Wyckoff Power Charting

Point and Figure Pauses that Refresh

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

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

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

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

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

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

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

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

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

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

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

All the Best,

Bruce

Counting Monster Point & Figure Charts

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

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


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

All the Best,

Bruce

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

Point and Figure Magic

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

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


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

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

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

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

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

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

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

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

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

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

All the Best,

Bruce

Secrets of Point and Figure Distribution

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

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


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

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

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

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

All the Best,

Bruce

Unlocking the Mysteries of Point and Figure Charts

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

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

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


                                                  (click on chart for active version)

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

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

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

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

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

All the Best,

Bruce

 

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

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

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

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

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

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

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

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

There is still time to enroll.

 

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).

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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.