Trading The Wyckoff Way

[DbPhoenix 42]

As one might expect after a trend day, particularly one worth so many points and which represented a substantial failure on the part of bulls, Thursday would not be and was not about drama.

 

But assuming that one had no bias toward the day, he would note first that the market was going to open (the red vertical bar) at or about the midpoint of the 5/1 upmove (1962). This, in and of itself, would be of secondary importance or less. The fact that that midpoint was on the same level as the low of the day on 5/6 might help to account for the level at which Thursday opens, but, again, it’s not all that important. What is more important is that price does not retest 1950 and ricochet off 1962, nor does it punch through 1962, test that, then rocket higher. Rather it just sits there, for an hour and a half, on moderately high but unremarkable and relatively featureless volume. Therefore, unless the trader wants to manufacture a trade, there’s really nothing to do unless and until support is tested on the one hand, or the nearest resistance at the midpoint of the previous day’s downmove (1978) is tested on the other.

 

The trader, after all, must remember that the proper entry here was at or near 1950 the previous day. Whether he took the entry or not is irrelevant. The market doesn’t care whether he took it or not. It only knows where he should have taken it. If he didn’t take it, he has to keep in mind that any other entry is second-best, if not third or worse. If he has a strategy for pyramiding, this may be the time to implement it. If he doesn’t, his choices are limited: wait and gauge the relative strengths of the bulls and bears or go ahead and buy with a very wide stop.

 

[DbPhoenix 42]

Whether or not one buys the higher low that occurs between 1045 and 1100, one can now draw a demand line underneath that low, beginning with the previous day’s low. Note that this is a demand line, not a trend line. It tracks those levels at which demand enters the market and stops or turns price. Therefore, whether 17 hours’ worth of time bars are included or not is irrelevant. One can use P&F or, as here, he can use CVBs. Since only two “points” are needed, the line can be extended toward the EOD.

 

 

Once this line is plotted, it can be copied and another, parallel line placed at what has so far been the swing high. This is also extended toward the EOD so that the trader can monitor the behavior of price if and when it approaches this line.

 

[DbPhoenix 42]

Shortly after 1100, price does approach, then push through, this line, becoming “overbought” by virtue of having pushed through the line. A few minutes later, it pushes further to the midpoint of Wednesday’s downmove. If the trader were long, should he exit here? Should he go short? That depends on the trader. But this is where the bears gain the upper hand and turn price back, not out of the blue, but at the confluence of these two important levels (compare the time chart to the CVB chart).

 

[DbPhoenix 42]

Thereafter, price reverses at 1966, though there’s no way of knowing that it will, and volume does not provide a clue until price hits this level a second time, after lunch. Whether one closes his short and goes long here depends on how confident he is that support is to be found in this area. But the point of this is not to find trading opportunities per se; it is rather to gauge the relative strength of bulls and bears. So far, the bulls are in control as shown by the higher lows.

 

Price thereafter makes a higher high, again “overbought”, followed by a higher low. If one is going to trade this, volume does provide clues at turning points, but a central and perhaps more important concern is just how far bulls can push price. If it cannot reach the previous day’s midpoint, this suggests weakness. On the other hand, if it can get past the midpoint, this suggests strength, either of which carries implications for the following day’s trading. This second higher high at 1400 does push past the midpoint, suggesting strength. And it appears to make a higher low a half hour later.

 

However, price now drops below the demand line and is unable to push back through it for more than a couple of points for more than a few minutes. This represents a change in the dynamic between bulls and bears which, again, is the point of plotting these lines and monitoring the relationship of price to them and to the support represented by the previous day’s low and the resistance represented by the midpoint of the previous day’s downmove. Again, one can trade this and, yes, one can make money with it. But, according to Wyckoff, the likelihood of doing so is enhanced by being sensitive to this push and pull between demand and supply and being able to place all of it in the right context. Otherwise, one is more likely to be making random trades, i.e., gambling.

 

Here, again, the supply line is drawn first, then a parallel line is plotted underneath to track demand.

 

[DbPhoenix 42]

One who understands how to interpret charts correctly can usually decide whether the whole market, or any single stock, or group of stocks, is most likely to advance, decline or stand still. Every market and every stock is always in a bullish, bearisn or neutral position. The person who can determine, with a high percentage of accuracy, the position in which the market, or a group, or a certain stock stands, holds the key to success in trading and investing.

 

Richard Wyckoff

Edited May 9, 2008 by DbPhoenix

[DbPhoenix 42]

For those who follow the ES, note that it never even made it to the previous day's midpoint, much less establish a trend. The fact that it could not do so suggests weakness.

 

The red lines are the midpoints of the respective moves. The dotted line is both a support and a resistance line, depending on where price is in relation to it during this period. The black line is, of course, the midpoint of the post 4/18 trading range.

 

[treadstone 10]

Very good series of posts there, Db. Thank you.

[Bearbull 10]

Zeon,

Hope you have gained more insight now , another illustration to reinforce what has been outlined in the posts here,

 

NQ 1,2 : prices fall with increasing vol. to 1965 , and bounces off the up trendline, you then have the classic VSA signals, downbar on high vol, followed by tests on low vol, Go Long,

 

NQ 3, however the traders had other ideas, the prices go down on low vol breaking the trendline because the demand is of poor quality. they do not tell you that in the VSA school. Had the market gone up from 1965, they would have come out and claimed how good VSA signals are. Have seen this countless times in their seminars, illustrations of setups which panned out.

 

My final effort to provide you with the incentive to seek answers from the charts rather than from any outside source.

[Bearbull 10]

Zeon,

And ofcourse another ideal long setup, hammer, doji, dragonfly right at the support from left 1963, palm tree in florida (VSA mantra), all signs of strength.

 

They talked about all the 9 principles of signs of strength and weakness in their seminars , however when somebody from the audience asked where is the entry and the stop loss, in short, how do you trade this. The answer was: it is up to the skill of the trader, all the 3 presenters claimed their style of trading would not suit everyone;)

[zeon 10]

Zeon,

And ofcourse another ideal long setup, hammer, doji, dragonfly right at the support from left 1963, palm tree in florida (VSA mantra), all signs of strength.

 

They talked about all the 9 principles of signs of strength and weakness in their seminars , however when somebody from the audience asked where is the entry and the stop loss, in short, how do you trade this. The answer was: it is up to the skill of the trader, all the 3 presenters claimed their style of trading would not suit everyone;)

 

 

If those are ideal long setups, than just watch how it goes down to 1952 again.

[Bearbull 10]

If those are ideal long setups, than just watch how it goes down to 1952 again.

 

Yes I know that, I wanted to bring to your attention the ideal setups as per the VSA tutors, :crap: now you can ask them why it did not work that time, same to the candlesticks folks, am sure they will all come up with some justification.

[zeon 10]

Yes I know that, I wanted to bring to your attention the ideal setups as per the VSA tutors, :crap: now you can ask them why it did not work that time, same to the candlesticks folks, am sure they will all come up with some justification.

 

VSA, Wyckoff, ... it doesn't matter much. From what I've seen here there's always an excuse at the end of the day why something else happened. Justification seems to happen no matter what approach.

 

Thanks for your efforts Bearbull. I do appreciate them.

[gassah 10]

Justification seems to happen no matter what approach.

 

I don't understand why trades that don't work out need justification. Pros don't get it right 40-60% of the time. I'll look over my trades to see if there was a mistake but the vast majority of the time I can't find anything and just move on. They aren't supposed to work out all the time and I don't get the hangup.

[DbPhoenix 42]

Yes I know that, I wanted to bring to your attention the ideal setups as per the VSA tutors, :crap: now you can ask them why it did not work that time, same to the candlesticks folks, am sure they will all come up with some justification.

 

The point of my posts was not to bash either VSA or candlesticks but to illustrate certain principles that are key to understanding Wyckoff's approach. And even though there is little in common between VSA and Wyckoff, there are those who, for whatever reason, won't be able to understand either one. They may, however, be able to make a fortune with a MACD/stochastic combo.

 

Therefore, let's focus on our business and let others go about theirs. This information is here for whoever chooses to benefit from it. Or not. As for zeon, he's already said goodbye twice, so let's not devote any more thread space to that particular arc.

[DbPhoenix 42]

For those who are interested, there are fourth and fifth editions of Technical Analysis of Stock Trends up for bid on eBay. These are the last editions that Magee updated himself, before "editors" got hold of the material.

[brownsfan019 17]

Yes I know that, I wanted to bring to your attention the ideal setups as per the VSA tutors, :crap: now you can ask them why it did not work that time, same to the candlesticks folks, am sure they will all come up with some justification.

 

As the resident Candlestick guy, I'll tell you that just finding a shape and calling it a reason to trade is exactly why candlestick analysis does not work for some. B/c that's a completely inaccurate way of using them. :doh:

 

Candlestick analysis is not play find a shape even though the majority here who think they know something about them do just that. Context. That's all there is to it.

 

Back to your regularly scheduled program from DB and boys.

[DbPhoenix 42]

Context. That's all there is to it.

 

Indeed....

[DbPhoenix 42]

A couple more points regarding the series of posts I made earlier.

 

1. The purpose behind drawing these lines is not to make the chart look pretty but to draw the trader's attention to those areas, zones, points, levels, whatever where price action is most likely to provide trading opportunities. Whether one draws lines, boxes, circles, arrows, or big, pointy fingers is irrelevant.

 

2. Once those areas, zones, points, etc are identified, volume becomes largely a non-event, i.e., one pays attention to it only at those areas, etc where it is most likely to mean something. That this point is so often overlooked is probably why so many people think volume is useless.

 

For example, using the 1m time bar chart I posted earlier, I've blown up the shaded area:

 

 

 

Until price reaches an area where a trading opportunity is most likely to occur, there's no reason to obsess over the minor ebbs and flows in volume. However, once trading opportunities are on the horizon, what might be considered directionless activity elsewhere suddenly becomes important.

 

Here, for example, when price comes back to 1966 the second time, the fact of the test is interesting enough. That it cannot make a lower low even with all the volume is even more interesting. The bullish boost at 1329-30 becomes more important because of what has come before, as does the volume recession when price pulls back to 1975. When another bullish boost occurs, beginning at 1352, it is significant, again, because of what has come before. And when price makes an attempt at a higher high at 1401 and volume isn't there, that again becomes significant because of what has become before and provides the "classic" double-top price-volume divergence setup for the short. Without the context, none of this matters, and volume is little more than traders going about their business. With the context, it becomes a high-probability short trade.

Edited March 9, 2013 by DbPhoenix

[Bearbull 10]

As the resident Candlestick guy, I'll tell you that just finding a shape and calling it a reason to trade is exactly why candlestick analysis does not work for some. B/c that's a completely inaccurate way of using them. :doh:

 

Candlestick analysis is not play find a shape even though the majority here who think they know something about them do just that. Context. That's all there is to it.

 

Back to your regularly scheduled program from DB and boys.

 

Once again I was merely trying to point out to Zeon that the argument he put forward previously on a trendline example which worked on one occasion and not on the other, similar charts can be presented for any indicator, VSA or RSI , CCI, candlestick patterns etc., Even the dragonfly in my example would work at other times as it is actual on a support level (congestion to the left) in which case somebody can point out : look this validates the signal, here is does not simply because the selling is overpowering demand, as simple as that.

 

I know a thing or two about context and the rest, same with VSA concepts, Wyckoff and Candlestick charting, have been in the business for over 15yrs;)

Back to you regularly scheduled program on candlestick thread

[DbPhoenix 42]

An update to the SPX "forest" chart I posted last week (336 and 344). Whether we go up or down from here is a separate concern from gathering data. The permabulls will miss out on the shorts, the permabears will miss out on the longs.

 

Edited May 14, 2008 by DbPhoenix

[DbPhoenix 42]

Regarding the above chart and the others like it, Wyckoff stresses that, in addition to trend and whatever channels may be formed by apparent consistency in the intrusion of demand and supply, one must also look to previous areas of support and resistance, which is what we're doing now. Yesterday there was an upthrust in the Nasdaq and the Dow. There was also an upthrust of sorts in the SPX, but there've been so many over the past few weeks that they are forming their own base .

 

Whatever these thrusts mean in and of themselves does not matter as much as where they are occurring, i.e., against important, previous support. Therefore, both intraday and EOD traders would do well to concentrate on how price behaves at this particular juncture.

[Tannism 10]

Db...

Whatever these thrusts mean in and of themselves does not matter as much as where they are occurring, i.e., against important, previous support. ........

 

 

It reminds me of the way you developed/refined pulling out the Mamis variables at the edges. The edges being defined by prior convention of the specific index.

 

Another principle?

 

TannisM

[DbPhoenix 42]

Db...

 

 

 

It reminds me of the way you developed/refined pulling out the Mamis variables at the edges. The edges being defined by prior convention of the specific index.

 

Another principle?

 

TannisM

 

Probably not. I was going to post the new high/volume of advancers stuff a couple of days ago, but there's a danger in viewing that kind of data as a "signal". There's an important difference between commentary and "making calls". There's also an important difference between "gathering evidence", as Wyckoff put it, and making "recommendations".

 

I don't recommend going short or long because I really couldn't care less whether anyone does either or neither. It's not my money. But it's important to note that a lower high has been made. Or volume is crap. Or new highs in the underlying aren't keeping up with new highs in the index. Translating "note" into "act", however, takes some doing, and one must have some justification for doing so other than "it seems like a good idea".

 

In any case, stockcharts.com is available to everybody for free, and everyone who's interested ought to know by now what to chart and what to look for. If anyone doesn't, I can look for the posts later and provide links, unless somebody knows where they are and can save me the time.

[Tannism 10]

I don't know where the links are, but here is my quick key for NZ variables (begin na) after the chart you posted recently. Note: the histogram lines have different scales.

 

The NY variables begin with ny.

[DbPhoenix 42]

I don't know where the links are, but here is my quick key for NZ variables (begin na) after the chart you posted recently. Note: the histogram lines have different scales.

 

The NY variables begin with ny.

 

I don't know where they are, either. I may not have posted it at all.

 

In any case, this is how I display it. Note that new highs were not shabby yesterday.