Wyckoff Power Charting

There are No Free Lunches

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

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

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Why Point and Figure Works

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

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

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Get Your Motor Going

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

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Main Street vs. Wall Street

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

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

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The Broadening Top Formation

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

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

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Wyckoff Doodles

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

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

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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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