Wyckoff Power Charting.

Let's Review

Bruce Fraser | July 01, 2015 at 07:06 PM

Previous posts have been devoted to the process of Accumulation. What distinguishes Power
Charting with the Wyckoff Method from other chart pattern recognition tools is our focus on
tracking the footprints of the Composite Operator. A long term trend requires intel ligent
Accumulation of very large quantities of shares prior to its launch. This must be done quietly and
deliberately. Therefore Accumulation is a logical, sequential and identifiable process. Vertical
charts with volume are the chosen tool for tracking the activities of the Composite
Operator. Accumulation is the preparation phase for the Markup, and Distribution is the
precondition for the Markdown. Accumulation, Markup, Distribution, and Markdown is an ongoing
cycle in financial markets. In every cycle, the stories and the names change while the principles of
speculation remain unchanged. Follow the Composite Operator’s activities to determine where
and when the successful themes will emerge.

Accumulation Schematic #1. Wyckoff schematics model the key characteristics of the
Accumulation area. Variations will always occur between the idealized and the actual trading
range. Identification of these essential conditions is an attribute of Wyckoff mastery. Students will
endlessly compare and contrast the theoretical schematics to actual case studi es to develop an
eye for actual conditions and tactics. We can thank Robert G. Evans for the adaptation of these
notations and chart principles to the original Richard Wyckoff teachings and thus significantly
enhancing the Methodology. Source: Hank Pruden, The Three Skills of Top Trading, Wiley Publ.
2007 with adaptations and modifications. Graphic by Roman Bogomazov.

Phase A. (Blog post: “The Stopping Action of a Downtrend”) Supply has engulfed the market
resulting in a large downtrend. Toward the conclusion of the decline, selling becomes panicky with
widening price spread and volume. Preliminary Support (PS) is an early indication of nascent
demand. The Selling Climax (SCLX) follows on dramatic price spreads and a massive expansion of
volume. Intensity in selling is not sustainable and is followed by a brief and large rally attempt that
is short lived. The Automatic Rally (AR) indicates that the SCLX is completed. Phase A is fulfilled
with a test of the SCLX and is labeled ST.

Phase B. (Blog post: “Accumulation Phase; Absorbing Stock Like a Sponge”) A Cause is built in Phase
B. Characteristic of this Phase is a trading range with extreme volatility early on that diminishes as
it matures. Volatility unnerves weak holders of the stock who weathered the prior bear phase but
who finally give up and sell/dump shares. The theme of the B Phase is Absorption. Wyckoffians
will attempt to determine if quality absorption is taking place during this phase. As long as supply
is present Phase B will persist, building an ever bigger Cause (which is measured using point and
figure charts). Use Support and Resistance Lines to define the outer bounds of the Phase B trading
range. Comparing the duration and extent of rallies and reactions in Phase B will often provide
early clues to the degree of bullish absorption.

Phase C. (Blog post: “Francis Bacon Reveals the Nature of Trends”) Absorption is nearly complete.
Smart money Composite Operators ‘Test’ the stock to determine if it is poised to begin its Markup
Phase. The Test is to determine if the Supply has been exhausted and this is done by removing
bids at Support and allowing the stock to breach the lows. A breakdown here is a bear trap catching
the last of the retail sellers and short sellers in a false move down. This acti on, called a Spring,
comes in three types. At times the final low prior to the beginning of the Markup is a higher low.
Wyckoff analysis deems this a Last Point of Support (LPS) and it is just as important as the Spring
(while possibly more elusive). Testing the lower bounds of the Accumulation Range, as a final act
before the all important start of the major uptrend, is the lofty purpose of Phase C.

Phase D. (Blog post: “Jumping the Creek”) Successfully testing the lower trading range bounds in
Phase C will unleash a condition whereby Demand engulfs remaining Supply. The stock price will
move up on widening price spread and expanding volume. The D phase is the final markup out of
the Accumulation Range. Phase C and D are tactically important as you will wa nt to make your
initial purchases on a rising scale during these phases. Colorful terms “Jump Across the Creek
(JAC)” and “Sign of Strength (SOS)” denote leaping price action. Reactions occur on narrowing
spread and volume and are labeled “Last Point of Support (LPS)” or “Backup to the Edge of the
Creek (BUEC)”. In Phase D, Demand is in control and other professional investors begin to
recognize the emergence of a trend in this attractive stock. Their Demand drives the stock price
upward as it is clear very little Supply exists and each new buy program pushes the price higher
and higher.
Phase E. (Future blog posts) The stock leaves the Accumulation Trading Range and begins a
primary uptrend or Markup. Leaving the TR is major advertising to the institutiona l community
that this stock is in-play. The tools for Markup are Trend Channels, Demand Lines, Overbought
Lines and Stepping Stone Reaccumulation formations. The study of the Markup is a rich and
rewarding Wyckoff subject.

The Accumulation range is a sequence of events that create context. They tell a real time story of
speculation. Phase analysis assists in the telling of the story and keeps us on-track with our tactics
and timing. Prior blogs have, more or less, followed the sequence of the Accumulation Phases. We
will continue with this format, with some breaks along the way. We will then circle back into these
subjects and drill down into more nuance and detail. Wyckoff is a mastery practice and the more
drills and case studies we do the better.

Context is a very important feature of the Wyckoff Method. Traditional technical analysis chart
pattern recognition tools offer no real contextual value. For example traders often get in trouble
at the end of Accumulation because they continually sell short the Resistance Line area. During
Phase D and E they sell short the same area again, not understanding the context of Phase C, D
and E price behavior. Very quickly they can find themselves in big loss traps as a Major Sign of
Strength (SOS) jumps the stock price permanently out of the Accumulation Range. They then
discover that it is very difficult to buy (cover) their shorts as there is an absence of Supply. Each
cover is at higher prices. This is one example of the value of Wyckoff context. As an example Phase
D and E in Accumulation Schematic #2 sets up a false short sale scenario for speculators after
successful short sale campaigns in Phase B. This strategy ends badly in Phase D and E as the markup
has begun. For the Wyckoffian the only conclusion is to reach up and buy this stock. This is an
example of the power of context.
Accumulation Schematic #2 illustrates a condition where price makes a final test of the support
area by making a higher low rather than a Spring (as shown in Schematic #1). This is referred to as
a Last Point of Support (LPS) as it is the price point where buying support stops the decline while
staying inside the trading range. This higher low is the final stop prior to beginning a rally out of
the TR and into a major Markup. Source: Hank Pruden, The Three Skills of Top Trading, Wiley Publ.
2007 with adaptations and modifications. Graphic by Roman Bogomazov.
Compare AAPL to Accumulation Schematic #1. Note the similarities and the differences between
the two. Judgment is an essential attribute of the Wyckoff Method. There are principles at work
in each phase and our job is to be intimately familiar with their attributes and thus to make the
most tactically sound decisions.

Join me next time as we begin to examine Phase E!