Wyckoff Power Charting

More Pie. Bigger Sky!

In 2011 Dr. Hank Pruden published a remarkable Point and Figure chart study, which called for a new bull market in stocks. The horizontal PnF counting method, as applied by Dr. Pruden, revealed a price objective of 17,600 / 19,200. That count produced a whopping 11,100 Dow Jones Industrial Average (INDU) points and was added to the countline of 8,100 and the low of 6,500. A big and bold count. During 2014 the minimum count was achieved. Thereafter a Reaccumulation formed. In July of 2016 a new uptrend began. Dr. Pruden, Roman Bogomazov and I reevaluated the original base count and the Reaccumulation to determine if there was more fuel in the tank for a continuation of the bull market. The result of this study was published here in July of 2016. Please take a minute and read this post (click here for a link). Also read the article where Dr. Pruden makes his legendary market call (click here for a link and turn to page 29).

When ‘Point and Figure Pie in the Sky?’ was posted, the INDU was jumping to a new high and clearing the 18 month Reaccumulation trading range at 18,600. In that blog post, the case was made for increasing the original Accumulation PnF count and making even higher price projections. In addition, the just completed Reaccumulation PnF count confirmed this higher price potential. New objectives were generated to approximately 22,000 / 24,000. Let’s now update the progress of the INDU on the way to these price objectives.

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Shorts Find TSLA Shocking

Tesla has just achieved a market capitalization that is larger than either Ford or General Motors. Currently Tesla manufactures just two different models (with a third on the way). How is it possible that Tesla has a valuation that exceeds these two Detroit behemoths? As a Wyckoffian I will tell you that I have no earthly idea. Could an analysis of the charts reveal the intentions of the large informed interests (the Composite Operator)? Is Tesla done going up, or is there more charge in the batteries to propel this stock price higher?

Tesla has been ‘climbing the wall of worry’ for a number of years. Recently short sellers have been squeezed by a stellar rally that has taken TSLA out of a multi-year trading range and into a new markup phase. In early 2016, we studied the Point and Figure Distribution Paradox (click here for a link) with TSLA as our case study. We managed to publish this study the week of the Shakeout low for TSLA. There was three confirming PnF counts which nested in the same price zone plus a Climactic Shakeout of the multi-year trading range. Let’s bring the TSLA chart studies up to date as much has happened since this original post.

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Another Stupid Chart Trick

Time for another ‘Stupid Chart Trick’ (click here for a prior chart trick). I have counted about one zillion (this might be a slight exaggeration, but barely) Point and Figure chart formations. As a consequence of this personal passion, I have devised some counting conventions that have proven to be very helpful. This is not a classic horizontal PnF counting technique. So please explore its usefulness for yourself with some practice counting.

A common problem with counting PnF Distribution is over-counting. We have addressed this in a prior post (click here for a link). Identifying the proper and accurate Distribution PnF count is a nuanced concept. Here is a technique to help with identifying counts that are more conservative (and I find more accurate).

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Segmenting PnF Counts

Wyckoffians often break up a large Point and Figure count into smaller count objectives. A large count objective usually requires a significant period of time to be fulfilled and pauses will occur along the way. Sometimes these pauses result in a period of Reaccumulation prior to moving on to higher and higher price objectives. Segmenting PnF counts can help to identify and evaluate these pauses.

Another very important reason to divide up PnF counts, is that often the entire base is not Accumulation. It is important to only count the Accumulation portion of the base structure. A decline can be stopped by a Selling Climax, but the strong hand of Composite Operator absorption may not yet be present. If that is the case, then only a part of the base is actual Accumulation. Over-counting a PnF Accumulation range is a common problem. Segmenting the PnF count is the answer to this potentially costly error. We are endlessly asking ‘how much of this trading range is Accumulation?’ What portion of this trading range structure is ‘Intelligent Accumulation?’

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The New Nifty Fifty

The ‘Nifty-Fifty’ era for stocks started in the 1960s and went into the early 1970s. These fifty or so stocks were consistent out-performers. Their earnings, sales and stock price growth stood apart from most other stocks. These stocks grew in value, year after year. They became known as ‘One Decision’ stocks. These companies could be bought and held forever. Buy them and forget them. The result and the consequence was that the Nifty-Fifty became very overvalued, and they stayed that way for a long time. Most other stocks during this era languished, underperforming badly.

Eventually the Nifty-Fifty Era ran out of steam. The result was the stock malaise of the 1970s. Stocks were in a decade long trading range. The mistake market participants made was thinking any stock is a ‘One-Decision’ investment. It appears we could be in a new Nifty-Fifty Era (of sorts), which we should embrace, while keeping the above lesson in mind.

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Pedaling Wyckoff

Horizontal Point and Figure analysis is one of the great mysteries of technical analysis. Very few do this analysis, and even fewer do it correctly. An incorrect procedure leads to bad counts. But when it is done properly PnF is magical. We have spent much time here establishing proper counting technique. The next step is to use the excellent stockcharts.com PnF charting engine to make (and count) lots and lots of charts. PnF analysis is like learning to ride a bicycle. Once you know how, you’ve got it.

Here we will circle back and review some recent energy and oil PnF studies and then do some fresh analysis on the S&P 500. Wyckoffians simply cannot get enough PnF, it gets into our technical analysis DNA. Let’s get on our Wyckoff Bicycle and ride back to the March 18, 2017 post, ‘Crude Oil’s Slippery Slope’ (click here for a link).

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Junk is in the Eye of the Beholder

High yield bonds came into their own in the 1980’s and have become ever more important to the functioning of the economy. They are often referred to as ‘Junk Bonds’ because they are bonds of lower quality. Investors are attracted to them for the higher yields offered over treasury and investment grade corporate yields. As Wyckoffians we watch Junk Bonds because they offer a richness of information about the state of the economy and the risk appetite of investors for bonds and stocks. Let’s look at the current state of the Junk Bond market to see if there are any useful messages now.

Since early 2016, High-yield bonds have had a robust bull run. The Relative Strength Line (RS) has been climbing at the same time. This RS line is constructed by comparing the SPDR Barclays High-Yield Bond ETF (JNK) to the iShares 20+ Year Treasury Bond ETF (TLT). By comparing low-quality bond prices to high-quality bond prices, we can make some inferences about the bond market and the economy. When the RS line is rising, Junk is outperforming Quality bonds. This generally means yield spreads are narrowing. Investors are willing to pay more for lower quality debt, which is a sign of improving confidence in the economy and the stock market. When the RS line is falling, these spreads are widening. This indicates bond buyers are seeking quality and shunning the higher risk bonds. Confidence is falling.

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Around the World in 21 Ways

The EAFE Stock Market Index includes the large and mid-cap stocks of 21 developed countries throughout the world. The U.S. and Canada are excluded from this index. The stocks in the EAFE represent more than $1.9 trillion of market capitalization.

Currently there is a worldwide movement toward nationalism. This could impact the flow of goods exported between countries. Many of the manufacturers of goods we rely on are based in these 21 countries.  If trade competition and barriers are impacted by the winds of political change will the EAFE be affected? Often the markets act in ‘counter intuitive’ ways and confound investor logic.  Let’s employ some Wyckoff analysis and attempt to get some clarity on the current state of the EAFE.

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The Big AAPL

Wyckoffians are always on the search for Causes being built. A trend will end and a Cause will start. A Cause will end and a trend will start. The Wyckoff Method is centered around the interpretation of these conditions and the appropriate tactics. The Composite Operator (C.O.) is our ‘fictitious’ large investor who builds size positions in these campaign stocks. The C.O. Accumulation of these shares result in big bases. The Distribution of shares at the end of a major uptrend will result in a decline. In the case study of Apple Inc. (AAPL) we had the opportunity to study a small Distribution that led to a Stepping Stone Reaccumulation (SSR). Take a few minutes to review the post of September 17, 2016 (click here for a link).

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Zim's Group

In 1987 Hank Pruden decided to take a break from teaching the Technical Analysis Courses at Golden Gate University. He offered me the job of teaching these courses during his absence. I was honored by his invitation and accepted. His sabbatical went on for three years and I believe it was a very creative period for Hank. In 1988, we became aware of a new mental technology called Neuro Linguistic Programming. The epicenter of this new thought work was Marin County which is very close to GGU. Hank and I discussed NLP over lunch and concluded that it could have profound benefits for traders as a mental edge. We decided to form a study group of professional traders, to meet twice a month in Marin County, to study and learn the techniques of NLP to be applied to trading skills. The reason we met in Marin County was to hire NLP Practitioners to work with us and install these methods. Over the ten-year life span of the group we worked with three NLP experts (and numerous trading coaches). The group was called the Zim’s Group because we met at a restaurant of the same name. Zim's provided a private dining room in the back where we could do our work (the hamburgers were great too).

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Animal Spirits

Leadership in the Technology Sector is generally a very good sign for the entire stock market. It bodes well for the market when technology stocks, as a group, are leadership as a rally starts. Speculative animal spirits are heightened by the emerging leadership of the Technology Sector. Conversely when technology stocks are generally laggards, caution is warranted for the market as a whole.

What is the current state of the Technology Sector and can we draw any Wyckoffian conclusions about the general health of the broad stock market? Using the Technology Select Sector ETF (XLK) we will put together a Wyckoffian analysis of the present position and likely future direction of this most important segment of the market.

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Crude Oil's Slippery Slope

Crude oil is on a slippery slope downward. Was this completely unexpected or were there clues of the impending decline? The stock market is a discounting mechanism. Stocks traditionally light the way by starting to move prior to the underlying economic events. That, of course, is the argument for Technical Analysis of stock prices. If stocks are going to move first, investors who wait for the economic news will have missed much of the trend.

Does this Discounting phenomenon work only in larger time frames? Is it possible to harness the stock markets x-ray vision in the intermediate and shorter windows of time? Crude oil prices tumbled this month and continue to be weak. Let’s take a Wyckoffian look at crude oil in comparison to energy stock prices to see if this Discounting mechanism warned of trouble for crude oil.

                                                 (click on chart for active version)

Do Energy stocks anticipate (Discount) trend changes for crude oil? Here we compare the daily vertical chart of crude oil futures ($WTIC) to the Energy Select Sector ETF (XLE). A rising trend in XLE develops in November and the stride of the trend channel forms right away. Note how the low for XLE precedes the low for $WTIC by 9 trading days. This is a useful ‘Downside Non-confirmation’ (DNC) of XLE. Crude oil and XLE climax together at the end of the uptrend with an overbought throw-over of the trend channel. This is classic exhaustion of both trends.

A Buying Climax and Automatic Reaction (AR) form the approximate outer boundaries of two range bound markets. XLE only spends 3 weeks above the support formed by the AR low. Energy stocks are notable in their weakness. The downward stride for XLE forms early. Weakness sets up two Sign of Weakness (SOW) price breaks and two Last Point of Supply (LPSY) attempts to rise above the ICE. This is Distributional price behavior. An LPSY (there can be more than one) is a final attempt to rally, which fails at a lower high. The Distribution is complete after the final LPSY. Then Markdown begins.

Why are the Energy shares so weak while $WTIC continues testing the BCLX high prices and the Resistance area? After the Secondary Test (ST) of $WTIC there is a full two months of trading around the highs. Is this Distribution or Reaccumulation? XLE would argue that energy shares are Discounting trouble in the oil patch. After an Upthrust (UT), weakness in crude oil seems to emerge out of nowhere (XLE was warning of impending trouble). The price of oil suddenly tumbles below the Support at 50. Note the extent of the decline in XLE prior to crude oil becoming weak. This trendless range bound market was Distribution for $WTIC, and XLE was leading the way lower.

Now that Distribution is complete for both $WTIC and XLE, Point and Figure counts can be taken to estimate price objectives. XLE spent less time in Distribution prior to initiating a Markdown. Crude oil had much longer to be Distributed and that could explain the sudden, sharp price break.

XLE was in Distribution from 78 down to 71 with the count line at 73. Using the 1-box reversal PnF method, 7 columns are counted. Therefore, the objective is 71 to 66. XLE is in that target zone now. On the vertical chart, signs of an oversold condition and Selling Climax are emerging. We are on the alert for stopping action, until then the downward trend is still in force. Our expectation is that XLE will bottom prior to $WTIC. But how much downward potential is there for $WTIC?

The Distribution structure for $WTIC began forming last December. It has just resolved downward. From the Upthrust to the Buying Climax (BCLX) 12 columns are counted. The countline is 55 and thus an objective of 43 is projected. There are key prior lows and support at 43 and this adds validity to this price objective.  

XLE has done a good job of leading and anticipating the moves in crude oil. We would expect this leadership to continue. A possible scenario is that XLE finds a low prior to $WTIC and becomes range bound (this would be expected between 71 and 66). There we can assess if this is Accumulation or Redistribution. In either case, we will watch XLE closely to light the way for the next move in crude oil.

All the Best,

Bruce

Complimentary webinar announcement: Fellow Wyckoffian Roman Bogomazov and I will be conducting a “Market Outlook and Stocks Review” session on March 29th, 3:00 – 5:00 pm (PST).  We are pleased to again welcome acclaimed author/trader Corey Rosenbloom. To find out more and to register for this free webinar click here.

 

 

NASDAQ 100 Index. A Current Case Study.

Point and Figure charts are generated from price volatility, unlike a vertical (bar) chart, which is plotted as a function of time. This is particularly valuable to Wyckoffians who are always on the search for a Cause being built. Causes lead to Effects; Accumulation results in Markup and Distribution turns into Markdown. Point and Figure analysis provides a method for estimating the potential extent of that Markup or Markdown. We have spent considerable time on methods and procedures for PnF analysis, and will continue our skill building using these powerful charts.

Here is a current and fascinating Point and Figure case study.

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Get to the Point and Figure

Sector activity can illuminate important thematic trends unfolding within the market. Point and Figure studies identify large Accumulation and Distribution Structures related to these themes poised to be campaigned over many months and years. The Sector can be campaigned using Exchange Traded Funds (ETFs). Also, by drilling down into the Sub-Industry Groups and stocks the very best leadership candidates can be identified and traded.

Here we will focus solely on the PnF studies and develop an eye for how these large formations help inform our strategy and entry tactics. This is, by no means, a complete list of current best sectors. Take the time to go through all of the sectors, generate PnF charts and hone your skills. The next step is to zoom into promising Sub-Industry Groups and continue the analysis. We know that best Sectors have within them best Sub-Industries, and within them, best stocks that are leading the way up.

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Three Legged Stool

Let’s do an integration case study. We have spent much time on two robust processes; Point and Figure analysis and Vertical Bar Chart analysis. Recently Relative Strength studies have been added to the mix. A stool has three legs, any fewer would make it unstable. Our Wyckoff stool has three strong legs. In this case study, we will combine these tools and see if it makes our analysis sturdier and more cohesive.

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Bonds. Shaken, Not Stirred.

It is time to circle back and update our studies of the US Treasury Bond market. On October 7, 2016, we did a Wyckoffian analysis of Treasury Bonds as they appeared to be at a critical juncture. Take a few minutes now and go back to that post (click here for a link) and review this prior analysis. To summarize; at that point bonds were in a well advanced state of Distribution that was 21 months along. After an exhaustion rally (or Upthrust) bonds returned back to the Resistance level. By zooming into the UT area, we identified completed Distribution on a smaller scale and took two Point and Figure counts. The larger of these two counts projected a sizable decline to the major Support line for bonds at about 110 on the TLT chart.

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