Wyckoff Power Charting

Three Legged Stool

Let’s do an integration case study. We have spent much time on two robust processes; Point and Figure analysis and Vertical Bar Chart analysis. Recently Relative Strength studies have been added to the mix. A stool has three legs, any fewer would make it unstable. Our Wyckoff stool has three strong legs. In this case study, we will combine these tools and see if it makes our analysis sturdier and more cohesive.

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Bonds. Shaken, Not Stirred.

It is time to circle back and update our studies of the US Treasury Bond market. On October 7, 2016, we did a Wyckoffian analysis of Treasury Bonds as they appeared to be at a critical juncture. Take a few minutes now and go back to that post (click here for a link) and review this prior analysis. To summarize; at that point bonds were in a well advanced state of Distribution that was 21 months along. After an exhaustion rally (or Upthrust) bonds returned back to the Resistance level. By zooming into the UT area, we identified completed Distribution on a smaller scale and took two Point and Figure counts. The larger of these two counts projected a sizable decline to the major Support line for bonds at about 110 on the TLT chart.

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Avoidance Strategy

The Wyckoffian mission is to trade and invest in the best stocks in the leading Industry Groups. We have been studying examples of leadership characteristics using Wyckoff Analysis in combination with Relative Strength. Recall that our workflow is to drill down from Sector to Industry Group to Stock. Always seeking the strongest stocks in the strongest groups. It is also a worthwhile exercise to study groups that are stalling and falling from favor. Once an Industry Group transitions from leadership to laggard it can remain there for a long time. In an uptrending bull market we might call this our ‘Avoidance Strategy’. It is always good to know where the leaders and the laggards are in any market and when important transitions are brewing.

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Sectors. Groups. Stocks.

Let’s continue our discussion about using Relative Strength Analysis to find leading stocks. A blend of Wyckoff analysis and Relative Strength analysis offers an efficient method for zoning in on the best leading stock candidates. In the prior post, Industry Group analysis was explored. Here we will jump into stock analysis. The concept is the same, find the leading stocks in the best Industry Groups. We know that when an Industry Group enters a leadership position there are individual stocks forging the way within that group. These early leaders will generally be mostly large capitalization stocks. Institutions will begin to favor the dominant big-cap stocks first and then turn to the mid-cap and smaller companies later. Relative Strength analysis will assist in identifying each of these emerging themes as they become active. When Relative Strength becomes In-Gear it tends to support the continuation of the price trend for long periods of time (this is either up or down). Let’s drill down and explore how Relative Strength helps with Stock selection.

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In Gear with Relative Strength

Wyckoffians find Relative Strength analysis to be very useful and illuminating. Relative Strength studies can be like having X-ray vision. With Relative Strength tools, one can see important hidden secrets about the health of a stock or industry group. Relative Strength analysis is simple and straightforward to apply and is one of the most useful tools in the Wyckoff toolkit.

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Stair Step to Profits

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

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

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Enjoying the Short Term View

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

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

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Going for the Gold

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

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

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Holiday Chartfest

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

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The Inner Game of Wyckoff

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

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