Wyckoff Power Charting

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.

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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).

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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.


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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.

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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.

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.

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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.


                                                               (click on chart for an active version)

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.

                                                               (click here for active version)

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.

                                                            (Click here for active version)

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).