Wyckoff Power Charting

Judging Power Waves

Determining the motives of the Composite Operator is the central mission of all Wyckoffians. There are numerous tools for this task. The present position and future trend of the market and the stocks within, are determined through the analysis of price and volume (‘the study of the tape’, Mr. Wyckoff would say). We have covered much ground in these blog posts, through the study of Accumulation, Distribution, Price Spreads, Volume, Support and Resistance, Trend Analysis and much more. It is time to add another powerful tool to our arsenal of market skills; The Comparison of the Waves of price. By learning to judge the relative power of Buying Waves and Selling Waves, the Wyckoffian develops the skills to decide when a stock is poised to move quickly and with leadership. When we see the footprints of the C.O. we are capable of acting in concert with this powerful force.

Power Waves are classically Wyckoff in nature. Devoid of indicators, Power Waves focus on the action of price as a pre-determinant to the beginning of big moves. Power Wave analysis helps with choosing and timing which stocks are poised to lead the way by outperforming their peers.

 


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Chipotle (CMG) 2008-09 is a good introductory case study.   To begin let’s study the waves of buying (demand) and selling (supply) for CMG. Note the large wave of selling at A which culminates in a Selling Climax. Wave B is a short sharp rise that quickly ends. Wave C is a continuation of selling. Compare wave C to wave A. Wave C is much shorter in duration, though the decline is steep. Supply could be exhausted as a result of the shortening thrust at C. Now compare wave D to B. D is dynamic in the speed and rapidity of the rise when compared to B. Wave E corrects slightly more than one half of the rise in D. Wave F is potentially confusing as the rally portion compares poorly to the D wave rise (more on this shortly). The wave at F is an LPS and a test for a jump out of the Accumulation at wave G. The G wave rally is forceful. Compare the waves at B, D and G, each is stronger than the prior wave. Also note how the power of the supply waves at C, E and F are generally diminishing in force.

Now let’s compare CMG’s waves to the S&P 500 as our market proxy. This is a form of relative strength analysis. Take a minute and study the demand waves and the supply waves of each to determine if there is an underlying bullish or bearish trend. By comparing waves we can see that CMG is basically in gear with $SPX during the declining wave at A, the rise at B and the decline at C. CMG begins to ‘tip its’ hand’ at wave D where it is noticeably stronger. CMG climbs up and out of the Accumulation range temporarily, while the $SPX can only rise to the middle of the range. The area at F is most interesting. At the area of Support the $SPX can barely lift up while CMG is rising toward the Resistance area, which is an indication of emerging relative strength. Then the $SPX falls away from Support and into a new downtrend (which turns out to be a Terminal Shakeout). CMG makes another higher low during the $SPX Shakeout. The $SPX rally at G moves strongly and persistently back into the Accumulation range. Note what happens to CMG in the G phase of the rally. It clears all resistance and has established a robust uptrend. Relative wave analysis of CMG to $SPX dramatically illustrates CMG’s emerging leadership. By studying each wave of supply and demand it is readily apparent that leadership was forming in CMG very early on in the Accumulation process. CMG continued this leadership during the subsequent bull market.

                                                 (click on chart for active version)

During the same 2008-09 time period Apple is a classic, and more subtle, Power Wave study. Each Supply Wave is less forceful (A, B, C and F). Note at the conclusion of C a Spring forms while $SPX makes a higher low (line D). Carefully study these waves. Apple is making a series of lower highs and lower lows at lines C and D. There are generally signs of diminishing downward force in AAPL but weakness to the market prevails. Then at wave E an important rally forms in AAPL while $SPX drifts. This puts AAPL back into its’ Accumulation range while $SPX teeters at Support. This is a key ‘Change of Character’ (CoC) and the first signs that AAPL wants to be an emerging leader. The minor new low in AAPL is a Spring. Compare the waves of supply at F where $SPX is noticeably weaker than AAPL. At the conclusion of F, $SPX is in a Shakeout while AAPL is staying within the Accumulation area, above Support, and forming an LPS. The rally at G is dynamic for AAPL and proves that it is an important new bull market leader. Often Relative outperformance materializes toward the end of Accumulation therefore Wyckoffians must remain forever diligent in their studies.

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Let’s turn our attention to the current markets and apply some Power Wave analysis to the Gold Miners using GDX as our proxy. At waves A and B, GDX is noticeably weaker than the $SPX. In August when the $SPX becomes very weak, GDX has already experienced much price damage and does not participate in the broad market decline. At D, $SPX rallies further and for longer than GDX. Then during the decline at E, gold shares begin falling first and are generally weaker than the $SPX. Note the channel at F where GDX has a slight upward tilt of higher highs and higher lows while the $SPX does the opposite. This is a constructive clue about a potential change of character. This has our attention. The decline at G is revealing as gold shares resist declining with the very weak stock market. We have drawn line H to illustrate the dramatic next step. Where the $SPX needs a test in February, gold shares do not, and they begin to markup immediately. GDX concludes a large Accumulation with a classic Spring.

Relative Power Wave Analysis is such a useful tool. Once you have become accustomed to doing wave analysis and relative strength analysis in this way, all other methods will pale in comparison. Stockcharts.com is an excellent tool for this analysis as can be seen from the above examples.

All the Best,

Bruce 

Ps. This Saturday, March 12, I will be Chip's guest on ChartWatchers LIVE at 1pm Eastern. (to register click here)

Point and Figure Analysis with Intraday Charts

We have worked with Point and Figure charts in multiple time frames using 1 box and 3 box methods. This is akin to constructing daily and weekly bar charts. For many traders intraday analysis and trading is preferred. The good news is that PnF analysis is a powerful technique for evaluating these smaller time periods. PnF scales down handily from 60 minute to 5 minute data.

Only two settings need be changed (StockCharts.com subscription required) to begin generating useful intraday PnF charts in your chosen trading instruments. Under ‘Chart Attributes’ select the period (30 minutes for example). Under ‘Chart Scaling’ select the method; ‘Dynamic (ATR)’. Now you are ready to create intraday PnF charts. The Dynamic (ATR) will use ‘Average True Range’ to calculate the vertical scale that is best for the time frame selected.


In Wyckoff we seek to identify a Cause that will lead to an Effect (trend in prices) worthy of a campaign. Causes built within intraday timeframes are often unnoticed, but can be counted, projected and campaigned. The counting techniques are essentially identical to the methods we have already studied. As in all intraday analysis, events happen quickly and require an intense focus on the data.

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This 2-hour vertical chart will be our roadmap for the PnF chart analysis below. Note how well the Wyckoff analysis works on this shorter time frame. We will use these anchor points for taking our counts on the PnF charts.

For the QQQ we have selected a 30 minute timeframe, 1 box reversal method, and the scale calculated by the ATR is .40 on the vertical axis. The count procedure is the same as for any PnF chart. Find the Last Point of Support (LPS) and count to the Preliminary Support (PS) which is 24 boxes. Multiply 24 by the 1 box method, by the .40 scale. From the count line of 97.60 the objective is 106.80 and from the low 104.80. For many intraday traders this is a meaningful campaign objective. The Cause is built over about a four day period. Now that the objective has been reached there are a few options to consider. First would be to stay in the trade and wait for evidence of distribution for an exit, which could come at higher prices. Or a Reaccumulation could form to propel prices higher. Finally, you could take profits and wait for the next Cause to be built.

In this 30 minute PnF of the NASDAQ Composite we have a 3 box reversal method chart. Generally this method is better for generating bigger counts than a 1 box method chart. And thus bigger Causes can be counted for larger moves. At the 4215 count line 11 columns are multiplied by the 3 box method and then by ATR scale of 14.05. The lower objective is 4678.65 and the upper is 4755.65. The count line is at the low of 4215.00 so we estimate the upper boundary by taking the midpoint of the trading range. $COMPQ has reached the target zone. Does it have further to go? The next chart goes out to 60 minutes and provides another perspective.

The prior analysis of the 30 minute chart is taking place within a larger Cause being built. The 60 minute chart brings perspective to this bigger potential. The two prior charts made counts to the top of this large trading range where we would expect resistance. The 60 minute chart suggests a much bigger potential Cause forming. So small Causes form within big Causes. The count is 23 columns multiplied by 3 box method and then by the ATR scale of 22.27. From the low the objective is 5767.93 and from the count line 5968.36 which carries to a new recovery high for the $COMPQ. The Wyckoffian intraday trader would consider the larger trend favors higher prices because of this analysis. Therefore the emphasis would be to trade from the long side as Reaccumulations form and set up future trades. Only the arrival of a Distribution count of meaningful size would alter the trader’s upward bias.

Shorter time period PnF charts, such as 5, 10 and 15 minutes, are very effective tools. The Causes and setups come and go quickly in these shorter time frames, while the principals are the same.       

All the Best,

Bruce

Ps. On March 12 I will be Chip's guest on ChartWatchers LIVE at 1pm Eastern. See you then. 

Crude Oil Update

In the blog post of December 17th titled ‘Crude Oil; How Low Can it Go?’ (click here for a link), we studied the bear market in crude oil of 2008-09, the bull market of 2009, and then the current bear market. The long term point and figure analysis for each of these periods has been very accurate and useful. The 2013-14 top generated a count that carried from $112 to a target range of $28 to $34 which was hard to believe at the time. $WTIC has since melted all the way down to the $27 (lowest PnF box) level before bouncing to $34 for a near direct hit of the PnF count objectives. Have we seen the low for crude oil? Is it time to buy crude oil? What should we expect next?

What has transpired since the prior post is really interesting and a good review of some essential Wyckoffian principles. Where our prior analysis was employing weekly vertical charts and 3-box reversal PnF, here we will zoom in with shorter term charts for a more detailed view. With crude on a glide path for a potential landing, shorter term data can inform how that landing will occur and if there will be a touchdown or a continuation of the decline.


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In November a trend channel established itself setting the rate of decline. The three red circles are the anchor points. The top two establish the Supply Line and the lower is used for the parallel ‘Oversold Line’. Note how well $WTIC obeys this channel and the stride is set very early in the trend. Keeping the $34 to $28 long term PnF objective in mind, the Wyckoffian will seek evidence of Stopping Action. This arrives in the form of Preliminary Support (PS), Selling Climax (SCLX), Automatic Rally (AR) and Secondary Test (ST). Eleven of twelve days down at the beginning of the year are volatile and are accompanied by persistently high volume. The throw under of the Oversold Line is a classic sign of exhaustion of the trend. And the decline is stopped at $28 (SCLX) and $27 (ST) for a PnF hit. The vertical chart is telling a classic Wyckoffian tale that syncs nicely with the PnF analysis. An AR should follow the SCLX. A brief rally moves crude through the top of the Supply Line where volume bulges (large sellers are present) we label this an AR. Draw a Support Line under the SCLX and a Resistance Line above the AR. This will be our trading range for the near future. Always expect an attempt to return to the Support area after an AR. The decline that follows to the ST is on very high volume which indicates that large Supply is available and must be absorbed in order for Accumulation to be completed. This generally takes time and we have learned from prior PnF studies on crude that big counts can and do form. So for now we expect a range bound market.

Study the trading range from August to November. It is a classic Stepping Stone Redistribution and a PnF count of this area could prove interesting. The persistently high volume on the break of support in November is a classic liquidation. The rally that follows is of poor quality and demonstrates a lack of demand by the C.O. 

The Stepping Stone Redistribution (SSR) counts to $28 to $30. This is inside the large count of $28-$34. It confirms the bigger count so we would call this SSR a ‘Stepping Stone Confirming Count’. Such a confirming count gives us a degree of confidence in our PnF work. Note the Cause that is being built has generated $16 (16 columns multiplied by $1 scale) of potential already. The volume signature in the vertical chart is still showing high volume on the declines to Support. We would expect some evidence of the Supply being exhausted before a meaningful rally is possible. Also, the C.O. will not support a rising market until all of the overhanging Supply has been vacuumed up.  Further attempts to return to the lows will generate additional columns of PnF count. It pays to be patient and wait for the real trend to begin and not to get chewed up by a volatile trading range. There is always the potential for this pause to be another Stepping Stone Redistribution generating lower counts for another leg down. Careful analysis of the vertical chart should give plenty of advance warning of this possibility. 

All the Best,

Bruce

Wyckoff Time

In trading and speculation we are all on the clock, the market clock. At times the market clock spins quickly and at other times it crawls. When a trend is unleashed time seems to move effortlessly. Time slows down when the market makes no progress while in a long drawn out trading range. The Wyckoff Methodology can help to tell what time it is in the market. If we know the ‘market time’ we know how to conduct our activities. Is it time to be patient and watch? Is it time to stalk a trade? Is it time get busy and put trades on? Are we holding long (or short) while waiting for the conclusion to the trend? And then are we stalking the market for the time to conclude our trade and take profits? In the cycles of the markets there is a time for all things. Market wisdom is to know what time it is in the markets and act accordingly.

Borrowing from the conversation started in the blog posts (click here and here for a link) of January 8th and 16th, 2016, let’s continue the case study of the Dow Jones Industrials with an emphasis on how Wyckoff would frame the unfolding of these market conditions. We counted a PnF distribution with a price objective of 15,700 to 15,500. In Wyckoff we look for evidence of stopping action in the vertical chart as a price objective is approached. Wide price bars and very high volume took the $INDU almost exactly into the 15,500 price objective. The close on the low day was above the mid-point of the day’s range showing quality demand. We recognize this to be the initiation of stopping action (at least temporarily) and the beginning of a trading range that is either Accumulation or Redistribution. The downtrend is over for the time being. After labeling this low a Selling Climax (SCLX) we expect a short and sharp rally called an Automatic Rally (AR). After drawing a horizontal line at the low of the SCLX and at the peak of the AR, a trading range is defined. A Wyckoffian expects most of the upcoming trade activity to take place within and around the Support and Resistance established by these lines.


It is now time to expect a swift downtrend to be turned into a volatile, but trendless, trading range. Wyckoffians will use the PnF price targets and the rapidly declining prices to cover some, or all, of their shorts (if they are inclined to be short). And then to study the unfolding trading range activity to determine the next low risk trading opportunity.

Once a PnF count objective is reached evidence of stopping action in the form of Preliminary Support (PS) and climactic activity (SCLX) is sought. That is what happened here. The SCLX is the beginning of the process of preparing for the next move. Building a Cause is the ebb and flow of prices between Support and Resistance and this builds a PnF count for the next price movement of substance. Volatile price swings build count quickly, as is the case here, and this can go on for a long time. We turn to the vertical chart to help determine when the trading range becomes a new trend.

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We draw Support lines under the SCLX low and above the AR peak. This is the outer bounds of the trading range. Price will mostly trade within the bounds defined. The character of price is that it will reach one extreme and then, abruptly, return to the other boundary. Note the Secondary Test (ST) low and the rapid reversal to the top with a three day rally. The drop from the AR to the ST was a fast five day decline. The volume expanded on the decline which is evidence of the presence of supply (this high volume leads us to conclude that further attempts to decline to the support line are likely). If this structure is Accumulation we want to see future declines in the trading range occurring on lessening volume. This tells us and the Composite Operator that sellers are exhausted and the supply of stock has largely been absorbed.

For the bulls there are two major scenarios to script here. The first is that the $INDU turns down from the area of the AR and attempts to return to the SCLX low. On these declines volume diminishes on balance and the daily price ranges are generally narrower than on the decline to the SCLX and the decline to the ST. This will be evidence of selling exhaustion. Also, the price may only be able to return to the mid-point of the trading range and make a Last Point of Support (LPS). This would be bullish and a place to initiate trades (often the LPS comes in at about the same level as the PS). Recall that PnF counts are generally taken from the LPS to the PS (and sometimes to the SCLX).

The second bullish scenario is the $INDU jumps the AR level without pulling back into the range. After Jumping it consolidates for a brief period of time and resumes the uptrend. Old Resistance becomes new Support and so we look for a backup into the old resistance (This backup is labeled a BUEC). This is a place to enter a trade.

The bearish scenario is that the current pause is Redistribution. We know from our prior studies that volatility tends to increase as Redistribution advances. Declines from the top of the trading range to the bottom are quick and accompanied by large volume. Supply is present and the C.O. is selling, not buying. At the Resistance level look for brief breakouts (called Upthrusts) that fail quickly back into the trading range. When the Support line is broken and price cannot lift back into the trading range the Redistribution is nearly complete and a new downtrend is imminent.

We are treating this juncture in the $INDU as a real time case study. So for now we are expecting a continuation of the trading range and have the broad scripts above to provide us with action points and steps for the next phase.

All the Best,

Bruce

The Point and Figure Distribution Paradox

Counting Point and Figure Distributions is a bit of a paradox. Accumulation counts can grow very large and lead to advances that are multiples of their starting point. However, a stock under Distribution is bound by the zero line. Counting conventions for Distribution are therefore different from Accumulation.

Judicious counting of Distribution is essential to successful PnF analysis and trading. A common error Wyckoffians make is to over-count Distribution formations and get counts that are neither practical nor useful. Let us examine this problem here and begin to employ the tactics that will make us Wyckoff PnF Power Chartists.


Tesla Motors ran into Preliminary Supply (PSY) in September of 2013 and the advance ended with a Buying Climax (BCLX) in February of 2014. From there, it traced out a pattern of Distribution between the Support and Resistance lines. This Distribution action lasted two and a half years. Establishing a PnF count for this period of time is not practical because of the sheer size of the Distribution. We need a strategy for counting portions of the formation that can provide manageable price objectives.

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Three areas have been circled as appropriate for taking a count. In each area volume expands on the decline off the peak, and indicates distributional selling. In the first two cases a rally develops after the initial decline, which is a test (labeled). Count from the test to the prior peak. Each of these circled areas represents a small portion of the entire range of Distribution, but they generate sizable counts.

The three counts coincide with the circled areas on the vertical bar chart. Each counts to a price objective nesting between 120 and 155. These counts are reasonable and tactically useful. If a larger count is attempted it could easily dip below zero. As an example, find points A and B and count the columns. The objectives flagged are -$20 to $30 and this is less than one half of the entire Distribution. The $30 target is possible, but not likely.

The nested count area has just now been reached. When a count objective is being approached, look for the signs of stopping action (AR, SCLX and ST). If price is stopped in the area of the counts, two broad scenarios are likely. Either an Accumulation forms or a Redistribution. Both will develop new PnF counts that could take months to form. An Accumulation would generate an upward count that would initiate a new bull market. Redistribution would generate a new downward price objective that would continue the existing bear trend. Often the new Redistribution count will reconfirm bigger distribution counts formed at higher prices (in this example points A to B). An excellent demonstration is the furthest count to the right, which forms the LPSY. This is technically a Redistribution (see this post for additional examples). Note how it confirms the two prior Distribution counts into the 135 area.

To review, the protocol for selecting and counting these smaller PnF counts within the larger distribution is to find a price peak in the area of the Resistance line and look for expanding volume on the drop off that peak. At some point a rally will develop. This rally will fail to reach the prior price peak. This is a failed test of the prior peak. Count the columns from the test to the peak. The theory here is that distributional selling is active off the peak and represents large interests unloading stock. This PnF count measures the potential downward Cause that the Composite Operator has generated in this segment.

The Stepping Stone Redistribution (SSR) at the LPSY is a slightly different animal. An LPSY is a rally of poor quality (low volume and narrow price spread) that signals that the C.O. is no longer supporting the stock and that demand is of low quality. Count the columns from the final peak of the LPSY to the start of the rally. In this example the SSR count matches the two larger counts and adds confidence that these objectives are valid and useful.

Now that the price objectives have been reached, we would look for evidence of stopping action and Cause building that will lead to a tradable rally or reaction.

There is much more to do on the subject of Distribution counting.

All the Best,

Bruce

Dr. Hank Pruden will be making a presentation to the TSAA-SF this Saturday February 13th at Golden Gate University. The title of Hank’s talk is; “The Double Helix Power of Combining Wyckoff Method and Elliott Wave”. The public is invited (click here for additional information). 

Point and Figure Pauses that Refresh

Uptrends occasionally need a rest. We call these price congestion areas Reaccumulation trading ranges. Wyckoffians seek these areas out as an opportunity to get onboard the uptrend. Point and Figure analysis for Reaccumulations follow the conventions outlined in prior posts, with some minor variations. There is great value in becoming familiar with counting Reaccumulations as they are the stair-steps on the way to the conclusion of the uptrend. There are often multiple stops or pauses along the upward path and each is a profitable window for initiating a trade or adding to an existing position.

What could be more fun than chart analysis (Wyckoff style), so let us spend our time in this post exploring charts.  In particular, one of the most valuable charts in the Wyckoff Methodology, Reaccumulation Trading Range charts.

Both of the Reaccumulations in the PII uptrend are long pauses and build big count objectives. They are excellent trading opportunities. Each has the lowest low occurring in the first half of the formation. Thereafter higher lows form. This is a classic sign of Absorption as stock is being bid for at ever higher prices.

Reaccumulations are different from Accumulation base formations in the way they start. A prior uptrend will be stopped with a Buying Climax (BCLX) and an Automatic Reaction (AR) which signals large sellers (click here and here for more). Reaccumulation will begin to show Absorption at about the mid-point of the formation. In PII higher lows become evident after the Secondary Test (ST). Also, volatility and volume are generally high in the first half of the formation and diminish thereafter. We take our PnF counts from the analysis labeled on this chart. Recall that our count will start at the Last Point of Support (LPS) which follows the Sign of Strength (SOS) to the AR (click here for a review).

Establishing counts on the bar charts eases confusion and makes for more accurate price objectives. Then on the PnF we find the LPS and the AR and count the columns. Even though there is an upward tilt to the formation we are clear about where the proper count starts and ends. Using a standard 3-box reversal method, 87 points of fuel is available and added to the low at the ST and the count line. This is a substantial trade with 87 points of profit potential being signaled by the PnF chart.

The Preliminary Supply (PSY) is a big bar with a bulge of volume. There is an immediate reaction, on the next down bar, with expanding volume that is evidence of large sellers. This will stop the uptrend for some period of time. We call the next big push to a higher high the BCLX because of the volume spike. The decline to the AR is on generally high volume and is further evidence of the presence of supply. Note how on subsequent pushes the price can exceed the BCLX level only temporarily. There is a supply of stock that must be absorbed. This ten month Reaccumulation builds a substantial count. Again, we locate the LPS that follows the SOS and count to the reaction after the PSY.

This Reaccumulation formation generates a count that is about a double of the price level of the formation. We find the relevant price locations labeled on the bar chart and transfer them to the PnF chart. This count is 81 points and offers a target of 156 to 168. Slightly higher than the target of the prior Reaccumulation. This second pause would be an excellent place to average up a winning trade that was initiated in the first Reaccumulation.

Note how Distribution sets in at the price target zones established on these two examples. When two or more Reaccumulation counts confirm each other, expect resistance at that level to be formidable. PII experiences trend stopping Distribution in this price zone. Take some time and evaluate this PII Distribution formation for additional practice.

Here FDX has a Reaccumulation in 2012-13 that builds a substantial count. Take some time and zoom in on this Reaccumulation and complete the analysis. Also, note the pause in the early part of 2014 that builds a count. Try counting this area with the 1-box reversal method.

We identify the price points and labels from the bar chart and transfer to the PnF chart. There are 35 columns which provides a count of 105 on the 3-box reversal method. The Spring (SPR) and both LPS points are excellent places for trade entry. The SOS points inform us of the inherent strength of the stock price to Absorb overhanging supply.

Reaccumulation trading ranges are among the most important conditions that a Wyckoffian can master. Numerous variations of Reaccumulation pauses can develop within a long term uptrend and each is a meaningful opportunity.

All the Best,

Bruce

Counting Monster Point & Figure Charts

How does a Wyckoffian take a very large horizontal PnF count? A large count that forms over many years? Let’s do a case study on an outsized formation and see if it yields useful PnF count objectives. A big thanks to one of my teaching partners at Golden Gate University, Professor Roman Bogomazov, for crafting these charts for a presentation we recently gave. As the blog is currently deep into the study of Point and Figure charting, let us add PnF charts to this analysis.

Biogen, and the biotech industry, has been leadership in the bull market that began in 2009. Prior to the price run up, BIIB was in a long volatile trading range. A monthly vertical bar chart shows BIIB in an eleven year Stepping Stone Reaccumulation (SSR), and then in 2011 it Jumps out and begins a multi-year uptrend. We, as Wyckoffians, would take this large horizontal PnF count and attempt to determine a price objective.


First we would evaluate the entire structure of the SSR (click here for more on SSR trading ranges) to get a feel for the evolution of the Phase work and the proper chart labels. In 1999 and 2000 a robust uptrend is stopped by a PSY, BCLX and AR. This sets up the Resistance and Support areas (go back and review prior posts for a refresher on these concepts). Note how the Support and Resistance establish the outer boundaries of the BIIB trading range for the next decade. The lowest low in the SSR is in 2002, and thereafter each attempt to test the Support area produces a higher low. This is a clue that this structure is Reaccumulation and not Distribution. Further evidence that Absorption of shares by the C.O. is taking place is diminishing volatility. The ‘Upthrust Action’ in 2007 rises above the trading range and the peak of the BCLX. But the Upthrust cannot hold above the Resistance line and turns back into the trading range. Volume on this break in 2008 expands, so supply is still present. But, this expanding volume cannot push BIIB to the Phase B low which produces another higher low. The Last Point of Support is in and a modest uptrend begins. In the red box (Phase C and D) is an Accumulation within a large SSR (see the BIIB weekly vertical bar chart for more detail).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Is it possible to count a decade long Stepping Stone Reaccumulation? Let’s try. Using traditional scaling techniques will produce a large and unwieldy PnF chart. So we will create a ‘modified’ PnF that will compress the chart and make it countable. Modified PnF charts forgo detail for the ability to take bigger counts. To modify the chart we will change the scaling by going to a $5 scale and keep the 3 box reversal. Our chart produces 25 columns of count which we multiply by 3 box reversal and by $5 scale. This produces a $375 count that is added to the count line ($40) and the low ($20). The objective is $395 to $415 which we have marked on the monthly vertical chart. Note that BIIB recently climaxed into that target range and has since turned down. The uptrend that produced this price objective took six years to unfold. Our PnF horizontal counting technique was able to tackle this big job of counting a massively large SSR. As Wyckoffians we would analyze and consider smaller, more reasonable counts first while keeping the mega-counts in the back of our minds. Let us turn to a smaller and more conservative PnF count for BIIB, derived from the Accumulation area identified on the weekly chart.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On this smaller scale we can see an Accumulation within the SSR (see the red box within the monthly chart). A Selling Climax (SCLX) stops the price decline in 2008 and then there is an Automatic Rally (AR). Support and Resistance are now set. In Phase B, stock is being bought (absorbed) by the C.O. and this takes a full year. The Upthrust Action is a sign of demand being present, but is followed by selling back to the mid-point of the Accumulation Range. This is Phase C and is the final Last Point of Support (LPS) before the uptrend is born. The PnF count will begin at this LPS.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This base should be counted for a price objective. To take this count we will identify the LPS and the PS (Preliminary Support), both points are on the $46 line. This is a large count that looks diminished because of the mega-SSR that it is positioned within. Using a 5 box reversal method, a $161 and a $153 price objective are flagged (see the above chart for parameters and calculations). This trade has meaningful potential. What the fuel in this base count does is propel BIIB out of the decade long trading range, clearing out all overhead resistance. Clearing the decade long Resistance (overhead supply) allows BIIB to embark on an impressive multi-year uptrend.

Again, I would like to thank my friend, and fellow Wyckoffian, Professor Roman Bogomazov for producing this outstanding case study. Roman teaches Wyckoff I and II, and Strategy & Implementation on the GGU Cyber-Campus.

 

All the Best,

Bruce

Answer to Brad’s question from two posts ago: I will paste the PnF chart into PowerPoint and use those markup tools. I then organize PnF charts by theme and category in these files. 

Point and Figure Magic

It is a little like magic when Point and Figure counts work out. Long term counts, short term counts, big counts and little counts; PnF is a robust and useful tool. Many Wyckoffians in training do not trust the counts. It seems to me this is because it is so difficult to conceptualize why PnF charting (specifically horizontal counting methodology) works. A solution to this is endless practice. PnF practice installs confidence.  Do the counts on a thousand charts, and then count a thousand more. Notice when you are doing the counting that ideas, thoughts and inspirations will come to you about why it works and how best to employ the technique for your specific circumstances.

As time goes on we will do more PnF case studies. When a price target is reached there are three general scenarios that could come to pass.


The first is that price ignores the target objectives and keeps going (or pulls up short of the objective). Sometimes we get the counts wrong. The area of the horizontal count is misjudged, or the instrument has a mind of its own. When a target is reached, a Wyckoffian will ‘read the tape’ and wait for clues about the culmination of a trend. If the trend continues, this will accrue to the benefit of the Wyckoffian who is a trend trader. We expect a trend to stop with some type of Climactic crescendo. Whether a buying or selling climax, it should be tested after an intervening Automatic Rally (or Reaction). The metaphor of the dropped knife is that one allows the knife to bounce off the floor and then come to a rest before picking it up.

Another common scenario when targets are reached is that a Stepping Stone Redistribution (or Reaccumulation) begins. The trend is interrupted by a pause that can last weeks to months and then continues in the same direction. A trend, is a trend, is a trend and we would expect that Reaccumulations and Redistributions often occur. These are among the very best tactical trading opportunities (for a prior discussion of this topic click here and here and here and here). PnF studies of this phenomenon will get much attention in these pages (for a CSCO case study with PnF click here).

A third scenario is that a price target is achieved and conditions form (a Cause is built) for a price reversal into a fresh new bull or bear market. This normally occurs with an acceleration of the trend at the conclusion (Climactic action) that is both dramatic and alarming for participants. Thereafter, a volatile trading range develops which builds Cause in the form of a PnF count (columns). Even though the emotion of fear (or joy) is extremely high after the Climax, we notice that price has stopped progressing in the direction of the trend. The nuance here is to wait patiently for the pivot point where price is brought to the conclusion of the trading range and a new trend is born. This is where we take the PnF count that will provide the target potential for the emerging new trend. Around the pivot, or hinge, is where the Wyckoffian becomes engaged with (by establishing trades) the emerging trend.

The key is to be a good tape reader and tactician so that when any of the above actions occur we can still profit and moderate risk.

Always be aware of the bigger picture. There could be a much larger count pending in the background that engulfs prices and causes the smaller counts to become irrelevant. Therefore, always scale up to a larger timeframe in your analysis, and determine if there are bigger counts looming above or below. Often, the smaller counts work within the context of the larger counts, creating small trends within big trends. Knowing where the big counts are pointing will help prevent being surprised by a powerful trend that overshadows the smaller picture.

Develop a tendency to under count Distribution. Err toward taking smaller partial counts. There are two overriding reasons. First, Distribution will typically correct only a portion of the prior uptrend before consolidating, building a new cause and starting a new Markup phase. A Distribution formation could lead to a one-half, or less retracement of a robust bull move. Only a portion of the Distribution is active selling by the Composite Operator. Break a PnF Distribution into segments and count part, and then the whole. We will drill on this concept going forward.

Secondly, large PnF Accumulation counts could lead to uptrends that can appreciate 100%, 200%, 300%. An instrument under Distribution is only capable of falling to zero, which is unlikely. It is not uncommon for a large PnF Distribution to count below zero and this does us no good. We must study Distribution (vertical charts) carefully to determine where the C.O. becomes active in their selling operations and only count that portion of the Distribution. Segmenting Distribution takes some practice and it is a very important PnF counting skill.

Accumulation and Distribution generally unfold differently on PnF charts. Recall that volatility is what creates columns of ‘count’. Accumulation begins with a Selling Climax (SCLX) and dramatic volatility. Most of the columns of the Accumulation count will develop early and then as stock is absorbed, volatility will diminish. Late in the Accumulation, volatility becomes dull and fewer columns are generated.  Dullness actually causes investors to stop paying attention, which is a mistake. Out of dullness big trends begin. So, even though a Wyckoffian may go days without making a plot on their PnF chart, they become more acutely focused and aware that a ‘change of character’ from trend-less to trending is in the wind and could occur at any moment.

Distribution begins with some type of Buying Climax (BCLX). Generally the dullest, least volatile, part of the PnF Distribution is the early part. As the C.O. unloads stock during the distribution, volatility increases. Columns of count multiply at a faster rate late in the distribution phase. Poorer and poorer quality of ownership is the result of distribution and this produces volatility, the opposite conditions of Accumulation. Very big counts manifest in a short period of time during Distribution, and volatility is the reason why. Wyckoffians are alert, and on their toes, during Distribution because events transpire much more quickly than during Accumulation.

Above are some key concepts I find important to keep in mind. We will illustrate these ideas in future posts. In the meantime keep making and counting PnF charts to become comfortable with this wonderful market tool.

All the Best,

Bruce

Secrets of Point and Figure Distribution

The procedure for the horizontal PnF counting of Distribution follows the same logic as counting Accumulation. A cause is built during Accumulation and Distribution that results in a trend. Point and Figure chart construction allows us to estimate the extent of a trend. This adds a powerful tactical tool to our trading arsenal. Point and Figure provides a method for calculating reward to risk potential. The reward being calculated is the count objective estimated in the horizontal count. The risk is the strategic stop placement (entry price minus the stop). Reward to Risk is the price objective divided by the risk. Using this Point and Figure concept of reward to risk calculation becomes a standard procedure for Wyckoffians. A three to one reward to risk parameter is considered the minimum threshold for a trade. My counsel is to base this three to one minimum on a conservative point and figure objective, and not on the mega-counts that are possible on large Distribution formations.

Another powerful benefit of PnF is the ability to evaluate two comparable investments and gauge the potential of each with the calculation of their respective count objectives. A Wyckoffian might be considering two housing stocks. Housing stock A has a 3 to 1 reward to risk in the count objective, while housing stock B has a 4 to 1 count objective. There is more of a cause built in stock B, and on balance, it has better potential. 


We plot our price charts from left to right. We count Distribution (like Accumulation) from the right to the left. From the End of Distribution to its’ beginning. Typically, Distribution ends with two events. First a Sign of Weakness (SOW), where the stock price dips below the prior lows of the trading range. Then a rally of poor quality lifts prices back into the Distribution area on low volume and narrow price spread. This rally is labeled a ‘Last Point of Supply’ (LPSY). Demand of poor quality and overhead supply will prevent the LPSY from reaching the highs of the Distribution trading range (the exception being the Up Thrust After Distribution, UTAD). We then locate the Buying Climax (BCLX). A BCLX will be accompanied by a spike in volume, indicating that large sellers are beginning to liquidate holdings. It takes time to liquidate large holdings and thus the formation of a range of Distribution. The volatile up and down swings will produce columns of sideways trading range on a PnF chart. We count the PnF columns from the LPSY to the BCLX to obtain our count objective.

The areas of LPSY, SOW, ST, AR, BCLX and PSY are all determined from vertical bar chart analysis and then transferred to the PnF chart. Note that each of these points are rally peaks within the Distribution (except the AR). Each rally peak is a place where price is overcome by supply which checks the advance. Supply coming in at a price is what creates a trading range of distribution. The Last Point of Supply is where the last of the remaining demand is met by selling from large interests. After the LPSY, the stock price slides through the bottom of the trading range and the markdown begins. The count procedure is to begin counting at the Last Point where Supply (LPSY) is present to the first place where supply is present which is either the Buying Climax (BCLX) or the Preliminary Supply (PSY). Therefore, we always count from an up column of x’s, to an up column x’s when determining the size of the Distribution. These are the counting guidelines.

The final LPSY is the place where overwhelming supply stops the advance and there is no quality demand to prop up prices. Price cascades down and out of the Distribution zone in a Markdown. Support is nonexistent and the price falls freely. In the $INDU case study we use a 3-Box Reversal method PnF chart.

The ‘Count Line’ is drawn from the peak of the LPSY to the BCLX. The count in this case is 15 columns multiplied by the 3-box method, multiplied by 50 point scale, which equals 2,250 points. Subtract this from the highest peak (17,950) and the count line (17,750) to calculate the count objective. In this example, the $INDU is within striking distance of the 15,700 to 15,500 target window. A Wyckoffian will look for the signs of stopping action around the price objective target zone. This helps to confirm that the counts are relevant. Recall that stopping action begins with a Selling Climax, Automatic Rally and Secondary Test. It is prudent not to attempt to catch the falling knife of climactic declines, as they can fall further and longer than expected. Reaching a price objective can result in an extended pause that is followed by a continuation of the trend. Note in the prior blog on Accumulation (click here for a link) how stopping action was followed by base building, which takes time, and also can be counted with the PnF Method.

All the Best,

Bruce

Unlocking the Mysteries of Point and Figure Charts

Point and Figure charts are familiar, but different. They have a relationship to classical bar charts while being unique. Their construction and interpretation requires skills that differ from traditional charting. And because of the mysteries of their construction, they yield information that other chart styles cannot. Namely, in our case, the ability to project price objectives.

Using the Wyckoff counting method to estimate price objectives can produce uncanny results. The proper count method makes it easier for the beginner and the advanced Wyckoffian to look at a PnF chart and derive a count quickly and objectively, keeping confusion to a minimum.

In this post we will introduce how to count Accumulation ranges. The recent August to October Accumulation in the market ($INDU) provides a classic example for reviewing how to make a base count and project a price objective. Next time we will examine how to take a Distribution count. From there we can add analytical nuance that helps to deal with the inevitable variations and complexities that all Wyckoffians encounter. This is a rich subject and is among the most interesting in all of technical analysis (in my humble opinion). Very few market analysts know how, or care to do, this work. I believe this is because it requires time and judgment that cannot be programmed into a computer. Let us see if we can convince ourselves of the value of doing PnF analysis and whether it can give us an edge in our campaigns.


                                                  (click on chart for active version)

We plot our charts from left to right as a convention, time moves to the right on a horizontal axis. While we also plot PnF volatility from left to right, we will do our analysis and counting from right to left. We do our analytical work from the conclusion of the Accumulation to its’ beginning; from right to left. As we have learned how to do in earlier posts, find the critical junctures: LPS, ST, SOS, SCLX and PS, etc. Label these points on a vertical bar chart. Next find these points and label them on the PnF chart. IF your vertical analysis is on a weekly bar chart, try using a 3 box reversal PnF. If on a daily, then construct a 1 box reversal PnF. On the $INDU chart, I break that rule by using a daily vertical bar chart and a 3 box PnF. So let's call this a guideline. The Accumulation (in this example) is relatively straightforward with a clear Selling Climax, an Automatic Rally, Secondary Test, a Sign of Strength, and a Last Point of Support. Most Accumulations are messier than this, which we will learn how to deal with in future posts.

Using our counting guidelines, we start at the right by identifying the LPS. Normally a good LPS is immediately preceded by a SOS where price jumps out of the Accumulation and then dives back in and attempts to return to the Support level near the bottom. At times the LPS is a ‘Spring’ but more often it is a final, and higher, low around the mid-point of the Accumulation price range. That is the case here. On the PnF chart label the LPS, SOS, ST, AR and the SCLX as determined from the vertical bar chart. Starting at the LPS, count columns on the PnF chart to the SCLX. There are 15 columns. How much fuel is in the tank to drive prices upward? An Accumulation is absorption that puts stock into strong hands. PnF is an estimation technique for determining how full the fuel tank is (cause) and the extent to which prices can move higher. To do this calculation we take the columns counted (15 columns) and multiply by the method (3 box reversal in this case) and then multiply by the chart scale (50 point). This yields a total of 2,250 points which is added to the lowest point in the Accumulation (15,400) and to the Count Line (15,950). This gives us a target range of objectives (17,650 to 18,200), which we flag on the chart. The final high is 17,950 which strikes the mid-point of the objective.

Note that the LPS column is a down column (represented by an 'o'). The 'catapult wall' is the column of x's that jumps the price out of the Accumulation and begins the uptrend. Begin taking the count on a down column (the LPS in this case) and finish the count on the first down column (the SCLX). Never start or end an Accumulation count on an up column (represented by an 'x'). Think last low, to first low.

We will continue to add nuance to (this cause estimating) counting method, but the foundation of horizontal PnF analysis is illustrated in the count guidelines described above. When a Wyckoffian encounters a complex PnF structure, reducing it down to its essential elements will clarify counts and tactics. Thereafter the complexity can be coped with.

Next time we will tackle the Distribution count that this same $INDU chart is currently revealing. Some labeling and counts are on these charts for your study. Distribution follows the same count guidelines only flipped over. A note here is that Distribution counts are trickier, as it is easy to over-count them. For now, please go through some of your favorite stocks and indexes and try lining up your Wyckoff labeling on the vertical bar chart next to a PnF chart and take some counts. Also, take a swing at some Distribution counts if you see them.

All the Best,

Bruce

 

The upcoming semester of technical analysis classes begin this week at Golden Gate University in San Francisco. Dr. Hank Pruden and I will team teach FI355, the Wyckoff II class, on campus beginning January 9th. Dr. Pruden has arranged for individuals interested in this class to attend the first session prior to making the decision to enroll. As space is strictly limited to the capacity of the classroom, reservations are a must. Please call Dr. Pruden at 415.442.6583 to reserve your space. 

Additional classes are available both on-campus and online (cyber campus).  For a complete list, and to see the schedule for additional details (click here for more information).  Dr. Pruden is available for any questions you may have regarding any of the classes and the path to earning a Graduate Certificate in Technical Market Analysis (offered exclusively at GGU).

Here is a list of upcoming Technical Analysis courses offered on the GGU Cyber-Campus:

FINANCE 352 - Technical Analysis of Securities (click here for more information)

FINANCE 354 - Wyckoff Method I (click here for more information)

FINANCE 355 - Wyckoff Method II (click here for more information)

FINANCE 358 - Technical Market Analysis Strategies (click here for more informationFI358 class provides advanced studies in trading execution. Money management, trading psychology and trading plan development are reviewed.

FINANCE 360 - Behavioral Finance (click here for more information)

There is still time to enroll.