Wyckoff Power Charting

Intro to Point and Figure Construction

As we enter 2016, it seems like a good opportunity to introduce Point and Figure chart construction. In future posts we will spend more and more time on the techniques of PnF counting using the Wyckoff Method. We will create a foundation for the process of creating PnF charts that conform to the Wyckoff Method.

PnF charts are employed in numerous methodologies. The Wyckoff PnF method is a somewhat obscure one that takes a HORIZONTAL count and projects a price objective. The price objectives calculated on charting websites almost universally use a VERTICAL count method. The Wyckoff principal at work here is the Law of Cause and Effect. The horizontal count represents the Cause that has been generated and the price objective is the Effect being projected or estimated.

Wyckoff PnF requires a unique chart construction. The good news is that StockCharts.com has an excellent PnF charting engine. It is ideal for our work with the Wyckoff Method. In this introduction we will review basic construction techniques and in future entries we will study how to take counts.


Traditional vertical bar charts have time as the constant variable. Either daily, weekly, monthly or intraday; each bar is a time constant. The next, and each future period, will get a plot (bar) at a price. The PnF chart’s horizontal axis is the result of volatility, not time. A plot in the next column of a PnF chart requires price movement in the opposite direction, either upward or downward by a minimum number of boxes. This is what is meant by ‘3 box reversal’ or ‘1 box reversal’. To move right to the next column there must be a reversal of trend by the required number of boxes. During a basing period much volatility can occur within a trading range. We have described this as Accumulation (or Distribution). Large PnF counts can form during such periods, while the price of the stock is confined to a trading range (click here for examples from the prior blog). Wide swinging trading ranges can create many columns of reversals. Wyckoff has a PnF technique for counting this horizontal trading range and estimating the upward or downward price objective. This estimating technique is very powerful and helps to establish reward to risk parameters for a trading campaign. We will integrate these tactics more and more during future blogs.

Many charting engines that have PnF capabilities do not use the Wyckoff conventions. StockCharts.com has developed a very Wyckoff friendly PnF tool for our use. For those of you who have not yet subscribed to StockCharts.com, now is the time. StockCharts.com is a great value simply for the ability to construct and save Wyckoff PnF charts. Also subscribers have access to intraday PnF charts which are very cool and very powerful. Down the road we will study intraday charts as they are tactically very useful.

 

Think of one box PnF charts as being on a comparable time frame to a daily vertical bar chart. The one box PnF method requires one box (pay attention to scaling) reversal of trend to move to the next column. At the conclusion of a downward move (column of ‘o’s), a reversal upward of one box will cause a move to the next column to the right and a plot of an ‘x’ (over one column to the right and up one box from the prior plot). Each full box up will result in a plot of another ‘x’ above the prior (in the same column). This occurs until a full box reversal down occurs and requires a move to the next column to the right and down one box. The caveat to the one box method is that a column must have at least two entries before a new column can be started. Many charting engines get this wrong, while StockCharts.com automatically does this plotting correctly. Note in the BA example, there are many columns with two entries and then a plot in a new column. For now just remember that two entries in each column are required to get an accurate horizontal count (see Dr. Pruden’s book, ‘The Three Skills of Top Trading’, pg. 112 for an excellent construction example).

PnF charting uses a scaling rule. Over $100 a unit (box) is two points. From $20 to $100 a box is one point. Under $20 and down to $5 is a half point. For an excellent tutorial on construction, see this Chart School article: (click here for link

Think of a three box PnF chart as being on a comparable time scale to a weekly vertical bar chart. A reversal requires a three box (for IBM each unit is $2 because it is trading over $100 and so a reversal requires a $6 movement) change of trend to move to the right one column. Wyckoffians will study the vertical bar charts for the nuances of price and volume. PnF charts will be used for volatility analysis and price projection estimates.

I am often asked what the logic is that makes horizontal counting of PnF charts work for projecting price objectives. All I can say is that PnF is among the oldest charting methods. Trial and error going back many decades has established the procedures taught by Mr. Wyckoff. Experience derived from endless practice will convince the Wyckoffian of the value of the method. In the classroom, we found that PnF charting is frequently difficult for students to learn. So we devoted much of the second semester to PnF construction and counting methods. If you find that you are struggling with these concepts, you are not alone. I will do my best to offer tips and tricks that will speed up the learning curve. Confidence will only come through much practice.

Look at some of your favorite stocks and indexes using the settings described above. Compare vertical bar charts to the PnF charts and become familiar with the ebb and flow of prices as they are plotted on each chart type. Pay attention to the congestion areas where the horizontal counts will be made (where Cause forms) and the resulting markup or markdown (where Effect takes place).

Happy New Year and Cheers to a Prosperous 2016,

 

Bruce

 

The upcoming semester of technical analysis classes will begin this next 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 information)

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

Crude Oil; How Low Can it Go?

On Monday of this week, the top four stories in the upper left hand column on DrudgeReport.com were about the weakness in oil prices.  This may have been a bell ringer of an indicator. Some consider Drudge to have his finger on the pulse of the news, and in this case the oil patch, and that pulse appears to be panicky. Let’s investigate crude oil prices from the perspective of Mr. Wyckoff.

Using Light Crude Oil prices ($WTIC), let’s put together a case study going back to 2008. When we observe our Wyckoffian tools working in a historical market setting, we gain confidence in our analysis of the current situation.


                                                     (Click on chart for active version)

This 2008 top is a ‘Hypodermic Top’ which arrives and turns down quickly, with a UTAD at the end. Even quick forming tops can make large distributional PnF counts. As can be seen in the chart below, the Distribution count carries to a price objective of $14 to $32. The final low was made on a Spring just below $34. This is within $2 of the upper count objective and a solid hit.

There are always anomalies encountered in Wyckoff. In this case, it is the lack of a Climax on volume into the conclusion of the downtrend at the lows in early and late December 2008. An early December low has climactic qualities as it accelerates to a low and the volume spikes. But the volume is not appreciably higher than the average of the entire decline. The late December low actually comes on diminishing volume and is followed by an AR. We call this low a PS because of the low volume. Next there is a constructive AR which rallies forcefully on expanding volume. We draw the lines of Support on the PS and Resistance on the AR. After the AR, the decline is quick and the volume expands which demonstrates that supply is still overhanging $WTIC. It is not time to buy yet as supply is present. The next decline into the Spring is Climactic with a huge bulge of volume on a whoosh down to a minor new low. This is a Spring #2 and immediately turns back up into the Accumulation area. We judge that the Climax is in. The Spring and the Climax together is unusual. The flushing of the lows on volume is the cathartic event that allows the market to freely run up to the top of the Accumulation area and out with good Jumping action and a Backup to the Edge of the Creek (BUEC). Springs, Jumps and BUEC can all be bought.

$WTIC rises in a Hypodermic to a final peak (inset weekly chart). Distribution counts can build up quickly as $WTIC rises into a narrow peak and turns down. The area of this count is the red circle on the previous chart. Despite the short period of time, a count builds for a potential decline to $32 to $14. The ultimate low is just under $34 and is considered a PnF hit.

A count of the 2008-09 base (see blue box in top chart and PnF above) offers a price objective of $115-125. Waiting for the completion of Accumulation reveals a meaningful count objective and emphasizes the value of patience. Note that the price objective is met at 114.83 in May of 2011 (another good hit from our PnF charts).

                                                    (Click on chart for active version)

After that peak, crude oil traded in a range and began breaking down (above chart) in June 2014. This decline is now nearly 18 months old. There is a series of four lows, each lower than the prior. These four lows allow for the reverse use of trendlines. On the most recent drop, notice the large declining bar on very high volume. This has Climactic qualities. Also, there is a minor breach of the trendline into the $34 area which is an oversold condition. This may not be the final low for crude oil but it could stop the decline for some period of time.

Wyckoffian tactics would make the case that a Climax is an appropriate juncture to begin covering shorts, but not yet ideal for buying. A good Climax will be followed by an Automatic Rally (AR) and then a retest of the area of the Climax low (we will watch for this development). A successful test would be an additional place for short sellers to cover remaining positions. As we studied on the 2008-09 charts, time is needed to build a Cause for a meaningful new rally in crude oil. This may be as long as 3 to 6 months into the future (first half of 2016). Studying the above chart, we notice price congestion during most of 2015. It is possible that the trading in this last year may become part of a PnF count for the future. For this to happen a powerful Sign of Strength would be needed to lift prices up toward the April-May 2015 peak in the $60 area followed by an attempt to return back toward the lows. This is ‘a big if’ at this point and for now we will watch with curiosity.

$WTIC touched $34 this week and has thus fulfilled the minimum PnF objective above. A continuation to the $28 area is entirely possible as Climaxes are hard to stop (and there is a viable PnF count to $10 not shown here, that we must keep in the back of our minds). At year end, volatile and panicky trading can exaggerate the trend in force. So year-end could be a good place to expect a low after an extended decline (note the December lows in 2008). That is why tactics are so important. The use of both PnF and Vertical charts together really strengthens our analysis.

In conclusion: Hopefully you enjoyed and found value in this Crude Oil case study. We will return to it at a later date to review our work. For now, remember that a Climax is for covering shorts (for those traders so inclined) and will be followed by a sharp, but brief, rally (AR). To be followed by a Secondary Test that may or may not get to the Climax low. After a meaningful Cause is built (PnF count) we would begin to look for Springs, Jumps, and Backups to buy for a worthwhile trade. If none of this materializes we would be on the lookout for a Stepping Stone Redistribution and another leg down.

All the Best,

Bruce

Ps. We will take a break during the upcoming Christmas Week. Have a wonderful Holiday.

 

 

The Illustrated Wyckoff

In a continuation of our discussion of the overarching principles of the Wyckoff Method, let’s do a visual case study. There are three principle Laws that compose the Wyckoff Method*:

The Law of Supply and Demand

The Law of Cause and Effect

The Law of Effort and Result

We become master Wyckoffians by developing visual knowledge of these principle laws in our chart reading. This becomes the foundation of the skill Mr. Wyckoff called ‘Tape Reading’. Through our innate understanding of these laws we raise our awareness of the reasons stock prices move in the ways that they do. And we become better and better at selecting the best candidates for speculative campaigns. Endless repetition assists us on the mastery path.


Here we will illustrate the concepts introduced in the prior post. It will help to have The Laws of Wyckoff at the ready for reference (click here for link).

In the Wyckoff Method every process has a reason for being. Everything included in the Methodology conforms to these three laws. Mastery is the product of becoming ever more skilled at identifying the Laws and their nuances at work. You are encouraged to go back through the prior posts and apply these Laws to the chart work. We will do some of that here, by revisiting a prior AAPL example and illustrating the Laws and the essential principles at work (click here to link to another AAPL chart).

                                                  (click on chart for active version)

When Supply exceeds Demand, price falls as the decline in the red box demonstrates. Stock is in weak hands. Supply equals Demand during the sideways trading within the yellow box. Wyckoffians seek to identify the footprints of the Composite Operator (C.O.) during this trendless trading. The C.O. will use this trendless period to Accumulate (as illustrated here) or Distribute a position. Absorption is the activity of building a stock position, and thus removing stock from the marketplace. Accumulation is occurring. When Absorption is effectively complete all that is required to unbalance the Supply / Demand relationship is the slightest increase of new buyers.  Supply is low and Demand is on the increase. Even a slight increase in buying can spark a new uptrend as the price action in the blue box illustrates.

Imbalance of Supply and Demand creates the potential for large trends that can go on for multiple years.

Effort and Result has to do with the interplay of volume and price. AAPL is a particularly rich case study. Note volume expanding as price marks down. The volatility of the price bars and the rate of decline is increasing. The Effort of volume and Result of price are harmonious. Note how the highest volume week of decline is only marginally down (and the weekly range narrows from the prior week). This is inharmonious action of price and volume. Effort (volume) without a commensurate Result (price) is another way to say it.

There is a three week dive to a new low in November 2008. Each week is on high volume and note that the spread of each bar is less than into the climax low in October. It can be seen that the November low is below the October low, but price is decelerating. This is inharmonious downward action. Effort in volume is not Resulting in dramatically in lower prices, again this is inharmonious. This is early evidence of stopping action of the large downtrend.

Turning to the uptrend, notice the volume signature, the effort being applied to prices. During the jump out of the Accumulation range, the price bars are wide and closing near the high of the weekly range. The Effort of volume is actually declining with each weeks advance. This seems to defy the market wisdom that price should rise on expanding volume. The Wyckoffian perspective is that most of AAPL stock has been absorbed by strong hands by the end of the Accumulation. Therefore it will not take much demand to put prices up, because there is very little stock for sale. This is a large Result with modest Effort which is considered bullish early in a new bull market. As a contrast, note the volume in May of 2009 as the price rallies into a five week pause. The volume (Effort) is higher each week and the spread of price is compressing, which is evidence of selling. This is an inharmonious action of Effort without a comparable Result. As the uptrend resumes, volume remains steady and does not spike as prices grind higher. Effort and Result is a concept that is applicable to monthly, weekly, daily and intraday charts. It is difficult to master but well worth the effort to learn.

Point and Figure charts provide a tool for estimating the Cause that has been built during an Accumulation (and also for Distribution). By counting the columns in the Accumulation, a calculation can estimate how much of a Cause there is. This Cause, or count, is projected upward to estimate an Effect, or price objective. In the above example AAPL has built a count that projects to $50. Mr. Wyckoff was a big proponent of employing PnF charts for estimating price objectives. PnF charting and counting is an elegant and obscure tool that addresses the law of Cause and Effect.

All the Best,

Bruce

*Source: Hank Pruden, 'The Three Skills of Top Trading', Wiley Publ. 2007 with adaptations and modifications. 

 

The Laws of Wyckoff

Three Principles or Laws govern the structure of the Wyckoff Methodology. Procedurally there are a series of Tests that determine buying and selling decisions. There are nine of these Tests, or thresholds, to be passed for making a buying decision, or a selling decision. The Nine Buying Tests and the Nine Selling Tests all adhere to the overarching Wyckoff Laws.  The tools Wyckoffians use to evaluate the Three Laws and the Nine Tests are vertical barcharts and point and figure charts. Our studies of Accumulation, Markup, Reaccumulation, Distribution, Markdown and Redistribution are chart analysis skills that prepare us to function within these Laws and Tests for making buying and selling decisions.

Three Principles or Laws are at the heart of the Wyckoff Methodology. Each addresses a characteristic of the nature of price and volume essential to a trader's market knowledge (as seen through the eyes of the Wyckoff Methodology). Here we will discuss the three laws and at a future time we will explore the buying and selling tests.


Three Wyckoff Laws*:

Supply and Demand

Cause and Effect

Effort and Result

Supply and Demand. This principle examines the quality of ownership of the stock. When stock is in strong hands it has been Absorbed. Very little stock is available for sale thus the Supply is low. Any incremental increase in Demand for the stock will cause it to move up. When Demand is increasing and Supply is low, expect prices to rise.

In a number of our early posts, we discussed the importance of Composite Operator absorption or ownership of a stock. When the C.O. is actively campaigning a stock, they remove available stock from the marketplace simply because they buy the stock and will not sell it. This can be observed throughout Accumulation when the C.O. stealthily buys up shares during long grinding basing periods.

As Wyckoffians evaluate Accumulation and Distribution phases (through the study of bar charts and PnF charts) the principle of Supply and Demand is being observed. The balance of ownership is shifting during these large trading ranges. This shift in ownership will profoundly change the Supply and Demand equation.

During Distribution the C.O. is selling and thus stock is going into weak hands. This has the effect of releasing a Supply of stock into the marketplace. Since the very large and informed C.O. is supplying the market with stock, a phase of Distribution forms, followed by a period of Markdown.

When Supply and Demand are about equal, the result will be a trading range where prices stay in a trendless state. This will be where the important shifts between Supply and Demand will take place. At the conclusion of the trading range, a new up or down trend will begin which reflects the imbalance of Supply and Demand.

Cause and Effect. This principle relates to the first law, Supply and Demand. A Cause must form before there will be an Effect. And the Effect will be in proportion to the size of the preceding Cause. A large Cause will produce a large Effect, a small Cause results in a small Effect. Accumulation and Distribution phases are periods of Cause building. The Effect is the subsequent Markup or Markdown.

The primary charting tool for estimating the potential Effect are Point and Figure charts (PnF). The Wyckoff Method uses a horizontal PnF counting technique. For example, an Accumulation trading range is plotted with a PnF chart. We then use Mr. Wyckoff's PnF technique for counting across the horizontal range of the Accumulation (or Distribution) and estimating the potential projected movement. PnF provides a powerful tool for ‘counting’ the Cause and estimating the Effect (see earlier posts for examples of PnF charting and counting). Distribution would produce a ‘down count’ and therefore the Effect would be declining prices.

A key to Wyckoff Analysis is to determine when a trading range is under Accumulation or Distribution (see earlier posts on this concept).   We can then estimate a price target based on the count.

Effort and Result. Volume provides Effort and the action of Price is the result. It takes Effort, in the form of Volume, to drive Price upward. As an illustration; the Stock Price climbs out of the Accumulation Phase and begins Marking Up. The Price Spread then should be wide and typically the close will be toward the high of the day (or week). Volume expands from the prior days. A Wyckoffian would conclude the Result (price advance) to be large on increasing Effort (higher Volume). This is Bullish for the continued advance of prices.

Toward the end of a trend, the daily price spread begins to narrow in comparison to prior Markup days. Meanwhile, the Effort of Volume is very high and expanding. The analysis of this condition is that large Effort (Volume) is Resulting in a marginal price advance. Large Effort with minimal Result is a form of divergence or inharmonious action between price and volume. This is an indication of a tiring uptrend and a correction of prices is expected. The above example is only an illustration. There is much more to consider in the evaluation of Effort and Result.

Exercise: Keeping these principles in mind go back to some of the early posts on Accumulation and Distribution and attempt to adapt these concepts to the chart studies.

These principles form a structure for understanding the nature of price activity and how best to conduct a speculative campaign. During our prior posts you have been exposed to each of these structural principles of the Wyckoff Methodology. There is much more to come.

All the Best,

Bruce

*Source: Hank Pruden, 'The Three Skills of Top Trading', Wiley Publ. 2007 with adaptations and modifications. 

 

 

 

 

Wyckoff Walk Around the Clock

We have just completed a walk around the classic market cycle. Let us take some time for review before we move on to other aspects of the Wyckoff Method. If we are all on the same page regarding the structure of prices during each stage of Accumulation, Markup, Distribution and Markdown, then we can speak the same Wyckoffian language as we move onward. There is richness to the Wyckoff Method that allows us to drill deeper and deeper into the nuances of this trading process. Our goal is trading mastery through the understanding of the relationship of price and volume. And how it reveals the motives and the activities of the large market operators (referred to as the Composite Operator). It requires the active sponsorship and campaigning of the large operators to put a stock into an uptrend and keep it rising for long and bullish uptrends.

Let’s review what we have done so far. By doing this we can emphasize that there is a rhyme and reason for everything that happens in the financial markets. We, as Wyckoffians, are able to understand this narrative and benefit from it with profitable trading strategies that involve following these large informed interests.


Click on the title to link to the article:

Getting some Basic Wyckoff Terminology Under our Belts. The discounting nature of stock prices is discussed. Stock prices lead or discount business conditions and if we wait for good news on the economy to buy stocks, we will be a year or more behind the uptrend. We must employ a methodology that is based on the most leading indicator, price, and not on economic conditions or the trend of earnings etc. The four broad stages of Accumulation, Markup, Distribution and Markdown are introduced.

Richard D. Wyckoff's REAL Rules of the Game. The concept of the Composite Operator as the primary force behind the long term uptrends and downtrends in stock prices is explored.

The Stopping Action of a Downtrend. Accumulation Phase; Absorbing Stock Like a Sponge. Both address the anatomy of Accumulation. The first is about the stopping of a prior bear market downtrend. The next is a look into how the Composite Operator stealthily accumulates large quantities of shares for a bull market campaign.

Francis Bacon Reveals the Nature of Trends. Jumping the Creek. Both of these address how Accumulation will conclude and the Markup begins. The attributes of Springs, Jumps and Backups are evaluated as they are prime places to build positions and ride along with the C.O.

Wyckoff Power Charting. Let's Review. This post has valuable schematics that illustrate the various ways that Accumulation phases can manifest.  This is also a general review of the prior Accumulation blogs.

Making the Trend Your Friend. The art of constructing trendlines and trend channels, Wyckoff style, is introduced. This is also a discussion of the Markup Stage.

Being a Chart Whisperer. Is a continuation of trend analysis with a discussion of some advanced concepts.

Rev Up with Reaccumulation Trading Ranges. Reaccumulation Roundup. When Termites Get into Your Trends. These all deal with the important concept of Reaccumulations within uptrends. A Reaccumulation is a price pause (a trading range) during a bull market.

Take the Fork in the Road. Follow the Bouncing Ball. The Way of Wyckoff. Distribution Definitions. Just Charts. Addresses the stopping action of a mature uptrend and the emergence of the Distribution process. Important schematics of the Distribution process are included. Also, there is a review of the ways that Distributions mature and become a bear market downtrend.

Context is King. Just Another Phase. The principle of Phases is introduced. During Distribution and Accumulation the behavior of price and volume will mature to the pivot point when the new trend is initiated. Learning to identify price behavior in each of these Phases helps the Wyckoffian to know when to act and when to patiently observe.

The Unfriendly Trend. Trendapalooza. These deal with Wyckoffian methods for drawing downtrend lines and channels during bear markets. The latter is a discussion of the structure of the Markdown Stage.

Redistribution Ruckus. Redistribution, the Evil Twin. Redistribution - A Case Study. The nature of a price pause during Markdowns, referred to as a Redistribution, is examined.

Accumulation, Markup, Distribution and Markdown are the four primary conditions of the classic cycle in financial asset prices (as the Wyckoff Method defines it). This cycle is endlessly repeating. In these blog posts this cycle is evaluated using the Wyckoff Methodology. This now provides us with a common language as we move forward and deeper into the discussion of how to trade with the Wyckoff Method.

I am grateful for your interest in this blog and for providing very useful feedback.

All the Best,

Bruce

Ps. We will take a break during the upcoming Thanksgiving Holiday week. Have a wonderful week.

 

 

 

 

Redistribution - A Case Study

The case study method is a preferred teaching tool in the Wyckoff classroom. Past real life market situations can be explored on an accelerated basis. Students are able to gain market experience (in the safety of the classroom) from a myriad of different and illustrative  trading environments. Here is a case study in our ongoing discussion of Redistribution.

Cisco Systems was one of the legendary bull campaigns of the 1990’s. CSCO offered stock to the public in February of 1990 and it trended higher for the entire decade. All good things come to an end in the stock market and in March of 2000, CSCO peaked out and began its’ first bear market. In this post we will evaluate the four stepping stone Redistributions of that bear market.

During the 10 year uptrend; the C.O., institutions and the public fully embraced Cisco Systems. This was a ‘must own’ stock in institutional portfolios. When the top arrived it was sudden and mostly unexpected. Very few were able to Distribute stock around the peak. Therefore CSCO was sold, by the C.O. and nimble institutions, on a scale down off the peak prices.

The decade long uptrend meant that tremendous supply would come in to the market after the high was in place. This stock would need to be sold during the Redistributions, and it would benefit the C.O. to have lengthy Redistributions. More stock could be sold during quiet trendless trading ranges. The public considers the early price breaks off the high prices as an opportunity to buy stock at bargain values. This, of course, is a trap.

A variety of Redistribution formations are illustrated during the entirety of the CSCO downtrend. It does not represent all of the possible ways that a bear market can stair step lower. It does show the tricky nature of declining prices.

 

                                                  (Click on chart for active version)

The above chart highlights the Redistribution areas to be studied.

                                                  (Click on chart for active version)

Declines typically stop with climactic action which involves high volume and volatile prices (see SCLX on the chart above). This portends a rally of some magnitude is coming and potentially the continuation of the uptrend. The surge of volume on the decline off the $72 peak is evidence of Distribution by large interests (the Composite Operator). The BCLX tests the PSY on high volume and stops the advance. This warns that a lower peak is likely forming at the $62 price level. From June to October this Redistribution develops the attributes of distributional selling. The ICE is broken in September on widening price spreads and rising volume. Thereafter, a pause forms at Support with minimal lift, and the ICE is tested from below. CSCO is vulnerable to price weakness directly ahead. Classic places to sell stock and sell short is at the Secondary Test (ST) and the Last Point of Supply (LPSY). Also the breaking of the ICE and the next LPSY represent the last quality places to sell. Diminishing price spread and volume on the rallies, and expanding price spread and volume on the declines, is a sign that the downtrend will be resuming soon. Breaking key price supports and prior price lows is labeled a Sign of Weakness (SOW) and is evidence of overwhelming supply. Look for prices to pause (followed by rallies of low quality) after a SOW and then to resume declining.

Principles inside of principles are at work. There is a big distribution that began prior to the final peak (as illustrated on this daily chart with a red dashed line). And there is a complete distribution within the Redistribution area (June-October). Notice that volatility is expanding as the stock price reaches the conclusion of the trading range and the start of the markdown. Volatility discourages traders from acting. Wyckoffians see the ramping up of volatility as evidence of a shift to the next phase and will prepare for what is to come.

                                                  (Click on chart for active version)

During Redistribution 2 price stabilizes at a new lower level. In this case just below the prior Redistribution. It is likely that the C.O. and institutions lent support to CSCO at $40 to $44 price level with the motive of selling more stock. It is now evident that CSCO is in a bear market and many institutions are just waking up to this new reality.

Redistribution 2 is shorter in duration and has a different structure. Lower lows and lower highs are evident throughout. This means that large sellers are more aggressively selling on strength into the top half of the trading range. After the LPSY price breaks on wide spread and high volume, support levels are easily broken. Also, this is where the ICE is broken. ICE is a support zone that is defined by a wavy line that indicates the tendency for support to come in, not at a price, but in an area. When the ICE is broken, the support is broken, and price will not be able to get back above the old support. Old support becomes new resistance. The rapidity and the force of prices in the drop is what helps the Wyckoffian to determine that support has been breeched.  Note how price revisits the ICE from below and does so a few times. The ICE has now become formidable resistance.

                                                  (Click on chart for active version)

Redistribution 3 is the briefest so far, lasting about two months. It begins with a minor selling climax (SCLX). Resistance is drawn at the two peaks (PSY and BCLX) with bulging volume (stopping action). Note the volume and price spread on the rally to the LPSY. The volume is low and diminishing, and the price spread is generally narrow. This is a rally of poor quality. The volume after the LPSY is expanding while the price drops quickly back to the support area. There is no price lift off the support, then a gap down and out of the trading range. We define this gap as the breaking of the ICE. This Redistribution is complete.

There have been three Redistributions in succession, each forming just below the prior one. Consider how difficult this is for short sellers. A trend will begin and then immediately stop and Redistribute for weeks and months. If the short seller attempts to sell the breakdown (bottom of the trading range) prices are soon jamming back up into the breakdown zone. Cisco Systems had been such an institutional favorite that buy recommendations were being issued repeatedly on the way down. This creates buying support on the way down and helps to levitate the stock for long periods.

Note that after the third Redistribution, a long protracted downtrend begins. The long term bulls are beginning to give in and sell. A classic trend channel defines the stride of the decline. After Redistribution #3 is completed comes the best opportunity to sell short and stay with the downtrend. Why does the briefest Redistribution result in the best downtrend? Each of the three Redistributions puts progressively more stock into weak hands. The cumulative effect is a long decline as the ownership is of poor quality.

                                                  (Click on chart for active version)

A series of climactic declines indicate that stopping action is taking place. The downtrend channel has been extended onto this daily chart. Note what a long-drawn-out decline this has become. This is a markdown of major proportions. Volume and price spread bulge during the final stages of the drop as conditions become climactic. This is a classic opportunity for short sellers to cover and close out their positions. The rally from the SCLX to the BCLX is about a 100% run-up. We must expect that many institutions and individuals are in a loss trap, having bought in the vicinity of the all-time high prices. Therefore, stock prices may retest the SCLX low and potentially go lower as these late buyers finally capitulate and sell stock. The April low is taken out in September.

A buying climax (BCLX) throws over the rising trend channel on high volume. Thereafter the declines are rapid and the rallies are labored (narrow spread and low volume). This Redistribution (#4) has the classic attributes of a normal distribution. The two LPSYs are ‘on the springboard’ and represent good places to sell short. A rapid decline to new lows follows.

Each of these Redistributions is unique. By studying these classic case studies we can accelerate our learning curve. And, most importantly, they can keep us on the right track and out of trouble.

A subject of future blogs is how to take horizontal point and figure counts. Here we take the horizontal count of each of the first three Redistributions. Note how they all have price count objectives that ‘nest’ at approximately the same price level. Cisco climaxed and consolidated in the area of these count objectives. Ultimately Cisco exceeded these counts. There is more to come on point and figure methodology.

All the Best,

Bruce

 

Redistribution, the Evil Twin

Redistributions are messy. They come in many shapes and sizes and defy categorization. Therefore my job is particularly difficult here.  Our mission is to find actionable characteristics in Redistributions that Wyckoffians can benefit from. Here is the problem in a nutshell. Recall that under Reaccumulation (pause in an uptrend) a stock, index, ETF, or commodity is being absorbed or accumulated for a continuation of the uptrend. As we have discussed in prior posts, absorption is the activity of removing stock from the marketplace in anticipation of a major uptrend. This is primarily the activity of the Composite Operator whom has the purchasing power to remove meaningful quantities of stock from active daily trading. Absorbing stock has the effect of reducing the volatility of the stock, as the Reaccumulation period matures to its conclusion, and the next uptrend begins. At the beginning of Reaccumulation, volatility is high as a result of the many speculator and trader types who have latched onto the prior uptrend. The early corrections against the uptrend are quick and volatile as shorter term investors take profits. Then, as the sideways trading range develops, the corrections become more dull and contained. This is because the C.O. and institutions are putting bids in to buy shares on pullbacks. These orders create support for the stock price. Often the last half of the time spent in the Reaccumulation trading range sees the price making a series of higher lows. Recall that a primary objective of the C.O. is to carefully accumulate shares in such a way that they don’t force prices to begin the uptrend before all of their buying is completed.


Contrast that with the activity taking place during Redistribution. A stock in a primary bear market downtrend lacks C.O. involvement. A stock requires C.O. ownership and active bullish campaigning to keep the price high and rising. When the C.O. community abandons a stock it becomes vulnerable to bear market behavior. In a downtrend short sellers will see enough profit that they will begin to cover their short positions. Bear market downtrends tend to be volatile. Short covering is a buying activity that will cause the stock price to reverse direction and rally quickly. A short covering rally is the beginning of the Redistribution trading range. A sharply rising stock price will drive nervous short sellers out of their positions. What happens during Redistribution is that a series of rallies and declines will occur with a general tendency for the rallies to be sharp and volatile and the reactions to be less so. These rallies and reactions jam the shorts and repeats until the less resolute among them have relinquished their positions. Only then can the downtrend resume.

Not all C.O. types are short sellers, but the best short sellers are Composite Operators. Their modus operandi during Redistribution periods is to sell short around the top of the trading range and to potentially cover (buy to cover) some of their position near the bottom of the range. On balance they are increasing the size of their short position throughout. The reason for the buying (covering) of some part of their short position at the bottom of the trading range is to provide support and not prematurely push the stock into a new downtrend before a meaningful short position can be established. For the C.O. and institutions it is much harder to short enough stock for a downtrend than it is to buy stock for an uptrend.

Therefore Redistribution is like the evil twin of Reaccumulation. Born from volatility, Redistribution remains volatile throughout and then ends with the emergence of another downtrend. Where Reaccumulation ends with a whimper (typically) and the emergence of a steady uptrend, Redistribution remains volatile and slides into a new downtrend with a bang.

                                               (Click on chart for active version)

Redistribution begins with volatility and ends with volatility. Typically a Selling Climax initiates the Redistribution process. The Redistribution process looks eerily similar to Distribution. A review of the process of Distribution could prove helpful (to study the Distribution process and schematics click here). On the ARMH case study; cover up everything to the left of the Selling Climax (SCLX) and compare to the schematics and prior Distribution examples. Note the family resemblance. The blue labeling of the SCLX, AR and ST are there to illustrate the similarities to the start of Accumulation. This is classic ‘stopping action’. The red labeling illustrates Distribution and Redistribution attributes. Note that once the stopping action is in place (primarily short covering) the footprints of Redistribution become evident.

The attempt to support ARMH takes place at the ICE. Note the series of lower price lows. This is a sign of inherent weakness and is labeled as SOW (Sign of Weakness). Once the ICE is broken there is no longer enough demand left to rally back into the prior trading range. ARMH is very vulnerable to a rapid markdown when below the ICE.

After the Climactic action at the Upthrust (UT) the volatility and price weakness become dominant. The rallies are weak, short in duration, and lack sponsorship from the C.O.

We will spend more time on the tricky business of Redistributions.

All the Best,

Bruce

Redistribution Ruckus

Bear markets are wild and wooly affairs; quick and painful, slow and tortuous, and every other kind of difficulty imaginable. Bear markets get less attention from market students than the other phases of price action. Amnesia sets in for investors after a bear market. Who among us can remember the bear market of 2007-09, much less the decline beginning in 2000? The truth is, for many, they are no fun to think about. The prior two posts were devoted to the art of drawing trendlines and trend channels during declining markets. The next few posts will be devoted to evaluating the concept of the ‘Redistribution’ Phase. This phase can loosely be described as a trading range that follows a downtrend. A Redistribution is a pause that is preceded by a decline in prices and then is followed by a resumption of falling prices. Multiple Redistribution Phases can occur within an entire decline.

The overarching theme of a bear market is an abundance of stock and a shortage of buying power. Stock is in ‘weak hands’ and strong hands are not buyers. This is a toxic brew for stock values. Markdown Phase is what we call the entirety of the Bear Market structure. But inside the Markdown is a multitude of price behaviors, most of which should be avoided by investors, but some of which are trading opportunities. The Redistribution is a pause that refreshes stocks for another downward run. A common mistake is to evaluate the structure of Redistribution as an Accumulation (a bottom for prices). Therefore an important goal for this discussion is to create skills in distinguishing one condition from the other. The ability to avoid making a premature buying decision is very valuable to portfolio returns and for peace of mind.

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Trendapalooza

When trendlines are drawn, with the Wyckoff Method, it is like putting on 3D glasses. With proper trend analysis two dimensional charts spring to life and reveal their innermost secrets and true intentions. Demand lines, Supply Lines, Overbought Lines, Oversold Lines, Support Lines and Resistance Lines; they all tell a story about the behavior and direction of prices.  When we raise our skills at drawing these trendlines we are putting ourselves onto the path toward Wyckoffian Mastery status.

Well considered, well drawn trendlines, channels and trading ranges bring a stock chart to life. The story of where supply is coming in and stopping the price advance becomes evident and informs trading tactics. A proper trendline will tip off the rate of advance or decline, the stride, at which the price will be moving for the foreseeable future. Trend Channels indicate the nature of the advance or decline. Is it a wide and loose channel which has big upward and downward swings contained within a large persistent trend? Is it a stair stepping move with long sideways plateaus followed by a sudden sharp drop to a new price level? These mini case studies are an introduction to the varied nature of downtrends and how proper trendlines can assist in effective trading tactics. Wyckoff trendline construction reveals secret gems hidden in plain sight. Our Wyckoffian 3D glasses provide the perspective of seeing our charts in a more useful way.

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The Unfriendly Trend

Once Distribution is complete, the Markdown Phase begins. Declining prices after the completion of Distribution can cause a ruckus. Sponsorship (of a stock, bond, commodity, ETF, etc.) by large and informed interests is necessary to drive prices higher and higher. Eventually large sponsors abandon ship, which they do through the Distribution process, and leave the stock in the hands of weak holders. A stock in weak hands will go down. The price of abandoned stocks will fall quickly. Over the course of the next few blogs we will study the Markdown phase and its attributes.

We are all familiar with “The Trend is Your Friend”. Downtrends are much less friendly than uptrends. They are volatile, abrupt and generally difficult to trade. In a word they are unfriendly.

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