Wyckoff Power Charting

An AAPL for Your Thoughts

So many important events happen in the fall of the year; school starts, football season begins, new television programming is introduced. But, for many, the momentous event is the reveal of the latest Apple iPhone. This year the pundits had a collective yawn over the new features of the iPhone 7, but the preorders were record setting, and very quickly the initial inventory was sold out. There is only one thing a Wyckoffian can do when their iPhone order has been delayed; evaluate the Apple chart (of course that is the Wyckoffian answer to nearly everything).

We must always keep in mind that markets are a discounting mechanism. The tendency of the market is to look out into the future and anticipate the important changes coming. This discounting phenomena is why Mr. Wyckoff counseled to read the motives and actions of the large interests by their conduct on the tape. As we discussed last week, this is best done by interpreting their footprints with the study of price and volume on the vertical bar chart. Was it a surprise to the large interests that Apple Inc. had such a favorable consumer response to their latest iPhone offering? Let’s consult the charts for some clarification.

Continue reading "An AAPL for Your Thoughts" »

Tracking Big Footprints

Two of the most elusive and rare phenomena in the world are; 1) a Big Foot (Sasquatch) sighting and 2) evidence of the Composite Operator.  In both cases we start by tracking their footprints. By stalking and following these footprints we hope for an infrequent sighting of these elusive creatures. In Big Foot’s case we look for actual tracks in the woods of their rather oversized feet. With the Composite Operator, the tell-tale tracks are discovered in the characteristics of price and volume. Both Bigfoot and the Composite Operator are widely considered to be fictitious. And while the sighting of Bigfoot might win a bet, the identification of the presence of the C.O. can lead to profitable trading.

The Composite Operator is a heuristic (a useful fiction). The C.O. is an aggregation of the trading activities of numerous, very large, and highly skilled stock market operators. As a group they can and do shape trading in the markets. When they conduct a campaign of Accumulation or Distribution their activities can be seen in the charts. Mr. Wyckoff counseled to learn how to identify and follow the activities of these large and expert operators. The Wyckoff Method provides the tools and skills to track the activities of the Composite Operator.


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Chipotle Mexican Grill is a highflying stock that recently has fallen out of favor with the investment community. Note the long downtrend in CMG that began in August of 2015. High spikes of volume on price weakness in November, December and January are signs of massive institutional and public liquidation. Year-end 2015 selling from 580 to 400 is Climactic in price spread, volume and duration. An Automatic Rally (AR) lifts CMG back from an Oversold condition (falling below the trend channel). We now can draw a Support line at the low of the SCLX and the peak of the AR. Note the volume on the AR rally. Very high volume is a sign of the Composite Operator’s presence. The rally to the Up Thrust (UT) is on much lower volume which means the C.O. is not sponsoring this stage of the rally. The UT is likely the top of a very wide Accumulation range, and where a Resistance line is drawn. Short sellers could sell the mid-March test of the UT peak with the idea that a new leg of the downtrend could start from here and return all the way to the Support line. In late April a gap low is a classic place to cover that short. The decline grinds downward to the SCLX low where a Spring #2 forms. Note the March and late April volume spikes. CMG is still being actively liquidated. But in both cases this drop in price and rise in volume occurs above the SCLX low which implies Accumulation by C.O. forces. An attempt to drop below the SCLX low will be the important test of the exhaustion of the supply of shares. This test should be on less volume. In early June, six down days lead to a marginal new low on much less volume than the prior March and April declines. The lack of follow through by price leads a Wyckoffian to conclude that CMG is being supported here by large interests. As volume did expand on the Spring (#2) we must expect one or more Tests. For most of June and into July CMG hovers near the low price but cannot breakdown. This means there are still more shares for sale at these low prices but they appear to be Absorbed. With a Spring #2 it is best to wait for a rally on rising volume followed by a dip back toward the lows on declining volume. In July that is what happens. Volume on the down days is diminishing and the late August lows get close to the Spring low but the test is good. The classic trade is to buy (a one third position or less) the turn off the Test low when some good up bars with expanding volume show strength. Stops are placed under the Spring low. A Backup action shows little ability to decline and volume is not expanding.

This entire sequence illustrates a stock that is under intense selling pressure. CMG has a Creek of overhead supply that is keeping the stock price in the bottom half of the Accumulation range. Wyckoffians see the footprints of the C.O. and their buying operations during the unfolding of this large Accumulation structure. Then CMG Jumps the Creek on the news that Pershing Square has announced the purchase of a 9.9% stake in the company. Now this news is as exciting to a Wyckoffian as a Bigfoot sighting. Imagine one large and skillful operator vacuuming up nearly 10% of a large, important stock right under everyone’s noses. Also, keep in mind that members of the C.O. community are always in competition with other C.O. types Accumulating in the same time period.

As Wyckoffians we now seek confirmation that all of the large sellers are done. This would suggest that Phase D is in force now. So we expect a rally to the top of the Accumulation area with pauses and Backups along the way.

 

Horizontal PnF targets could help clarify strategy.  The conservative PnF Distribution count is exceeded on the final decline to the SCLX. The price snaps right back into the target zone on the AR. The Accumulation is not complete and it is too early to attempt a count of the entire range. The Spring area can be counted and it projects to just above the Accumulation range. This would be a potential Sign of Strength (SOS). This PnF price objective (568/588) would be an attractive target for a trade from the Test of the Spring. We now want to see an ease of movement in the (Phase D) rally that can get above the mid-point of the Accumulation range (above 468). Any big Backup activity should stay well above the Spring low to demonstrate strength of ownership (shares in strong hands). Successful Backups during the rally out of the Accumulation would be the ideal places to add or initiate positions.

It appears that Bigfoot and the Composite Operator Live!

All the Best,

Bruce  

Homework: CMG has a potentially larger Distribution structure spanning all of 2015. Try to count the larger PnF structure. How does this information impact long term tactics?

ChartCon 2016 is fast approaching. It will be an information packed two days with legendary technicians presenting their best work. My presentation is titled: Understanding Wyckoff's Approach to Technical Trading. I am working on this presentation now. My mission will be to reveal tools, tips and tricks for making the Wyckoff Method a powerful ally for you. We will explore how to determine the action points, where they are and techniques for identifying them. I hope you can join me during this exciting two day event.

Action - Test

A cornerstone of the Wyckoff Methodology is the concept of the Action and the resulting Test of prices. Price has a surge of power when it emerges into a Markup Phase or a Markdown Phase. During the Markup Phase prices rise on an imbalance of buying power that exceeds the available supply of shares being sold. The conclusion of an uptrend is typically a Buying Climax. A Climax is an Action. Such an Action must be Tested.

Actions and Tests are occurring in all markets, in all timeframes, all the time. An essential part of the Wyckoff Method is learning to judge this two-step process. Over the course of this blog we have evaluated many examples of this phenomena. Becoming a judge of the Action – Test will put the Wyckoffian well down the path to trading mastery.


Some Tests are successful, while others are not. Gauging the quality and effectiveness of a Test is important in determining whether a price reversal is at hand. A Test is the ‘tell’ when judging if the Action (Climax) has exhausted the trend. We might say that if the Action is the scene of the crime, the Test is the return to the scene of the crime.

A Selling Climax after a powerful downtrend results in the exhaustion of the supply of stock available for sale (at least for the time being). The Automatic Reaction is a sharp, but short lived, rally that indicates that buyers are present to tip the scales. The Test that follows is important. If the Test fails, the downtrend resumes. A successful Test can occur above, at, or below the Selling Climax low and still be successful. Notice that within the schematic of Accumulation that Testing is happening throughout. The bigger the magnitude of the prior trend, the more times it may need to be Tested before it can be reversed. The Test is a visual question: Is the majority of the selling exhausted?

The drama of the Action and Test plays out in all timeframes. Above is a 5 minute chart with about two days of trading. Note the phenomena of the Action and Test repeating multiple times. Traders in all timeframes will seek proof of the exhaustion of the prevailing trend, in the form of Tests, before committing to the new trend.

The signature of the Action phase is volatility, wide spread, and high volume. In contrast the Testing should have compression of the price spread, less volatility and diminishing volume. These indications all point to exhaustion of the prior trend.

As can be seen on this 5 minute chart these concepts are at work continually. Each larger timeframe may be telling a different story, even though the same principles of Action and Test are occurring.

More attention will be placed on the nuances of these trading concepts in future posts. Mastering this Wyckoff cornerstone will prove beneficial to many aspects of your trading success.

All the Best,

Bruce  

ChartCon 2016 is fast approaching. It will be an information packed two days with legendary technicians presenting their best work. My presentation is titled: Understanding Wyckoff's Approach to Technical Trading. I am working on this presentation now. My mission will be to reveal tools, tips and tricks for making the Wyckoff Method a powerful ally for you. We will explore how to determine the action points, where they are and techniques for identifying them. I hope you can join me during this exciting two day event.

Phase Analysis. Two Case Studies

Accumulation is a process, from beginning to end. The purpose of Accumulation is to create an environment where the Composite Operator (C.O.) is able to accumulate large quantities of stock. This is referred to as Absorption. A long and robust stock uptrend follows Accumulation. The Absorption of stock is the systematic removal of stock from the marketplace. The C.O. is purchasing the stock and making it unavailable for purchase by the public or other C.O. types. The goal of the C.O. is to amass these shares of stock in such a way that they do not cause the stock to jump out of the Accumulation area prematurely. The C.O. is very quiet about their activities so as not to attract the unwanted attention of other C.O. types and institutions and thus intensify competition for the Accumulation of available shares.

This process of Accumulation becomes more and more difficult as the Accumulation range reaches a conclusion and the uptrend begins. There are fewer shares being sold by the public and institutions, and there is more smart money competition for these few remaining shares. This is a high skill, large money endeavor.


Unlike any other charting methodology, the Wyckoff Method recognizes the evolution of the Accumulation from start to finish. It clarifies the price and volume progression within the Absorption process. Logic tells us that the structure of price and volume will change in ways that the careful observer can identify. These changes signal where the Accumulation is in its march to completion.

Phase analysis in the Wyckoff Method is for tracking the footprints of the Composite Operator in their campaigns. Please refer to prior posts (click here and here and here) for a review of Phase Analysis and then we will do two case studies using current market examples.

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Micron Technology (MU): Look for very large spikes in volume and an acceleration of the stock price in to a low which marks the start of the Accumulation range. This is the Selling Climax (SCLX). After the Automatic Rally and Secondary Test, Phase A is complete. The B Phase is a volatile and aimless trading range which discourages stock holders to the point they give up and sell their shares. Note the two Upthrusts (UT) which appear to breakout of the trading range and then, suddenly, fail back into the range. After the second UT, price slides to the lows where Support is present (classic Phase B action). When the Support area is reached during (the typically long) Phase B, Wyckoffians begin to look for trade entry locations. If a new low is made, expect a Spring. If a new low is not made, a Last Point of Support (LPS) is expected. Testing prior price lows are a major principle in Wyckoff. The LPS is testing the SCLX and the two ST. When a low is made on very high volume, expect a price retest at a later date. That is what is happening at the LPS. An LPS or a Spring are doing the same type of work; which is to test a prior high volume price low. Volume will diminish on the LPS test as compared to the prior low. Supply is being Absorbed.

After the LPS and test, we watch for a rally to the top of the Accumulation area. We are looking for a quality rally that demonstrates a Change of Character. Price spread widens while volume expands and this is evidence of aggressive buying. In addition, the stock price has the power to jump above the prior UT highs and the price holds above the Accumulation area. After the SOS, a Backup to the Edge of the Creek (BUEC) forms. This is a pause that allows more stock to be absorbed around and above the Resistance line. Stock is being bought by the C.O. on a scale up from the lows of the LPS, primarily on the pauses and backups. Because of this Change of Character (CHoCH) this area is labeled Phase D and it is the rally up to, and out of the Accumulation. Phase D concludes after SOS 2 and BUEC 2. Phase E marks the beginning of the uptrend.

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Twitter (TWTR): At the January low the range of Support and Resistance is set, all in one day (Note the SCLX and the AR). We determine this to be the SCLX because of the big volume surge and the ability of price to close off the low and up on the day. Aggressive buying is present on this day. A big bulge of volume on a SCLX will be tested at a later date, which occurs here at the ST. Phase A is complete after the ST. Volatility is the signature of Phase B. After the Up Thrust (UT), price declines easily and rallies are labored. In May and June price camps out (yellow box) at the bottom of the Accumulation below the Support line of the SCLX. During this listless period, a Spring #2 dips below the ST and the price begins to jump the next day. After a Test of the Spring, price jumps the overhead line of Support (blue line). This concludes the final testing of Phase C.

In Phase D we look for price to march up toward the top of the Accumulation zone. The rally in the D Phase cannot get to the AR Resistance line before gapping down on earnings news. We note this rally peak as a Minor Sign of Strength since it could not reach the Resistance line and turned back downward to the LPS. A more dynamic rally would have been preferred. The rally after the LPS and earnings announcement was on better volume and carried above the UT in a near vertical ascent, which was an improvement over the prior rally. Volume spiked on the LPS which demonstrates a supply of stock still being present. As Wyckoffians we expect that price often must retest that high volume level at a later date. Therefore a return to the area currently labeled LPS may be in TWTR’s future. It is possible that a test of the $14 level could be needed.

After a rally to $21 we watch for a SOS that can hold above Resistance. The less price retraces back into the Accumulation the better. But TWTR cannot hold and begins showing signs of weakness and volume expansion immediately. A bullish scenario here would involve the price stabilizing and starting to trade in a small range at the Resistance area. TWTR is a murky picture. Supply is present at the top of the Accumulation and a classic SOS did not form. For these reasons the Wyckoffian must stay vigilant and not assume that any one outcome is likely.

The Spring and the LPS produced classic buy points. Now TWTR must demonstrate that it can resist declining back into the Accumulation, and consolidate near the top of the range. The Backups should have the signature of shrinking volume and spread to prove absorption has taken place. If weakness persists with widening volume and price spread, then we would conclude that more supply is arriving which could drive prices downward.  If this second scenario unfolds then we would relabel Phase C and D as a continuation of Phase B, with the final testing still ahead.

The Wyckoff Method is always an unfolding story where unexpected twists and turns are possible. We must continually be ready to update our scenarios and labeling, and thus our tactics.

All the Best,

Bruce

Announcements:

ChartCon 2016 is fast approaching. It will be an information packed two days with legendary technicians presenting their best work. My presentation is titled: Understanding Wyckoff's Approach to Technical Trading. I am working on this presentation now. My mission will be to reveal tools, tips and tricks for making the Wyckoff Method a powerful ally for you. We will explore how to determine the action points, where they are and techniques for identifying them. I hope you can join me during this exciting two day event.

Dr. Hank Pruden will teach FI354, the Wyckoff Method I class, at Golden Gate University in San Francisco, beginning September 3rd. Roman Bogomazov and I will team up with Dr. Pruden with guest lectures during the semester. Dr. Pruden has arranged for individuals interested in this class to attend the first session free of charge. If you live in the San Francisco Bay Area take advantage of this unique opportunity (GGU is one block from the Montgomery St. BART station). 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. 

Roman Bogomazov will be conducting a complimentary webinar on Monday, August 29th. This is an introduction to his online series: Advanced Wyckoff Trading Course (AWTC) - Wyckoff Market Structure (3:30 – 5:30 p.m. PDT).   For more information and the registration link, please click here or if you would like to just register directly, please click here.

The Really Big Picture

The Wyckoff Method scales down into smaller timeframes. It also is very effective in large timeframes. We have spent much time and attention evaluating daily and weekly charts (and intraday charts). Now we will turn our attention to monthly charts where a decade or more of data can be evaluated. Are these charts useful and practical for making decisions in today’s markets?

At times having the perspective of this larger scale can guide our tactics. Let’s evaluate three important bell-weather stocks to attempt to determine their potential and get clues about how they could influence the larger stock market indexes.


Microsoft Corp. (MSFT), Intel Corp. (INTC), and Cisco Systems Inc. (CSCO) are three very large and influential companies. Each is in the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite. Their performance can and does impact these important indexes. Evaluating their monthly charts could help to shine a light on the potential of these indexes to perform in the months and year ahead.

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After a dramatic bull run into 1999, MSFT stumbles badly. This decline was the start of a 15 year trading range. Using Wyckoff analysis we can see that even on a monthly scale chart, the attributes of Accumulation are present. Notice after the third Jump Across the Creek (JAC) and Backup to the Edge of that Creek (BUEC 3) the price finally moves above the Accumulation area. This cleared the way for three years, and counting, of an uptrend. Once the resistance line of the 12 year Accumulation is overcome, very little overhead supply exists to impede the progress of prices up to the all-time high price at 41.72. The 1999 high did pause the uptrend for nearly a year, but the trend has since continued.

How much of the Accumulation range is counted on a PnF chart? We always want to make counts that are practical and useful for tactical purposes. Here we count the bear market base from 2011 to 2008 and generate a count of 63.50 to 72. There is also a Stepping Stone Reaccumulation count at the congestion area at the return to the all-time high. This counts to a range of 66 to 70. Therefore this is a confirming count and adds to our confidence about the validity of the two counts. So there is still the potential of higher prices from here for MSFT. Once these counts are fulfilled we will then go back and determine if there are larger PnF counts to evaluate.

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Cisco Systems has a family resemblance to MSFT. It concluded a big bull run in early 2000 and then submerged into a big multi-year decline. A very large 15 year Accumulation range has formed. It appears that after a Sign of Strength, a shallow and long (one year) Backup to the Edge of the Creek (BUEC 3) has formed. Now CSCO is above the SOS high price. As with MSFT, there is minimal resistance for CSCO from the current price to the all-time high at 70.75. Possibly CSCO can act similarly to MSFT as it clears the Accumulation, and a robust uptrend could be ahead.

As we did with MSFT let’s count the Accumulation area of the prior bear market. In this case from 2012 to 2008 (marked on the vertical chart). This generates a PnF count of 70.50 to 73.50 which targets the 2000 high price of 70.75. The PnF price objective targeting the prior all-time high price for CSCO is compelling. We would expect it to take multiple years for such a price target to be reached.

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Intel peaked out in early 2000 and a nasty decline followed. Even on such a large time horizon the attributes of Wyckoff Accumulation are present. INTC has a similar appearance to our prior two examples, but there are differences. Note that a JAC out of the Accumulation area in mid-2014 resulted in a nearly two year Stepping Stone Reaccumulation (SSR) and a Backup to the Edge of the Creek (BUEC 3). What is important is the ability of INTC to Jump out and stay out of the prior Accumulation. This is bullish action. The 2000 high price is 53.27 and that becomes a magnet for an emerging uptrend. Currently INTC is poised at the top of this SSR area and any further price strength puts it into a new stage of Markup.

We have two PnF charts to study. We will count the 2012 to 2008 base. An objective of 62 to 69.50 targets an area above the 2000 price high of 53.27. This PnF count suggests that much fuel remains in the tank and there is potential for new all-time high prices for INTC.

Using a 1 box PnF chart we count the SSR that developed after Jumping out of the Accumulation area. This PnF chart generates a 58 to 64 count to confirm the prior base count. We now have two counts for INTC that nest in the same price zone. If and when these price levels are reached we will revisit the PnF chart to determine if larger counts are available.

Monthly charts can be so revealing. It is always worthwhile zooming out to this mega-timeframe to see if there is a Wyckoff story in the chart. Wyckoff analysis on monthly charts can reveal when major uptrends and downtrend are beginning. Here are three companies that are very influential in all the major stock indexes and will have an impact if they start to run toward their all-time high price points.

All the Best,

Bruce

Please join Roman Bogomazov and me for a free online webinar and interactive discussion on August 24th, 2016, at 3:00 p.m. (PDT). We will review the current market and several leading stocks from a Wyckoff Method perspective. (click here to register)

 The Technical Securities Analysts Association of San Francisco (TSAASF) is having their annual conference on August 20th. This one day conference has an all-star cast of speakers. "The Titans of Technical Analysis" is this years theme. It will be held at Golden Gate University, includes lunch and is a great value. For more information click here.

Wyckoff Power Charting will take next week off. Have a great week.

A Gaggle of Groups

So much time is spent on the study of the S&P 500 ($SPX) and other broad market indexes that we forget to have a look at the core themes that make up the performance of the entire market. Let’s take some time to review the underlying sectors to determine the current leadership and emerging trends that might be developing.

Prior to Brexit, the $SPX was forming a Stepping Stone Reaccumulation. A Shakeout of the low of the SSR occurred after the Brexit vote which turned out to be a ‘cathartic event’ that launched the market up and out of the SSR.


Now we see about a three week pause and well-deserved rest in the $SPX. In Wyckoff terms we would call this a ‘Backup to the Edge of the Creek’ (BUEC). A backing up action occurs after a jump out of an important consolidation such as an Accumulation or a Stepping Stone Reaccumulation. A BUEC will often return to the breakout area (Creek) before resuming the uptrend.

Industry Sectors and Groups will generally have a family resemblance to the $SPX. While some of these Sectors will be in lockstep with the broad indexes, some will be leading and some will be lagging. As a general rule, the current leaders will keep leading and the current laggards will keep lagging. Let’s have a look at some of the more interesting sectors for a sense of where the action is, and is not.

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A Spring in the $SPX sets up a dramatic rally which takes the index up and out to a new all-time high price level. Keep this chart in the back of your mind while we look at some of the underlying sectors that make up this 500 stock index.

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The Materials Sector is early leadership. The XLB rally begins in January, ahead of most sectors and stocks. After a classic SSR, a Brexit Spring sets up a rally. The BUEC is very shallow, and indicates that XLB may want to keep leading upward.

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The Energy Sector (XLE) made a low in January, ahead of the $SPX, and began an uptrend. At the time it was demonstrating emerging leadership, along with XLB. Note that Energy is making higher lows during the SSR, including the Brexit low. This looks very bullish. But then at the Resistance area sellers of Energy check the advance. Thereafter, XLE drifts back into the SSR and becomes somewhat of a laggard. This is a change of character that could persist and thus Energy could become an underperformer. SSR formations often have a series of higher lows, as is the case with XLE now. If XLE can turn upward off the current levels (or even slightly lower) and jump out of the SSR, leadership could be reestablished. Energy sector capitalization is a very large component of the market. It is difficult for the $SPX to rally without energy participating. Currently energy is not doing its part. This means that other groups and sectors are propelling the Indexes and we want to know which ones.

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Financial stocks (XLF) were a laggard at the beginning of the year. Where Materials and Energy made their lows in January, XLF made lows into February (and was weaker than $SPX). Note how wide and loose the price action was from April onward. The Brexit decline was so deep that we will call it a Shakeout. Note how strong the XLF was on the rally back to the top of the range. This is a classic Change of Character (CHoCH). Although the XLF could not break to a high above the SSR until yesterday, look at the BUEC. It is very narrow and shallow. Sellers cannot push the XLF price back into the SSR which is very constructive. The market generally likes it when the financials lead the way to higher prices.

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The Industrial Sector (XLI) was another leader in January. The post Brexit rally was very strong and XLI jumped to new recovery price highs. Industrials want to lead. The BUEC has more of a downward tilt than $SPX, as would be expected after such a strong rally. As long as XLI stays above the SSR it is poised to resume leadership.

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After the breakout to new highs in the $SPX, most sectors and groups paused to take a rest. Not technology (XLK), which went on a tear. We can see that tech had been tracking with the rest of the market since the January lows with no real indication that it wanted to lead the way. Once out of the SSR it took over and started to grind higher, mostly by itself. Note the contrast between XLE and XLK. Expect tech to lead any move higher by the market.

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Consumer Staples (XLP) has been leading the market higher since January, but something interesting happened after the Brexit rally. Institutions will often favor Consumer stocks during periods of dull, trendless, or uncertain markets. Clearly this has been true recently. After a very shallow Brexit correction, XLP leapt to an all-time high. A sudden bout of weakness followed and now XLP is threatening to fall back into the SSR. Now that the market indexes are making new all-time highs, group and sector rotation is shifting. The old leaders, such as Consumer Staples are giving way to the more economically sensitive themes such as Industrials, Technologies and Materials.

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Health Care (XLV) launched higher off a minor Spring and has just kept going upward. A Climax five days ago indicates that a Backing Up action is directly ahead. XLV has rallied so far out of the SSR that it should prove difficult to return back to it.

New high prices in the $SPX are starting to get Wall Street’s speculative juices flowing. New groups and sectors are emerging and leading while the old favorites are falling away. Take time each week to review all of the Sectors and the leading Industry Groups. Finish this analysis by evaluating Consumer Discretionary (XLY), Utilities (XLU), and Gold Miners (GDX). Then drill down into the Industry Groups that interest you most. Stockcharts.com makes it easy and efficient to get from the Sectors to the Industry Groups to the Stocks that are leading the way.

All the Best,

Bruce

For an index of essential Wyckoff concepts and blogs, and for general review Click Here.

Beach Reads

During the long hot summer, it is a wise idea for Wyckoffians to go to the beach (or the pool) and relax, recharge, and do some light reading. My favorite summer reads are…. Charts!! What could possibly be more relaxing and enjoyable. So get your tablet (or laptop), find a beach towel and start reading.

I am off to the beach to take some of my own medicine. So here are some charts that I am going to be looking at while having fun in the sun. May these charts get your rest and relaxation off to a good start.


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Here is a 60 minute chart of the Dow Jones Industrials. Note the stopping action at the Preliminary Supply (PSY) followed by a Buying Climax (BCLX). Thereafter the $INDU has become range bound and increasingly volatile and Distributional in nature. After the peak at the Secondary Test (ST), volatility emerges and this is a sign of large interests selling stock. Smaller timeframes like this 60 minute chart will still have Wyckoff attributes, and events will unfold more quickly. After a robust breakout (see a daily or weekly $INDU chart) to all-time new high prices, a backing up action would be expected that returns the index back toward, or slightly in to, the breakout area. The Distribution on the 60 minute chart could be an indication that such a backing up action is at hand. We will turn to a Point and Figure chart to estimate the potential that has been generated in this Distribution.

This PnF chart is constructed with 5 minute data. Note that it encompasses the timeframe of the 60 minute vertical chart. When constructing PnF charts, different time intervals can be used when comparing the vertical chart to the PnF chart. The key is that each price point evaluated on the vertical can be identified on the PnF for counting purposes.

ATR scaling and the 1 box reversal method yields a substantial short term price objective. Two counts are generated, a conservative count and a more aggressive one. The smaller count returns the $INDU to the top of the breakout area and does not settle back into the prior high prices. While the larger count dips back into the area of the old high prices. Using stockcharts.com make a daily and a weekly vertical bar chart to visualize how this retracement could occur.

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Light Crude Oil ($WTIC) has a family resemblance to the $INDU above. The Distributional qualities outlined for the $INDU are at work here. $WTIC is a daily chart, therefore the scale of the Distribution is more extensive than the $INDU. After the peak price at the BCLX, there is a change of character where $WTIC then becomes volatile. This classic Distributional price action results in a breaking of the ICE and then a steady markdown.

Ponder this chart while you are getting sand between your toes. The earlier counts worked out well. Two current Distribution counts are shown. If the smaller count is accurate then a nice symmetry is formed from the LPS to the PS, and a mega PnF Accumulation count objective could be in the works. The larger Distribution count returns the $WTIC back to the low of the trading range. 

Copper has been in a bear trend since 2011. Here is a 3 box reversal PnF chart of the copper ETN (JJC) that has a Distribution count and two Redistribution counts on the way down. Note how they are nesting into a price range and establishing ‘confirming counts’. Copper has met these objectives and appears to be attempting to stop the decline. If this is the area of the low, we would expect to see a Cause built in copper for a new bull market.  Make a one box reversal PnF chart and try to determine if copper is in the early stages of Accumulation. Also have a look at the daily vertical bar chart.

Here is a weekly chart of copper for your review. Note that a Cause appears to be building. There is more Accumulation work to be done. Also, note the price throwing under the Oversold line and forming a PS and SCLX into the area where the JJC PnF chart had price objectives.

Fellow Wyckoffians notice how rested, relaxed and recharged you are beginning to feel. Now see what other amazing charts you can find.

All the Best,

Bruce

 

Point and Figure Pie in the Sky?

During the bear market that ended in 2009, the broad market indexes traced out a large base. Using the horizontal Point and Figure counting methodology, a Wyckoffian could generate a very large price objective. The countline was at the 8,100 level on the Dow Jones Industrial Average, with a low of 6,500. Once the Accumulation zone was completed the price projection was a range of 17,600 to 19,200. At the time the wheels appeared to be coming off all of the financial markets. While the gloom was thick, the Composite Operator was absorbing shares of stock with the expectation of higher prices, much higher prices. In December of 2014 the $INDU peaked at 17,991.19 fulfilling the lower 17,600 projection. During the following 18 months the $INDU index has been unable to rally to, or above, the 19,200 zone. The recent run to a new high has taken the $INDU to 18,622, still nearly 600 points below the 19,200 upper target.

Looking back at the projection generated from the base horizontal PnF count we must conclude that it was a remarkable projection. Dr. Hank Pruden published this count in the International Federation of Technical Analysts Journal in 2011 (click here for a link to this excellent article, pages 29 to 34). Now that the Dow Jones Industrials is 3% from the upper count, Wyckoffians should consider possibilities and tactics. 


The post Brexit new high in the $INDU and the $SPX has generated much excitement. While Wyckoffians are intently focused on 19,200 as a potential stopping level, many are asking if this market has the capacity to begin a new uptrend. Mr. Wyckoff would counsel that reaching a PnF objective is not, in itself, a reason to close out a position, or change long term strategy. Rather it is a signal to ‘Stop, Look and Listen’ to the market for other evidence that reinforces or refutes the PnF count objective just attained.

The Case for Distribution. An Upthrust After Distribution (UTAD) is like a Spring at the completion of Accumulation. A UTAD is the last gasp push to new high prices. This is an attempt by the C.O. types to trap the breakout buyers with a convincing drive to new highs after an area of Distribution.  This brings in new money to buy stock with the expectation of a fresh new uptrend starting. A UTAD will not linger long at new high prices. After a sharp and final breakout, expect one or two thrusts upward and then a turn downward. Once price falls back into the Distribution area, assume that prices can fall rapidly. The sequence that follows a UTAD would be a Sign of Weakness (SOW) and then a Last Point of Supply (LPSY) followed by a bear market downtrend. The danger of a UTAD is in the name itself. Distribution precedes the Upthrust, which means that C.O. selling is complete and markdown is the next important chart action. The result is that price can markdown at an alarming rate from the UTAD to the bottom of the prior trading range (think January lows) where a SOW is made.

A sound strategy for this scenario is to snug up stops on long stock positions to just below the break out high price in the Indexes.  As an example, the $INDU should not return to the Brexit low price and thus would represent a good tactical place for stops. A return of more than one third of the prior trading range would be a warning.

The Case for a New Uptrend. A Backup (BUEC) action will usually follow a good breakout. The shallower the BUEC the better. A return to the breakout level should, at most, minimally dip back into that level. It is even better to stay above the breakout zone.

Is there more fuel in the PnF tank for higher prices? Dr. Pruden presented his bull market PnF count objectives at the annual IFTA conference in October of 2009 as the $INDU was jumping out of the large Accumulation structure. These charts were published later in the IFTA Journal. In 2011 a large BUEC formed as the market indexes settled back to the Accumulation of 2008-09. Typically the BUEC is the most aggressive PnF count. Let us take that count and determine if there could be more fuel for higher prices. 

This PnF chart is modified from the original chart from 2009. Here we use a 5 box reversal method and the scaling is ATR 20 (click here for discussion of ATR 20 scaling). Even with these changes our counts should be consistent. In green is the original 2009 count Dr. Pruden made. Our PnF chart (using 5 box reversal and ATR20 settings) projects to 17,572.50 to 19,258.75, very very close to Dr. Pruden’s 17,600 to 19,200 original count. Next we add the newer data generated by the count from the BUEC to the SCLX. 35 columns produce a much larger objective of 22,010.00 to 23,696.25. It is always best to work off the conservative counts before extending to the more aggressive objectives. The lower counts appear to have stalled the averages for 18 months and the upper range of the count has still not been exceeded.

There is another Stepping Stone Reaccumulation count that was just generated in 2016. Does it confirm the bigger Accumulation count? The target of this Reaccumulation is 22,850.80 to 24,483.00 and is very close to the larger Accumulation count. It is a confirming PnF count!!

Legendary technician and investor Marty Zweig famously advised ‘Don’t Fight the Fed’. Typically the final phase of a bull market is buffeted by rising interest rates and a hostile Federal Reserve Bank. Currently the Fed has a zero interest rate policy and no appetite for raising rates anytime soon. With an accommodative Fed and more fuel in the PnF tank it is entirely possible that another leg of the bull market is ahead of us.

                                           (click on chart for active version)

Summary. The 17,600 to 19,200 PnF count objective is the active price projection (click here to see a chart). Wyckoffians are on the alert for a UTAD which would be triggered with a decline back into the prior trading range below 18,350. Bullish action would be to stay above the breakout area while consolidating and then resume the markup. Then, and only then, would Wyckoffians begin to focus on the higher PnF price objectives.

All the Best,

Bruce

Many thanks to my teaching partners Dr. Hank Pruden and Prof. Roman Bogomazov for their contributions to this blog.

New Workshop: “Successful Trend Trading in All Time Frames Using the Wyckoff Method: Identifying and Profiting from Institutional Campaigns.”  Roman Bogomazov, Hank Pruden and I will be conducting an in-person, day-long workshop in San Francisco on August 19, 2016.  This is a unique opportunity to learn from three Wyckoff experts how to recognize when large institutions are just about to launch or end major market campaigns, and how to profitably time trade entries and exits to take advantage of the subsequent price action. For more information, please click here.  

Getting on the Gas

Since 2008 natural gas has been in a downtrend and has generally under-performed crude oil, common stocks and other commodities. Recent price strength for natural gas could be indicating change is in the air. Is this a sign of better days ahead or just a tease before prices sag and lag again? Let us review this market with a Wyckoffian eye and attempt to divine whether there is potential to profit from an emerging new bull market.

Wyckoff analysis scales well into various time frames. In prior posts we have explored intra-day to weekly to monthly time frames. We will begin by evaluating the continuous futures contract of monthly natural gas prices ($NATGAS) to assess the prior bear trend and get a big picture grasp on current price activity.


                                                       (click on chart for active version)

It is so important to go up one or two time frames above where you are trading. If trading intraday, study the daily and the weekly time frames. Often the biggest and best moves are easier to see in the next larger time period. Also, big negative surprises are often identified and avoided by being in tune with the bigger picture. The monthly chart of $NATGAS is telling a Wyckoffian tale. The bear market began with a 2005 Buying Climax and a 2008 Secondary Test, and has made lower lows in ‘09, ‘12, ‘15 and ‘16. A Selling Climax (SCLX) and Automatic Rally (AR) set up the outer boundaries of a potential Accumulation in 2009. Note how well this has contained the trading in $NATGAS since. The potential Accumulation is nearly seven years in duration. Such a long period of underperformance and lower prices creates apathy among investors and traders that is difficult to reverse.  

A Spring in the first quarter of 2016 has resulted in a notable rally that has snapped prices back into the Accumulation area quickly. We will call this a Change of Character (CHOCH) and watch if and how $NATGAS works back toward the Resistance area of the Accumulation around the $6 level.

$NATGAS remains very near the bottom of the trading range and still has a high risk of turning down and making new lows. A series of bullish Wyckoff type events are needed from here to confirm that a new bull trend is possible. The promise of the monthly chart is a Cause that has been forming for nearly seven years while $NATGAS was all but forgotten. A Spring has just been made and $NATGAS is jumping back into the Accumulation. The rally, post Spring, should be dynamic with good jumps and modest backups as price marks up toward Resistance. A decline into a Last Point of Support should retrace no more than one half of the gain made off the low. Less is better. Let’s turn to the weekly chart to refine our analysis.

                                                       (click on chart for active version)

Zooming into the weekly timeframe provides another perspective. At the beginning of 2014 $NATGAS Upthrusts the Resistance area (see monthly chart) and climaxes. The two year downtrend results in an Oversold condition and the Spring that we identified on the prior chart. Note the quality of the rallies after the SCLX and the Secondary Test (ST). These rallies have an ease of movement that is much better than any prior rally in the downtrend. This is a notable Change of Character (CHOCH). Also, observe the ease with which the price went from an oversold condition (at the bottom of the trend channel) to jumping out of the top of the channel during this recent rally. Wyckoffians will look to a CHOCH as a clue to important changes in the trend of prices. The Oversold condition is the Spring on the monthly chart and illustrates why being aware of the larger timeframe is critical. Recall that after a SOS we expect a backing up action that results in a Last Point of Support (LPS). Price drifting down into a LPS will provide a couple of benefits. First, an LPS is a classic zone for entering a trade and secondly, the PnF horizontal count is taken from the LPS to the SCLX and the Preliminary Support (PS). There can be more than one LPS during the price rally up and out of the Accumulation area. $NATGAS will not be out of the Accumulation area and into an uptrend until it gets and stays above the $6 area. This is a long way away. In the monthly time frame a reaction from the SOS to the conclusion of a LPS could take six months or more. Rallies can go on for many months also. We must be psychologically in synch with the time frames being studied and traded.

Prior PnF counts of $NATGAS have been useful, as we can see on this three box reversal PnF chart. We have elected Dynamic ATR for calculating the scale. The current count is not yet complete as it needs a LPS. The green shaded box is a guess about the potential horizontal size. Currently 14 columns are counted. At 15 columns there is enough fuel to get to $6.20 which is the area of Resistance on the monthly chart. It could take more time and numerous additional columns to complete the PnF horizontal count. We must let the tape tell us when and if the Accumulation is complete and an uptrend is brewing.

$NATGAS is showing us an Accumulation structure on the Monthly and the weekly charts. If $NATGAS can get to the top of the monthly Accumulation, PnF counts could be generated that portend an advance of major bullish potential.

All the Best,

Bruce

 

 

Gold Fever

My grandfather and great grandfather were gold miners. They took their ‘grubstake’ to Alaska and the mountains of California. After many adventures they succeeded with a small working gold mine in Northern California. You should know this when reading this post as, by heredity; I may have a touch of ‘Gold Fever’.

To tamp down my perma-enthusiasm for gold I am first and foremost a Wyckoffian. Let us do the Wyckoff Drill on the SPDR Gold Shares (GLD). GLD is designed to track the price of the cash gold market. A share of GLD is valued at about one tenth the price of an ounce of gold. It has been a reliable proxy for the price of gold and it is traded by many gold enthusiasts. There are other gold tracking instruments that differ in composition and thus may be more suitable for your objectives.


After a long and grinding bear market for gold, a powerful turn upward in January and February has persisted through mid-year 2016. Is this the start of a new gold bull market? Does it have the potential to keep rising? How far can GLD go and how long can it go?

                                         (click on chart for active version)

Notice the largest bulge of volume at the Preliminary Support (PS) which often happens. The Selling Climax follows, also on very high volume. The Automatic Rally (AR) and the SCLX set the trading range of the Accumulation, which has been three years in the making. Lower peaks (circled in blue) keep the meme of a downtrend in force and mask the Accumulation at work under the surface. A classic trend channel is drawn and highlights an oversold condition in July ’15 and November ’15. We are calling this a Shakeout as it deeply penetrates the SCLX level and remains below for an extended period. The $100 level holds by 23 cents, a key round number and important support.

The rally that starts at the beginning of 2016 is a ‘Change of Character’. Springs and Shakeouts often reverse in such a dramatic fashion. Is the rally nearly over or is there more fuel in the tank? First note that Gold is still within the Accumulation structure. The peak of the Automatic Rally (AR) is Resistance and defines the upper border of Accumulation. Gold has not yet rallied to Resistance. A Sign of Strength (SOS) is a rally that has the power to push higher than a prior important peak. A Minor Sign of Strength has just occurred with a move above $125 (prior important peak). Often a SOS indicates resistance is forming and price needs a rest. There are three key peaks in the Accumulation that are magnets for a SOS followed by a Backing Up action (more on this later).

Labeled on the PnF chart are the essential points from the vertical chart. We always take our horizontal PnF counts from the analysis of the vertical chart. Is there enough fuel in the tank (pent up Accumulation) to make a campaign in GLD worthwhile? We always count from right to left and the LPS will be our anchor on the right side to begin counting. Three segments are counted, two Secondary Tests (ST) and the SCLX. Each of these counts is flagged on the PnF chart. The count could become bigger if GLD rises to the Resistance area and forms additional LPS and Backup levels as these can and would be counted.

The first segment (smallest count) takes GLD to the Resistance area at 141 / 155 which would produce a Major Sign of Strength and complete the Accumulation. The next segment counts to an exact double of the 102 low. There is substantial fuel in the tank to propel GLD higher. The segment from the LPS to the SCLX targets a price of 252 / 266.

Horizontal PnF counting is a powerful tool as it offers a method for estimating the extent of a price movement. But it cannot reveal the time it will, take or the path. The ‘Art of the Campaign’ is a major subject for future consideration. Here is an article co-authored by Dr. Pruden, Prof. Bogomazov and your blogger on another campaign that could illuminate how to proceed with GLD (click here for a link).

Take a moment to study and compare the above schematic to our GLD chart. Typically markets do not move in a straight line. At times markets are in hurry, and then they languish. Wyckoffians learn to let the markets lead the way. This schematic provides a potential roadmap for how prices emerge from Accumulation. It could help us to understand how GLD will stair step its way into an uptrend. There is Resistance at the upper bounds of the Accumulation that must be worked through. This will create pauses and opportunities to climb on board GLD. There is something here for investors and for traders. Investors will look to the dull periods when prices sag to build a position for a long term campaign while the trader will be poised for when dull and quiet prices morph into jumping action and the emergence of a new uptrend.

All the Best,

Bruce

Seminar Announcement: "The Art of Stock Campaigning Using the Wyckoff Method", Roman Bogomazov, Hank Pruden and I will be conducting a day long seminar in San Francisco on August 19, 2016. For additional information click here.