Wyckoff Power Charting

Stair Step to Profits

Let’s look back at 2016, Wyckoff style. As Wyckoffians, our mission is to sharpen our skills and to gain some ideas about how 2017 could unfold. The past year began with a stiff correction that cascaded into a Selling Climax in January. A classic Accumulation formed between January and March when the large informed interests of the Composite Operator absorbed stock. Once the absorption was complete the market (here we study the S&P 500) jumped into an uptrend. Calculating the Point and Figure return potential, the S&P 500 generated a Cause of over 19% (this price objective was exceeded in mid-December).

Following the Accumulation and the jump into an uptrend, two Reaccumulations formed during the year. Each Reaccumulation was over two months in duration and resulted in the continuation of the uptrend. We look to these stair stepping pauses to generate PnF counts that confirm the price objective of the Accumulation (click here for more on Stepping Stone Confirming counts).

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Enjoying the Short Term View

Wyckoff has a fractal quality, and thus, the Method essentially works in all timeframes. The trained eye can see the price structures unfolding whether it be on a weekly vertical chart or the shortest term intra-day chart. Let us see if we can drill into the shorter timeframe and find a nuanced interpretation of the current market from the intraday data. After a robust advance in the aftermath of the November presidential election it seems possible that the market could have a retracement, of sorts. As Wyckoffians we would seek to identify a Cause being built, in the form of Distribution prior to a corrective decline. This retracement of prices typically would be in proportion to the advance that preceded it. To capture the minutia of the Distribution we would want to zoom into the smaller timeframes where the elements of the structure can be seen.

In this case-study we focus in on the trading range that has formed since mid-December in the S&P 500 Index ($SPX). The 60-minute vertical chart captures the entire trading range (which may not be complete).

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Going for the Gold

Group rotation has recently brought to life moribund sectors such as the financials, materials, and industrials. Gold was largely forgotten in the aftermath of the election. At times, it is in lockstep with the broad stock market, and at other times it is marching to its own drummer. After a long bear market gold rallied at the beginning of 2016 and was a bright spot into mid-year. Then it went into a grinding decline that was a huge disappointment to many gold watchers.

Now that we are entering 2017, let us turn a Wyckoffian eye toward the metal and try to make sense of the prior year and the possibilities going forward.

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Holiday Chartfest

The Holiday Season is a joyful time of year. Wyckoffians appreciate the year-end and anticipate the year to come. This period of reflection and planning is best enjoyed by studying lots of charts. Here we offer a few charts to enhance your year-end fun. May you find lots of additional charts to augment your Holiday Season!

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The Inner Game of Wyckoff

Looking back over this soon to be concluded year could be a very useful exercise. Let us put a twist on this ‘lookback’ to supercharge the exercise and improve our Wyckoff Method of trading. Mental rehearsal can be a valuable technique for strengthening trading skills. With this technique we take a historical market structure that we are determined to master; and analyze it, evaluate it, label it and then paper trade it. The intention is to become nuanced with the many variations of price structures that develop in markets. Mental rehearsal is the ability to make this rehearsal process as real as possible in the mind’s eye. I believe that all successful traders employ this technique, in a very personal way, in the development and mastery of their vocation.

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There are No Free Lunches

As this year comes to an end, investors and traders begin thinking about the year ahead. Wyckoff as a tape reading process is concerned with what the current position indicates about the future direction of markets. Ideally Wyckoffians develop their tape reading skills (chart analysis) to a level where market opinions are stripped away and replaced with an unbiased assessment of conditions.

Having said this, your blogger was invited to present a ‘2017 look ahead’ at the annual December TSAA-SF luncheon. As my mission in life is to stay in this moment and evaluate current conditions I knew attendees looking for prognostications would be disappointed. Therefore, I decided to focus on current conditions that may affect the future direction of the market.

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Why Point and Figure Works

We are often asked to explain the rationale for why the horizontal Point and Figure (PnF) method works for estimating price objectives. The horizontal PnF method which requires judgment and nuance to employ, is rarely used these days, yet it works surprisingly well. The judgment required is in knowing how much of the horizontal congestion area to count for the purposes of estimating how far a price move could extend. To understand why counting a horizontal congestion area could systematically and consistently measure the potential for a price move, we must review the role of the Composite Operator in the Accumulation and Distribution processes.

An abundance of volatility allows the C.O. to Accumulate the shares of a stock they intend to campaign. A wide trading range with many upward and downward swings provides cover to the C.O. to absorb the many shares needed for a sizable position. Therefore, the key element necessary for the C.O. to Accumulate shares is volatility. If there is less volatility during the trading range, it will take longer. With more volatility it will take less time.

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Get Your Motor Going

Recently Toyota Motors (TM) has shown signs of life after a long cyclic decline. There seems to be a rhythm between the swings in the price of TM and the trend of the dollar. A strong dollar can improve profit margins of the Japan based auto manufacturer. The current rising trend of the dollar is likely improving business conditions for TM and other foreign companies doing substantial business in the U.S.

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Main Street vs. Wall Street

When a bull market begins, near the end of a recession in business activity, the fed is actively pumping money into the banking system. This new money seeks a place to go where it can work the hardest. During the early stages of the economic recovery the real economy is running below its capacity to produce. There is slack in the system. It can take years for business activity to rise to a level where companies start to invest in new productive capacity. Generally, the first half of a bull market move in stocks is very robust because new capital is not needed by Main Street and thus finds its way to Wall Street where speculation is very profitable.

There is always competition for capital. So capital is continuously migrating to where it is perceived to be working most efficiently and profitably. We can think in terms of two big camps which are competing for capital in the domestic economy; Main Street and Wall Street. When the economy is slow and running below its capacity to produce, Main Street has no incentive to invest in new plant, equipment or to hire additional employees. The Fed pumps money into the banking system and it goes toward Wall Street speculation. During this time Wall Street is paved with gold and Main Street is full of pot holes. When the Animal Spirits of speculation are at work on Wall Street it is a very exciting time. Eventually that capital starts moving to Main Street (as the economy improves) when value and opportunity emerge.

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The Broadening Top Formation

My very first technical analysis book was “Technical Analysis of Stock Trends” by Robert Edwards and John Magee (5th edition). How I loved that book! I read and reread it and endlessly studied the charts. In my estimation it is one of the most important technical analysis books ever published. Golden Gate University Professor, Charles Bassetti, has done a masterful job of keeping this series current with updated editions in recent years (click here for a link to the book).

In the early years of my chart studies the ‘Broadening Top Formation’ revealed itself on a few occasions. Edwards and Magee has an excellent section on this formation. The Broadening Top structure has a signature of increasing volatility within a trading range. This manifests as a series of higher highs and lower lows with the net effect that price is making no progress (a trading range of increased volatility). This price structure typically arrives at the conclusion of a bull market, is a bearish development, and can take months to years to develop.

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Wyckoff Doodles

When markets become dull and listless, Wyckoffians tend to doodle. Currently equity markets seem to be marking time while waiting for the results of the presidential election. The best way for the Wyckoff Nation to prepare is to keep reading the tape (in the form of chart analysis). One of my favorite activities is to doodle on the charts by drawing trendlines.

These lines can bring a chart to life and illuminate possibilities that would otherwise remain hidden and obscure. Doodling is best done on charts that you typically do not spend much time studying. Longer term charts are ignored in many cases. Recent posts have shown the value of these very large timeframes for anticipating big moves.

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