The tendency of the Force to trend is not a timing tool. It
doesprovide indications as to which side of the market the trader should be trading. As a rule,
traders who are trading against the tend of the Force will end up paying for their mistake just as
those who try to trade against the trend of the Wyckoff Wave are likely to have to pay for their
error.
The points of interest outlined in the third part of this series should be viewed as being secondary
to the character of the price and volume action. They should be used to confirm indications
provided by the price an volume action. Trying to use any of them mechanically in lieu of an
ongoing study of the price and volume will likely lead to unintended consequences.
The effort to leave that range to the up side failed resulting in an up thrust. The high point of an
up thrust is a point from which a down count may be taken. Since there is only one posting at the
40000 level, it appears that there is no potential. Making this conclusion is the result of an overly
mechanical approach to taking counts. Since the July high was an up thrust and an ending action,
it is acceptable to count the potential created by the entire trading range even though there is
only one posting at the high. In this case, it appears that the Wyckoff Wave began moving into
the trading range during May when it first reached the 38500 level in column one of the figure
chart. The potential built during the period from May to July was 4500 points for an objective of
35500. This objective was reached as the Wave approached its August low in column three of
the figure chart.
After the Wyckoff Wave made its initial break to the down side from the July high, it made a
corrective rally that ended at the 38500 level at the beginning of column three. This rally
represented the test of the up thrust. The high point of the rally provided a place to take another
and more aggressive measure of the potential in the trading range. This count began at the top of
the test of the up thrust and extended to the left to where the Wave was rallying into May to the
38000 level in column one of the figure chart. The potential measured by this count was 7000
points indicating a down side objective range of 31000 to 33000. This objective was reached on
the decline to the January 2008 low.
The August low in column four of the vertical chart was the end of the first major thrust of the
entire decline from the July high to the present. Although it was not clearly defined, a trading
range did develop following the August low. If the low in column four was interpreted to be the
selling climax of that phase of the decline, the preliminary support can be seen as having been
met at the low in column three of the vertical chart. If these two points had been defined, the
high as the action crossed from column four into column five of the vertical chart would have
been labeled as the top of the automatic rally making the low in column five the secondary test,
which confirmed a new trading range. Since the action immediately left the range to the up side
after the secondary test, it could be seen as also being a last point of support. Wyckoff tells us
that the maximum count to the up side stretches from the last point of support to preliminary
support. If that rule was used in this case, the result would have been a 3500 point potential at
the 36000 level indicating an up side objective range of 38000 to 39500. The top of the objective
range was reached at the October high.
An up trend was defined on the vertical chart off of the lows in column four and five. This trend
was broken in column six. At the end of that column, the Wyckoff Wave made an attempt to
reenter the up trend that failed. The failure confirmed the breaking of the up trend and began the
defining of the next trading range. The failed attempt to reenter the up trend was used to define
the resistance level of the new trading range and the low in the next column was used to define
the support level. The action in column eight of the vertical chart provided an obvious ending
action in the form of an up thrust of the resistance level. At the end of column three of the figure
chart and extending into column four, the potential for the next decline was established. It was
only 1500 points. However, when the up thrust was tested in column nine of the vertical chart,
the potential had grown to 3000 points for an objective of 36500 to 35000, which was reached
and over run on the decline to the November low.
The character of the trading range that developed during September and October points out the
value of maintaining more than one figure chart. That trading range was relatively short term and
was confined to a relatively narrow range. Frequently, the potential in trading ranges like this
can be underestimated if the figure chart being used is long term in nature as is the case with the
five hundred point chart. Keeping a one hundred point figure chart in addition to the five
hundred point chart provides an intermediate interpretation of the action that can better estimate
the potential developed in shorter term trading ranges.
The next trading range that developed was defined by the November low in column four of the
figure chart and by the December high in column five. After the limits of this range were
defined, the action moved into an apex. The action broke from the apex in column five of the
figure chart as the Wyckoff Wave began its decline to the January low. When the apex was
broken, a new down side potential could have been measured. This count was taken at the 35500
level and indicated an objective range of 29500 to 30500. This objective has not as yet been
reached. It may or may not be reached based on the outcome of the current trading range.
The current trading range was defined by the January low and the February high. It was
confirmed when the February low respected the support level of the range. After a trading range
has been defined and confirmed, the expectation is for an ending action to develop to signal that
trading range action is being completed and to provide an indication as to the direction of the
next move. Thus far, there has been no ending action relative to the new trading
range. Therefore, taking a count in either direction cannot be justified. However, it is acceptable
to periodically measure how much potential might be developing so as to have a feeling as to
how significant the next move might be. If the potential of the current range is measured at its
widest point as of the last trading day in February, the potential could be as much as 8000 points
if it is measured back to where the action was declining to the January low. The potential is
somewhat less if it is measured only since the January low. If the anticipated ending action
relative to the range points to additional down trend activity, the 29500 to 30500 objective range
will likely be overrun by a wide margin. However, if the ending action points to an advance, it is
likely that the lower objective mentioned will never be reached. The objectives that the action in
trading ranges forecast should be seen as being indications only subject to being confirmed or
denied by the character of the price and volume action.
Note: Part three of this series will focus on other points of interest that have developed since the
all time high of the Wyckoff Wave was put in place last July.
© The Jamison Group, Inc.: Stock Market Trading, The Wyckoff Method
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Stock Market Analysis
Tools & Strategies
Analyzing the Wyckoff Wave,
O. P. Index and Trend Barometer
Part 1 - Trends
Since the Wyckoff Wave put in its all time high back in July of 2007, its action has been
dominated by down trends. Three of the down trends are of special interest because they have or
may have an impact on current and future action of the Wave. The most important down trend
was defined off the July high (Column 2).
The second rally top used to define this trend was the October high (Column 9). The parallel
over sold line for this trend was constructed through the August low (Column 4). Since it was
defined, the supply line of this longer term down trend has never been weakened or even
seriously challenged and it is unlikely that it will be in the near future due to the fact that the
current action of the Wyckoff Wave is more than 5000 points below the supply line. The action
of the Wave has had encounters with the over sold line of the down trend.
The action of the Wyckoff Wave first encountered the over sold line
of the longer term down trend in November (Column 12). The resulting penetration of the over
sold line produced an over sold position that needed to be corrected. The correction of an over
sold position can unfold as a period of horizontal action that over time allows the Wave to move
back into the down trend channel.
However, the correction normally unfolds as a rally, which is what happened in this case as the
Wave rallied back to near the middle of the down trend channel (Column 13). With the Wave
solidly back in the middle of the down trend channel, it was free to resume down trend
activity. During January (Column 15), the Wave again encountered the over sold line of the
down trend and entered an over sold position.
This time, the ability of the Wave to correct the over sold line with a normal corrective rally was
less impressive. Instead of moving back to the middle of the down trend channel, the Wave has
moved in more of a horizontal direction clinging to the over sold line. The inability of the Wave
to make the normal corrective rally to the middle of the down trend channel indicates continuing
weakness. It suggests that the bears are content with their short positions and see no reason to be
panicked into a short covering rally. It also suggests that the bulls that have been worn out or
shaken out of the market are reluctant to return. If this thinking among the bears and the bulls
continues, the Wave may continue to move horizontally until a position near the middle of the
down trend channel is reestablished. Other possibilities include a gradual drift lower as the over
sold line moves lower. If the bulls and the bears change their assessment of the action, a normal
corrective rally is another possibility.
In addition to serving as the second point for defining the supply line of the longer term down
trend, the October high (Column 9) also was a factor in defining the intermediate down
trend. The second point used to define this trend was the December high (Column 13). The over
sold line was constructed parallel to the supply line from the November low (Column12). During
January (Column 16), the action of the Wyckoff Wave approached but did not reach the over
sold line of the intermediate down trend. Normal down trend action would have penetrated or
reached the over sold line of the down trend. The failure to reach the over sold line indicated that
the intermediate down trend was in trouble and vulnerable to being broken. It was also a warning
to bears whose positions were based on the existence of this trend to become more defensive in
the management of their positions. As the action of the Wave moved from January into February
(Column 17), the supply line was penetrated. This action weakened the intermediate down
trend. Frequently, down trends are ended with a four step process that begins with the weakening
of the supply line. The second step is for the price to reenter the down trend, but not make a
lower low than the low that occurred before the supply line was weakened. In this case, step two
was completed during February (column 18). Step three is for the supply line to be decisively
broken by a rally that takes out the high recorded when the supply line was weakened. The final
step is for the price to confirm the breaking of the down trend with a reaction that is unable to
reenter the down trend channel. As of the last day posted, the action was working on step three,
but the outcome was inconclusive resulting in a conclusion that the intermediate down trend was
still having an impact on the action.
The third significant down trend since the July high was defined off the highs that were recorded
during December (Columns 13 & 14). The over sold line that completed the definition of this
shorter term down trend was constructed through the low point of the reaction that separated the
two rally tops used to define the supply line. The over sold line of this trend was penetrated
twice during January (Columns 15 & 16). The response to the first over sold position was a
normal corrective rally. The response to the second over sold position was more
impressive. After slightly weakening the supply line and briefly reentering the shorter term down
trend, the supply line was decisively broken (Column 16 & 17). The Wyckoff Wave could have
clearly ended the shorter term down trend by failing to reenter the short term down trend
channel, but it did not. During February (Column 17) the action of the Wave slipped back into
the down trend channel, but did not make a lower low. On the one hand, this action seemed to
confirm the breaking of the short term down trend by failing to make a lower low. However on
the other hand, the action seemed not to confirm the breaking of the down trend by reentering the
down trend channel. Conflicting signals such as these encourage traders to be more
defensive. Since the action of the Wave reentered the down trend, it has been horizontal in nature
and has lifted the Wave out of the down trend channel. As horizontal action continues and the
gap between current action and the supply line widens, it may be concluded that the breaking of
the shorter term down trend has been confirmed even though there was the reentry into the trend
after the supply line was decisively broken.
The three down trends mentioned above are the ones that are having an impact on current
action. However, there have been others that deserve to be noted. After the July high (Column
2), there was a rally to a lower top during August (Column 3) that allowed a shorter term down
trend to be defined. An over sold position relative to this down trend developed at the August
low (Column 4). The correction of the over sold position began the process than lead to the end
of the down trend being confirmed during September (Column 6). Another shorter term down
trend was defined near the end of October ( Column 9) when the Wyckoff Wave rallied to a
lower top relative to the high that had been recorded earlier in October. The Wave has moved out
of this down trend. However, it should be noted that the stopping action was not the more classic
type mentioned earlier.
Although the action since July 2007 has been dominated by down trends, there have been up
trends as well. There have to be up trends for down trends to be defined. The up trends that have
unfolded have all been short term in nature. They have been characterized by being relatively
narrow compared to the down trends discussed earlier and they have been steep. Trends that are
steeply inclined and narrow are difficult for the action to sustain. In this case with the action
dominated by down trends, the short, steep and narrow up trends likely were the result of bears
rotating out of some short positions and bulls rushing back into the market to avoid missing the
next advance and in the process setting themselves up to being shaken out or worn out later. The
up trends that stand out most clearly were defined off the August low (Column 4), the November
low (Column 12) and the January low (Column 16).
Earlier it was noted that in order to have down trends there must be up trends. However, in order
for there to be trends in either direction, there must be trading ranges that provide the potential
that the fuel the advances and declines that lead to up trends and down trends. The trading ranges
that have developed since the all time high of the Wyckoff Wave will be the subject of the
second part in this series.
© The Jamison Group, Inc.: Stock Market Analysis-Tools and Strategies
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
The Macro View of A. T. & T
December 7, 2008
NOTE; For a better appreciation of the text of this article, the reader is encouraged to retrieve
a weekly chart of A. T. & T covering the past two years and a monthly chart covering the past
tend years at bigcharts.com and to number the columns from left to right. The weekly chart has
twenty-four columns and the monthly chart has ten columns.
The very long term view of A. T. & T. has been a story of three trends. The first trend was an
aggressive down trend that began to form following the high in column 2. The second point that
defined the supply line of the down trend was recorded in column 3 at the top of the relatively
weak rally that followed the initial decline from the high. The over sold line of the down trend
channel was constructed parallel to the supply line passing through the low near the beginning of
column 3. This trend channel contained the action into 2002 in column 4 when the price entered
an over sold position relative to the down trend. Wyckoff tells us that over sold positions need to
be corrected. In this case, the correction could have taken the form of a corrective rally back
toward the supply line of the down trend or the form of a new trading range allowing the price to
reestablish a position in the down trend over a period of time. A. T. & T. chose the corrective
rally approach. The rally was completed at the end of column 4 and down side progress resumed.
After being aggressively bearish through the end of column 4, the character of the action began
to change in column 5. Wyckoff traders should always be alert to potential changes in the
character of the action because they indicate that an existing position needs to be more actively
and defensively managed. They also provide an early signal to the long term investor with a
neutral position that there may be a new trading opportunity in the foreseeable future. In this
case, the indication of a change in character was given near the beginning of column 5 when the
down side progress that had resumed in column 5 was unable to reach the over sold line of the
down trend channel. This failure to make what would have been a normal amount of down side
progress suggested that the down trend was in trouble.
As the action progressed across column 5 in 2003, there were other more obvious indications
that the down trend was in trouble. The first came when the rally off the low in column 5
weakened the supply line of the down trend. For the long term investor participating in the down
trend, the weakening of the supply line should have been seen as being an unacceptable
development requiring an even more active management of an existing short position. Toward
the end of column 5, a higher bottom was put in on a reaction. This confirmed a new trading
range to compete with the down trend for control of the action. By the end of column 5, the
trading range had won the battle for control of the action and the supply line of the down trend
had been decisively broken.
Long term bears had plenty of time to realize that the trend was no longer in their favor and to
liquidate their positions as the trading range dominated the action in columns 6 and 7. At the
beginning of column 8, the action played what can be seen as a dirty trick on long term bears
looking to reestablish short positions. The first posting in column 8 produced a penetration of the
resistance level of the trading range. When the price failed to follow through on the second
posting in the column with another strong performance to the up side, the Wyckoff investor
could have and should have concluded that the penetration was not a jump but rather a potential
up thrust. An up thrust is a primary selling position. Therefore, long term bears could have
justified reentering on the short side in anticipation of the potential that had been built during the
trading range would take the price much lower. Here is where the dirty trick entered the picture.
Mr Evans frequently mentioned on is recorded lectures that Wyckoff investors should always
begin by anticipating what is normal because that is what happens most of the time. The normal
response to an up thrust is a move back to at least the middle of the trading range. In this case,
the price did move back into the trading range, but it was supported well above the middle of the
range. When the action fails to unfold in a normal manner, investors need to see red flag
warnings and take defensive action. Abnormal behavior usually is an indication that a
development not anticipated by the investor when a position wad established may be about to
unfold. The investor's response should be to protect the funds involved in any open positions. In
this case, the unanticipated development was the failure of the test of the up thrust as the price
left the trading range to the up side on wide price spread.
The departure from the trading range allowed for the second long term trend that has dominated
the action since the high in column 2 to be defined. It was an up trend defined off the lows in
column 5 and column 7 with the over bought line defined through the high in column 5.
Unfortunately for the long term bulls, there was no clearly defined ending action to signal that
the price was intending to leave the trading range to the up side. Therefore, they likely did not
have an opportunity to participate in the advance into column 9. If they had found an acceptable
entry point, they would likely have spent much of the time in that position worrying about its
status. The reason for concern was the development of an over bought position that developed
near the end of column 8 and worsened throughout column 9. The need for a correction of the
over bought position is what lead to the development of the third long term trend that can be best
assessed on the weekly chart. It should be noted that the over bought position that developed
during 2007 was in the vicinity of the halfway point of the decline from the high in 2000.
Therefore, there were two reasons to anticipate a new trend to try to take control away from the
up trend.
The current long term down trend began to form in column 13 of the weekly chart. The high in
that column combined with the high in column 18 to define the supply line. The over sold line
was constructed through the low in column 15, The down trend has had three thrusts thus far that
have been of similar size. Usually, Wyckoff investors anticipate the thrusts in an extended move
to shorten as the move develops and more and more of the bears participating are satisfied. The
first thrust produced a 9.84 point decline as the price moved from the high in column 13 to the
low in column 15. The second thrust began in column 18 and ended in column 20 with a 10.98
point decline. Down thrust number three began in column 21 and ended in column 23 with the
price in a severely over sold position relative to the down trend having completed a decline of
10.73 points. Together, the three thrusts represent a sustained pattern of considerable weakness.
However, nothing is forever. The action since the low in column 23 suggests that there is a new
battle for the control of the long term action underway.
As noted, the low in column 23 resulted in a severely over sold position that needed to be
corrected. The correction has been underway for nearly two months at this point and the price is
just attempting to reenter the down trend channel. This is a critical point in the long term action.
The normal expectation is for the price to continue horizontal action for many more months as it
did during 2004 and 200f allowing the price to reestablish a solid position in the down trend
from which it could resume down trend activity. A second and less likely scenario is that the
price will resume down side progress immediately from the over sold line of the down trend and
move decisively into new low ground allowing an accelerated down trend to be defined. In this
case, the bears would have a windfall profit added to the already substantial gains that have
rewarded their patience. Either scenario suggests that the long term bears are still in control and
that long term bulls that are actively looking for opportunities should look elsewhere.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
The Macro View of Boeing
March 15, 2009
NOTE: For a better understanding of the text of this article, the reader is encouraged to access
the following three charts at bigcharts.com: a monthly chart for the past ten years, a weekly chart
going back three years and a daily chart covering the past twelve months.
Since its high in 2000, which can be seen on the monthly chart, Boeing has had three impressive
longer term moves. The cause for the first move began to form following the high in 2000. Early
in 2001, the 2000 high and the low recorded during March 2001 defined the limits of a potential
trading range. The trading range was confirmed during May when the price respected the
resistance level. It left the trading range to the down side in a fall through the ice during
September 2001. Wyckoff tells us that after a fall through the ice it is normal to get a rally back
to or toward the ice level. The rally back was completed early in 2002 when the price returned to
the former support level of the previous trading range reaching that critical level on reduced
volume relative to that which had been experienced on the fall through the ice.
Viewing what happened following the rally back today with the advantage of hindsight, it is
possible to see a down trend channel defined off the high during 2001 and the top of the rally
back. At the time, however, the down trend channel would not have presented itself as clearly.
Normally, Wyckoff investors look for aggressive down side progress following a rally back to
the ice with the down trend being revealed when the price takes out the low point of the fall
through the ice on widening price spread and increasing volume. In this case, the price did make
down side progress for the balance of 2002, but at a more leisurely pace than might have been
anticipated in view of the fall through the ice and rally back. Therefore, a long term Wyckoff
investor could have embraced an alternate interpretation that the price was actually working on
the creation of a new trading range under the original range with the limits of the new range
defined by the low point of the fall through the ice in 2001 and by the top of the rally back in
2002.
The investor who was monitoring the action throughout most of 2002 from the standpoint of it
being an effort to confirm a new trading range was rewarded for his good judgment and patience
near the beginning of 2003 when the price entered a potential major spring position by
penetrating the support level defined by the 2001 low. Mr. Evans use to encourage Wyckoff
investors to buy all springs, or to at least consider buying them. This is a case where heeding that
advice could have netted the investor one of those buys of a life time as the price used the spring
position as the starting point for a four year advance resulting in a three hundred percent gain.
When an investor opts not to take a position on a potential spring, the thinking is that there is
likely to be a test of the spring and that the test will provide a safer entry point and a more
defendable position. Unfortunately, the monthly chart does not show a clearly defined test of the
spring suggesting that those who chose not to buy the spring may have missed the entire advance
especially if they were only viewing the action from the standpoint of the monthly chart. Those
who were monitoring the action with a weekly chart may have found a convincing test on one of
the five to ten point reactions that followed the initial response to the spring.
During 2006, the monthly chart shows the first signs of excessive bullishness as the price entered
an over bought position relative to the long term up trend defined off the low point of the spring
in 2002. Wyckoff investors expect over bought positions to be corrected. This one was corrected
with a move back to the demand line of the long term up trend that actually weakened the line
with a small penetration. The weakening of a demand line is an early warning signal that the
trend might be in trouble. In this case, the warning may have been overlooked due to the fact that
the correction of the over bought position found support at the former resistance defined by the
2000 high. The investor who noted the warning of the weakened demand line had several
defensive options to consider. A portion of the position might have been liquidated to guarantee
a portion of the profit no matter what happened from that point forward. The stop order on the
entire position could have been raised to guarantee an even greater portion of the profit. A third
strategy would have been to use a combination of the first two.
Late in 2006, the price returned to an over bought position relative to the long term up trend. It
continued to maintain an over bought position during much of 2007. A potential buying climax
can be identified late in 2007 when the volume spiked to its highest level of the entire advance.
After that, it was only a couple months before markdown began. The monthly chart suggests that
there was not much in the way of preparation for the decline that followed and that continues to
unfold. However, the weekly chart reveals that the price defined the limits of a new trading range
during July and August of 2007 and confirmed the range during September. During the final
months of 2007, the price entered a potential spring position relative to the new trading range.
Some long term investors might have rightfully used the spring as a signal to add to their
positions. However, they and all other long term bulls who chose not to add to their positions
should have quickly realized that the character of the action was changing. The first indication
came when the response to the spring was less than normal. While this is a concern, most
Wyckoff investors have learned that a less than normal response to a spring can still lead to a
successful test and a substantial advance. This was not one of those times. 2008 began with the
test of the spring failing as the price fell through the ice and out of the trading range.
Since the high in 2007, Boeing has lost seventy-three percent of its value. The decline has
unfolded in two down trends. The original down trend was defined off the high that confirmed
the trading range at the top of the advance in 2007 and by the rally back to the support level of
the trading range during May of 2008. As the general market was putting in its important low in
November 2008, BA entered a severely over sold position relative to its down trend and began to
correct that position. In view of the high volume on the move to the over sold position, some
over anxious bulls may have concluded that the over sold position marked the beginning of the
end of the decline. The recent action has not validated the bullish conclusion. When the price
encountered a the over sold line of the original down trend as it was correcting the over sold
position, it resumed down side progress making an additional twenty-five percent decline and in
the process defining an accelerated down trend.
If the trend lines of the accelerated down trend are extended, the indication is that the price will
be nearing zero in a few months. However, the figure chart suggests that things are not going to
get that bad. The figure chart indicates that the price is nearing its objective range. The
indication is provided by a count that can be measured at the forty-three level from the action
just before the accelerated down trend began. This count has a nineteen point potential for an
objective range of 24 to 28. The price recently traded as low as 29.05. Long term bears should
begin to ask themselves how much of their paper profit they want to risk to realize what may
only be one more point of potential profit and then to activate an appropriate defensive strategy.
Wyckoff tells us that large professional traders looking to build big positions for important
advances are frequently most interested in issues that have been beat up the worst because they
can quietly build their positions relatively unnoticed as the general public is licking its wounds
from the previous decline or is simply too scared to consider an issue that has lost most of its
previous value. Long term Wyckoff investors should be watching for signs that a change of
character is beginning to take shape in Boeing. Ideally, it will begin with a clearly defined
selling climax that hits bottom somewhere in the objective range mentioned above. The end may
also come with the exhaustion of supply resulting in the price action simply flattening out and
moving into a trading range. Either way, long term bulls need to be patient. There are two down
trends that need to be broken and a new potential that needs to be built before the next significant
advance can begin. Will it be as big as the advance from the 2003 low? Probably not. However,
even if it is only a normal correction of the decline from the 2007 high that will still be more
than a 100% advance from the down side objective.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Craig's Corner Phase 2
The Micro View of Bank of America
December 14, 2008
NOTE: For a better appreciation of the text of this article, the reader is encouraged to retrieve a
fifteen minute intra-day chart covering the past ten days and a daily chart covering the past
month at bigcharts.com
During the past ten to thirty days, short term traders in BAC could have been viewing the action
and their trading opportunities from two very different perspectives depending upon how short
term a view of the action they were taking. The Wyckoff trader viewing the short term action
from the perspective of the fifteen minute vertical line chart (Call him Trader A) saw a potential
jump and the possibility of an opportunity on the long side on the back up. The trader viewing
the action from the somewhat broader perspective of the daily chart (Call him Trader B) for the
past month saw the possibility of the jump, but then saw that possibility quickly deteriorate into
a potential up thrust providing an immediate opportunity on the short side.
When the price began the potential jump on December 8 moving into new high ground on
widening spread and increasing volume, Trader B was justified in defining an up trend on the
daily chart using the lows on November 21 and December 5. His anticipation would have been
that the potential jump would take the price into an over bought position relative to the newly
defined up trend channel and that the back up would begin from that position. However, on
December 9 there was no follow through to the up side. That action was inconsistent with the
jump scenario. Trader B could have immediately concluded that the potential jump was more
likely a potential up thrust of the high on November 28 and established a short position. The over
bought condition that had existed on December 8 (Tec of 52.5) and the relatively over bought
condition that still existed on December 9 (Tec of 48.1) provided a measure of confirmation that
the action actually was a potential up thrust and not a jump. It is not normal for clearly over
bought conditions to develop on the first day of a potential jump. Since the price traded lower on
December 9 in a narrower price spread and on lower volume, the wisdom of acting so quickly
might be questioned based on the possibility that the price might have resumed up side progress
the next day in another wide spread and on increased volume. That was a possibility, but it was
also a possibility that the price would respond to the potential up thrust with down side progress
resulting in a much less favorable entry point. When it comes to short term trading, Wyckoff
traders need to act immediately when a potential opportunity develops, protect the position and
then see what happens. The short term trader who hesitates is likely to miss many and perhaps
most opportunities.
When Trader B took his short position on December 9, the one point figure chart indicated that
there was a four point down side potential for an objective of 14. On December 10, Trader B was
rewarded with a wider price spread to the down side on reduced volume indicating a lack of
demand. On December 11, he received an even bigger reward in the form of another wide spread
to the down side on increased volume indicating that supply was entering the stock. Note that on
this day, the price penetrated the demand line that had been defined off the November 21 low
weakening the up trend. This was an important development for Trader B. If the action had
successfully tested the demand line, his position would have been in jeopardy because the
successful test could have been followed by a new rally in the up trend back to and through his
entry point. On December 12, the demand line of the up trend was decisively broken and the
anticipated objective was reached. Trader B should have closed his position and thanked the
market very much for giving him most of a four point move on a seventeen dollar stock in less
than a week. Some might wonder why Trader B would not have stayed with his position since
the action was moving the price in his favor. He should have gotten out because the market had
given him what he got in to get and there was no indication that there was any more to get. The
short term trader who hesitates entering a position frequently misses opportunities and the short
term trader who hesitates closing a position frequently misses out realizing the best profit.
Trader A who was only looking at the fifteen minute bar chart would not have seen the potential
up thrust, but would have seen the potential jump. Wyckoff does not identify any trading
opportunity as the jump is occurring. Therefore, Trader A needed to wait to see how the back up
unfolded to consider an entry on the long side. A problem that Wyckoff traders in all time frames
of market operation have is making a determination as to how far the price can back up after
jumping a creek before it is too far. In this case, Trader A should have identified the zone
between the high on December 5 and the low on December 8 as being the best area for the back
up to be completed. If he had done this, he would have known on December 11, that an
opportunity to enter on the long side was probably not going to develop because the price had
traded through the creek on wide spread and increasing volume.
As of the open on December 15, both Trader A and Trader B are looking for new opportunities.
Trader A can see on his fifteen minute chart that the action is correcting an over sold position
that developed relative to the down trend defined off the high on December 9. The price has
reentered the down trend channel and an opportunity on the short side may develop as the supply
line of the down trend is tested. However, Trader A needs to remember that the stock closed in a
clearly over sold condition on December 12 with a Tec reading of 38.2. Therefore, immediate
trading activity is discouraged. Trader B is also looking for a new opportunity on the short side.
In addition to knowing what Trader A knows, Trader B knows that the short term up thrust that
provided his last opportunity will likely be tested. He also knows that the breaking of the up
trend that he defined will likely be confirmed. The combination of both of these developments
may provide a new entry point. However, Trader B like Trader A needs to pay attention to the
condition of the stock so that a new position is not actively considered until the condition
indicates that the price is vulnerable to another short term reaction.
Wyckoff Stock Market Institute
P.O. Box 4130
Clifton Park, NY 12065
www.wyckoffstockmarketinstitute.com
Measuring Relative Strength/Weakness
March 1, 2009
One of the simplest Wyckoff concepts is one of the most important. It is the concept of relative
strength or weakness. Stocks that have established themselves as being relatively strong vs. a
general market index or a fixed universe potential trade candidates like the components of the
Wyckoff Wave or the Dow Jones Industrials are more likely to be the best candidates for long
positions. Issues that are relatively weak to an index or group of other individual stocks are more
likely to be the best candidates for short positions. Relative strength or weakness can be
measured in two ways. A trader can measure it by simple observation or by doing some simple
math.
The Wyckoff trader who is using the observational approach is comparing the tops of rallies and
the bottoms of reactions in individual issues to the similar rally tops and reaction lows in a
general market index. Identifying the halfway points of rallies and reactions on the individual
issues under consideration and a general market index can also be helpful. If the trader is bullish,
he is looking for those individual issues that are demonstrating the most consistent pattern of
higher tops on rallies and higher bottoms on reactions relative to the similar rallies and reaction
in the market index. These observations are going to be most helpful in identifying potential long
candidates while the general market is still in a trading range, but early leaders have already
begun to trend. If the trader is bearish, he is looking for those individual issues that are
demonstrating the most consistent pattern of lower bottoms on reaction and lower tops on rallies
relative to similar bottoms and tops in the market index. These observations are going to be most
helpful in identifying early leaders to the down side and potential short candidates while the
general market is still in a trading range.
The same types of observations mentioned above can also be helpful in identifying trade
candidates late in a sustained advance or decline when the general market has moved into a
trading range, but some issues continue to trend again demonstrating patterns of higher tops and
bottoms to be identified as long candidates, or lower bottoms and tops to be identified as being
short candidates.
When both the general market and individual issues are trending in the same direction,
identifying the relatively strong and relatively weak issues by observation can be more difficult
since both the market and the stocks are doing the same thing. This is where identifying the
halfway points of previous rallies and reactions can be helpful. If both the market and individual
issues are trending higher, the Wyckoff trader wants to identify those issues that are under
performing to the down side on reactions relative to the general market. These will be most
obviously revealed in cases where the general market reacts to or through its halfway point of the
previous advance and the individual issues hold above their halfway points. These are the issues
that are more likely to participate well in the next rally. The same approach works in reverse
when both the market and individual issues are trending lower. Here, the trader wants to identify
those issues that are under performing to the up side on rallies relative to the general market and
the halfway points of the previous reactions can serve as a good guide in making the
observations.
Traders using the observational approach to measuring relative strength or weakness should
focus on the obvious and avoid the marginal. Trying to make a case for an issue as a trade
candidate where the issue is not clearly making the case for its self usually will lead to
disappointing results if a position is taken.
Wyckoff traders who are looking for a more precise way to measure relative strength or
weakness or who are looking for a way to confirm the results of the observational approach
might want to consider developing a weekly relative strength/weakness report. To do this, the
trader will need to determine the percentage change in price at the end of the current week from
three previous points in time. Since most Wyckoff traders engage in market operations that are
short term to intermediate term in nature, determining the net change over the past week, the past
four weeks and the past thirteen weeks is suggested. Traders who are more comfortable with a
longer term market operation might want to use the changes over the past four weeks, thirteen
weeks and fifty-two weeks. Percentage changes should be determined for both the universe of
individual issues being considered and for the general market index that is used.
This approach to measuring relative strength or weakness is best suited for the trader who
operates in a fixed and limited universe of individual issues such as the twelve components of
the Wyckoff Wave or the thirty Dow Jones Industrials. If the components of the Wave are being
used, the trader wants to rate them based on the percentage changes that were determined in the
first step of this approach. To do this, the trader assigns a score to each component and to the
Wave for each of the three time frames. A score of zero is assigned to the issue that turned in the
most bearish performance. A score of twelve is assigned to the issue that turned in the most
bullish performance. When this has been done for each of the issues and the index in each of the
three time frames, the three scores are added to determine the total for each. The totals will range
somewhere between zero and thirty-six if the Wave and its components were used. If the DJIA
and its components were used, the totals will range somewhere between zero and ninety-three.
Here are two recent examples of how a weekly relative strength/weakness report could have
helped identify two trading opportunities. When the report for the week ending February 20 was
prepared, it revealed that one component of the Wyckoff Wave had been among the three
weakest during each of the thirteen previous weeks. The issue was BAC. During the most recent
week, BAC rallied into a clearly over bought condition as measured by its Technometer
indicating that it was vulnerable to a reaction. Wyckoff tells us to sell relative weakness on
rallies. In this case, the sustained pattern of relative weakness allowed the price of the stock to
decline two points in less than two days, which was a huge percentage move for an issue trading
under six dollars per share.
Another example of how the relative strength/weakness report can be helpful in identifying
trading opportunities can be found in IBM. When the report for the week ending February 20
was prepared, it revealed that IBM had been among the three strongest components of the Wave
for eight of the previous thirteen weeks. It had reacted to the vicinity of the halfway point of its
previous advance putting it in a primary buying opportunity. It was also in a clearly over sold
condition as measured by its Technometer. Wyckoff tells up to buy relative strength on
reactions. The weekly report indicated that the stock was one of the strongest in the Wave. By
the end of last week, the price had taken advantage of its relative strength and had rallied nearly
ten points.
The two examples above should not be taken as an endorsement of the idea of being long and
short in the same market at the same time. Theoretically, this is possible to do especially if the
positions on opposite sides of the market are aimed at different time frames. However, most
Wyckoff traders who try this approach tend to not do well at it. Therefore, traders are
encouraged to only trade that side of the market that is most in harmony with its trend. That
being the case, BAC would have been the better choice for a trade even though IBM rewarded
those who choose to take a position in it.