Wyckoff Power Charting

Zim's Group

In 1987 Hank Pruden decided to take a break from teaching the Technical Analysis Courses at Golden Gate University. He offered me the job of teaching these courses during his absence. I was honored by his invitation and accepted. His sabbatical went on for three years and I believe it was a very creative period for Hank. In 1988, we became aware of a new mental technology called Neuro Linguistic Programming. The epicenter of this new thought work was Marin County which is very close to GGU. Hank and I discussed NLP over lunch and concluded that it could have profound benefits for traders as a mental edge. We decided to form a study group of professional traders, to meet twice a month in Marin County, to study and learn the techniques of NLP to be applied to trading skills. The reason we met in Marin County was to hire NLP Practitioners to work with us and install these methods. Over the ten-year life span of the group we worked with three NLP experts (and numerous trading coaches). The group was called the Zim’s Group because we met at a restaurant of the same name. Zim's provided a private dining room in the back where we could do our work (the hamburgers were great too).

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Animal Spirits

Leadership in the Technology Sector is generally a very good sign for the entire stock market. It bodes well for the market when technology stocks, as a group, are leadership as a rally starts. Speculative animal spirits are heightened by the emerging leadership of the Technology Sector. Conversely when technology stocks are generally laggards, caution is warranted for the market as a whole.

What is the current state of the Technology Sector and can we draw any Wyckoffian conclusions about the general health of the broad stock market? Using the Technology Select Sector ETF (XLK) we will put together a Wyckoffian analysis of the present position and likely future direction of this most important segment of the market.

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Crude Oil's Slippery Slope

Crude oil is on a slippery slope downward. Was this completely unexpected or were there clues of the impending decline? The stock market is a discounting mechanism. Stocks traditionally light the way by starting to move prior to the underlying economic events. That, of course, is the argument for Technical Analysis of stock prices. If stocks are going to move first, investors who wait for the economic news will have missed much of the trend.

Does this Discounting phenomenon work only in larger time frames? Is it possible to harness the stock markets x-ray vision in the intermediate and shorter windows of time? Crude oil prices tumbled this month and continue to be weak. Let’s take a Wyckoffian look at crude oil in comparison to energy stock prices to see if this Discounting mechanism warned of trouble for crude oil.

                                                 (click on chart for active version)

Do Energy stocks anticipate (Discount) trend changes for crude oil? Here we compare the daily vertical chart of crude oil futures ($WTIC) to the Energy Select Sector ETF (XLE). A rising trend in XLE develops in November and the stride of the trend channel forms right away. Note how the low for XLE precedes the low for $WTIC by 9 trading days. This is a useful ‘Downside Non-confirmation’ (DNC) of XLE. Crude oil and XLE climax together at the end of the uptrend with an overbought throw-over of the trend channel. This is classic exhaustion of both trends.

A Buying Climax and Automatic Reaction (AR) form the approximate outer boundaries of two range bound markets. XLE only spends 3 weeks above the support formed by the AR low. Energy stocks are notable in their weakness. The downward stride for XLE forms early. Weakness sets up two Sign of Weakness (SOW) price breaks and two Last Point of Supply (LPSY) attempts to rise above the ICE. This is Distributional price behavior. An LPSY (there can be more than one) is a final attempt to rally, which fails at a lower high. The Distribution is complete after the final LPSY. Then Markdown begins.

Why are the Energy shares so weak while $WTIC continues testing the BCLX high prices and the Resistance area? After the Secondary Test (ST) of $WTIC there is a full two months of trading around the highs. Is this Distribution or Reaccumulation? XLE would argue that energy shares are Discounting trouble in the oil patch. After an Upthrust (UT), weakness in crude oil seems to emerge out of nowhere (XLE was warning of impending trouble). The price of oil suddenly tumbles below the Support at 50. Note the extent of the decline in XLE prior to crude oil becoming weak. This trendless range bound market was Distribution for $WTIC, and XLE was leading the way lower.

Now that Distribution is complete for both $WTIC and XLE, Point and Figure counts can be taken to estimate price objectives. XLE spent less time in Distribution prior to initiating a Markdown. Crude oil had much longer to be Distributed and that could explain the sudden, sharp price break.

XLE was in Distribution from 78 down to 71 with the count line at 73. Using the 1-box reversal PnF method, 7 columns are counted. Therefore, the objective is 71 to 66. XLE is in that target zone now. On the vertical chart, signs of an oversold condition and Selling Climax are emerging. We are on the alert for stopping action, until then the downward trend is still in force. Our expectation is that XLE will bottom prior to $WTIC. But how much downward potential is there for $WTIC?

The Distribution structure for $WTIC began forming last December. It has just resolved downward. From the Upthrust to the Buying Climax (BCLX) 12 columns are counted. The countline is 55 and thus an objective of 43 is projected. There are key prior lows and support at 43 and this adds validity to this price objective.  

XLE has done a good job of leading and anticipating the moves in crude oil. We would expect this leadership to continue. A possible scenario is that XLE finds a low prior to $WTIC and becomes range bound (this would be expected between 71 and 66). There we can assess if this is Accumulation or Redistribution. In either case, we will watch XLE closely to light the way for the next move in crude oil.

All the Best,

Bruce

Complimentary webinar announcement: Fellow Wyckoffian Roman Bogomazov and I will be conducting a “Market Outlook and Stocks Review” session on March 29th, 3:00 – 5:00 pm (PST).  We are pleased to again welcome acclaimed author/trader Corey Rosenbloom. To find out more and to register for this free webinar click here.

 

 

NASDAQ 100 Index. A Current Case Study.

Point and Figure charts are generated from price volatility, unlike a vertical (bar) chart, which is plotted as a function of time. This is particularly valuable to Wyckoffians who are always on the search for a Cause being built. Causes lead to Effects; Accumulation results in Markup and Distribution turns into Markdown. Point and Figure analysis provides a method for estimating the potential extent of that Markup or Markdown. We have spent considerable time on methods and procedures for PnF analysis, and will continue our skill building using these powerful charts.

Here is a current and fascinating Point and Figure case study.

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Get to the Point and Figure

Sector activity can illuminate important thematic trends unfolding within the market. Point and Figure studies identify large Accumulation and Distribution Structures related to these themes poised to be campaigned over many months and years. The Sector can be campaigned using Exchange Traded Funds (ETFs). Also, by drilling down into the Sub-Industry Groups and stocks the very best leadership candidates can be identified and traded.

Here we will focus solely on the PnF studies and develop an eye for how these large formations help inform our strategy and entry tactics. This is, by no means, a complete list of current best sectors. Take the time to go through all of the sectors, generate PnF charts and hone your skills. The next step is to zoom into promising Sub-Industry Groups and continue the analysis. We know that best Sectors have within them best Sub-Industries, and within them, best stocks that are leading the way up.

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Three Legged Stool

Let’s do an integration case study. We have spent much time on two robust processes; Point and Figure analysis and Vertical Bar Chart analysis. Recently Relative Strength studies have been added to the mix. A stool has three legs, any fewer would make it unstable. Our Wyckoff stool has three strong legs. In this case study, we will combine these tools and see if it makes our analysis sturdier and more cohesive.

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Bonds. Shaken, Not Stirred.

It is time to circle back and update our studies of the US Treasury Bond market. On October 7, 2016, we did a Wyckoffian analysis of Treasury Bonds as they appeared to be at a critical juncture. Take a few minutes now and go back to that post (click here for a link) and review this prior analysis. To summarize; at that point bonds were in a well advanced state of Distribution that was 21 months along. After an exhaustion rally (or Upthrust) bonds returned back to the Resistance level. By zooming into the UT area, we identified completed Distribution on a smaller scale and took two Point and Figure counts. The larger of these two counts projected a sizable decline to the major Support line for bonds at about 110 on the TLT chart.

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Avoidance Strategy

The Wyckoffian mission is to trade and invest in the best stocks in the leading Industry Groups. We have been studying examples of leadership characteristics using Wyckoff Analysis in combination with Relative Strength. Recall that our workflow is to drill down from Sector to Industry Group to Stock. Always seeking the strongest stocks in the strongest groups. It is also a worthwhile exercise to study groups that are stalling and falling from favor. Once an Industry Group transitions from leadership to laggard it can remain there for a long time. In an uptrending bull market we might call this our ‘Avoidance Strategy’. It is always good to know where the leaders and the laggards are in any market and when important transitions are brewing.

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Sectors. Groups. Stocks.

Let’s continue our discussion about using Relative Strength Analysis to find leading stocks. A blend of Wyckoff analysis and Relative Strength analysis offers an efficient method for zoning in on the best leading stock candidates. In the prior post, Industry Group analysis was explored. Here we will jump into stock analysis. The concept is the same, find the leading stocks in the best Industry Groups. We know that when an Industry Group enters a leadership position there are individual stocks forging the way within that group. These early leaders will generally be mostly large capitalization stocks. Institutions will begin to favor the dominant big-cap stocks first and then turn to the mid-cap and smaller companies later. Relative Strength analysis will assist in identifying each of these emerging themes as they become active. When Relative Strength becomes In-Gear it tends to support the continuation of the price trend for long periods of time (this is either up or down). Let’s drill down and explore how Relative Strength helps with Stock selection.

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