Trading The Wyckoff Way

[cantana 10]

How cool. Where did you get this? Do you subscribe to his newsletter?

 

I stole the Mamis chart from T Lo's site. She still has a lot that is accessible to non paying scum like me.

[DbPhoenix 42]

I stole the Mamis chart from T Lo's site. She still has a lot that is accessible to non paying scum like me.

 

Yes, she and Raschke give away an enormous amount of stuff.

[DbPhoenix 42]

Stock Selection Part 1

 

Is there a Part 2?

[gassah 10]

Is there a Part 2?

 

Slave driver. Yes.

[DbPhoenix 42]

Slave driver. Yes.

 

I'll do my version of it when you're done.

[gassah 10]

Does this help?

 

 

We can get a few more bars by selecting the largest chart size.

[gassah 10]

Stock Selection Part 2

 

W described "two processes of reasoning" for the selection of the best stocks: the deductive, or top down, and the inductive, or bottom up.

 

The deductive method first determines "the position and trend of the general market; then the position and trend of the various group averages; and finally the position and trend of individual issues."

 

The inductive method moves "from the particular to the general." He created a position sheet and assigned each stock a technical position, that is, was it bullish, bearish or neutral for both the short and intermediate terms. There would be multiple stocks for each group and at a glance you could determine the position and trend of the various groups, and the general market. At the appropriate time the best stocks would be selected from this sheet. I've included a .pdf by Hutson that explains it in more detail.

 

"Either approach is good by itself, though reasoning from the particular to the general requires the exercise of more skill and judgment and takes a little more time. It is best to employ both methods if possible, for then one will serve to check the other."

Position Sheet- Hutson.pdf

[gassah 10]

Stock Selection Part 3

 

Did W find the fundamentals of a company important?

 

On the one hand he makes the following statements in How I Trade and Invest in Stocks and Bonds (thanks, Jason).

 

"While in former years I usually began with a consideration of the trend of the market, and then passed to the choice of security, I now line the factors up in the following order:

 

(1) Long trend of the market.

(2) Nature and tendency of the industry.

(3) Trend of the selected company's affairs (toward improvement or contrary).

(4) Character and reputation of the management.

(5) Financial Position and earning power.

(6) Position in relation to the intermediate, i.e., the thirty to sixty-day swings.

 

"When all of the above prove up to my satisfaction I feel safe in making an investment. Of course, there are other considerations, but these are the most important."

 

On the other hand, from the course:

 

"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."

[DbPhoenix 42]

Since the above book predated the course by a number of years, he may have determined in the meantime that none of this is really necessary. Plus the '29 crash intervened.

 

In any case, all of this will sound strangely familiar to readers of Wm O'Neil. Now you know where he got it.

[cantana 10]

The whole enchilada from T Lo.

 

 

The following is an exerpt from my book, The Ultimate Trading Course. I discuss Justin Mamis’ writing in his classic, The Nature of Risk.

What we have (in Chart 14 of The Nature of Risk) is essentially a graphical representation of the manic depressive moods typically experienced by market participants as a function of time and price in one complete sentiment loop. There are two areas in a typical loop where the market does something that traders describe as ‘churn’ or ‘chop’, and two areas where directional trends are found.

RETURNING CONFIDENCE

On the upside, the area where churning takes place is in between the Returning Confidence phase and the Subtle Warning phase, after a significant advance has already taken place. This often appears in the form of a head and shoulders top on weekly or monthly charts. By the time confidence returns, the market has already been going up for ages while the retracement patterns become ever larger, each one scarier than the last.

To technical traders, this type of price action tells us that the market is getting tired. Perceived bull market volatility excites investors. They waited forever on the sidelines for fundamentals to confirm that the move up was ‘real’. The coast is finally clear and they jump in with both feet. This phase typically ends with a failure on test of top, and the big, super scary ‘buy the dip’ pullback begins.

BUY THE BIG DIP

The public continues to pour money in, lured by glowing good news and economic data. After the long move up, finding attractive stocks becomes difficult for technical traders and market veterans. Traders chase momentum where they find it. Investors believe that the game is back on, and they are willing to take big risk and buy big dips. This Big Dip usually comes after a failed test of top in the Returning Confidence phase. The Big Dip typically takes price below the 50-day simple moving average and quite often, to the 200-day moving average. This is where ABC Corrections are typically found.

ENTHUSIASM

Once it is widely accepted that economic and corporate fundamentals are supporting higher prices, a bell goes off. The bull survived The Big Dip. Those who had previously been afraid now have plenty of reasons – and proof – that it is safe to go back into the market and buy again.

At this point, we detect a subtle change in psychology, a shift from the fear of loss to the fear of missing out, and the appetite for risk becomes evident. Investors buy on faith, bolstered by analyst and media reports projecting the trend to continue. As price rises to new highs, they all scream, “It’s a breakout!” They are supremely confident that the best is yet to come.

The high made in the Returning Confidence phase typically marks the ‘point of breakout’ and becomes an important psychological number. We know this high is where sellers showed up before, and if price should sink below this area, traders and investors might come to the conclusion that the breakout failed, and therefore, begin selling in case the uptrend is approaching the point where it starts to bend.

At some point, all the buyers who want to be in the market have bought, and they stop buying. Smart money begins to take some off the table. The net result is rotation of buying and selling from sector to sector, causing the major stock indexes to stop going up in any meaningful way and price charts to churn and chop. In the old days, they called this ‘distribution’, marking the transfer of stock from smart to dumb money, from strong to weak hands. This area is where a buildup of participants in position to write sell tickets takes place. If price fails to move up or it comes back under the point of breakout, selling begins.

DISBELIEF

The market fails to go higher, and indeed many of the early leaders have broken down under the 50-day moving average, giving technicians the Subtle Warning. This marks the beginning of the ‘something is not right’ gut feeling, but in the absence of bad news, investors hold on to hope. Not only are they heavily invested in the market, they are psychologically invested in being right and they ignore anything that does not go with their worldview. Indeed, they even wonder aloud why their beloved stocks cannot go up amidst good news, higher earnings guidance and analyst upgrades.

OVERT WARNING TO PANIC

The area of sustained directional trending price action to the downside takes place is between the Overt Warning and Panic phases. There will be some sort of catalyst. Perhaps it is an earnings warning or some point of economic data that leads the crowd to finally clue in that the nagging negative price action they have been watching is the beginning of something big and bad.

The 200-day moving average is broken, and CNBC alerts investors. Everyone knows that the ship is sinking. Those who bought in the churning top realize they are holding the bag and stop buying the dips. Smart money shorts each failing bounce. Stop losses are hit, and margin calls force liquidation. Supply simply overwhelms demand and price action becomes a one-way street.

DISCOURAGEMENT AND AVERSION

After a long price slide, the area where churning takes place is between the Discouragement and the Aversion phase, after a significant decline has already taken place. Often, this appears as a head and shoulders bottom, a cup and handle or a saucer dish pattern. As the public continues to dump stocks, short sellers become bold and bearish. Their views are supported by bad news and poor economic data. Prognostication of lower prices to come is undoubted. This is when everyone knows that the market cannot ever go up again, and that anything, even cash, is preferable to owning stocks.

WALL OF WORRY

While the broad indices are still going down, certain sectors will have bottomed. At some point, everyone who wants to sell has done so, and the selling stops. Low prices and relative value returns, and early buyers with deep pockets begin to nibble at the market. The net effect is that the major stock indexes stop plunging and begins to dribble or moves sideways.

This area is where we find a buildup of participants in position to write buy tickets, producing potential buy pressure. With sellers gone, the market even goes up on bad news. Rallies are labeled as ‘technical bounces’ or are written off as ‘short covering’. Short positions add more on every bounce, confident that lower prices are around the corner. When good news trickles in, it is summarily dismissed as aberrations, subject to revision next month.

AVERSION TO DENIAL

Sustained directional trending action to the upside begins between the Aversion phase and the Denial phase. As the market slowly creeps up, the shorts start to sweat while those who don’t own a piece of the action vow to themselves that they will get in on the next dip that they believe is sure to come. The market continues higher and does not let them in.

More and more bids materialize as buyers show up again while shorts begin to cover. Since there are not many sellers overhead, the move up can be big and fast, and on low volume. If it keeps going, eventually those left behind in the dust have to get in again, and the loop continues.

CONCLUSION

Take note of the way churning precedes trending as an entire group of market participants are trapped in the wrong direction. Indeed, we could argue that trends can only take place after a large group of market participants have been lulled into believing the status quo will last infinitely. When the reversal finally takes place, the ensuing mad scramble becomes a directional trend.

The sentiment loop neatly summarizes the market and all its associated psychosis in a nutshell. I use the word psychosis on purpose, as it is medically defined as “a loss of contact with reality, typically including delusions (false ideas about what is taking place or who one is) and hallucinations (seeing or hearing things which aren’t there).” It is the only way to describe the things that people do at the tops and bottoms. It is similar to how some people break with reality when playing games such as Dungeons and Dragons, and their existence enters another realm. What we must do is to know where we are on the map at all times and maintain a separate sense of self by standing on the outside as impartial observers. That is the only way to preserve sanity and to make money.

[DbPhoenix 42]

So it's hers? Excellent. Thanks for posting.

 

This sort of reminds me of something I've included in one of my pdfs:

 

 

.

[DbPhoenix 42]

As for the top-down approach to selecting stocks, I don't know how many people still do this since it's so much easier nowadays to scan for stocks using indicators (e.g., MA crosses) or candle patterns. But even if one takes the bottom-up approach, it still pays to check the various groups of which the stock is a part to see if he's out there all by himself or he's got lots of company.

 

At the very least, one ought to keep track of what's going on the sectors, even if he trades only index futures. There are only nine of them, after all (not counting Telecommunications), and keeping tabs on them has become easier than falling off a log since the invention of ETFs.

 

Reviewing these, it is clear that Technology (XLK) is weak. It may be bottoming, and it is showing signs of accumulation. But, for now, it's weak. If we go to BigCharts and click Technology, we get a list of the major groups in that sector, in this case, 2. If we look at those charts, we see that Hardware and Equipment is a nice match:

 

 

 

Under Hardware and Equipment, there are two subgroups that are also weak, Eletronic Office Equipment -- which is forming a hinge -- and Telecommunications Equipment:

 

 

 

Now if we go to each of these subgroups, we can get a list of all the stocks that belong to that particular category. Unfortunately, BigCharts doesn't provide scanning by price or market cap, so the universe of stocks is often broad, to say the least. But it's free. And if you scan the list for companies that you've actually heard of, their market cap is likely to be acceptable, at least at this level of screening.

 

For Electronic Office Equipment, we get this prospect (the purple line is the group):

 

 

Pitney had its problems all at once and has been trading sideways for nearly six months. Perhaps its downside is limited. However, it's also forming a hinge:

 

 

For the other subgroup, Telecommunications Equipment, we get this prospect, one that most likely everyone has heard of:

 

 

And this one has some possibilities:

 

 

At this point, of course, one then goes on to analyze the individual stock charts. But for now, this gives you an overview of the process.

 

Clearly, you have to love doing this. Even if you scan for stocks bottom up using indicator or candle scans, you have to love doing it. I stopped loving doing it long ago, the day I discovered eminis. And I haven't researched a stock since.

 

But for those of you who remain bright-eyed and bushy-tailed and still love doing it, this is more or less the process.

 

.

[cantana 10]

So it's hers? Excellent. Thanks for posting.

 

 

Doh!

All this time I've been reading the first line as "discussed with Justin Mamis" :doh:

[DbPhoenix 42]

Doh!

All this time I've been reading the first line as "discussed with Justin Mamis" :doh:

My copy of Nature of Risk is packed away somewhere, so I can't referee. But they think alike, so.....

[gassah 10]

I guess this board is okay for this since Wyckoff encouraged swing analysis. I'm wondering if this is a bullish chart as it comes down to support. It seems to be struggling down; it went up more easily (label "1"). It's taken more bars to come down yet it's much higher than the 2/20 low. Concepts borrowed from McLaren. His ebook is a good read, IMO. http://www.mclarenreport.net.au/articles/

 

nic

 

 

 

 

 

 

 

 

[gassah 10]

Concepts borrowed from McLaren.

 

I think he suggests waiting for a ST higher low in this kind of situation.

[DbPhoenix 42]

It also depends on timeframe and bar interval, which takes you back to Dow (where would Elder be without Dow?). Using the NQ for an example:

 

 

Notice we are not only finding resistance at the August swing low, but all this is taking place in the same zone we were in 18mo ago.

 

And for a very short-term example:

 

 

Of course, many people will say Yeah, well, I've seen charts like this a lot of times but so what? What do I do with it?

 

What one does with it is note the differences between the length and slope of the swings. In this case, it tells you to focus on the downside rather than try to fight what W called the "stride", at least until the character of these swings reverses.

Edited April 14, 2008 by DbPhoenix

[erierambler 10]

Of course, many people will say Yeah, well, I've seen charts like this a lot of times but so what? What do I do with it?

 

What one does with it is note the differences between the length and slope of the swings. In this case, it tells you to focus on the downside rather than try to fight what W called the "stride", at least until the character of these swings reverses.

 

Kinda reminds me of Magee, speaking of the Greeks, "nothing in excess", "measure in all things". In otherwords , don't get too caught up , but pay attention.......

erie

[DbPhoenix 42]

I should also point out, given that this is the first day of trading after the initiation of the thread, that W advocated entering on swings rather than on breakouts. So, for example, one would look to enter somewhere in the trough of the retest after a selling climax.

[gassah 10]

There are examples of him buying breakouts in the course but it wasn't his first choice.

 

nic

[DbPhoenix 42]

I don't recall where I read this, but at some point he said that the best entry -- though the most aggressive -- was the climax; second best, the test; worst, the breakout above the intervening swing point, largely because everybody on the planet is looking at that point.

[DbPhoenix 42]

On the one hand, it's awfully arrogant of anyone to say Well, Wyckoff would have done this or Wyckoff would have done that. But it is fun (if you don't get out much) to speculate about what he might have done.

 

For example, with all these index minis, I suspect he wouldn't even have bothered to trade any of this sideways movement since mid-January. If he did, his stop would probably have to be above 1900:NQ. Whether he would have agreed with my suggestion for today's short is anybody's guess.

[cantana 10]

I don't recall where I read this, but at some point he said that the best entry -- though the most aggressive -- was the climax; second best, the test; worst, the breakout above the intervening swing point, largely because everybody on the planet is looking at that point.

 

 

I wonder if, considering an entry during a climax, he would hold on into a retest? Or maybe he was planing to staying in only as long as it turned out to be a V bottom?

I don't see how entering at the climax would be advantages otherwise.

 

I'm just thinking about the “poke” effect on a W

[DbPhoenix 42]

I wonder if, considering an entry during a climax, he would hold on into a retest? Or maybe he was planing to staying in only as long as it turned out to be a V bottom?

I don't see how entering at the climax would be advantages otherwise.

 

I'm just thinking about the “poke” effect on a W

 

Well, assuming that he was better at all this, he'd also be better about distinguishing between a "preliminary" selling climax and the real thing. In any case, the stop is below the climax swing. If the test were a lower low, I assume he'd stop himself out and re-enter. To do otherwise might be to assume that one has information that one doesn't really have but is actually hoping, instead.

 

The advantage, of course, is getting in at a lower price, but there is also the advantage of having all the short-coverers propel you into a profit position fairly quickly, along with all those who were supporting the reversal in the first place.

[treadstone 10]

Wouldn't it be great to bring Wyckoff back, he'd probably tune in within around 10 minutes and start making money out of the e mini's.