Wyckoff Power Charting

Beach Reads

During the long hot summer, it is a wise idea for Wyckoffians to go to the beach (or the pool) and relax, recharge, and do some light reading. My favorite summer reads are…. Charts!! What could possibly be more relaxing and enjoyable. So get your tablet (or laptop), find a beach towel and start reading.

I am off to the beach to take some of my own medicine. So here are some charts that I am going to be looking at while having fun in the sun. May these charts get your rest and relaxation off to a good start.


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Here is a 60 minute chart of the Dow Jones Industrials. Note the stopping action at the Preliminary Supply (PSY) followed by a Buying Climax (BCLX). Thereafter the $INDU has become range bound and increasingly volatile and Distributional in nature. After the peak at the Secondary Test (ST), volatility emerges and this is a sign of large interests selling stock. Smaller timeframes like this 60 minute chart will still have Wyckoff attributes, and events will unfold more quickly. After a robust breakout (see a daily or weekly $INDU chart) to all-time new high prices, a backing up action would be expected that returns the index back toward, or slightly in to, the breakout area. The Distribution on the 60 minute chart could be an indication that such a backing up action is at hand. We will turn to a Point and Figure chart to estimate the potential that has been generated in this Distribution.

This PnF chart is constructed with 5 minute data. Note that it encompasses the timeframe of the 60 minute vertical chart. When constructing PnF charts, different time intervals can be used when comparing the vertical chart to the PnF chart. The key is that each price point evaluated on the vertical can be identified on the PnF for counting purposes.

ATR scaling and the 1 box reversal method yields a substantial short term price objective. Two counts are generated, a conservative count and a more aggressive one. The smaller count returns the $INDU to the top of the breakout area and does not settle back into the prior high prices. While the larger count dips back into the area of the old high prices. Using stockcharts.com make a daily and a weekly vertical bar chart to visualize how this retracement could occur.

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Light Crude Oil ($WTIC) has a family resemblance to the $INDU above. The Distributional qualities outlined for the $INDU are at work here. $WTIC is a daily chart, therefore the scale of the Distribution is more extensive than the $INDU. After the peak price at the BCLX, there is a change of character where $WTIC then becomes volatile. This classic Distributional price action results in a breaking of the ICE and then a steady markdown.

Ponder this chart while you are getting sand between your toes. The earlier counts worked out well. Two current Distribution counts are shown. If the smaller count is accurate then a nice symmetry is formed from the LPS to the PS, and a mega PnF Accumulation count objective could be in the works. The larger Distribution count returns the $WTIC back to the low of the trading range. 

Copper has been in a bear trend since 2011. Here is a 3 box reversal PnF chart of the copper ETN (JJC) that has a Distribution count and two Redistribution counts on the way down. Note how they are nesting into a price range and establishing ‘confirming counts’. Copper has met these objectives and appears to be attempting to stop the decline. If this is the area of the low, we would expect to see a Cause built in copper for a new bull market.  Make a one box reversal PnF chart and try to determine if copper is in the early stages of Accumulation. Also have a look at the daily vertical bar chart.

Here is a weekly chart of copper for your review. Note that a Cause appears to be building. There is more Accumulation work to be done. Also, note the price throwing under the Oversold line and forming a PS and SCLX into the area where the JJC PnF chart had price objectives.

Fellow Wyckoffians notice how rested, relaxed and recharged you are beginning to feel. Now see what other amazing charts you can find.

All the Best,

Bruce

 

Point and Figure Pie in the Sky?

During the bear market that ended in 2009, the broad market indexes traced out a large base. Using the horizontal Point and Figure counting methodology, a Wyckoffian could generate a very large price objective. The countline was at the 8,100 level on the Dow Jones Industrial Average, with a low of 6,500. Once the Accumulation zone was completed the price projection was a range of 17,600 to 19,200. At the time the wheels appeared to be coming off all of the financial markets. While the gloom was thick, the Composite Operator was absorbing shares of stock with the expectation of higher prices, much higher prices. In December of 2014 the $INDU peaked at 17,991.19 fulfilling the lower 17,600 projection. During the following 18 months the $INDU index has been unable to rally to, or above, the 19,200 zone. The recent run to a new high has taken the $INDU to 18,622, still nearly 600 points below the 19,200 upper target.

Looking back at the projection generated from the base horizontal PnF count we must conclude that it was a remarkable projection. Dr. Hank Pruden published this count in the International Federation of Technical Analysts Journal in 2011 (click here for a link to this excellent article, pages 29 to 34). Now that the Dow Jones Industrials is 3% from the upper count, Wyckoffians should consider possibilities and tactics. 


The post Brexit new high in the $INDU and the $SPX has generated much excitement. While Wyckoffians are intently focused on 19,200 as a potential stopping level, many are asking if this market has the capacity to begin a new uptrend. Mr. Wyckoff would counsel that reaching a PnF objective is not, in itself, a reason to close out a position, or change long term strategy. Rather it is a signal to ‘Stop, Look and Listen’ to the market for other evidence that reinforces or refutes the PnF count objective just attained.

The Case for Distribution. An Upthrust After Distribution (UTAD) is like a Spring at the completion of Accumulation. A UTAD is the last gasp push to new high prices. This is an attempt by the C.O. types to trap the breakout buyers with a convincing drive to new highs after an area of Distribution.  This brings in new money to buy stock with the expectation of a fresh new uptrend starting. A UTAD will not linger long at new high prices. After a sharp and final breakout, expect one or two thrusts upward and then a turn downward. Once price falls back into the Distribution area, assume that prices can fall rapidly. The sequence that follows a UTAD would be a Sign of Weakness (SOW) and then a Last Point of Supply (LPSY) followed by a bear market downtrend. The danger of a UTAD is in the name itself. Distribution precedes the Upthrust, which means that C.O. selling is complete and markdown is the next important chart action. The result is that price can markdown at an alarming rate from the UTAD to the bottom of the prior trading range (think January lows) where a SOW is made.

A sound strategy for this scenario is to snug up stops on long stock positions to just below the break out high price in the Indexes.  As an example, the $INDU should not return to the Brexit low price and thus would represent a good tactical place for stops. A return of more than one third of the prior trading range would be a warning.

The Case for a New Uptrend. A Backup (BUEC) action will usually follow a good breakout. The shallower the BUEC the better. A return to the breakout level should, at most, minimally dip back into that level. It is even better to stay above the breakout zone.

Is there more fuel in the PnF tank for higher prices? Dr. Pruden presented his bull market PnF count objectives at the annual IFTA conference in October of 2009 as the $INDU was jumping out of the large Accumulation structure. These charts were published later in the IFTA Journal. In 2011 a large BUEC formed as the market indexes settled back to the Accumulation of 2008-09. Typically the BUEC is the most aggressive PnF count. Let us take that count and determine if there could be more fuel for higher prices. 

This PnF chart is modified from the original chart from 2009. Here we use a 5 box reversal method and the scaling is ATR 20 (click here for discussion of ATR 20 scaling). Even with these changes our counts should be consistent. In green is the original 2009 count Dr. Pruden made. Our PnF chart (using 5 box reversal and ATR20 settings) projects to 17,572.50 to 19,258.75, very very close to Dr. Pruden’s 17,600 to 19,200 original count. Next we add the newer data generated by the count from the BUEC to the SCLX. 35 columns produce a much larger objective of 22,010.00 to 23,696.25. It is always best to work off the conservative counts before extending to the more aggressive objectives. The lower counts appear to have stalled the averages for 18 months and the upper range of the count has still not been exceeded.

There is another Stepping Stone Reaccumulation count that was just generated in 2016. Does it confirm the bigger Accumulation count? The target of this Reaccumulation is 22,850.80 to 24,483.00 and is very close to the larger Accumulation count. It is a confirming PnF count!!

Legendary technician and investor Marty Zweig famously advised ‘Don’t Fight the Fed’. Typically the final phase of a bull market is buffeted by rising interest rates and a hostile Federal Reserve Bank. Currently the Fed has a zero interest rate policy and no appetite for raising rates anytime soon. With an accommodative Fed and more fuel in the PnF tank it is entirely possible that another leg of the bull market is ahead of us.

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Summary. The 17,600 to 19,200 PnF count objective is the active price projection (click here to see a chart). Wyckoffians are on the alert for a UTAD which would be triggered with a decline back into the prior trading range below 18,350. Bullish action would be to stay above the breakout area while consolidating and then resume the markup. Then, and only then, would Wyckoffians begin to focus on the higher PnF price objectives.

All the Best,

Bruce

Many thanks to my teaching partners Dr. Hank Pruden and Prof. Roman Bogomazov for their contributions to this blog.

New Workshop: “Successful Trend Trading in All Time Frames Using the Wyckoff Method: Identifying and Profiting from Institutional Campaigns.”  Roman Bogomazov, Hank Pruden and I will be conducting an in-person, day-long workshop in San Francisco on August 19, 2016.  This is a unique opportunity to learn from three Wyckoff experts how to recognize when large institutions are just about to launch or end major market campaigns, and how to profitably time trade entries and exits to take advantage of the subsequent price action. For more information, please click here.  

Getting on the Gas

Since 2008 natural gas has been in a downtrend and has generally under-performed crude oil, common stocks and other commodities. Recent price strength for natural gas could be indicating change is in the air. Is this a sign of better days ahead or just a tease before prices sag and lag again? Let us review this market with a Wyckoffian eye and attempt to divine whether there is potential to profit from an emerging new bull market.

Wyckoff analysis scales well into various time frames. In prior posts we have explored intra-day to weekly to monthly time frames. We will begin by evaluating the continuous futures contract of monthly natural gas prices ($NATGAS) to assess the prior bear trend and get a big picture grasp on current price activity.


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It is so important to go up one or two time frames above where you are trading. If trading intraday, study the daily and the weekly time frames. Often the biggest and best moves are easier to see in the next larger time period. Also, big negative surprises are often identified and avoided by being in tune with the bigger picture. The monthly chart of $NATGAS is telling a Wyckoffian tale. The bear market began with a 2005 Buying Climax and a 2008 Secondary Test, and has made lower lows in ‘09, ‘12, ‘15 and ‘16. A Selling Climax (SCLX) and Automatic Rally (AR) set up the outer boundaries of a potential Accumulation in 2009. Note how well this has contained the trading in $NATGAS since. The potential Accumulation is nearly seven years in duration. Such a long period of underperformance and lower prices creates apathy among investors and traders that is difficult to reverse.  

A Spring in the first quarter of 2016 has resulted in a notable rally that has snapped prices back into the Accumulation area quickly. We will call this a Change of Character (CHOCH) and watch if and how $NATGAS works back toward the Resistance area of the Accumulation around the $6 level.

$NATGAS remains very near the bottom of the trading range and still has a high risk of turning down and making new lows. A series of bullish Wyckoff type events are needed from here to confirm that a new bull trend is possible. The promise of the monthly chart is a Cause that has been forming for nearly seven years while $NATGAS was all but forgotten. A Spring has just been made and $NATGAS is jumping back into the Accumulation. The rally, post Spring, should be dynamic with good jumps and modest backups as price marks up toward Resistance. A decline into a Last Point of Support should retrace no more than one half of the gain made off the low. Less is better. Let’s turn to the weekly chart to refine our analysis.

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Zooming into the weekly timeframe provides another perspective. At the beginning of 2014 $NATGAS Upthrusts the Resistance area (see monthly chart) and climaxes. The two year downtrend results in an Oversold condition and the Spring that we identified on the prior chart. Note the quality of the rallies after the SCLX and the Secondary Test (ST). These rallies have an ease of movement that is much better than any prior rally in the downtrend. This is a notable Change of Character (CHOCH). Also, observe the ease with which the price went from an oversold condition (at the bottom of the trend channel) to jumping out of the top of the channel during this recent rally. Wyckoffians will look to a CHOCH as a clue to important changes in the trend of prices. The Oversold condition is the Spring on the monthly chart and illustrates why being aware of the larger timeframe is critical. Recall that after a SOS we expect a backing up action that results in a Last Point of Support (LPS). Price drifting down into a LPS will provide a couple of benefits. First, an LPS is a classic zone for entering a trade and secondly, the PnF horizontal count is taken from the LPS to the SCLX and the Preliminary Support (PS). There can be more than one LPS during the price rally up and out of the Accumulation area. $NATGAS will not be out of the Accumulation area and into an uptrend until it gets and stays above the $6 area. This is a long way away. In the monthly time frame a reaction from the SOS to the conclusion of a LPS could take six months or more. Rallies can go on for many months also. We must be psychologically in synch with the time frames being studied and traded.

Prior PnF counts of $NATGAS have been useful, as we can see on this three box reversal PnF chart. We have elected Dynamic ATR for calculating the scale. The current count is not yet complete as it needs a LPS. The green shaded box is a guess about the potential horizontal size. Currently 14 columns are counted. At 15 columns there is enough fuel to get to $6.20 which is the area of Resistance on the monthly chart. It could take more time and numerous additional columns to complete the PnF horizontal count. We must let the tape tell us when and if the Accumulation is complete and an uptrend is brewing.

$NATGAS is showing us an Accumulation structure on the Monthly and the weekly charts. If $NATGAS can get to the top of the monthly Accumulation, PnF counts could be generated that portend an advance of major bullish potential.

All the Best,

Bruce

 

 

Gold Fever

My grandfather and great grandfather were gold miners. They took their ‘grubstake’ to Alaska and the mountains of California. After many adventures they succeeded with a small working gold mine in Northern California. You should know this when reading this post as, by heredity; I may have a touch of ‘Gold Fever’.

To tamp down my perma-enthusiasm for gold I am first and foremost a Wyckoffian. Let us do the Wyckoff Drill on the SPDR Gold Shares (GLD). GLD is designed to track the price of the cash gold market. A share of GLD is valued at about one tenth the price of an ounce of gold. It has been a reliable proxy for the price of gold and it is traded by many gold enthusiasts. There are other gold tracking instruments that differ in composition and thus may be more suitable for your objectives.


After a long and grinding bear market for gold, a powerful turn upward in January and February has persisted through mid-year 2016. Is this the start of a new gold bull market? Does it have the potential to keep rising? How far can GLD go and how long can it go?

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Notice the largest bulge of volume at the Preliminary Support (PS) which often happens. The Selling Climax follows, also on very high volume. The Automatic Rally (AR) and the SCLX set the trading range of the Accumulation, which has been three years in the making. Lower peaks (circled in blue) keep the meme of a downtrend in force and mask the Accumulation at work under the surface. A classic trend channel is drawn and highlights an oversold condition in July ’15 and November ’15. We are calling this a Shakeout as it deeply penetrates the SCLX level and remains below for an extended period. The $100 level holds by 23 cents, a key round number and important support.

The rally that starts at the beginning of 2016 is a ‘Change of Character’. Springs and Shakeouts often reverse in such a dramatic fashion. Is the rally nearly over or is there more fuel in the tank? First note that Gold is still within the Accumulation structure. The peak of the Automatic Rally (AR) is Resistance and defines the upper border of Accumulation. Gold has not yet rallied to Resistance. A Sign of Strength (SOS) is a rally that has the power to push higher than a prior important peak. A Minor Sign of Strength has just occurred with a move above $125 (prior important peak). Often a SOS indicates resistance is forming and price needs a rest. There are three key peaks in the Accumulation that are magnets for a SOS followed by a Backing Up action (more on this later).

Labeled on the PnF chart are the essential points from the vertical chart. We always take our horizontal PnF counts from the analysis of the vertical chart. Is there enough fuel in the tank (pent up Accumulation) to make a campaign in GLD worthwhile? We always count from right to left and the LPS will be our anchor on the right side to begin counting. Three segments are counted, two Secondary Tests (ST) and the SCLX. Each of these counts is flagged on the PnF chart. The count could become bigger if GLD rises to the Resistance area and forms additional LPS and Backup levels as these can and would be counted.

The first segment (smallest count) takes GLD to the Resistance area at 141 / 155 which would produce a Major Sign of Strength and complete the Accumulation. The next segment counts to an exact double of the 102 low. There is substantial fuel in the tank to propel GLD higher. The segment from the LPS to the SCLX targets a price of 252 / 266.

Horizontal PnF counting is a powerful tool as it offers a method for estimating the extent of a price movement. But it cannot reveal the time it will, take or the path. The ‘Art of the Campaign’ is a major subject for future consideration. Here is an article co-authored by Dr. Pruden, Prof. Bogomazov and your blogger on another campaign that could illuminate how to proceed with GLD (click here for a link).

Take a moment to study and compare the above schematic to our GLD chart. Typically markets do not move in a straight line. At times markets are in hurry, and then they languish. Wyckoffians learn to let the markets lead the way. This schematic provides a potential roadmap for how prices emerge from Accumulation. It could help us to understand how GLD will stair step its way into an uptrend. There is Resistance at the upper bounds of the Accumulation that must be worked through. This will create pauses and opportunities to climb on board GLD. There is something here for investors and for traders. Investors will look to the dull periods when prices sag to build a position for a long term campaign while the trader will be poised for when dull and quiet prices morph into jumping action and the emergence of a new uptrend.

All the Best,

Bruce

Seminar Announcement: "The Art of Stock Campaigning Using the Wyckoff Method", Roman Bogomazov, Hank Pruden and I will be conducting a day long seminar in San Francisco on August 19, 2016. For additional information click here.

 

 

Stupid Chart Tricks

Stupid Chart Tricks are obscure rules of thumb in chart analysis that are helpful in your trading. These tricks are actually not stupid, they are clever and useful and generally unknown. Over the years we pick up these tips and tricks and incorporate them into daily chart analysis. We use them so often that these tricks become second nature and nearly automatic in their application.

From time to time we will showcase some ‘Stupid Chart Tricks’ that could be useful and helpful. In this post we explore one of my favorites that comes from the horizontal Point and Figure counting methodology.

At the completion of an Accumulation, Wyckoffians will make a horizontal count of the area and project a range of price objectives. At some point in the uptrend a Reaccumulation (SSR) trading range may form. There is a technique for determining when the SSR is likely to end and the uptrend resume. This nifty timing tool is our first ‘Stupid Chart Trick’.


In our last post (click here for a link) we evaluated potential outcomes from the Brexit vote. A bullish scenario was a springing of the trading range and a rally up to the Resistance area. So far this outcome has merit. Let’s count the Reaccumulation area and see if our chart trick might work.

The Accumulation that formed in the first two months of 2016 provided fuel for a robust uptrend. Since April the S&P 500 ($SPX) has formed a Stepping Stone Reaccumulation. Formidable resistance is in the area of the 2015 high prices where the market has stalled. Overhead supply must be absorbed before the market has the potential to climb to new high prices. Is there a technique for estimating when the Reaccumulation is complete and the $SPX may be ready to jump into a new uptrend?

The $SPX reached 2,110 and then entered a SSR. The Accumulation count is 2,270 to 2,350 so there is more upside potential. There is still more fuel in the tank. As Wyckoffians we ask if it is possible to fulfill this higher count objective generated at the beginning of the year (illustrated in yellow). Since April, a high level consolidation has formed a potential Stepping Stone Reaccumulation (SSR). There is a timing technique we can employ for determining when the SSR could end and the uptrend begin. When the Accumulation PnF count and the Reaccumulation count objectives approximately match, look for the uptrend to resume.

The $SPX is a real-time case study of this timing technique. In the Accumulation 15 columns formed before the liftoff. We would expect the Reaccumulation to have fewer columns before resuming the trend and matching the price objective of the Accumulation count. As the SSR forms, we can estimate the number of columns needed to match the price objectives formed in the Accumulation. In this case 9 columns of count in the SSR will match the 15 columns of count made at the lower price level of the Accumulation. Therefore when the SSR has completed 5-6-7 columns of count we estimate that a total of nine are needed.  This is a timing technique. Once we have 9 we start to look for the completion of the SSR on the vertical chart and the resumption of the uptrend. Note the nesting of the count objectives on the PnF chart. After the Brexit Spring, one more reversal downward (by three boxes or more) will complete a total of nine columns of count. When the Accumulation count and the Reaccumulation count approximately equal we will see if our Chart Trick works.

All the Best,

Bruce

For a case study of  Redistribution click here . For more on Reaccumulation analysis click here and here and here.

Seminar Announcement: "The Art of Stock Campaigning Using the Wyckoff Method", Roman Bogomazov, Hank Pruden and I will be conducting a day long seminar in San Francisco on August 19, 2016. For additional information click here.

breXit and O's

Using the Dow Jones Industrials ($INDU) as a proxy for the U.S. stock market, let’s look at the market’s response to the Brexit vote. Is there a Wyckoffian theme unfolding that possibly provides some early advice on how to proceed from here?

Wyckoffians think in terms of scenarios. Now that price has returned to Support, we consider a bearish and a bullish response to the Brexit event.


In April a big bulge of volume accompanies Preliminary Supply (PSY) and a Buying Climax (BCLX). This supply checks the advance and indicates the C.O. is Distributing in this price zone. Thereafter, a long grinding decline takes $INDU back to the area of Support and slightly through it for a Sign of Weakness (SOW). ICE is an estimation of where Demand and Support reside. The index needs to hold above the ICE and rally away from it. When a market or stock is Distributing, there comes a moment when ICE is suddenly and forcefully broken. This appears to have taken place on the sharp Brexit decline. Volume was huge. We ask ourselves what typically happens after a breaking of the ICE?

Bull Case: Support is still in-play at this price level. A Spring of the SOW low and then a reversal up produces a rally back to the Resistance and potentially into a new uptrend. The Brexit decline is the conclusion of the Reaccumulation and the new uptrend begins.

Bear Case: The very big bearish Brexit bar off the Last Point of Supply (LPSY) is evidence of Distribution being nearly complete. LPSY (there can be more than one LPSY) is the last act of the Distribution phase. A period of Markdown follows the completion of Distribution. There are three classic responses $INDU could make at this level. First, the index rallies to about the mid-point of the Distribution range. The rally is of low quality and low volume. Such a rally would be labeled as another LPSY. This could take a few weeks. Second, the price does not lift and trades sideways under the ICE for a week or two and then resumes the decline down and away from the distribution area. Third, price weakness continues within a few days and the markdown is underway.

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The volume indicates there was an abundance of supply on Brexit day. Markdowns often start in such a manner. The bull case would need $INDU to begin retracing the Brexit decline very soon with a robust jump back into the Resistance area and to the top of the trading range.

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The Financial Select Sector SPDR ETF (XLF) has recently been weaker than the $INDU and the $SPX. This sector tends to be leadership (bullish and bearish). Since the beginning of 2016 the XLF has been a laggard. In May and June, XLF is weaker and is breaking into a Markdown after a SOW and LPSY.

Counting the trading range from March to the present as Distribution, there is 2,550 $INDU points generated so far. There could be more. This projects a price objective back to the range of the lows set in January and February. There is a case to be made for another LPSY forming, and this would make the count larger. Also note that the minimum bullish count generated early in the year has been met. The domestic stock market has been in a huge trading range since 2014. The Distribution count illustrated above returns the market back to the bottom of this large multi-year trading range.

Conclusion: the Brexit decline has taken the $INDU to the Support area. Price should attempt to hold in the area of Support. The quality of the rally (or the lack of) that follows will tell much about what comes next. For additional recent market studies click here and here.

All the Best,

Bruce

June Webinar Special: ‘Practices for Successful Trading: Establishing Routines and Effective Mental Habits’

Roman Bogomazov and I have created a new two part webinar series to help traders and investors adopt or refine the habits – psychological and analytical – needed to acquire mastery of the Wyckoff Method of trading. Join us for part two on Monday, June 27th and review both recordings at your convenience. (click here to learn more)

Putting It All Together

Mr. Wyckoff created a methodology that requires the trader to use judgment for positioning trades. We live in an era where sophisticated computer algorithms are all the rage in trading circles. These automated systems are designed to remove trading judgment from the human process and build it into the computer’s functions. In Wall Street lore these automated trading systems were called a ‘Black Box’. Black Box systems were popular because they promised to remove 'flawed' human emotion from the trading process and therefore generate steady profits. In the end the markets would turn on these automated systems and render them ineffective. It could be argued that if Black Box systems really did work and were the holy grail of investing, cyclicality of prices through the business/investment cycle would become history. And we know from the recent past, that is not the case. The investment cycle is alive and well.

Black box methods (secret mechanical systems) were around in Mr. Wyckoff’s era. But he rejected the notion that such techniques could succeed in the long run. He strongly believed that a trader must understand the ‘Real Rules of the Game’ of speculation. The driving force of price trends is in the campaigns of the Composite Operator. The C.O. is dependent on the large up and down trends of prices and the tendency of the majority of investors to do the wrong thing at the wrong time. Mr. Wyckoff understood that this co-dependent relationship would never fundamentally change. He advised the devoted investor/trader to understand the real rules and develop the skills and knowledge to conduct trading operations in harmony with the large informed interests of the Composite Operator.


The impulses of human nature tend to work against being successful in investing. Therefore, the Wyckoff Method was designed to help the devoted individual trader to shed those natural impulses and replace them with the habits that make for successful speculation. It takes time and practice to retrain one’s thinking to be in sync with the forces that create the big profitable price trends.

We have covered much ground on the disciplines of ‘tape reading’ (chart reading) the Wyckoff way. Putting the pieces together means to integrate what we have learned so far into a cohesive process that maximizes the potential for success in our trading campaigns. This methodology should solidly align us with the interests, motives and forces of the large informed interests. We conduct our campaigns when they conduct their campaigns. We buy when they buy. We sell when they sell. We rest when they rest. The classic human impulse is to buy when the C.O. is selling and to sell when the C.O. is buying. This instinct leads the average investor to hold large stock positions when the C.O. is out of the market (during large markdown phases) and resting up for the next big bull campaign.

Here is the framework for our market campaigns.

Understand the Present Position of the Market. Is the market in an Uptrend?  Is the market in a Stepping Stone Reaccumulation in an ongoing uptrend? Is it in the final stages of an Accumulation? From this analysis we can make a judgment about the markets readiness to begin a move. Determine which stage the market is likely in (Accumulation, Markup, Distribution and Markdown). Using trading range and trend analysis methods, Wyckoffians have superior tools for making these determinations.

Select a Stable of Stocks that are Poised to Move with the Projected Trend of the Market. Using industry group analysis and stock analysis, identify stocks that are leading the market. These are stocks that you are expecting to move further and faster than the market will move. Using Vertical Charts and the excellent tools in stockcharts.com, relative outperformance can quickly be determined. A quality list of leading stocks, in leading groups will prepare us for that moment when markets jump into uptrends.

Identify a Good Cause (Point and Figure Analysis) where Absorption has Taken Place. Accumulation or Reaccumulation can be measured using horizontal PnF counting techniques to estimate a potential for price appreciation. Only consider stocks that exceed your minimum reward to risk objectives.

Select Stocks that are Ready and Poised to Move with the Market. Find those stocks that are poised on the ‘springboard’ to jump upward and out of their area of absorption and into a new or continuing uptrend. There will always be stronger stocks ready to lead the market upward, and these are the stocks we seek to campaign.

Wait Patiently Until the Market is Ready to Begin Turning Upward. When a new uptrend begins the speculator has the wind at her/his back. By timing purchase commitments to coincide with a fresh new uptrend, profits can build quickly. Be alert and ready to act at the beginning of the markets ascent. Markets can move suddenly and quickly. By completing the above processes, a Wyckoffian is ready to make the best decisions at the right times. Integrating these ‘Best Practices’ will put us in alignment with the methods and the activities of the Composite Operator.

Mr. Wyckoff has provided us with all of the required tools to do the above analysis and to be prepared to act in a timely manner. It takes practice and skill to integrate these elements with a high degree of mastery. Practice will bring us closer and closer to the ideal.

Note: For declining markets, the concepts above are applied in reverse.

All the Best,

Bruce

Roman Bogomazov and I have created a new two part webinar series to help traders and investors adopt or refine the habits – psychological and analytical – needed to acquire mastery of the Wyckoff Method of trading. (click here to learn more)

The Unfriendly Skies

Mr. Wyckoff’s counsel was to learn how to read the tape and then to determine buying and selling decisions by the price action. For Mr. Wyckoff ‘reading the tape’ was best done by plotting the price onto a chart and then interpreting the chart. Our mission in ‘Wyckoff Power Charting’ is to elevate our tape reading skills through the endless practice of chart analysis.

In our last post we compared the Dow Jones Transportation Average to the Dow Jones Industrial Average. The Dow Theory was founded on this type of analysis. Let’s drill down into the Transportation Average and study one of the key industry groups; Airlines.


                                                        (click on chart for active version)

Monthly charts can be illuminating. A nearly five year long Accumulation forms after the bear market of 2007-09. The structure of classic Accumulation can be observed and labeled on this monthly vertical chart.  A big Cause leads to a big Effect. From the low to the high this six year advance in the Airlines industry group leads to over a 940% advance. At the conclusion of the bull run a dramatic Buying Climax forms. After the climax, the price structure has the characteristics of Distribution. We will zoom into a weekly view for more detail.

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After the rush into the Buying Climax, classic Distribution forms for the Airlines. The rally from the Automatic Reaction (AR) to the Secondary Test (ST) is of poor quality and the result is a decline into a Sign of Weakness (SOW). After the SOW for both the $SPX and the Airlines industry group, the two indexes diverge from each other. The S&P 500 remains strong and matches the prior high, while the Airlines make a lower peak. This is labeled a Last Point of Supply (LPSY) because of the prior SOW. Recall that when a lower low forms (SOW), Wyckoffians are on the alert for a LPSY which is a lower peak. An LPSY typically results in a bear market downtrend. Note how the Airlines have become weak after the LPSY and are now hovering just above the prior (February 2016) low. This is where ICE forms. Now at the bottom of this trading range, Support needs to hold and a rally begin. Falling through the ICE can result in a breakdown and the resumption of the downtrend.

All the Best,

Bruce

June Webinar Special: ‘Practices for Successful Trading: Establishing Routines and Effective Mental Habits’

Roman Bogomazov and I have created a new webinar series to help traders and investors adopt or refine the habits – psychological and analytical – needed to acquire mastery of the Wyckoff Method of trading. (click here to learn more)

How Now Charles Dow?

My first teaching assignment at Golden Gate University was the survey course, FI352 ‘Technical Analysis of Securities’. This course is devoted to the study of the major technical analysis methods. It is a wonderful course for becoming familiar with the vast body of knowledge that is technical analysis. When I began teaching FI352 it was the only graduate course available on the subject at an accredited university. Today, in addition to FI352, there is an entire graduate degree program in technical analysis offered at GGU, and it remains the only program of its kind anywhere.

I would always open the FI352 semester with a lecture on Charles H. Dow and ‘Dow’s Theory’. His theory, in many regards, is the birth of modern day technical analysis. Chart analysis was in use before his arrival on Wall Street. But it was his innovations, in my opinion, that revolutionized the study of markets and influenced so many of the tools we use today and the common understanding we have about how markets work.


In the early 1880’s, Mr. Dow and Edward Jones began publishing an afternoon two-page summary of the day’s financial news. Included was an 11 stock index mostly composed of Rail stocks.  This publication was delivered throughout New York City and became indispensable to those working in finance at the time. At the end of the decade this publication became the ‘Wall Street Journal’. A few years later Mr. Dow created the Dow Jones Industrial stock index which was composed of 12 industrial stocks. About a year later he added a Dow Jones Transportation stock index. These two indexes became very popular and were watched very closely.

Mr. Dow was of the strong belief that stocks tended to move upward and downward together. Like a flock of birds, most stocks moved in lockstep with the overall direction of the market indexes he published. He observed three degrees of movement in the markets; a major move lasting years, an intermediate move lasting months, and minor swings lasting weeks. Mr. Dow noted that the major trend of stock prices tracked the ebb and flow of business conditions and broad economic activity. His industrial and transportation stock indexes were very useful in indicating the health and direction of the economy.

Another very important observation was that stocks tended to ‘discount’ future economic activity. As we have discussed in earlier blogs, stocks (and therefore the stock indexes) tend to change their trends months prior to the turn in broad economic activity (click here for a link to an earlier blog on this subject). The stock market is a very reliable leading indicator of changes in economic activity.

These theories were published by Mr. Dow on the editorial page over a period of years. The collection of these editorials became known as ‘Dow’s Theory’ or ‘The Dow Theory’.

Central to the Theory was the definition of a trend. A Bull Market uptrend was composed of a series of higher high prices and higher low prices in the Dow Jones Indexes. Intermediate swings of weeks to months in duration would trace out these trends to ever higher prices that make up a big Bull Market. Bear Markets were a series of lower high index prices followed by lower low prices.  The broad conclusion to be made was that business conditions would follow the lead of these big upward and downward stock index trends.

After Mr. Dow’s death, numerous outstanding market analysts carried the baton of The Dow Theory and added their own ideas to it. As Wyckoffians we acknowledge this robust theory for all it has done for the development of the study of markets. The Dow Theory advanced the concepts of indexes, industry groups, chart analysis, and on and on.

From the study of index charts and stock charts Mr. Wyckoff developed his own methodology. He was familiar with the theory and paid close attention to the published indexes.  

As a ‘Tip of the Hat’ to Mr. Dow, we will compare the Dow Jones Industrial Average and the Dow Jones Transportation Average and add in some Wyckoff Analysis. The analysis and comparison of the Industrial Average and the Transportation Average can be as useful today as it was a century ago.

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A key tenet of the Dow Theory is that when both the Transportation and Industrial Averages trend together, a bull or bear market is confirmed. From 2013-15 we see robust uptrends in both averages and this would be considered a bull market. In 2015 the Transportation Average enters a downtrend while we might describe the Industrial Average to be in a giant trading range. The theory states that the Industrials reflect the health of manufacturing and the Transports indicate that the goods manufactured are (or are not) being shipped to market. If these two gauges fall out of synch with each other then the economy is not humming along. There is stress developing for the broad business environment. A decline in both averages portends a slow down or recession in business conditions.

On the weekly charts above, we can see a Selling Climax in January of 2016 in the Transportation Average and this was followed by a robust rally. But the rally, so far, has been to a lower high. It appears that the Transports are still lagging the Industrials but the Selling Climax is suggesting the downtrend may be over.

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Zooming in to the daily chart the $TRAN culminates the downtrend with a SCLX (mid-January) and then acts distinctly stronger than the $INDU by beginning an uptrend early. The robust uptrend ends with a BCLX and a throwover of the Overbought line. Support and Resistance lines can be drawn after the Automatic Reaction (AR). Classic signs of Distribution are emerging. We note the decline into a Sign of Weakness (SOW) on expanding volume. The rally that follows is of poor quality as the volume diminishes on the rise from 7500 to 7800. After a SOW we look for a Last Point of Supply (LPSY). Weakness typically follows an LPSY. One potential scenario is that $TRAN declines, but stays above the February low. This could indicate a bigger base being formed (with a larger PnF count) for a more sustainable bull run later on.

If the current trading range in the $TRAN is a Stepping Stone Reaccumulation, we would want to see the volume become dull and quiet on the pullbacks while expanding on the rallies. The evidence does not yet suggest this scenario.

The minimum objective of the Distribution count is an exact hit. Also this is confirmed by a Stepping Stone Redistribution count to the same target. Note that a large SCLX develops right into these downside price objectives which helps to confirm that the PnF price targets are working. In 2015 there appears to have been a bear market in the Dow Jones Transports while the Dow Jones Industrials muddled along in a large trading range. Fulfilling the PnF downside projections combined with a ‘Change of Character’ in the Transports is an encouraging sign for the bulls. While the $INDU is near all-time high prices, the $TRAN is not. Both indexes, in gear together and in strong uptrends would be a good sign for the stock market and broad business conditions.

Mr. Wyckoff was influenced by the development of the Dow Jones Indexes and Charles Dow’s Theory. He added to this body of technical analysis knowledge by developing his own buying and selling tests that built on these principles as well as other valuable indicators. In future posts we will explore these contributions by Mr. Wyckoff.

All the Best,

Bruce

(Although not in use today, the phrase "how now" is a greeting, short for "how say you now", and can be found in archaic literature, such as the plays of William Shakespeare. -Wikipedia)

Group Stink

Let’s continue our discussion of scanning the market with a top down approach. Recall that we proposed a process of first evaluating the stock market (S&P 500), followed by the Sectors and then the Industry Groups. With a quick scan the best and the worst Sectors and Industry Groups can be identified. This ultimately allows for a focus on the very best ideas.

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 from this, the best stocks. This week we will learn to spot the warning signs of emerging weakness in the Sectors and Industry Groups.


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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

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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