Wyckoff Power Charting
1 Welcome to "Wyckoff Power Charting with Bruce Fraser"!.note
Wyckoff Power Charting
Welcome to "Wyckoff Power
Charting with Bruce Fraser"!
Chip Anderson | April 24, 2015 at 03:00 PM
Today I am very happy to announce the start of another great new blog on StockCharts.com - "Wyckoff
Power Charting with Bruce Fraser."
For those of you that do not know Bruce, he has been teaching graduate level courses on Technical
Analysis (and Wyckoff Analysis in particular) at Golden Gate University since 1987. Bruce worked
together with Dr. Hank Pruden at GGU to craft the original curriculum there and has been teaching as an
Adjunct Professor at GGU ever since. Bruce was a featured presenter at our most recent ChartCon
Conference in Seattle in August of 2014 and his presentation was very positively received. Bruce’s broad
breadth of experience has also allowed him to periodically teach many of the other required courses in
GGU’s Technical Analysis degree program including Technical Analysis of Securities, Business Cycle
Analysis and Strategy & Implementation.
(Are you getting the impression that Bruce is really experienced at explaining Technical Analysis to
people? Good! That is the correct impression to have.)
Soon after meeting Bruce in 2012, we began talking about how to increase the visibility of both Wyckoff
Analysis and Point & Figure charting within the StockCharts.com community. When Bruce volunteered
to start contributing to the website, I jumped at the offer and today, we begin to see the fruits of those
conversations.
If the name "Wyckoff" is unfamiliar to you, I urge you to read our ChartSchool article on Wyckoff
Analysis. Over the course of the next several months (hopefully "years") Bruce will be diving down into
the topic in much more detail, but the ChartSchool article is a good place to get started. (And if you have
115 minutes to kill, you can get a head start on the rest of the class by watching Bruce's YouTube video.)
By the way, if you have been reading any of Gatis Roze's "Traders Journal" blog, then you are already
somewhat familiar with Wyckoff even if you don't realize it. Several of Gatis' techniques are based on
"Wyckoffian" ("Wyckovian?") principles.
Finally, don't miss Saturday's "ChartWatchers LIVE" webinar at 1pm Eastern. Bruce will be my special
guest and he will be talking about his plans for this blog then. Click here to register for the webinar.
Welcome aboard Bruce!
- Chip
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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2 Getting some Basic Wyckoff Terminology Under our Belts.note
Wyckoff Power Charting
Getting some Basic Wyckoff
Terminology Under our Belts
Bruce Fraser | May 11, 2015 at 07:08 PM
The stock market is a mystery. Sometimes it makes sense and it seems rational, such as when stock prices
rise with expanding earnings growth and general business conditions. And conversely when stock prices
typically fall with declining earnings and sales growth. At other times the stock market does not make
sense when the news and business conditions are out of whack with the trend of prices.
The business cycle is an endless phenomenon of ebb and flow, typically alternating between recession and
expansion every four to six years. This cyclicality of business activity seems to coincide with bull and bear
markets and the trend of stock prices. Bull markets track expansionary business conditions and bear
markets correlate to general business contractions. When the business cycle is plotted alongside the stock
market, they somewhat track each other. But on closer inspection the stock market cycle leads the
economic (or business) cycle, typically by six to nine months or more. What this means is that at the
beginning of a new bull market in stocks the economy is still contracting. Stock prices stop falling and
some stocks even start turning up while earnings, sales and general business conditions continue to
worsen. The general mood of the investment community is gloom and doom. For many months prior to
the low in stock prices, the news on the economy deteriorates. At the bottom of a bear market pessimism
is everywhere. There is an old saying: Wall Street is the only place that gives a half-price sale and nobody
shows up.
Then all of a sudden the lows are
in for the best stocks and some
stock indexes. And herein lays the
paradox for investors. It will be six
to nine months before the final low
in the economy is in place. It will
take economists another six or
more months before they see
enough economic data points to
proclaim that the recession is
over and ‘business conditions are
in the recovery phase’. If an
investor waits for this
announcement, stocks will have
been rallying for more than a year
and the very best performing
stocks will have already climbed to substantially higher prices.
At the end of a long bull market in stocks, this phenomenon works in reverse. Stock prices and indexes
begin to sag. They no longer follow good economic and earnings news to higher prices. Meanwhile analysts
are singing the high praise of company conditions and economists see endless prosperity for the economy.
Larry Livingston said in Reminiscences of a Stock Operator, “I was in such a hurry to try the new key that
I did not notice that there was another lock on the door…a time lock!”
The characteristic of the stock market leading economic conditions is often referred to as a “discounting
mechanism”. A company’s stock price can trend for a year or more before there is evidence of a
turnaround in its business conditions. But Wall Street seems endlessly fascinated with the lagging
indicators of business activity; corporate earnings, sales growth, etc. Isn’t it likely that anyone making
decisions using this lagging data will be surprised when Mr. Market changes the lock and the bull
becomes a bear or the bear a bull?
Richard D. Wyckoff understood that stock price trends precede and discount future business conditions.
He also made it his life’s work to understand the reason stock prices go up and go down (which may
surprise you and will be the subject of our next blog post). He devised a methodology that depends solely
on the action of stock prices. He called this technique “tape reading”. What he did to read the ‘tale of the
tape’ was to plot daily price activity on a vertical bar chart with volume for the day plotted below the
price. We know these as bar charts. He understood the stock price to be the ultimate leading indicator.
The Wyckoffian Analyst strives to correctly anticipate a stock’s future direction by the action of its own
price.
Four primary phases make up the classic stock market cycle: The Accumulation Phase, The Markup
Phase, The Distribution Phase and The Markdown Phase. Stock prices as observed in ‘vertical charts’ will
behave in uniquely characteristic fashion during each of these phases. The Wyckoffian analyst will become
skilled at distinguishing between each of these phases and thus determine when and how to conduct
speculative activities. In future blog posts we will study, in great detail, examples of each of these phases.
Understanding the attributes of these phases is what Power Chart Reading is all about.
Next time we will reveal the driving force behind stock price movement and “The Real Rules of the Game”.
- Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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3 Richard D. Wyckoff's REAL Rules of the Game.note
Wyckoff Power Charting
Richard D. Wyckoff's REAL Rules of
the Game
Bruce Fraser | May 19, 2015 at 10:39 PM
Stock prices are constantly impacted by large and small forces. These forces
propel prices endlessly up and down. If we can make sense of these forces
and identify their influence, we can learn to anticipate stock price
movements.
Richard D. Wyckoff was determined to know the real reasons behind stock
price movements. In his search he discovered a group of better informed,
more highly skilled investor / traders. These "super" traders were of such a
large scale they had the capacity to influence the trend and direction of
prices. These tendencies were revealed by the tape, thus Mr. Wyckoff could
see their footprints on the tape (i.e., in his charts). The stock market
operations of these traders had common characteristics cycle after cycle.
They tended to be in the best stocks in the beginning of the trend and they
would stay on the trend longer. Because of the immense scale of their
operations, they would arrive very early in the Accumulation Phase for a stock and stealthily buy shares.
By working very hard to remain undetected in their buying operations, huge quantities of stock could be
acquired at low prices. The goal was always to accumulate shares without driving the price up on
themselves. Such operations could take months. Large amounts of capital were skillfully and quietly
deployed at bottoms. Wyckoffians call this absorption of the floating supply of stock.
Wyckoff concluded that such operations, conducted on a large scale, would result in the chosen stocks
rallying dynamically after the accumulation phase. These targeted stocks would move further, faster and
longer than other stocks. These were the stocks worth owning.
Avoiding detection was essential to the conduct of such large operations. Super traders are always in
competition with other super traders for the available float of the most desirable stocks. Secrecy in the
conducting of a campaign is critical. The combined activities of these large competing super traders
became the focus of Mr. Wyckoff’s analysis. He learned how to see their operations in the charts. Their
actions could have stealth, but their footprints were seen all over the charts. They could not hide from
Wyckoffian analysts who could see this evidence in the way price bars behaved and in the volume
characteristics. These unknown large traders, in aggregate, became known as the “Composite Operator”.
Composite Operators demonstrate skills and abilities in their campaigns that are not evident in most
traders. Mr. Wyckoff was determined to become like them in thought and action, and he did. He was then
determined to teach the public about the activities of their operations and how to detect them. Thus the
birth of the Wyckoff Method.
The “Real Rules of the Game” were the activities of the Composite Operator. Mr. Wyckoff wanted to raise
the investing public’s awareness of these operations. Without this knowledge, the public’s tendency is to
enter the markets at the wrong time in the trend, do the wrong things and lose their savings. The natural
instincts of the layman are the wrong ones for trading and investing. Mr. Wyckoff taught students how to
act in concert with the C.O. and therefore learn to think like the C.O.
The Composite Operator is a heuristic, a useful fiction. The C.O. is the story of the collective activities of a
number of professional operations occurring at the same time. In aggregate they reveal themselves in the
vertical bar charts. We tell the story of their actions and motives as though they are one giant operator.
We do this through the careful study and interpretation of the charts. By repeatedly telling the story of the
C.O. on the charts, the Wyckoff student begins to think and act in concert with these professional
activities.
Recall from the last post the cycle of Accumulation, Markup, Distribution and Markdown. Each phase has
the characteristic footprints of the C.O. revealed in the charts. Accumulation begins with the stopping
action of the prior downtrend (markdown phase). We will explore at great length each of these phases.
Wyckoff is a mastery process and repetition is the key to mastery. So let’s start with the stopping action of
the prior markdown with this 2008-9 look at AAPL. Stopping action involves: Preliminary Support (PS),
Selling Climax (CLX), Automatic Rally (AR) and Secondary Test (ST). Study these points on the AAPL
chart. Pay attention to the nature of the vertical bars and the volume. Stopping the prior trend is the
beginning of the activities of the C.O. to accumulate shares. There is still much chart activity that must
occur to demonstrate that the stock is ready for purchase by the Wyckoffian. Between now and our next
post, try to find more examples of this stopping action. A hint is to look at the indexes and some stocks
during 2008-9.
Until next time,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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4 The Stopping Action of a Downtrend.note
Wyckoff Power Charting
The Stopping Action of a Downtrend
Bruce Fraser | May 26, 2015 at 08:39 PM
A downtrend occurs when the supply (of shares) is greater than the
demand. The float of a stock is the total number of shares owned by
investors and traders in the marketplace. With the exception of corporate
buybacks and secondary offerings, the float of a stock is relatively constant
and owned by individuals, institutions, hedge funds, etc. Why do stocks
have long uptrends and downtrends? Wyckoff believed that it is a change in
the quality of the ownership of the floating supply of stock. If the ownership quality is high, the stock will
rise. If the quality is low, the stock will be vulnerable. Who controls the floating supply of stock? Is it in
strong or weak hands? That is the endless question in stock speculation.
Downtrending stock prices reflect a poor quality of ownership. Mr. Wyckoff would say the stock is in weak
hands. Under low quality ownership, stock prices can fall for a long time. What is the change in conditions
that will stop a downtrend? Eventually after many months of decline, stock prices will become panicky. As
volatility rises, the decline of prices accelerates. The daily range of prices can widen to three or more times
a normal range and volume will be very high.
Acceleration of prices downward is very unnerving to investors. Many are selling shares. This volatility in
the stock price may be in conjunction with negative news about the stock or the economy as a whole. This
provides multiple reasons to sell. The entire market may be subject to this selling contagion. Selling in one
stock leads to selling in other stocks, especially in margined accounts.
Relentless selling can go on for days and weeks. One memorable description is that it is like a ‘fever that
won’t break’. Then the climax day arrives. The climax day can have a range of trading that is gigantic
when compared to the days and weeks that preceded it. One attribute of this very wide ranging day is that
for much of it, prices often will trade wildly around the lows of the day on extreme volume, and then close
above the mid-point of the day’s range. This is an important day! We will label this the climax day (CLX)
on our charts. Most likely, high quality buying came in on that day. What prices do in the following days
and weeks is important to confirming our analysis.
Our chart analysis will attempt to determine if this high quality buying is the Composite Operator
returning to the stock to begin absorbing shares at bargain prices. This absorption will take weeks or even
months and it is a very good sign. We will watch this stock closely for the moment when the Wyckoffian
trader can jump on board with the C.O. as they begin marking up the stock to much higher prices.
(Click to view a live version)
High volume is a sign of the Composite Operator stepping up and buying stock. This is high quality
demand meeting panicky selling. Wyckoff analysis looks for four chart points: Preliminary Support (PS),
Selling Climax (CLX), Automatic Rally (AR) and Secondary Test (ST). When these four points are
identified the conclusion is the Markdown has been stopped. It is too early in the trading range to call this
Accumulation. This sequence is often called 'Stopping Action'.
(Click to view a live version)
Immediately upon the identification of the PS, CLX, AR and ST draw support and resistance lines out into
the blank space of your chart. Prices will tend to be bound by this support and resistance. This is one of
the most useful techniques in technical analysis and is unique to Wyckoff analysis. Note the extreme
volatility present during a markdown. This volatility is unnerving to most investors and often leads to
panicky selling. Also the AR is a sign of the exhaustion of supply which is brief and dramatic (the
percentage jump of the AR is eye popping but temporary). Expect a decline back to or through the CLX
after the AR. There is still much overhanging supply. Attempting to trade a Markdown and CLX is not
advised for new Wyckoffians because of the extreme volatility (even old Wyckoffians tend to avoid them).
(Click to view a live version)
Note how the support line drawn at the CLX level comes into play later in the Accumulation Phase. Also
the Resistance line at the AR goes to work a full seven months later.
(Click to view a live version)
(Click to view a live version)
Preliminary Support (PS) is a brief pause in the drop of the stock price followed by a modest bounce (see
two examples above). PS is a sometimes occurrence. The PS is a sign of good demand beginning to buy
shares. The PS can be distinguished from a CLX by what price does next. An AR indicates that the prior
low was a CLX. We will address the benefits of the PS in future posts.
(Click to view a live version)
In trading ranges demand and supply are in balance. With the Wyckoff Method we learn how to
determine if there is something more going on in the trading range and that is Accumulation by the C.O.
In this blog we have studied the first phase of Accumulation. Accumulation is a progression that takes
time, often many months. Here is some homework. Look at these stocks in the same 2008-09 timeframe:
UNH, HD, MAR, KO, TXN, LBTYK, SIAL, CTSH, BRCM.
Until Next Time,
Bruce
5 Accumulation Phase; Absorbing Stock
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
where he has been instrumental in crafting the curriculum. At Golden
Likeearlya 1990s,
Sponge.note
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Accumulation Phase; Absorbing
Stock Like a Sponge
Bruce Fraser | June 02, 2015 at 09:35 PM
What are the conditions that need to be in place prior to a long and sustained rally in a stock? That is an
important question to ask because it is not a random accident when a stock rises bigger, better and faster
compared to most other stocks. When large, informed interests (Composite Operator) determine that the
stock of a company will be a substantial holding in their portfolio, a campaign is planned. The purpose is
to acquire a large number of shares at a favorable price with the expectation that the company will
experience dynamic growth and propel the stock price to a much higher level. The initial phase of the
campaign is to absorb the targeted number of shares. Planning is required as it could take many months
to accumulate the desired quantity. The goal is to buy these shares quietly without drawing attention to
their activities. The C.O. cannot hide their actions forever; eventually they will be discovered by other
C.Os. This early large buyer becomes active in the stock during the Selling Climax, or soon thereafter, and
has the greatest advantage in accumulating shares quietly. A Selling Climax is accompanied by large
quantities of stock for sale. As the Accumulation Phase progresses it gets harder to purchase large
numbers of shares and it requires greater trading skill.
During the entire Accumulation Phase there is an overhanging supply of stock for sale. With careful
planning and execution the C.O. intends to absorb these shares at the lowest average price possible. As
this phase evolves, greater numbers of C.O.s will be competing for fewer and fewer available shares for
sale. The paradox is the public becomes ever more pessimistic when prices remain low and listless. Here is
a key to the C.O. strategy; keep prices low. As the Accumulation Phase develops this becomes ever harder
to do. Mr. Wyckoff was intimately familiar with the C.O.’s methods and knew that their footprints on the
charts could not be hidden.
Absorption is the key feature (that a Wyckoffian cares about) of the Accumulation Phase. The C.O.
absorbs shares, like a sponge, at a good price/value with the intention of holding the shares for a very long
time. The only scenario that would cause the C.O. to sell these absorbed shares would be much higher
prices. If the Composite Operator community absorbs, buys, locks up most of the available floating supply
of stock, what happens to the price of the stock? Once the stock is in ‘strong hands’, available supply will
be low and even a slight increase in demand will cause the stock price to jump. The major uptrend begins.
This is when the Wyckoffian gets busy buying shares to ride along with the large, informed interests.
Last week hedge fund research firm Preqin made news with a report that 92% of hedge fund assets are
controlled by 11% of the 5,122 hedge funds in operation. A total of 570 hedge fund managers control $2.78
trillion of assets. Can there be any doubt these hedge funds are the best of the best and deploy their equity
capital with great skill? They are competing with each other for the preeminent ideas and are collectively
allocating a massive capital base in to equities and other asset classes. Also, these C.O. types are
competing with other extremely skilled institutional investors (mutual funds, pension plans, ETFs).
Remember, not all institutional investors are Composite Operators and not all Composite Operators are
institutional investors. Equity capital tends to concentrate where it will work the hardest. Consequently,
as reported by Prequin, the most skilled managers (the C.O.) control the majority of the capital.
(Click to view a live version)
Stock is bought on weakness as the stock price falls from the top of the Accumulation range to the bottom.
Support at the bottom of the range is the result of large C.O. buying activity and this can be seen in the
spike of volume activity.
(Click to view a live version)
A trading range is a gridlock of supply and demand. In this example DOW has bulges of volume toward
the top of the range. Supply is evident and must be absorbed prior to any meaningful uptrend starting.
Volume will diminish as the stock progresses further into the Accumulation range. Many stocks have
trading ranges that are not actively being absorbed by strong hands. These stocks will not show the
attributes of Accumulation and will continue in a trendless pattern for a long time.
(Click to view a live version)
This week's blog is a discussion of the trendless trading range that follows stopping action (see our prior
blog post). For the investor/trader this is an insufferably long time period. Volatility is high and prices are
low which leads to capitulation by retail investors as they give up and sell stock. Meanwhile the C.O. is
systematically using this environment to buy shares. During all of this back and forth action the
Wyckoffian is patiently waiting on the sidelines for that moment when the stock is ready to become active
again as the uptrend begins (the subject of upcoming blogs).
(Click to view a live version)
Two years of trading range activity is an excruciatingly long time. Note the final act of this Accumulation
is to make a minor new low. This is referred to as a spring. Note the change of character as the price
reverses off this Spring action (more on Springs later) and marches up to the top of the range. Compare
this rally to the prior rallies in the Accumulation.
Homework: My teaching partner and Wyckoff mentor is the legendary Hank Pruden. Make him your
mentor by reading his article "Wyckoff Schematics: Visual Templates for Market Timing Decisions", by
Hank Pruden and Max von Lichtenstein. This article and other resources can be found at
hankpruden.com. Also checkout Hank's book "The Three Skills of Top Trading". It is a modern day classic.
- Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Would you like to receive email notifications whenever a new article is added to this blog?
6 Fun With Current Charts, Wyckoff Style.note
Wyckoff Power Charting
Fun With Current Charts, Wyckoff
Style
Bruce Fraser | June 07, 2015 at 04:10 PM
Accumulation, Markup, Distribution and Markdown are the four basic stages of the Wyckoff Cycle. Prior
posts have been focused on the primary phases of Accumulation. There is still more to do, but let’s take a
break and explore the current market circumstances, which are very interesting. Consider this an
introduction to the principles of Distribution with the promise that we will explore this topic in great
detail in the not to distant future.
(Click to view a live version)
The $INDU set a trading range with a Buying Climax and an Automatic Reaction. These two points frame
the trading range for the foreseeable future. Here we are in June and for the most part that December
action is holding true up to today. Also note that on Thursday of last week the $INDU dipped back below
the December BCLX peak. We draw horizontal lines from the peak of the BCLX and the low of the AR to
establish the outer ranges of the potential Distribution range. Note how price could climb above the BCLX
peak but could not stay above nor pull away.
The Up Thrust after Distribution (UTAD) is an interesting development. As a last act in the Distribution
area, price will sometimes make a higher high by a marginal amount as it did here. Then it will turn back
into the range. In the classic UTAD what follows is a short sharp drop to the bottom of the trading range.
These slides tend to be volatile. The chart shows volume expanding on the price declines off each of the
recent peaks (red arrows). This is evidence of active selling.
Wyckoffians think in terms of scenarios and tactics. What the bulls need here is a reversal at or above
17,600 and a resumption of the uptrend by charging to a new high. 17,068 is the Automatic Reaction
(AR) and is the next target. If price gets to and through this level (even briefly), we would label such a
decline a Sign of Weakness (SOW). The subsequent rally would reveal much about whether the entire
structure is a large Distribution with further potential for decline, or a Stepping Stone Reaccumulation
(we will spend much time on the SSR which is a most important formation). Keep in mind that the
character of the classic UTAD is to whoosh down quickly and with volatility.
(Click to view a live version)
The Russell 2000 iShares (IWM) has a different look from the $INDU. The BCLX and the AR arrived in
late March. Note how well they contain the subsequent price action. A decline off the Secondary Test (ST)
comes on expanding volume and is a sign of active selling and results in a Sign of Weakness (SOW). The
May rally does not take the IWM to a new high and we label it a ST. Later the label may change to a Last
Point of Supply (LPSY). The primary distinction between the two is that a ST decline to the prior lows of
the Distribution Range and the LPSY is the last rally point prior to a larger downtrend. The volatility of
the last four bars is somewhat high, and there is no further upward progress. We would conclude this to
be churning near the highs. The bulls need a follow through of prices to new highs soon. Otherwise testing
the bottom of the trading range or declining further is a real possibility.
Stay tuned as we continue to learn about all things Wyckoff and periodically include current market
updates.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Would you like to receive email notifications whenever a new article is added to this blog?
7 Francis Bacon Reveals the Nature of Trends.note
Wyckoff Power Charting
Francis Bacon Reveals the Nature of
Trends
Bruce Fraser | June 13, 2015 at 05:47 PM
Francis Bacon said; “As in nature things move violently to their place and calmly in their place…”. It
seems that Mr. Bacon understood the stock market very well. Stocks tend to move calmly, gently, listlessly
in their trading ranges and then they move violently into trends. A tipping point between supply and
demand is achieved and listlessness morphs into activity. In the gentleness of a quiet and boring market
the seeds of change are sown. The genius of speculation is to know when the calm ends. Timing IS
everything.
Mr. Wyckoff taught that in the process of Accumulation is sown the seeds of change. Accumulation is a
Cause that produces a subsequent Effect. In prior posts we have illustrated the activity of Absorption by
large interests. A moment arrives when there is no more stock to absorb. The Composite Operator is filled
up with stock and the uninitiated public has no more stock to sell. In that moment is the tipping point,
where there is no reason for prices to remain listless and boring. All of the shares of stock are in ‘strong
hands’. Only much, much higher prices will induce strong handed large interests to supply shares to the
market. In effect, there is a shortage of stock to buy. When a shortage of stock is met with a slight bump
up in demand, prices can move violently. A trend of major proportions has been launched.
The genius of the Wyckoff Method is to recognize Accumulation disguised as the boringness of listless,
trendless prices. Then to wait like a monk for the moment when conditions shift suddenly and take action
to align one’s interests with the C.O. The Wyckoffian is trained to see the subtle nuances of absorption in
the ups and downs of a seemingly innocuous trading range. Distinctions are seen between the monotonous
back and forth of a typical trendless market and the footprints of intelligent activity in Accumulation.
A Spring tests the lower bounds of prices by penetrating the support area and making a new low. This is a
‘Bear Trap’. It encourages bearish traders to short more stock and the public to sell any remaining stock
and give up. The Composite Operator (C.O.), will suspend purchases at the level of the prior low to
determine if a new supply of stock shows up when prices fall to new lows. For the C.O. a Spring is really a
question; How much supply is there below the lows? If there is supply the stock price could skid much
lower before the C.O. puts a firm bid under the market. This condition is referred to as a Shakeout. A
Shakeout will normally be accompanied by expanding volume. Bulging volume indicates a new supply of
stock engulfing the market. Even lower prices typically follow this expansion of supply (volume). A
Shakeout (#1 Spring) is a failed Spring.
The volume signature is the final arbiter of the type of Spring developing and this also determines the
strategy for entry. In the example below CMG penetrates the low of the Selling Climax and appears to
breakdown intraday. But then it closes up on the day. Note the volume; it is about average to its recent
past. If there is no active selling below the SCLX (Sell Climax) low; the C.O. concludes from this action
that supply is exhausted. The C.O. will add stock to their holdings immediately and on a scale up.
Wyckoffians will buy a low volume Spring immediately and place stops below the lowest price. This is
often referred to as a #3 Spring.
CMG’s Spring comes earlier in the Accumulation Range than is normal. We would definitively label it a
Spring because of the price action that follows. The Sign of Strength (SOS) marches all the way to
resistance (and makes a minor new high) on increasing price spread and volume and thus is showing
active demand. Typically the Spring action would develop later in the Accumulation formation.
This 1982 Dow Jones Industrial Average September low is the beginning of a historic bull market. It is
also a classic formation. Secondary Test 1 (ST1) has the potential to be a Spring on high volume as price
meets large supply just below the Support Line. The rally that follows does not reach the Resistance Line
and thus does not make a SOS before turning back to the lows. High volume at the lows normally involves
a retest as it tells the C.O. that supply is still present. ST2 is another attempt to vacuum up shares at the
Support Line and could be a Spring. Volume again is high on the Spring action below Support and
another new low. The rally is even less robust than the prior rally staying near the bottom of the
Accumulation. Then it turns back to and through the prior lows. Two important things are different here.
The two weekly bars of decline are on low volume and the Spring is on low volume (highlighted by the
green circle). This is in contrast to the prior two Secondary Tests. The rally that follows is dynamic. In
three weeks the DJIA jumps out of the Accumulation range and a new bull market begins.
High volume Springs need to be tested in the following days or weeks. This is because ample supply is
present below the support line. If there is a low volume move towards the Support Line (the Test), that
indicates the prior supply was absorbed. Low volume Springs do not need to be tested, as this indicates
that supply is no longer present. We will devote future blogs to the appropriate trading tactics for these
and other entry conditions.
So there are three types of Springs: The Number 3 Spring is a shallow penetration of the prior low on
modest volume and can be bought immediately. The Number 2 Spring goes further below the low on
expanded volume and then has a brief lift followed by a drop back toward the lows (this is called a test).
The test will be on diminished volume and can be bought with stops below the Spring low. The Number 1
Spring is actually a Shakeout that is a complete breakdown. It should not be bought.
In our next post we will continue on the topic of final tests by discussing more on the concept of the Last
Point of Support (LPS).
All the Best,
Bruce
8 Jumping the Creek.note
Homework: SIAL, FAST, PCAR, SLB, BRKB. Study the period of 2008-09 for these stocks. Identify the
type of Spring. Bonus points given for attempting to markup the entire Accumulation Phase.
Wyckoff Power Charting
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Bruce Fraser | June 23, 2015 at 10:23 AM
Prices
differently
when aatrend
begins.isEach
price
barblog?
tells a story
Would you like to receive
emailbehave
notifications
whenever
new article
added
to this
during the sideways action of an Accumulation Range and each bar tells a
different story when the trend starts. A big, long trend is born inside the
inconspicuousness of an Accumulation area. The keen eyed Wyckoffian is
able to detect this change in behavior as the trend begins, and initiate a
campaign in the stock.
In an Accumulation range the forces of overhanging supply keep the price of
a stock suppressed. Supply is not a linear phenomenon. Selling does not always arrive at a constant price
of $50 (as an example). Great market operators understand that big supplies of stock will materialize and
stop the advance of the stock price and cause a return back to Support levels. Each attempted rally can be
met by supply at different price levels inside the Accumulation area.
Robert Evans took the helm of Wyckoff Associates (which became the Stock Market Institute) in the early
1950’s. He was a master Wyckoffian and a great teacher. He used memorable analogies and story telling to
convey important concepts. The colorful 'creek story' conveys the nature of overhanging supply in the
trading range. He tells the story of the Boy Scout hiking in the woods along the banks of the creek. To
continue to his destination the scout must find a place to cross to the other side of the creek. But the creek
(supply of stock) is too wide and running too fast for a jump to the other side. So he meanders along the
creek and at times walks away from the banks and then returns to find a place to cross. Eventually the
creek narrows enough that the Boy Scout determines that he can jump across if he gets a good running
start. At this narrow place he backs up away from the banks of the creek, gets a mighty running start and
leaps across to the other side. The momentum of his run carries him away from the opposite bank. He
then decides a rest is needed and returns to the creek, takes his shoes off, and puts his feet in the water.
After his rest he resumes his journey away from the creek and onward. The creek no longer represents a
barrier (resistance) on the journey to his destination (higher prices).
Of course the creek story is about the overhanging supply of stock for sale that keeps prices from starting
their upward trend. A dramatic event is needed to put prices on the other side of the creek. A creek
meanders through the forest turning here and there, while becoming wide and then narrow. The supply of
stock works in much the same way. A wavy line can be drawn over the price peaks where prices are turned
back down by selling pressure. It looks like a creek. There will come a place where the stock will back up (a
Spring or Last Point of Support), get a head of steam and then leap to the other side by absorbing the
remaining supply. This leap or Jump (as Mr. Evans would call it) has a signature characteristic of
widening price bars and a surge in volume (the required energy to overcome the remaining supply). To a
Wyckoffian these attributes of price and volume are different than what came before and this indicates
that a trend is emerging. The Composite Operator is embarking on a long term campaign in this stock,
and the Wyckoffian analyst can see this in the change of price and volume behavior. It is the time for
action.
Often a creek will split off into two, a lower creek and an upper creek. Accumulation ranges will often have
two supply areas (two creeks) that must be crossed. The Resistance Line is often the price area where
another surge of selling will materialize and stop the price advance. Once this resistance area is overcome
the stock will have cleared the entire Accumulation area and will be emerging into an uptrend.
Supply is like a meandering Creek that flows and exerts pressure on prices throughout an Accumulation.
Sellers of stock are willing to put Supply out at lower and lower prices. This can give the chart a
particularly bearish look. Ironically as the C.O. is accumulating shares, the majority of the public is
becoming ever more pessimistic toward the stock. The Jump (JAC-Jump Across the Creek) and the
Backup (BUEC-Backup to the Edge of the Creek) are ‘bell ringing’ events on the chart. They indicate the
readiness of the stock to start moving upward through the Resistance Line and onward.
After a JAC comes the BUEC. A shallow retracement during the BUEC is a good sign and indicative of the
change of character of prices as they rise upward. A JAC is synonymous with a SOS (Sign of Strength) and
BUEC with a LPS (Last Point of Support). They can be used interchangeably.
The rise from the #2 Spring is not being labeled a JAC as Volume is not expanding. The JAC comes later
where a notable surge of Volume lifts the price rapidly. Later the upper Creek is jumped on a Volume
surge. This is a major SOS.
Thank you to reader Josh for submitting Coffee futures for analysis. We are analyzing coffee using the
iPath Coffee Subindex ETN (symbol JO) as a proxy so the volume and price signatures might vary
somewhat from the futures contract. This is a good example for the current topic of JAC’s. A Creek of
overhanging supply is blanketing Coffee here. JO had a Spring and volume surged in. But almost
immediately the price bars became compressed and volume dried up as it rallied. Now it is back below
Support having corrected more than halfway back to the Spring on generally high volume. There is still
supply influencing the price action. Your homework is to write up what you would need to see to label the
subsequent price and volume action as a JAC and a BUEC. This is a real-time exercise and only for
educational purposes. It is not a recommendation to buy or sell.
9 Wyckoff Power Charting. Let's Review.note
All the Best,
Bruce
Wyckoff Power Charting
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff Power Charting. Let's
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Fraser | July 01,
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2015 at 07:06
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Previous posts have been devoted to the process of Accumulation. What
distinguishes Power Charting with the Wyckoff Method from other chart
pattern recognition tools is our focus on tracking the footprints of the
Composite Operator. A long term trend requires intelligent Accumulation of
very large quantities of shares prior to its launch. This must be done quietly
and deliberately. Therefore Accumulation is a logical, sequential and
identifiable process. Vertical charts with volume are the chosen tool for
tracking the activities of the Composite Operator. Accumulation is the
preparation phase for the Markup, and Distribution is the precondition for
the Markdown. Accumulation, Markup, Distribution, and Markdown is an ongoing cycle in financial
markets. In every cycle, the stories and the names change while the principles of speculation remain
unchanged. Follow the Composite Operator’s activities to determine where and when the successful
themes will emerge.
Accumulation Schematic #1. Wyckoff schematics model the key characteristics of the Accumulation area.
Variations will always occur between the idealized and the actual trading range. Identification of these
essential conditions is an attribute of Wyckoff mastery. Students will endlessly compare and contrast the
theoretical schematics to actual case studies to develop an eye for actual conditions and tactics. We can
thank Robert G. Evans for the adaptation of these notations and chart principles to the original Richard
Wyckoff teachings and thus significantly enhancing the Methodology. Source: Hank Pruden, The Three
Skills of Top Trading, Wiley Publ. 2007 with adaptations and modifications. Graphic by Roman
Bogomazov.
Phase A. (Blog post: “The Stopping Action of a Downtrend”) Supply has engulfed the market resulting in a
large downtrend. Toward the conclusion of the decline, selling becomes panicky with widening price
spread and volume. Preliminary Support (PS) is an early indication of nascent demand. The Selling
Climax (SCLX) follows on dramatic price spreads and a massive expansion of volume. Intensity in selling
is not sustainable and is followed by a brief and large rally attempt that is short lived. The Automatic Rally
(AR) indicates that the SCLX is completed. Phase A is fulfilled with a test of the SCLX and is labeled ST.
Phase B. (Blog post: “Accumulation Phase; Absorbing Stock Like a Sponge”) A Cause is built in Phase B.
Characteristic of this Phase is a trading range with extreme volatility early on that diminishes as it
matures. Volatility unnerves weak holders of the stock who weathered the prior bear phase but who finally
give up and sell/dump shares. The theme of the B Phase is Absorption. Wyckoffians will attempt to
determine if quality absorption is taking place during this phase. As long as supply is present Phase B will
persist, building an ever bigger Cause (which is measured using point and figure charts). Use Support and
Resistance Lines to define the outer bounds of the Phase B trading range. Comparing the duration and
extent of rallies and reactions in Phase B will often provide early clues to the degree of bullish absorption.
Phase C. (Blog post: “Francis Bacon Reveals the Nature of Trends”) Absorption is nearly complete. Smart
money Composite Operators ‘Test’ the stock to determine if it is poised to begin its Markup Phase. The
Test is to determine if the Supply has been exhausted and this is done by removing bids at Support and
allowing the stock to breach the lows. A breakdown here is a bear trap catching the last of the retail sellers
and short sellers in a false move down. This action, called a Spring, comes in three types. At times the final
low prior to the beginning of the Markup is a higher low. Wyckoff analysis deems this a Last Point of
Support (LPS) and it is just as important as the Spring (while possibly more elusive). Testing the lower
bounds of the Accumulation Range, as a final act before the all important start of the major uptrend, is
the lofty purpose of Phase C.
Phase D. (Blog post: “Jumping the Creek”) Successfully testing the lower trading range bounds in Phase C
will unleash a condition whereby Demand engulfs remaining Supply. The stock price will move up on
widening price spread and expanding volume. The D phase is the final markup out of the Accumulation
Range. Phase C and D are tactically important as you will want to make your initial purchases on a rising
scale during these phases. Colorful terms “Jump Across the Creek (JAC)” and “Sign of Strength (SOS)”
denote leaping price action. Reactions occur on narrowing spread and volume and are labeled “Last Point
of Support (LPS)” or “Backup to the Edge of the Creek (BUEC)”. In Phase D, Demand is in control and
other professional investors begin to recognize the emergence of a trend in this attractive stock. Their
Demand drives the stock price upward as it is clear very little Supply exists and each new buy program
pushes the price higher and higher.
Phase E. (Future blog posts) The stock leaves the Accumulation Trading Range and begins a primary
uptrend or Markup. Leaving the TR is major advertising to the institutional community that this stock is
in-play. The tools for Markup are Trend Channels, Demand Lines, Overbought Lines and Stepping Stone
Reaccumulation formations. The study of the Markup is a rich and rewarding Wyckoff subject.
The Accumulation range is a sequence of events that create context. They tell a real time story of
speculation. Phase analysis assists in the telling of the story and keeps us on-track with our tactics and
timing. Prior blogs have, more or less, followed the sequence of the Accumulation Phases. We will
continue with this format, with some breaks along the way. We will then circle back into these subjects
and drill down into more nuance and detail. Wyckoff is a mastery practice and the more drills and case
studies we do the better.
Context is a very important feature of the Wyckoff Method. Traditional technical analysis chart pattern
recognition tools offer no real contextual value. For example traders often get in trouble at the end of
Accumulation because they continually sell short the Resistance Line area. During Phase D and E they sell
short the same area again, not understanding the context of Phase C, D and E price behavior. Very quickly
they can find themselves in big loss traps as a Major Sign of Strength (SOS) jumps the stock price
permanently out of the Accumulation Range. They then discover that it is very difficult to buy (cover)
their shorts as there is an absence of Supply. Each cover is at higher prices. This is one example of the
value of Wyckoff context. As an example Phase D and E in Accumulation Schematic #2 sets up a false
short sale scenario for speculators after successful short sale campaigns in Phase B. This strategy ends
badly in Phase D and E as the markup has begun. For the Wyckoffian the only conclusion is to reach up
and buy this stock. This is an example of the power of context.
Accumulation Schematic #2 illustrates a condition where price makes a final test of the support area by
making a higher low rather than a Spring (as shown in Schematic #1). This is referred to as a Last Point
of Support (LPS) as it is the price point where buying support stops the decline while staying inside the
trading range. This higher low is the final stop prior to beginning a rally out of the TR and into a major
Markup. Source: Hank Pruden, The Three Skills of Top Trading, Wiley Publ. 2007 with adaptations and
modifications. Graphic by Roman Bogomazov.
Compare AAPL to Accumulation Schematic #1. Note the similarities and the differences between the two.
Judgment is an essential attribute of the Wyckoff Method. There are principles at work in each phase and
our job is to be intimately familiar with their attributes and thus to make the most tactically sound
decisions.
Join me next time as we begin to examine Phase E!
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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10 Making the Trend Your Friend.note
Wyckoff Power Charting
Making the Trend Your Friend
Bruce Fraser | July 09, 2015 at 08:23 PM
The Wyckoff Method is primarily a trend following system. The orientation and goal is to discover and
campaign the best leadership stocks for the biggest and best price moves. The jumping of the stock price
out of the Accumulation and into an uptrend is an important event. Mr. Wyckoff developed a very
thorough and thoughtful approach to identifying and managing uptrends and downtrends using charting
tools.
We have recently been studying the Accumulation Stage. In this post we will review some techniques for
evaluating uptrends. Uptrends and downtrends are where investment returns really stack up. As
important as Accumulation is in Wyckoff analysis, trend analysis may prove to be the more important
skill set. There are many places in an uptrend to jump onboard for the ride and have meaningful success
and profit.
The ‘Stride’ of an uptrend is often established early in the Markup stage (E Phase). The stock is indicating
the rate at which it intends to advance. This is a very valuable piece of information. The trend then tends
to follow the Stride, or rate of advance, for the duration of the uptrend. The lows, circled in blue, (see
above chart) at the June ’13 low and the April ’14 low set the Stride of the future advance of AAPL. Draw
this trendline, which is called the Support Line. The intervening high of December ’13 is the only price
point needed to draw the parallel Overbought Line. Notice how price climbs at a rate that is consistent
with the drawn trendlines. This rate of advance is referred to as the Stride. A year later AAPL has a
Throwover of the Overbought Line and is in an “Overbought” condition. An eight week correction begins
the following week. A second Overbought condition occurs in February ’15 and is a stopping action that
contained the AAPL advance for 4 months (so far).
The general procedure for drawing a trend channel is to identify two adjacent corrections of
approximately equal duration (the time of correction) and extent (magnitude of the decline). Decline
number 1 is about 9 points and is 7 weeks. The second decline is about 8 points and is 19 weeks in
duration. As an exercise try drawing the Support Line using the February ’14 low which was 8 weeks in
duration, you will discover that Support Line also has value. If you see a potential trend channel, draw it!
Reverse use of Trendlines is a useful, but not well known, technique for constructing trendlines. There are
times when the traditional Wyckoff Method for trendline construction is not possible. At such times try
using this approach. Seek two adjacent price peaks (red circles) and strike a trendline (see above chart).
Next find the intervening low price point and draw the parallel trendline. Note how IBB has four oversold
conditions (red arrows) that are tactically useful for initiating or adding to a long position. At the
conclusion of the advance a Throwover and Overbought condition stands out (BCLX) on the chart as the
upper trend channel line is breached. The subsequent correction (labeled AR) is on expanding volume
and sets the outer boundaries of the trading range. Time will tell if this will become Distribution or a
Stepping Stone Reaccumulation for another advance (subject of a future blog).
Congratulations to Worapak Jitpakdee for winning the head and shoulders contest with his submission of
CENX (see the Greg Morris blog of April 30th ‘Shampooing the Market’). I am always interested in what
took place prior to the conclusion of a move that contributed to the advance or decline. CENX had a
dynamic run up into the head and shoulders top. A classic trend channel formed with an Overbought
condition concluding the advance and beginning the top formation. CENX is plotted on a log scale in this
example. Convert the scale to arithmetic and try to draw the trend channel. When drawing trend lines try
switching between the two price scales to find the one that works best. Long uptrends are usually best
evaluated on a log scale, but look at both.
Trends will become overheated and climax, but that does not mean the uptrend is over. Often an extended
trading range forms and then is resolved with a new uptrend. A trading range that emerges into a new leg
up is referred to as a ‘Stepping Stone Reaccumulation’. In the CENX case a top forms, the trend is
concluded, and a downtrend begins. A Wyckoffian will develop the skills to distinguish between a
Distribution formation and a Stepping Stone Reaccumulation. We will study both conditions and
compare and contrast the distinctions between them.
Also at the risk of getting ahead of myself (apologies in advance) here is a point and figure chart (PnF) of
CENX. Mr. Wyckoff employed PnF charts to estimate potential price objectives using a horizontal count
methodology. It is beyond the scope of today’s post to explain the technique (more later). CENX is a
wonderful case study to blend trendline analysis and PnF price objectives. The purpose of PnF is to
establish the price potential of a campaign and then to track the unfolding of the trend. Here CENX has a
base count that takes it from the countline at $8 to a potential target price of $28 to $30. At the target
price, exhaustion sets in with a Buying Climax and a Throwover of the trend channel (see vertical bar
chart). Thereafter a top forms and a PnF down count is established with the potential to drop to a target
of between $5 and $10. CENX is below $10 and has met the upper price objective. Point and figure is a
very powerful and not a well understood technique. In this example it complements the trendline analysis
very well. Many thanks to Worapak for sharing this fine example.
All the best,
Bruce
11 Being a Chart Whisperer.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
« Previous Article | Next Article »
Wyckoff Power Charting
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Being a Chart Whisperer
Bruce Fraser | July 17, 2015 at 12:42 AM
Trend analysis using trendlines (Wyckoff Method) is one of the most valuable skills of a Wyckoffian. The
main idea is that a stock will advance at a set Stride, or rate of advance. Often (not always) the Stride can
be detected early in the advance and this can help with entry tactics. In this post we will construct
trendlines, which can be a very profitable pastime. Please review the prior blog. Our mission this week is
to take an additional look at the various ways that trends manifest.
The dominant line in an uptrend is the Support Line. The stock price will ebb and flow above the Support
Line. When price returns to the Support Line demand materializes and the rally resumes. For
construction two adjacent corrections (green circles) are used to strike this new trendline. Corrections
should be approximately the same duration of time and extent of decline. The overbought line is drawn
parallel to the Support Line using the intervening peak (third green circle). There was a pause of 5 months
in 2010 that approached the Support Line. A parallel line is drawn on that peak to see if price respects
that trendline (pink circle) and it does. In Wyckoff analysis, the purpose is not to draw the trendline with
the most touches, but rather to grasp the accurate rate of advance of prices for the foreseeable future.
Before IWM is out of its’ Reaccumulation, the Stride is set (green circles). This trend has been in force for
nearly four years. Look for trendlines inside bigger trends. In 2013 a helpful trendline forms on a smaller
scale and price respects that advance for nearly a year. Note how the Overbought line contains the
advance. When price decisively breaks below the steeper trend, shows weakness, and then attempts to
advance again, the trendline becomes resistance. Two trendlines stop the advance and turn IWM down.
The subsequent decline takes IWM back to the major Support Line.
Note how the first higher low in the GLW Accumulation represents the first anchor point for the Stride of
the advance. Price hugs the Overbought Line for nine months before returning to the Support Line where
it sets up a nice buy point on the breach of the trendline. Price can hug the Overbought Line for extended
periods and this is not necessarily a condition for selling. Future posts will address Distribution analysis.
GLW has fallen out of the trend channel and lost its stride.
Here is a case study where the two adjacent corrections take place after the first leg up in the advance.
Trendlines can be drawn for any time frame. Here a daily vertical bar chart is analyzed. The adjacent
corrections are circled. Note how price can bulge outside the trend channel but always returns into the
channel. Daily charts can appear more dramatic in volatility but follow the same principles. There are
numerous opportunities to swing trade this trend.
What is more fun than studying charts? Spend some time with these examples and then draw some
trendlines on your favorite trading instruments.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
« Previous Article | Next Article »
12 Rev Up with Reaccumulation Trading Ranges.note
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Wyckoff Power Charting
Rev Up with Reaccumulation
Trading Ranges
Bruce Fraser | July 24, 2015 at 10:22 AM
In the course of every long uptrend there are extended pauses. The longer the trend, the more pauses there
will be. In terms of duration they can last as little as a few months or as long as a year or more. They are
designed to torture long term holders with protracted periods of boredom. As with all aspects of the price
cycle, Wyckoffians have discovered the principles governing the dynamics of the trading range (extended
pause). In this post we will introduce the concept known as Reaccumulation.
Once a trend emerges from an Accumulation it begins to mature and changes internally. At a trend’s
beginning, strong holders (the Composite Operator) of the stock are the dominant owners and almost
immediately shorter term traders jump on board the uptrend and ride along. These trader types will not
hold the stock for the duration of the uptrend, they will repeatedly take quick profits and leave at early
signs of trouble. The Composite Operator has the intention of staying on the trend for the entire multiyear move. They expect pauses in the uptrend that occur along the way to the final conclusion of the bull
move. The C.O. will use these Reaccumulation phases to add to their holdings. Wyckoffians also use these
Reaccumulation phases to initiate a position or add to an existing holding.
As the trend continues to mature, the activity becomes dominated by trading, in contrast to investing. For
a period of time, accelerating momentum in an uptrend can be very profitable. Accelerating prices have
widening price spreads (daily and weekly) and high volume. Upward and downward volatility are a
signature of the late stages of a trend, and a condition of approaching exhaustion. Recall from our recent
posts on trends, that a common condition at the conclusion of an advance is the throwover of the top of
the trend channel. A throwover is a classic sign of exhaustion and often coincides with a Buying Climax
which is a stopping action of price. The uptrend becomes so overheated with speculation that a blowoff
price movement ends the advance. The Buying Climax is the beginning of one of two conditions:
Distribution or Reaccumulation. This is significant because one condition concludes with a resumption of
the uptrend (Reaccumulation). The other is the termination of the uptrend and the first step in the
formation of a top, referred to as a Distribution. Mr. Wyckoff can help us to make the all-important
distinction between the two scenarios.
The condition of Reaccumulation and Distribution begin with the same action and in the same manner.
This is a stopping action of the prior trend. What follows is a large and often long trading range.
After the Buying Climax (BCLX) an Automatic Reaction (AR) follows, which is a big and volatile
correction that is far larger than the corrections within the preceding uptrend. This is confirmation of the
BCLX, if we were unsure before. We label the BCLX and AR and immediately draw a Resistance line at the
peak of the BCLX and a Support line at the low of the AR. If this sounds familiar, it is because we apply
the same technique after a Selling Climax and an Automatic Rally establishing the outer boundaries of the
Accumulation.
We look for trading to be largely contained by the Support and Resistance for the weeks and months
ahead. During that time the Wyckoffian will study price and volume cues as to whether Reaccumulation is
occurring or Distribution.
Initially look for a series of Secondary Tests of the BCLX area (Resistance) and the AR (Support). Price
activity will be abrupt and volatile with big jumps up to the highs and reactions to the bottom of the
trading range. Weak holders of the stock are being shaken out by this extreme volatility. The AR will scare
the short term momentum traders out with some wicked losses. It all happens very quickly. But thereafter
the careful observer will see that the volatility is receding. Declines to Support will take longer to complete
and the volume will generally be lower with each succeeding reaction to the bottom of the trading range.
As the trading range grows longer and longer, trader pessimism is on the increase. The momentum
traders are long gone and speculators are fishing in different waters. Sometimes the catalyst for the pause
is a bearish news item or a disappointing quarterly earnings report that alarms traders.
The Composite Operator is using this turn of events to begin accumulating stock. Just as in the initial
Accumulation, the C.O. will systematically Absorb shares as prices correct toward Support and will cease
buying activity as the price rises back to Resistance. It becomes harder for the price to return back to
Support and will be reflected in the Vertical bar chart with narrowing price ranges and generally
diminishing volume. The principles of Absorption are the same here as we previously discussed in
Accumulation.
A common mistake traders make with Reaccumulation is to conclude it is Distribution and they initiate a
short selling campaign. We will study this in detail. For now, the key points to be made are that during
Distribution volatility and volume increase as the trading range matures and prepares for a bearish
downtrend. During Reaccumulation the opposite takes place because of the principals of Absorption.
Reaccumulations have various ‘looks’ and here is one example. Absorption is occurring as the trading
range progresses. With the Creek we observe diminished volatility and volume, an indication that the
Reaccumulation is nearly concluded. Once Absorption is complete, Jumping action will take the price out
of the trading range and into a new markup phase. This is the place where Wyckoffians get busy adding
shares to the portfolio.
There is only one Accumulation Phase at the beginning of a long term uptrend while there are numerous
Reaccumulations to be campaigned. In the above DJIA example, so far, there are four large
Reaccumulation phases in this bull market. Wyckoffians are keenly aware of Reaccumulation phases in
the instruments they are trading.
Reaccumulation phases are found in all trading instruments; stocks, commodities, bonds, currencies etc.
And they occur in all time frames; intraday, daily, weekly, monthly. Here is the GLD (gold ETF) uptrend
(monthly). Reaccumulation phases stand out on this larger time frame.
In future posts we will drill in and study various Reaccumulation patterns. For those of you asking for
homework, please study the schematic above and become familiar with it. It is only one of a number of
various ‘looks’ a Wyckoffian will encounter. But the essential elements of most Reaccumulation formations
are in this schematic. The second assignment is to read the Stocks and Commodities article, “The
Composite Man’s Bull Market Campaign” (click here for the article).
All the best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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13 Reaccumulation Roundup.note
Wyckoff Power Charting
Reaccumulation Roundup
Bruce Fraser | July 31, 2015 at 03:23 PM
During this and the next several posts we will focus our attention on Reaccumulation formations. These
are among the most useful and powerful setups that a Wyckoffian can master. Let’s concentrate on charts
in this post and become familiar with Reaccumulations in some of their many varied formations.
Wyckoffians emphasize the principles behind price action. Because we focus on principles, we can see the
footprints of the Composite Operator and the motives behind their activity. Many different price
structures can unfold and the Wyckoffian can still identify the C.O.’s activities and their intentions.
Accumulation, Reaccumulation, Distribution and Redistribution all have attributes that reveal the
motives and the objectives of the large, informed Composite Operator. We must become versed in the
language of the tape (chart reading) so that we know when, where and how to climb on board with the
C.O.
In the above AMZN example, at the BCLX there is sufficient evidence of exhaustion. This is confirmed by
the long grinding decline into the Automatic Reaction (AR). At this point there are two major scenarios:
Distribution has begun, or an area of Reaccumulation. In either case it will take months to a year or more
to develop. The BCLX and the AR become initial Resistance and Support for containing the trading range.
The AMZN Reaccumulation takes 15 months to develop. Note how AMZN spends most of the time in the
bottom half of the range. Traders become very bearish when prices keep returning to Support and cannot
lift to Resistance (the C.O. is very aware of the tendencies of the average trader / investor).
Price has a big character change when the Spring is Tested and a huge vertical Jump follows. The BUEC
at about $375 also demonstrates a change of behavior as the price has a very shallow back up or pause
prior to Jumping out of the entire Reaccumulation trading range. The second BUEC also gives up ground
begrudgingly and will not even return to the prior Resistance area. This is a bullish development.
When volume bulges up as price revisits the Support area we can tentatively conclude this is Demand by
the C.O. But it also indicates that there is ample Supply to be Absorbed and the price is likely to return to
these Support levels until the C.O. finds it difficult to buy stock (indicated by diminishing volume on the
decline to the support area).
As in this Apple example, Reaccumulation can be a brief affair occurring early in strong uptrends and
lasting only a few months. During an aggressive uptrend, the first low of the Reaccumulation is often the
lowest, as is the case with these two AAPL examples. Traders will often mistake Reaccumulation for a
Distributional top. Note how the second AAPL Reaccumulation resembles a head and shoulders
formation. Volume will generally diminish in the last half of a Reaccumulation, while volume will generally
remain high during the entire Distribution formation. When the uptrend (JAC) resumes, volume will
expand on rallies and contract during pauses and back ups (LPS and BUEC).
In this Polaris example, a dramatic Buying Climax (BCLX) is followed by a swift Automatic Reaction (AR).
Volume is declining on the AR which is an early clue that a Reaccumulation is beginning. In this example
the AR is the lowest low in the trading range. Much time is spent thereafter in the lower half of the range
but price is unable to return to the level of the AR. The C.O. uses the ample time spent in the lower part of
the range to buy as much stock as possible. A near vertical rise follows with minimal pauses.
When volume expands at Support in Micron Technology, we expect a bounce followed by a return to the
Support. Volume at support is evidence of Supply entering the market and the C.O. absorbing that Supply.
Subsequent attempts to return to Support should be on diminishing volume which indicates that sellers
are becoming exhausted and have liquidated their positions, and thus Absorption by the C.O. is nearly
complete. Also we attempt to visualize and draw the overhanging Creek of Supply that is pressing down on
prices and keeping them in the trading range. Eventually this Creek will be Jumped which is an important
indication of a resumption of the Markup.
14
BOFI has a dramatic runup followed by a Buying Climax and then a Selling Climax. This is a real headsnapper.
Though
we call it a Reaccumulation, it has many of the attributes of an Accumulation. It takes
When Termites Get into
Your
Trends.note
nearly a year to complete the Reaccumulation phase, which is likely the result of the two and a half year
uptrend that preceded the Buying Climax. The final low was a Spring that occurred two thirds of the way
through the Reaccumulation. The Spring sets up a rally to the top of the Reaccumulation and above it,
which is labeled a Sign of Strength.Wyckoff
On the BackPower
Up (BUEC)
the price touches the Resistance line from
Charting
above. Old Resistance becomes new Support.
Reaccumulations are occuring in the markets all of the time. Uptrends will have multiple pauses on their
path higher, all of which offer opportunities to get onboard and ride the trend higher and higher.
When Termites Get into Your Trends
All the Best,
Bruce
Bruce Fraser | August 07, 2015 at 01:47 PM
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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A trend is like a house on a foundation of wood. When the house is new the foundation is strong. Over
time termites burrow in and infest the foundation. The house looks structurally sound even though the
termites have compromised its underpinnings. Unexpectedly, one day the foundation gives way and the
house collapses. A trend starts with a strong foundation of ownership, but with time the trend becomes
infested with owners of stock who weaken the trend’s foundation. Eventually the trend reverses with an
abrupt failure of prices and the repair process begins. This rebuilding of the ownership foundation is
called a Reaccumulation. Wyckoffians are the inspectors of the trend. They carefully study the trend for
conditions of impairment and reconstruction. Once the foundation is strong again, it is time to move back
in.
A Reaccumulation is the result of a prior uptrend that needs to be consolidated. The composition of the
ownership of the stock will change during the course of the uptrend. When an uptrend begins, the float is
under very strong ownership (the Composite Operator). Invariably we can conclude that strong uptrends
are the result of the float being under the control of superior ownership. There comes a point in the
uptrend when there are enough traders involved, and longer term holders ready to take profits, that selling
activity stops the uptrend. An overbought condition of the trend, such as a Buying Climax, will emerge
and stop the upward movement of prices. Because of the changing nature of the quality of ownership,
prices can weaken quickly as traders rush to close out positions. This results in a swift downdraft that is
labeled an Automatic Reaction (AR). The Reaccumulation phase has begun. The remainder of this post
will be devoted to observations about the Reaccumulation phenomena that we have picked up through the
years studying and teaching on this subject. Gratitude goes out to fellow teachers and many students for
the brilliant contributions made to this and all things Wyckoff.
The tendencies we review here are generalities, conditions that tend to materialize at certain times and
under certain conditions. When possible we will attempt to benefit from the knowledge of these
tendencies. But the market is capable of doing anything at anytime. An abundance of caution is always
warranted.
A strong trend with superior relative strength is an indication of, and the result of, dominant ownership of
the float by the Composite Operator. Reaccumulations have the effect of purging the shorter term holders
from the trend. The Composite Operator (see earlier blogs) is campaigning and holding for the duration of
the multi-year uptrend. Therefore they will use pauses in the uptrend to Accumulate additional shares at
good prices. Thus a good uptrend is often a good predictor of a future big uptrend (with multiple
Reaccumulation phases along the way). Uptrends begat more uptrends. Understanding this, the
Reaccumulation phenomena becomes tactically very valuable to us Wyckoffians. Our goal is to identify the
conclusion of the Reaccumulation and the emergence of the next uptrend and to Accumulate, or add on
to, a position.
When strong hands still dominate the ownership of the floating shares at the conclusion of an uptrend, the
Reaccumulation phase will tend to be shorter in duration. Also the lowest price low will tend to occur in
the first half of the Reaccumulation phase (often within the first third of the entire time of the
Reaccumulation). Determining this to be the case will be the result of superior tape reading (chart
reading) skill. Often the Automatic Reaction or the Secondary Test of the AR will be the lowest price low.
Thereafter all of the remaining attempts to push back to the low will be met with buying of good quality
which will be demonstrated by higher lows on the charts. We can conclude that the C.O. has dominant
control of the supply of stock and that good demand is putting bids just above prior low prices.
Often the Reaccumulation of longer duration (a year or more is not uncommon) indicates that not all of
the available float had been absorbed in the Accumulation prior to the uptrend. Time is needed to vacuum
up these available shares. Large Reaccumulation phases can be counted with the horizontal Point and
Figure methodology to estimate the upside price objective (we will study this technique). Patience is a
virtue that Wyckoffians learn to cultivate within themselves when waiting for the final conclusion to large
Reaccumulations (as the C.O. does).
If there is an excess of shares overhanging the market (in the hands of short term traders) it can be
expected that prices will dive to the bottom, the support area, repeatedly. Such price weakness tends to
dislodge the shares and they are absorbed by stronger and more patient holders. If supply continues to
materialize (signaled by bulging volume on the drop from Resistance to Support) then expect Spring type
activity around the Support area. The Spring is a strategy of the C.O. to shake loose the last remaining
shares from traders and other weak holders. The Spring typically comes at the tail end of the
Reaccumulation and is followed by a robust Jumping action toward the Resistance area. Recall that a
Spring is a breach of the lowest price low of the trading range. As a general rule a Spring is more likely to
manifest during a Reaccumulation in an aging bull market trend. This is understandable when
considering the ownership makeup of a late stage trend compared to a new trend. The nature of the
ownership in an aging trend reveals the Spring as a useful tool for dislodging shares prior to a new
markup phase. For a review of the various types of Springs go visit Mr. Francis Bacon (click here to go to
the article).
WDC has a three-year Reaccumulation. Even on such a large time scale it has the essential attributes of a
Reaccumulation. The Test of the Spring #2 is the first tactical entry point. Thereafter the two JAC and
two LPS followed by the BUEC are quality places to enter or add to positions. Take some time to study the
smaller Reaccumulation formations circled in blue.
It is always valuable to study the next larger time frame for context. Here is the monthly chart of WDC. It
becomes evident the Reaccumulation studied in the prior chart was influenced by the all-time high of
1997. At that price area stiff resistance contained prices for five years before new all-time highs and a
robust new uptrend. There are some classic setups highlighted (circled) on this chart that you may wish to
zoom in and study.
EXPE is in strong hands. The first low is the lowest and thereafter each low is higher. This means that it is
being aggressively bid up within the Reaccumulation. Also each high is higher than the prior. The LPS,
two JACs and BUEC are excellent places to enter. The Backup to the Edge of the Creek (BUEC) has a
shallow retracement of the rally starting at the LPS to the SOS. A shallow retracement of a price run up
and out of the trading range is very positive. Note the Jumps after the BUEC, they are kicking off the
uptrend.
AZO is in a mature uptrend. A larger mix of traders increases the likelihood that a Spring type piercing of
the Support is needed to conclude the Reaccumulation. Both examples do produce Springs which can be
bought immediately as they are of the Number 3 type.
Recent activity in DIS highlights the value of trendline analysis. On the weekly chart a trendline is drawn
at the two adjacent lows (red arrows). At the intervening high a parallel overbought line is drawn. Note
the throw over and overbought condition. With the recent break back into the trend channel expect either
a Reaccumulation or potentially Distribution activity. In either case this is a change of character from
trending to trading range activity.
Reverse use of trendlines on the monthly DIS chart tells the same story using a different and longer term
method. With reverse use of trendlines the overbought line is drawn first using adjacent peaks (circled in
red). In the sixth year of this uptrend it finally throws over and becomes overbought. Monthly charts can
be very useful tools.
All the Best,
Bruce
15 Take the Fork in the Road.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Wyckoff Power Charting
Take the Fork in the Road
Bruce Fraser | August 21, 2015 at 04:15 PM
Modern American sage, Yogi Berra, advises that when we come to a fork in the road we should take it.
When stopping action stalls the price of a stock (commodity, ETF, etc.) a fork in the road is dead ahead.
As Wyckoffians we are confronted with either the conditions of Reaccumulation or Distribution. Stopping
action leads to one or the other. Reaccumulation is a pause in an ongoing uptrend, Distribution is the
conclusion of that uptrend. Whichever fork we choose, the decision has consequences.
It is somewhat ironic that Distribution begins with the same characteristic footprint as Reaccumulation.
It is as though Distribution is the ‘evil twin’ of Reaccumulation. Thankfully, with some practice one can
tell the difference between these twins!
Stopping action begins with Preliminary Supply (PSY) and culminates with a price surge called a Buying
Climax (BCLX). A Buying Climax is a brief and dynamic acceleration of prices on high volume. The price
bars are wide and volatile. This price acceleration is often associated with ‘good news’ (but this is not
necessary). Surging prices (and news) will bring in public buying and momentum traders. There is a
general ‘glow’ of good feelings toward the company and its future prospects. Such news gives investors and
traders the courage to buy. This Climactic action is actually a stopping action and will result in a range
bound market.
The Buying Climax and the Automatic Reaction (AR) will generally be the outer boundaries (resistance
and support) of the trading action for some period of time. During this extended trading range, the
condition will set up for either a resumption of the uptrend or a downturn into a bear market. We have
studied the activities of Reaccumulation in prior posts. In summary, absorption of shares is the primary
activity of a Reaccumulation. During Distribution the opposite is occurring, the disgorgement of shares in
anticipation of a large primary downtrend. The Composite Operator is selling ALL shares held.
The distribution of all of the shares held by the Composite Operator is a tricky business. It requires skill
and patience. The C.O. is buying wholesale (during Accumulation) and selling retail (during Distribution).
They buy when the news is bad and sell when the news is good. This is counter-intuitive but makes sense
with some deeper consideration. The C.O. buys when they can and sells when they must. We have studied
the dynamics of Accumulation and now let’s consider Distribution.
Who must the C.O. Distribute shares to? Sadly the public is who must buy shares and hold them
throughout the next downturn. Some public buying occurs during the uptrend and is intense around the
highest prices. When we say that the C.O. is selling retail it means that they must sell shares in small
batches to the public. This manifests in the footprint of increased volume. The C.O. has a huge quantity of
stock to sell and this takes time. Too much stock hanging over the market would cause prices to sag.
Therefore stock must be released carefully and slowly and only in quantities that the public can digest.
This requires skill.
Reaccumulation is the art of shaking investors out of their stock holdings with Springs and Shakeouts that
drive prices below key levels. Distribution is the high art of keeping prices inside trading boundaries to
encourage buying by the unsuspecting public. The C.O. strategy for doing this is to sell shares during the
rally phases of the Distribution and off the highs of the trading range. Then as prices slide toward the
bottom of the trading range, stop the selling and possibly even do some buying to support the price
around the bottom of the range. This goes on repeatedly throughout the Distribution process. The C.O. is
always in a race because there are multiple operators with the same intention of selling out. Early on in
the Distribution process there are relatively few large sellers, but as time goes on, more and more of these
large institutional sellers become aware of the action on the tape. This is when the trouble can begin for
the stock price and the bear market downtrend begins.
The Composite Operator is typically an institution, but not all institutions are Composite Operators. So
when a room full of large elephants tries to exit at the same time a stampede can occur. This results in a
cascading of prices lower and lower.
Over the course of the next few blogs we will dissect various Distribution activities and the proper tactics
for acting within them. In the meantime, study the schematic to become familiar with the essential
attributes. As we would expect, Distribution comes in various shapes and sizes. What is common among
them is the process of selling by large informed interests. Their price and volume signatures will be
engrained in our minds and become second nature.
A Dominant characteristic is the Upthrust after Distribution (UTAD). A UTAD is like a Spring in reverse
as it is a final and temporary move to a new high which is unsustainable. What follows is a brisk return
toward the Support area on widening price spread and volume. Think of a UTAD as being like a question;
How much buying power is there at new price highs? A rush of new demand will take the price away from
the prior peak (UT) and into a continuation of the uptrend. A failure will cause the C.O. to conclude that
buying power is weak and they will sell shares on a scale down toward support. Source: Hank Pruden, The
Three Skills of Top Trading, Wiley Publ. 2007 with adaptations and modifications. Graphic by Roman
Bogomazov.
(click on chart for active version)
This IWM chart was originally published in the June 7th blog (click here for blog). As a homework
assignment update the analysis using the schematic above.
In Schematic #2 the
rally fails to make a
new high and is
labeled a Last Point
of Supply (LPSY).
The LPSY rally will
have narrowing price spread and generally low volume, an indication that demand is lacking. Each rally to
a lower high is labeled an LPSY as that peak proves to be as far as the rally can lift as the markdown phase
begins. Source: Hank Pruden, The Three Skills of Top Trading, Wiley Publ. 2007 with adaptations and
modifications. Graphic by Roman Bogomazov.
(click on chart for active version)
This $INDU chart was originally published on June 7th. For extra credit attempt to complete the labeling
of this $INDU chart to bring it up to date.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate Follow
University, the
Bruce'sBouncing
teaching has focused
largely on Wyckoff Analysis. Learn
16
Ball.note
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Follow the Bouncing Ball
Bruce Fraser | August 28, 2015 at 04:04 PM
In 1965 Wham-O came out with the Super Ball. About the size of a plum, this hard rubber ball was simply
amazing. When dropped on a solid surface it was advertised to bounce back 92%. When slammed down it
could be made to bounce over a two story building. For kids it was a dangerous and endless source of fun.
The current market activity got me thinking about the Super Ball. And not only for the self-inflicted, plum
sized welts all over one’s body (and portfolio). Recent market volatility has a punch and it can hurt. When
we throw that ball against the wall we don’t expect it to come back and whack us with a mighty sting. But
it happens.
Distribution is somewhat like setting your Super Ball on the kitchen table. In a seemingly benign state of
rest, that ball, like a stock, is in a potential state of distribution. It needs a protagonist to engineer
running the Super Ball to the edge of the table (in this example the Composite Operator is played by a
bratty younger sibling). When the table is bumped the ball rolls to the edge. Though the ball appears to be
in a state of rest there is potential built into it that will be unleashed if it is rolled over the side. To the
delight of the younger sister or brother, one nudge sends the ball off the edge and it accelerates lower at a
blistering rate of decline. The drop is sudden and unexpected. Once the ball hits the floor it bounces wildly
upward retracing much, but not all, of the decline. Suddenly it turns back down and is bouncing off the
floor once again. You get the picture. The Super Ball keeps bouncing, each time to a slightly lower high.
Volatility is the greatest at the beginning and diminishes over time (think absorption).
A Super Ball at rest on the kitchen table and a stock in Distribution have much in common. There is pent
up energy begging to be unleashed. The seemingly inert state is deceptive as it creates the impression of
being benign, when it is not. Inaction becomes activity with a swiftness that is difficult to respond to. In
part, this is because the stockholder has been lulled into a state of inattention. Such a mental state makes
an appropriate market response difficult when stocks transition from pausing to dropping. I’ve heard of a
big market decline being described as like thunder and lightning. When one hears the thunder, the
lightning has already done the damage.
Therefore, as Wyckoffians, we learn to become more alert and vigilant as the conditions of Distribution
become evident on the tape. What follows Distribution is Markdown where prices fall like a Super Ball
dropping off the kitchen table. Once prices are in a free fall, strategy and tactics change. They become
more difficult. When a stock is falling it becomes wickedly volatile all the way to the bottom where the
final Selling Climax is followed by an Automatic Rally (the first bounce). As Wyckoffians we wait until the
volatility is out of the stock (after the Super Ball stops bouncing we pick it up) before we consider buying.
We will spend time on the Markdown phase later. For now let us continue to study the conditions and
nuances of the Distribution process with chart examples. Let’s see if we can tell when stocks are creeping
to the edge of the table.
Distribution is always messy. Volatility occurs at the beginning and usually increases throughout. Recall
that the C.O. is competing with others to get the entire position sold. Note how NTAP lives at the BCLX
price highs for many months. Prices near the highs is soothing to investors (the public and institutions)
while providing time for the C.O. to liquidate and to possibly get short. All of the attributes of Distribution
are evident in the smaller top. Meanwhile a mega top is forming around the smaller one. A fellow
Wyckoffian likes to call this the ‘Big Top’ because underneath there is a three-ring circus.
Note how the ball rolls to the edge at the second small Last Point of Supply (LPSY). Once it falls off the
table all hell breaks loose. It can be very difficult to respond to such sudden downward volatility. This is a
major reason for taking potential Distribution so seriously. We then focus on a key prior low, in this case
the AR, for some stopping action. The break below the AR results in a major Sign of Weakness (SOW).
This sets up a rally to the LPSY of the larger distribution. In future posts we will explore entry locations
and tactics.
MU is a classic UTAD. Note the low volume on the rally to the UTAD peak. There is a lack of sponsorship
on this rally. The high volume on the bar that tests the BCLX and ST peaks, is selling by large interests.
Churning two bars later on the UTAD bar is on the highest volume to date on the chart. Again there is
more selling at the final high. Here we introduce the concept of ICE which is not unlike the Creek concept,
but in reverse. ICE is a floating current of demand. We will spend more time on this useful idea in the
future. Note how the ICE reverses from demand to supply once the price drops below it. The price is
vulnerable to a steady decline thereafter. This is true of the Support Line when price goes from residing
above Support to below it.
After a long uptrend, TXN accelerates into a classic BCLX and thereafter sets up a wide and volatile
distribution. This is a daily vertical chart and thus additional perspective from the weekly vertical could
be helpful. Two Support Lines are drawn and both prove useful later on. The volatility is notable during
the declines and is accompanied by high volume (circled). Take the time to look at all of these charts on a
larger time scale to see the price action leading up to the Distribution and what occurred thereafter. The
Last Point of Supply is the highest that price can reach before selling engulfs the stock and turns it down.
An LPSY will not be exceeded at a later date, only lower highs lay ahead. Therefore an LPSY is a tactical
place to sell and possibly to short stock. There can be multiple LPSY points, each at a lower high.
Distribution is a most interesting subject and we will devote more time to it before moving on.
All the Best,
Bruce
17 Just Charts.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff Power Charting
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Just Charts
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Bruce Fraser | September 04, 2015 at 02:47 PM
A chart is worth a thousand words. So let’s study some charts. We continue our discussion of Distribution
and review some additional examples. Our goal is chart reading mastery. The ability to see changing price
conditions, in real time, is an important long term goal. This takes time, practice and devotion to
accomplish. An attribute of this skill, is the ability to identify and act at the proper junctures on the chart.
We have spent much time and attention to becoming familiar with the classic investment cycle
(Accumulation, Markup, Distribution, Markdown). Understanding the nature of price behavior during
each of these phases has been our emphasis. Future posts will focus additional attention on the best
tactical places for the Wyckoffian to enter trades and place stops. Chart reading is an exercise in decision
making in the face of uncertainty. We are always operating in the ‘fog’ of markets. As Wyckoffians we are
making judgments about the current position and probable future direction of stock prices. Our mission
is to maximize the return and reduce the risk in our campaign to make profits from stock price
movements. Also, as Wyckoffians, we seek to identify the best stock candidate from a list of potential
ideas. The stock poised to move the furthest and the soonest is the one we want to campaign.
These mastery skills come to us through countless hours of study and practice. I know of no other way to
achieve mastery and to overcome the inevitable pitfalls inherent in stock speculation, than through such
efforts. My goal is to accelerate your journey down this mastery path by illustrating the principles of the
Wyckoff Method and to provide examples for study. You are heartily encouraged to mark up as many
charts as time permits to advance your deeper understanding of the Methodology. Your experiences on
the path are of great interest to me and may be valuable to others as well. Feedback is helpful as many
others may have similar thoughts and comments. When possible I will include clarifying examples to your
questions and remarks. I hope to hear from you. Now on to the charts.
AKAM spends much time drifting up from the Support level to Resistance and quickly falls back. The C.O.
is selling stock on a scale up. The overlapping price bars with generally low volume is a telltale sign (see
April advance). Rising prices, though lackluster, soothes traders nerves (a call for Wyckoffian vigilance
and caution). The C.O. sells what they can, when they can. Their goal is to not depress prices as a result of
their selling activities. Thus the drifting upward tilt to prices. Note how quickly prices fall back to
Support. This indicates minimal demand and active large sellers. Also, there are large spikes of volume
near the high prices of the Resistance area indicating the presence of Supply. The May price break was an
eye opener to many large holders. We label this as the breaking of the ICE because of the sheer force of the
price decline. It is expected that price will have trouble lifting much as more large holders arrive to sell
shares after such a high volume decline. This results in the Last Point of Supply (LPSY) which is another
lower high that will not be exceeded again in this price cycle.
ISRG illustrates the point that Distribution can take many forms. A Wyckoffian’s mission is to identify the
telling signs of large interests selling their position irrespective of the look of the chart pattern. Wyckoff is
about tape reading principles as illustrated in vertical price bars and volume. Even though Distribution
can come in many shapes and sizes, the Wyckoffian can still determine the essential nature of the
formation and the motives of the Composite Operator. Here we see sharp breaks off of Resistance and
then downward drifting price action (see Feb. and May-June and Aug. of ‘08). Long periods of time where
stock can be sold. The highest price is made on the Upthrust (UT) and thereafter lower highs are being
made. After the UT we label subsequent attempts of price to return to the UT high as Secondary Tests
(ST). Volume on down days is generally greater than on up days throughout the Distribution.
GMCR makes a relatively short duration top. A dramatic surge of prices into a BCLX on a gap is
exhaustion of the uptrend. In a reverse use of trendlines we can see a throwover, which is an overbought
condition. A Buying Climax (BCLX), a test (UT) and then an LPSY constitute the peaks of the
Distribution. The sharp break from the UT to the Sign of Weakness (SOW) is wickedly fast. This looks like
ICE breaking and puts us on alert. The lackluster rally on diminishing volume to the LPSY is a major clue
of Distribution being in an advanced state. The Preliminary Supply (PSY) peak about equals the LPSY
peak, which often provides Resistance, and does so here.
We go with the BCLX label because of the dramatic Automatic Reaction (AR) which indicates the arrival
of large selling interests (C.O.). The Sign of Weakness is an important attribute of Distribution. Typically
lower highs and lower lows are evident within the structure of Distribution. If the low comes early in the
trading range structure and then higher lows appear as the trading range is maturing, it is more likely
that a Reaccumulation is being formed. Prior blogs have been devoted to this distinction and we will
return to it in future postings. With MS note the large expansion of Volume as the Distribution matures.
ICE is a concept of Support arriving at various price levels. ICE is typically broken with a jolt, as is the
case here. With breaking the ICE we expect that any subsequent rally attempt will be muted and not
capable of returning to prior high price levels. The stock price is very vulnerable to further declines when
it is below the ICE.
The Buying Climax is a very emotional price point, it is the culmination and exhaustion of the entire
preceding uptrend. All future attempts to rise above the BCLX will be met with selling at and around the
Resistance line. Even stocks that are ultimately going to higher prices in the future need to Reaccumulate
after a BCLX. This is why we draw a Resistance line at the price peak of the BCLX. Note in MS, the Up
Thrust and the Secondary Test are classic places for the C.O. to sell stock in quantity. Thereafter, a big
grinding decline to a SOW illustrates just how much selling was done at those peaks. There is simply no
C.O. demand to hold MS up and it falls to and below the Support Line.
Take some time to study the price action leading up to and after the Distribution Phase on the charts
above.
All the Best,
Bruce
The fall semester of technical analysis classes begins soon at Golden Gate University in San Francisco. Dr.
Hank Pruden and I will team teach FI354, the Wyckoff I class, on campus beginning September 5th. In
addition there are two other fall class offerings, FI352 and FI360. These classes can be taken individually
or as part of a degree program. For more information call Dr. Pruden at 415.442.6583 (click here to link
to the GGU website). Classes are available both on-campus and online (cyber campus), see the schedule
for additional details.
Dr. Pruden has arranged for individuals interested in the upcoming Wyckoff I class to attend the first
session prior to making the decision to enroll. This opportunity is only for candidates who are interested
in enrolling in the class for the upcoming semester. As space is strictly limited to the capacity of the
classroom reservations are a must. Please call Dr. Pruden at 415.442.6583 to reserve your space.
Also of note: Legendary technician (and stockcharts.com contributor) Martin Pring will be team teaching
FI 352: Technical Analysis of Securities over the internet (online) this fall on the GGU Cyber-Campus.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
18 Context is King.note
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Context is King
Bruce Fraser | September 11, 2015 at 11:18 AM
Accumulation and Distribution Schematics are like road maps (click here for the Distribution schematics
discussed in this article). They point toward where to go and how to get there. They are like road maps
without the mileage to the next turn. Just to rev things up, each time a Wyckoffian makes the journey
through Accumulation or Distribution the miles (time) to each juncture changes. No two journeys look
alike. Though this seems not very useful, it is the best that can be done. And it is valuable. These
schematics provide context, which is very important to the seasoned trader. Wyckoff does context better
than any other methodology.
Let’s pull Distribution together into a structure that will bring more clarity to the whole. We tell the story
of the uber trader known as the Composite Operator. The C.O. conducts market operations on such a large
scale that the individual trader is like flotsam in the wake of their massive campaigns. When the C.O.
conducts a campaign it follows a rational and logical sequence from beginning to end. Schematics are
visual metaphors for the unfolding of their trading activities. Schematics provide the context that
indicates the progress being made by the C.O. in their campaign to Accumulate or Distribute a position.
Wyckoffians learn to conduct their trading in concert with the activities of the C.O. while most speculators
unknowingly act in opposition to these big money operations.
Phases depict the structural shift of price behavior as Distribution matures to its conclusion. Each Phase
has a subtle and unique quality. By understanding the price and volume attributes during each Phase the
Wyckoffian, has a better grasp of when and how Distribution ends and Markdown begins. Phase analysis
is context. There are five Phases; A through E and by developing the ability to see their distinctions,
Wyckoffians become better at knowing what to do, and when to do it.
The C.O. has a mega position that must be distributed and this takes time and patience. A large and
persistent uptrend will be stopped as a result of the selling operations of the C.O. Phase A begins with the
stopping of an uptrend.
Phase A: Stopping action begins to check the advance of prices. Demand, in the late stages of an uptrend,
is the result of buying by weak hands; speculators, traders, some institutions, and the public. Preliminary
Supply (PSY) is a peak from which prices are turned down briefly, but forcefully. Thereafter, the uptrend
continues into the Buying Climax (BCLX). The BCLX can end with a bang or a whimper. Price often
accelerates with big leaping upward bars that create much excitement. Or the price advance can end with
narrowing bars and diminishing volume. The Automatic Reaction (AR) is a large, abrupt and sharp price
drop. This indicates that large selling interests have arrived and unloaded large quantities of stock. The
AR low is the price level where this heavy selling stops and Support is found. Draw a Support line at the
low of the AR and a Resistance line at the peak of the BCLX. A rally back toward the BCLX high is a
Secondary Test (ST). If the rally is stopped near the BCLX price level either a Distribution or Stepping
Stone Reaccumulation is forming.
Phase B: This is a period of time where price is in a trendless trading range bound by the BCLX and the
AR. Phase B is where the mileage metaphor is most apt. This phase can go on and on or be very short. An
Upthrust (UT) is likely, but not essential, during this phase. A UT is a minor breakout to new high prices
which is brief and fails quickly. Watch volume closely in this phase as it will tend to bulge near the top of
the range (near the Resistance Line) and stay high on the break back toward the Support levels. A tip off
of Distribution is that volume is high on the declines and with each succeeding decline off the Resistance
level, volume and volatility tend to be higher. Repeated Secondary Tests (ST) are common during this
Phase. Rallies from near the Support Line toward the Resistance Line are labeled ST in Phase B. The
variation in the number of these ST rallies gives each Phase B a unique character. The longer Phase B
lasts, the more opportunity the C.O. has to sell stock and this can result in the subsequent Markdown
being larger and longer.
Phase C: By the end of Phase B it should be evident to Wyckoffians that Distribution is at hand. The value
of Context is evident at this time. Phase B is a period to watch carefully and to sell stock on the ST. Phase
C is where the final upward test occurs. This is either a Last Point of Supply (LPSY) or an Upthrust After
Distribution (UTAD). Once a peak is in, prices decline persistently and often with alacrity. The final test,
which is the focus of Phase C, will conclude in two primary ways (with many variations). The leap into the
UTAD is characterized by wide price spreads and high volume. The price surges above the prior high
point and the Resistance Line (Distribution Schematic #1) before failing. This is an exhaustion move, but
often traps traders who buy believing that it is a continuation of the prior uptrend. The big price leap
encourages breakout buying. Prematurely bearish short sellers will often cover shorts on a UTAD
breakout. Expect a Test after the UTAD price peak and then a failure back into the trading range. The
Test of the UTAD is a strategic place for short sellers to initiate a trade and place the stop above the high
price of the UTAD.
The Last Point of Supply (LPSY) is a different type of concluding rally. The LPSY will end at a lower peak,
somewhere in the middle of the Distribution range (Distribution Schematic #2). The classic LPSY will
rally from around the Support area in a lackluster fashion with narrow, overlapping price bars on
diminishing volume. This poor activity will cause the Wyckoffian to conclude that demand is weak and
lacks C.O. buying sponsorship.
Phase D: This is the emergence of the Markdown. The character of price changes when it begins its final
descent down, through and out of the Distribution range. Price spread tends to become large and volatile
and volume is high while declining to and through the support area. Phase D is typically where we see the
breaking of the ICE and the Support area. Price then tends to live under the Support area where testing of
the ICE and the Support lines (from below those levels) is the final pause before prices fade away into the
Markdown.
The Last Point of Supply is the final peak before the continuation of the downtrend. Price will not return
to the peak of the LPSY again in this price cycle. There can be multiple LPSY levels on a declining scale
throughout Phase D. Short sellers will often use a series of LPSY peaks to average into positions placing
stops just above the LPSY as prices resume their decline.
Phase E: Markdown phase is in full force and will be the overarching theme for the foreseeable future.
Context is King. Consider the richness of the principals evident in the behavior of each Phase. Price and
volume behaviors are subtly, but significantly, different in each Phase. Mastery of the Wyckoff Method
promises the ability to know the best strategy and tactics for each Phase of Accumulation, Markup,
Distribution and Markdown.
In summary, Phases A & B are tactically where to sell into the BCLX, ST, and UT price peaks. Phase C & D
are the tipping points where Composite Operator selling is largely complete. The C.O. is no longer
motivated to support the stock to facilitate their operations, and therefore it is poised for a major
markdown. Short sellers are using Phase C, D and E to establish a position for a large and rapid decline.
Distribution is the process of the C.O. shifting from being a large holder of shares to a seller of these
shares. It takes skill to sell so many shares stealthily without putting price in a downtrend until all of the
stock is sold. There can be no question that the character of price must change as Distribution matures
from phase to phase. Grasping this as a tape reader is a skill we should all aspire to in the Wyckoff Nation.
All the Best,
Bruce
Exercise: Using the Distribution Schematics identify each Phase of Distribution on the case studies from
the prior three blog posts.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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19 Just Another Phase.note
Wyckoff Power Charting
Just Another Phase
Bruce Fraser | September 18, 2015 at 04:23 PM
Let’s continue our discussion of Phases from the prior blog post by getting right into chart analysis. Please
review ‘Context is King’ (click here for link) for more on Phases.
A classic BCLX is followed by an AR which sets up the Distribution trading range for AKAM. Note how the
rallies to the BCLX, ST, UT and LPSY are each less robust than the prior. The time spent dropping from
the UT and the LPSY peaks increases. This indicates there is active selling on a scale down off the peaks.
Phase A is the stopping of the prior uptrend. The ST ending in the vicinity of the BCLX establishes that
the prior trend has been concluded. The B phase is typically a long trendless trading range where stock is
being sold in large quantities by the C.O. Continued retesting of the high price area brings comfort to
stockholders, at their peril. Phase C is that final and brief test that fails and sets an important lower high,
which in this case is a LPSY. A Test of that high is typically made within days of the LPSY peak. A Test of
the LPSY is a classic place for Wyckoffian short sellers to enter a trade and place a stop above the LPSY
high. Phase D is the continuation of the markdown out of the Distribution range where the downtrend
begins (Phase E).
The ST of the BCLX stops the uptrend of CVX. A volatile and wide trading range indicates that conditions
have changed for the stock. The SOW undercutting the AR is another subtle clue that Distribution is at
hand. Phase A stops the trend and Phase B is active selling. Phase C in this case is a UTAD which hovers
above the BCLX peak for 9 weeks. Climactic volume in to the UTAD peak is evidence of active sellers.
Phase D has a Stepping Stone Redistribution (SSR). Here price pauses in the downtrend for a
considerable period and has no capacity to rally back to the top of the Distribution range, a meaningful
sign of trouble ahead. CVX breaks very hard out of the Distribution into Phase E. This proves to be the low
of the decline and then 5 months later tests that low after another SSR. Note how the UTAD sets up a
rapid and weak price formation where selling dominates to the conclusion of Phase D and into the
markdown of Phase E.
KLAC has a big selling event in September and October which is not preceded by a typical Distribution.
Then it has another near vertical run up into a more characteristic Distribution. PSY forms at the level of
the September peak with a shallow pause, followed by a Phase A BCLX and AR. We mark the first minor
Test as the completion of Phase A and the AR follows. This is a judgment call as the normal protocol is to
look for a ST after the AR low and that is the conclusion of Phase A. In Phase B the UT is followed by a
rapid decline into a SOW. This puts us on alert that the Distribution is progressing in a hurry. Even
though a quick rally forms into the LPSY, the SOW gives us a heads up that KLAC is inherently weak and
that we should be tightening stops if long the stock. The LPSY is not tested as it gaps right to the SOW
and then skids out of the brief Distribution, where a second SOW forms. A three week rally of poor quality
and low volume raises prices into another LPSY. This LPSY is tested and sets up a short sale just above
the Support line. Note that BCLX roughly equals LPSY and PSY roughly equals the second LPSY. When
price parity is formed around these levels Wyckoffians stop, look, and listen for reversals. Phase D is long
and drawn out and a large SSR forms in Phase E. Take time to look at the aftermath of these examples.
This NFLX case study is a particularly difficult form of Distribution. The final leg of the uptrend is where
the C.O. is Distributing stock. Distribution on a rising scale, in an uptrend, is challenging to detect and
evaluate. Once the uptrend is complete a virulent markdown begins immediately. Phase analysis is
difficult as everything happens so quickly. The big early clues are the long declines in the uptrend which
indicate large, active sellers. Also the throwover at the BCLX is a valuable indication. The breaking of the
Supporting trendline (Demand Line) is a wakeup call that all is not well. The two LPSYs at the Support
line are final touches to conclude the D phase and begin the markdown. There is evidence of hypodermics
in the final stages of the NFLX advance (hypodermics are discussed below).
PCLN is Distributing while in a rising pattern. Note how the final leg up is accelerating upward and away
from the Support Trendline. Attributes of Distribution are evident throughout (PSY, BCLX, ST, UTAD).
What is not evident are signs of price weakness on the way up. Sharply higher lows are being made into
the UTAD. This makes the uptrend look sound when, in fact, it is dangerously toppy. The tendency is for
traders to focus on the uptrend and not on the signs of Distribution. Wyckoffians are also subject to these
mistakes and therefore will use trendlines as a place to set trailing stops and sell stock. After the trendline
is broken, a price rally tests it from underneath (PSY=LPSY) and is a tactically sound place for short
selling.
Acceleration and exhaustion of price in the final leg up was referred to as a Hypodermic in Richard
Wyckoff’s era. FXI is a recent example of this phenomena (NFLX and PLCN above have attributes of
Hypodermic behavior in their final advance). Somewhat rare, it is still a form of Distribution that
Wyckoffians should be aware of. The daily chart below isolates the final blistering price advance into the
peak. Below the chart is a wonderful description of Hypodermics by Dr. Pruden.
“Around the end of a market advance, the market is sustained or revived by a series of periodic
hypodermic injections of artificial stimulants that shoot prices and volume up, only to quickly fade away.
The hypodermic could keep an almost dead bull on its legs for a while longer. Good news, analysts’
comments, public interest and ballyhoo help create a lethal tonic. As injections wear off quickly, the blow
off advance is given up and the market trades erratically, leaching back. The Composite Operator repeats
the stimulus several times in an attempt to reinstate the aged bull. His objectives are just about realized.
The result is a Teepee or UTAD distributive condition with descending peaks in a fast moving collapse, as
repeated hypodermics lose their punch and the bull’s stride is broken.” –Dr. Hank Pruden.
20
On the daily chart of FXI, after the PSY, price attempts to accelerate upward and away from the
supporting trendline. This ‘whooping up’ is short lived and prices fall quickly back to the trendline.
Breaking under the trendline, even briefly should be considered a Sign of Weakness and a warning of
inherent weakness, and active selling, of the aging trend. Climax type action is evident at the BCLX and
the ST. Phases become difficult to define, but some important signposts light the way. This advance is
steep and we cannot expect much warning of trend change. The BCLX is a stopping action indicating
Phase A. The Secondary Test (ST) could be the final peak and is provisionally labeled Phase B or C. We
expect the break of the trendline to kick off the decline to the bottom of the distribution range, which is
Distribution Definitions.note
around the PSY price level. That would be Phase D and thereafter Phase E. So the Phase work gives us a
way to think about or script what could happen.
Finally, emphasis on the supporting trendline is valuable and important. As we can see in these examples,
once the upward stride is broken the tone and trend of the market can change quickly. Trendlines often
Wyckoff Power Charting
prove to be the important last line of defense where stops protect capital and lock in the profits of
successful campaigns.
All the Best,
Bruce
Distribution Definitions
Bruce Fraser | September 24, 2015 at 12:27 PM
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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In recent weeks we have covered much ground on the concept of Distribution. We now know that
Distribution is a process, and that it takes time. Our mission, as Wyckoffians, is to become a keen
observer of these Phases and Events within Phases, which are markers along the evolution of the
Distribution phenomenon. Based on our observations, to then know what to do (sell or sell short stock)
and when to do it. We study the behavior of price and volume to identify these Events. For the Wyckoff
analyst, mastery comes from endless hours of chart study to develop an eye for the characteristics that
define these Events and Phases.
Combine this discussion with the prior one on Phase analysis as they go hand in glove.
PSY—Preliminary Supply. After a long robust uptrend, price becomes climactic with wide up-bars and
surging volume. Price then falls back as a normal correction ensues. Wyckoffians will recognize that these
wide up-bars and high volume is evidence of selling by large interests, and that the correction was
typically deeper than the prior corrections in the uptrend. In addition, the time taken during the
correction was longer than prior pauses on the way up. At the conclusion of this correction, price begins
another robust advance that exceeds the PSY price peak and continues to new highs. The rate of this new
advance may be as fast as, or faster than the run-up into the PSY. The PSY is early evidence of major
selling by the C.O. as the uptrend is maturing.
BCLX—Buying Climax. This event typically arrives with wide price bars and exceptional volume increases.
Often this price advance is accompanied by bullish news or earnings. Trader, speculator, institutional and
public buying is intense on this ‘good news’ breakout to new highs. The C.O. must sell into this advance
and therefore the volume will be large. At times the volume on the PSY run-up is higher, but typically it is
highest on the BCLX. The advance of price can end with a large, long, upward spike or it can conclude
with narrowing bars which demonstrate active selling over the market. In either case the C.O. is actively
selling stock. What follows defines and confirms the BCLX event.
AR—Automatic Reaction. A sudden and sharp retracement of price (typically) back to the area of the PSY
is large and unexpected. The decline arrives on wide price spread and high volume. This is evidence of
Supply now engulfing the market in a way that is more intense than any pause or correction in the prior
uptrend. AR is sudden, brief and over quickly. Once the AR is established, we will draw a Support Line
under the low price and a Resistance Line above the price peak of the BCLX. This is the outer bounds of
the trading range that we expect for the foreseeable future. As Wyckoffians, we are now on the lookout for
either a Stepping Stone Reaccumulation or a Distribution formation. Either event usually takes
considerable time.
ST—Secondary Test. Price momentum is a result of the run-up into the BCLX. Momentum is a condition
that allows the C.O. to sell stock for weeks and months to come. After the AR, there will be a rally back to
the resistance area defined by the BCLX. The rally may reach, or (slightly) exceed, the BCLX price peak
and this constitutes the Secondary Test. A return to the bottom of the trading range follows. The peak of
the ST will generally be marked by high volume and reversal price bars. As price turns back down volume
will normally remain high. This is all evidence of the heavy selling by the C.O., which generates the
resistance at the top. Multiple ST rallies should be expected.
UT—Upthrust. The UT is an extended form of a Secondary Test. An Upthrust results in a new high above
the BCLX peak. Breakouts during distribution bring in the momentum traders which are a source of
demand the C.O. can sell shares into. Therefore, a UT will not linger above the Resistance area for long
before returning to support.
SOW—Sign of Weakness. After a ST or UT, the drop to Support is marked by wide declining price bars
and expanding volume. At the conclusion of the decline, price breaches the Support line (drawn at the AR
low) and the prior low(s) set by the ST decline. Often the SOW indicates a subtle change of character,
where price weakness is widely evident. Once the SOW is in place, the Wyckoffian will become alert for a
final rally that sets up the conclusion of Distribution.
UTAD—Upthrust after Distribution. This last gasp rally from Support occurs occasionally, and will drive
the stock price above Resistance and the prior price peaks in the Distribution trading range. Price rallies
with conviction and often has big leaping bars and volume. Once at new highs, price can stay above the
Resistance area for days to weeks. The conviction of this rally and breakout will attract a following of
buyers. After a series of Tests, price begins to sink back below the prior peaks and in short order is
heading back to the Support area. After a UTAD, price becomes persistently weak to and through Support
and into a confirmed downtrend.
LPSY—Last Point of Supply. A rally forms off the Support area (often a SOW), which is particularly feeble.
The Distribution is now mature and demand has largely been exhausted by the blanket of Supply from the
Composite Operator. Overlapping price bars and low volume are signatures of the LPSY rally. The LPSY
will not have the lift to return back to the Resistance area before turning down. Last Point of Supply
means what it says. This is the highest and last price point where C.O. supply will stop the advance (the
remaining public demand) in this Distribution Event. Price will not return to this level again in this cycle.
Distribution of shares by the C.O. is largely complete. Multiple LPSY points on a scale down can and will
occur often.
Please study these idealized schematics of Distribution, but remember, an incalculable number of
variations can be revealed during the Distribution Phase. Mastery is seeing the overall principles (Phases)
at work and knowing when and where to act while operating inside these endless variations. Practice,
practice, practice.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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21 The Way of Wyckoff.note
Wyckoff Power Charting
The Way of Wyckoff
Bruce Fraser | October 02, 2015 at 04:25 PM
I am on the road this week so this will be a brief post. As you know, I continually emphasize the motives
and roles of the Composite Operator. We call the C.O. a heuristic, or a useful fiction. There are many large
interests at work in the markets simultaneously. Some of these large and skilled interests are at work in
the active stocks that the public is trading in. We assume that these C.O. interests are much better
informed and skilled in trading these stocks, indexes and exchange traded funds (ETFs). They wield a line
of stock that is massive in size.
So what was Richard D. Wyckoff trying to teach us about using the activity of price and volume (the tape)
to follow these large informed interests? He wanted us to know that their sizable activities could not be
hidden from those who knew what to look for.
What does thinking about the motives of the C.O. do for us as Wyckoffians? It helps us in two key ways.
First, it puts us in alignment with the thinking of the large interests. Our purpose is to patiently wait for
the juncture when the C.O. has completed their campaign of accumulating or distributing stock, and then
to ride along with them on the markup or markdown. All of our attention is focused on the juncture where
price can move and move now. With enough time and practice this skill is available to us.
Secondly, thinking like the C.O. allows us to role-play at being the "smart money" and if we do that long
enough we begin to associate into the role. By continually practicing this C.O. narrative, we gradually
leave our 'public' nature behind and develop new and better habits. This comes to us very gradually, but
with persistence, one day it arrives.
What is required, is to always ask what the motives of the Composite Operator are (a C.O. journal can
help). Always keeping in mind that it is a heuristic.
Students often have trouble seeing the charts correctly for labeling purposes. These skills come with
practice, practice, practice. Here is a little secret; find a chart attribute that you recognize and work
backwards. One big 'tell' on the charts is the Automatic Reaction (AR) late in an uptrend. Work backward
to find the BCLX, and then the PSY etc. The AR will be a price decline that is larger in magnitude than the
declines that preceded it during the uptrend. Another example is the breakdown through support and out
of the trading range. This is a clue that Phase D or E is at hand. Work backwards to study the volume on
the breaks and on the rallies. Soon you will discover the structure revealing itself.
Wyckoffians see what is important and actionable. As time goes on we will dive into the strategy and the
mental aspects of trading with the Wyckoff Methodology.
(click on chart for active version)
Here is a chart of IBB that was first published in July (click here for link). With the reverse use of
trendlines we see a throw-over condition. The Automatic Reaction (AR) is larger than the price
corrections in the uptrend, indicating that selling is intensifying. With the AR identified, we backtrack to
the prior peak to determine if it has BCLX qualities. We now suspect that a BCLX occurred, resulting in
one of two conditions; a Stepping-Stone Reaccumulation or a Distribution. Patience is required here, as it
will take time for either condition to mature into a new trend. Biotech is one of the most loved investment
themes of this bull market, therefore we know that it will take time for the C.O. to Distribute all of their
biotech holdings. Biotech stocks are heavily owned by institutions this cycle. If and when the institutions
fall out of love with this group, they will sell stock rapidly. IBB is a proxy for the activity of the entire group
and thus this ETF is ideal for Wyckoff analysis. We can assume that one of the most dominant themes of
this bull market to date has sizable C.O. Sponsorship. The push to a new high above the BCLX price peak
is a classic place for C.O. selling, so it is very important that prices maintain these new highs. Failure back
below the Resistance line could cause a cascade of selling, and it does with expanding price spread and
rising volume. UTAD price failures often break quickly to the Support Line. In this case a Major Sign of
Weakness (SOW) forms with an extreme break of the Support line prior to bouncing back into the
Distribution area. This example illustrates our point that a break below Support indicates that large
sellers are present, and that Phase D or Phase E is forming. We don’t need all of the labels to draw this
conclusion. The Support Line drawn from the AR low being dramatically broken tells us much. Now we
can go back and try to label the prior key points. Also, the rally to the second LPSY provides an
opportunity to sell IBB shares.
In future posts we will discuss the Markdown and Stepping Stone Redistribution conditions.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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22 The Unfriendly Trend.note
Wyckoff Power Charting
The Unfriendly Trend
Bruce Fraser | October 13, 2015 at 05:01 PM
Once Distribution is complete, the Markdown Phase begins. Declining prices after the completion of
Distribution can cause a ruckus. Sponsorship (of a stock, bond, commodity, ETF, etc.) by large and
informed interests is necessary to drive prices higher and higher. Eventually large sponsors abandon ship,
which they do through the Distribution process, and leave the stock in the hands of weak holders. A stock
in weak hands will go down. The price of abandoned stocks will fall quickly. Over the course of the next
few blogs we will study the Markdown phase and its attributes.
We are all familiar with “The Trend is Your Friend”. Downtrends are much less friendly than uptrends.
They are volatile, abrupt and generally difficult to trade. In a word they are unfriendly.
Downtrends can occur in orderly trend channels. Or they can gap down, pause, then gap down again, and
again, and again. During bull market uptrends, large sponsors will put a bid under the price which makes
countertrend declines more orderly. No such sponsorship exists in a downtrend. Therefore declines are
difficult to trade.
Trend channel construction begins with a Supply Line. This is a Trendline drawn over the peaks of the
emerging decline. Most investors are still hoping for higher prices and thus the notion of drawing a
downtrend line is not even considered. Wyckoffians must be ever vigilant. After the final peak, trouble can
start right away.
The “stride” of the decline can be set very early in the downtrend. This is the rate or pace at which the
price decline will cascade lower. Two lines compose the trend channel. The overhead Trendline is called
the Supply Line. The lower line is the Oversold Line. The Supply Line is the level that price will rally to
where it encounters overwhelming selling (or Supply). Each of these succeeding rallies is to a lower peak,
thus setting the downtrend. The decline from the Supply Line roughly goes to the Oversold Line. The result
is a declining trend channel, or downtrend.
To construct the Supply Line find two adjacent price peaks with the second peak being lower than the
first. Draw the downtrend off these two peaks; this is the overhead Supply Line. Find the intervening low
between the two price peaks, there draw a parallel line to the Supply Line. This is the Oversold Line. Look
for the trend channel to roughly follow this path lower. Think of a downtrend channel as though it is a
trading range with a declining tilt to it. Expect prices to bounce around the outer boundaries of the
channel with price often bulging beyond it.
After a period of decline the phenomena of the Stepping Stone Redistribution (SSR) can occur. This is a
sideways trading range that can last from weeks to many months. The SSR will generally interrupt the
downtrend channel. After the completion of an SSR the decline resumes and new trend channels will be
drawn, if possible.
(click on chart for active version)
The pace of the decline is established by two adjacent peaks in this excellent GMCR example. The parallel
Oversold Line is breached twice on the way down. The final drop below the Oversold Line is on a large gap
and is the SCLX. Thereafter, the tone changes and GMCR lifts right back through the channel and out.
Once out, the Supply Line acts as support, where before it was resistance. Wyckoff Methodology dictates
that three points are required to define a downtrend channel. Click this active chart and look forward a
year to see if GMCR is Redistributing for another decline or is beginning Accumulation.
(click on chart for active version)
TSLA had a volatile seven month downtrend. The inability to return to the Oversold Line in March
signaled diminishing downward momentum. You are encouraged to label the Accumulation that is
forming inside the channel (see support and resistance lines). Jumping the Supply Line and using it as
support is major evidence of a price character change.
(click on chart for active version)
A well defined downtrend in the IWM ETF has recently developed. Note how the trend becomes more
volatile as it extends. Climactic activity is apparent in the dramatic break below the Oversold Line. This is
stopping action and will likely lead to a Stepping Stone Redistribution or an Accumulation. Either
condition will take time and Wyckoff analysis should reveal which scenario comes to pass.
These three examples are illustrations of definable downtrend channels. There are situations where
trendlines and channels are nearly impossible to construct and this will be the subject of future posts.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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23 Trendapalooza.note
Wyckoff Power Charting
Trendapalooza
Bruce Fraser | October 22, 2015 at 03:29 PM
When trendlines are drawn, with the Wyckoff Method, it is like putting on 3D glasses. With proper trend
analysis two dimensional charts spring to life and reveal their innermost secrets and true intentions.
Demand lines, Supply Lines, Overbought Lines, Oversold Lines, Support Lines and Resistance Lines; they
all tell a story about the behavior and direction of prices. When we raise our skills at drawing these
trendlines we are putting ourselves onto the path toward Wyckoffian Mastery status.
Well considered, well drawn trendlines, channels and trading ranges bring a stock chart to life. The story
of where supply is coming in and stopping the price advance becomes evident and informs trading tactics.
A proper trendline will tip off the rate of advance or decline, the stride, at which the price will be moving
for the foreseeable future. Trend Channels indicate the nature of the advance or decline. Is it a wide and
loose channel which has big upward and downward swings contained within a large persistent trend? Is it
a stair stepping move with long sideways plateaus followed by a sudden sharp drop to a new price level?
These mini case studies are an introduction to the varied nature of downtrends and how proper trendlines
can assist in effective trading tactics. Wyckoff trendline construction reveals secret gems hidden in plain
sight. Our Wyckoffian 3D glasses provide the perspective of seeing our charts in a more useful way.
Last week began a discussion on downtrends and how to construct trendlines and trend channels. See
earlier posts for a discussion of uptrends (Link to these posts here and here). Let’s continue on with
additional downtrend case studies.
(click on chart for active version)
The stride of the trend is set early with HOG. The peak and the first lower high both arrive on bulging
volume. Volume confirms that supply is present and thus these peaks are ideal for drawing a Supply
Trendline. The low that forms between these two peaks is all that is needed for drawing an Oversold Line
parallel to the Supply Line, creating a trend channel. The validity of the channel is dramatically revealed
with a climactic shakeout of the lower trendline and then closes above it, sets the low and begins a rally.
This climax terminates the decline.
(click on chart for active version)
The 1998 decline in the Dow Jones Industrials has a classic downtrend channel. Volume is high in and
around the touchpoints of the Supply Line. Notice how poorly the $INDU rallies in August. It is more of a
plateau than a rally. This is typical price action when price is below the ICE. The plateau ends with a
dramatic decline that concludes with a climactic action below the Oversold Line. The climax and the
oversold condition (as determined by the trendline) stops the decline where testing and Accumulation
take place. Price rallies to the Supply Line where it reacts back to the lows of the Accumulation area. Once
the $INDU is above the Supply Line it is free to markup quickly.
(click on chart for active version)
Two useful trend channels are drawn on this CREE chart. The blue trend channel is constructed with a
‘normal use of trendlines’. The Pink channel is using the ‘reverse use of trendlines’. They illustrate there to
be more than one way to draw and interpret trendlines on a chart. Consider unbundling these trendlines
and redrawing them separately. Each method offers classic turning (trading) point junctures.
(click on chart for active version)
This is a weekly chart of the Dow Jones Industrials encompassing more than four years of activity. It
illustrates that trend channel construction is very effective in large time frames. Note the width of the
channel, it is huge. Volume at the 2001 peak and the 2002 lower high are evidence of supply and should
immediately cause a Wyckoffian to start drawing lines. The intervening low is very deep and climactic.
The width of the channel is a hint of things to come as the decline off the second peak returns all the way
back to the Oversold Line where it climaxes almost exactly on the trendline. The climax and the touch of
the Oversold Line stops the decline. An Automatic Rally (AR) follows and Accumulation begins. The
inability of the price to return back to the Oversold Line is an indication that $INDU is tired of declining.
(click on chart for active version)
Reverse use of trendlines is a technique that is useful with MNST. Two adjacent lows set up a very
effective trend channel that can breech the channel on both sides but cannot stay outside of it. It takes
climactic action to stop the decline and jump the price out of the downtrend. Note how climactic action
comes into play with these examples at the termination of the decline. Another signature of the
downtrend that is so well illustrated using trend channels is how the volatility increases as the downtrend
matures to its conclusion.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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24 Redistribution Ruckus.note
Wyckoff Power Charting
Redistribution Ruckus
Bruce Fraser | October 30, 2015 at 03:50 PM
Bear markets are wild and wooly affairs; quick and painful, slow and tortuous, and every other kind of
difficulty imaginable. Bear markets get less attention from market students than the other phases of price
action. Amnesia sets in for investors after a bear market. Who among us can remember the bear market
of 2007-09, much less the decline beginning in 2000? The truth is, for many, they are no fun to think
about. The prior two posts were devoted to the art of drawing trendlines and trend channels during
declining markets. The next few posts will be devoted to evaluating the concept of the ‘Redistribution’
Phase. This phase can loosely be described as a trading range that follows a downtrend. A Redistribution
is a pause that is preceded by a decline in prices and then is followed by a resumption of falling prices.
Multiple Redistribution Phases can occur within an entire decline.
The overarching theme of a bear market is an abundance of stock and a shortage of buying power. Stock
is in ‘weak hands’ and strong hands are not buyers. This is a toxic brew for stock values. Markdown Phase
is what we call the entirety of the Bear Market structure. But inside the Markdown is a multitude of price
behaviors, most of which should be avoided by investors, but some of which are trading opportunities.
The Redistribution is a pause that refreshes stocks for another downward run. A common mistake is to
evaluate the structure of Redistribution as an Accumulation (a bottom for prices). Therefore an important
goal for this discussion is to create skills in distinguishing one condition from the other. The ability to
avoid making a premature buying decision is very valuable to portfolio returns and for peace of mind.
Redistributions come in many varied shapes, sizes and timeframes. They tend to be messy with much
volatility and minimal predictability. There are some generalizations that are useful, and we will cover
these as we evaluate case studies over the next few posts. There are an infinite number of variations. We
will attempt to find the setups that are actionable for short sellers, and emphasize that investors should
avoid these downtrend conditions throughout.
(click on chart for active version)
ARMH advance concludes with a dramatic Hypodermic, a sharp break and then a nine month
Redistribution. Note the Upthrusts above the green box. These thrusts bring in buyers and keep the short
sellers off balance. Meanwhile the C.O. has little time to distribute shares in a Hypodermic and therefore
needs the Redistribution to get the bulk of their selling done. The second Redistribution takes a year to
unfold with the result being a stock price that goes from $17.50 to $2.00. The big break off of a
Hypodermic peak can freeze investors and discourage them from acting. The massive drop is a warning
that the bull phase is over for the foreseeable future. The first Redistribution is an important opportunity
to sell.
(click on chart for active version)
AMZN has a series of volatile stair steps lower. The trendline drawn off the early adjacent peaks shows the
trajectory of the decline for the remainder of the bear phase. The Markup phase that follows is shown to
illustrate the dramatic difference in volatility between a bear market and a bull market. Bear market
volatility is very difficult to endure for most investors and should be avoided.
(click on chart for active version)
From March 2008 to September 2008, GS is quiet and listless. This calm should not lull investors into
non-attention. The decline that follows is sudden and deep. Redistributions typically are resolved with
volatile and sharp price drops.
(click on chart for active version)
Note the dramatic BAC advance from $17 to $37 during the second Redistribution, all the while BAC is on
a path to $2.50. Some C.O. types are short sellers and they use Redistributions to sell remaining long
stock and possibly to establish short positions. All of the ‘tricks of the trade’ employed during Distribution
are put to work during Redistribution phases. We will explore these strategies and devices in upcoming
posts.
(click on chart for active version)
Trend analysis can be a useful tool during downtrends and Redistributions. A volatile downtrend becomes
more volatile as the downtrend grows old. The MS trend channel is breeched repeatedly, but is not
violated permanently. The Redistribution flirts with the Supply Line at the conclusion of the sideways
action and then turns to a rapid decline.
Redistributions are very common, elusive and difficult to trade. There are characteristics that can be
understood, identified and traded successfully. For most of us, avoiding the bear phases is the wisest
course of action. As Wyckoffians, we are students of all markets and we are always involved in the study of
the current market conditions. Then when the best opportunities present themselves we are rested,
engaged and ready to campaign the emerging trends.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
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25 Redistribution, the Evil Twin.note
Wyckoff Power Charting
Redistribution, the Evil Twin
Bruce Fraser | November 06, 2015 at 02:54 PM
Redistributions are messy. They come in many shapes and sizes and defy categorization. Therefore my job
is particularly difficult here. Our mission is to find actionable characteristics in Redistributions that
Wyckoffians can benefit from. Here is the problem in a nutshell. Recall that under Reaccumulation (pause
in an uptrend) a stock, index, ETF, or commodity is being absorbed or accumulated for a continuation of
the uptrend. As we have discussed in prior posts, absorption is the activity of removing stock from the
marketplace in anticipation of a major uptrend. This is primarily the activity of the Composite Operator
whom has the purchasing power to remove meaningful quantities of stock from active daily trading.
Absorbing stock has the effect of reducing the volatility of the stock, as the Reaccumulation period
matures to its conclusion, and the next uptrend begins. At the beginning of Reaccumulation, volatility is
high as a result of the many speculator and trader types who have latched onto the prior uptrend. The
early corrections against the uptrend are quick and volatile as shorter term investors take profits. Then, as
the sideways trading range develops, the corrections become more dull and contained. This is because the
C.O. and institutions are putting bids in to buy shares on pullbacks. These orders create support for the
stock price. Often the last half of the time spent in the Reaccumulation trading range sees the price
making a series of higher lows. Recall that a primary objective of the C.O. is to carefully accumulate shares
in such a way that they don’t force prices to begin the uptrend before all of their buying is completed.
Contrast that with the activity taking place during Redistribution. A stock in a primary bear market
downtrend lacks C.O. involvement. A stock requires C.O. ownership and active bullish campaigning to
keep the price high and rising. When the C.O. community abandons a stock it becomes vulnerable to bear
market behavior. In a downtrend short sellers will see enough profit that they will begin to cover their
short positions. Bear market downtrends tend to be volatile. Short covering is a buying activity that will
cause the stock price to reverse direction and rally quickly. A short covering rally is the beginning of the
Redistribution trading range. A sharply rising stock price will drive nervous short sellers out of their
positions. What happens during Redistribution is that a series of rallies and declines will occur with a
general tendency for the rallies to be sharp and volatile and the reactions to be less so. These rallies and
reactions jam the shorts and repeats until the less resolute among them have relinquished their positions.
Only then can the downtrend resume.
Not all C.O. types are short sellers, but the best short sellers are Composite Operators. Their modus
operandi during Redistribution periods is to sell short around the top of the trading range and to
potentially cover (buy to cover) some of their position near the bottom of the range. On balance they are
increasing the size of their short position throughout. The reason for the buying (covering) of some part of
their short position at the bottom of the trading range is to provide support and not prematurely push the
stock into a new downtrend before a meaningful short position can be established. For the C.O. and
institutions it is much harder to short enough stock for a downtrend than it is to buy stock for an uptrend.
Therefore Redistribution is like the evil twin of Reaccumulation. Born from volatility, Redistribution
remains volatile throughout and then ends with the emergence of another downtrend. Where
Reaccumulation ends with a whimper (typically) and the emergence of a steady uptrend, Redistribution
remains volatile and slides into a new downtrend with a bang.
(Click on chart for active version)
Redistribution begins with volatility and ends with volatility. Typically a Selling Climax initiates the
Redistribution process. The Redistribution process looks eerily similar to Distribution. A review of the
process of Distribution could prove helpful (to study the Distribution process and schematics click here).
On the ARMH case study; cover up everything to the left of the Selling Climax (SCLX) and compare to the
schematics and prior Distribution examples. Note the family resemblance. The blue labeling of the SCLX,
AR and ST are there to illustrate the similarities to the start of Accumulation. This is classic ‘stopping
action’. The red labeling illustrates Distribution and Redistribution attributes. Note that once the
stopping action is in place (primarily short covering) the footprints of Redistribution become evident.
The attempt to support ARMH takes place at the ICE. Note the series of lower price lows. This is a sign of
inherent weakness and is labeled as SOW (Sign of Weakness). Once the ICE is broken there is no longer
enough demand left to rally back into the prior trading range. ARMH is very vulnerable to a rapid
markdown when below the ICE.
After the Climactic action at the Upthrust (UT) the volatility and price weakness become dominant. The
rallies are weak, short in duration, and lack sponsorship from the C.O.
We will spend more time on the tricky business of Redistributions.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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26 Redistribution - A Case Study.note
Wyckoff Power Charting
Redistribution - A Case Study
Bruce Fraser | November 14, 2015 at 12:38 PM
The case study method is a preferred teaching tool in the Wyckoff classroom. Past real life market
situations can be explored on an accelerated basis. Students are able to gain market experience (in the
safety of the classroom) from a myriad of different and illustrative trading environments. Here is a case
study in our ongoing discussion of Redistribution.
Cisco Systems was one of the legendary bull campaigns of the 1990’s. CSCO offered stock to the public in
February of 1990 and it trended higher for the entire decade. All good things come to an end in the stock
market and in March of 2000, CSCO peaked out and began its’ first bear market. In this post we will
evaluate the four stepping stone Redistributions of that bear market.
During the 10 year uptrend; the C.O., institutions and the public fully embraced Cisco Systems. This was a
‘must own’ stock in institutional portfolios. When the top arrived it was sudden and mostly unexpected.
Very few were able to Distribute stock around the peak. Therefore CSCO was sold, by the C.O. and nimble
institutions, on a scale down off the peak prices.
The decade long uptrend meant that tremendous supply would come in to the market after the high was
in place. This stock would need to be sold during the Redistributions, and it would benefit the C.O. to have
lengthy Redistributions. More stock could be sold during quiet trendless trading ranges. The public
considers the early price breaks off the high prices as an opportunity to buy stock at bargain values. This,
of course, is a trap.
A variety of Redistribution formations are illustrated during the entirety of the CSCO downtrend. It does
not represent all of the possible ways that a bear market can stair step lower. It does show the tricky
nature of declining prices.
(Click on chart for active version)
The above chart highlights the Redistribution areas to be studied.
(Click on chart for active version)
Declines typically stop with climactic action which involves high volume and volatile prices (see SCLX on
the chart above). This portends a rally of some magnitude is coming and potentially the continuation of
the uptrend. The surge of volume on the decline off the $72 peak is evidence of Distribution by large
interests (the Composite Operator). The BCLX tests the PSY on high volume and stops the advance. This
warns that a lower peak is likely forming at the $62 price level. From June to October this Redistribution
develops the attributes of distributional selling. The ICE is broken in September on widening price
spreads and rising volume. Thereafter, a pause forms at Support with minimal lift, and the ICE is tested
from below. CSCO is vulnerable to price weakness directly ahead. Classic places to sell stock and sell short
is at the Secondary Test (ST) and the Last Point of Supply (LPSY). Also the breaking of the ICE and the
next LPSY represent the last quality places to sell. Diminishing price spread and volume on the rallies, and
expanding price spread and volume on the declines, is a sign that the downtrend will be resuming soon.
Breaking key price supports and prior price lows is labeled a Sign of Weakness (SOW) and is evidence of
overwhelming supply. Look for prices to pause (followed by rallies of low quality) after a SOW and then to
resume declining.
Principles inside of principles are at work. There is a big distribution that began prior to the final peak (as
illustrated on this daily chart with a red dashed line). And there is a complete distribution within the
Redistribution area (June-October). Notice that volatility is expanding as the stock price reaches the
conclusion of the trading range and the start of the markdown. Volatility discourages traders from acting.
Wyckoffians see the ramping up of volatility as evidence of a shift to the next phase and will prepare for
what is to come.
(Click on chart for active version)
During Redistribution 2 price stabilizes at a new lower level. In this case just below the prior
Redistribution. It is likely that the C.O. and institutions lent support to CSCO at $40 to $44 price level
with the motive of selling more stock. It is now evident that CSCO is in a bear market and many
institutions are just waking up to this new reality.
Redistribution 2 is shorter in duration and has a different structure. Lower lows and lower highs are
evident throughout. This means that large sellers are more aggressively selling on strength into the top
half of the trading range. After the LPSY price breaks on wide spread and high volume, support levels are
easily broken. Also, this is where the ICE is broken. ICE is a support zone that is defined by a wavy line
that indicates the tendency for support to come in, not at a price, but in an area. When the ICE is broken,
the support is broken, and price will not be able to get back above the old support. Old support becomes
new resistance. The rapidity and the force of prices in the drop is what helps the Wyckoffian to determine
that support has been breeched. Note how price revisits the ICE from below and does so a few times. The
ICE has now become formidable resistance.
(Click on chart for active version)
Redistribution 3 is the briefest so far, lasting about two months. It begins with a minor selling climax
(SCLX). Resistance is drawn at the two peaks (PSY and BCLX) with bulging volume (stopping action).
Note the volume and price spread on the rally to the LPSY. The volume is low and diminishing, and the
price spread is generally narrow. This is a rally of poor quality. The volume after the LPSY is expanding
while the price drops quickly back to the support area. There is no price lift off the support, then a gap
down and out of the trading range. We define this gap as the breaking of the ICE. This Redistribution is
complete.
There have been three Redistributions in succession, each forming just below the prior one. Consider how
difficult this is for short sellers. A trend will begin and then immediately stop and Redistribute for weeks
and months. If the short seller attempts to sell the breakdown (bottom of the trading range) prices are
soon jamming back up into the breakdown zone. Cisco Systems had been such an institutional favorite
that buy recommendations were being issued repeatedly on the way down. This creates buying support on
the way down and helps to levitate the stock for long periods.
Note that after the third Redistribution, a long protracted downtrend begins. The long term bulls are
beginning to give in and sell. A classic trend channel defines the stride of the decline. After Redistribution
#3 is completed comes the best opportunity to sell short and stay with the downtrend. Why does the
briefest Redistribution result in the best downtrend? Each of the three Redistributions puts progressively
more stock into weak hands. The cumulative effect is a long decline as the ownership is of poor quality.
(Click on chart for active version)
A series of climactic declines indicate that stopping action is taking place. The downtrend channel has
been extended onto this daily chart. Note what a long-drawn-out decline this has become. This is a
markdown of major proportions. Volume and price spread bulge during the final stages of the drop as
conditions become climactic. This is a classic opportunity for short sellers to cover and close out their
positions. The rally from the SCLX to the BCLX is about a 100% run-up. We must expect that many
institutions and individuals are in a loss trap, having bought in the vicinity of the all-time high prices.
Therefore, stock prices may retest the SCLX low and potentially go lower as these late buyers finally
capitulate and sell stock. The April low is taken out in September.
A buying climax (BCLX) throws over the rising trend channel on high volume. Thereafter the declines are
rapid and the rallies are labored (narrow spread and low volume). This Redistribution (#4) has the classic
attributes of a normal distribution. The two LPSYs are ‘on the springboard’ and represent good places to
sell short. A rapid decline to new lows follows.
Each of these Redistributions is unique. By studying these classic case studies we can accelerate our
learning curve. And, most importantly, they can keep us on the right track and out of trouble.
A subject of future blogs is how to take horizontal point and figure counts. Here we take the horizontal
count of each of the first three Redistributions. Note how they all have price count objectives that ‘nest’ at
approximately the same price level. Cisco climaxed and consolidated in the area of these count objectives.
Ultimately Cisco exceeded these counts. There is more to come on point and figure methodology.
All the Best,
27 Wyckoff Walk Around
the Clock.note
Bruce
Wyckoff Power Charting
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff Walk Around the Clock
« Previous Article | Next Article »
Bruce Fraser | November 20, 2015 at 12:19 PM
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We have just completed a walk around the classic market cycle. Let us take some time for review before
we move on to other aspects of the Wyckoff Method. If we are all on the same page regarding the structure
of prices during each stage of Accumulation, Markup, Distribution and Markdown, then we can speak the
same Wyckoffian language as we move onward. There is richness to the Wyckoff Method that allows us to
drill deeper and deeper into the nuances of this trading process. Our goal is trading mastery through the
understanding of the relationship of price and volume. And how it reveals the motives and the activities of
the large market operators (referred to as the Composite Operator). It requires the active sponsorship and
campaigning of the large operators to put a stock into an uptrend and keep it rising for long and bullish
uptrends.
Let’s review what we have done so far. By doing this we can emphasize that there is a rhyme and reason
for everything that happens in the financial markets. We, as Wyckoffians, are able to understand this
narrative and benefit from it with profitable trading strategies that involve following these large informed
interests.
Click on the title to link to the article:
Getting some Basic Wyckoff Terminology Under our Belts. The discounting nature of stock prices is
discussed. Stock prices lead or discount business conditions and if we wait for good news on the economy
to buy stocks, we will be a year or more behind the uptrend. We must employ a methodology that is based
on the most leading indicator, price, and not on economic conditions or the trend of earnings etc. The
four broad stages of Accumulation, Markup, Distribution and Markdown are introduced.
Richard D. Wyckoff's REAL Rules of the Game. The concept of the Composite Operator as the primary
force behind the long term uptrends and downtrends in stock prices is explored.
The Stopping Action of a Downtrend. Accumulation Phase; Absorbing Stock Like a Sponge. Both address
the anatomy of Accumulation. The first is about the stopping of a prior bear market downtrend. The next
is a look into how the Composite Operator stealthily accumulates large quantities of shares for a bull
market campaign.
Francis Bacon Reveals the Nature of Trends. Jumping the Creek. Both of these address how Accumulation
will conclude and the Markup begins. The attributes of Springs, Jumps and Backups are evaluated as they
are prime places to build positions and ride along with the C.O.
Wyckoff Power Charting. Let's Review. This post has valuable schematics that illustrate the various ways
that Accumulation phases can manifest. This is also a general review of the prior Accumulation blogs.
Making the Trend Your Friend. The art of constructing trendlines and trend channels, Wyckoff style, is
introduced. This is also a discussion of the Markup Stage.
Being a Chart Whisperer. Is a continuation of trend analysis with a discussion of some advanced concepts.
Rev Up with Reaccumulation Trading Ranges. Reaccumulation Roundup. When Termites Get into Your
Trends. These all deal with the important concept of Reaccumulations within uptrends. A Reaccumulation
is a price pause (a trading range) during a bull market.
Take the Fork in the Road. Follow the Bouncing Ball. The Way of Wyckoff. Distribution Definitions. Just
Charts. Addresses the stopping action of a mature uptrend and the emergence of the Distribution process.
Important schematics of the Distribution process are included. Also, there is a review of the ways that
Distributions mature and become a bear market downtrend.
Context is King. Just Another Phase. The principle of Phases is introduced. During Distribution and
Accumulation the behavior of price and volume will mature to the pivot point when the new trend is
initiated. Learning to identify price behavior in each of these Phases helps the Wyckoffian to know when
to act and when to patiently observe.
The Unfriendly Trend. Trendapalooza. These deal with Wyckoffian methods for drawing downtrend lines
and channels during bear markets. The latter is a discussion of the structure of the Markdown Stage.
Redistribution Ruckus. Redistribution, the Evil Twin. Redistribution - A Case Study. The nature of a price
pause during Markdowns, referred to as a Redistribution, is examined.
Accumulation, Markup, Distribution and Markdown are the four primary conditions of the classic cycle in
financial asset prices (as the Wyckoff Method defines it). This cycle is endlessly repeating. In these blog
posts this cycle is evaluated using the Wyckoff Methodology. This now provides us with a common
language as we move forward and deeper into the discussion of how to trade with the Wyckoff Method.
I am grateful for your interest in this blog and for providing very useful feedback.
All the Best,
Bruce
Ps. We will take a break during the upcoming Thanksgiving Holiday week. Have a wonderful week.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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28 The Laws of Wyckoff.note
Wyckoff Power Charting
The Laws of Wyckoff
Bruce Fraser | December 04, 2015 at 02:48 PM
Three Principles or Laws govern the structure of the Wyckoff Methodology.
Procedurally there are a series of Tests that determine buying and selling
decisions. There are nine of these Tests, or thresholds, to be passed for
making a buying decision, or a selling decision. The Nine Buying Tests and
the Nine Selling Tests all adhere to the overarching Wyckoff Laws. The
tools Wyckoffians use to evaluate the Three Laws and the Nine Tests are
vertical barcharts and point and figure charts. Our studies of Accumulation,
Markup, Reaccumulation, Distribution, Markdown and Redistribution are
Three Principles or Laws are at the heart of the Wyckoff Methodology. Each
chart analysis skills that prepare us to function within these Laws and Tests
addresses a characteristic of the nature of price and volume essential to a
for making buying and selling decisions.
trader's market knowledge (as seen through the eyes of the Wyckoff
Methodology). Here we will discuss the three laws and at a future time we will explore the buying and
selling tests.
Three Wyckoff Laws*:
Supply and Demand
Cause and Effect
Effort and Result
Supply and Demand. This principle examines the quality of ownership of the stock. When stock is in
strong hands it has been Absorbed. Very little stock is available for sale thus the Supply is low. Any
incremental increase in Demand for the stock will cause it to move up. When Demand is increasing and
Supply is low, expect prices to rise.
In a number of our early posts, we discussed the importance of Composite Operator absorption or
ownership of a stock. When the C.O. is actively campaigning a stock, they remove available stock from the
marketplace simply because they buy the stock and will not sell it. This can be observed throughout
Accumulation when the C.O. stealthily buys up shares during long grinding basing periods.
As Wyckoffians evaluate Accumulation and Distribution phases (through the study of bar charts and PnF
charts) the principle of Supply and Demand is being observed. The balance of ownership is shifting during
these large trading ranges. This shift in ownership will profoundly change the Supply and Demand
equation.
During Distribution the C.O. is selling and thus stock is going into weak hands. This has the effect of
releasing a Supply of stock into the marketplace. Since the very large and informed C.O. is supplying the
market with stock, a phase of Distribution forms, followed by a period of Markdown.
When Supply and Demand are about equal, the result will be a trading range where prices stay in a
trendless state. This will be where the important shifts between Supply and Demand will take place. At the
conclusion of the trading range, a new up or down trend will begin which reflects the imbalance of Supply
and Demand.
Cause and Effect. This principle relates to the first law, Supply and Demand. A Cause must form before
there will be an Effect. And the Effect will be in proportion to the size of the preceding Cause. A large
Cause will produce a large Effect, a small Cause results in a small Effect. Accumulation and Distribution
phases are periods of Cause building. The Effect is the subsequent Markup or Markdown.
The primary charting tool for estimating the potential Effect are Point and Figure charts (PnF). The
Wyckoff Method uses a horizontal PnF counting technique. For example, an Accumulation trading range
is plotted with a PnF chart. We then use Mr. Wyckoff's PnF technique for counting across the horizontal
range of the Accumulation (or Distribution) and estimating the potential projected movement. PnF
provides a powerful tool for ‘counting’ the Cause and estimating the Effect (see earlier posts for examples
of PnF charting and counting). Distribution would produce a ‘down count’ and therefore the Effect would
be declining prices.
A key to Wyckoff Analysis is to determine when a trading range is under Accumulation or Distribution
(see earlier posts on this concept). We can then estimate a price target based on the count.
Effort and Result. Volume provides Effort and the action of Price is the result. It takes Effort, in the form
of Volume, to drive Price upward. As an illustration; the Stock Price climbs out of the Accumulation
Phase and begins Marking Up. The Price Spread then should be wide and typically the close will be
toward the high of the day (or week). Volume expands from the prior days. A Wyckoffian would conclude
the Result (price advance) to be large on increasing Effort (higher Volume). This is Bullish for the
continued advance of prices.
Toward the end of a trend, the daily price spread begins to narrow in comparison to prior Markup days.
Meanwhile, the Effort of Volume is very high and expanding. The analysis of this condition is that large
Effort (Volume) is Resulting in a marginal price advance. Large Effort with minimal Result is a form of
divergence or inharmonious action between price and volume. This is an indication of a tiring uptrend
and a correction of prices is expected. The above example is only an illustration. There is much more to
consider in the evaluation of Effort and Result.
Exercise: Keeping these principles in mind go back to some of the early posts on Accumulation and
Distribution and attempt to adapt these concepts to the chart studies.
These principles form a structure for understanding the nature of price activity and how best to conduct a
speculative campaign. During our prior posts you have been exposed to each of these structural principles
of the Wyckoff Methodology. There is much more to come.
All the Best,
Bruce
*Source: Hank Pruden, 'The Three Skills of Top Trading', Wiley Publ. 2007 with adaptations and
modifications.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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29 The Illustrated Wyckoff.note
Wyckoff Power Charting
The Illustrated Wyckoff
Bruce Fraser | December 11, 2015 at 11:06 AM
In a continuation of our discussion of the overarching principles of the Wyckoff Method, let’s do a visual
case study. There are three principle Laws that compose the Wyckoff Method*:
The Law of Supply and Demand
The Law of Cause and Effect
The Law of Effort and Result
We become master Wyckoffians by developing visual knowledge of these principle laws in our chart
reading. This becomes the foundation of the skill Mr. Wyckoff called ‘Tape Reading’. Through our innate
understanding of these laws we raise our awareness of the reasons stock prices move in the ways that they
do. And we become better and better at selecting the best candidates for speculative campaigns. Endless
repetition assists us on the mastery path.
Here we will illustrate the concepts introduced in the prior post. It will help to have The Laws of Wyckoff
at the ready for reference (click here for link).
In the Wyckoff Method every process has a reason for being. Everything included in the Methodology
conforms to these three laws. Mastery is the product of becoming ever more skilled at identifying the Laws
and their nuances at work. You are encouraged to go back through the prior posts and apply these Laws to
the chart work. We will do some of that here, by revisiting a prior AAPL example and illustrating the Laws
and the essential principles at work (click here to link to another AAPL chart).
(click on chart for active version)
When Supply exceeds Demand, price falls as the decline in the red box demonstrates. Stock is in weak
hands. Supply equals Demand during the sideways trading within the yellow box. Wyckoffians seek to
identify the footprints of the Composite Operator (C.O.) during this trendless trading. The C.O. will use
this trendless period to Accumulate (as illustrated here) or Distribute a position. Absorption is the activity
of building a stock position, and thus removing stock from the marketplace. Accumulation is occurring.
When Absorption is effectively complete all that is required to unbalance the Supply / Demand
relationship is the slightest increase of new buyers. Supply is low and Demand is on the increase. Even a
slight increase in buying can spark a new uptrend as the price action in the blue box illustrates.
Imbalance of Supply and Demand creates the potential for large trends that can go on for multiple years.
Effort and Result has to do with the interplay of volume and price. AAPL is a particularly rich case study.
Note volume expanding as price marks down. The volatility of the price bars and the rate of decline is
increasing. The Effort of volume and Result of price are harmonious. Note how the highest volume week of
decline is only marginally down (and the weekly range narrows from the prior week). This is inharmonious
action of price and volume. Effort (volume) without a commensurate Result (price) is another way to say
it.
There is a three week dive to a new low in November 2008. Each week is on high volume and note that the
spread of each bar is less than into the climax low in October. It can be seen that the November low is
below the October low, but price is decelerating. This is inharmonious downward action. Effort in volume
is not Resulting in dramatically in lower prices, again this is inharmonious. This is early evidence of
stopping action of the large downtrend.
Turning to the uptrend, notice the volume signature, the effort being applied to prices. During the jump
out of the Accumulation range, the price bars are wide and closing near the high of the weekly range. The
Effort of volume is actually declining with each weeks advance. This seems to defy the market wisdom that
price should rise on expanding volume. The Wyckoffian perspective is that most of AAPL stock has been
absorbed by strong hands by the end of the Accumulation. Therefore it will not take much demand to put
prices up, because there is very little stock for sale. This is a large Result with modest Effort which is
considered bullish early in a new bull market. As a contrast, note the volume in May of 2009 as the price
rallies into a five week pause. The volume (Effort) is higher each week and the spread of price is
compressing, which is evidence of selling. This is an inharmonious action of Effort without a comparable
Result. As the uptrend resumes, volume remains steady and does not spike as prices grind higher. Effort
and Result is a concept that is applicable to monthly, weekly, daily and intraday charts. It is difficult to
master but well worth the effort to learn.
Point and Figure charts provide a tool for estimating the Cause that has been built during an
Accumulation (and also for Distribution). By counting the columns in the Accumulation, a calculation can
estimate how much of a Cause there is. This Cause, or count, is projected upward to estimate an Effect, or
price objective. In the above example AAPL has built a count that projects to $50. Mr. Wyckoff was a big
proponent of employing PnF charts for estimating price objectives. PnF charting and counting is an
elegant and obscure tool that addresses the law of Cause and Effect.
All the Best,
Bruce
*Source: Hank Pruden, 'The Three Skills of Top Trading', Wiley Publ. 2007 with adaptations and
modifications.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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30 Crude Oil; How Low Can it Go?.note
Wyckoff Power Charting
Crude Oil; How Low Can it Go?
Bruce Fraser | December 17, 2015 at 11:02 PM
On Monday of this week, the top four stories in the upper left hand column
on DrudgeReport.com were about the weakness in oil prices. This may have
been a bell ringer of an indicator. Some consider Drudge to have his finger
on the pulse of the news, and in this case the oil patch, and that pulse
appears to be panicky. Let’s investigate crude oil prices from the perspective
of Mr. Wyckoff.
Using Light Crude Oil prices ($WTIC), let’s put together a case study going back to 2008. When we
observe our Wyckoffian tools working in a historical market setting, we gain confidence in our analysis of
the current situation.
(Click on chart for active version)
This 2008 top is a ‘Hypodermic Top’ which arrives and turns down quickly, with a UTAD at the end. Even
quick forming tops can make large distributional PnF counts. As can be seen in the chart below, the
Distribution count carries to a price objective of $14 to $32. The final low was made on a Spring just
below $34. This is within $2 of the upper count objective and a solid hit.
There are always anomalies encountered in Wyckoff. In this case, it is the lack of a Climax on volume into
the conclusion of the downtrend at the lows in early and late December 2008. An early December low has
climactic qualities as it accelerates to a low and the volume spikes. But the volume is not appreciably
higher than the average of the entire decline. The late December low actually comes on diminishing
volume and is followed by an AR. We call this low a PS because of the low volume. Next there is a
constructive AR which rallies forcefully on expanding volume. We draw the lines of Support on the PS and
Resistance on the AR. After the AR, the decline is quick and the volume expands which demonstrates that
supply is still overhanging $WTIC. It is not time to buy yet as supply is present. The next decline into the
Spring is Climactic with a huge bulge of volume on a whoosh down to a minor new low. This is a Spring
#2 and immediately turns back up into the Accumulation area. We judge that the Climax is in. The
Spring and the Climax together is unusual. The flushing of the lows on volume is the cathartic event that
allows the market to freely run up to the top of the Accumulation area and out with good Jumping action
and a Backup to the Edge of the Creek (BUEC). Springs, Jumps and BUEC can all be bought.
$WTIC rises in a Hypodermic to a final peak (inset weekly chart). Distribution counts can build up
quickly as $WTIC rises into a narrow peak and turns down. The area of this count is the red circle on the
previous chart. Despite the short period of time, a count builds for a potential decline to $32 to $14. The
ultimate low is just under $34 and is considered a PnF hit.
A count of the 2008-09 base (see blue box in top chart and PnF above) offers a price objective of $115125. Waiting for the completion of Accumulation reveals a meaningful count objective and emphasizes the
value of patience. Note that the price objective is met at 114.83 in May of 2011 (another good hit from our
PnF charts).
(Click on chart for active version)
After that peak, crude oil traded in a range and began breaking down (above chart) in June 2014. This
decline is now nearly 18 months old. There is a series of four lows, each lower than the prior. These four
lows allow for the reverse use of trendlines. On the most recent drop, notice the large declining bar on very
high volume. This has Climactic qualities. Also, there is a minor breach of the trendline into the $34 area
which is an oversold condition. This may not be the final low for crude oil but it could stop the decline for
some period of time.
Wyckoffian tactics would make the case that a Climax is an appropriate juncture to begin covering shorts,
but not yet ideal for buying. A good Climax will be followed by an Automatic Rally (AR) and then a retest
of the area of the Climax low (we will watch for this development). A successful test would be an
additional place for short sellers to cover remaining positions. As we studied on the 2008-09 charts, time
is needed to build a Cause for a meaningful new rally in crude oil. This may be as long as 3 to 6 months
into the future (first half of 2016). Studying the above chart, we notice price congestion during most of
2015. It is possible that the trading in this last year may become part of a PnF count for the future. For
this to happen a powerful Sign of Strength would be needed to lift prices up toward the April-May 2015
peak in the $60 area followed by an attempt to return back toward the lows. This is ‘a big if’ at this point
and for now we will watch with curiosity.
$WTIC touched $34 this week and has thus fulfilled the minimum PnF objective above. A continuation to
the $28 area is entirely possible as Climaxes are hard to stop (and there is a viable PnF count to $10 not
shown here, that we must keep in the back of our minds). At year end, volatile and panicky trading can
exaggerate the trend in force. So year-end could be a good place to expect a low after an extended decline
(note the December lows in 2008). That is why tactics are so important. The use of both PnF and Vertical
charts together really strengthens our analysis.
In conclusion: Hopefully you enjoyed and found value in this Crude Oil case study. We will return to it at a
later date to review our work. For now, remember that a Climax is for covering shorts (for those traders so
inclined) and will be followed by a sharp, but brief, rally (AR). To be followed by a Secondary Test that
may or may not get to the Climax low. After a meaningful Cause is built (PnF count) we would begin to
look for Springs, Jumps, and Backups to buy for a worthwhile trade. If none of this materializes we would
be on the lookout for a Stepping Stone Redistribution and another leg down.
All the Best,
Bruce
Ps. We will take a break during the upcoming Christmas Week. Have a wonderful Holiday.
31 Intro to Point and Figure Construction.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff
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Intro to Point and Figure
Construction
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Bruce Fraser | January 01, 2016 at 05:49 PM
As we enter 2016, it seems like a good opportunity to introduce Point and
Figure chart construction. In future posts we will spend more and more
time on the techniques of PnF counting using the Wyckoff Method. We will
create a foundation for the process of creating PnF charts that conform to
the Wyckoff Method.
PnF charts are employed in numerous methodologies. The Wyckoff PnF
method is a somewhat obscure one that takes a HORIZONTAL count and
projects a price objective. The price objectives calculated on charting
websites almost universally use a VERTICAL count method. The Wyckoff
principal at work here is the Law of Cause and Effect. The horizontal count
represents the Cause that has been generated and the price objective is the
Effect being projected or estimated.
Wyckoff PnF requires a unique chart construction. The good news is that
StockCharts.com has an excellent PnF charting engine. It is ideal for our work with the Wyckoff Method.
In this introduction we will review basic construction techniques and in future entries we will study how
to take counts.
Traditional vertical bar charts have time as the constant variable. Either daily, weekly, monthly or
intraday; each bar is a time constant. The next, and each future period, will get a plot (bar) at a price. The
PnF chart’s horizontal axis is the result of volatility, not time. A plot in the next column of a PnF chart
requires price movement in the opposite direction, either upward or downward by a minimum number of
boxes. This is what is meant by ‘3 box reversal’ or ‘1 box reversal’. To move right to the next column there
must be a reversal of trend by the required number of boxes. During a basing period much volatility can
occur within a trading range. We have described this as Accumulation (or Distribution). Large PnF
counts can form during such periods, while the price of the stock is confined to a trading range (click here
for examples from the prior blog). Wide swinging trading ranges can create many columns of reversals.
Wyckoff has a PnF technique for counting this horizontal trading range and estimating the upward or
downward price objective. This estimating technique is very powerful and helps to establish reward to risk
parameters for a trading campaign. We will integrate these tactics more and more during future blogs.
Many charting engines that have PnF capabilities do not use the Wyckoff conventions. StockCharts.com
has developed a very Wyckoff friendly PnF tool for our use. For those of you who have not yet subscribed to
StockCharts.com, now is the time. StockCharts.com is a great value simply for the ability to construct and
save Wyckoff PnF charts. Also subscribers have access to intraday PnF charts which are very cool and very
powerful. Down the road we will study intraday charts as they are tactically very useful.
Think of one box PnF charts as being on a comparable time frame to a daily vertical bar chart. The one
box PnF method requires one box (pay attention to scaling) reversal of trend to move to the next column.
At the conclusion of a downward move (column of ‘o’s), a reversal upward of one box will cause a move to
the next column to the right and a plot of an ‘x’ (over one column to the right and up one box from the
prior plot). Each full box up will result in a plot of another ‘x’ above the prior (in the same column). This
occurs until a full box reversal down occurs and requires a move to the next column to the right and down
one box. The caveat to the one box method is that a column must have at least two entries before a new
column can be started. Many charting engines get this wrong, while StockCharts.com automatically does
this plotting correctly. Note in the BA example, there are many columns with two entries and then a plot
in a new column. For now just remember that two entries in each column are required to get an accurate
horizontal count (see Dr. Pruden’s book, ‘The Three Skills of Top Trading’, pg. 112 for an excellent
construction example).
PnF charting uses a scaling rule. Over $100 a unit (box) is two points. From $20 to $100 a box is one
point. Under $20 and down to $5 is a half point. For an excellent tutorial on construction, see this Chart
School article: (click here for link)
Think of a three box PnF chart as being on a comparable time scale to a weekly vertical bar chart. A
reversal requires a three box (for IBM each unit is $2 because it is trading over $100 and so a reversal
requires a $6 movement) change of trend to move to the right one column. Wyckoffians will study the
vertical bar charts for the nuances of price and volume. PnF charts will be used for volatility analysis and
price projection estimates.
I am often asked what the logic is that makes horizontal counting of PnF charts work for projecting price
objectives. All I can say is that PnF is among the oldest charting methods. Trial and error going back
many decades has established the procedures taught by Mr. Wyckoff. Experience derived from endless
practice will convince the Wyckoffian of the value of the method. In the classroom, we found that PnF
charting is frequently difficult for students to learn. So we devoted much of the second semester to PnF
construction and counting methods. If you find that you are struggling with these concepts, you are not
alone. I will do my best to offer tips and tricks that will speed up the learning curve. Confidence will only
come through much practice.
Look at some of your favorite stocks and indexes using the settings described above. Compare vertical bar
charts to the PnF charts and become familiar with the ebb and flow of prices as they are plotted on each
chart type. Pay attention to the congestion areas where the horizontal counts will be made (where Cause
forms) and the resulting markup or markdown (where Effect takes place).
Happy New Year and Cheers to a Prosperous 2016,
Bruce
The upcoming semester of technical analysis classes will begin this next week at Golden Gate University in
San Francisco. Dr. Hank Pruden and I will team teach FI355, the Wyckoff II class, on campus beginning
January 9th. Dr. Pruden has arranged for individuals interested in this class to attend the first session
prior to making the decision to enroll. As space is strictly limited to the capacity of the classroom,
reservations are a must. Please call Dr. Pruden at 415.442.6583 to reserve your space.
Additional classes are available both on-campus and online (cyber campus). For a complete list, and to
see the schedule for additional details (click here for more information). Dr. Pruden is available for any
questions you may have regarding any of the classes and the path to earning a Graduate Certificate in
Technical Market Analysis (offered exclusively at GGU).
Here is a list of upcoming Technical Analysis courses offered on the GGU Cyber-Campus:
FINANCE 352 - Technical Analysis of Securities (click here for more information)
FINANCE 354 - Wyckoff Method I (click here for more information)
FINANCE 355 - Wyckoff Method II (click here for more information)
FINANCE 358 - Technical Market Analysis Strategies (click here for more information)
FINANCE 360 - Behavioral Finance (click here for more information)
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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32 Unlocking the Mysteries of Point and Figure Charts.note
Wyckoff Power Charting
Unlocking the Mysteries of Point
and Figure Charts
Bruce Fraser | January 08, 2016 at 02:19 PM
Point and Figure charts are familiar, but different. They have a relationship
to classical bar charts while being unique. Their construction and
interpretation requires skills that differ from traditional charting. And
because of the mysteries of their construction, they yield information that
other chart styles cannot. Namely, in our case, the ability to project price
objectives.
Using the Wyckoff counting method to estimate price objectives can
produce uncanny results. The proper count method makes it easier for the
beginner and the advanced Wyckoffian to look at a PnF chart and derive a
count quickly and objectively, keeping confusion to a minimum.
In this post we will introduce how to count Accumulation ranges. The recent August to October
Accumulation in the market ($INDU) provides a classic example for reviewing how to make a base count
and project a price objective. Next time we will examine how to take a Distribution count. From there we
can add analytical nuance that helps to deal with the inevitable variations and complexities that all
Wyckoffians encounter. This is a rich subject and is among the most interesting in all of technical analysis
(in my humble opinion). Very few market analysts know how, or care to do, this work. I believe this is
because it requires time and judgment that cannot be programmed into a computer. Let us see if we can
convince ourselves of the value of doing PnF analysis and whether it can give us an edge in our campaigns.
(click on chart for active version)
We plot our charts from left to right as a convention, time moves to the right on a horizontal axis. While
we also plot PnF volatility from left to right, we will do our analysis and counting from right to left. We do
our analytical work from the conclusion of the Accumulation to its’ beginning; from right to left. As we
have learned how to do in earlier posts, find the critical junctures: LPS, ST, SOS, SCLX and PS, etc. Label
these points on a vertical bar chart. Next find these points and label them on the PnF chart. IF your
vertical analysis is on a weekly bar chart, try using a 3 box reversal PnF. If on a daily, then construct a 1
box reversal PnF. On the $INDU chart, I break that rule by using a daily vertical bar chart and a 3 box
PnF. So let's call this a guideline. The Accumulation (in this example) is relatively straightforward with a
clear Selling Climax, an Automatic Rally, Secondary Test, a Sign of Strength, and a Last Point of Support.
Most Accumulations are messier than this, which we will learn how to deal with in future posts.
Using our counting guidelines, we start at the right by identifying the LPS. Normally a good LPS is
immediately preceded by a SOS where price jumps out of the Accumulation and then dives back in and
attempts to return to the Support level near the bottom. At times the LPS is a ‘Spring’ but more often it is
a final, and higher, low around the mid-point of the Accumulation price range. That is the case here. On
the PnF chart label the LPS, SOS, ST, AR and the SCLX as determined from the vertical bar chart.
Starting at the LPS, count columns on the PnF chart to the SCLX. There are 15 columns. How much fuel is
in the tank to drive prices upward? An Accumulation is absorption that puts stock into strong hands. PnF
is an estimation technique for determining how full the fuel tank is (cause) and the extent to which prices
can move higher. To do this calculation we take the columns counted (15 columns) and multiply by the
method (3 box reversal in this case) and then multiply by the chart scale (50 point). This yields a total of
2,250 points which is added to the lowest point in the Accumulation (15,400) and to the Count Line
(15,950). This gives us a target range of objectives (17,650 to 18,200), which we flag on the chart. The
final high is 17,950 which strikes the mid-point of the objective.
Note that the LPS column is a down column (represented by an 'o'). The 'catapult wall' is the column of x's
that jumps the price out of the Accumulation and begins the uptrend. Begin taking the count on a down
column (the LPS in this case) and finish the count on the first down column (the SCLX). Never start or
end an Accumulation count on an up column (represented by an 'x'). Think last low, to first low.
We will continue to add nuance to (this cause estimating) counting method, but the foundation of
horizontal PnF analysis is illustrated in the count guidelines described above. When a Wyckoffian
encounters a complex PnF structure, reducing it down to its essential elements will clarify counts and
tactics. Thereafter the complexity can be coped with.
Next time we will tackle the Distribution count that this same $INDU chart is currently revealing. Some
labeling and counts are on these charts for your study. Distribution follows the same count guidelines only
flipped over. A note here is that Distribution counts are trickier, as it is easy to over-count them. For now,
please go through some of your favorite stocks and indexes and try lining up your Wyckoff labeling on the
vertical bar chart next to a PnF chart and take some counts. Also, take a swing at some Distribution
counts if you see them.
All the Best,
Bruce
The upcoming semester of technical analysis classes begin this week at Golden Gate University in San
Francisco. Dr. Hank Pruden and I will team teach FI355, the Wyckoff II class, on campus beginning
January 9th. Dr. Pruden has arranged for individuals interested in this class to attend the first session
prior to making the decision to enroll. As space is strictly limited to the capacity of the classroom,
reservations are a must. Please call Dr. Pruden at 415.442.6583 to reserve your space.
Additional classes are available both on-campus and online (cyber campus). For a complete list, and to
see the schedule for additional details (click here for more information). Dr. Pruden is available for any
questions you may have regarding any of the classes and the path to earning a Graduate Certificate in
Technical Market Analysis (offered exclusively at GGU).
Here is a list of upcoming Technical Analysis courses offered on the GGU Cyber-Campus:
FINANCE 352 - Technical Analysis of Securities (click here for more information)
FINANCE 354 - Wyckoff Method I (click here for more information)
FINANCE 355 - Wyckoff Method II (click here for more information)
FINANCE 358 - Technical Market Analysis Strategies (click here for more information) FI358 class provides
advanced studies in trading execution. Money management, trading psychology and trading plan development are reviewed.
FINANCE 360 - Behavioral Finance (click here for more information)
There is still time to enroll.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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33 Secrets of Point and Figure Distribution.note
Wyckoff Power Charting
Secrets of Point and Figure
Distribution
Bruce Fraser | January 16, 2016 at 03:08 PM
The procedure for the horizontal PnF counting of Distribution follows the same logic as counting
Accumulation. A cause is built during Accumulation and Distribution that results in a trend. Point and
Figure chart construction allows us to estimate the extent of a trend. This adds a powerful tactical tool to
our trading arsenal. Point and Figure provides a method for calculating reward to risk potential. The
reward being calculated is the count objective estimated in the horizontal count. The risk is the strategic
stop placement (entry price minus the stop). Reward to Risk is the price objective divided by the risk.
Using this Point and Figure concept of reward to risk calculation becomes a standard procedure for
Wyckoffians. A three to one reward to risk parameter is considered the minimum threshold for a trade.
My counsel is to base this three to one minimum on a conservative point and figure objective, and not on
the mega-counts that are possible on large Distribution formations.
Another powerful benefit of PnF is the ability to evaluate two comparable investments and gauge the
potential of each with the calculation of their respective count objectives. A Wyckoffian might be
considering two housing stocks. Housing stock A has a 3 to 1 reward to risk in the count objective, while
housing stock B has a 4 to 1 count objective. There is more of a cause built in stock B, and on balance, it
has better potential.
We plot our price charts from left to right. We count Distribution (like Accumulation) from the right to
the left. From the End of Distribution to its’ beginning. Typically, Distribution ends with two events. First
a Sign of Weakness (SOW), where the stock price dips below the prior lows of the trading range. Then a
rally of poor quality lifts prices back into the Distribution area on low volume and narrow price spread.
This rally is labeled a ‘Last Point of Supply’ (LPSY). Demand of poor quality and overhead supply will
prevent the LPSY from reaching the highs of the Distribution trading range (the exception being the Up
Thrust After Distribution, UTAD). We then locate the Buying Climax (BCLX). A BCLX will be
accompanied by a spike in volume, indicating that large sellers are beginning to liquidate holdings. It
takes time to liquidate large holdings and thus the formation of a range of Distribution. The volatile up
and down swings will produce columns of sideways trading range on a PnF chart. We count the PnF
columns from the LPSY to the BCLX to obtain our count objective.
The areas of LPSY, SOW, ST, AR, BCLX and PSY are all determined from vertical bar chart analysis and
then transferred to the PnF chart. Note that each of these points are rally peaks within the Distribution
(except the AR). Each rally peak is a place where price is overcome by supply which checks the advance.
Supply coming in at a price is what creates a trading range of distribution. The Last Point of Supply is
where the last of the remaining demand is met by selling from large interests. After the LPSY, the stock
price slides through the bottom of the trading range and the markdown begins. The count procedure is to
begin counting at the Last Point where Supply (LPSY) is present to the first place where supply is present
which is either the Buying Climax (BCLX) or the Preliminary Supply (PSY). Therefore, we always count
from an up column of x’s, to an up column x’s when determining the size of the Distribution. These are the
counting guidelines.
The final LPSY is the place where overwhelming supply stops the advance and there is no quality demand
to prop up prices. Price cascades down and out of the Distribution zone in a Markdown. Support is
nonexistent and the price falls freely. In the $INDU case study we use a 3-Box Reversal method PnF chart.
The ‘Count Line’ is drawn from the peak of the LPSY to the BCLX. The count in this case is 15 columns
multiplied by the 3-box method, multiplied by 50 point scale, which equals 2,250 points. Subtract this
from the highest peak (17,950) and the count line (17,750) to calculate the count objective. In this
example, the $INDU is within striking distance of the 15,700 to 15,500 target window. A Wyckoffian will
look for the signs of stopping action around the price objective target zone. This helps to confirm that the
counts are relevant. Recall that stopping action begins with a Selling Climax, Automatic Rally and
Secondary Test. It is prudent not to attempt to catch the falling knife of climactic declines, as they can fall
further and longer than expected. Reaching a price objective can result in an extended pause that is
followed by a continuation of the trend. Note in the prior blog on Accumulation (click here for a link) how
stopping action was followed by base building, which takes time, and also can be counted with the PnF
Method.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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34 Point and Figure Magic.note
Wyckoff Power Charting
Point and Figure Magic
Bruce Fraser | January 22, 2016 at 12:28 PM
It is a little like magic when Point and Figure counts work out. Long term counts, short term counts, big
counts and little counts; PnF is a robust and useful tool. Many Wyckoffians in training do not trust the
counts. It seems to me this is because it is so difficult to conceptualize why PnF charting (specifically
horizontal counting methodology) works. A solution to this is endless practice. PnF practice installs
confidence. Do the counts on a thousand charts, and then count a thousand more. Notice when you are
doing the counting that ideas, thoughts and inspirations will come to you about why it works and how
best to employ the technique for your specific circumstances.
As time goes on we will do more PnF case studies. When a price target is reached there are three general
scenarios that could come to pass.
The first is that price ignores the target objectives and keeps going (or pulls up short of the objective).
Sometimes we get the counts wrong. The area of the horizontal count is misjudged, or the instrument has
a mind of its own. When a target is reached, a Wyckoffian will ‘read the tape’ and wait for clues about the
culmination of a trend. If the trend continues, this will accrue to the benefit of the Wyckoffian who is a
trend trader. We expect a trend to stop with some type of Climactic crescendo. Whether a buying or
selling climax, it should be tested after an intervening Automatic Rally (or Reaction). The metaphor of the
dropped knife is that one allows the knife to bounce off the floor and then come to a rest before picking it
up.
Another common scenario when targets are reached is that a Stepping Stone Redistribution (or
Reaccumulation) begins. The trend is interrupted by a pause that can last weeks to months and then
continues in the same direction. A trend, is a trend, is a trend and we would expect that Reaccumulations
and Redistributions often occur. These are among the very best tactical trading opportunities (for a prior
discussion of this topic click here and here and here and here). PnF studies of this phenomenon will get
much attention in these pages (for a CSCO case study with PnF click here).
A third scenario is that a price target is achieved and conditions form (a Cause is built) for a price
reversal into a fresh new bull or bear market. This normally occurs with an acceleration of the trend at the
conclusion (Climactic action) that is both dramatic and alarming for participants. Thereafter, a volatile
trading range develops which builds Cause in the form of a PnF count (columns). Even though the
emotion of fear (or joy) is extremely high after the Climax, we notice that price has stopped progressing in
the direction of the trend. The nuance here is to wait patiently for the pivot point where price is brought
to the conclusion of the trading range and a new trend is born. This is where we take the PnF count that
will provide the target potential for the emerging new trend. Around the pivot, or hinge, is where the
Wyckoffian becomes engaged with (by establishing trades) the emerging trend.
The key is to be a good tape reader and tactician so that when any of the above actions occur we can still
profit and moderate risk.
Always be aware of the bigger picture. There could be a much larger count pending in the background
that engulfs prices and causes the smaller counts to become irrelevant. Therefore, always scale up to a
larger timeframe in your analysis, and determine if there are bigger counts looming above or below. Often,
the smaller counts work within the context of the larger counts, creating small trends within big trends.
Knowing where the big counts are pointing will help prevent being surprised by a powerful trend that
overshadows the smaller picture.
Develop a tendency to under count Distribution. Err toward taking smaller partial counts. There are two
overriding reasons. First, Distribution will typically correct only a portion of the prior uptrend before
consolidating, building a new cause and starting a new Markup phase. A Distribution formation could
lead to a one-half, or less retracement of a robust bull move. Only a portion of the Distribution is active
selling by the Composite Operator. Break a PnF Distribution into segments and count part, and then the
whole. We will drill on this concept going forward.
Secondly, large PnF Accumulation counts could lead to uptrends that can appreciate 100%, 200%, 300%.
An instrument under Distribution is only capable of falling to zero, which is unlikely. It is not uncommon
for a large PnF Distribution to count below zero and this does us no good. We must study Distribution
(vertical charts) carefully to determine where the C.O. becomes active in their selling operations and only
count that portion of the Distribution. Segmenting Distribution takes some practice and it is a very
important PnF counting skill.
Accumulation and Distribution generally unfold differently on PnF charts. Recall that volatility is what
creates columns of ‘count’. Accumulation begins with a Selling Climax (SCLX) and dramatic volatility.
Most of the columns of the Accumulation count will develop early and then as stock is absorbed, volatility
will diminish. Late in the Accumulation, volatility becomes dull and fewer columns are generated.
Dullness actually causes investors to stop paying attention, which is a mistake. Out of dullness big trends
begin. So, even though a Wyckoffian may go days without making a plot on their PnF chart, they become
more acutely focused and aware that a ‘change of character’ from trend-less to trending is in the wind and
could occur at any moment.
Distribution begins with some type of Buying Climax (BCLX). Generally the dullest, least volatile, part of
the PnF Distribution is the early part. As the C.O. unloads stock during the distribution, volatility
increases. Columns of count multiply at a faster rate late in the distribution phase. Poorer and poorer
quality of ownership is the result of distribution and this produces volatility, the opposite conditions of
Accumulation. Very big counts manifest in a short period of time during Distribution, and volatility is the
reason why. Wyckoffians are alert, and on their toes, during Distribution because events transpire much
more quickly than during Accumulation.
Above are some key concepts I find important to keep in mind. We will illustrate these ideas in future
posts. In the meantime keep making and counting PnF charts to become comfortable with this wonderful
market tool.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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35 Counting Monster Point & Figure Charts.note
Wyckoff Power Charting
Counting Monster Point & Figure
Charts
Bruce Fraser | January 29, 2016 at 11:17 AM
How does a Wyckoffian take a very large horizontal PnF count? A large count that forms over many years?
Let’s do a case study on an outsized formation and see if it yields useful PnF count objectives. A big thanks
to one of my teaching partners at Golden Gate University, Professor Roman Bogomazov, for crafting these
charts for a presentation we recently gave. As the blog is currently deep into the study of Point and Figure
charting, let us add PnF charts to this analysis.
Biogen, and the biotech industry, has been leadership in the bull market that began in 2009. Prior to the
price run up, BIIB was in a long volatile trading range. A monthly vertical bar chart shows BIIB in an
eleven year Stepping Stone Reaccumulation (SSR), and then in 2011 it Jumps out and begins a multi-year
uptrend. We, as Wyckoffians, would take this large horizontal PnF count and attempt to determine a price
objective.
First we would evaluate the entire structure of the SSR (click here for more on SSR trading ranges) to get
a feel for the evolution of the Phase work and the proper chart labels. In 1999 and 2000 a robust uptrend
is stopped by a PSY, BCLX and AR. This sets up the Resistance and Support areas (go back and review
prior posts for a refresher on these concepts). Note how the Support and Resistance establish the outer
boundaries of the BIIB trading range for the next decade. The lowest low in the SSR is in 2002, and
thereafter each attempt to test the Support area produces a higher low. This is a clue that this structure is
Reaccumulation and not Distribution. Further evidence that Absorption of shares by the C.O. is taking
place is diminishing volatility. The ‘Upthrust Action’ in 2007 rises above the trading range and the peak
of the BCLX. But the Upthrust cannot hold above the Resistance line and turns back into the trading
range. Volume on this break in 2008 expands, so supply is still present. But, this expanding volume
cannot push BIIB to the Phase B low which produces another higher low. The Last Point of Support is in
and a modest uptrend begins. In the red box (Phase C and D) is an Accumulation within a large SSR (see
the BIIB weekly vertical bar chart for more detail).
Is it possible
to count a
decade long
Stepping
Stone
Reaccumulation? Let’s try. Using traditional scaling techniques will produce a large and unwieldy PnF
chart. So we will create a ‘modified’ PnF that will compress the chart and make it countable. Modified
PnF charts forgo detail for the ability to take bigger counts. To modify the chart we will change the scaling
by going to a $5 scale and keep the 3 box reversal. Our chart produces 25 columns of count which we
multiply by 3 box reversal and by $5 scale. This produces a $375 count that is added to the count line
($40) and the low ($20). The objective is $395 to $415 which we have marked on the monthly vertical
chart. Note that BIIB recently climaxed into that target range and has since turned down. The uptrend
that produced this price objective took six years to unfold. Our PnF horizontal counting technique was
able to tackle this big job of counting a massively large SSR. As Wyckoffians we would analyze and
consider smaller, more reasonable counts first while keeping the mega-counts in the back of our minds.
Let us turn to a smaller and more conservative PnF count for BIIB, derived from the Accumulation area
identified on the weekly chart.
On this
smaller scale
we can see an
Accumulation within the SSR (see the red box within the monthly chart). A Selling Climax (SCLX) stops
the price decline in 2008 and then there is an Automatic Rally (AR). Support and Resistance are now set.
In Phase B, stock is being bought (absorbed) by the C.O. and this takes a full year. The Upthrust Action is
a sign of demand being present, but is followed by selling back to the mid-point of the Accumulation
Range. This is Phase C and is the final Last Point of Support (LPS) before the uptrend is born. The PnF
count will begin at this LPS.
This base should be counted for a price objective. To take this count we will identify the LPS and the PS
(Preliminary Support), both points are on the $46 line. This is a large count that looks diminished
because of the mega-SSR that it is positioned within. Using a 5 box reversal method, a $161 and a $153
price objective are flagged (see the above chart for parameters and calculations). This trade has
meaningful potential. What the fuel in this base count does is propel BIIB out of the decade long trading
range, clearing out all overhead resistance. Clearing the decade long Resistance (overhead supply) allows
BIIB to embark on an impressive multi-year uptrend.
Again, I would like to thank my friend, and fellow Wyckoffian, Professor Roman Bogomazov for producing
this outstanding case study. Roman teaches Wyckoff I and II, and Strategy & Implementation on the GGU
Cyber-Campus.
All the Best,
Bruce
Answer to Brad’s question from two posts ago: I will paste the PnF chart into PowerPoint and use those
markup tools. I then organize PnF charts by theme and category in these files.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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36 Point and Figure Pauses that Refresh.note
Wyckoff Power Charting
Point and Figure Pauses that
Refresh
Bruce Fraser | February 05, 2016 at 02:56 PM
Uptrends occasionally need a rest. We call these price congestion areas
Reaccumulation trading ranges. Wyckoffians seek these areas out as an
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path and each is a profitable window for initiating a trade or adding to an
existing position.
Both of the Reaccumulations in the PII uptrend are long pauses and build big count objectives. They are
excellent trading opportunities. Each has the lowest low occurring in the first half of the formation.
Thereafter higher lows form. This is a classic sign of Absorption as stock is being bid for at ever higher
prices.
Reaccumulations are different from Accumulation base formations in the way they start. A prior uptrend
will be stopped with a Buying Climax (BCLX) and an Automatic Reaction (AR) which signals large sellers
(click here and here for more). Reaccumulation will begin to show Absorption at about the mid-point of
the formation. In PII higher lows become evident after the Secondary Test (ST). Also, volatility and
volume are generally high in the first half of the formation and diminish thereafter. We take our PnF
counts from the analysis labeled on this chart. Recall that our count will start at the Last Point of Support
(LPS) which follows the Sign of Strength (SOS) to the AR (click here for a review).
Establishing counts on the bar charts eases confusion and makes for more accurate price objectives. Then
on the PnF we find the LPS and the AR and count the columns. Even though there is an upward tilt to the
formation we are clear about where the proper count starts and ends. Using a standard 3-box reversal
method, 87 points of fuel is available and added to the low at the ST and the count line. This is a
substantial trade with 87 points of profit potential being signaled by the PnF chart.
The Preliminary Supply (PSY) is a big bar with a bulge of volume. There is an immediate reaction, on the
next down bar, with expanding volume that is evidence of large sellers. This will stop the uptrend for some
period of time. We call the next big push to a higher high the BCLX because of the volume spike. The
decline to the AR is on generally high volume and is further evidence of the presence of supply. Note how
on subsequent pushes the price can exceed the BCLX level only temporarily. There is a supply of stock that
must be absorbed. This ten month Reaccumulation builds a substantial count. Again, we locate the LPS
that follows the SOS and count to the reaction after the PSY.
This Reaccumulation formation generates a count that is about a double of the price level of the
formation. We find the relevant price locations labeled on the bar chart and transfer them to the PnF
chart. This count is 81 points and offers a target of 156 to 168. Slightly higher than the target of the prior
Reaccumulation. This second pause would be an excellent place to average up a winning trade that was
initiated in the first Reaccumulation.
Note how Distribution sets in at the price target zones established on these two examples. When two or
more Reaccumulation counts confirm each other, expect resistance at that level to be formidable. PII
experiences trend stopping Distribution in this price zone. Take some time and evaluate this PII
Distribution formation for additional practice.
Here FDX has a Reaccumulation in 2012-13 that builds a substantial count. Take some time and zoom in
on this Reaccumulation and complete the analysis. Also, note the pause in the early part of 2014 that
builds a count. Try counting this area with the 1-box reversal method.
We identify the price points and labels from the bar chart and transfer to the PnF chart. There are 35
columns which provides a count of 105 on the 3-box reversal method. The Spring (SPR) and both LPS
points are excellent places for trade entry. The SOS points inform us of the inherent strength of the stock
price to Absorb overhanging supply.
Reaccumulation trading ranges are among the most important conditions that a Wyckoffian can master.
Numerous variations of Reaccumulation pauses can develop within a long term uptrend and each is a
meaningful opportunity.
All the Best,
Bruce
37 The Point and Figure Distribution Paradox.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff Power Charting
« Previous Article | Next Article »
The Point and Figure Distribution
Paradox
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Bruce Fraser | February 12, 2016 at 02:58 PM
Counting Point and Figure Distributions is a bit of a paradox. Accumulation counts can grow very large
and lead to advances that are multiples of their starting point. However, a stock under Distribution is
bound by the zero line. Counting conventions for Distribution are therefore different from Accumulation.
Judicious counting of Distribution is essential to successful PnF analysis and trading. A common error
Wyckoffians make is to over-count Distribution formations and get counts that are neither practical nor
useful. Let us examine this problem here and begin to employ the tactics that will make us Wyckoff PnF
Power Chartists.
Tesla Motors ran into Preliminary Supply (PSY) in September of 2013 and the advance ended with a
Buying Climax (BCLX) in February of 2014. From there, it traced out a pattern of Distribution between
the Support and Resistance lines. This Distribution action lasted two and a half years. Establishing a PnF
count for this period of time is not practical because of the sheer size of the Distribution. We need a
strategy for counting portions of the formation that can provide manageable price objectives.
(Click here for active version)
Three areas have been circled as appropriate for taking a count. In each area volume expands on the
decline off the peak, and indicates distributional selling. In the first two cases a rally develops after the
initial decline, which is a test (labeled). Count from the test to the prior peak. Each of these circled areas
represents a small portion of the entire range of Distribution, but they generate sizable counts.
The three counts coincide with the circled areas on the vertical bar chart. Each counts to a price objective
nesting between 120 and 155. These counts are reasonable and tactically useful. If a larger count is
attempted it could easily dip below zero. As an example, find points A and B and count the columns. The
objectives flagged are -$20 to $30 and this is less than one half of the entire Distribution. The $30 target
is possible, but not likely.
The nested count area has just now been reached. When a count objective is being approached, look for
the signs of stopping action (AR, SCLX and ST). If price is stopped in the area of the counts, two broad
scenarios are likely. Either an Accumulation forms or a Redistribution. Both will develop new PnF counts
that could take months to form. An Accumulation would generate an upward count that would initiate a
new bull market. Redistribution would generate a new downward price objective that would continue the
existing bear trend. Often the new Redistribution count will reconfirm bigger distribution counts formed
at higher prices (in this example points A to B). An excellent demonstration is the furthest count to the
right, which forms the LPSY. This is technically a Redistribution (see this post for additional examples).
Note how it confirms the two prior Distribution counts into the 135 area.
To review, the protocol for selecting and counting these smaller PnF counts within the larger distribution
is to find a price peak in the area of the Resistance line and look for expanding volume on the drop off that
peak. At some point a rally will develop. This rally will fail to reach the prior price peak. This is a failed
test of the prior peak. Count the columns from the test to the peak. The theory here is that distributional
selling is active off the peak and represents large interests unloading stock. This PnF count measures the
potential downward Cause that the Composite Operator has generated in this segment.
The Stepping Stone Redistribution (SSR) at the LPSY is a slightly different animal. An LPSY is a rally of
poor quality (low volume and narrow price spread) that signals that the C.O. is no longer supporting the
stock and that demand is of low quality. Count the columns from the final peak of the LPSY to the start of
the rally. In this example the SSR count matches the two larger counts and adds confidence that these
objectives are valid and useful.
Now that the price objectives have been reached, we would look for evidence of stopping action and Cause
building that will lead to a tradable rally or reaction.
There is much more to do on the subject of Distribution counting.
All the Best,
Bruce
Dr. Hank Pruden will be making a presentation to the TSAA-SF this Saturday February 13th at Golden
Gate University. The title of Hank’s talk is; “The Double Helix Power of Combining Wyckoff Method and
Elliott Wave”. The public is invited (click here for additional information).
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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38 Wyckoff Time.note
Wyckoff Power Charting
Wyckoff Time
Bruce Fraser | February 19, 2016 at 01:31 PM
In trading and speculation we are all on the clock, the market clock. At times the market clock spins
quickly and at other times it crawls. When a trend is unleashed time seems to move effortlessly. Time
slows down when the market makes no progress while in a long drawn out trading range. The Wyckoff
Methodology can help to tell what time it is in the market. If we know the ‘market time’ we know how to
conduct our activities. Is it time to be patient and watch? Is it time to stalk a trade? Is it time get busy
and put trades on? Are we holding long (or short) while waiting for the conclusion to the trend? And then
are we stalking the market for the time to conclude our trade and take profits? In the cycles of the markets
there is a time for all things. Market wisdom is to know what time it is in the markets and act accordingly.
Borrowing from the conversation started in the blog posts (click here and here for a link) of January 8th
and 16th, 2016, let’s continue the case study of the Dow Jones Industrials with an emphasis on how
Wyckoff would frame the unfolding of these market conditions. We counted a PnF distribution with a
price objective of 15,700 to 15,500. In Wyckoff we look for evidence of stopping action in the vertical chart
as a price objective is approached. Wide price bars and very high volume took the $INDU almost exactly
into the 15,500 price objective. The close on the low day was above the mid-point of the day’s range
showing quality demand. We recognize this to be the initiation of stopping action (at least temporarily)
and the beginning of a trading range that is either Accumulation or Redistribution. The downtrend is over
for the time being. After labeling this low a Selling Climax (SCLX) we expect a short and sharp rally called
an Automatic Rally (AR). After drawing a horizontal line at the low of the SCLX and at the peak of the AR,
a trading range is defined. A Wyckoffian expects most of the upcoming trade activity to take place within
and around the Support and Resistance established by these lines.
It is now time to expect a swift downtrend to be turned into a volatile, but trendless, trading range.
Wyckoffians will use the PnF price targets and the rapidly declining prices to cover some, or all, of their
shorts (if they are inclined to be short). And then to study the unfolding trading range activity to
determine the next low risk trading opportunity.
Once a PnF count objective is reached evidence of stopping action in the form of Preliminary Support
(PS) and climactic activity (SCLX) is sought. That is what happened here. The SCLX is the beginning of
the process of preparing for the next move. Building a Cause is the ebb and flow of prices between Support
and Resistance and this builds a PnF count for the next price movement of substance. Volatile price
swings build count quickly, as is the case here, and this can go on for a long time. We turn to the vertical
chart to help determine when the trading range becomes a new trend.
(click here for active version)
We draw Support lines under the SCLX low and above the AR peak. This is the outer bounds of the
trading range. Price will mostly trade within the bounds defined. The character of price is that it will
reach one extreme and then, abruptly, return to the other boundary. Note the Secondary Test (ST) low
and the rapid reversal to the top with a three day rally. The drop from the AR to the ST was a fast five day
decline. The volume expanded on the decline which is evidence of the presence of supply (this high volume
leads us to conclude that further attempts to decline to the support line are likely). If this structure is
Accumulation we want to see future declines in the trading range occurring on lessening volume. This tells
us and the Composite Operator that sellers are exhausted and the supply of stock has largely been
absorbed.
For the bulls there are two major scenarios to script here. The first is that the $INDU turns down from the
area of the AR and attempts to return to the SCLX low. On these declines volume diminishes on balance
and the daily price ranges are generally narrower than on the decline to the SCLX and the decline to the
ST. This will be evidence of selling exhaustion. Also, the price may only be able to return to the mid-point
of the trading range and make a Last Point of Support (LPS). This would be bullish and a place to initiate
trades (often the LPS comes in at about the same level as the PS). Recall that PnF counts are generally
taken from the LPS to the PS (and sometimes to the SCLX).
The second bullish scenario is the $INDU jumps the AR level without pulling back into the range. After
Jumping it consolidates for a brief period of time and resumes the uptrend. Old Resistance becomes new
Support and so we look for a backup into the old resistance (This backup is labeled a BUEC). This is a
place to enter a trade.
The bearish scenario is that the current pause is Redistribution. We know from our prior studies that
volatility tends to increase as Redistribution advances. Declines from the top of the trading range to the
bottom are quick and accompanied by large volume. Supply is present and the C.O. is selling, not buying.
At the Resistance level look for brief breakouts (called Upthrusts) that fail quickly back into the trading
range. When the Support line is broken and price cannot lift back into the trading range the
Redistribution is nearly complete and a new downtrend is imminent.
We are treating this juncture in the $INDU as a real time case study. So for now we are expecting a
continuation of the trading range and have the broad scripts above to provide us with action points and
steps for the next phase.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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39 Crude Oil Update.note
Wyckoff Power Charting
Crude Oil Update
Bruce Fraser | February 26, 2016 at 12:00 PM
In the blog post of December 17th titled ‘Crude Oil; How Low Can it Go?’ (click here for a link), we studied
the bear market in crude oil of 2008-09, the bull market of 2009, and then the current bear market. The
long term point and figure analysis for each of these periods has been very accurate and useful. The 201314 top generated a count that carried from $112 to a target range of $28 to $34 which was hard to believe
at the time. $WTIC has since melted all the way down to the $27 (lowest PnF box) level before bouncing
to $34 for a near direct hit of the PnF count objectives. Have we seen the low for crude oil? Is it time to
buy crude oil? What should we expect next?
What has transpired since the prior post is really interesting and a good review of some essential
Wyckoffian principles. Where our prior analysis was employing weekly vertical charts and 3-box reversal
PnF, here we will zoom in with shorter term charts for a more detailed view. With crude on a glide path
for a potential landing, shorter term data can inform how that landing will occur and if there will be a
touchdown or a continuation of the decline.
(click on chart for an active version)
In November a trend channel established itself setting the rate of decline. The three red circles are the
anchor points. The top two establish the Supply Line and the lower is used for the parallel ‘Oversold Line’.
Note how well $WTIC obeys this channel and the stride is set very early in the trend. Keeping the $34 to
$28 long term PnF objective in mind, the Wyckoffian will seek evidence of Stopping Action. This arrives
in the form of Preliminary Support (PS), Selling Climax (SCLX), Automatic Rally (AR) and Secondary Test
(ST). Eleven of twelve days down at the beginning of the year are volatile and are accompanied by
persistently high volume. The throw under of the Oversold Line is a classic sign of exhaustion of the trend.
And the decline is stopped at $28 (SCLX) and $27 (ST) for a PnF hit. The vertical chart is telling a classic
Wyckoffian tale that syncs nicely with the PnF analysis. An AR should follow the SCLX. A brief rally moves
crude through the top of the Supply Line where volume bulges (large sellers are present) we label this an
AR. Draw a Support Line under the SCLX and a Resistance Line above the AR. This will be our trading
range for the near future. Always expect an attempt to return to the Support area after an AR. The decline
that follows to the ST is on very high volume which indicates that large Supply is available and must be
absorbed in order for Accumulation to be completed. This generally takes time and we have learned from
prior PnF studies on crude that big counts can and do form. So for now we expect a range bound market.
Study the trading range from August to November. It is a classic Stepping Stone Redistribution and a PnF
count of this area could prove interesting. The persistently high volume on the break of support in
November is a classic liquidation. The rally that follows is of poor quality and demonstrates a lack of
demand by the C.O.
The Stepping Stone Redistribution (SSR) counts to $28 to $30. This is inside the large count of $28-$34.
It confirms the bigger count so we would call this SSR a ‘Stepping Stone Confirming Count’. Such a
confirming count gives us a degree of confidence in our PnF work. Note the Cause that is being built has
generated $16 (16 columns multiplied by $1 scale) of potential already. The volume signature in the
vertical chart is still showing high volume on the declines to Support. We would expect some evidence of
the Supply being exhausted before a meaningful rally is possible. Also, the C.O. will not support a rising
market until all of the overhanging Supply has been vacuumed up. Further attempts to return to the lows
will generate additional columns of PnF count. It pays to be patient and wait for the real trend to begin
and not to get chewed up by a volatile trading range. There is always the potential for this pause to be
another Stepping Stone Redistribution generating lower counts for another leg down. Careful analysis of
the vertical chart should give plenty of advance warning of this possibility.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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40 Point and Figure Analysis with Intraday Charts.note
Wyckoff Power Charting
Point and Figure Analysis with
Intraday Charts
Bruce Fraser | March 04, 2016 at 03:22 PM
We have worked with Point and Figure charts in multiple time frames using 1 box and 3 box methods.
This is akin to constructing daily and weekly bar charts. For many traders intraday analysis and trading is
preferred. The good news is that PnF analysis is a powerful technique for evaluating these smaller time
periods. PnF scales down handily from 60 minute to 5 minute data.
Only two settings need be changed (StockCharts.com subscription required) to begin generating useful
intraday PnF charts in your chosen trading instruments. Under ‘Chart Attributes’ select the period (30
minutes for example). Under ‘Chart Scaling’ select the method; ‘Dynamic (ATR)’. Now you are ready to
create intraday PnF charts. The Dynamic (ATR) will use ‘Average True Range’ to calculate the vertical
scale that is best for the time frame selected.
In Wyckoff we seek to identify a Cause that will lead to an Effect (trend in prices) worthy of a campaign.
Causes built within intraday timeframes are often unnoticed, but can be counted, projected and
campaigned. The counting techniques are essentially identical to the methods we have already studied. As
in all intraday analysis, events happen quickly and require an intense focus on the data.
(click on chart for active version)
This 2-hour vertical chart will be our roadmap for the PnF chart analysis below. Note how well the
Wyckoff analysis works on this shorter time frame. We will use these anchor points for taking our counts
on the PnF charts.
For the QQQ we have selected a 30 minute timeframe, 1 box reversal method, and the scale calculated by
the ATR is .40 on the vertical axis. The count procedure is the same as for any PnF chart. Find the Last
Point of Support (LPS) and count to the Preliminary Support (PS) which is 24 boxes. Multiply 24 by the 1
box method, by the .40 scale. From the count line of 97.60 the objective is 106.80 and from the low
104.80. For many intraday traders this is a meaningful campaign objective. The Cause is built over about
a four day period. Now that the objective has been reached there are a few options to consider. First
would be to stay in the trade and wait for evidence of distribution for an exit, which could come at higher
prices. Or a Reaccumulation could form to propel prices higher. Finally, you could take profits and wait
for the next Cause to be built.
In this 30 minute PnF of the NASDAQ Composite we have a 3 box reversal method chart. Generally this
method is better for generating bigger counts than a 1 box method chart. And thus bigger Causes can be
counted for larger moves. At the 4215 count line 11 columns are multiplied by the 3 box method and then
by ATR scale of 14.05. The lower objective is 4678.65 and the upper is 4755.65. The count line is at the
low of 4215.00 so we estimate the upper boundary by taking the midpoint of the trading range. $COMPQ
has reached the target zone. Does it have further to go? The next chart goes out to 60 minutes and
provides another perspective.
41 Judging Power Waves.note
Wyckoff Power Charting
The prior analysis of the 30 minute chart is taking place within a larger Cause being built. The 60 minute
chart brings perspective to this bigger potential. The two prior charts made counts to the top of this large
trading range where we would expect resistance. The 60 minute chart suggests a much bigger potential
Cause forming. So small Causes form within big Causes. The count is 23 columns multiplied by 3 box
method and then by the ATR scale of 22.27. From the low the objective is 5767.93 and from the count line
Bruce Fraser | March 11, 2016 at 04:25 PM
5968.36 which carries to a new recovery
high for the $COMPQ. The Wyckoffian intraday trader would
consider the larger trend favors higher prices because of this analysis. Therefore the emphasis would be to
trade from the long side as Reaccumulations form and set up future trades. Only the arrival of a
Distribution count of meaningful size would alter the trader’s upward bias.
Judging Power Waves
Shorter time period PnF charts, such as 5, 10 and 15 minutes, are very effective tools. The Causes and
setups come and go quickly in these shorter time frames, while the principals are the same.
All the Best,
Bruce
Ps. On March 12 I will be Chip's guest on ChartWatchers LIVE at 1pm Eastern. See you then.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Determining the motives of the Composite Operator is the central mission of all Wyckoffians. There are
numerous tools for this task. The present position and future trend of the market and the stocks within,
are determined through the analysis of price and volume (‘the study of the tape’, Mr. Wyckoff would say).
We have covered much ground in these blog posts, through the study of Accumulation, Distribution, Price
Spreads, Volume, Support and Resistance, Trend Analysis and much more. It is time to add another
powerful tool to our arsenal of market skills; The Comparison of the Waves of price. By learning to judge
the relative power of Buying Waves and Selling Waves, the Wyckoffian develops the skills to decide when a
stock is poised to move quickly and with leadership. When we see the footprints of the C.O. we are capable
of acting in concert with this powerful force.
Power Waves are classically Wyckoff in nature. Devoid of indicators, Power Waves focus on the action of
price as a pre-determinant to the beginning of big moves. Power Wave analysis helps with choosing and
timing which stocks are poised to lead the way by outperforming their peers.
(click on chart for active version)
Chipotle (CMG) 2008-09 is a good introductory case study. To begin let’s study the waves of buying
(demand) and selling (supply) for CMG. Note the large wave of selling at A which culminates in a Selling
Climax. Wave B is a short sharp rise that quickly ends. Wave C is a continuation of selling. Compare wave
C to wave A. Wave C is much shorter in duration, though the decline is steep. Supply could be exhausted
as a result of the shortening thrust at C. Now compare wave D to B. D is dynamic in the speed and
rapidity of the rise when compared to B. Wave E corrects slightly more than one half of the rise in D.
Wave F is potentially confusing as the rally portion compares poorly to the D wave rise (more on this
shortly). The wave at F is an LPS and a test for a jump out of the Accumulation at wave G. The G wave
rally is forceful. Compare the waves at B, D and G, each is stronger than the prior wave. Also note how the
power of the supply waves at C, E and F are generally diminishing in force.
Now let’s compare CMG’s waves to the S&P 500 as our market proxy. This is a form of relative strength
analysis. Take a minute and study the demand waves and the supply waves of each to determine if there is
an underlying bullish or bearish trend. By comparing waves we can see that CMG is basically in gear with
$SPX during the declining wave at A, the rise at B and the decline at C. CMG begins to ‘tip its’ hand’ at
wave D where it is noticeably stronger. CMG climbs up and out of the Accumulation range temporarily,
while the $SPX can only rise to the middle of the range. The area at F is most interesting. At the area of
Support the $SPX can barely lift up while CMG is rising toward the Resistance area, which is an
indication of emerging relative strength. Then the $SPX falls away from Support and into a new
downtrend (which turns out to be a Terminal Shakeout). CMG makes another higher low during the $SPX
Shakeout. The $SPX rally at G moves strongly and persistently back into the Accumulation range. Note
what happens to CMG in the G phase of the rally. It clears all resistance and has established a robust
uptrend. Relative wave analysis of CMG to $SPX dramatically illustrates CMG’s emerging leadership. By
studying each wave of supply and demand it is readily apparent that leadership was forming in CMG very
early on in the Accumulation process. CMG continued this leadership during the subsequent bull market.
(click on chart for active version)
During the same 2008-09 time period Apple is a classic, and more subtle, Power Wave study. Each
Supply Wave is less forceful (A, B, C and F). Note at the conclusion of C a Spring forms while $SPX makes
a higher low (line D). Carefully study these waves. Apple is making a series of lower highs and lower lows
at lines C and D. There are generally signs of diminishing downward force in AAPL but weakness to the
market prevails. Then at wave E an important rally forms in AAPL while $SPX drifts. This puts AAPL
back into its’ Accumulation range while $SPX teeters at Support. This is a key ‘Change of Character’
(CoC) and the first signs that AAPL wants to be an emerging leader. The minor new low in AAPL is a
Spring. Compare the waves of supply at F where $SPX is noticeably weaker than AAPL. At the conclusion
of F, $SPX is in a Shakeout while AAPL is staying within the Accumulation area, above Support, and
forming an LPS. The rally at G is dynamic for AAPL and proves that it is an important new bull market
leader. Often Relative outperformance materializes toward the end of Accumulation therefore Wyckoffians
must remain forever diligent in their studies.
(click on chart for active version)
42
Let’s turn our attention to the current markets and apply some Power Wave analysis to the Gold Miners
using GDX as our proxy. At waves A and B, GDX is noticeably weaker than the $SPX. In August when the
$SPX becomes very weak, GDX has already experienced much price damage and does not participate in
the broad market decline. At D, $SPX rallies further and for longer than GDX. Then during the decline at
E, gold shares begin falling first and are generally weaker than the $SPX. Note the channel at F where
GDX has a slight upward tilt of higher highs and higher lows while the $SPX does the opposite. This is a
constructive clue about a potential change of character. This has our attention. The decline at G is
revealing as gold shares resist declining with the very weak stock market. We have drawn line H to
illustrate the dramatic next step. Where the $SPX needs a test in February, gold shares do not, and they
Distribution Power Waves.note
begin to markup immediately. GDX concludes a large Accumulation with a classic Spring.
Relative Power Wave Analysis is such a useful tool. Once you have become accustomed to doing wave
analysis and relative strength analysis in this way, all other methods will pale in comparison.
Stockcharts.com is an excellent tool for this analysis as can be seen from the above examples.
All the Best,
Bruce
Wyckoff Power Charting
Distribution Power Waves
Ps. This Saturday, March 12, I will be Chip's guest on ChartWatchers LIVE at 1pm Eastern. (to register
click here)
Bruce Fraser | March 18, 2016 at 05:00 PM
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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In the prior post we introduced the study of comparative waves of buying and selling. By judging the
relative power of adjacent waves of buying and selling one can discern emerging strength, or weakness in
the stock’s structure. The change in the power of rally waves and selling waves is an important tool for the
Composite Operator as they judge whether a stock is ready to markup (or markdown).
Wave analysis is the comparative study of the rising and falling movements of the price of a stock. It is
also the study of these price waves in comparison to a benchmark index such as the S&P 500.
What we seek with this analysis is evidence of a ‘Change of Character’ (CoC). This can often manifest as a
stock resting gently in a trading range and then jumping fiercely into a new trend. Wyckoffians will
compare buying waves and selling waves looking for the most subtle clues of CoC. Wave analysis of
Distribution works in much the same way as Accumulation. Here are two Distribution case studies to get
us started.
(click on chart for active version)
Let’s start by only considering and comparing the stock price wave structure. Thereafter we will introduce
the S&P 500 to the analysis. During March and April 2015 the Russell 2000 ETF (IWM) was
demonstrating leadership by making higher highs and higher lows. Note the robust rally in IWM in
February. The March rally was steeper and shorter in duration. The April rally was the poorest of the three
as it barely made a new high and had the weakest ascent (note all of the overlap of price from day to day).
A lower high test at B is a vulnerable place and is followed by a decline at C that is a major CoC. When
compared to the prior declines during the uptrend, C is persistent and creates price damage. The
conclusion is that large sellers are present at C. We expect a rally after the first round of active selling at C.
The price rise at D is long in duration but labored as it pushes to the highs. This rally takes a long time
and does not make much price progress. Comparing D to the rallies in the uptrend, it appears less
dynamic with little buying power to propel prices higher. The decline at E retakes almost all of the rally at
D in about one quarter of the time. Also, E declines further than C, demonstrating that the selling above
125 is large and a sign the C.O. is distributing. The rally and decline at F is a lower high and a lower low
which occurs quickly relative to prior up and down waves. Quick and volatile moves deep into the lower
part of a trading range smacks of Distribution. The drop at F appears to be a break of the ICE and that is
confirmed to be the case when price has no capacity to lift its head and rally back into the overhead
supply. This is a most vulnerable place on the chart as it shows that the C.O. is no longer sponsoring IWM.
It is poised to markdown from here. Points F and G are part of the emerging markdown phase.
IWM is the leader compared to $SPX which is now in a trading range at A. The first tell that sellers are
present is the decline at C for IWM. $SPX barely moves down at C. The rally at D for IWM does not result
in a rally for $SPX. IWM is the leader. At E both indexes get in gear with selling that moves prices to the
bottom of the range. This is a major CoC for $SPX. Both indexes are equally weak. At F $SPX is stronger
with a rally to the top of the range and a reaction to a higher low. This position is where IWM tips its
hand that it is the weaker index. IWM is making new lows and is already effectively marking down.
(click on chart for active version)
The Energy Select Sector ETF (XLE) has a jump and a test at A which leads to a good rally at B. After a
correction at C the next advance at D stalls quickly. The decline at E is weaker than C and is followed by
drifting. The second decline in the E phase is weaker than the first. The selling is becoming more intense
and ultimately puts XLE at the lows of A where it marks time before another drop.
In summary, when comparing rallies to the peak each is diminished. The declines beginning at E have
ever greater selling and expanding price damage to the lows at G. The intervening pauses have no lift in
them.
XLE compared to $SPX has a moment of hope at the B rally. The pause at C shows that $SPX is stronger
in relation to XLE and then into the final peak at D. The decline and rally at E illuminates XLE’s weakness
and is a warning. During the decline at F, while both XLE and $SPX are falling there is evidence XLE is
declining less when compared to the drop in $SPX. XLE may be finding big buyers in the final stages of
the decline to G. At G the test is a higher low for XLE while $SPX needs to return to the low. The
subsequent rally in XLE keeps pace with the $SPX and is demonstrating a Change of Character into a
leadership role.
43 How to Determine the
Best Trade Entry Points.note
All the Best,
Bruce
Ps. We will not publish during the upcoming week. Have a great week.
Wyckoff Power Charting
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
How to Determine the Best Trade
Entry Points
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Bruce Fraser | April 01, 2016 at 03:50 PM
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Wyckoff is a complete Methodology which means that rules and processes guide when to enter a trade,
how long to hold a position and when to exit the trade. We have explored the principles of stopping
action, cause building and jumping into a trend. In Accumulation (as in Distribution) there is that
moment, that tipping point, when conditions shift from trendless to trending. We call it a Change of
Character (CoC) because prices are at the inflection point. Mr. Wyckoff’s council was to only commit
capital when stocks and the market are ready to move, and move quickly, and move now.
In Dr. Pruden’s book, “The Three Skills of Top Trading” there is an important section on the Ten Tasks of
Trading. The tasks speak to the proper mental states for each of these essential trading activities. Top
traders are very patient. They are willing to wait long periods of time for that right moment when
inactivity and patience give way to a flurry of activity because market conditions present the opportunity
for positioning a trade. To seamlessly go from inaction to action takes practice.
The Wyckoff Method seeks specific conditions for beginning the process of positioning a stock (ETF,
commodity, etc.). There are rules for deploying capital, placing stops, and for averaging up to a larger
exposure in winning positions.
Once a cause is built and the upward potential for a stock can be estimated (using Point and Figure
charts), a Wyckoffian will begin to stalk for the best strategic price level to begin buying. In our study of
Phases this would be Phase C (click here and here for a link), the final testing area. During Accumulation
the final test is either a Spring or a Last Point of Support. There are three categories of Springs. A Spring
is the final low prior to the beginning of the uptrend. But, Phase C does not require a Spring type action
and sometimes a Last Point of Support is the final test (higher low) of the Accumulation area prior to the
beginning of the uptrend. Whether a Spring or an LPS is the final test, from this moment onward the
stock will generate higher highs and higher lows in the emergence of a new uptrend. This act of testing is
the conclusion of the Cause building.
Initiating and building a position in a stock using the Wyckoff Method usually occurs in three tranches.
Each purchase or tranche of stock must be at a higher price than the prior purchase. This is an important
rule: Only average up a winning position. Specific points in Phase C and D are ideal for averaging up to a
full position size in the stock.
Wyckoffians become very skilled at identifying these action points in real time to help make it easier to
jump from a Stalking state of mind to an Action state. Endless practice and mental rehearsal hone these
skills.
The philosophy behind this method is to 1) have the trade work right away, and 2) to place a stop loss
order in a zone that has a very low potential for being triggered. This is an excellent system for averaging
up winning trades while placing trailing stops at tactical levels that will preserve and protect capital as
profits grow and market exposure becomes larger.
Over the course of the next few weeks we will explore the best junctures and tactics for entering a trade.
Accumulation Schematic #1 models a period of absorption. As the sponging up of shares nears
completion, a period of final testing of the Support area will occur. This is known as Phase C. A Spring is
depicted in Schematic #1 (click here for more on Springs). Other forms of testing will be addressed in
future posts. Note the price action at the conclusion of the Spring, there is a Change of Character. Price
begins marking up from the Spring to the top of the Accumulation Range and out. This is the beginning of
the uptrend and the time and place within the Accumulation to be buying this stock.
Four junctures in Phases C and D are ideal for trade entry. 1) Spring and Test of the Spring, 2) Last Point
of Support (there are often multiple LPS points), 3) Backup (BU) after the jump up and out of the
Accumulation, 4) Breakout above the high of the BU/SOS (Sign of Strength).
(click on chart for active version)
GDX dives to a final low in January and the volume is high into the low. This is a Spring #2 which must
be tested, and it is in the two days immediately following the Spring. The test of a Spring #2 can be
bought. The next buy point is the Last Point of Support, which is very brief in this example. Note the
veracity with which GDX lifts off. This is a dramatic example of the Change of Character (CoC) that comes
in Phases C and D. Stop placement can go just below the Spring, LPS, or BU. We will be more specific as
we dig deeper into this subject.
It is a good exercise to compare the structure of GDX to Schematic #1. This is the look of Accumulation by
the Composite Operator. Note how difficult it is to buy the Phase C rally as the bullish price bars leap day
after day. And this is why we must be prepared with our action plan when it is time to get busy. Over the
next few posts we will explore strategies for averaging up a winning position in an emerging uptrend.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
44 Stalking the Trade.note
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Wyckoff Power Charting
Stalking the Trade
Bruce Fraser | April 08, 2016 at 02:36 PM
No matter your investment timeframe, consider your trade to be a
campaign. A campaign has steps or actions from beginning to end. A
campaign has mental state management from beginning to end. Mental
states vary from the patience of stalking to the aggressiveness of taking
profits to conclude the trade. A campaign is managed.
Once a potential campaign is identified (this is also called a low risk idea) it
is stalked for the ideal moment when capital is put at risk. Point and Figure
analysis provides us a method for estimating a price objective, or cause. Reward to risk objectives require
this ratio to be three to one or greater. If this three to one ratio cannot be met, a Wyckoffian will reject the
trade for one that is more suitable. When counting PnF objectives for this analysis we will use
conservative counts to determine the reward potential. At times there will be larger PnF counts available
on the chart, but we will determine ‘reward risk’ on the smaller, conservative, PnF count.
How do we establish the ‘risk’ in this ratio? The risk is the execution price of the trade to the stop level. As
an example, our trade entry is $38 and our stop is $36, thus the risk is $2. The reward marked on our PnF
chart must be a reward of 3 multiplied by $2 and added to our entry price of $38 or $44. So our
conservative PnF count must exceed $44.
When comparing two similar trades where (for the sake of our case) everything else is the same, if one
PnF counts to $44 and the other counts to $48 we would tend to favor the trade with the larger potential.
We think of trade entry as a three part process. Determine the amount of capital devoted to a single
position and then divide that figure into thirds. Buy your position in thirds. Each subsequent tranche is
bought if, and only if, the prior tranche is showing a profit. So a Wyckoffian is always averaging up a
winning trade. If the last purchase is not showing a profit then the next addition must not be made, until
the previous acquisition is at a profit. The average price of the combined purchases must exceed a three
to one reward to risk ratio. Pay close attention to your average cost. After each additional tranche the stop
should be raised. The goal is to set your new stop at a place where, if stopped, the prior purchases will
show a profit. Only the latest purchase would have a loss. The goal with this strategy is to always be
reducing your risk of ownership.
(click on chart for active version)
STLD offers a recent case study of a stock in the ‘Position Building Zone’. The Spring and Test sets up the
initial buy zone. Look for a Test of the Spring #2 as the first buy point. Rising above the December low on
a strong Demand Bar is the next place to buy if the test is missed. Good Demand Bars will have wide
spread and good volume while moving easily in the direction of the new emerging trend. The close for the
day should be near the high for the day. More good Demand Bars should follow as price moves easily
upward. In this hypothetical trade the first purchase is at $16.25 and stop placement will go below the
Spring low of $15.22 at $15. Mr. Wyckoff advised placing stops strategically where they would be unlikely
to be executed. Buy point #2 is on the turn off the LPS, execution price of $17.25. Now the average price
for two tranches is $16.75 ($16.25+$17.25 divided by two). Stop placement is moved up under the low of
the LPS at $16.75 where the first tranche is stopped at a profit and the second tranche at a loss for a
breakeven on the average price of both. The third tranche is executed on the test known as a Backup to
the Edge of the Creek (BUEC or BU). STLD has jumped out of the base here. Execution price for tranche
three is $20 after turning up above the LPS/BU on a good Demand Bar. Average cost is $17.83
($16.25+$17.25+$20 divided by three). The stop is set below the LPS/BU at $19 which protects the profit
on tranches one and two. Take note that the average cost of the campaign is about the mid-point of the
Accumulation Range (which, by the way, is the cost objective of the Composite Operator). Now STLD is in
a robust markup phase and this Wyckoffian strategy has built a full campaign position.
Establishing a three to one ‘hurdle rate’ with Point and Figure analysis is critical. Note the partial count
used. A much larger count may come into play at a later date (and higher price). The first tranche has the
greatest risk at $1.25 points of loss potential and the entry price is $16.25. The reward estimated is $32$16.25=$15.75. $15.75 of reward divided by $1.25 of risk is a ratio of 12.6 which is well above 3/1. It is a
good idea to do this calculation on each tranche on the way up to be confident that each commitment of
new capital is worthwhile. STLD has an attractive campaign potential for the risk taken.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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45 Wyckoff Buy Strategies.note
Wyckoff Power Charting
Wyckoff Buy Strategies
Bruce Fraser | April 15, 2016 at 11:58 AM
When initiating a campaign our mission is to buy when the stock is ready to emerge into a major uptrend.
Uptrends begin when periods of Accumulation are complete and the majority of the available supply of
shares has been absorbed. This is the juncture when stock is held by strong hands. A small increase in
demand for shares can create an imbalance that tips the stock price trend into a robust bull market.
As Wyckoffians we will develop our skills at identifying this tipping point on the charts and to have an
action plan for building our position in the stock. Final testing action of the Accumulation is called Phase
C. There are two types of tests; the Spring (or Shakeout) and the Last Point of Support (LPS).
The Last Point of Support is the final drive toward the bottom of the Accumulation area before the
uptrend begins. In most regards it looks much like the prior drives toward the Support level. The Spring
is easier to identify because the Spring makes a minor new price low. An LPS makes a higher low and then
turns upward. An LPS is an important juncture to identify and to trade. Either a Spring or a Last Point of
Support arrive in Phase C which is the last test of the Support area prior to the markup out of the
Accumulation. One or the other will occur (see the last post for a discussion of Springs).
(click on chart for active version)
Wyckoff is an excellent chart skill for intraday analysis and trading. This 30 minute $INDU chart has a
classic LPS setup. A Sign of Strength (SOS) is price attempting to breach overhead resistance by
temporarily rising above a prior peak. Demand is absorbing supply at the top of the trading range. After
the SOS, the price will typically fall back into the Accumulation area and attempt to return to support. It
is after the SOS where the Wyckoffian will look for the LPS. After the SOS in $INDU, price moves in two
stages downward. Note the very high volume on the low bar, this is absorption and good demand. This is
the low bar of the LPS. The attempt to ‘test’ the low bar arrives two bars later and on much lower volume.
This bar or the next bar can be bought. It only takes two good demand bars to put $INDU at Resistance
where a BUEC (Backup to the Edge of the Creek) forms. After the LPS entry, place a stop under the low of
the LPS, or under the prior low of April 8th.
(click on chart for active version)
In the ALB example, the SOS exceeds the two prior peaks and the Resistance line. After the SOS we must
be prepared for another round of weakness as is the case here. ALB returns to Support and dips below the
prior two lows. The SOS has us on the alert for an LPS. There is an LPS, then a test, then a good demand
bar. Buy a tranche here and place a stop below the low of the LPS. The second LPS is a turn off a higher
low and gives the Wyckoffian great conviction that an uptrend is forming. On this second LPS, buy any of
the early demand bars as the price turns up. If the first LPS was missed, the second LPS is a fine place to
initiate the campaign. Note at the third LPS, how large interests are buying more aggressively as ALB can
barely rest at the Resistance line.
The decline after the SOS is a nasty shakeout that has many holders of ALB selling their shares in a panic.
This is how the C.O. shakes loose the final supply of stock prior to a meaningful markup. This is not an
easy business. The first LPS goes almost exactly to the Buying Climax low. It is no surprise that the final
low of the Accumulation area, the LPS, is the same price level where the large interests began their buying
operations. SCLX=LPS. This is a price level where they want to buy stock and they proved it by stopping
the declines at both the SCLX and the LPS. Also note, that as scary as the price decline was into the LPS
low, it was well above the September / October low.
46 Wyckoff Skill Building.note
To take a count, identify the LPS on the bar chart, then find that point on the PnF chart and count to the
Wyckoff
Power
Charting
left. Take a conservative count. If you
deem the reward
to risk
to be suitable to your objectives, make the
trade. From the LPS, ALB has a count estimate to $86. Now that the stock has jumped out, it may need a
pause in the form of a BUEC or a Stepping Stone Reaccumulation before the trend can continue.
All the Best,
Bruce
Wyckoff Skill Building
Bruce Fraser | April 22, 2016 at 03:48 PM
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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There are no absolutes in trading financial markets. The best market operators are exceptional risk
managers. The Wyckoff Method seeks conditions where a high likelihood of success is probable.
Wyckoffians systematically search for the clues that precede a stock becoming a persistent and long term
leader. Some of these characteristics we have already explored. The list includes; breaking above a
downtrending channel, fulfilling a Point and Figure down count, building a Cause with an accumulation
area, completing the accumulation with the final test of a Spring or LPS, and a persistent mark up and
out of the accumulation area. Through honing these observational skills, our mission is to increase the
potential of owning the best stocks at the right time.
To be better Wyckoffians in ‘real time’ we do endless chart work with the goal of becoming more
discerning in our analysis and more capable in our trading. In light of our mission to build skills, let’s look
at more charts, charts, charts. In recent posts the focus has been on identifying best entry points for
buying stocks. We will continue that theme here.
(click on chart for active version)
LVS has been in a two year downtrend (click here for more on downtrend analysis). The stride of the
downtrend has been well defined from the beginning (three red circles define the future path of prices).
Note the constant stream of lower highs throughout the decline. Finally the climatic oversold condition of
the PS, SCLX and Spring stop the decline. From the LPS to the PS a Cause is building and finally the
upper trend line (Supply Line) is breached in a dramatic way.
LVS builds a Distributional Cause in 2014 and then embarks on a downtrend. A Selling Climax arrives in
the window of the price target. A new Cause is being built.
(click on chart for active version)
We see that LVS has become oversold on the weekly chart (repeatedly breaking and returning to the trend
channel) and has fulfilled the PnF distribution count. Next we look at the refinement of the entry strategy
on the daily chart. There is an Upthrust at the Resistance area. There is little Cause built so far, and we
expect price to attempt to return to Support, which it does in a long grinding decline. Note the series of
lower peaks on the way down. This type of weakness often leads to a new low, which could be a Spring,
and it is. A Spring #2 arrives, which can be bought on a test. The test occurs the next day. The immediate
LVS price jump above the prior peak is a good sign of a potential ‘Change of Character’ and a minor Sign
of Strength. After a SOS, expect a Last Point of Support (LPS), which is another entry area. Note that the
LPS returns almost exactly to the Preliminary Support (PS) where the Composite Operator began
supporting the stock with large purchases. Purchase LVS on the test of the Spring and place a stop below
the low of the Spring. If the LPS is the second tranche, set the stop for both purchases below the low of the
LPS.
(click on chart for active version)
AHS is in a Stepping Stone Reaccumulation after a good uptrend. The SCLX and the AR set the Support
and Resistance. The stock price thereafter grinds downward with a series of lower high price peaks. We
must conclude that an attempt will be made to decline below the SCLX low. A Spring type action ends the
decline. A dramatic Change of Character lifts the stock price up and out of the Reaccumulation area. The
test of the Spring #2 is the best buy point and then the early demand bars thereafter. Stop the trade below
the Spring low. Stocks under Reaccumulation will tend to change their character much more abruptly
than stocks basing in a cyclical low such as LVS. Expect Reaccumulation rallies to reignite quickly and
unexpectedly.
(click on chart for active version)
Note how the spot price of Corn spends eight months in an Accumulation. The last half of the
Accumulation has the corn price hugging the bottom half of the range. This would lead us to expect a
Spring to conclude the basing action. Note the attempt to Spring in January. The price stalls and then
returns to Support without making a SOS above the prior peaks, thus more work must be done. A very
large down bar Springs the low in April with massive volume. Buy the Test. The Change of Character takes
$CORN to Resistance quickly indicating that all of the price activity of the prior eight months is potential
C.O. Accumulation. To confirm this we would expect $CORN to attempt to stay in the top half of the
Accumulation area and then jump out.
47 Trading the Reaccumulation.note
All the Best,
Bruce
Wyckoff Power Charting
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been
instrumental
in crafting
curriculum.
« Previous
Article
| NexttheArticle
» At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Trading the
Reaccumulation
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Bruce Fraser | April 29, 2016 at 04:27 PM
When a stock enters a robust uptrend it can go on for a long period of time, for years in some cases. But
eventually even the best uptrend needs a rest. Leading up to this pause, the ownership quality of the float
deteriorates. Strong handed Composite Operators lock up much of the float at the beginning of a new
uptrend. Then as the trend matures, stock finds its way into weaker and weaker hands. The stock then
needs a rest in the form of a Stepping Stone Reaccumulation. The C.O. will take advantage of a SSR and
mop up loose shares from the more short term oriented traders.
A strong uptrend attracts more and more interest from a broad spectrum of speculators and the public.
This eventually destabilizes the trend and leads to a large and unexpected price correction. The cause of
this price weakness is short term oriented traders (weak hands) who are much quicker to sell at the
slightest signs of trouble on the tape.
The remedy for this change in the stock’s ownership structure is a ‘Stepping Stone Reaccumulation’ (SSR).
Reaccumulation is a sideways or a down period in the stock price that can last from a few months to a few
years. Almost without exception, any stock in a long term uptrend will experience one or more pauses on
the way upward to the bull move’s conclusion. Wyckoffians become masters at the art of evaluating and
trading Reaccumulations (click here and here for more on this subject).
What are some of the causes of a Stepping Stone Reaccumulation? Speculators become impatient with a
stock in a Reaccumulation period and seek greener pastures. Also, some long term retail stock holders
become discouraged and sell their shares. Often stock analysts will conclude that a Reaccumulation is a
top and the end of the uptrend. We have two case studies that explore how to trade a certain style of SSR.
In future posts we will consider other types of SSR formations.
As a general rule, an uptrend will be stopped by a Buying Climax as can be seen in Dollar Tree (DLTR). A
17.6% four month correction follows and concludes with a Selling Climax (SCLX). Usually the greatest
price damage is done at the beginning of an SSR. Such a large price drop means that a period of
Reaccumulation must follow as the C.O. is carefully vacuuming up shares. Because there is a core of strong
handed C.O.s already involved with the stock (they own a large portion of the shares from the beginning of
the uptrend), a typical SSR will spend less time at the bottom of the range near Support. The Wyckoffian
will be on the alert for higher lows being made and will be attempting to buy at these junctures. After the
Secondary Test (ST) the price of DLTR rises up to the resistance area and hovers there. Four places to buy
are highlighted. They are the ST, the Last Point of Support (LPS), the correction at the Back Up to the
Edge of Creek (BUEC) and the breakout of the BUEC. Set stops below the low price level of these areas.
Study the price turn off these lows for large Demand Bars that demonstrate a bullish ‘Change of
Character’. Often an early price upthrust after the turn is the best place to buy. It is confirmation that the
price pushing downward is unsustainable.
Point and Figure analysis helps to define the upside potential in the trade. Here we count the SSR just
studied. After the ST the price hovers around the Resistance area for a long period of time. All of this
additional trading in DLTR prior to jumping out adds columns to the PnF count. This raises the target
price objective and makes the campaign even more attractive. Wyckoffians understand that additional
time spent Reaccumulating allows for more stock to be absorbed by the C.O and thus for a larger PnF
count objective. Eventually the new price uptrend exceeds the upper PnF target by three points.
Boeing spends three years in this Stepping Stone Reaccumulation. BA concludes the preceding uptrend
with a BCLX and then drops suddenly into a Selling Climax. This sets the Resistance and the Support
areas that bound the trading range during Reaccumulation. At about the half way point of the SSR, the
price of BA Springs the low on volume (a Spring #2) and then tests the Spring multiple times.
Wyckoffians would attempt to buy this Test of the Spring with the idea that BA will jump to Resistance
and then begin the uptrend. The SSR is over one year in age at this point. Instead of jumping into an
uptrend, the price hugs the Resistance area for more than a year. Each low after the Spring is a higher low
and we must conclude that the C.O. is involved and absorbing shares at Resistance. This is very bullish as
the C.O. is aggressively buying BA and preventing the price from returning to the bottom of the trading
range. Noted above are the ideal places for trade entry and stop placement.
We count the Stepping Stone Reaccumulation using a 5 box method. Boeing’s price came very close to
fulfilling the lower target area of 166. Again, notice the extended time BA spent hovering around the
Resistance area building a much bigger PnF count and then fulfilling this extended count. As Wyckoffians
we want to see larger PnF counts form during the Stepping Stone Reaccumulation as they generate higher
price objectives.
All the Best,
Bruce
Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6
hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden
Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions
with additional material added. Each session will include ample time for attendees to ask questions. The
fee for this series is only $49. Click here to learn more.
48 Current Point and Figure Counts.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Wyckoff Power Charting
« Previous Article | Next Article »
Current Point and Figure Counts
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Bruce Fraser | May 03, 2016 at 04:05 PM
The concept of Cause and Effect is at work in markets constantly. This Wyckoff Law is codified and
measured using Point and Figure charts. These charts are robust tools for measuring market potential or
cause that has been built and then expended. Let’s take a survey of the current market with PnF charts
and look for a theme.
The Dow Jones Industrial Average PnF is constructed with daily data and a 3 box reversal method. This is
similar in scale to a weekly chart. A large Distribution (Cause) formed in late 2015 and then discharged
(Effect) as a swift markdown in January fulfilling the down count exactly. Thereafter, a large
Accumulation (Cause) formed and built a count range of 18,350 to 19,050. The $INDU has risen in
dramatic fashion (Effect) to a peak of 18,150 where it has paused. Currently it appears that a Stepping
Stone Reaccumulation (SSR) is forming. An SSR would build additional Cause on a PnF chart for further
upward progress. We can see that there is a little more fuel in the tank off the big point count formed
earlier this year. The lower count of 18,350 matches the high price made in May 2015 and 19,050 would
be a new high in the $INDU.
The S&P 500 has pushed up against its all-time high. A 1 box reversal PnF chart base count earlier this
year produces a range potential of 2,010 to 2,090. Ultimately $SPX exceeds the upper count by two boxes
(occurring on a climactic type price spike) and now appears to be in a trading range. The all-time high for
$SPX is directly above and so it seems likely that resistance will come into play around here. A Stepping
Stone Reaccumulation could build the additional count needed to Jump the indexes to new highs.
To show how robust the technique of horizontal PnF counting is as a tactical tool, here is a 5 minute PnF
count construction. Over a 4 day period, a Stepping Stone Redistribution forms and then is followed by a
swift decline. The SSR does an excellent job of targeting the low. What follows is a minor Accumulation
which has been fulfilled.
Conclusion: Indexes have expended much of the fuel in their Causal bases made earlier in the year. Risks
are much higher here in contrast to the beginning of the markup when the Cause was new and just
completed. The resistance of prior highs and the exhaustion of the prior Causal base means there are
headwinds. The building of Reaccumulation counts would help propel prices over the prior highs. Expect
volatile and trendless trading activity that is indicative of a new Cause being built. The question will be; Is
the Cause a Reaccumulation with new high prices directly ahead or is it Distribution for a new trend
down?
All the Best,
Bruce
Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6
hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden
Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions
with additional material added. Each session will be recorded and will include ample time for attendees to
ask questions. The recordings will be available for your review or if you are unable to attend any of the
live sessions. The fee for this series is only $49. Click here to learn more.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
« Previous
Article
| NexttheArticle
» At Golden
early 1990s, where he has been
instrumental
in crafting
curriculum.
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
Would you like to receive email notifications whenever a new article is added to this blog?
49 Springing into Action.note
Wyckoff Power Charting
Springing into Action
Bruce Fraser | May 06, 2016 at 03:49 PM
Stepping Stone Reaccumulation (SSR) formations are significant yet common. An SSR is a pause where
the stock rests before resuming the uptrend. SSR formations often have a signature of making the lowest
low early in the pause (in the first third to half of the total time spent in the SSR). We have recently
explored some examples of this phenomena and how best to trade it (click here). Once the low is in place,
the tendency is for the price to then scale upward with a series of higher lows until reaching the resistance
area. Once above resistance, the trend tends to resume at a steady and robust pace. There is another type
of SSR that we should be prepared to trade.
As is the case with all SSR formations, once the Buying Climax has been set, the Automatic Reaction will
follow and these two points set the Resistance and Support of the emerging trading range. In this
alternative type of SSR, we see a pattern of rallies off of Support being stopped at ever lower peaks. The
appearance is of a series of declining highs which suggests that sellers are becoming more aggressive in
their shedding shares at ever lower prices. This looks like Distribution, but it is not.
The final act of this deteriorating picture is typically a Spring. A break of the Support line and the prior
lows shatters the confidence of the remaining holders and in many cases they are compelled to sell. It is
difficult to hold on to stock that continually diminishes in value as the trading range grinds onward, only
to be confronted with a wholesale breakdown of the SSR.
The breakdown in the late stages of the SSR is a Spring. The Spring is a terminal act that concludes the
listless sideways price action and it is followed by a robust rally to the Resistance area and a resumption of
the uptrend.
(click on chart for active version)
Apple abruptly concludes an advance with a reversal and we label a BCLX and AR to set the Resistance
and Support. Each peak thereafter is lower than the prior. An important rule of thumb for this type of
SSR is that lower peaks are followed by a Spring. That is the case here. Note the big surge of volume on
the break of Support. This is a Spring #2 which must be tested and it is the next day. High volume
indicates a supply of stock becoming available below the Support zone. The Composite Operator is buying
this stock but they are uncertain how much supply is actually present at this level. The next day on the
Test, the price remains above the low and the volume is less than on the Spring day. The selling appears to
be exhausted. Quality demand bars emerge the next two days on high volume as Apple works up to the
Resistance line and into a new uptrend. Note the gap on the way up. We conclude from the gap that much
of the supply has been absorbed and price will now move easily upward. Volume diminishes as price
climbs above the Resistance area. It is taking very little Effort (volume) to move prices up (the Law of
Effort and Result). Stock supply is scarce. Buy Apple on the Test of the Spring #2 and place the stop under
the lowest price. Also stock can be bought on the demand bars that follow the turn off the Spring. Stops
would be set in the same location.
(click on chart for active version)
Charles Schwab has an Upthrust as it tests the BCLX and then returns to Support. The next peak is
marginally lower than the UT and then abruptly falls back to Support. Note in both of these examples that
the stock wants to return to Support. In previous SSR studies, the stock tended to make higher lows and
stay near the Resistance area. For SCHW the tendency is for the price to camp in the lower half of the
trading range. The price hovering near the low of the trading range is very discouraging to stock holders.
The final act is a Spring #3 which goes below the low of the AR and the Support. The volume is low, not
rising above the recent low levels. When the price Springs on low volume the stock can be bought right
away. Don’t expect a Test of a #3 Spring and in the case of SCHW there is no Test. The price pivots off the
low and begins marching upward. Buy the Spring or any of the demand bars that follow. Place stops under
the low of the Spring day. Just like with AAPL, there is a gap up and out of the Resistance. Stock has been
absorbed and is scarce. The gap proves that institutions are finding it difficult to buy the stock in
quantity. After a SOS there is a Back Up to the Edge of the Creek (BUEC) which returns to Resistance (old
Resistance becomes new Support). The BUEC is a classic place to add to the position. Move up stops on
the entire position to under the BUEC and the Resistance line. After the BUEC, a big demand bar launches
SCHW into the next phase of the uptrend.
There are no absolutes in the price action of stocks and markets. We study and discuss tendencies.
Tendencies are the product of human behavior in action, and the sum total of all of the participants and
their methods and influence. All reflected on the tape. We study these tendencies and we prepare for any
and all eventualities as best we can. As Wyckoffians we learn to love the uncertainty and the opportunity
to learn something from every situation. This attitude puts us on the mastery path. We walk it with
humility and gratitude.
All the Best,
Bruce
Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6
hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden
Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions
with additional material added. Each session will be recorded and will include ample time for attendees to
ask questions. The recordings will be available for your review or if you are unable to attend the live
sessions. The fee for this series is only $49. Click here to sign up now.
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
« Previous Article | Next Article »
Would you like to receive email notifications whenever a new article is added to this blog?
50 Wyckoff Power Charting. Happy Birthday!.note
Wyckoff Power Charting
Wyckoff Power Charting. Happy
Birthday!
Bruce Fraser | May 12, 2016 at 06:33 PM
We have reached the one year anniversary of the Wyckoff Power Charting blog. Many thanks for being
enthusiastic and supportive readers. Let’s pause and look back at what we did in the first year.
Richard D. Wyckoff’s emphasis was, first and foremost, to educate investors about the ‘Real Rules of the
Game’ of Wall Street. The public must understand that investing is a competition where they are trading
against the sharpest minds and the best systems imaginable. The absolute finest of this professional class
of investors are the ‘Super Traders’ whom we call the Composite Operator (C.O.). The C.O. is the very, very
best on Wall Street and they manage inordinately large portfolios. When the C.O. finds a stock they plan
on owning and campaigning, they build a huge position in it. This takes knowledge, time and skill. The
C.O. class of investor also must compete with other large C.O. types to lock up the float of the available
shares.
In the blog post ‘Getting Some Basic Terminology Under our Belts’ (click here for a link) we explore the
investment cycle. The investment cycle is classically composed of Accumulation, Markup, Distribution and
Markdown. This cycle repeats endlessly on Wall Street. Mr. Wyckoff wanted us to understand that the fate
of a stock is the result of who owns it. Who has absorbed and controls the floating supply of shares
available? The law of Supply and Demand is the dynamic at work here. If the Supply of shares is in the
strongest hands (the C.O.) then the float is locked up. The Composite Operator, through their campaigns,
have limited the shares available for others to buy. A slight increase in Demand for the shares, combined
with scarcity of shares obtainable, will send the stock price rocketing upward.
The process of Absorbing shares of a stock is called Accumulation. After a markdown, the C.O. determines
the price where value exists and Supply is present (the area of the Selling Climax, SCLX) and initiates the
Accumulation process. This is the start of the absorption of the floating shares. Early blogs were devoted
to the study of Accumulation, beginning with the stopping of a downtrend (SCLX). Then the C.O. carefully
absorbs shares without unintentionally driving the stock upward until a full position is Accumulated. Mr.
Wyckoff made the case that we could detect the footprints of the C.O. on the tape (in the vertical bar
chart) as they stealthily did their work. Through the analysis of the Phases of Accumulation (click here for
a link), Wyckoffians learn how to see the nuanced changes in the stock price action that tells of the
completion of Accumulation.
Completing Accumulation (absorption) tips the Supply and Demand balance toward scarcity of shares
and this puts the stock into a robust uptrend. The Wyckoff method has a unique and ‘all its’ own’ quality
to trend analysis. Trend channels in the form of Demand Lines and Overbought Lines show the ‘Stride’ of
the advance and provide junctures for the purchase of shares during the Markup. Trend analysis is unique
in the ability to identify trend exhaustion which either leads to the Stepping Stone Reaccumulation or the
Distribution Phase.
A Wyckoffian’s objective is to detect the stock that is under Accumulation and then to time purchases to
coincide with the stock Jumping into an uptrend. The mission here is not to compete with the Composite
Operator, but rather, to trade in concert with their campaigns.
Exhaustion of the uptrend arrives with a series of Climactic price spikes. Either a Stepping Stone
Reaccumulation or a Distribution formation follows Climactic stopping action. A Stepping Stone
Reaccumulation is a period of time in a trading range where stock is Reaccumulated for another leg up of
the bull run.
Distribution arrives after many months to years of rising prices. The C.O. is very, very carefully selling
their large holding of stock with the objective of not inducing weakness while they sell and prematurely
putting the stock in a downtrend. A stock requires the active support of the C.O. to remain in a bullish
uptrend. The removal of that campaign of support will stall the stock and produce a sideways market. The
act of selling will eventually produce a bear market. The best markets to sell into are frothy with bullish
news on the market and on the individual stock’s sunny prospects. This glow of good news has the effect of
keeping institutions and individual investors in the stock and buying more. The paradox of good news at
the top is one that Wyckoffians must guard against. Good news during Distribution and bad news during
Accumulation is a signature of all market cycles. Selling in concert with the C.O. is the objective of
Wyckoff Analysis.
The Markdown is the inevitable result of the C.O. finally selling all of their stock during Distribution.
Typically the downtrend begins with a bang as prices tumble violently. Downtrend channels are very
helpful tools for evaluating and trading bear markets.
In Wyckoff Analysis the compliment to the vertical bar chart is the point and figure chart. The horizontal
counting method provides the Wyckoff trader the ability to estimate price objectives. By counting across
the horizontal area of the Accumulation range or the Stepping Stone Reaccumulation the potential
‘reward’ or extent of the move can be calculated. Counting the Area of the Distribution and Stepping
Stone Redistribution accomplishes the same objective for declining markets.
First Year Highlights for your Review (click on the title for a link):
'Wyckoff Walk Around the Clock' For a review of the investment cycle of Accumulation, Markup,
Distribution, Markdown.
'Wyckoff Power Charting. Let's Review' A discussion of the Phases of Accumulation with Schematics.
'Context is King' A discussion of the Phases of Distribution.
‘The Laws of Wyckoff’ and ‘The Illustrated Wyckoff’ A discussion of the three laws of the Wyckoff Method.
'Intro to Point and Figure Construction' This is the first of seven posts devoted to horizontal point and
figure construction and counting.
We have done much work in building the Wyckoff foundation during the first year. As year two begins, we
will focus more attention on skill building and mastery development. There is also more to reveal about
the method and its hidden secrets. Again, thank you for your readership.
Also, I would like to express my gratitude to Chip Anderson and the staff at stockcharts.com for their
ongoing support of Wyckoff Power Charting.
All the Best,
Bruce
Professor Roman Bogomazov and I discuss the Wyckoff Method in a three part webinar series (6 hours in
total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden Gate
University. It is not too late to sign up for this lively discussion of the Wyckoff Method. All sessions are
recorded and available to each attendee. Join us for two more sessions of live discussions and review all of
the recordings at your convenience. We will use the “Wyckoff Power Charting” blogs as the framework
with additional material added. The fee for this series is only $49. Click here to sign up now.
51 Wyckoff Group Think.note
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental in crafting the curriculum. At Golden
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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Wyckoff Group Think
Bruce Fraser | May 19, 2016 at 07:22 PM
Finding the best emerging stock ideas can seem like finding a needle in a haystack. The goal is to organize
your market analysis in such a way that you can drill down into the market structure and find leadership
quickly and efficiently. There are many good ways to survey the market. As a Wyckoffian, I think a
powerful technique is to scan the market manually. This approach will give you a feel for the market that
is unique and intimate. While this may seem like a daunting task, a thoughtful system reduces the
burden.
My preference is to scan the overall market, then the Sectors, then the Industry Groups. Choose the most
promising Industry Groups and then drill into them to find the strongest, leading stocks. Doing this work
each week on some part of the market will give you a good feel for the state of the entire stock market.
Soon you will have a strong sense of the leadership and the laggards and eventually a feel for the emerging
rotation of Industries into favor and out of favor.
Organizing your analysis by market, then Sector, then Industry Group will make this exercise manageable
in the time you have available. Stockcharts.com makes it efficient to drill in and go from Sector to
Industry Group to stock analysis.
(click here for active version)
Leadership change among the Sectors often occurs somewhat suddenly (over a few weeks). The Materials
Sector is weak and has a decline that is in-gear with the $SPX into the January low. Then an abrupt shift
occurs where XLB is noticeably stronger than the $SPX while the broad market is basing.
(click here for active version)
When we drill into the Materials Sector list there are ten Industry Groups. The Specialty Chemical Group
illustrates how well Wyckoff Analysis works. In late 2015 this group was a laggard performer. At the
beginning of 2016 this all changed as the Specialty Chemicals began building a Cause and performing in
lockstep with the $SPX. IF the Specialty Chemicals are demonstrating improved performance there must
be stocks in this Industry Group that are outperforming. The Wyckoffian mission is to find the stocks
imbedded in the Industry Group that are pulling the entire Group and Sector upward.
52 Group Stink.note
(click here for active version)
H.B. Fuller (FUL) is in the Specialty Chemical Group. First note that FUL makes a final low one week
before the $SPX makes a Climax low. Thereafter it shows pronounced leadership. By the final February
test in the $SPX, the higher low in FUL is dramatically higher. This is one of the stocks that is leading the
Wyckoff
Power
Charting
Specialty Chemical Group. As Wyckoffians
we are
interested
in campaigning the leading stocks. FUL is
clearly a leading stock in an emerging Industry Group leader ($DJUSCX) and Sector leader (XLB). The
dynamic performance of FUL, once the entire market enters an uptrend, proves that this stock wants to
persist as a leader.
Group Stink
There are other considerations as you search through the individual stocks in an emerging Industry
Bruce
Fraser | May names
27, 2016first.
at 11:25
AM
Group. Start by looking at the largest
capitalization
Institutions
will tend to buy the large and
liquid stocks first. They will generally avoid the small capitalization stocks. Always buy the leaders and
avoid the laggards. Early leadership tends to persist as long term leadership.
Try drilling into the Materials Sector and the Underlying Industry Groups to see if you can identify other
emerging leadership stocks during the January and February timeframe. With practice you will become
very efficient at finding the best leadership in the market.
All the Best,
Bruce
Skill Drill: Visually scan the Sectors to identify leaders and laggards. (click here for a list of Sectors).
Choose a leading Sector and evaluate the underlying Industry Groups by clicking on the Sector name
(click here for an example).
Evaluate the stocks in an Industry Group (click on the name for the list of stocks in that group) and see if
you can find the leading stocks (click here for an example).
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
Let’s continue our discussion
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« Previous
Article | Next Article »
In the prior post we drilled down into the Materials Sector (XLB) and next into the emerging Specialty
Chemical Industry Group. We were seeking emerging strength in the Sectors and Industry Groups, and
Would
youstocks.
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(click on chart for active version)
Let’s study the Materials Sector (XLB) during 2014 and 2015. At the early November recovery high of the
$SPX, the Materials Sector is clearly lagging. The XLB eventually rallies to its September peak in late
November. The $SPX is stronger and makes new highs. The lagging nature of the XLB is becoming more
pronounced. When the $SPX reverses down in December the XLB is already falling and is much weaker.
Thereafter, XLB makes a series of lower peaks until a final thrust into a Buying Climax in late February.
Noticeable weakness follows for Materials while the $SPX keeps pushing to new high prices from
February through May. There are early warnings of trouble for the Materials sector and the lagging
behavior results in a total breakdown in June. The $SPX is still hovering near the high prices while XLB is
in free-fall. We take a cue from this persistent weakness to drill down into the Industry Groups that
compose this Sector to find the culprits that are dragging down the Sector
(click on chart for active version)
The Paper Industry Group is within the Materials Sector. Though it is not the only weak Industry Group,
it is an excellent case study. Note the $DJUSPP Buying Climax (BCLX) and the persistent price
deterioration thereafter. Not only is Paper weaker than the market it is also weaker than the Materials
Sector. At the Secondary Test (ST), Paper forms a large negative divergence in comparison to XLB and
$SPX . This combined with the BCLX argues for the stopping of the trend and a reversal into
Distribution. A breakdown of key support for Paper while the $SPX is probing new high prices is a big
warning to sell the Industry Group. The two Last Point of Supply (LPSY) areas are profoundly weak
points on the chart. The markdown that follows is in sharp contrast to the price action in the $SPX.
(click on chart for active version)
International Paper is a large capitalization component of the Paper Industry Group. IP follows the Group
closely. Much of what was said about the Group is relevant here. Note the downward stride that is
established immediately off the BCLX peak. Try drawing the downtrend channel. After a Sign of Weakness
(SOW) expect a Last Point of Supply (here we have two). There is an attempt to rally which has poor lift
and stalls at the ICE. This is a particularly dangerous place on the chart which can lead to major
weakness, and does so here.
An uptrend in the stock market indexes can mask the emerging weakness of formerly strong Industry
Groups and stocks. By always scanning the Sectors and Industry Groups a Wyckoffian can see these shifts
as they are emerging and be prepared to trade important investment theme changes.
All the Best,
Bruce
About the author: An accomplished "Wyckoffian", Bruce Fraser has been teaching
graduate level courses on Technical Analysis at Golden Gate University since the
early 1990s, where he has been instrumental
in crafting
the curriculum. At Golden
« Previous
Article
Gate University, Bruce's teaching has focused largely on Wyckoff Analysis. Learn
More
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