Wyckoff Method and Cheet Sheet Part 2

Analyses of Trading Ranges UT UTAD Test BC ST LPSY PSY LPSY AR SOW in Phase B SOW ChoCH Phase A ChoCH Phase B Phase C Phase D Phase E Wyckoff Events PSY—preliminary supply, where large interests begin to unload shares in quantity after a pronounced up-move. Volume expands and price spread widens, signaling that a change in trend may be approaching. BC—buying climax, during which there are often marked increases in volume and price spread. The force of buying reaches a climax, with heavy or urgent buying by the public being filled by professional interests at prices near a top. A BC often coincides with a great earnings report or other good news, since the large operators require huge demand from the public to sell their shares without depressing the stock price. AR—automatic reaction. With intense buying substantially diminished after the BC and heavy supply continuing, an AR takes place. The low of this selloff helps define the lower boundary of the distribution TR. ST—secondary test, in which price revisits the area of the BC to test the demand/supply balance at these price levels. For a top to be confirmed, supply must outweigh demand; volume and spread should thus decrease as price approaches the resistance area of the BC. An ST may take the form of an upthrust (UT), in which price moves above the resistance represented by the BC and possibly other STs before quickly reversing to close below resistance. After a UT, price often tests the lower boundary of the TR. SOW—sign of weakness, observable as a down-move to (or slightly past) the lower boundary of the TR, usually occurring on increased spread and volume. The AR and the initial SOW(s) indicate a change of character in the price action of the stock: supply is now dominant. LPSY—last point of supply. After testing support on a SOW, a feeble rally on narrow spread shows that the market is having considerable difficulty advancing. This inability to rally may be due to weak demand, substantial supply or both. LPSYs represent exhaustion of demand and the last waves of large operators’ distribution before markdown begins in earnest. UTAD—upthrust after distribution.A UTAD is the distributional counterpart to the spring and terminal shakeout in the accumulation TR. It occurs in the latter stages of the TR and provides a definitive test of new demand after a breakout above TR resistance. Analogous to springs and shakeouts, a UTAD is not a required structural element: the TR in Distribution Schematic #1 contains a UTAD, while the TR in Distribution Schematic #2 does not. Analyses of Trading Ranges UT in Phase B BC LPSY ST LPSY PSY LPSY AR SOW in Phase B SOW ChoCH Phase A ChoCH Phase B Phase C Phase D Phase E Wyckoff Phases Phase A: Phase A in a distribution TR marks the stopping of the prior uptrend. Up to this point, demand has been dominant and the first significant evidence of supply entering the market is provided by preliminary supply (PSY) and the buying climax (BC). These events are usually followed by an automatic reaction (AR) and a secondary test (ST) of the BC, often upon diminished volume. However, the uptrend may also terminate without climactic action, instead demonstrating exhaustion of demand with decreasing spread and volume; less upward progress is made on each rally before significant supply emerges. In a redistribution TR within a larger downtrend, Phase A may look more like the start of an accumulationTR (e.g., with climactic price and volume action to the downside). However, Phases B through E of a re-distribution TR can be analyzed in a similar manner to the distribution TR at the market top Phase B: The function of Phase B is to build a cause in preparation for a new downtrend. During this time, institutions and large professional interests are disposing of their long inventory and initiating short positions in anticipation of the next markdown. The points about Phase B in distribution are similar to those made for Phase B in accumulation, except that the large interests are net sellers of shares as the TR evolves, with the goal of exhausting as much of the remaining demand as possible. This process leaves clues that the supply/demand balance has tilted toward supply instead of demand. For instance, SOWs are usually accompanied by significantly increased spread and volume to the downside. Phase C: In distribution, Phase C may reveal itself via an upthrust (UT) or UTAD. As noted above, a UT is the opposite of a spring. It is a price move above TR resistance that quickly reverses and closes in the TR. This is a test of the remaining demand. It is also a bull trap—it appears to signal the resumption of the uptrend but in reality is intended to “wrong-foot” uninformed break-out traders. A UT or UTAD allows large interests to mislead the public about the future trend direction and, subsequently, sell additional shares at elevated prices to such break-out traders and investors before the markdown begins. In addition, a UTAD may induce smaller traders in short positions to cover and surrender their shares to the larger interests who have engineered this move. Aggressive traders may wish to initiate short positions after a UT or UTAD. The risk/reward ratio is often quite favorable. However, the “smart money” repeatedly stops out traders who initiate such short positions with one UT after another, so it is often safer to wait until Phase D and an LPSY. Often demand is so weak in a distribution TR that price does not reach the level of the BC or initial ST. In this case, Phase C's test of demand may be represented by a UT of a lower high within the TR. Wyckoff Phases Phase D: Phase D ar rives after the tests in Phase C show us the last gasps of demand. During Phase D, price travels to or through TR support. The evidence that supply is clearly dominant increases either with a clear break of support or with a decline below the mid-point of the TR after a UT or UTAD. There are often multiple weak rallies within Phase D; these LPSYs represent excellent opportunities to initiate or add to profitable short positions. Anyone still in a long position during Phase D is asking for trouble. Phase E: Phase E depicts the unfolding of the downtrend; the stock leaves the TR and supply is in control. Once TR support is broken on a major SOW, this breakdown is often tested with a rally that fails at or near support. This also represents a high-probability opportunity to sell short. Subsequent rallies during the markdown are usually feeble. Traders who have taken short positions can trail their stops as price declines. After a significant down-move, climactic action may signal the beginning of a re-distribution TR or of accumulation. RESUME The pioneering work of Richard D. Wyckoff in the early twentieth century was centered around the realization that instruments price trends were driven primarily by institutional and other large operators who manipulate prices in their favor. Many professional traders today use Wyckoff's method, but his overall approach is still not widely-followed among retail traders, even though his educational efforts were intended to teach the public the “real rules of the game.” Nonetheless, his stock selection and investment methodology has stood the test of time, largely due to its thorough, systematized and logical structure for identifying high-probability and highly profitable trades. The discipline involved in this approach allows the investor to make informed trading decisions unclouded by emotion. Using Wyckoff's method, one can invest in any instrument by capitalizing on the intentions of the large “smart money” interests, rather than being caught on the wrong side of the market. Attaining proficiency in Wyckoff analysis requires considerable practice, but is well worth the effort. CHEAT SHEETS CHANGE OF CHARACTER (ChoCH) UT UTAD Test BC ST LPSY PSY LPSY When does a trend change into consolidations? How can we observe this change in enviroment? AR SOW in Phase B SOW ChoCH Phase A ChoCH Phase B Phase C Phase D Phase E “The Creation of a Trend” Phase A Phase B Phase C Phase D Phase E SOS AR PS BU/LPS LPS ST SC ST in Phase B Test Spring ChoCH ChoCH Non-trending enviroment Trending enviroment Non-trending enviromentTrending enviroment CHEAT SHEETS Distinction: Identify your trading opportunity within the price cycle Current TR Who are you as a trader? Investor, swing trader or day trader? Based on your time frame, you need to identify your trading opportunities within the current wave structure. One of the best trading opportunities is to open a position in the original accumulation trading range or in a reaccumulation TR Reacumulation TR Original Accumulation TR CHEAT SHEETS Distinction: Reaccumulation TR and its characteristics - Reaccumulation is a trading range within a continuing uptrend - Four+ types of Reaccumulation TRs: Reaccumulation after a decline, Reaccumulation with Spring action, Reaccumulation after a shakeout, and Reaccumulation with an uprising structure. - Reaccumulation with an uprise is the strongest and has higher highs / higher lows - Usually, any shakeout and/or decline action before Reaccumulation will have a local smaller distribution pattern (cause and effect) - Initial Shakeout/Decline is less pronounced during Reaccumulation than before Accumulation - Volume: Reccumulation usually has less supply than Accumulation -The maximum swing of TR (highest to lowest point): Reaccumulation TR is usually tighter compared with an Accumulation TR Alternative labeling of Wyckoff Reaccumulation TRs and examples: ST BC SoS SoS SoS SoS SoS BC LPS AR AR Resistance AR Creek Sos BC SoS Resistance AR LPS LPS PSY ST Area Jump across the creek Local SC ST Area AR Resistance LPS LPS Creek Jump across the creek Jump across the creek PSY Shakeout BC SoS Resistance Jump across the creek Creek LPS LPS LPS PSY ST Area LPS PSY Shakeout ST Area Shakeout Spring Support Reaccumulation after decline Reaccumulation with Spring action Reaccumulation after shakeout Reaccumulation with uprise - Weakest among reaccumulation types - Flat or sloping down formation -Absorption of supply happens in the TR - Strongest among reaccumulation types - Decline usually starts from a small local - It can potentially have a few lower lows with without violation of support -This structure will exhibit higher highs / distribution pattern a spring being the lowest point of the TR - Usually and depending on a position of the higher lows - It can have different variations of - Leading stocks can exhibit shortterm market, this pattern exhibits strength - Sometimes can be confused with a topping the TR (see the structure of the weakness after strength in this formation next 3 formations) TR CHEAT SHEETS SCHEMATIC #1 Accumulation: Phases C, D and E) 1. PHASES: A B C D E 2. 3. 4. 5. SOS 6. AR LPS SOS PS 7. LPS ST 8. SC ST Spring INTENTIONS behind Phases C, D and E: i. Phase C: TEST ii. Phase D: MARKUP in TR iii. Phase E: MARKUP outside of TR WYCKOFF EVENTS: i. Phase C: Spring/shakeout, failed spring, test of a spring, LPS ii. Phase D: LPS, SOS, BUC iii. Phase E: up trend SPRING: i. Tes�ng of Phase A and B lows ii. Will either fail or reverse (down or up) iii. Different types: 1-2-3 FAILED SPRING i. Spring ac�on that fails to reach the lows of the range ii. This is a sign of strength! iii. It could be also labeled as an LPS, but the principle is that of a spring iv. The high of AR defines the resistance line of a trading range SHAKEOUT: i. Sharp decline on big spread and volume. ii. Deep penetra�on of support level iii. Quick recovery iv. Requires a test to act upon SOS: i. Traveling to higher levels of the range on bigger spread and increasing volume (usually) ii. New higher highs, higher lows iii. Penetra�on of the resistance level of a range LPS: i. ii. iii. Higher low Inability to go lower – SOS There could be quite a few LPS(s) BUC: i. ii. Last big reac�on before the Markup No more than 50% price reac�on is preferred CHEAT SHEETS SCHEMATIC #1 Accumulation: Phases A and B 1. 2. PHASES: A B C D E 3. 4. iv. SOS 5. AR LPS SOS PS LPS ST SC ST Spring 6. INTENTIONS behind Phases A and B: i. Phase A: STOP ii. Phase B: SUPPLY/DEMAND WYCKOFF EVENTS: i. Phase A: PS, SC, AR, ST ii. Phase B: UT, ST and ST as SOW PRELIMINARY SUPPORT: i. First a�empt to stop a decline ii. It always fails as price goes lower to SC low SELLING CLIMAX: i. Big spread / big volume ii. Excep�on 1: Contrac�ng supply on con�nuous lower SC ac�ons iii. Excep�on 2: SC ACTION can take a period of �me to develop and the lowest bar might not be the biggest and with highest volume IV. The low of SC defines support line of a TR AUTOMATIC RALLY: i. It could take 1-2 days or a period of �me ii. Exhaus�on of supply creates an ini�al rally o ff SC low, which is con�nued later by short covering at higher prices iii. The high of the AR defines the resistance line of a trading range SECONDARY TEST: i. ST can be a local event to SC+AR ii. It can occur later as a bigger confirma�on iii. It can create a small trading range as a tes�ng ac�on iv. In Phase B, a lower ST can be interpreted as a poten�al SOW which indicates more retes�ng or more consolida�on UP THRUST: i. NOT only in distribu�on! (Think unconven�onally and in terms of func�onality) ii. It leaves a trading range above resistance and quickly comes back – failure and supply CHEAT SHEETS SCHEMATIC #2 PHASES: A B C D E Distribution: Phases A and B 1. 2. 3. UT as ST BC ST 4. LPSY PSY LPSY AR iv. SOW MSOW 5. 6. 7. INTENTIONS behind Phases A and B: i. Phase A: STOP ii. Phase B: SUPPLY/DEMAND WYCKOFF EVENTS: i. Phase A: PSY, BC, AR, ST ii. Phase B: UT and SOW PRELIMINARY SUPPLY: i. First a�empt to stop an advance ii. It always fails as price goes higher to BC high BUYING CLIMAX: i. Big spread / big volume ii. Excep�on1: Series of consecu�ve up bars, but not necessarily on big spread and higher volume iii. Some�mes BC ac�on is more visible on higher �me frame (Daily-Weekly-Monthly) iv. The high of BC defines resistance line of a trading range AUTOMATIC REACTION: i. It could take 1-2 days or a period of �me ii. Exhaus�on of demand creates an ini�al decline off BC high iii. which is con�nued later by covering of long posi�ons at lower prices iv. The low of AR defines the support line of a trading range SECONDARY TEST: i. ST can be a local event to SC+AR ii. and can occur later as a bigger confirma�on iii. It can create a small trading range as a tes�ng ac�on UP THRUST: i. It leaves a trading range above resistance and quickly comes back – failure and supply MINOR SOW: i. Indica�on of poten�al supply ii. Possible retest of lows in the future CHEAT SHEETS SCHEMATIC #2 Distribution: Phases C, D and E PHASES: A B C D E 1. 2. UT as ST BC ST 3. LPSY PSY LPSY AR SOW 4. 5. MSOW 7. 8. INTENTIONS behind Phases C, D and E: i. Phase C: TEST ii. Phase D: MARKDOWN in TR iii. Phase E: MARKDOWN outside of TR WYCKOFF POINTS: i. Phase C: UTAD, Failed UT, test of UTAD, high LPSY ii. Phase D: LPSY, MSOW iii. Phase E: downtrend UPTHRUST AFTER DISTRIBUTION: i. Test of the upper boundaries of a range ii. Price travels out of the range and can stay there for some �me iii. Draws a lot of public following Test of UTAD: i. Failed rally a�er UTAD ii. It looks like a healthy pause in a rally, but fails right a�erwards Failed UT (Roman): i. Upthrust ac�on with an inten�on to create UTAD ii. Always fails to advance above the higher range point – SOW iii. It can have a test as UTAD iv. It can be also labeled as high LPSY MAJOR SOW: i. One of the characteris�cs for high probability Wyckoff setup ii. It can be iden�fied by increasing volume, spread, velocity and price penetra�on iii. Usually will produce a new lower low iv. It could be a second, third or fourth a�empt to break the ice and it is the most successful one LPSY: i. ii. iii. Failed rally and lower high Lower volume and decreasing spread It can occur at different levels in a range signifying strength or weakness