Riding the Wyckoff Wave

[dandxg]

	Quote:	DbPhoenix
	Does this help?

Thanks for letting us know it's from big charts. I could never get my VP in Sierra to look anything like that. It always showed as dynamic or "globbed" together and it never looked as clear as the ones you showed in this other pictures.

[DbPhoenix]

Nic and I have resuscitated a few sections from Wyckoff's original course. The first is attached to the OP, the analysis of 1930-31. This and the next two posts will address basic concepts.

THE BASIC LAW OF SUPPLY AND DEMAND

I had been in Wall Street 20 years when I discovered that it was possible to judge the future course of the market by its own action. In my book, WallStreet Ventures and Adventures through Forty Years, I stated my experience and observations in 1909 as follows:

I saw more and more that the action of stocks reflected the plans and purposes of those who dominated them. I began to see possibilities of judging from the very tape what these master minds were doing. My editorial work was proving a most valuable means of self-education. In gathering material that would benefit my readers, 1 was actively searching out the stuff that would aid me personally. While my subscribers were given the best of what I collected, there was much in material discarded which helped to build up what I might call a code of enlightened procedure for use in this greatest of all the world’s games.

I had a friend who had been a member of the Exchange and who was well up on the technique of the market from the standpoint of the floor trader. We often discussed the difference between reading the tape simply to follow price changes (as most clients did) and reading the tape in order to judge the probable action of stocks in the immediate future.

Starting from the simple ground that the logical action of a stock was to decline when offerings exceeded the number of shares bid for, and to advance when the amount bid for was greater than the amount offered, we agreed that the quantity or volume of stock changing hands in each succeeding transaction was of great importance. Anyone who undertook to rend the minds of the momentary buyers and sellers was able to measure, to a certain degree, their eagerness or anxiety to buy or sell; also to measure the force of the buying power or selling power as shown by the number of shares; and to judge of the purpose behind the action, whether it was to buy without advancing the price, or to force the price up, or to mark it down, or to discourage buying or selling by others, as the case might be.

Each transaction carried with it certain evidence, although it was not always possible to interpret that evidence. All stocks no matter by whom they were owned, bought or sold, looked alike on the tape. But the purposes behind this buying and this selling were different and these might be fairly clear to those who understood market psychology.

Each transaction, although recorded only once, represented a meeting of minds; those of a buyer and a seller. This meeting of minds took place at a certain post on the floor of the Stock Exchange, even though the buyer might be in the far west and the seller in Europe.

Not all transactions were significant, but the interpreter must detect those which were. He must see that some indicated a purpose. Some one or some group was carrying, or attempting to carry, something through. He must take advantage of that.

Continuing my studies of the tape, I realized that the Basic Law of Supply and Demand governed all price changes; that the best indicator of the future course of the market was the relation of supply to demand.

The Law of Supply and Demand operates in all markets in every part of the world. When demand exceeds supply, prices rise, and when supply is greater than demand, prices decline. This is true not only of stocks; it is constantly being demonstrated in markets for wheat, corn, cotton, sugar and every other commodity that is bought and sold; also, it is reflected in other markets such as real estate, labor, etc.

I demonstrated this further in a series of articles entitled: “Studies in Tape Reading” which attracted wide attention as the first of their kind ever published anywhere, as far as I knew.

My basic idea in this series was that the stock market, by its own action, continually indicates the probable direction of its immediate and future trend, and anyone able to determine this with accuracy should attain success in trading and investing.

Coming events, I claimed, were foreshadowed on the tape because large interests there disclosed their anticipation of advances or declines by their purchases or sales. So, too, with the large speculator who was endeavoring to raise or depress prices. If one were to become sufficiently expert, he could judge by the action of stocks what was in the minds of these large interests and follow them.

The trend was simply the line of least resistance. When a stock met opposition in its rise, it must either be strong enough to overcome this resistance (selling) or it must inevitably turn downward, and when, in its downward course, sufficient buying was encountered to halt the decline, it would turn upward. The critical moments in all these various phases of the market were these minor and major turning points, or else the points where the price broke through the opposition into a new field.

Further development of this method of judging the market from its own action resulted in my using it as a basis for predicting the probable course of the market, and this eventually led to my issuing weekly, “The Trend Letter” (first published in 1911) which had a most successful career for many years. In fact, the forecasts contained in this Letter were so accurate that a large following was developed. As a result of a series of successful campaigns we were not only overwhelmed with business but brokerage houses throughout the country passed along these recommendations to their clients. So many followers were gained that an undue effect was had on the quotations for the stocks in which they traded, and in certain cases the effect on the market was important.

My reason for mentioning these facts is to show that this method of judging the market by its own action was highly successful from the standpoint of profits realized for subscribers who followed my advices, as well as for many thousands of people who were not subscribers but who bought and sold when we did.

From the above you may judge how vital it is in the stock market, as in every field, to operate with the proper principles.

[gassah]

As I read through the Buying and Selling Waves section of W's course I remembered how I wanted to do a better job of comparing waves (swings). Ray Barros also does this and uses it to guide him on whether or not swings or trends will continue or reverse.

Market Analyst makes it relatively easy. This chart shows the swings compared: the mean bar size and volume have dropped in the second swing. Barros likes to see a 30% change to call it significant. There's something called Swing Strength with a big decline. I don't know what it measures and I'm having trouble accessing their web site at the moment to find out.

Anyway, just an idea. I haven't played around with it much.

[DbPhoenix]

JUDGING THE MARKET BY ITS OWN ACTION

The business of Wall Street is to finance corporations and to sell the securities - stocks and bonds - which result from this financing. Some securities are good; others not so good. Those who manufacture and sell them to the public know their value best. The public has comparatively little idea of their real value, except for seasoned securities—those which have been on the market for a long time and which, therefore, have established earning power and intrinsic value.

In every case the banker who does the financing and the dealers who help distribute, have paid for their securities either in cash or in services, or have underwritten them. The object is to market these stocks and bonds at as high prices as possible. This marketing is done through distributing houses and syndicates, by private sale, by public offering, and by means of listing on the stock exchanges.

In the latter case, the stock is advertised by making it active on the tape. If the price be advanced, and the transactions made large, the activity attracts buyers, and those who are handling the stock are thus able to dispose of their shares.

Sponsorship is sometimes continued after the market is thus made for a company’s shares. The bankers operate for themselves, or others operate for them. After a stock is floated, its sponsors try to create a stable market and support the price as well as they can without taking back too much stock. When it is thoroughly distributed and enough people are interested in the stock to make a market which takes care of itself, under ordinary conditions, the original banker, syndicate or sponsor may discontinue operations and turn attention to some other stock which affords a new opportunity for money-making.

Other interests may begin operations in that stock. Generally speaking, there are usually one or more sponsors or large operators working in every stock. Sometimes there are many. These interests see opportunities for profit, accumulate a line, mark up the price when conditions are favorable and then sell out. Or they may sell short, depress the price and cover.

No one can deny that in Wall Street the big fish eat the little ones. Large operators could not operate successfully without the large number of people making up the public; that is, if there were only ten big interests in the market and no public, these ten could only make a profit by dealing with each other. It would be difficult for one crowd to deceive any of the nine others. But when the public enters the stock market, the large operator’s game becomes easier for him.

Tape Reading and Chart Reading enable one to detect and profit by these inside operations or manipulation; to judge the future course of stocks, by weighing the relation of supply and demand. This sometimes can be done from price movement alone, but if you consider also the volume of transactions you gain an additional and vitally important helpful factor.

By accurately judging this supply and demand, you are able to determine the trend of the whole market and of certain stocks; also which stocks to buy or sell, and, what is even more important, when to do so.

You always aim to select the most promising opportunities; that is, the stocks which are likely to move soonest, fastest and farthest. You make no commitments without sound reasons and you avoid undue risks.

Whenever you study the tape or a chart, consider what you see there as an expression of the forces that lift and depress prices. Study your charts not with an eye to comparing the shapes of the formations, but from the viewpoint of the behavior of the stock; the motives of those who are dominant in it; and the successes and failures of the buyers and sellers as they struggle for mastery on every move.

The struggle is continuous. The tape shows all this in detail. The charts enable you to pick the market apart and study whatever portion or phase of it you choose.

Supply and demand may be studied on the tape of the stock ticker, and to even better advantage from charts.

The tape is like a moving picture film. Every minute of the day it is demonstrating whether supply or demand is the greater. Prices are constantly showing strength or weakness: strength when buyers predominate and weakness when the offerings overpower the buyers. All the various phases from dullness to activity; from strength to weakness; from depression to boom, and from the top of the market down to the bottom – all these are faithfully recorded on the tape. All these movements, small or great, demonstrate the workings of the Law of Supply and Demand. By transferring to the charts portions of what appears on the tape, for study and forecasting purposes, one is more readily enabled to make deductions with accuracy.

And now that you are undertaking to learn this Method, it is best that you prepare your mind for it by discarding most of the factors that you have heretofore employed in forming your judgment and making your decisions, such as: tips, rumors, news items, newspaper and magazine articles, analyses, reports, dividend rates, politics and fundamental statistics; and especially the half-baked trading theories which are expounded in boardrooms and popular books on the stock market.

It is not necessary for you to consider any of these factors because the effect of all of them is boiled down for you on the tape. Thus the tape does for you what you are unable to do for yourself; it concentrates all these elements (that other people use as a basis for their stock market actions) into the combined effect of their buying and selling.

You draw from the tape or from your charts the comparatively few facts which you require for your purpose. These facts are: (1) price movement, (2) volume, or the intensity of the trading, (3) the relationships between price movement and volume and (4) the time required for all the movements to run their respective courses.

You are thus far better equipped than the man who is supplied all the financial news, statistics, etc., from the whole world.

I, therefore, claim that:

You need never read anything on the financial page of your newspaper except the table of stock prices and volumes.

You need pay no attention to the news, earnings, dividend rates or statements of corporations.

You need never study the financial or the business situation.

You need not understand railroad or industrial statistics, the money market, the crop situation, the bank statements, foreign trade or the political situation.

You can absolutely ignore all the thousands of tips, rumors, reports and especially the so-called inside information that flood Wall Street.

You can discard all of these completely and finally.

UNLESS YOU DO THIS YOU WILL BE UNABLE TO GET THE BEST RESULTS FROM YOUR MARKET OPERATIONS.

[DbPhoenix]

BUYING AND SELLING WAVES

Every upward or downward swing in the market, whether it amounts to many points, only a few points, or fractions of a point, consists of numerous buying and selling waves. These have a certain duration; they run just so long as they can attract a following. When this following is exhausted for the time being, that wave comes to an end and a contrary wave sets in. The latter may attract more of a following than the former. By studying the relationships between these upward and downward waves, their duration, speed and extent, and comparing them with each other, we are able to judge the relative strength of the bulls and the bears as the price movement progresses.

All stock market movements, however large or small, are made up of buying and selling waves. The market does not rise and fall like the water in a tank which is being filled or emptied. It moves to a higher or lower level by a series of surges - a good deal like an incoming or outgoing tide, with successive waves higher or lower than those preceding.

The small buying and selling waves which occur during every stock market session run so many minutes. They are caused largely by the restlessness of active professional traders, much like the ripples produced by the wind upon the ocean. Traders must have activity; they make their livelihood by trading on fluctuations. Therefore, they engage in a ceaseless tug of war, trying to put prices up whenever the condition of the market is favorable, or drive them down when they find that the bulls are weak or have over-extended themselves. The degree of success or failure attending their efforts enables us to determine whether the market is growing stronger or weaker.

These small waves are part of the larger waves which run several days, and eventually make up movements of 3 to about 5 points [Note: this was the average daily range of the index at that time; today the average daily range is more than 200 points; adjust accordingly]. The 10 and 20 point moves are made up of 3 to 5 point waves, and the bull and bear markets are composed of many swings of 10 to 20 points or more.

You can easily confirm the above by examining any chart. It is important that you do this so as to impress upon your mind these numerous waves of various sizes, inasmuch as this will help you to understand the market. You will thereafter think in waves.

When you are looking for an opportunity to buy, watch for the down waves in the market and in your stock. After you have bought, you sit through a number of small, medium and good-sized waves, until finally you observe that it is about flood tide in that stock. Then watch for an especially strong up-wave and give your broker an order to sell your stock at the market.

The waves of the market furnish a clear insight into changes in supply and demand. By learning to judge all sizes of market waves, you will gradually learn to spot the time when a rising market or a rally, and the time when a declining market or a reaction, has halted and is about to reverse. These are the turning points.

To be able to say when these turning points are occurring - at the bottom of a bear market, or at any important rallying point on the way down to the bottom, or at the top of a bull market, or at any important reactionary point on the way up - is a mark of ability in an investor as well as a trader.

Remember: The market itself tells us everything we need to know about its probable future action. Every significant change in supply or demand is registered on the tape. When you have learned to analyze the market by its own action, as recorded on the tape or on your charts, then you will be proficient in the art of operating in stocks.

Of all the things that are most desirable to know about the stock market, these two are most important:

(1) First, to be able to determine the final top of a bull market, and second, to determine the top of the intermediate swings, and finally the top of the minor moves.

(2) To be able to determine the final low in a bear market, the bottom of the intermediate swings, and the end of the minor moves.

Master this branch of the subject thoroughly, it is vital.

But there is one step more: Your education will not be complete until you can cover all your shorts and go long at the bottom of a panic, a depression or of an intermediate swing, and sell out all long stocks and go short at the top of a boom or an intermediate bull movement. This will be the result of practice, training, and experience. It requires great flexibility of mind and absolute control of your emotions. You can learn to do it if you will study and faithfully practice this Method.

[dandxg]

Thanks both of you for this thread. I am sure it will be a favorite at TL.

[DbPhoenix]

.
About Monday:

Last week, I posted charts of seven of the sectors (I didn't include utilities or healthcare) here, including the support and resistance zones contained by my world-famous boxes. Price was turned back in every one of them.

As for the Dow and SPX, and using the SPY and DIA as proxies, I see no reason -- absent evidence to the contrary -- why we shouldn't complete these patterns and revisit the January/March lows.

.
Given that, and given that we closed outside the range, a short on the NQ anywhere in the 1800 to 1820 area looks good, if the market provides it (I'm using BigCharts because it's available to everybody to play with as they like).

.

[gassah]

I was thinking along the same lines as I went through my list of stocks; nearly all of them are getting rejected at resistance.

[DbPhoenix]

	Quote:	gassah
	I was thinking along the same lines as I went through my list of stocks; nearly all of them are getting rejected at resistance.

Maybe you should show them how to develop a list of stocks using The Method.

C'mon, folks, give 'im a hand

[gassah]

My "thanks" was full of sarcasm.