Contents:
Setbacks, such as shakeouts and more typical reactions, are usually short-lived. 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, and heavy or urgent buying by the public is being filled by professional interests at prices near a top. A BC often occurs coincident 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.
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. If a top is to be confirmed, supply will outweigh demand, and volume and spread should decrease as price approaches the resistance area of the BC. A ST may take the form of an upthrust UT , in which price moves above the resistance represented by the BC and possibly other STs, then quickly reverses 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. 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. 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: 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 then 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, and with less upward progress 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 accumulation TR e.
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. 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. For instance, SOWs are usually accompanied by significantly increased spread and volume to the downside.
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. A UT or UTAD allows large interests to mislead the public about the future trend direction and to 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.
Phase D arrives 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 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.
Analysis of supply and demand on bar charts by examining volume and price movement represents one of the central pillars of the Wyckoff method. For example, a price bar with wide spread, closing at its high well above the highs of the previous several bars, accompanied by higher-than-average volume, suggests the presence of demand. Similarly, a high-volume price bar with wide spread, closing at its low well below the lows of prior bars suggests the presence of supply. These simple examples belie the extent of the subtleties and nuances of such analysis. For instance, labeling and understanding the implications of Wyckoff events and phases in trading ranges, and ascertaining when the price is ready to be marked up or down, is based largely on the correct assessment of supply and demand.
Wyckoff's first and third laws described above Supply and Demand and Effort versus Result embody this core approach. Conventional wisdom of much technical analysis and basic economic theory accepts one of the obvious insights of the law of Supply and Demand: The converse is also true: Wyckoff's third law Effort versus Result involves identifying price-volume convergences and divergences to anticipate potential turning points in price trends.
For example, when volume Effort and price Result both increase substantially, they are in harmony, suggesting that Demand will likely continue to propel price higher. In some instances, however, volume may increase, and even increase substantially, yet the price does not follow, producing only a marginal change at the close. If we observe this price-volume behavior in a reaction to support in an accumulation trading range, this indicates absorption of supply by large interests, and is considered bullish.
Similarly, huge volume on a rally with minimal price advance in a distribution trading range demonstrates a stock's inability to rally because of the presence of significant supply, also from big institutions. In the first, we see prices falling on a number of wide-spread bars and volume increasing. This suggests a harmony between volume Effort and the decline in price Result.
In the second reaction, price decreases by a similar amount as in Reaction 1, but on smaller spreads and lower volume, indicative of reduced supply, which in turn suggests the potential for at least a short-term rally. In Reaction 3, the swing size decreases, but volume increases. In other words, the Effort increases while the Result decreases, showing the presence of large buyers absorbing supply in anticipation of a continuation of the rally.
Wyckoff's stock selection process always included an analysis of comparative strength. To identify candidates for long positions, he looked for stocks or industries that were outperforming the market, both during trends and within trading ranges; while for short positions he looked for underperformers. Therefore, he conducted his comparative strength analysis between a stock and the market or between a stock and others in its industry by placing one chart under another, as in the example below. Wyckoff compared successive waves or swings in each chart, examining the strength or weakness of each in relation to prior waves on the same chart and to the corresponding points on the comparison chart.
A variation of this approach is to identify significant highs and lows and note them on both charts. Then one can evaluate the strength of the stock by looking at its price relative to the previous high s or low s , doing the same thing on the comparison chart. This shows that AAPL is underperforming the market at point 3. The picture changes in February: AAPL is starting to outperform the market by making a higher high at point 5 and higher low at 6 relative to the market, which is making a lower high at point 5 and a lower low at point 6.
Modern Wyckoff practitioners can utilize the Relative Strength Ratio between a stock and a market proxy to compare points of strength and weakness. In fact, use of the Relative Strength Ratio can more easily eliminate potential inaccuracies due to the existence of different price scales between a stock and its relevant market index.
Whereas the three Wyckoff laws provide a big-picture foundation for the Wyckoff method, the nine buying and selling tests are a set of narrower, specific principles to help guide trade entry. These tests help delineate when a trading range is drawing to a close and a new uptrend markup or downtrend markdown is about to begin. In other words, the nine tests define the line of least resistance in the market.
Below is a listing of the nine buying tests and nine selling tests, including the references to which kind of chart should be used. Volume contracts throughout the trading range and prices start to make higher highs and higher lows — this shows a decrease and absorption of supply and ease of upward movement, despite decreasing demand.
Once supply has been exhausted, price can rise on lower demand than one might otherwise expect. Such activity is bullish and it satisfies Test 3. The downward stride and downtrend channel have been broken and price consolidates in the trading range — Test 4 is satisfied. This satisfies Tests 5, 6 and 7. The stock has spent six months consolidating and has built a cause sufficient for a substantial future advance.
The base is formed, satisfying Test 8. The Wyckoff Count Guide shows the trader how to calculate the cause built during a trading range so as to be able to project future price targets. The process consists of the following:. The box size is points with 3-box reversals. Therefore, to calculate price targets, tally the number of columns at the level of the count line, multiply that sum by the box size and 3 the reversal metric , then add this product to: The pioneering work of Richard D.
Wyckoff in the early twentieth century was centered around the realization that stock price trends were driven primarily by institutional and other large operators who manipulate stock prices in their favor. The discipline involved in this approach allows the investor to make informed trading decisions unclouded by emotion. Attaining proficiency in Wyckoff analysis requires considerable practice, but is well worth the effort. In order to use StockCharts. Click here to learn how to enable JavaScript. Log In Sign Up Help.
Table of Contents The Wyckoff Method: A Five-Step Approach to the Market. Wyckoff Buying Tests for Accumulation. Wyckoff Selling Tests for Distribution. The Composite Man carefully plans, executes, and concludes his campaigns. One must study individual stock charts with the purpose of judging the behavior of the stock and the motives of those large operators who dominate it.
With study and practice, one can acquire the ability to interpret the motives behind the action that a chart portrays. Wyckoff and his associates believed that if one could understand the market behavior of the Composite Man, one could identify many trading and investment opportunities early enough to profit from them. PS—preliminary support , where substantial buying begins to provide pronounced support after a prolonged down-move. Volume increases and price spread widens, signaling that the down-move may be approaching its end.
SC—selling climax , the point at which widening spread and selling pressure usually climaxes and heavy or panicky selling by the public is being absorbed by larger professional interests at or near a bottom.
Often price will close well off the low in a SC, reflecting the buying by these large interests. AR—automatic rally , which occurs because intense selling pressure has greatly diminished. A wave of buying easily pushes prices up; this is further fueled by short covering. The high of this rally will help define the upper boundary of an accumulation TR. If a bottom is to be confirmed, volume and price spread should be significantly diminished as the market approaches support in the area of the SC.
It is common to have multiple STs after a SC. Test —Large operators always test the market for supply throughout a TR e. If considerable supply emerges on a test, the market is often not ready to be marked up. A spring is often followed by one or more tests; a successful test indicating that further price increases will follow typically makes a higher low on lesser volume. SOS—sign of strength , a price advance on increasing spread and relatively higher volume. Backing up to an LPS means a pullback to support that was formerly resistance, on diminished spread and volume.
Goodreads helps you keep track of books you want to read. Want to Read saving…. Want to Read Currently Reading Read. Refresh and try again. Open Preview See a Problem? Thanks for telling us about the problem. Return to Book Page. Preview — Operator 5 by Curtis Steele. The Invisible Empire by Curtis Steele. Published first published May 1st To see what your friends thought of this book, please sign up.
To ask other readers questions about Operator 5 , please sign up. Lists with This Book. Sep 25, Jeff J. The second Operator 5 novel continues to define the standards of pulp fiction: While Operator 5 doesn't have the superhuman features of Doc Savage, the Shadow, the Spider, or others of their ilk, he does share with his compatriots a strong character and brilliant mind.
Looking forward to reading more of Operator 5.