Wyckoff Power Charting

Wyckoff Group Think

Finding the best emerging stock ideas can seem like finding a needle in a haystack. The goal is to organize your market analysis in such a way that you can drill down into the market structure and find leadership quickly and efficiently. There are many good ways to survey the market. As a Wyckoffian, I think a powerful technique is to scan the market manually. This approach will give you a feel for the market that is unique and intimate. While this may seem like a daunting task, a thoughtful system reduces the burden.

My preference is to scan the overall market, then the Sectors, then the Industry Groups. Choose the most promising Industry Groups and then drill into them to find the strongest, leading stocks. Doing this work each week on some part of the market will give you a good feel for the state of the entire stock market. Soon you will have a strong sense of the leadership and the laggards and eventually a feel for the emerging rotation of Industries into favor and out of favor.


Organizing your analysis by market, then Sector, then Industry Group will make this exercise manageable in the time you have available.  Stockcharts.com makes it efficient to drill in and go from Sector to Industry Group to stock analysis.

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Leadership change among the Sectors often occurs somewhat suddenly (over a few weeks). The Materials Sector is weak and has a decline that is in-gear with the $SPX into the January low. Then an abrupt shift occurs where XLB is noticeably stronger than the $SPX while the broad market is basing. 

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When we drill into the Materials Sector list there are ten Industry Groups. The Specialty Chemical Group illustrates how well Wyckoff Analysis works. In late 2015 this group was a laggard performer. At the beginning of 2016 this all changed as the Specialty Chemicals began building a Cause and performing in lockstep with the $SPX. IF the Specialty Chemicals are demonstrating improved performance there must be stocks in this Industry Group that are outperforming. The Wyckoffian mission is to find the stocks imbedded in the Industry Group that are pulling the entire Group and Sector upward.

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H.B. Fuller (FUL) is in the Specialty Chemical Group. First note that FUL makes a final low one week before the $SPX makes a Climax low. Thereafter it shows pronounced leadership. By the final February test in the $SPX, the higher low in FUL is dramatically higher. This is one of the stocks that is leading the Specialty Chemical Group. As Wyckoffians we are interested in campaigning the leading stocks. FUL is clearly a leading stock in an emerging Industry Group leader ($DJUSCX) and Sector leader (XLB). The dynamic performance of FUL, once the entire market enters an uptrend, proves that this stock wants to persist as a leader.

There are other considerations as you search through the individual stocks in an emerging Industry Group. Start by looking at the largest capitalization names first. Institutions will tend to buy the large and liquid stocks first. They will generally avoid the small capitalization stocks. Always buy the leaders and avoid the laggards. Early leadership tends to persist as long term leadership.

Try drilling into the Materials Sector and the Underlying Industry Groups to see if you can identify other emerging leadership stocks during the January and February timeframe. With practice you will become very efficient at finding the best leadership in the market.

All the Best,

Bruce

 

Skill Drill: Visually scan the Sectors to identify leaders and laggards. (click here for a list of Sectors).

Choose a leading Sector and evaluate the underlying Industry Groups by clicking on the Sector name (click here for an example).

Evaluate the stocks in an Industry Group (click on the name for the list of stocks in that group) and see if you can find the leading stocks (click here for an example).

Wyckoff Power Charting. Happy Birthday!

We have reached the one year anniversary of the Wyckoff Power Charting blog. Many thanks for being enthusiastic and supportive readers. Let’s pause and look back at what we did in the first year.

Richard D. Wyckoff’s emphasis was, first and foremost, to educate investors about the ‘Real Rules of the Game’ of Wall Street. The public must understand that investing is a competition where they are trading against the sharpest minds and the best systems imaginable. The absolute finest of this professional class of investors are the ‘Super Traders’ whom we call the Composite Operator (C.O.). The C.O. is the very, very best on Wall Street and they manage inordinately large portfolios. When the C.O. finds a stock they plan on owning and campaigning, they build a huge position in it. This takes knowledge, time and skill. The C.O. class of investor also must compete with other large C.O. types to lock up the float of the available shares.


In the blog post ‘Getting Some Basic Terminology Under our Belts’ (click here for a link) we explore the investment cycle. The investment cycle is classically composed of Accumulation, Markup, Distribution and Markdown. This cycle repeats endlessly on Wall Street. Mr. Wyckoff wanted us to understand that the fate of a stock is the result of who owns it. Who has absorbed and controls the floating supply of shares available? The law of Supply and Demand is the dynamic at work here. If the Supply of shares is in the strongest hands (the C.O.) then the float is locked up. The Composite Operator, through their campaigns, have limited the shares available for others to buy. A slight increase in Demand for the shares, combined with scarcity of shares obtainable, will send the stock price rocketing upward.

The process of Absorbing shares of a stock is called Accumulation. After a markdown, the C.O. determines the price where value exists and Supply is present (the area of the Selling Climax, SCLX) and initiates the Accumulation process. This is the start of the absorption of the floating shares. Early blogs were devoted to the study of Accumulation, beginning with the stopping of a downtrend (SCLX). Then the C.O. carefully absorbs shares without unintentionally driving the stock upward until a full position is Accumulated. Mr. Wyckoff made the case that we could detect the footprints of the C.O. on the tape (in the vertical bar chart) as they stealthily did their work. Through the analysis of the Phases of Accumulation (click here for a link), Wyckoffians learn how to see the nuanced changes in the stock price action that tells of the completion of Accumulation.

Completing Accumulation (absorption) tips the Supply and Demand balance toward scarcity of shares and this puts the stock into a robust uptrend. The Wyckoff method has a unique and ‘all its’ own’ quality to trend analysis. Trend channels in the form of Demand Lines and Overbought Lines show the ‘Stride’ of the advance and provide junctures for the purchase of shares during the Markup. Trend analysis is unique in the ability to identify trend exhaustion which either leads to the Stepping Stone Reaccumulation or the Distribution Phase.

A Wyckoffian’s objective is to detect the stock that is under Accumulation and then to time purchases to coincide with the stock Jumping into an uptrend. The mission here is not to compete with the Composite Operator, but rather, to trade in concert with their campaigns.

Exhaustion of the uptrend arrives with a series of Climactic price spikes. Either a Stepping Stone Reaccumulation or a Distribution formation follows Climactic stopping action. A Stepping Stone Reaccumulation is a period of time in a trading range where stock is Reaccumulated for another leg up of the bull run.

Distribution arrives after many months to years of rising prices. The C.O. is very, very carefully selling their large holding of stock with the objective of not inducing weakness while they sell and prematurely putting the stock in a downtrend. A stock requires the active support of the C.O. to remain in a bullish uptrend. The removal of that campaign of support will stall the stock and produce a sideways market. The act of selling will eventually produce a bear market. The best markets to sell into are frothy with bullish news on the market and on the individual stock’s sunny prospects. This glow of good news has the effect of keeping institutions and individual investors in the stock and buying more. The paradox of good news at the top is one that Wyckoffians must guard against. Good news during Distribution and bad news during Accumulation is a signature of all market cycles. Selling in concert with the C.O. is the objective of Wyckoff Analysis.

The Markdown is the inevitable result of the C.O. finally selling all of their stock during Distribution. Typically the downtrend begins with a bang as prices tumble violently. Downtrend channels are very helpful tools for evaluating and trading bear markets.

In Wyckoff Analysis the compliment to the vertical bar chart is the point and figure chart. The horizontal counting method provides the Wyckoff trader the ability to estimate price objectives. By counting across the horizontal area of the Accumulation range or the Stepping Stone Reaccumulation the potential ‘reward’ or extent of the move can be calculated. Counting the Area of the Distribution and Stepping Stone Redistribution accomplishes the same objective for declining markets.

First Year Highlights for your Review (click on the title for a link):

'Wyckoff Walk Around the Clock'  For a review of the investment cycle of Accumulation, Markup, Distribution, Markdown.

'Wyckoff Power Charting. Let's Review' A discussion of the Phases of Accumulation with Schematics.

'Context is King' A discussion of the Phases of Distribution.

The Laws of Wyckoff’ and  ‘The Illustrated Wyckoff’  A discussion of the three laws of the Wyckoff Method.

'Intro to Point and Figure Construction' This is the first of seven posts devoted to horizontal point and figure construction and counting.

We have done much work in building the Wyckoff foundation during the first year. As year two begins, we will focus more attention on skill building and mastery development. There is also more to reveal about the method and its hidden secrets. Again, thank you for your readership.

Also, I would like to express my gratitude to Chip Anderson and the staff at stockcharts.com for their ongoing support of Wyckoff Power Charting.

All the Best,

Bruce

Professor Roman Bogomazov and I discuss the Wyckoff Method in a three part webinar series (6 hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden Gate University. It is not too late to sign up for this lively discussion of the Wyckoff Method. All sessions are recorded and available to each attendee. Join us for two more sessions of live discussions and review all of the recordings at your convenience. We will use the “Wyckoff Power Charting” blogs as the framework with additional material added. The fee for this series is only $49. Click here to sign up now.

 

Springing into Action

Stepping Stone Reaccumulation (SSR) formations are significant yet common. An SSR is a pause where the stock rests before resuming the uptrend. SSR formations often have a signature of making the lowest low early in the pause (in the first third to half of the total time spent in the SSR). We have recently explored some examples of this phenomena and how best to trade it (click here). Once the low is in place, the tendency is for the price to then scale upward with a series of higher lows until reaching the resistance area. Once above resistance, the trend tends to resume at a steady and robust pace. There is another type of SSR that we should be prepared to trade.

As is the case with all SSR formations, once the Buying Climax has been set, the Automatic Reaction will follow and these two points set the Resistance and Support of the emerging trading range. In this alternative type of SSR, we see a pattern of rallies off of Support being stopped at ever lower peaks. The appearance is of a series of declining highs which suggests that sellers are becoming more aggressive in their shedding shares at ever lower prices. This looks like Distribution, but it is not.


The final act of this deteriorating picture is typically a Spring. A break of the Support line and the prior lows shatters the confidence of the remaining holders and in many cases they are compelled to sell. It is difficult to hold on to stock that continually diminishes in value as the trading range grinds onward, only to be confronted with a wholesale breakdown of the SSR.

The breakdown in the late stages of the SSR is a Spring. The Spring is a terminal act that concludes the listless sideways price action and it is followed by a robust rally to the Resistance area and a resumption of the uptrend.

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Apple abruptly concludes an advance with a reversal and we label a BCLX and AR to set the Resistance and Support. Each peak thereafter is lower than the prior. An important rule of thumb for this type of SSR is that lower peaks are followed by a Spring. That is the case here. Note the big surge of volume on the break of Support. This is a Spring #2 which must be tested and it is the next day. High volume indicates a supply of stock becoming available below the Support zone. The Composite Operator is buying this stock but they are uncertain how much supply is actually present at this level. The next day on the Test, the price remains above the low and the volume is less than on the Spring day. The selling appears to be exhausted. Quality demand bars emerge the next two days on high volume as Apple works up to the Resistance line and into a new uptrend. Note the gap on the way up. We conclude from the gap that much of the supply has been absorbed and price will now move easily upward. Volume diminishes as price climbs above the Resistance area. It is taking very little Effort (volume) to move prices up (the Law of Effort and Result). Stock supply is scarce. Buy Apple on the Test of the Spring #2 and place the stop under the lowest price. Also stock can be bought on the demand bars that follow the turn off the Spring. Stops would be set in the same location.

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Charles Schwab has an Upthrust as it tests the BCLX and then returns to Support. The next peak is marginally lower than the UT and then abruptly falls back to Support. Note in both of these examples that the stock wants to return to Support. In previous SSR studies, the stock tended to make higher lows and stay near the Resistance area. For SCHW the tendency is for the price to camp in the lower half of the trading range. The price hovering near the low of the trading range is very discouraging to stock holders. The final act is a Spring #3 which goes below the low of the AR and the Support. The volume is low, not rising above the recent low levels. When the price Springs on low volume the stock can be bought right away. Don’t expect a Test of a #3 Spring and in the case of SCHW there is no Test. The price pivots off the low and begins marching upward. Buy the Spring or any of the demand bars that follow. Place stops under the low of the Spring day. Just like with AAPL, there is a gap up and out of the Resistance. Stock has been absorbed and is scarce. The gap proves that institutions are finding it difficult to buy the stock in quantity. After a SOS there is a Back Up to the Edge of the Creek (BUEC) which returns to Resistance (old Resistance becomes new Support). The BUEC is a classic place to add to the position. Move up stops on the entire position to under the BUEC and the Resistance line. After the BUEC, a big demand bar launches SCHW into the next phase of the uptrend.

There are no absolutes in the price action of stocks and markets. We study and discuss tendencies. Tendencies are the product of human behavior in action, and the sum total of all of the participants and their methods and influence. All reflected on the tape. We study these tendencies and we prepare for any and all eventualities as best we can. As Wyckoffians we learn to love the uncertainty and the opportunity to learn something from every situation. This attitude puts us on the mastery path. We walk it with humility and gratitude.

All the Best,

Bruce

Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6 hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions with additional material added. Each session will be recorded and will include ample time for attendees to ask questions.  The recordings will be available for your review or if you are unable to attend the live sessions. The fee for this series is only $49. Click here to sign up now.

Current Point and Figure Counts

The concept of Cause and Effect is at work in markets constantly. This Wyckoff Law is codified and measured using Point and Figure charts. These charts are robust tools for measuring market potential or cause that has been built and then expended. Let’s take a survey of the current market with PnF charts and look for a theme.


The Dow Jones Industrial Average PnF is constructed with daily data and a 3 box reversal method. This is similar in scale to a weekly chart. A large Distribution (Cause) formed in late 2015 and then discharged (Effect) as a swift markdown in January fulfilling the down count exactly. Thereafter, a large Accumulation (Cause) formed and built a count range of 18,350 to 19,050. The $INDU has risen in dramatic fashion (Effect) to a peak of 18,150 where it has paused. Currently it appears that a Stepping Stone Reaccumulation (SSR) is forming. An SSR would build additional Cause on a PnF chart for further upward progress. We can see that there is a little more fuel in the tank off the big point count formed earlier this year. The lower count of 18,350 matches the high price made in May 2015 and 19,050 would be a new high in the $INDU.

The S&P 500 has pushed up against its all-time high. A 1 box reversal PnF chart base count earlier this year produces a range potential of 2,010 to 2,090. Ultimately $SPX exceeds the upper count by two boxes (occurring on a climactic type price spike) and now appears to be in a trading range. The all-time high for $SPX is directly above and so it seems likely that resistance will come into play around here. A Stepping Stone Reaccumulation could build the additional count needed to Jump the indexes to new highs.

To show how robust the technique of horizontal PnF counting is as a tactical tool, here is a 5 minute PnF count construction. Over a 4 day period, a Stepping Stone Redistribution forms and then is followed by a swift decline. The SSR does an excellent job of targeting the low. What follows is a minor Accumulation which has been fulfilled.

Conclusion: Indexes have expended much of the fuel in their Causal bases made earlier in the year. Risks are much higher here in contrast to the beginning of the markup when the Cause was new and just completed. The resistance of prior highs and the exhaustion of the prior Causal base means there are headwinds. The building of Reaccumulation counts would help propel prices over the prior highs. Expect volatile and trendless trading activity that is indicative of a new Cause being built. The question will be; Is the Cause a Reaccumulation with new high prices directly ahead or is it Distribution for a new trend down?

All the Best,

Bruce

Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6 hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions with additional material added. Each session will be recorded and will include ample time for attendees to ask questions.  The recordings will be available for your review or if you are unable to attend any of the live sessions. The fee for this series is only $49. Click here to learn more.

Trading the Reaccumulation

When a stock enters a robust uptrend it can go on for a long period of time, for years in some cases. But eventually even the best uptrend needs a rest. Leading up to this pause, the ownership quality of the float deteriorates. Strong handed Composite Operators lock up much of the float at the beginning of a new uptrend. Then as the trend matures, stock finds its way into weaker and weaker hands. The stock then needs a rest in the form of a Stepping Stone Reaccumulation. The C.O. will take advantage of a SSR and mop up loose shares from the more short term oriented traders.

A strong uptrend attracts more and more interest from a broad spectrum of speculators and the public. This eventually destabilizes the trend and leads to a large and unexpected price correction. The cause of this price weakness is short term oriented traders (weak hands) who are much quicker to sell at the slightest signs of trouble on the tape.


The remedy for this change in the stock’s ownership structure is a ‘Stepping Stone Reaccumulation’ (SSR). Reaccumulation is a sideways or a down period in the stock price that can last from a few months to a few years. Almost without exception, any stock in a long term uptrend will experience one or more pauses on the way upward to the bull move’s conclusion. Wyckoffians become masters at the art of evaluating and trading Reaccumulations (click here and here for more on this subject).

What are some of the causes of a Stepping Stone Reaccumulation? Speculators become impatient with a stock in a Reaccumulation period and seek greener pastures. Also, some long term retail stock holders become discouraged and sell their shares. Often stock analysts will conclude that a Reaccumulation is a top and the end of the uptrend. We have two case studies that explore how to trade a certain style of SSR. In future posts we will consider other types of SSR formations.

As a general rule, an uptrend will be stopped by a Buying Climax as can be seen in Dollar Tree (DLTR). A 17.6% four month correction follows and concludes with a Selling Climax (SCLX). Usually the greatest price damage is done at the beginning of an SSR. Such a large price drop means that a period of Reaccumulation must follow as the C.O. is carefully vacuuming up shares. Because there is a core of strong handed C.O.s already involved with the stock (they own a large portion of the shares from the beginning of the uptrend), a typical SSR will spend less time at the bottom of the range near Support. The Wyckoffian will be on the alert for higher lows being made and will be attempting to buy at these junctures. After the Secondary Test (ST) the price of DLTR rises up to the resistance area and hovers there. Four places to buy are highlighted. They are the ST, the Last Point of Support (LPS), the correction at the Back Up to the Edge of Creek (BUEC) and the breakout of the BUEC. Set stops below the low price level of these areas. Study the price turn off these lows for large Demand Bars that demonstrate a bullish ‘Change of Character’. Often an early price upthrust after the turn is the best place to buy. It is confirmation that the price pushing downward is unsustainable.

Point and Figure analysis helps to define the upside potential in the trade. Here we count the SSR just studied. After the ST the price hovers around the Resistance area for a long period of time. All of this additional trading in DLTR prior to jumping out adds columns to the PnF count. This raises the target price objective and makes the campaign even more attractive. Wyckoffians understand that additional time spent Reaccumulating allows for more stock to be absorbed by the C.O and thus for a larger PnF count objective. Eventually the new price uptrend exceeds the upper PnF target by three points.

Boeing spends three years in this Stepping Stone Reaccumulation. BA concludes the preceding uptrend with a BCLX and then drops suddenly into a Selling Climax. This sets the Resistance and the Support areas that bound the trading range during Reaccumulation. At about the half way point of the SSR, the price of BA Springs the low on volume (a Spring #2) and then tests the Spring multiple times. Wyckoffians would attempt to buy this Test of the Spring with the idea that BA will jump to Resistance and then begin the uptrend. The SSR is over one year in age at this point. Instead of jumping into an uptrend, the price hugs the Resistance area for more than a year. Each low after the Spring is a higher low and we must conclude that the C.O. is involved and absorbing shares at Resistance. This is very bullish as the C.O. is aggressively buying BA and preventing the price from returning to the bottom of the trading range. Noted above are the ideal places for trade entry and stop placement.

We count the Stepping Stone Reaccumulation using a 5 box method. Boeing’s price came very close to fulfilling the lower target area of 166. Again, notice the extended time BA spent hovering around the Resistance area building a much bigger PnF count and then fulfilling this extended count. As Wyckoffians we want to see larger PnF counts form during the Stepping Stone Reaccumulation as they generate higher price objectives.

All the Best,

Bruce

 

Professor Roman Bogomazov and I will discuss the Wyckoff Method in a three part webinar series (6 hours in total) on May 9th, 16th and 23rd. Roman teaches the Wyckoff Method (online course) at Golden Gate University. We will use the “Wyckoff Power Charting” blogs as the framework for our discussions with additional material added. Each session will include ample time for attendees to ask questions. The fee for this series is only $49. Click here to learn more.

Wyckoff Skill Building

There are no absolutes in trading financial markets. The best market operators are exceptional risk managers. The Wyckoff Method seeks conditions where a high likelihood of success is probable. Wyckoffians systematically search for the clues that precede a stock becoming a persistent and long term leader. Some of these characteristics we have already explored. The list includes; breaking above a downtrending channel, fulfilling a Point and Figure down count, building a Cause with an accumulation area, completing the accumulation with the final test of a Spring or LPS, and a persistent mark up and out of the accumulation area. Through honing these observational skills, our mission is to increase the potential of owning the best stocks at the right time.

To be better Wyckoffians in ‘real time’ we do endless chart work with the goal of becoming more discerning in our analysis and more capable in our trading. In light of our mission to build skills, let’s look at more charts, charts, charts. In recent posts the focus has been on identifying best entry points for buying stocks. We will continue that theme here.



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LVS has been in a two year downtrend (click here for more on downtrend analysis). The stride of the downtrend has been well defined from the beginning (three red circles define the future path of prices). Note the constant stream of lower highs throughout the decline. Finally the climatic oversold condition of the PS, SCLX and Spring stop the decline. From the LPS to the PS a Cause is building and finally the upper trend line (Supply Line) is breached in a dramatic way.

LVS builds a Distributional Cause in 2014 and then embarks on a downtrend. A Selling Climax arrives in the window of the price target. A new Cause is being built.

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We see that LVS has become oversold on the weekly chart (repeatedly breaking and returning to the trend channel) and has fulfilled the PnF distribution count. Next we look at the refinement of the entry strategy on the daily chart. There is an Upthrust at the Resistance area. There is little Cause built so far, and we expect price to attempt to return to Support, which it does in a long grinding decline. Note the series of lower peaks on the way down. This type of weakness often leads to a new low, which could be a Spring, and it is. A Spring #2 arrives, which can be bought on a test. The test occurs the next day. The immediate LVS price jump above the prior peak is a good sign of a potential ‘Change of Character’ and a minor Sign of Strength. After a SOS, expect a Last Point of Support (LPS), which is another entry area. Note that the LPS returns almost exactly to the Preliminary Support (PS) where the Composite Operator began supporting the stock with large purchases. Purchase LVS on the test of the Spring and place a stop below the low of the Spring. If the LPS is the second tranche, set the stop for both purchases below the low of the LPS.

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AHS is in a Stepping Stone Reaccumulation after a good uptrend. The SCLX and the AR set the Support and Resistance. The stock price thereafter grinds downward with a series of lower high price peaks. We must conclude that an attempt will be made to decline below the SCLX low. A Spring type action ends the decline. A dramatic Change of Character lifts the stock price up and out of the Reaccumulation area. The test of the Spring #2 is the best buy point and then the early demand bars thereafter. Stop the trade below the Spring low. Stocks under Reaccumulation will tend to change their character much more abruptly than stocks basing in a cyclical low such as LVS. Expect Reaccumulation rallies to reignite quickly and unexpectedly.

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Note how the spot price of Corn spends eight months in an Accumulation. The last half of the Accumulation has the corn price hugging the bottom half of the range. This would lead us to expect a Spring to conclude the basing action. Note the attempt to Spring in January. The price stalls and then returns to Support without making a SOS above the prior peaks, thus more work must be done. A very large down bar Springs the low in April with massive volume. Buy the Test. The Change of Character takes $CORN to Resistance quickly indicating that all of the price activity of the prior eight months is potential C.O. Accumulation. To confirm this we would expect $CORN to attempt to stay in the top half of the Accumulation area and then jump out.

All the Best,

Bruce

Wyckoff Buy Strategies

When initiating a campaign our mission is to buy when the stock is ready to emerge into a major uptrend. Uptrends begin when periods of Accumulation are complete and the majority of the available supply of shares has been absorbed. This is the juncture when stock is held by strong hands.  A small increase in demand for shares can create an imbalance that tips the stock price trend into a robust bull market.

As Wyckoffians we will develop our skills at identifying this tipping point on the charts and to have an action plan for building our position in the stock. Final testing action of the Accumulation is called Phase C. There are two types of tests; the Spring (or Shakeout) and the Last Point of Support (LPS).


The Last Point of Support is the final drive toward the bottom of the Accumulation area before the uptrend begins. In most regards it looks much like the prior drives toward the Support level. The Spring  is easier to identify because the Spring makes a minor new price low. An LPS makes a higher low and then turns upward. An LPS is an important juncture to identify and to trade. Either a Spring or a Last Point of Support arrive in Phase C which is the last test of the Support area prior to the markup out of the Accumulation. One or the other will occur (see the last post for a discussion of Springs).

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Wyckoff is an excellent chart skill for intraday analysis and trading. This 30 minute $INDU chart has a classic LPS setup. A Sign of Strength (SOS) is price attempting to breach overhead resistance by temporarily rising above a prior peak. Demand is absorbing supply at the top of the trading range. After the SOS, the price will typically fall back into the Accumulation area and attempt to return to support. It is after the SOS where the Wyckoffian will look for the LPS. After the SOS in $INDU, price moves in two stages downward. Note the very high volume on the low bar, this is absorption and good demand. This is the low bar of the LPS. The attempt to ‘test’ the low bar arrives two bars later and on much lower volume. This bar or the next bar can be bought. It only takes two good demand bars to put $INDU at Resistance where a BUEC (Backup to the Edge of the Creek) forms. After the LPS entry, place a stop under the low of the LPS, or under the prior low of April 8th.

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In the ALB example, the SOS exceeds the two prior peaks and the Resistance line. After the SOS we must be prepared for another round of weakness as is the case here. ALB returns to Support and dips below the prior two lows. The SOS has us on the alert for an LPS. There is an LPS, then a test, then a good demand bar. Buy a tranche here and place a stop below the low of the LPS. The second LPS is a turn off a higher low and gives the Wyckoffian great conviction that an uptrend is forming. On this second LPS, buy any of the early demand bars as the price turns up. If the first LPS was missed, the second LPS is a fine place to initiate the campaign. Note at the third LPS, how large interests are buying more aggressively as ALB can barely rest at the Resistance line.

The decline after the SOS is a nasty shakeout that has many holders of ALB selling their shares in a panic. This is how the C.O. shakes loose the final supply of stock prior to a meaningful markup. This is not an easy business. The first LPS goes almost exactly to the Buying Climax low. It is no surprise that the final low of the Accumulation area, the LPS, is the same price level where the large interests began their buying operations. SCLX=LPS. This is a price level where they want to buy stock and they proved it by stopping the declines at both the SCLX and the LPS. Also note, that as scary as the price decline was into the LPS low, it was well above the September / October low.

To take a count, identify the LPS on the bar chart, then find that point on the PnF chart and count to the left. Take a conservative count. If you deem the reward to risk to be suitable to your objectives, make the trade. From the LPS, ALB has a count estimate to $86. Now that the stock has jumped out, it may need a pause in the form of a BUEC or a Stepping Stone Reaccumulation before the trend can continue.

All the Best,

Bruce

Stalking the Trade

No matter your investment timeframe, consider your trade to be a campaign. A campaign has steps or actions from beginning to end. A campaign has mental state management from beginning to end. Mental states vary from the patience of stalking to the aggressiveness of taking profits to conclude the trade. A campaign is managed.

Once a potential campaign is identified (this is also called a low risk idea) it is stalked for the ideal moment when capital is put at risk. Point and Figure analysis provides us a method for estimating a price objective, or cause. Reward to risk objectives require this ratio to be three to one or greater. If this three to one ratio cannot be met, a Wyckoffian will reject the trade for one that is more suitable. When counting PnF objectives for this analysis we will use conservative counts to determine the reward potential. At times there will be larger PnF counts available on the chart, but we will determine ‘reward risk’ on the smaller, conservative, PnF count.


How do we establish the ‘risk’ in this ratio? The risk is the execution price of the trade to the stop level. As an example, our trade entry is $38 and our stop is $36, thus the risk is $2. The reward marked on our PnF chart must be a reward of 3 multiplied by $2 and added to our entry price of $38 or $44. So our conservative PnF count must exceed $44.

When comparing two similar trades where (for the sake of our case) everything else is the same, if one PnF counts to $44 and the other counts to $48 we would tend to favor the trade with the larger potential.

We think of trade entry as a three part process. Determine the amount of capital devoted to a single position and then divide that figure into thirds. Buy your position in thirds. Each subsequent tranche is bought if, and only if, the prior tranche is showing a profit. So a Wyckoffian is always averaging up a winning trade. If the last purchase is not showing a profit then the next addition must not be made, until the previous acquisition is at a profit. The average price of the combined purchases must exceed a three to one reward to risk ratio. Pay close attention to your average cost. After each additional tranche the stop should be raised. The goal is to set your new stop at a place where, if stopped, the prior purchases will show a profit. Only the latest purchase would have a loss. The goal with this strategy is to always be reducing your risk of ownership.

                                                    (click on chart for active version)

STLD offers a recent case study of a stock in the ‘Position Building Zone’. The Spring and Test sets up the initial buy zone. Look for a Test of the Spring #2 as the first buy point. Rising above the December low on a strong Demand Bar is the next place to buy if the test is missed. Good Demand Bars will have wide spread and good volume while moving easily in the direction of the new emerging trend. The close for the day should be near the high for the day. More good Demand Bars should follow as price moves easily upward. In this hypothetical trade the first purchase is at $16.25 and stop placement will go below the Spring low of $15.22 at $15. Mr. Wyckoff advised placing stops strategically where they would be unlikely to be executed. Buy point #2 is on the turn off the LPS, execution price of $17.25. Now the average price for two tranches is $16.75 ($16.25+$17.25 divided by two). Stop placement is moved up under the low of the LPS at $16.75 where the first tranche is stopped at a profit and the second tranche at a loss for a breakeven on the average price of both. The third tranche is executed on the test known as a Backup to the Edge of the Creek (BUEC or BU). STLD has jumped out of the base here. Execution price for tranche three is $20 after turning up above the LPS/BU on a good Demand Bar. Average cost is $17.83 ($16.25+$17.25+$20 divided by three). The stop is set below the LPS/BU at $19 which protects the profit on tranches one and two. Take note that the average cost of the campaign is about the mid-point of the Accumulation Range (which, by the way, is the cost objective of the Composite Operator). Now STLD is in a robust markup phase and this Wyckoffian strategy has built a full campaign position.

Establishing a three to one ‘hurdle rate’ with Point and Figure analysis is critical. Note the partial count used. A much larger count may come into play at a later date (and higher price). The first tranche has the greatest risk at $1.25 points of loss potential and the entry price is $16.25. The reward estimated is $32-$16.25=$15.75. $15.75 of reward divided by $1.25 of risk is a ratio of 12.6 which is well above 3/1. It is a good idea to do this calculation on each tranche on the way up to be confident that each commitment of new capital is worthwhile. STLD has an attractive campaign potential for the risk taken.

All the Best,

Bruce

How to Determine the Best Trade Entry Points

Wyckoff is a complete Methodology which means that rules and processes guide when to enter a trade, how long to hold a position and when to exit the trade. We have explored the principles of stopping action, cause building and jumping into a trend. In Accumulation (as in Distribution) there is that moment, that tipping point, when conditions shift from trendless to trending. We call it a Change of Character (CoC) because prices are at the inflection point. Mr. Wyckoff’s council was to only commit capital when stocks and the market are ready to move, and move quickly, and move now.

In Dr. Pruden’s book, “The Three Skills of Top Trading” there is an important section on the Ten Tasks of Trading. The tasks speak to the proper mental states for each of these essential trading activities. Top traders are very patient. They are willing to wait long periods of time for that right moment when inactivity and patience give way to a flurry of activity because market conditions present the opportunity for positioning a trade. To seamlessly go from inaction to action takes practice.


The Wyckoff Method seeks specific conditions for beginning the process of positioning a stock (ETF, commodity, etc.). There are rules for deploying capital, placing stops, and for averaging up to a larger exposure in winning positions.

Once a cause is built and the upward potential for a stock can be estimated (using Point and Figure charts), a Wyckoffian will begin to stalk for the best strategic price level to begin buying. In our study of Phases this would be Phase C (click here and here for a link), the final testing area. During Accumulation the final test is either a Spring or a Last Point of Support. There are three categories of Springs. A Spring is the final low prior to the beginning of the uptrend. But, Phase C does not require a Spring type action and sometimes a Last Point of Support is the final test (higher low) of the Accumulation area prior to the beginning of the uptrend. Whether a Spring or an LPS is the final test, from this moment onward the stock will generate higher highs and higher lows in the emergence of a new uptrend. This act of testing is the conclusion of the Cause building.

Initiating and building a position in a stock using the Wyckoff Method usually occurs in three tranches. Each purchase or tranche of stock must be at a higher price than the prior purchase. This is an important rule: Only average up a winning position. Specific points in Phase C and D are ideal for averaging up to a full position size in the stock.

Wyckoffians become very skilled at identifying these action points in real time to help make it easier to jump from a Stalking state of mind to an Action state. Endless practice and mental rehearsal hone these skills.

The philosophy behind this method is to 1) have the trade work right away, and 2) to place a stop loss order in a zone that has a very low potential for being triggered. This is an excellent system for averaging up winning trades while placing trailing stops at tactical levels that will preserve and protect capital as profits grow and market exposure becomes larger.

Over the course of the next few weeks we will explore the best junctures and tactics for entering a trade. Accumulation Schematic #1 models a period of absorption. As the sponging up of shares nears completion, a period of final testing of the Support area will occur. This is known as Phase C. A Spring is depicted in Schematic #1 (click here for more on Springs). Other forms of testing will be addressed in future posts. Note the price action at the conclusion of the Spring, there is a Change of Character. Price begins marking up from the Spring to the top of the Accumulation Range and out. This is the beginning of the uptrend and the time and place within the Accumulation to be buying this stock.

Four junctures in Phases C and D are ideal for trade entry. 1) Spring and Test of the Spring, 2) Last Point of Support (there are often multiple LPS points), 3) Backup (BU) after the jump up and out of the Accumulation, 4) Breakout above the high of the BU/SOS (Sign of Strength).

                                                       (click on chart for active version)

GDX dives to a final low in January and the volume is high into the low. This is a Spring #2 which must be tested, and it is in the two days immediately following the Spring. The test of a Spring #2 can be bought. The next buy point is the Last Point of Support, which is very brief in this example. Note the veracity with which GDX lifts off. This is a dramatic example of the Change of Character (CoC) that comes in Phases C and D. Stop placement can go just below the Spring, LPS, or BU. We will be more specific as we dig deeper into this subject.

It is a good exercise to compare the structure of GDX to Schematic #1. This is the look of Accumulation by the Composite Operator. Note how difficult it is to buy the Phase C rally as the bullish price bars leap day after day. And this is why we must be prepared with our action plan when it is time to get busy.  Over the next few posts we will explore strategies for averaging up a winning position in an emerging uptrend. 

All the Best,

Bruce

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.


                                                      (click on chart for active version)

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.

                                                     (click on chart for active version)

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.