Wyckoff Method

(1)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Law o Supply an

d Demand

by Jerry Garner jr

Te Law o Supply and Demand

1. States that when demand is

greater than supply, prices will

rise, and when supply is greater

them demand, prices will all.

Here the analyst studies the

relationship between supply

versus demand using price &

volume over time as ound on

the bar chart.

2. Te L

2. Te Law o Cause & Eﬀaw o Cause & Eﬀectect

Postulates

Postulatesthat in order to havethat in order to have

an eﬀect will be in proportion

to the cause. Tis law is

seen working as the orce o

accumulation or distribution

within a trading range.

3. Te Law o Eﬀort Versus Result

divergences and disharmonies

between volume and price ofen

presage a change in the direction

o the price trend & helpul or

indentiying accumulation verses

distribution & gauging eﬀort.

•

• Demand reers to how much (quantity) o a product or service is desired by buyers. Te quantity demanded is the amount oDemand reers to how much (quantity) o a product or service is desired by buyers. Te quantity demanded is the amount o

a product people are willing to buy at a

a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as thecertain price; the relationship between price and quantity demanded is known as the

demand relationship

demand relationship. Te analyst . Te analyst studies the relationship between supply studies the relationship between supply vs. demand using price and vs. demand using price and volume over time.volume over time.

•

• Supply represents how much the market can oﬀer. Te quantity supplied reers to the Supply represents how much the market can oﬀer. Te quantity supplied reers to the amount o a certain amount o a certain good producers aregood producers are

willing to supply when receiving a certain price. Te correlation between price and how much o a

willing to supply when receiving a certain price. Te correlation between price and how much o a good or service good or service is suppliedis supplied

to the market is known as the

to the market is known as the supply relationshipsupply relationship. Price, thereore, is a reﬂection o supply and demand.. Price, thereore, is a reﬂection o supply and demand.

•

• Te Law o Demand states, the lower something’s price is, the more demand there is or it and the relationship betweenTe Law o Demand states, the lower something’s price is, the more demand there is or it and the relationship between

demand and price is an inverse relationship

demand and price is an inverse relationship. As one goes up, the ot. As one goes up, the other comes down. Te Law o Supply states, the higherher comes down. Te Law o Supply states, the higher

something’

something’s price is, the s price is, the more it will be supplied and the relationship between supply and price is a more it will be supplied and the relationship between supply and price is a direct relationship. As onedirect relationship. As one

goes up, the other goes up.

•

• Supply and demand is the basic oundation o economics However Supply and demaSupply and demand is the basic oundation o economics However Supply and demand is the eﬀect, not nd is the eﬀect, not the cause. Somethingthe cause. Something

happens, and supply increases or demand decreases (or both) causing price to go down, or something happens and supply

goes down or demand goes up (or both) causing price to

goes down or demand goes up (or both) causing price to go up. Te “something” is the cause, and the change in supply/go up. Te “something” is the cause, and the change in supply/

demand is the eﬀect. So, yes,

demand is the eﬀect. So, yes, price went up because o an increase in demand however, it is the cause or the change inprice went up because o an increase in demand however, it is the cause or the change in

supply and demand that caused the price change. trading is the perception and speculation o what the change in supply and

demand will be.

•

• Markets move oﬀ o the imbalance o supply and demand, a imbalance o supply and the market has to all, Markets move oﬀ o the imbalance o supply and demand, a imbalance o supply and the market has to all, a imbalance oa imbalance o

demand and the market has to rise. Accumulation rom the Supply/Demand perspective is demand coming in to gradually

overcome and absorb the supply and to support the market at this price le

overcome and absorb the supply and to support the market at this price level. Distribution rom the Supply/Demandvel. Distribution rom the Supply/Demand

perspective is

perspective is where the Supply overcomes Demand and stops where the Supply overcomes Demand and stops the upward move and eventually begins tthe upward move and eventually begins the downward move.he downward move.

Distribution reers to the elimination o a long investment or speculative position and ofen involves establishing a speculative

Distribution reers to the elimination o a long investment or speculative position and ofen involves establishing a speculative Te mechanics o the markets are so

Te mechanics o the markets are so complicated that one must breakcomplicated that one must break

it down into some oundational guidelines that encompass the whole,

then build upon that oundation slowly and methodically until it

makes sense and becomes a high probability, low risk undertaking.

(2)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Law o Cause & Eﬀect

by Jerry Garner jr

the bar chart.

2. Te L

Postulates

•

• A second basic principle underlying all analytical efforts is A second basic principle underlying all analytical efforts is the law o cause and effect. Te idea the law o cause and effect. Te idea here is that in order or therehere is that in order or there

to be an eﬀect t

to be an effect that shows up as a change in the price o a hat shows up as a change in the price o a stock, there must first be a stock, there must first be a cause. In its most basic state, tcause. In its most basic state, this lawhis law

seems very much the s

seems very much the same as the law o supply and demand. In the cases o ame as the law o supply and demand. In the cases o the individual trades mentioned, the cause is thethe individual trades mentioned, the cause is the

buyer’

buyer’s desire to hold the shares, or s desire to hold the shares, or the seller’s desire to have dollars. In one case the cause is expressed in terms the seller’s desire to have dollars. In one case the cause is expressed in terms o demando demand

and in the other in terms o

and in the other in terms o supplysupply..

•

• A cause can be stated in terms A cause can be stated in terms o the reason behind an individual trade. In the making o o the reason behind an individual trade. In the making o important proﬁts in the stockimportant proﬁts in the stock

market, however

market, however, the signiﬁcance o each individual trade is , the signiﬁcance o each individual trade is greatly reduced. Here the idea o a cause must be taken moregreatly reduced. Here the idea o a cause must be taken more

broadly

broadly, Te eﬀect realized by a , Te eﬀect realized by a cause will be in cause will be in direct proportion to that cause. Consequently, to get an important move, ordirect proportion to that cause. Consequently, to get an important move, or

eﬀect there must be an important cause. Tese are not

eﬀect there must be an important cause. Tese are not built rom one trade, but rather take time, sometimes built rom one trade, but rather take time, sometimes a long time, toa long time, to

develop.

•

• Generally these causes are built during an important shif in who is Generally these causes are built during an important shif in who is holding the stock. Te ﬂow o shares that is holding the stock. Te ﬂow o shares that is o greatesto greatest

signiﬁcance is the one that occurs as

signiﬁcance is the one that occurs as shares leave the strong hands o the proessional traders and go to the weaker hands oshares leave the strong hands o the proessional traders and go to the weaker hands o

the general public.

•

• Every market advance begins only afer the proessional traders have all, or just about all, Every market advance begins only afer the proessional traders have all, or just about all, the shares they desire. Once thethe shares they desire. Once the

move begins, it will b

move begins, it will be carried orward primarily by the increasing and emotional buying o the public. Te emotion at worke carried orward primarily by the increasing and emotional buying o the public. Te emotion at work

here, by the way, is greed. Te knowledgeable trader will go with the upward trend o the advance as long as prices continue

to move up e

to move up easily.asily.

•

• Te idea is to measure this Te idea is to measure this cause and project the extent o its eﬀect. Te cause and project the extent o its eﬀect. Te excesses that develop in supply and demand are notexcesses that develop in supply and demand are not

random but are the result o key events in market action or the result o

random but are the result o key events in market action or the result o periods o preparation. Tis law’s operation can beperiods o preparation. Tis law’s operation can be

seen working as the orce o accumulation or distribution within a trading range that works itsel out in the subsequent move

out o that trading range. Tis law can be seen

out o that trading range. Tis law can be seen working over a group o bars.working over a group o bars.

Richard D. Wyckoﬀ devised three laws that gove

Richard D. Wyckoﬀ devised three laws that govern market dynamics.rn market dynamics.

Tese laws tell you how and why the markets work. Te law o Supply

and Demand is the most undamental and overriding aspect o

market dynamics. Te other two laws act on and measure Supply

and Demand.

(3)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Law o Eﬀort vs Result

by Jerry Garner jr

the bar chart

2. Te L

Postulates

•

• states that the change in price o a tstates that the change in price o a trading vehicle is the result o an eﬀort expressed by the rading vehicle is the result o an eﬀort expressed by the level o volume & that harmonylevel o volume & that harmony

between eﬀort & result promotes urther price movement while lack o harmony promotes a change in direction. Te law o

eﬀort (volume) verses result (price) is action, this

eﬀort (volume) verses result (price) is action, this law can be seen working on one bar.law can be seen working on one bar.

•

• o get a o get a better idea o better idea o how the concept o how the concept o eﬀort versus result works and how it eﬀort versus result works and how it can help protect against disaster, consider yetcan help protect against disaster, consider yet

another hypothetical situation. It begins with a stock that explo

another hypothetical situation. It begins with a stock that explodes upward by six points. Te volume is ten thousand shares.des upward by six points. Te volume is ten thousand shares.

Te next day, there is an additional advance o our points and trading expands to twenty thousand shares. At this point,

many people are making a lot o money. Tis is also t

many people are making a lot o money. Tis is also the type o situation that brings out an incredible amount o greed. Onhe type o situation that brings out an incredible amount o greed. On

the third day, the stock takes on an additional two points while

the third day, the stock takes on an additional two points while the volume soars to orty-thousand shares. Ten day numberthe volume soars to orty-thousand shares. Ten day number

our comes and this time the “wonder stock” only advances hal a point. Te

our comes and this time the “wonder stock” only advances hal a point. Te volume, howevervolume, however, tops the hundred thousand, tops the hundred thousand

share level.

•

• Is it clear what is happening in this case? Is it clear what is happening in this case? ObviouslyObviously, the price is , the price is moving up and the volume is expanding. Tat should bemoving up and the volume is expanding. Tat should be

a good sign and in many cases

a good sign and in many cases it is a good indication or the it is a good indication or the uture. In this case, though, it creates a problem. As tuture. In this case, though, it creates a problem. As the stockhe stock

advances, the amount o each successive advance decreases. Te volume on the ot

advances, the amount o each successive advance decreases. Te volume on the other hand increases steadily throughout theher hand increases steadily throughout the

our days. Tis results in a clear case o

our days. Tis results in a clear case o an eﬀort without a corresponding result. It produces a warning o potential trouble.an eﬀort without a corresponding result. It produces a warning o potential trouble.

Anyone not already in this stock is well advised

Anyone not already in this stock is well advised not to get in, at least not to get in, at least not at this dangerous time. Tose already holdingnot at this dangerous time. Tose already holding

positions should protect themselves as best

positions should protect themselves as best they can, or just get out. they can, or just get out. Until it can be determined why the result is laggingUntil it can be determined why the result is lagging

behind the eﬀort or until the s

behind the effort or until the situation corrects itsel, there is the potential or disaster. Te chart at the bituation corrects itsel, there is the potential or disaster. Te chart at the bottom o exhibit fiveottom o exhibit five

shows how this concept o eﬀort without result might look in actual

shows how this concept o eﬀort without result might look in actual practice.practice.

Te price o every equity moves up or down because there is an excess

o demand over supply or supply over demand, the Law o Eﬀort vs.

Results - divergencies and disharmonies between volume and price

ofen presage a change in the direction

(4)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ

Wyckoﬀ Schematics O

Schematics O

Market

Phases

Whckoﬀ Schematics

1. Wyckoﬀ empowers the

trader-analyst with a balanced, whole

analyst with a balanced, whole

brained approach to technical

analysis decision making. Te

schematics provide picture

dia-grams as a right-brained tool to

grams as a right-brained tool to

complemen

complement the t the lef-brained ana-lef-brained

ana-lytical checklists urnished by the

lytical checklists urnished by the

Wyckoﬀ three laws and nine tests.

2. One objective o the Wyckoﬀ

method o technical analysis

is to improve market timing

when establishing a speculative

position in anticipation o a

coming move where a avorable

reward/risk ratio exists to justiy

taking that position.

3. o be successul, you must be able

to anticipate and correctly judge

the direction and magnitude o

the move out o the R.

rad

rading ranges ing ranges are places where the previous move has been haltedare places where the previous move has been halted

and there is relative equilibrium between supply and de

and there is relative equilibrium between supply and demand. It ismand. It is

here within the R that campaigns o

here within the R that campaigns o accumulation or distributionaccumulation or distribution

develop in preparation or the coming bull or bear trend.

develop in preparation or the coming bull or bear trend. It is thisIt is this

orce o accumulation or distribution that can be said to build a

cause that unolds in the subsequent move.

(5)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Whckoﬀ Schematics

1. Wyckoﬀ empowers the

trader-analyst with a balanced, whole

analyst with a balanced, whole

brained approach to technical

analysis decision making. Te

schematics provide picture

dia-grams as a right-brained tool to

grams as a right-brained tool to

complemen

complement the t the lef-brained ana-lef-brained

ana-lytical checklists urnished by the

lytical checklists urnished by the

Wyckoﬀ three laws and nine tests.

2. One objective o the Wyckoﬀ

method o technical analysis

is to improve market timing

when establishing a speculative

position in anticipation o a

coming move where a avorable

reward/risk ratio exists to justiy

taking that position.

3. o be successul, you must be able

to anticipate and correctly judge

the direction and magnitude o

the move out o the R.

rad

rading Ranges present avorable short-teing Ranges present avorable short-term trading opportunitiesrm trading opportunities

with potentially very

with potentially very avorable reward/risk parameters.avorable reward/risk parameters.

Nevertheless, great reward comes with participation in the trend that

emerges rom the rading Range. Wyckoﬀ oﬀers unique guidelines by

which the trader-analyst can examine the phases within a R

which the trader-analyst can examine the phases within a R..

visual representation of the Wyckoﬀ market action typically found within a TR

(6)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Phases o Accumulation

1.

1. Lines A and B deﬁne support oLines A and B deﬁne support o

the trading range, while lines C

and D deﬁne resistance.

2. Phase A: o stop a downward

trend either permanently or

temporarily.

3. Phase B: o build a cause within

the trading range or the next

eﬀect and trend.

4. Phase C: Smart money “tests”

the market along the lower and/

or the upper boundaries o the

trading range. Here one observes

“springs” and/or “jumps” and

“backups”.

5.

5. Phase D: Deﬁnes the “line o leastPhase D: Deﬁnes the “line o least

resistance

resistance” with the ” with the passage o thepassage o the

nine buying tests.

6.

6. Phase E: Te mark up or thePhase E: Te mark up or the

upward trending phase unolds.

Wyckoﬀ model or accumulation is not a schematic or all the

possible variations within the anatomy o a 

possible variations within the anatomy o a rading Range, it doesrading Range, it does

provide the important W

provide the important Wyckoﬀ principles that are evident in anyckoﬀ principles that are evident in an

area o accumulation. It also shows the key phases used to guide

our analysis rom the beg

our analysis rom the beginning o the radiinning o the rading Range with a sellingng Range with a selling

climax, through building a cause

climax, through building a cause until the taking o a position.until the taking o a position.

(7)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Accumulatio

Accumulation n Schematic DeﬁnedSchematic Deﬁned

1.

1. PS (1) – preliminary support,PS (1) – preliminary support,

where substantial buying begins

to provide pronounced support

afer a

afer a prolonged down-move.prolonged down-move.

Volume and the price spread

wid-en and provide a signal that the

en and provide a signal that the

down move may be approaching

its end.

2.

2. SC (2) – selling climax, the pointSC (2) – 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 proessional interests at

prices near the bottom. At the

low

low, the , the climax helps to deﬁne theclimax helps to deﬁne the

lower level o the R.

3. AR (3) – automatic rally, where

selling pressure has been

exhausted. A wave o buying

can now easily push up prices,

which is urther uelled by short

covering.

(8)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Accumulatio

1. S (4, 5, 8) – secondary test, price

revisits the area o the s

revisits the area o the selling cli-elling

cli-max to test

max to test the supply/demand atthe supply/demand at

these price levels. I a bottom is to

be conﬁrmed, signiﬁcant

be conﬁrmed, signiﬁcant supplysupply

should not resurace, and volume

and

2.

2. Te Creek (6) – is a wavy line oTe Creek (6) – is a wavy line o

resistance drawn loosely across

rally peaks within the

rally peaks within the tradingtrading

range. Tere are minor lines o

resistance and a more

resistance and a more signiﬁcantsigniﬁcant

“creek” o supply that will have

to be crossed beore the market’s

journey can contin

journey can continue onwarue onward andd and

upward.

(9)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Springs or Shakeouts (7) Deﬁned

1.

1. Usually occur late within theUsually occur late within the

trading range and allow the

dominant players to make a

deﬁnitive test o available supply

beore a markup campaign will

unold.

2. I the amount o supply that

suraces on a break o support is

very light (low vol

very light (low volume), it will beume), it will be

an indication that the way is clear

or a sustained advance.

3. Heavy supply here usually means

a renewed decline.

4. Moderate volume here may mean

more testing o support and a

time to proceed with caution.

5.

5. Te spring or shakeout alsoTe spring or shakeout also

serves the purpose o

serves the purpose o providingproviding

dominant interests with

additional supply rom weak

holders at low prices.

(10)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Accumulation

Accumulatio

1.

1. Jump (9) – continuinJump (9) – continuing the creekg the creek

analogy, the point at which

analogy, the point at which priceprice

jumps through the

jumps through the resistanceresistance

line; a bullish sign i the

line; a bullish sign i the jump isjump is

achieved with increasing speed

and volume.

2.

2. SOS (10, 12) – sign o strength, anSOS (10, 12) – sign o strength, an

advance on increasing spread and

volume, usu

volume, usually over some ally over some level olevel o

resistance

3.

3. BU/LPS (13) – last point oBU/LPS (13) – last point o

support, the ending point o a

reaction or pullback at which

support was met. Backing up

to an LPS means a pullback

to support that was ormerly

resistance, on diminished spread

and volume afer an SOS. Tis

is a good

is a good place to initiate longplace to initiate long

positions or to add to proﬁtable

ones.

(11)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Distribution

Accumulatio

1.

1. PS (1) – Preliminary Supply isPS (1) – Preliminary Supply is

where substantial selling begins

to provide pronounced resistance

afer an up move. Volume and

spread widen and provide a

sig-nal that the up move may be

nal that the up move may be

ap-proaching its end.

proaching its end.

2.

2. BC (2) – Buying Climax is theBC (2) – Buying Climax is the

point at which w

point at which widening spreadidening spread

and the orce o

and the orce o buying climaxes,buying climaxes,

and heavy or urgent buying by

the public is being ﬁlled by larger

proessional interests at prices

near a top.

3.

3. AR (3) – Automatic ReactioAR (3) – Automatic Reaction withn with

buying pretty much

buying pretty much exhaustedexhausted

and heavy supply continuing an

AR ollows the BC. Te low o this

selloﬀ will help deﬁne the bottom

o the rading Range (R).

(12)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Distribution

Accumulatio

1. S

1. S – Secondary – Secondary est(s) revisit theest(s) revisit the

area o the Buying Climax to test

the demand/supply balance at

these price levels. I a top is

these price levels. I a top is to beto be

conﬁrmed, supply will outweigh

demand and volume and spread

should be diminished as the

mar-ket approaches the resistance area

ket approaches the resistance area

o the BC.

2. SOW

2. SOW – Sign o – Sign o WWeakness at pointeakness at point

10 will usually occur on increased

spread and volume as compared

to the rally to

to the rally to point 9. Supply ispoint 9. Supply is

showing dominance. Our ﬁrst

“all on the ice” holds and we get

up try to orge ahead.

3. Te ice is an analogy to a wavy

line o support drawn loosely

under reaction lows o the

rad

rading Range. A ing Range. A break throughbreak through

the ice will likely be

the ice will likely be ollowed byollowed by

attemp

attempts to get ts to get back above it.back above it.

(13)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Distribution

Accumulatio

1. UAD

1. UAD – UPthrust Afer– UPthrust Afer

Distributio

Distribution Similar n Similar to the to the SpringSpring

and erminal Shakeout in the

trading range o

trading range o AccumulationAccumulation,,

a UAD may occur in a R or

distribution. It is more deﬁnitive

test o new demand afer a

breakout above the resistance line

o the R and usually occurs in

the latter stages o the R.

2.

2. I this breakout occurs on lightI this breakout occurs on light

volume with n

volume with no ollow throo ollow throughugh

or on heavy volume with a

breakdown back into the

breakdown back into the centercenter

o the trading range, then this is

more evidence that the R was

Distributio

Distribution n not not AccumulatioAccumulation.n.

3. Tis UAD usually results in

weak holders o short positions

giving them up to more dominant

interests, and also in more

distribution to new, less inormed

buyers beore a decline.

An upthrust is the opposite o a spring. It is a price move above the

resistance level o a

resistance level o a trading range that quickly reverses itsel andtrading range that quickly reverses itsel and

moves back into the t

moves back into the trading range. An upthrust is a “bull rading range. An upthrust is a “bull traptrap” – it” – it

appears to signal a start

appears to signal a start o an uptrend but in reality marks the eo an uptrend but in reality marks the end ond o

the up move.

(14)

Te Whyckoﬀ rading Method 1930:

A Case Study o the US Stock Ma

rket

Wyckoﬀ Schematic O Distribution

Accumulatio

1. LPSY

1. LPSY – Last Point – Last Point o Supplyo Supply

afer we test the ice (support)

on a SOW, a eeble rally attempt

on narrow spread shows us the

diﬃculty the market is having in

making a urther rise. Volume

may be light or

may be light or heavyheavy, showing, showing

weak demand or substantial

supply. It is at these LPSY’s that

the last waves

the last waves o distribution areo distribution are

being unloaded beore markdown

is to begin.

2.

2. Afer a break through the ice, aAfer a break through the ice, a

rally attempt is thwarted at the

ice’s surace (now resistance). Te

rally meets a

rally meets a last wave o supplylast wave o supply

beore markdown ensues. LPSY’s

are good places to initiate a short

position or to add to already

proﬁtable ones.

3. In Phase E, the stock or

commodity leaves the R and

supply is in control.

Within the dynamics o a rading Ran

Within the dynamics o a rading Range, the orce o accge, the orce o accumulationumulation

or distribution gives us the cause and the potential opportunity or

substantial trading proﬁts.