Wyckoff Power Charting Blog Archives

March 2016

Distribution Power Waves

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.


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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.

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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.

All the Best,

Bruce

Ps. We will not publish during the upcoming week. Have a great week.

Judging Power Waves

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.

 


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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.

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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.

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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 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 

Ps. This Saturday, March 12, I will be Chip's guest on ChartWatchers LIVE at 1pm Eastern. (to register click here)

Point and Figure Analysis with Intraday Charts

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.

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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.

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 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.

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. 

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