Wyckoff Power Charting

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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Does Lightening Strike Twice?

The Wyckoff Method is a trend following and trend management system. It seeks to identify the pre-conditions to the emergence of a rising (or falling) trend, with the intention of participating in that trend for the duration of it. The Method is timeless and is often used for other means, such as trading range scalping and option trading. In keeping with the prior post, we will scale out to the larger timeframe and discuss the value of Wyckoff context and how one timeframe can speak to what is happening in others.

Every bull market has a mega-leadership theme. In the current cycle, an epic uptrend took place in biotech (we will study the IBB as a proxy for the biotechnology industry group). Can Wyckoff help us find these large trends and help us manage such trends? The big returns reside in the big trends and the Composite Operator fully understands this principle.

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Wyckoff Nation

In the Wyckoff Nation we appreciate how the Wyckoff Method provides context. This is an advantage unique to this approach of chart analysis. We have learned that a process unfolds during the formation of Accumulation and Distribution. The perspective of context follows from becoming intimate with the nuances of this evolution observed on the charts. This edge develops into mastery. In this blog, and in your individual practice, we are devoted to raising the skills of our Wyckoff Nation.

When we tackle the analysis of a stock it is valuable to follow a process. A process has multiple benefits. When evaluating a stock a good process will make for a more thorough analysis. It will provide a viewpoint that will minimize the potential to make an erroneous evaluation. It will improve the likelihood of selecting the best candidates. Also, with time, we become more efficient at researching candidates therefore covering more ground.

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Wyckoff Bonding

The US Treasury Bond market is largely dominated by the activities of the Federal Reserve Bank. For seven years the Fed has maintained a policy of zero to one quarter percent interest rates. In December 2015 the Fed raised the Fed Funds rate to a range of ¼% to ½%, and since that time they have taken no action. In addition, the Fed is a major buyer and owner of US Treasury Notes and Bonds.  With this in mind, is it possible to evaluate the US Treasury Bond market with our Wyckoffian tools to make a cogent and useful conclusion?

With interest rates near the zero bound, small changes in rates can result in large swings in bond prices. Interest rates can rise a modest amount and result in large declines in the price of the bonds. Therefore the risk of owning bonds (the longer the maturity the more volatile) could be high. Now the Fed is indicating the intention of raising interest rates in December. The pressure seems to be building in the economy for interest rates to climb. We should pull out our Wyckoff Toolbox and get to work on bonds. Being a Wyckoff tape reader may be the best method for navigating the bond market in the years ahead.

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Wyckoff Chartfest

In the glow of the great ChartCon event, I am simply at a loss for words. It was a festival of charts and technical analysis. Being in the company of these super talented (and legendary) technicians was an experience. I am sure this vibe was oozing out of your computer as it was mine. I am looking forward to replaying all of the presentations. The charts are always telling a story, let’s have them do the talking this week.

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An AAPL for Your Thoughts

So many important events happen in the fall of the year; school starts, football season begins, new television programming is introduced. But, for many, the momentous event is the reveal of the latest Apple iPhone. This year the pundits had a collective yawn over the new features of the iPhone 7, but the preorders were record setting, and very quickly the initial inventory was sold out. There is only one thing a Wyckoffian can do when their iPhone order has been delayed; evaluate the Apple chart (of course that is the Wyckoffian answer to nearly everything).

We must always keep in mind that markets are a discounting mechanism. The tendency of the market is to look out into the future and anticipate the important changes coming. This discounting phenomena is why Mr. Wyckoff counseled to read the motives and actions of the large interests by their conduct on the tape. As we discussed last week, this is best done by interpreting their footprints with the study of price and volume on the vertical bar chart. Was it a surprise to the large interests that Apple Inc. had such a favorable consumer response to their latest iPhone offering? Let’s consult the charts for some clarification.

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Tracking Big Footprints

Two of the most elusive and rare phenomena in the world are; 1) a Big Foot (Sasquatch) sighting and 2) evidence of the Composite Operator.  In both cases we start by tracking their footprints. By stalking and following these footprints we hope for an infrequent sighting of these elusive creatures. In Big Foot’s case we look for actual tracks in the woods of their rather oversized feet. With the Composite Operator, the tell-tale tracks are discovered in the characteristics of price and volume. Both Bigfoot and the Composite Operator are widely considered to be fictitious. And while the sighting of Bigfoot might win a bet, the identification of the presence of the C.O. can lead to profitable trading.

The Composite Operator is a heuristic (a useful fiction). The C.O. is an aggregation of the trading activities of numerous, very large, and highly skilled stock market operators. As a group they can and do shape trading in the markets. When they conduct a campaign of Accumulation or Distribution their activities can be seen in the charts. Mr. Wyckoff counseled to learn how to identify and follow the activities of these large and expert operators. The Wyckoff Method provides the tools and skills to track the activities of the Composite Operator.


                                               (click on chart for active version)

 

Chipotle Mexican Grill is a highflying stock that recently has fallen out of favor with the investment community. Note the long downtrend in CMG that began in August of 2015. High spikes of volume on price weakness in November, December and January are signs of massive institutional and public liquidation. Year-end 2015 selling from 580 to 400 is Climactic in price spread, volume and duration. An Automatic Rally (AR) lifts CMG back from an Oversold condition (falling below the trend channel). We now can draw a Support line at the low of the SCLX and the peak of the AR. Note the volume on the AR rally. Very high volume is a sign of the Composite Operator’s presence. The rally to the Up Thrust (UT) is on much lower volume which means the C.O. is not sponsoring this stage of the rally. The UT is likely the top of a very wide Accumulation range, and where a Resistance line is drawn. Short sellers could sell the mid-March test of the UT peak with the idea that a new leg of the downtrend could start from here and return all the way to the Support line. In late April a gap low is a classic place to cover that short. The decline grinds downward to the SCLX low where a Spring #2 forms. Note the March and late April volume spikes. CMG is still being actively liquidated. But in both cases this drop in price and rise in volume occurs above the SCLX low which implies Accumulation by C.O. forces. An attempt to drop below the SCLX low will be the important test of the exhaustion of the supply of shares. This test should be on less volume. In early June, six down days lead to a marginal new low on much less volume than the prior March and April declines. The lack of follow through by price leads a Wyckoffian to conclude that CMG is being supported here by large interests. As volume did expand on the Spring (#2) we must expect one or more Tests. For most of June and into July CMG hovers near the low price but cannot breakdown. This means there are still more shares for sale at these low prices but they appear to be Absorbed. With a Spring #2 it is best to wait for a rally on rising volume followed by a dip back toward the lows on declining volume. In July that is what happens. Volume on the down days is diminishing and the late August lows get close to the Spring low but the test is good. The classic trade is to buy (a one third position or less) the turn off the Test low when some good up bars with expanding volume show strength. Stops are placed under the Spring low. A Backup action shows little ability to decline and volume is not expanding.

This entire sequence illustrates a stock that is under intense selling pressure. CMG has a Creek of overhead supply that is keeping the stock price in the bottom half of the Accumulation range. Wyckoffians see the footprints of the C.O. and their buying operations during the unfolding of this large Accumulation structure. Then CMG Jumps the Creek on the news that Pershing Square has announced the purchase of a 9.9% stake in the company. Now this news is as exciting to a Wyckoffian as a Bigfoot sighting. Imagine one large and skillful operator vacuuming up nearly 10% of a large, important stock right under everyone’s noses. Also, keep in mind that members of the C.O. community are always in competition with other C.O. types Accumulating in the same time period.

As Wyckoffians we now seek confirmation that all of the large sellers are done. This would suggest that Phase D is in force now. So we expect a rally to the top of the Accumulation area with pauses and Backups along the way.

 

Horizontal PnF targets could help clarify strategy.  The conservative PnF Distribution count is exceeded on the final decline to the SCLX. The price snaps right back into the target zone on the AR. The Accumulation is not complete and it is too early to attempt a count of the entire range. The Spring area can be counted and it projects to just above the Accumulation range. This would be a potential Sign of Strength (SOS). This PnF price objective (568/588) would be an attractive target for a trade from the Test of the Spring. We now want to see an ease of movement in the (Phase D) rally that can get above the mid-point of the Accumulation range (above 468). Any big Backup activity should stay well above the Spring low to demonstrate strength of ownership (shares in strong hands). Successful Backups during the rally out of the Accumulation would be the ideal places to add or initiate positions.

It appears that Bigfoot and the Composite Operator Live!

All the Best,

Bruce  

Homework: CMG has a potentially larger Distribution structure spanning all of 2015. Try to count the larger PnF structure. How does this information impact long term tactics?

ChartCon 2016 is fast approaching. It will be an information packed two days with legendary technicians presenting their best work. My presentation is titled: Understanding Wyckoff's Approach to Technical Trading. I am working on this presentation now. My mission will be to reveal tools, tips and tricks for making the Wyckoff Method a powerful ally for you. We will explore how to determine the action points, where they are and techniques for identifying them. I hope you can join me during this exciting two day event.