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Analyzing Trends using the Wycloff Method

Wyckoff tells us that the most important thing that anyone can know about the market or anindividual issue is its trend. The trend is most simply defined as being the line of least resistance.Prices will tend to follow the line of least resistance until there is a significant development inthe action that suggests that a change in trend should be anticipated. A trader can look at theprice of a market or issue and compare it to the price from the previous day, week, month or yearand determine the direction in which it is trending. While this can be helpful in keeping a traderon the right side of the action, Wyckoff had something more specific in mind for determining thetrend. He provided guide lines as to the proper way to define a trend so that it could be morehelpful in applying the five steps of the Wyckoff Method.

Trends can be defined in three directions and in at least three time frames. There are up trends,down trends and horizontal trends normally referred to as trading ranges. Trends can be shortterm in nature, intermediate term or long term. The time frames that one Wyckoff trader uses todefine the three durations of trends may be different than another Wyckoff trader uses. This doesnot necessarily mean that one trader is correctly defining the trends and the other is incorrectlydefining them. The important point is that the trends that are defined by consistent with the timeframe of the market operation that is being undertaken. A short term trader may define the shortterm trend as being one that is defined and completed in just a few days. This trader may viewintermediate term trends as being those that are defined and completed over several weeks andhe may look at long term trends as those that last no more than a couple months. Theintermediate term or longer term trader may see the short term traders idea of a long term trendas being his short term trend. These traders may look at intermediate trends as lasting for severalmonths and long term trends as lasting a year and more. These traders cannot be faulted for thedifferent time frames they use to define trends of different durations. A problem only develops ifa trader defines trends in one time frame, but then attempts to operate in a different time frame.This type of error can be fatal for a market operation.

An up trend in any time frame is defined by a demand line and an over bought line. A demandline connects the low points of two consecutive reactions of similar significance where thesecond reaction low is at a higher level than the first. Finding two reaction lows where thesecond is higher than the first is a simple matter. However, some Wyckoff traders who are newto the approach have difficulty with the idea of similar significance. Looking for reactions thatlast for approximately the same number of days or move the price approximately the samedistance can be helpful in identifying reactions of similar significance. While Wyckoff would notnecessarily frown on this approach, he would prefer that the trader identify two consecutivereaction lows that are both important points in the action. The most important points in the actionfor those looking for an up trend are the primary buying opportunities. Combining two of these

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to define the demand line of an up trend is seen as being the best approach.

To complete the definition of an up trend, the Wyckoff trader needs to define the over boughtline of the trend. This line is constructed parallel to the demand line. It passes through the top ofthe rally or advance that is between the two reaction lows used to define the demand line. Acommon error that new Wyckoff traders make in defining the over bought line is to use a top thatcomes before or after the two lows used to define the demand line. Making this error will resultin a trend channel that is either too wide or too narrow. The purpose of the over bought line is toindicate where thrusts in the up trend are likely to end. Defining a trend that is too wide or toonarrow can result in the trader looking for rallies to end higher than is likely or to close outpositions at prices that are lower than necessary.

A down trend is defined by a supply line and an over sold line. The supply line connects the highpoints of two consecutive rallies of similar significance where the top of the second rally is at alower level than the first/ Wyckoff would prefer that two consecutive lows that are bothimportant points in the action be used to define the supply line. The most important points in theaction are those that Wyckoff identifies as primary selling opportunities. The over sold line of adown trend is constructed parallel to the supply line through the low point of the reaction ordecline that separates the two points used to define the supply line. Defining the over sold linethrough a point before or after the two points used to define the supply line will result in adistorted trend.

Normal trend development will have an up trend and a down trend or two trends pointing in thesame direction separated by a horizontal trend or trading range. Trading ranges are defined by asupport level and a resistance level. If a trading range is following an up trend, the resistancelevel will be defined first. If a trading range is following a down trend, the support level will bedefined first. The resistance level of a trading range following an up trend is defined horizontallythrough the high point of the up trend that is being completed. The support level of this tradingrange is constructed parallel to the resistance level and passes through the low point of thereaction that follows the point used to define the resistance level. The trading range is confirmedby the rally that follows the low used to construct the support level if that rally respects theresistance level of the range. The support level of a trading range following a down trend isdefined horizontally through the low point of the down trend being completed. The resistancelevel of this trading range is constructed parallel to the support level and passes through the highpoint of the rally that follows the point used to define the support level. This trading range isconfirmed by the next reaction if that reaction does not make a lower low than the one used todefine the support leve,

Since the trend is the most important thing that any Wyckoff trader can know about the action ofa market or an issue, defining the appropriate trend or trends for the time frame of the marketoperation that is being undertaken is the first thing that a trader should do each time anassessment of the action is made. A chart that does not have accurately defined trends drawn onit is unlikely to produce a profit for the trader. Without trend channels, it is not possible toidentify buying or selling opportunities or to properly asses the progress of an existing position.The trend is your friend as long as you trade in harmony with it.

Stock Market Primary Buying OpportunitiesTest of Springs

After the stock market or an individual issue has been in a spring position and has responded tothe spring with a rally, there is likely to be a test of the spring. The test provides supply with asecond opportunity to come pouring into the market to crush the price and begin a sustaineddecline. In these cases, the test is said to have failed.

However, in those cases where supply does not take control of the action, the test is said to havebeen successful. These are the tests that Wyckoff traders want to consider buying. As was thecase with the spring position, successful tests of springs are likely to be followed by a rally. Mostof the time, the response to the test of a spring takes the price to a higher level than was recordedon the initial response to the spring. Sometimes, the higher high is much higher

The quality of a test of a spring and its desirability as an entry point on the long side aredetermined by price spread and volume. A high quality test is one that unfolds on narrowingprice spreads and decreasing volumes. The ideal test is one where the average volume as the testdevelops is less than the average volume that was seen during the days leading to the springposition.

The same is true with the price spreads. A high quality test will unfold on price spreads that onaverage are narrower than those leading to the spring. A third factor to consider in determiningthe quality of a test is where the low point of the test is in relationship to the low point of thespring. A high quality test will put in a higher bottom than was recorded on the spring.

Not all tests are of high quality. However, not all lower quality tests fail. There are three ways inwhich a test can reveal itself to be of questionable quality. One is by making a lower low thanthe spring. This is a concern especially for the trader who took an initial position on the springbecause it provides supply with another opportunity to step up and take control of the action.

A test can also be considered to be of lower quality if the average volume on the test is greaterthan it was on the development of the spring. The lowest quality tests are those that make alower low than the spring and are done on higher volume. As a general rule, these tests shouldnot be traded. The risk of the test failing is too great if it is of the lowest quality.



With some tests ending well above the low point of the spring while others more nearly reach thelow point of the spring and still others make new lows, it can be difficult to judge exactly wherethe test will end and where a position should be established. There are guidelines to consider inmaking these decisions. One is the halfway point of the response to the spring. Since it is normalfor a bullish rally to be followed by a halfway correction, the halfway point of the response tothe spring can be used a place to open a position.

Another level to consider is the support level that was sprung. If the price respects that supportlevel on the test, it is indicating that a position can be justified. A third level of importance is thesupport level defined by the low point of the spring. This is the lowest level at which a positionshould be seriously considered.

Those tests that are judged to be of lower quality either because of a lower low, higher volume orboth will likely be tested again at a later date assuming they do not fail. These are usuallyreferred to as being more important tests. Their quality is also determined by price spread,volume, low point and by a fourth factor. As with the initial test, the Wyckoff trader is lookingfor narrower price spreads, lower volumes and a higher bottom on the more important test.

The fourth factor to consider is whether the response to the first test put in a higher high than theinitial response to the spring. The ability to make a higher high on the response to the first testindicates that the bulls are willing to follow the price higher. If a more important test exhibits allfour factors mentioned, it can be considered to have corrected the problem or problems that werepresent on the first test and taking a position can be considered.

The disciplined Wyckoff trader will never take a position without at the same time placing a stopor buying some insurance. When a position is taken on the test of a spring, it is important that thestop be placed below the low point of the spring to keep the stop from being vulnerable. If thepotential indicated by the figure chart is not sufficient to allow the stop to be placed below thelow point of the spring, a position should not be taken. The determination as to whether the stopcan be placed below the low point of the spring is based on how many points are being riskedand how many points of potential profit are indicated. At least three points of potential profitshould be indicated for each point that is risked.

Some Wyckoff traders choose to take their full position on the spring. Some choose to take theirfull position on the test of the spring. Both groups are taking more risk than those who choose totake only a partial position on the spring and then adding a second partial position on the test.The goal is to build a winning position as the action unfolds. After the test of the spring, thereare two additional opportunities that may provide places to add other partial positions.

© The Jamison Group, Inc.: Stock Market Primary Buying Opportunities- Back Ups

Primary Buying OpportunitiesNormal Corrections

Even after an issue or the market has left a trading range to the up side, jumped the creek andbacked up, a Wyckoff trader may still be presented with one more type of primary buyingopportunity. It or they depending on how the action unfolds develop on normal corrections inthe up trend that follows the trading range. Most advances develop as a series of thrusts ratherthan one sustained push toward the indicated objective. After each thrust, a correction of thatportion of the advance that has just been completed is likely. If the correction is normal and ifthe character of the action during the correction is bullish, a Wyckoff trader is provided with anopportunity to add to a position that was opened earlier at a lower level, or to take an initialposition if the amount of remaining potential in the anticipated move is large enough to make theeffort worthwhile.

What is a normal correction? A normal correction is one where the price retreats to the vicinityof the halfway point of the previous thrust to the up side. Over the years, the vicinity of thehalfway point has come to be known as anything between the one third and two thirds point ofthe previous advance. If the upward thrust that is being corrected was large, the vicinity of thehalfway point of the thrust is also going to be relatively large. Therefore, the Wyckoff tradershould not mechanically preselect the point in the vicinity of the halfway point that will be theentry point. Using the one third point can be too high resulting in a position being stopped outjust as it is about to turn and make the anticipated advance. Using the two thirds point can be toolow resulting in potentially good trades being missed. Using the halfway point will usuallyresult in a position being opened. However, even entering at this relatively safe point canrepresent an error in judgment if one critically important factor has not been considered.

The all important factor in determining where in the vicinity of the halfway point that a positionshould be considered is the character of the action. If the price is correcting the previous thruston wide spread and high volume, it is best to not take a position no matter where the price is inthe vicinity of the halfway point. This combination of price spread and volume is most likely tobe bearish. Taking a long position during bearish action can easily lead to the position bequickly stopped out. The character of action that the Wyckoff trader wants to see in the vicinityof the halfway point is action that is most likely bullish. Bullish action is indicated by narrowspreads to the down side on relatively low or decreasing volume. There are no mechanical guidelines as to how narrow the spreads have to be or how low the volumes have to be for the actionto be considered bullish. However, if the price is in the zone defined as the vicinity of thehalfway point and the spreads are the narrowest they have been on average during the wholecorrection and if the volumes are the lowest they have been during the entire correction, itusually safe to conclude that the correction is nearing an end.



Another consideration that can be helpful in determining where in the vicinity of the halfwaypoint to enter a position is the position of the price in the up trend. If the price is at or above themiddle of the up trend channel, it is best to avoid a position. The closer the price is to thedemand line of the up trend channel the more interesting it is for a new position. However, thisassumes that the character of the action is bullish. Bearish action at the bottom of the up trendchannel suggests that the trend is about to be weakened or broken. In these cases, it is best tolook for another trade candidate,

If a position is established in the vicinity of the halfway point, selecting a price at which to placea protective stop order can be a challenge. Ideally, the initial stop should be placed below thebottom of the zone defined as the vicinity of the halfway point. However , this is frequently notpossible do to the rule that Wyckoff traders should never risk more than one point for every threepoints of anticipated profit. Due to the fact that a portion of the initial up side potential has beenconsumed by the time these types of positions are entered, it may be necessary to place theprotective stop within the zone of the halfway point. Since the entry point is also in this zone,there is a greater risk of being stopped out. Therefore, the trader must feel absolutely certain thatthe character of the action is bullish before the position is taken.

Most Wyckoff traders use the vicinity of the halfway point to add to an already wining positionestablished at a lower level. Wyckoff traders should always strive to build winning positionsrather than averaging in to losing positions. However, the halfway point can also be used if thetrader has for some reason missed out on earlier opportunities. Another time when these types ofpositions can be helpful is when positions taken previously in early leaders in an advance havereached their objectives and funds become available to use for new positions. Sometimes anadvance is large enough to allow for more than one normal correction of a previous advance.These later corrections of additional thrusts may provide additional entry points.

Stock Market Buying Tests - Part One How to Take a Profitable Position in the Stock Market

Wyckoff traders looking for a trading opportunity on the long side have a number of options thatmay be employed in an effort to identify the best trade candidates. Using the five steps of theWyckoff method and searching for primary buying positions are two options.

A third approach is to use the series of nine buying tests that Wyckoff identifies. Each buyingtest is a development in the price and/or volume action that indicates that the price is preparingfor an advance. It is normal for buying tests to be passed over a period of time.

A creek is the zone of resistance usually near the top of a trading range defined by a series ofrally tops within the trading range. It represents an obstacle to up side progress that must beovercome if the price is going to work out the potential that has been built while the price hasbeen in the trading range. The price overcomes the resistance with a sign of strength indicated bya combination of price spread and volume action.

There are three elements to the combination of price spread and volume action needed toaccomplish a jump.

The first element is wide price spreads to the up side over several days as the price passesthrough the zone of resistance defined by the earlier rally tops.

The second element is strong closes on those days with the wide spreads. If the price makes awide spread to the up side and then closes at or near the bottom of the spread, the indication isthat supply was met and overcame the demand that entered the market and that the price is notready to leave the trading range.

The third element is high volume. High volume confirms the sign of strength indicated by theprice action. Most potential jumps will take the price through the resistance level of the tradingrange and decisively into new high ground relative to all the action that occurred during thetrading range. However, some will not.

If the trading range is especially wide and most of the rally tops during the range are well belowthe resistance level, it is possible for a jump to be accomplished without moving the price up andout of the range. In those cases, the Wyckoff trader needs to recognize the fact that the resistancelevel of the range still represents an obstacle to up side progress that may derail the bullishscenario from unfolding as anticipated even though there was a jump and a back up. SomeWyckoff traders elect to avoid these situations due to the higher degree of doubt involved.

The completion of a jump is normally indicated by a dramatic narrowing of the price spreads tothe up side following the wide spreads that moved the price through the zone of resistance.



When this action occurs, the Wyckoff trader knows that the back up is about to begin and that itis time to start paying close attention to the day to day action so as not to miss the opportunity totake a position. When the back up begins, the trader needs to identify in advance where it islikely to be completed. It is impossible to pinpoint exactly at what level the back up is likely tobe completed. The creek that was jumped was defined by a range of values and the area in whichthe back up is likely to be completed is defined by a range of values.

The first step in identifying where this range of values is located is to find the halfway point ofthe advance that produced the jump. Wyckoff tells us that it is normal for an advance to becorrected with a reaction to the vicinity of the halfway point of the advance. The halfway point islikely to be above the zone of values that represent the creek or in that zone. If the halfway pointis above the creek, the back up is most likely to be completed between the halfway point and thetop of the creek. If the halfway point is in the creek, the back up is most likely to be completedbetween the halfway point and the low point of the creek.

Those situations where the back up is likely to be completed above the top of the creek are thebest. In those situations where the back up reenters the creek, there is a risk of the price fallingback into the creek resulting in no buying opportunity.

Having an idea in advance where the price is likely to complete the back up is important.However, the most important factor on a back up is the character of the price and volume on theback up. If the back up unfolds with the same combination of wide spreads and high volumesthat were present on the jump, there will be no opportunity to take a long position. In these cases,the price is most likely to fall back into the creek.

All that the potential jump accomplished was to suck in premature bulls and the bearishcharacter of the back up tends to lock them into positions that probably will not be profitable. Abullish back up is indicated by narrowing spreads and decreasing volumes as the price reachesthe pre-identified zone where the back is anticipated to end. This combination of where the priceis and how it got there is what indicates to the Wyckoff trader that taking a position should beconsidered.

Taking a position on a back up is similar to buying the test a spring or a spring in one respect.Any position opened on a back up must be protected with a stop. Ideally, the potential up sideobjective will be high enough above the entry price to allow the initial stop to be placed belowthe support level of the trading range. The anticipated objective must be high enough above theentry price to allow the initial stop to be placed below the low point of the creek. Placing a stopso close to the entry price that it is in the creek is an invitation to be stopped out.

Theoretically, taking a long position on the back up to a creek where the jumping of the creekallowed the price to move up and out of a trading range is the best of all buying opportunities.This is because it provides the clearest indication that the preparation phase has been completedand that the price has the strength to overcome all obstacle to up side progress.

© The Jamison Group, Inc.: Stock Market Buying Tests - Part One

Stock Market Buying Tests - Part 2 How to Take a Profitable Position in the Stock Market

After an individual stock has completed a stopping action with preliminary support, a sellingclimax, automatic rally and secondary test, a Wyckoff stock market trader needs to see the pricedemonstrate relative strength. It is most desirable if the stock shows relative strength comparedto other issues in the same stock market industry group and to the stock market as a whole.There are two ways that a stock can demonstrate that it is relatively strong. One way is to look at the bigger picture. On thedecline that was stopped by the selling climax, how much down side progress did the stock make? This should be measured from the top of the previous advance to the bottom ofthe decline that has just been stopped.

The measurement should be taken in terms of a percentage not in terms of the number of points lost. The percentage decline in the individual stock being considered should be comparedto that of other issues in the same group. If an industry group index is available for that industry,it would be a good idea to compare the performance of the individual issue to that on the groupindex.

A similar comparison should be made to a general stock market index. Those stocks that can bedetermined to have performed more bullishly on the previous decline relative to other issues inthe group and the general market are most likely to be the best candidates for new long positions.

Relative strength also needs to be demonstrated after a previous decline has been stopped. Thetendency is to assume that the preparation following a decline is going to be for an advance. Thisis not always the case. If the price of an individual stock does not continue to demonstraterelative strength during preparation for its next move, there is a good chance that the move beingprepared will be in the same direction as the previous move. Relative strength in the tradingrange that prepares the price for its next move can be identified by comparing the percentages ofthe rallies and reactions within the range to those in other stocks in the same industry group andto the general stock market.

The Wyckoff stock market trader should also consider the character of the price and volumeaction on the rallies and reactions during the trading range phase. If the rallies are made quicklywith wide price spreads, increased volumes and strong closes, the action is providing anindication of strength. These issues are more likely to be better long candidates than those issuesthat have to struggle to make their rallies. On the reactions within a trading range, relativelystrong issues will struggle to make down side progress. Their price spreads will be relatively



narrow compared to those during the rallies within the range and their volumes will be relativelylower. This combination of narrower spreads and lower volumes should make the action duringthe reactions appear more laborious.

Wyckoff traders looking for stock trading opportunities on the long side should avoid stocks andmarkets that make laborious rallies during the trading range and then give back the groundgained quickly. This pattern suggests that the sellers are still in control of the action. Tradersshould also beware of issues that make both high volume wide spread rallies and reactionswithin the trading range. These rapid swings in the trading range are more often an indication ofdistribution than accumulation.

When an stock or the market has stopped a decline and moved into a trading range, it is likelythat the previously defined down trend will still be in tact. During this period, the down trendand the trading range are said to be in competition for control of the action. Wyckoff stocktraders should wait until the trading range has won the competition before seriously consideringan entry on the long side.

The trading range has won the competition when the supply line of the previously defined downtrend has been broken. Many times, there is a particular set of steps that unfold in the action thatlead to the breaking of the supply line. They begin with the price making a small and relativelyinsignificant penetration of the supply line. This is said to weaken the line.

On the day or days that this is accomplished, the price will likely spend part of the day aboveand below the supply line. The price will likely follow up on the weakening of the supply linewith a move back into the heart of the down trend channel. This provides the price with anopportunity to demonstrate that the down trend is still in solid control of the action or to providean indication that the level of control has been diminished by the weakening of the supply line.

If the degree to which the down trend is in control has been compromised, the next rally shoulddecisively break the supply line. This is demonstrated by wide price spreads on increasedvolumes that result in the entire spread for a day or several days is above the supply line. Thefinal step in breaking the supply line is when the stock's price reacts back toward the supply lineon narrower spreads and lower volumes and refuses to reenter the down trend channel.

The sixth buying test is met when the stock's price demonstrates the ability to put in highersupports on rallies. This can be shown by the action within a trading range or after the price hasleft the trading range to the up side. Frequently, the rallies and reactions within a trading rangewill all be completed near the top and bottom of the range.

The Wyckoff stock market trader should not automatically consider this to be a bearishindication. It is actually normal action. Some times, the low points of the reactions within thetrading range will put in gradually higher bottoms. This indicates a willingness on the part ofbuyers to pay a higher price suggesting that the price is getting ready to leave the trading rangeto the up side.

A pattern of higher supports in a trading range and the desirability of seeing the price move intothe primary buying position of a spring seem to be at odds with each other since it is not possiblefor the price to maintain a consistent pattern of higher bottoms and still move into a springposition. The development of a spring position following a pattern of higher bottoms onreactions does not neutralize the stock's bullish indication of the higher supports. It actuallyconfirms it by providing supply with one last opportunity to reclaim control of the action. Ifsupply declines to take advantage of the opportunity, the stock trader can conclude that the priceis ready to make an effort to leave the trading range to the up side.

The test of higher supports can also be demonstrated after the stock has left the trading range tothe up side. Two of the primary buying opportunities develop when the price is passing thisbuying test. Both the back up to a creek and a normal correction of a previous advance require ahigher support. The entire definition of and the continuation of a stock's up trend require apattern of higher supports. The seventh buying test is a logical follow up to the sixth test. It andthe last two buying tests will be considered in part three of this series.

© The Jamison Group, Inc.: Stock Market Buying Test - Part two

Stock Market Buying Tests - Part ThreeHow to take a profitable position in the Stock Market

Wyckoffs sixth buying test was to look for a pattern of higher supports on reactions indicatingthat the bulls are willing to pay gradually higher prices for the shares that they are accumulating.The sevenths buying test is passed when a pattern of higher tops on rallies is observed. Thisindicates that the bears are requiring gradually higher prices before they are willing to enter themarket on the short side.

It also reflects a willingness on the part of the bulls to hold their positions longer before exitingthe market. A pattern of higher tops on rallies can be identified while the price is in a tradingrange or after it has left the range and has begun to trend.

A pattern of higher tops on rallies and higher bottoms on reactions is most clearly observed afterthe price has left the trading range and has begun to trend. A consistent pattern of higher topsand higher bottoms is what defines an up trend. Perhaps the most important higher top is the onethat is recorded on a jump across the creek. This is the thrust that propels the price out of thetrading range and on its way toward its objective.

A Wyckoff trader wants to see a pattern of higher tops, but never buys as one is being put inplace. An important rule in Wyckoff is to only buy on reactions and only sell on rallies. If aposition is established on the back up that follows a jump, the expectation is that the next upwardthrust will make an even higher top than was recorded on the jump. As long as the ralliescontinue to put in higher tops and the up side objective has not been reached, the position can beheld. Traders should beware of the rally that fails to put in a higher top. When this happens, it isan indication that the character of the action is changing. When there is a change in character, thetrader should become more defensive in the managing of any position that is held. This can takethe form of raising the stop to a point closer to the current price. It can also take the form ofclosing out a portion of an existing position or exiting the position entirely.

Higher tops within a trading range and a consistent pattern of higher tops and bottoms in a rangecan signal that the price is getting ready to jump the creek and leave the range to the up side. If aposition is established in anticipation of a jump, the Wyckoff trader needs to be very disciplinedin managing it. If the price does not jump on the next rally or at least continue the pattern ofhigher tops within the trading range, consideration should be given to closing the position. If aposition is established after a pattern of higher tops has been identified and the price is still in thetrading range, the trader needs to fell comfortable placing the initial stop below the bottom of thetrading range. The reason for this is the possibility that the price may need to spring the tradingrange before it is able to leave the range to the up side. If this happens and the stop has been



placed within the trading range, it will be caught and the position will be eliminated likely at aloss just before the move that was anticipated actually begins.

The eighth buying test for Wyckoff traders is to identify that a base has formed on a figure chart.This is another way of saying that there needs to be a trading range following a previous decline.The trading range or base contains the potential for the next move. Without that potential,meaningful up side progress is unlikely even if the action in the trading range appearsconstructive. There are no rigid rules in Wyckoff as to how large a base should be beforeconsideration is given to establishing a position. This determination has to be based on the typeof market operation the trader is conducting. Some traders get nervous easily. They areuncomfortable holding positions for a long time. They do not want to make the extra effort todefend a position as needed so as to allow a bigger move to be completed. They are looking totake a smaller profit quickly and then move on to another opportunity. These traders can besatisfied with a base that only indicates a five to fifteen percent move. Most Wyckoff traders arelooking for an intermediate sized move. These are usually identified as being in the range ofoffering a 25% to 40% profit potential. Traders who are looking for these opportunities are goingto be less active. The least active traders are those who require the largest bases before they willconsider taking a position. Usually, these are bases that offer the possibility of at least a 50%move. Whatever profit potential a trader establishes, it is important that the requirement be metbefore a position is established.

The final buying test is one of the most important. Wyckoff teaches traders to never take aposition unless the anticipated profit is at least three times the indicated risk. The figure chart ofthe action indicates what the profit potential is, but the trader determines what the indicated riskis. This is accomplished by the placement of a stop or alternate defensive measure. SomeWyckoff traders require a higher ratio of potential profit to indicated risk. These traders usecloser stops. Closer stops will limit the potential loss on trades but they increase the vulnerabilityof being stopped out. The three to one ratio provides the position with an ample amount ofwiggle room while at the same time providing a high level of protection.

© The Jamison Group, Inc.: Stock Market Buying Tests - Part Three

Directional Indicators and Timing Tools

Wyckoff traders have several tools that can help them determine the direction in which themarket or an individual issue is likely to move and the likelihood of a change in that direction.These tools are the Optimism-Pessimism Index (O.P.), Technometer (Tec) and the Force. Theyare all derived from the volumes of the intra-day buying and selling waves.

The purpose of these tools is to confirm the indications provided by the price and volume action.They are not intended to take the place of a regular interpretation of the character of the priceand volume action, the trend of that action or the position of the action in the trend.

Those who attempt to use them in this incorrect manner are embracing an mechanical approachto Wyckoff. The market may let them get away with this approach for a while. However, theWyckoff approach is judgmental and not mechanical. Those who persist in efforts to use thesetools in a mechanical manner will eventually pay a price for their laziness.

Wyckoff tells us that for a move in the market or an individual issue to continue there needs tobe harmony between effort and result. The result is measured by the amount that price movesfrom point A to point B. The effort is measured by the O.P. The O.P. moves from point A topoint B by adding the volume in the up waves and by subtracting the volume in the down waves.

As long as the price of an index or an individual issue and its O.P. are moving in the samedirection at approximately the same rate making similar highs and lows relative to previoushighs and lows, the price is likely to continue making progress toward an indicated objective.

Positions taken in anticipation of an objective being reached can be maintained as long as thisharmony exists and new positions can be considered at appropriate points in the action. If thereis a lack of harmony between effort and result, Wyckoff traders need to be more defensive withrespect to existing positions because the lack of harmony suggests a change in the direction ofthe price movement. Although these indications can be detrimental to existing positions, theyalso represent opportunities to consider positions on the other side of the market.

When effort and result are not moving in the same direction at approximately the same rate, thecondition is referred to as inharmonious action. Inharmonious action can be corrected without achange in the direction in which prices are trending by either effort or result accelerating to catchup with the other or hesitating to allow the other to catch up.

If harmony is not restored, there will be a change in the direction in which the trend of the actionis pointed. Some inharmonious actions are obvious and some are not. However, there is one typeof inharmonious action that is especially obvious. It is a divergence.



A divergence develops when the lack of harmony is so great that the price action and the actionof the O.P. do not make new highs or new lows relative to previous rally tops or reaction lows atthe same time. Divergences can be bullish or they can be bearish. They can result from too mucheffort for the result, or they can result from too much result for the effort. In each case, thedevelopment of a divergence is a warning of an impending change in the direction of the pricemovement.

A bullish divergence develops when the price of a market or an issue makes a lower low on acurrent reaction than on the low point of the previous reaction but the O.P. does not make asimilar lower low. A bullish divergence also develops when the O.P. makes a lower low on acurrent reaction than on the previous reaction and the price does not make a similar lower low.

Either way, the lack of harmony is so great that the result is likely to be a change in the directionof the price movement away from the direction in which it was moving when the divergencedeveloped. Although both types of bullish divergence favor an advance in the price, one has overtime tended to be more reliable than the other in turning the price.

If the O.P. makes a lower low and the price does not, the situation is indicating effort withoutresult. This is the more reliable bullish divergence. The effort has been expressed but the pricehas not responded. Therefore , as the effort is relaxed, the price is likely to move in the oppositedirection. In the other type of bullish divergence where there has already been a result expressedby the price not supported by the effort, the effort may still enter the market and eliminate thedivergence. Since the effort has this extra opportunity to correct the situation, this type of bullishdivergence is somewhat less reliable in warning of a likely change in direction.

Bearish divergences are measured across the tops of rallies rather than across the bottom ofreactions. As was the case with bullish divergences, there are two types of bearish divergences.One is where there is effort without result. It is the more reliable type.

There is also the type where there is a result without effort. The effort without result variety iswhen the O.P. on a current rally makes a higher high than on the previous rally, but the pricedoes not. The result without effort variety is when the price makes a higher high on the currentrally relative to the high on the previous rally but the O.P. does not.

Divergences should not be used as timing tools for entering or exiting positions. They providewarning of likely changes in the direction of price movement, but they do not trigger the changein direction by themselves. A divergence that develops on one day may widen over the days thatfollow resulting in a more extreme divergence providing a stronger warning. Therefore, aposition taken on the first day that a divergent condition develops could be stopped out as thedivergence becomes more extreme resulting in the trader being moved to the sidelines just wherehe should actually be taking a position.

The best place to act on the indication of a divergence is when it confirms a primary buying orselling opportunity. A bullish divergence in combination with a primary buying opportunity ismore likely to produce a change in direction than either the divergence or the buying opportunityalone. The same is true of bearish divergences in combination with primary selling opportunities.

The development of divergences is not limited to the price action and the O.P. action. They canalso develop between the price action and the Force. The Force measures the amount of volumein the intra-day buying waves relative to the volume in the intra-day selling waves over a ten dayperiod.

The primary difference between the Force and the O.P. is that the Force looks at a limitedamount of time while the O.P. does not. As the excess of volume in the up waves grows relativeto the volume in down waves, the value of the Force moves higher. It may move from a morenegative number to a less negative number, or from a negative number to a positive number, orfrom a less positive number to a more positive number.

The absolute value of the Force reading is not what matters most. What does matter is how thepeaks and valleys in the Force relate to rally tops and reaction lows in the price. Divergencesdevelop when the price and the Force do not make higher tops or lower bottoms together. Whenthis happens, the excess or lack there of in the accumulated up side volume over the down sidevolume during the ten day period reaches an extreme that needs to be corrected by a turn in thedirection of the price movement.

The short term excesses mentioned above are a tool that can be used in timing the entry orexiting of a position or an adjustment in how a position is managed. The Force also provides adirectional indication. If the values of the Force from day to day are posted to a chart, theWyckoff trader will note that they tend to trend. This means that there will be periods of timewhen there are lower peaks and lower valleys and periods of time when there are higher peaksand higher valleys. Trend lines can be drawn on a chart of a Force just as they can be drawn on achart of the price action. When a tend in the movement in the Force is broken, the indication isthat a change in the direction of the price action should be anticipated. As with the price and O.P.relationships, the price and Force relationships are most reliable when they confirm primarybuying and selling opportunities.

The Tec is a timing tool only. It indicates over bought and over sold conditions. The Tecmeasures a ratio of the volume in the intra-day buying waves relative to the volume in theintra-day selling waves over a five day period. However, longer time periods can be used toprovide longer term over bought and over sold indications. Theoretically, the Tec reading of amarket or an issue can range from zero to one hundred.

However, neither of these extremes has ever been recorded or is likely to ever be recorded. Areading of zero would require five consecutive days during which there were only one intra-daywave per day and only down waves for each of the five days. A reading of one hundred wouldrequire five consecutive days during which there were only one intra-day wave per days andonly up waves for each of the five days. Decades of monitoring Tec readings have revealed thatreadings of 50 or higher should be viewed as indicating an over bought condition and thatreadings of 38 or lower should be viewed as indicating over sold conditions. A reading of 44.4indicates absolute neutrality. When an over bought condition is indicated, the price is vulnerableto down side progress. When an over sold condition is indicated, the price is vulnerable to upside progress. If an over bought or over sold condition on one day is replaced by a more over

bought or more over sold condition the next day, the vulnerability of the price to a reaction orrally increases. The degree to which the market or an issue is over bought or over sold does notprovide any indication as to the size of the reaction or rally that is being forecasted. Theseindications are provided by figure charts. Although over bought or over sold indications maydevelop at any time as the price action unfolds from day to day, those that develop when theprice is in primary buying or selling positions are the most important.

The indications provided by the O.P., the Tec and the Force should be used to confirm theindications of the price action. They should not be used in lieu of an interpretation of the priceand volume action. Anyone who does so is attempting to use these tools in a mechanical mannerand that will not result in the desired results over time. This warning cannot be stressed to much.

Figure Charts, Counts and Counting

An important part of the Wyckoff approach is the use of figure charts. Figure charts are a toolthat Wyckoff traders can use to compress the action of the market or an individual issue toprovide a perspective that may not be effectively provided by a bar chart. They provide aninsight as to the future level of the market or future price of an individual issue. They can beeffectively used as a supplement to the study of price and volume action and they can be grosslymisused by traders who are caught up in wishing and hoping for things that have little chance ofever being realized.

Figure charts come in a wide range of shapes and sizes. In order to be a effective tool in a marketoperation, a trader must learn how to select the type of figure chart that it best suited for thechosen type of market operation. To some extent this has to be a trial and error exercise.However, there are some general guide lines that can prove helpful. The most important of theseis to match the time frame of the figure chart that is used to the time frame of the marketoperation. If a Wyckoff trader is focusing on a short term market operation, he is likely lookingfor moves in individual issues of ten to fifteen percent in a four to six week time frame. This typeof operation requires a more sensitive figure chart. For moderately priced issues that normallymeans a one point figure chart. However, for low price issues, a half point figure chart may beselected to provide the sensitivity needed to measure the smaller moves that these issues usuallymake. For very low priced issues, a Wyckoff trader may even choose to use a quarter pointfigure chart. If a trader is operating in an intermediate time frame focusing on twenty-five toforty percent moves over three to six months, the one point figure chart may still be acceptablefor most moderately priced issues. In this type of operation, a trader might also want to use theone point figure chart for lower priced issues as well to reduce the sensitivity of the chartallowing the trader to focus on the more important developments. In a similar manner, theintermediate trader might choose to use a two point modified or five point modified figure chartfor high priced issues or those that have a history of being especially volatile. The longer terminvestor looking for moves of fifty percent or more perhaps lasting as long as a year should focuson the modified variety of figure chart so as not to be distracted by shorter term developments.

A figure chart will not help a Wyckoff trader assess the quality of the price and volume action ofan issue or a market. Its purpose is to provide a projection of future value. It does this with thedevelopment of a count. A count is a vertical projection based on the horizontal development onthe figure chart produced by the price movement from day to day and in some cases evenintra-day. The count taken at a particular price level includes all of the horizontal divisions onthe chart at that level whether there is a positing in the division or it is blank. As long as the pricetrades at or around the level being counted, the count provides a measure of the amount ofpotential being built for the advance or decline that will follow. When the price leaves the area inwhich the count level is located, the count is actually taken and the target of the anticipated



move is indicated.

The manner in which a Wyckoff trader selects the level at which the potential is measured and atwhich the count is taken depends on whether an advance or a decline is anticipated based on thecharacter of the price and volume action. If the trader is anticipating an advance, a sign ofstrength and the last point of support that follows the sign of strength are identified. A sign ofstrength may be a spring position and the response to the spring. It could be a jump across thecreek. It might also be a rally within a trading range accomplished on widening price spreads andincreased volumes. In the case of the spring and response, the last point of support is the test ofthe spring. For a jump across the creek, the last point of support is the low point of the back up.If the sign of strength was an aggressive rally within the trading range, the last point of supportwill be the low point of the correction that follows the sign of strength. In each case, thepotential is measured and the projection of future value is made from the last point of support.

If a Wyckoff trader is anticipating a decline, a sign of weakness and a last point of supply mustbe identified to determined at what level the potential should be measured and the count taken.Signs of weakness include an up thrust and response, a fall through the ice and a reaction withina trading range that unfolds on widening spread and increased volume. The last point of supplyfollowing an up thrust and response is the test of the up thrust. The rally back to the ice is the lastpoint of supply following a fall through the ice. The last point of supply following an aggressivereaction within a trading range is the high point of the corrective rally that follows the reaction.

If a spring position or an up thrust position makes a small penetration of the support level orresistance level being penetrated and if the level of volume on the penetration is a smallpercentage of the average volume, the indication of strength or weakness and the last point ofsupport or supply will be represented by the spring or up thrust. In these cases, there may not bea clearly defined test. Therefore, the trader is justified in measuring the potential and taking thecount from the low point of the spring or the high point of the up thrust. Even if a test isanticipated, a trader may want to take a count from the spring or up thrust so as to get a moreconservative indication of potential an objective. Wyckoff teaches that the most conservativecount should always be taken first and that the decision to trade or not to trade should be basedon the projection of the most conservative count.

Many times, counts can be broken into phases. Within a trading range, the price may rally andreact several times before the last point of support or supply is reached and the price is ready toleave the range. If an up count is being taken, the low point of each reaction in the trading rangerepresents the end of a phase. If a down count is being taken, the high point of each rally in thetrading range represents the end of a phase. In addition to indicating the objective of the entirecount, a Wyckoff trader should identify the objective as each phase is added. This is donebecause the reaching of each of these interim objectives is potentially the end of the move. Aseach objective is reached, the trader needs to focus on the character of the price and volumeaction looking for indications of continuing bullish or bearish action or for a change in thecharacter of the action. If there is no change in the character of the action, the trader can look tothe next indicated objective. If there is a change in the character of the action, the trader needs tobe more defensive in the management of that position even to the point of closing out theposition even if the maximum objective is much higher or lower.

Frequently as larger long term moves unfold, the price will move into short term trading rangesalong the way to rest following a thrust. Often, these resting spells occur in and around theobjectives of phases in a larger count. These trading ranges build short term potentials resultingin short term counts that may confirm the objective of the next phase of a larger count. If so, theyare called stepping stone confirming counts. They provide an indication that the move will becontinuing and not ending.

Counts on a figure chart should never be considered to be more than an indication only. Once setin place, they do not guarantee that the price will reach the indicated objective. Above all else isthe character of the price and volume action. In the final analysis, it determines what is possibleand likely. If a position is held in an issue where the indicated objective is higher or lower thanthe current price but there is a change in the character of the action in that issue, the trader needsto respond to that change in character. The response may be to increase the level of protection.The response may be to close the trade. Opting to do nothing in response frequently results inending up with less than was possible and much less than was anticipated.

Stock Market Trading, The Wyckoff Method Two Goals, Three Laws and Five Steps

Applying the Wyckoff approach to stock market trading can be complicated due to the manyvariations in the manner in which stock market action can unfold. However, the foundation uponwhich the method is built is quite simple. The foundation of the Wyckoff method consists of twogoals, three laws and five steps all of which can be simply stated in a relatively few words. Thestock market trader or investor who builds his understanding of the Wyckoff approach on thisfoundation can become consistently successful no matter how complicated the curves are that themarkets throw at him.

One goal of the Wyckoff stock market trading approach is to make a profit on a consistent enough basis that exceeds the rewards available from investment vehicles where the return is absolutely guaranteed and for those profits to exceed guaranteed returns by a wide enoughmargin to make the effort worth while. However, this is not the most important goal of theWyckoff method. The most important goal is the preservation of capital. Every time the stockmarket is entered capital is put at risk. There is no way around this. However, risk can always bemanaged. Wyckoff teaches that no position should be taken unless it has a predetermined exitstrategy. The stock market provides vehicles such as stops and options that help managerisk. One or more of these tools should always be in place when position is taken. Protection ofcapital should never be an after thought. Having something in mind to do later if developmentswarrant frequently results in doing nothing until the pain of a mounting paper loss becomesunbearable.

The three laws in the foundation of the Wyckoff stock market trading method are the law ofsupply and demand, the law of cause and effect and the law of effort vs. result. The price ofevery trading or investment vehicle moves up or down because there is an excess of demandover supply or supply over demand expressed in the form of urgency to exchange dollars forshares or contracts or to exchange shares or contracts for dollars. The law of cause and effectstates that the excesses that develop in supply and demand are not random but are the result ofkey events in market action or the result of periods of preparation. Wyckoff teaches what thesedevelopments are and how to judge when they are unfolding in time to take advantage of theexcesses in supply or demand that will follow. The low of effort vs. result states that the changein price of a trading vehicle is the result of an effort expressed by the level of volume and thatharmony between effort and result promotes further price movement while lack of harmonypromotes a change in direction.



The third cornerstone of the foundation of the Wyckoff approach are the five steps. These are thegeneral procedures that every student of the Wyckoff stock market method needs to employ eachand every time the action of a market or trading vehicle is considered. Here are those fivesteps. Determine the trend and position of the market being traded. Determine the relativestrength or weakness of the issue being considered. Select issues that are presenting a cause thatis likely to produce an acceptable effect. Determine the readiness of an issue being considered torespond to its cause. Time trades in individual issues to anticipated turns in the market in whichthey are traded. Learning how to correctly apply each of these five steps is what makes asuccessful trader or investor. Most of what Wyckoff teaches is the finer details of applying thesesteps.

Once a trader or investor understands the foundation of the Wyckoff approach to stock markettrading and accepts the philosophy that it embraces, he can begin building the knowledge thatcan lead to a more successful market operation. In the next installment of this series, a closerlook will be taken at the first step of the Wyckoff stock market method.

© The Jamison Group, Inc.: Stock Market Trading, The Wyckoff Method

Why I Trade the Wyckoff Wave

For a few years now, I have only traded 8 stocks. The ones that make up the Wyckoff Wave.

Why, you say? Actually it's easy. Subscribing to the Pulse of the Market and trading the wavestocks gives me a tool kit that substantially increases my profitability. While I certainly havemade some mistakes and all my trades have not been successful, 2007 has been a very successfultrading year.

By using each stock's Optimism - Pessimism index, (which charts volume) and the Technometerand Force indicators, I am able to identity, turning points as well as entry and exit points. Byfocusing on eight stocks, I also seem to better understand each stocks individual characteristics.This fact alone, has saved me from making several bad trades.

In his article Trade the Wave in 2008, Craig Schroeder identified 18 times a Wyckoff Wavestock made a 20% or greater move. While I didn't participate in all 18, I did catch a few andsome smaller moves, rewarded me with some nice profits. These profits would not have beenpossible without my comfort level with these eight stocks and the Pulse of the Market data Ireceive, by e-mail, every business day. Here are a few examples:

Exxon-MobileIn August, XOM sprung a trading range created at the 80 ½ level. A little over a week later, ittested the spring and created a good entry point. A Figure Chart count along the $79.00 levelproduced an objective of 92. Five weeks later, XOM reached 94 and eventually reached 95 1/4. Iactually closed my position at 91 /7/8 and was able to pocket a nice profit.

IBMIn 207, IBM presented both long and short trading opportunities. In February, IBM climaxed at88 ½ and developed a trading range. There was no spring, but IBM did "jump the creek" andback up to an LPS (last point of support) at 93. There was a positive divergence with the buyingclimax that practically screamed, buy me. The figure chart presented an objective of 109. IBMbecame overbought and created a negative Optimism - Pessimism divergence at 108 and theposition was closed at 107 ½.. The 14 point gain produced another nice profit a little over amonth. I am not a long term trader, but the indicators from the Pulse of the Market data wouldhave enabled a longer term trader to ride IBM all the way to it's June high of 118. That's a 25point move. I could not find a good entry point and did not participate.

An opportunity to short IBM came about in mid-October. After reaching the high describedabove, IBM reacted strongly to 102 ½. In hind site, there was a trading opportunity, but by the



time I figured it out, IBM had reacted sharply and it was to late. It then rallied to 119 and createda new trading range. The range was up thrusted in October and immediately tested 3 days later.It then reacted sharply and I missed another one. However, a down channel was created and onHalloween IBM reached an overbought position and condition. In addition, there was a majornegative divergence. I took a short position at 115. This trade would not have been possiblewithout the Pulse of the Market data. The figure chart showed an objective of 101. A week and ahalf later IBM climaxed at 99 3/8. I closed my position at 101 and added to my 2007 profits.

Merrill LynchIf you are a bear, Merrill Lynch was the year's biggest winner and certainly put some money inmy pocket.

As an aside, a study of Merrill Lynch is a classic example of why the Wyckoff method is sosuccessful. As it was flirting with the $100.00 mark, MER was touted as part of that bullishfinancial sector. However, Wyckoff students saw the buying climax and developing tradingrange. Them MER reacted to 51. As it was climaxing, the bad news about the sub-primemortgages and the resignation of the CEO hit the street. Of course, by then the smart money hadalready taken profits and left the building. As usual, when the bad news hits, the reaction isusually over.

I took a short position in MER at 94. MER had upthrusted the trading range earlier and the Pulseof the Market data showed MER to be oversold and having a negative divergence. The fuguechart presented an objective of 82. MER then fell through the creek and presented an 2ndobjective of 70. MER moved to 70 and I closed my position. It then moved sideways and createdanother trading range. It then fell through the ice and I took a position on the rally to the ice or aLPSY (last point of supply). The objective was 51. I closed out my position at 54. I thought itwas on climatic action, but it turned out to be Preliminary Support. The buying climax came laterat 51, right at the original objective.

As you can see, I am a big proponent of just trading a few stocks and using the Pulse of theMarket tools to create some substantial profits. I spend 2-3 hours each day charting (I draw everychart by hand) and analyzing the Wyckoff Wave and the associated stocks. I write down a dailycommentary on the wave and each stock. If I had to always be looking for new opportunities, myanalysis time would be reduced and I strongly believe my judgment would not be as good aswith a smaller consistent number.

© The Jamison Group, Inc.: I Traded the Wave

Price and Volume Relationships

Wyckoff tells us that the most important thing that can be known about the action of a market oran issue is its trend. Step one of the Wyckoff Method indicates that the position of the actionrelative to the trend is also an important piece of knowledge. A third essential element indeveloping an analysis of the action is judging the character of the action. The character of theaction is revealed by the relationship between the price action and the volume action. Theserelationships either make bullish statements or bearish statements. Each trading session makesone of these statements. Some are strongly bullish or bearish and some are more moderate.Occasionally, when the action is an especially sensitive point in its development, the character ofthe action on one particular day is seen as being so important in determining how developmentsare likely to unfold from that point forward that the day is frequently referred to as being a keyday. However, most of the time, it is an accumulation of bullish or bearish statements over asuccession of days that reveals wether a move in progress is likely to continue or if a change indirection is likely.

Each day, the price of the market or an issue is likely to move up or down on a close to closebasis. It does so either in a price spread that is likely to be wider or narrower than the day beforeand volume that is likely to be either higher or lower than the day before. How these threevariables group themselves together determines that character of the action for that day andwhether it makes a bullish or bearish statement.

If the price spread for a day is wider to the up side leading to a strong close on increased volume,the advance is said to indicate demand entering. This action makes a bullish statement. If thesame price action occurs on reduced volume, the advance is said to be the result of a lack ofsupply. This action also makes a bullish statement. If the price spread for a day is narrower to theup side, the action makes a bearish statement. If the narrower spread to the up side is combinedwith higher volume, the action is said to indicate the meeting of supply. If the volume is reduced,the action is said to indicate a lack of demand. Either combination tends to work againstadditional up side progress. That is why the statements made are considered to be bearish.

If the price spread for a day is wider to the down side leading to a poor close on increasedvolume, the decline is said to indicate supply entering. This action makes a bearish statement.The same price action on decreased volume is said to be the result of a lack of demand. It alsomakes a bearish statement. If the price spread for a day is narrower to the down side, it makes abullish statement. If the narrower spread is combined with high volume, the action is said toindicate the meeting of demand. If the volume is lower, it is said to indicate a lack of supply.Either combination tends to work against additional down side progress. That is why it makes abearish statement.



Sometimes there are days that start out as wide spreads to the up side, but end with poor closes.There can also be days that start out as wide spreads to the down side, but end up with strongcloses. These days are said to include intra-day failures. These failures change the character ofthe action from what it might seem to be on the surface. A wider spread to the up side onincreased volume makes a bullish statement because it indicates demand entering if the close isstrong. However, if the close is poor, the indication is that the demand that was present initiallywas either withdrawn or overwhelmed by supply. In both cases,the intra-day failure changes thebullish statement to a bearish statement. However, being overwhelmed by supply is consideredto be more bearish than is having demand withdrawn. Intra-day failures that occur to the downside on wide spreads and high volumes leading to strong closes change what would otherwise bebearish statements into bullish statements. In these cases, the indication is that either the supplywas withdrawn or that supply was overwhelmed by demand. Demand overwhelming supply issaid to be more bullish than having supply withdrawn. Trying to interpret the exact meaning ofan intra-day failure can sometime be difficult if the action of the day is only looked at as awhole. Viewing the intra-day action can assist in determining where the bulk of the volume waspresent and that can help with the interpretation.

Knowing what statements the character of the action is making is especially important at andaround primary buying and selling positions. Bullish statements tend to confirm the validity ofbuying positions while bearish statements tend to confirm the validity of selling positions. Theseconfirmations help to reduce the emotional strain that frequently accompanies taking a position.Knowing whether the action is making bullish or bearish statements day to day after a positionhas been established and the price is moving in the desired direction helps the Wyckoff tradermake a judgment as to whether the position is likely to continue moving in the desired directionand whether it should be held, exited or more securely defended.

Stock Market Primary Buying OpportunitiesBack Ups

If a Wyckoff trader chooses not to open a long position when the market or an individual issue isin a spring position and makes the same choice or misses the opportunity to enter on the longside on the test of a spring, there is a third primary buying opportunity that can be used to begina campaign. It is on a back up to the edge of a creek.

A creek is the zone of resistance usually near the top of a trading range defined by a series ofrally tops within the trading range. It represents an obstacle to up side progress that must beovercome if the price is going to work out the potential that has been built while the price hasbeen in the trading range. The price overcomes the resistance with a sign of strength indicated bya combination of price spread and volume action.

There are three elements to the combination of price spread and volume action needed toaccomplish a jump.

The first element is wide price spreads to the up side over several days as the price passesthrough the zone of resistance defined by the earlier rally tops.

The second element is strong closes on those days with the wide spreads. If the price makes awide spread to the up side and then closes at or near the bottom of the spread, the indication isthat supply was met and overcame the demand that entered the market and that the price is notready to leave the trading range.

The third element is high volume. High volume confirms the sign of strength indicated by theprice action. Most potential jumps will take the price through the resistance level of the tradingrange and decisively into new high ground relative to all the action that occurred during thetrading range. However, some will not.

If the trading range is especially wide and most of the rally tops during the range are well belowthe resistance level, it is possible for a jump to be accomplished without moving the price up andout of the range. In those cases, the Wyckoff trader needs to recognize the fact that the resistancelevel of the range still represents an obstacle to up side progress that may derail the bullishscenario from unfolding as anticipated even though there was a jump and a back up. SomeWyckoff traders elect to avoid these situations due to the higher degree of doubt involved.

The completion of a jump is normally indicated by a dramatic narrowing of the price spreads tothe up side following the wide spreads that moved the price through the zone of resistance.



When this action occurs, the Wyckoff trader knows that the back up is about to begin and that itis time to start paying close attention to the day to day action so as not to miss the opportunity totake a position. When the back up begins, the trader needs to identify in advance where it islikely to be completed. It is impossible to pinpoint exactly at what level the back up is likely tobe completed. The creek that was jumped was defined by a range of values and the area in whichthe back up is likely to be completed is defined by a range of values.

The first step in identifying where this range of values is located is to find the halfway point ofthe advance that produced the jump. Wyckoff tells us that it is normal for an advance to becorrected with a reaction to the vicinity of the halfway point of the advance. The halfway point islikely to be above the zone of values that represent the creek or in that zone. If the halfway pointis above the creek, the back up is most likely to be completed between the halfway point and thetop of the creek. If the halfway point is in the creek, the back up is most likely to be completedbetween the halfway point and the low point of the creek.

Those situations where the back up is likely to be completed above the top of the creek are thebest. In those situations where the back up reenters the creek, there is a risk of the price fallingback into the creek resulting in no buying opportunity.

Having an idea in advance where the price is likely to complete the back up is important.However, the most important factor on a back up is the character of the price and volume on theback up. If the back up unfolds with the same combination of wide spreads and high volumesthat were present on the jump, there will be no opportunity to take a long position. In these cases,the price is most likely to fall back into the creek.

All that the potential jump accomplished was to suck in premature bulls and the bearishcharacter of the back up tends to lock them into positions that probably will not be profitable. Abullish back up is indicated by narrowing spreads and decreasing volumes as the price reachesthe pre-identified zone where the back is anticipated to end. This combination of where the priceis and how it got there is what indicates to the Wyckoff trader that taking a position should beconsidered.

Taking a position on a back up is similar to buying the test a spring or a spring in one respect.Any position opened on a back up must be protected with a stop. Ideally, the potential up sideobjective will be high enough above the entry price to allow the initial stop to be placed belowthe support level of the trading range. The anticipated objective must be high enough above theentry price to allow the initial stop to be placed below the low point of the creek. Placing a stopso close to the entry price that it is in the creek is an invitation to be stopped out.

Theoretically, taking a long position on the back up to a creek where the jumping of the creekallowed the price to move up and out of a trading range is the best of all buying opportunities.This is because it provides the clearest indication that the preparation phase has been completedand that the price has the strength to overcome all obstacle to up side progress.

© The Jamison Group, Inc.: Stock Market Primary Buying Opportunities- Back Ups

Putting It All TogetherPart 2 - Existing Positions

Wyckoff traders are always looking for their next potentially profitable trading opportunity.However, there is nothing more important than the management of existing positions. Part ofputting it all together involves regularly and objectively reviewing the status of every openposition. Regular reviews are easy to do. Objective reviews can be more difficult, however.Every trader wants to believe that each open position is developing as planned and that the fullmeasure of profit anticipated will be realized. That is not always the case. Each trading sessionprovides new information. Sometimes, the new information confirms the trader's expectationsand sometimes it does not. Either way, it may be desirable to make adjustments to existingpositions or to the expectations regarding those positions. The best way to make an objectiveevaluation of existing positions is to use the five steps of the Wyckoff method and the buyingand selling tests.

The trend and position of the general market are as important in reviewing an existing position asthey are in considering a new position. Although each individual issue can do its own thingindependent of the market, it is always best to have the market working in favor of an existingposition and not against it. If a position was established based in part on the fact that the marketwas in an up trend or down trend, the Wyckoff trader wants to see that trend continue. The sameis true of the trend of the individual issue. If either the market or the issue violates a trend line ofan established trend channel, the trader may want to take a defensive action to better protect thefunds at risk in that position. This is especially true if it is the issue that violates its trend line. Ifboth the market and the individual issue violate a trend line, the need for some type of defensiveadjustment should be seen as being more urgent. Failure to act in these situations can result inmore paper profits being returned to the market than necessary. Failure to act can even result in aprofitable position going into negative territory.

When an existing position was established, part of the reasons for making the trade was that theissue be traded was as strong or stronger than the market if it was a long position, or as weak orweaker than the market if it was a short position. At some point, the relationship between themarket and the issue will change. When a long position is no longer in an issue that is as strongor stronger than the market, it is time to consider a defensive adjustment. The same is true of ashort position in an issue that is no longer as weak or weaker than the market.

Every existing position has an anticipated objective. Many times, individual issues have severalpotential objectives as a result of phases in their counts. The reaching of any objective ispotentially the end of the move. Therefore, if an objective is reached, consideration of adefensive adjustment to the position is in order. Sometimes, a situation may be encounteredwhere the general market reaches an indicated objective, but the issue in which a position is held



does not. In these cases, the Wyckoff trader may choose to make no defensive adjustment. Thisis especially true if both the market and the issue remain in trends that are friendly to the existingposition. If a defensive adjustment is made, it may be a milder form of adjustment that allows theposition to perform in a profitable manner as apposed to a more radical adjustment that couldlimit profits.

In step four of the Wyckoff method, the trader determines an issues readiness to move. This stepis critically important when it comes to existing positions especially if the issue is ready to movein the wrong direction. What does this mean? If a long position is held in an issue that is in anover bought position relative to an up trend that is being traded, it is ready to move in the wrongdirection. If a long position is held and the price moves into an up thrust position, it is ready tomove in the wrong direction. If the price is in a potential spring position and a short position isheld, the position is ready to move in the wrong direction. These are just a few situations that candevelop where the Wyckoff trader should consider a defensive adjustment to an existingposition. There will also be times when an issue is ready to move in the direction that favors anexisting position. Obviously, these are the most desirable situations. Even in these situations theWyckoff trader may want to consider an adjustment. When the issue starts to move in thedirection indicated, the trader may want to protect a measure of profit already realized.

Finally, the Wyckoff trader wants to time trades in individual issues with anticipated turns in themarket. If the expected turn in the market has the potential to damage a position in an individualissue, this is a time to strongly consider a defensive adjustment. While this may be the only timethat a trader may want to enter a new position, it should be remembered that it is not the onlytime that defensive adjustments should be considered.

When a trader takes a position, part of the decision to enter the trade is based on the passing ofsome or all of the buying and selling tests. If not all of the tests have passed when the trade isopened, it is important that the remaining tests are passed as the action unfolds. It is even moreimportant that the action does not start to pass selling tests if a long position is held or buyingtests start to be passed if a short position is held.

What is a defensive adjustment? There are several that can be considered. Some are more radicalthan others and some are milder. The degree of defensiveness taken needs to fit the situation andthe personality of the trader. If a trend that is being traded is decisively broken or an equallyimportant opposing trend is defined, the Wyckoff trader will likely consider a radical adjustment.However, if only a normal correction is anticipated or one has just been completed, the traderwill likely consider a milder adjustment.

The most radical defensive adjustment is to close the position. If the trader feels anuncomfortable level of uncertainty, this is the best thing to do. Other defensive adjustmentsinclude closing a portion of a trade and maintaining the rest of it. Moving stop orders so as toreduce the amount of exposure to an unanticipated price move in the wrong direction is anotherdefensive adjustment that can be made. Never adjust a stop in such a way that the level of risk isincreased. That is reckless not defensive. There are also option strategies that can be used tomake an adjustment. Except when the most radical defense is chosen, a Wyckoff trader maywant to consider a combination of defensive adjustments. The most important thing is that when

defensive action is indicated that some adjustment is made.

Existing positions can be reviewed at the same time as new trade candidates are considered. Ifthis does not feel comfortable, make the review of the action a two step process. If this is theprocedure that is followed, it is suggested that existing positions be reviewed first. These are thefunds that are at risk. They deserve top priority

Putting It All TogetherPart One - New Positions

Each Wyckoff concept by itself is relatively simple and easy to understand. If conceptsdeveloped in the market one at a time and isolated from all the others, applying the Wyckoffmethod would be very easy and all Wyckoff traders would realize a profit from every trade.Unfortunately, concepts do not develop one at a time and isolated from all the others. There arealways multiple variables to consider that make applying the Wyckoff approach morecomplicated than many would like. Managing the potential complexity can be accomplished bydeveloping a step by step plan and then faithfully following the plan. The plan should begin withmaking some choices as to such things as to what general market index to use, what universe ofindividual issues to follow, when and how often to review the action of the market andindividual issues and what steps to follow when those reviews are made.

The Wyckoff approach begins with the trader determining the trend and position of the generalmarket. Therefore, a Wyckoff trader must regularly monitor the action of a general market index.There is no need to follow more than one market index. Trying to monitor multiple indexeslimits the amount of time that can be spent studying and understanding any one of them. Thiscan lead to failing to consider important factors. Confusion and uncertainty are also possibilitiesif multiple indexes are monitored since they all are seldom saying exactly the same thing atexactly the same time. This can lead to trading paralysis or to over trading if the trader jumpsfrom index to index in an effort to maintain a high level of trading activity.

Wyckoff traders tend to experience their best trading results when they limit the number ofissues that they follow on a regular basis. Developing an understanding of how each issuebehaves especially as they approach potential trading opportunities takes time. Therefore,monitoring many issues will leave relatively little time to devote to each one. This can lead tooversights or snap judgments either of which can lead to costly trading mistakes. If a narrowlydefined general market index such as the Wyckoff Wave or the Dow Jones Industrials is used, itis a good idea to consider limiting the universe of potential trade candidates to the components ofthat index. The reason is simple. An index can only move from point A to point B based on theaction of its components. If a narrowly defined index is used and judgments concerning its actionare made correctly, the trader has a good chance of finding the individual issues that are mostlikely to be the biggest participants in the move anticipated in the index if only the componentsof that index are considered. If a trader chooses to use a broadly defined index such as the S&P500, it is unwise to attempt to examine all five hundred components each time the action isreviewed. Consider dividing them into relatively small segments and reviewing those segmentson a rotating basis. A computer program that filters out issues based on certain parameters mightbe used to limit the number of issues that need to be considered in greater detail. If this is done,care must be given to make sure that the parameters used for the filtering process are consistentwith Wyckoff concepts.



Every Wyckoff trader should designate a time and a place for reviewing the action of the market.Most traders are busy individuals with numerous responsibilities and interests competing for aportion of their discretionary time. A judgment must be made as to where market analysis fitsinto those responsibilities and interests. Once that judgment is made, a block of time should beset aside each day and a set location should be selected at which to study the market. Developingdiscipline is an important part of being successful in the market. Making these decisions as towhen and where to study the action of the market is part of that discipline.

When a Wyckoff trader sits down at the appointed time and in the appointed location to make anassessment of the action of the market and individual issues, there are only a few things that areneeded to make a credible examination of the action. One thing that is needed is a group ofvertical line and figure charts that provide a picture of the action that is consistent with the timeframe of the traders market operation. Adding additional charts to the group on an occasionalbasis to provide a picture of other time frames can be helpful especially when a trade is about tobe opened or closed.

The only other things a Wyckoff trader really needs is a list of the five steps of the Wyckoffmethod and a list of the buying and selling tests. Using these and these alone will result in anorderly and disciplined analysis of the action. It is suggested that traders begin their analysiswith the action of the general market. Traders need to look at the action from two perspectives.One is the perspective of whether to take new positions. The other perspective of what ifanything needs to be done to properly manage existing positions.

If there are no existing positions, step one of the Wyckoff method will indicate what type of newpositions might be considered and whether those positions should be considered immediately orif additional developments are needed first. If the position in the trend justifies consideringimmediate action and the universe potential trade candidates is limited to trading vehiclesderived from the index being analyzed, the trader can skip step two of the method and go to stepthree. The trader who is considering positions in individual issues must make a stop at step two.

Whether the market is indicating a trading opportunity on the long side or the short side willdetermine how the trader seeking positions in individual issues will apply step two. Wyckofftells us to buy relative strength on reactions and to sell relative weakness on rallies. If the marketis indicating an opportunity on the long side, only those issued that have overall been strongerthan the market and that are currently making a reaction should be considered. If an opportunityon the short side is indicated, only those issues that have overall been weaker than the marketand that are currently making a rally should be considered.

At step three, both the index trader and the issue trader need to determine that the potential thathas been developed meets a predetermined requirement. If the requirement is a ten percentpotential and the potential in place is only five percent, the trading opportunity should beconsidered unacceptable and the analysis can stop. If the required potential is in place, bothtraders can continue to step four. Generally speaking, index traders can accept a smallerrequirement as to the amount of potential that is in place to justify a trade due to the nature of thetrading vehicles involved than individual issues traders. It should be noted that the individualissue trader needs to have a requirement as to the amount of potential that is in place for both themarket and the individual issue and those requirements can be different.

At step four, the index trader considers the indexes readiness to move based on the character ofthe price and volume action. This involves determining whether the statements made by the priceand volume action during the days leading up to the potential opportunity are consistent with thatopportunity. If the action on a day to day basis has been making bearish statements, but a longposition is being considered, the trader should step back. The index is not indicating a readinessto move in the desired direction. A similar consideration should be made by the individual issuetrader to those issues that have survived the analysis to this point. Those that are not indicating areadiness to move in the desired direction should be set aside. The individual issue trader shouldalso look for primary trading positions among those candidates still in the running. Thesetogether with the character of the action will determine a readiness to move.

The index trader is ready to take a position when step four has been completed. However, beforeactually taking the position, the trader should consider the Price/O.P. relationship and anyindications provided by the Technometer and Force. The trader is looking for indications fromthese indicators that confirm the wisdom of actually taking the position. If these indicatorsprovide non-confirming indications, the trader should step back and at least postpone taking theposition. If the O.P., Tec and Force provide neutral indications, the trader may still choose to goahead with the trade, but should realize that there is an element of uncertainty that is involved.The individual issue trader must insist that the confirming indicators for the general market areactually providing confirmation. Step five tells the individual issue trader to time trades toanticipated turns in the general market. Confirmation from the Pice/O.P. relationship, and theTec and Force are an important part in justifying the anticipation of a turn. If these indicators areavailable for the individual issues as will as for the general market, the individual issue traderwants them to be confirming the wisdom of the trade as well.

Each time either the index trader or the individual issue trader completes one of the five steps,the appropriate list of buying tests or selling tests should be reviewed and any of the tests thathave been passed at that point should be noted. By the time the trader gets to step five of theWyckoff method, the number of buying or selling tests that have been passed and which havebeen passed must meet predetermined requirements. The position should at least be postponed.

It might seem that it could take hours to work through all the procedures listed above, but that isnot so. Each step flows easily and quickly into the next. Often just a glance at a chart that has theappropriate markings on it will indicate that several steps have been completed favorably or not.If a Wyckoff trader finds that it is taking more than an hour to work through the processsomething is wrong. If the trader is an individual issue trader, the problem may be that theuniverse of trade candidates it too large. However, it more likely will indicate an unacceptablelevel of doubt resulting from a lack of experience, a lack of knowledge or both. In these cases,any trades under consideration should be limited to practice trades. The exercise will addexperience and knowledge so that the next time an analysis is done there may be no doubt.

Primary Selling Opportunities - Part 3Rally Back to the Ice

A market or an individual issue provides a Wyckoff trader with a third opportunity to establish ashort position when it makes what Wyckoff traders call a rally back to the ice. In order toidentify a rally back, a trader must first know what ice is. Wyckoff defines ice as a zone ofvalues defined by the lows of reactions in a trading range. Wyckoff traders will frequentlysimplify this definition and equate ice with the support level of a trading range. Normally, this isacceptable. However, there can be instances where the ice is defined higher up in the tradingrange. The determining factor is where the low points of the various reactions in the tradingrange are located.

In order for there to be a rally back to the ice, the price must first provide an indication ofweakness by falling through the ice. This is accomplished by wide price spreads to the down sideon high or increasing volumes resulting in poor closes as the price passes through the ice.Normally, this is accomplished over several days. However, one especially bearish day canresult in a fall through the ice. The Wyckoff trader wants to see the fall through the ice push theprice decisively through and below the ice. This provides the price with the room needed tomake a successful rally back. Traders should beware of those penetrations of an ice level that donot develop with the price spread and volume characteristics mentioned or do not decisivelybreak the ice level. These may actually be buying opportunities.

A fall through the ice is the first step in the mark down phase. It comes after the preparation for adecline has been completed in the trading range. Therefore, the rally back is theoretically thebest place to enter a short position because all of the preparation for the decline has beencompleted. Unfortunately, there is no mechanical way to identify exactly where the rally back isgoing to be completed and where the absolute best place is to open a short position. However,there are guidelines that the Wyckoff trader can use to identify a relatively narrow range ofvalues in which to consider making a trade.

One factor to consider in identifying a spot to open a position is to consider the decline thatproduced the fall through the ice and where the bottom of the ice is located. Wyckoff tells us thatit is normal for a reaction to be corrected by a rally equal to half of the reaction being corrected.Therefore, when the fall through the ice has been completed, the trader should identify thehalfway point of the decline that produced the fall through the ice. Another important level is thebottom of the ice. When this level is combined with the halfway point of the fall through the ice,the result is a zone of values. It is in this zone where the rally back is most likely to becompleted. Beware of the rally back that is able to get through this zone. If the price is able toget through the zone, it is demonstrating a level of strength that should be viewed as beingincompatible with taking a short position.



A second factor to consider in identifying the spot to open a short position is the character of theprice and volume action as the rally back unfolds. Wide spreads to the up side on high orincreasing volumes leading to strong closes is not what the potential short seller wants to see.Action that has these characteristics indicates strength. It can result in the price rallying backthrough the ice and then making a significant advance. When this happens, a shakeout is said tohave occurred. The Wyckoff trader wants to see a rally back that confirms the weaknessdemonstrated on the fall through the ice. This is accomplished with a series of price spreads tothe up side that tend to narrow as the rally back progresses. If these price spreads come ondecreasing volumes, the indication is of a lack of demand, which tends to confirm the weaknessseen on the fall through the ice. Sometimes, there will be a surge of volume at the top of a rallyback in combination with a narrow price spread. This should not discourage the short seller fromconsidering a position. The combination of narrow spread and high volume at the top of a rallyback indicates the meeting of supply and that is an indication of weakness. Supply will beneeded to fuel the decline that is anticipated to follow the rally back.

When a Wyckoff trader opens a short position on a rally back, a protective stop should be placedat the same time. The trader wants to keep the stop as close as possible to the entry point tominimize the damage should the action not unfold as anticipated and the position be stopped out.However, if the stop is placed too close, it represents an invitation to be stopped out. Whenselecting the level at which to place the initial stop order, the trader should consider the potentialprofit from anticipated and the location of the ice. The stop should be placed above the ice. Itshould also be placed such that no more than one point is being risked for every three points ofprofit that is anticipated. If these two conditions are met and the entry point has been selected assuggested, the Wyckoff trader has the odds in his favor and an excellent chance of realizing aprofit.

Stock Market Selling TestsTests of Up Thrusts - Part Two

Most up thrusts are tested. The test of an up thrust provides the Wyckoff trader who establishedan initial position on the up thrust with an opportunity to add to that position. For other traders,the test of an up thrust provides an opportunity to consider taking an initial position. ManyWyckoff traders prefer to open their initial position on the test of an up thrust. There are tworeasons for preferring the test rather than the up thrust itself. One is that the response to the upthrust has provided the price of the issue being considered to demonstrate some weakness. Theother reason is that the top of the up thrust has defined a resistance level that provides a measureof protection against being stopped out.

For the trader looking to take a position on the test of an up thrust, the up thrust is a wake upcall. It alerts the Wyckoff trader that a potential short candidate has been identified. Theresponse to the up thrust provides the trader with an opportunity to make an initial judgment asto how much interest there should be in establishing a position when the up thrust is tested. If theup thrust penetrated the resistance level of an established trading range, the Wyckoff traderwants to see the response to the up thrust take the price to at least the middle of the tradingrange. This is considered a normal response. When a response is normal, it improves the odds ofthe test being successful and of a mark down phase following the test. If the price of an issueunder consideration can reach the lower portion of the trading range on the response to the upthrust, it becomes a better candidate for a trade on the test because it has demonstrated greaterweakness. Traders should beware of the response to an up thrust that is less than normal. Theseleave the price with less room in which to complete the test increasing the odds that the test willnot be successful.

The average level of volume on the response to an up thrust is also an important factor for thepotential short seller to consider. If the average level of volume on the response to an up thrust isequal to or greater than the average level of volume on the rally leading up to the up thrust, thetrader has reason to be especially interested in that candidate because it has provided anotherindication of weakness. The Wyckoff trader wants to see the average level of volume on the rallythat produces the test of the up thrust to be less than the volume on both the rally that producedthe up thrust and the reaction that represented the response to the up thrust. This indicates a lackof buyers and improves the odds of a successful test. There is a situation where high volume onthe test of an up thrust can be a good thing for the potential short seller. If the price rallies intothe test of the up thrust on narrowing price spreads and increasing volumes, the indication is thatsupply is present and supply is what is needed to make the anticipated mark down phase beproductive.



At what price should the test of an up thrust be completed? It is not possible for a Wyckoff traderto pick an exact price at which the test of the up thrust is likely to end. However, it is possible toidentify a range of values where the test is likely to be completed. Frequently, this range ofvalues is relatively narrow. It is defined by the price of the resistance level that was up thrustedand by the price that represents the halfway point of the reaction that was the response to the upthrust. Most but not all successful tests will be completed in the zone defined by these twolevels. Those candidates that fail to reach the zone likely will turn out to be missed opportunitiesunless there is some characteristic of the price and volume action that indicates an unusual surgein supply or lack of demand. Those candidates that overrun the short selling zone should be seenas being of lower quality. This is especially true if the top of the test of the up thrust is higherthan the top of the up thrust. These poor quality tests have a greater chance of failing and leadingto additional up side progress. Even when they are successful, the Wyckoff trader can feelconfident that there will be an additional test. If that more important test is of better quality thanthe first, a position can be taken.

Although the test of an up thrust is not as dangerous a danger point as the up thrust, any shortposition established on the test must be protected. If the protection selected is a stop order, thestop needs to be placed above the high point of the upthrust. How far above the top of the upthrust is a matter of personal choice. Making the choice should be determined by comparing theamount being risked to the anticipated profit. Wyckoff traders should never risk more than onepoint for every three points of potential profit. Placing a stop just above the top of the up thrustas some traders do can be just as unwise as placing it too high. A stop that is that close runs agreater risk of being caught. There is nothing more frustrating than to be stopped out of aposition and then watch from the side lines as the price goes on to do exactly what wasanticipated.

© The Jamison Group, Inc.: Stock Market Buying Tests - Part One

Primary Selling Opportunities - Part 1Upthrusts

The Wyckoff approach is not just for the bulls and for advancing markets. It also identifiesprimary selling opportunities for the bears in declining markets. These are places in the action ofa market or an individual issue where the price becomes unusually vulnerable to down sideprogress. One of these places is when the price enters an up thrust position.

A potential up thrust position develops when the price penetrates a resistance level that wasdefined by the top of a previous advance. Theses advances can be short term rallies, intermediateterm swings or major moves. The Wyckoff trader anticipates a response to a potential up thrustthat is proportional to the significance of the up thrust. Potential up thrusts that develop after theprice has been in a trading range for some time are the most interesting because the time spent inthe trading range prior to the up thrust provides measurable down side potential to fuel theanticipated decline.

Not every penetration of an established resistance level is an up thrust. As with all Wyckoffconcepts, how the action unfolds is as important as the fact that the penetration is occurring.When the price passes through a resistance level on wide price spread and increasing volumeleading to a strong close and repeats this type of action for several days, that is not an up thrust.In those cases, the price is breaking out into new high ground. These are very bullishdevelopments and not ones that should be considered for taking action on the short side.

The penetration that is of greatest interest to the Wyckoff trader looking for an opportunity onthe short side is one that unfolds on narrowing price spread. or at least on spreads that are similarto those just prior to the penetration. This is important because it indicates to the trader wetherthe bulls or the bears are in control of the action at that critical point when the price moves intonew high ground. If the bulls are in control, the price spread widens on the move into new highground as the demand to be positioned on the long side swells. If the price spread does not widenin new high ground or narrows, the indication to the trader is that either the demand that ispresent is of poor quality or that supply is in control of the situation. Making a judgment as towho is in control of the action requires an examination of the level of volume as the penetrationof the resistance level is made.

If the price moves into potential up thrust position on declining volume in combination withnarrowing price spreads or spreads that do not widen, the indication is that the demand is lackingat a point where it should be abundant and that the quality of the demand that is present is poor.The lack of quality demand at that critical point in the action tells the Wyckoff trader that up sideprogress is not likely to be sustained and that the price is likely to respond to the up thrustposition with a move back below the resistance level. If the price moves into new high ground on



narrowing spreads or spreads that do not widen and volume is high, the indication is that supplyis in control and that up side progress is not likely to be sustained. Here again, the anticipation isfor a response to the up thrust position that takes the price to lower levels.

The response that the price makes to an up thrust position is expected to be proportional to theamount of potential put in place prior to the up thrust. The full measure of the decline thatfollows an up thrust seldom unfolds in one sustained move. It is normally is spread over a seriesof declines and corrective rallies. Some of these thrusts and corrections may also develop intoprimary selling opportunities. The Wyckoff trader who establishes a position with the price in anup thrust is entering at a danger point. Therefore, defensive measures should always be taken atthe same time that a short position is established to provide protection against the unforeseen.Barring the unforeseeable, a trade opened on an up thrust position has the potential to be themost rewarding.

Primary Selling Opportunities - Part 4Normal Corrective Rallies

The last type of primary selling opportunity that the market or an issue will present to a Wyckofftrader is a normal corrective rally. When the price of a trading vehicle leaves a trading range tothe down side, it may move to the indicated down side objective in one sustained decline.However, these situations are the exception to the rule. Most of the time, the path from tradingrange to down side objective is accomplished by way of a series of thrusts and corrective rallies.The corrective rallies can provide additional entry points on the short side if they are normal andif the anticipated objective is far enough below the entry price to justify the trade.

Wyckoff identified a normal corrective rally as one that ends in the vicinity of the halfway pointof the previous thrust to the down side. Over the years, the vicinity of the halfway point hascome to be known as anywhere from a one third correction to a two thirds correction. Thosecorrective rallies that are completed below the halfway point are seen as being more desirable fortaking a position because they suggest a greater level of continuing weakness than do thecorrective rallies that end above the halfway point. All positions should immediately beprotected with a stop order. If a position is being established below the halfway point, the initialstop needs to be placed above the halfway point. If it can be placed just above the two thirdspoint, that is seen as being more desirable because the stop is less likely to be caught. If the ashort position is being established above the halfway point, the initial stop should be placedabove the two thirds point. Wyckoff traders are reminded to never risk more than one point forevery three points of anticipated profit when placing a stop order. Also remember that stops thatare placed unusually close to an entry price in an effort to minimize the risk are more vulnerableto being caught.

Selecting a price within the zone identified as the vicinity of the halfway point at which to opena position should be based on an assessment of the character of the action during the correctiverally and on any indication that may be provided by the figure chart. Sometimes, the price willhesitate at the bottom of a downward thrust long enough to build a short term potential on thefigure chart that provides an indication as to where the corrective rally is likely to be completed.These indications should not be viewed as being automatic selling points. They are indicationsonly and require confirming price and volume action before a position is actually taken.

In those cases where the figure chart does not provide an indication as to where the correctiverally is likely to be completed, the Wyckoff trader must relay on making a judgment as to thecharacter of the price and volume. The trader is looking for that place during the corrective rallythat the price and volume action indicates a withdrawal of demand or the meeting of supply.These indications are normally provided over a series of days rather than on one key day.Therefore, hesitating for a few days after the first indication is seen before taking a position is



frequently a good idea because it can provide a better entry price. There is a potential down sideto this hesitation, however, in that it may result in missing the opportunity should the pricesuddenly resume down side progress. In these cases, it is best to look for another opportunityrather than to chase a price lower.

A withdrawal of demand or the meeting of supply can both be indicated by narrowing pricespreads to the up side when the price is in the vicinity of the halfway point. The differencebetween the two indications is provided by the level of volume. Narrowing price spreads to theup side on declining volumes indicate a withdrawal of demand. Narrowing spreads to the up sideon increasing volume indicate the meeting of supply.Sometimes, a Wyckoff trader can conclude that a withdrawal of demand or the meeting ofsupply is indicated at the top of a corrective rally if the price spread is wide. These indicationsrequires that the close be at or near the low price of the day. In these cases, low volume suggeststhat demand has been exhausted and high volume indicates that demand has been overwhelmedby supply.

Some down trends will have only one normal corrective rally and others may have several. Thereis no way to know in advance how many there will be. However, each is a potential entry pointfor the short seller providing the anticipated profit meets the traders requirements and theamount of funds put into that one trading vehicle is not more than the one third of total funds thatWyckoff suggests be used as a guideline.

Stock Market Analysis Tools & StrategiesAnalyzing the Wyckoff Wave, O. P. Index and Trend Barometer

Since the Wyckoff Wave put in its all time high back in July of 2007, its action has beendominated by down trends. Three of the down trends are of special interest because they have ormay have an impact on current and future action of the Wave. The most important down trendwas defined off the July high (Column 2).

The second rally top used to define this trend was the October high (Column 9). The parallelover sold line for this trend was constructed through the August low (Column 4). Since it wasdefined, the supply line of this longer term down trend has never been weakened or evenseriously challenged and it is unlikely that it will be in the near future due to the fact that thecurrent action of the Wyckoff Wave is more than 5000 points below the supply line. The actionof the Wave has had encounters with the over sold line of the down trend.

The action of the Wyckoff Wave first encountered the over sold line of the longer term downtrend in November (Column 12). The resulting penetration of the over sold line produced an oversold position that needed to be corrected. The correction of an over sold position can unfold as aperiod of horizontal action that over time allows the Wave to move back into the down trendchannel.

However, the correction normally unfolds as a rally, which is what happened in this case as theWave rallied back to near the middle of the down trend channel (Column 13). With the Wavesolidly back in the middle of the down trend channel, it was free to resume down trendactivity. During January (Column 15), the Wave again encountered the over sold line of thedown trend and entered an over sold position.

This time, the ability of the Wave to correct the over sold line with a normal corrective rally wasless impressive. Instead of moving back to the middle of the down trend channel, the Wave hasmoved in more of a horizontal direction clinging to the over sold line. The inability of the Waveto make the normal corrective rally to the middle of the down trend channel indicates continuingweakness. It suggests that the bears are content with their short positions and see no reason to bepanicked into a short covering rally. It also suggests that the bulls that have been worn out orshaken out of the market are reluctant to return. If this thinking among the bears and the bullscontinues, the Wave may continue to move horizontally until a position near the middle of thedown trend channel is reestablished. Other possibilities include a gradual drift lower as the oversold line moves lower. If the bulls and the bears change their assessment of the action, a normalcorrective rally is another possibility.



In addition to serving as the second point for defining the supply line of the longer term downtrend, the October high (Column 9) also was a factor in defining the intermediate downtrend. The second point used to define this trend was the December high (Column 13). The oversold line was constructed parallel to the supply line from the November low (Column12). DuringJanuary (Column 16), the action of the Wyckoff Wave approached but did not reach the oversold line of the intermediate down trend. Normal down trend action would have penetrated orreached the over sold line of the down trend. The failure to reach the over sold line indicated thatthe intermediate down trend was in trouble and vulnerable to being broken. It was also a warningto bears whose positions were based on the existence of this trend to become more defensive inthe management of their positions. As the action of the Wave moved from January into February(Column 17), the supply line was penetrated. This action weakened the intermediate downtrend. Frequently, down trends are ended with a four step process that begins with the weakeningof the supply line. The second step is for the price to reenter the down trend, but not make alower low than the low that occurred before the supply line was weakened. In this case, step twowas completed during February (column 18). Step three is for the supply line to be decisivelybroken by a rally that takes out the high recorded when the supply line was weakened. The finalstep is for the price to confirm the breaking of the down trend with a reaction that is unable toreenter the down trend channel. As of the last day posted, the action was working on step three,but the outcome was inconclusive resulting in a conclusion that the intermediate down trend wasstill having an impact on the action.

The third significant down trend since the July high was defined off the highs that were recordedduring December (Columns 13 & 14). The over sold line that completed the definition of thisshorter term down trend was constructed through the low point of the reaction that separated thetwo rally tops used to define the supply line. The over sold line of this trend was penetratedtwice during January (Columns 15 & 16). The response to the first over sold position was anormal corrective rally. The response to the second over sold position was moreimpressive. After slightly weakening the supply line and briefly reentering the shorter term downtrend, the supply line was decisively broken (Column 16 & 17). The Wyckoff Wave could haveclearly ended the shorter term down trend by failing to reenter the short term down trendchannel, but it did not. During February (Column 17) the action of the Wave slipped back intothe down trend channel, but did not make a lower low. On the one hand, this action seemed toconfirm the breaking of the short term down trend by failing to make a lower low. However onthe other hand, the action seemed not to confirm the breaking of the down trend by reentering thedown trend channel. Conflicting signals such as these encourage traders to be moredefensive. Since the action of the Wave reentered the down trend, it has been horizontal innature and has lifted the Wave out of the down trend channel. As horizontal action continues andthe gap between current action and the supply line widens, it may be concluded that the breakingof the shorter term down trend has been confirmed even though there was the reentry into thetrend after the supply line was decisively broken.

The three down trends mentioned above are the ones that are having an impact on currentaction. However, there have been others that deserve to be noted. After the July high (Column2), there was a rally to a lower top during August (Column 3) that allowed a shorter term downtrend to be defined. An over sold position relative to this down trend developed at the Augustlow (Column 4). The correction of the over sold position began the process than lead to the end

of the down trend being confirmed during September (Column 6). Another shorter term downtrend was defined near the end of October ( Column 9) when the Wyckoff Wave rallied to alower top relative to the high that had been recorded earlier in October. The Wave has movedout of this down trend. However, it should be noted that the stopping action was not the moreclassic type mentioned earlier.

Although the action since July 2007 has been dominated by down trends, there have been uptrends as well. There have to be up trends for down trends to be defined. The up trends that haveunfolded have all been short term in nature. They have been characterized by being relativelynarrow compared to the down trends discussed earlier and they have been steep. Trends that aresteeply inclined and narrow are difficult for the action to sustain. In this case with the actiondominated by down trends, the short, steep and narrow up trends likely were the result of bearsrotating out of some short positions and bulls rushing back into the market to avoid missing thenext advance and in the process setting themselves up to being shaken out or worn out later. Theup trends that stand out most clearly were defined off the August low (Column 4), the Novemberlow (Column 12) and the January low (Column 16).

Earlier it was noted that in order to have down trends there must be up trends. However, in orderfor there to be trends in either direction, there must be trading ranges that provide the potentialthat the fuel the advances and declines that lead to up trends and down trends. The trading rangesthat have developed since the all time high of the Wyckoff Wave will be the subject of thesecond part in this series.

© The Jamison Group, Inc.: Stock Market Analysis-Tools and Strategies

Stock Market Analysis Tools & Strategies Analyzing the Wyckoff Wave, O.P. Index and Trend Barometer

Part 2 - Trading Ranges

In order for the action of the Wyckoff Wave to have been dominated by down trends since thehigh in July 2007, there has to have been trading ranges in which the Wave was able to build thepotential that has fueled the decline. The most important trading ranges stand out most clearly onthe five hundred point figure chart of the Wave. The all time high of the Wave occurred incolumn two of the figure chart. The vertical chart of the Wave shows the July high to be thebeginning of the decline. However, the figure chart indicates that it was also the end of a tradingrange that had developed earlier in the year.

It can be argued that each trading session provides a point of interest because it provides a pieceof additional information about the move that is underway or being prepared. This examinationwill be limited to three particular points of interest. They are thrusts, inharmoniousactions/divergences and Trend Barometer indications. These three tend to provide the mostuseful information as to the character of the stock market action that is unfolding at the moment or that is likely tounfold in the foreseeable future.

The stock market represented by the Wyckoff Wave seldom moves from point "A" to point "B"in a straight line. The moves that most traders trade are made up of a series of thrusts. The size ofthese thrusts, the amount of new progress that each makes and the extent to which each thrust iscorrected indicate the overall health of an unfolding ove.

Ideally, each thrust in a move would be bigger than the previous thrust, make more new progressthan the previous thrust and correct less than the previous thrust. In reality, this is very seldomhow events unfold. The longer term down trend that has been guiding the Wyckoff Wave sincelast July has had three completed thrusts and is working on thrust number four. The first thrustbegan in column two of the vertical chart and ended in column 4. After that thrust wascompleted, the second thrust began in column nine and ended in column twelve. The third thruststarted in the next column and ended in column sixteen. The current thrust had its beginning incolumn seventeen and appears to still be underway.

In most cases, the first thrust of a move will make the largest amount of new progress because itis starting at the very beginning of the move and is all new ground gained or lost. The firstdownward thrust of the Wave in the decline that began last July was 5700 points in roundnumbers from its top to its bottom and all of that was new ground gained to the down side. The



second thrust was bigger than the first when measured from its top to its bottom. However, itonly made 800 points of new down side progress after completing a decline of 6100points. These observations provide several indications. The fact that the second thrust was biggerthan the first suggested that the market became weaker during the second thrust than it had beenin the first. The fact that the second thrust only made 800 points of new down side progressindicated that the bulls had been able to fight back against the bears on the correction of the firstthrust. They made up almost all of the ground lost on the first thrust. On the correction of thesecond thrust. the bulls were considerably weaker than they had been on the first correctivephase. When the second correction was completed in column twelve, the Wave had recoveredless than half of the ground covered by the second thrust compared to having recovered almostall of the ground covered by the first thrust. With the second thrust to the down side having beenbigger than the first and with the second correction having corrected a smaller portion of thethrust before it, the indication as of the high in column twelve was that the market wasweakening and that the decline would likely continue. During the third thrust to the down side,the Wyckoff Wave made more new down side progress than during the second thrust. Thisobservation indicated that the Wave was still weak suggesting that the decline was notover. However, the third thrust and the correction that followed it provided indications that theWave was not as weak as it was during the period of the second thrust and its correction. Theseindications were made by the fact that the third thrust was somewhat smaller than the second andby the fact that the Wave was able to regain a larger portion of the third thrust than had been thecase on the correction of the second thrust.

The current thrust of the decline began on February 1. As of March 7, it appeared to be a work inprogress. Therefore, any conclusions as to any indications it provides have to be subject tochange when the thrust has been completed. However, as of now, the fourth thrust has beensubstantially shorter than any of the first three and no new down side progress has beenmade. The conclusion that comes from these observations is that the Wyckoff Wave is not asweek as it had been during the previous thrusts in the decline. This conclusion suggests that animportant change in character in the action may be developing. Therefore, the bears would dowell to be more defensive with respect to managing existing positions or considering new onesand the bulls should be vigilant so as not to miss any new opportunities that may be presentedduring the weeks ahead.

The thrusts outlined above were all of what most Wyckoff traders would consider to beintermediate in nature. It should be noted that each of those thrusts was made up of smallerthrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorterterm trader looking to realize as much profit as possible from each thrust rather than beingcontent to ride out the entire decline with one set of positions. Due to the process of rotation, theleaders during one thrust of a larger move may not be the leaders in the next thrust. Studying theindications from the smaller thrusts within the bigger moves can be helpful when one set ofpositions should be replaced by a new set.

Inharmonious actions between the Wyckoff Wave and O.P. Index are always points ofinterest. They indicate that there is an unstable relationship between the result expressed by theWyckoff Wave and by the effort expressed by the O.P. The indication when one of theseunstable relationships develops is that the Wave is likely to change direction from the direction it

was moving when the inharmonious action or divergence first appeared. Inharmonious actionsand divergences should not be considered to be timing tools. In other words, if one of thoserelationships develops today, do not assume that the Wave will respond tomorrow. There is,however, a general relationship between the magnitude of an inharmonious action or divergenceand the amount of time it will take for a response to begin and be completed. If an inharmoniousaction or divergence develops over a long period of time, the response to it is likely to takelonger to begin and complete. Those that develop over shorter periods of time should produce aquicker response and one that is completed sooner.

Since July of 2007, there have been several cases of inharmonious action or divergence. The firstcame in column three of the vertical chart when the Wyckoff Wave rallied to a lower top thanhad been recorded during July and the O.P. rallied to a higher top. That divergence was a case ofup side effort unconfirmed by result. It suggested the likelihood of a reaction in the Wave. In thatcase, the response was immediate and severe as the Wave declined to its August low. When theWave put in its October high in column twelve, it was only 400 points from its Julyhigh. However, the O.P. was approximately 1000 points below its high. This was a bearishinharmonious action. The response by the Wave was unconfirmed by the effort. The indicationwas for a decline in the Wave. In that case, the response also came quickly and it wassubstantial. At the November low in column twelve, the Wyckoff Wave was in new low groundrelative to its August low. However, the O.P. was not. In that case, the down side result wasunconfirmed by the effort indicating the likelihood of a turn to the up side by the Wave. As theWave was putting in its December high, the O.P. was higher than it had been in October, but theWave was not. This was another bearish divergence suggesting that a reaction in the Wave waslikely and it declined to the January low. In the case of this divergence, it should be noted thatthe O.P. continued to try to pull the Wave higher into column fourteen. This widened thedivergence and possibly helped the Wave make more down side progress than it might havemade.

Thus far during 2008, there have been additional cases of divergence and inharmoniousaction. At the January low in column sixteen, the Wyckoff Wave was in new low ground relativeto its November low and the O.P. was not. This result to the down side was unconfirmed by theeffort and the Wave then responded with a rally to the high on February 1. At the end ofFebruary, the Wave was putting in a lower top relative to the one recorded at the beginning ofthe month while the O.P. was making a higher high. In this case, the O. P. had expressed aneffort to the up side that the Wave had not confirmed. The response to that bearish divergencehas lead to where things stand as of March 7. Now there is a bullish inharmonious action and abullish divergence. The divergence can be seen by comparing the current position of the Waveand O.P. to where they were during the middle of February. The Wave is now lower and the O.P.is not. The unconfirmed result suggests a change in direction. At the same time, there is also abullish inharmonious action that can be seen when the current positions of the indexes arecompared to their January lows. The Wave is almost back to its January low, but the O.P. isnot. This is another indication of a likely change in direction

The Trend Barometer is the final point of interest that will be examined. It is the name given tothe Technometer and the Force Index. The Technometer indicates to what degree the market is

over sold or over bought. The Force Index indicates whether the Wyckoff Wave is beinginfluenced by down side pressure or up side pull.

Theoretically, the Technometer can have values as low as zero and as high as onehundred. However, neither of those numbers have ever been recorded and it unlikely that eitherwill ever be recorded. Observations over the past seventy plus years have indicated that theTechnometer spends most of the time below a reading of 50 and above a reading of38. Therefore, readings at or above 50 are seen as indicating an over bought condition andreading at or below 38 are seen as indicating an over sold condition. An over sold conditionindicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicatesthat the Wave is vulnerable to a reaction. To be more precise, over bought and over soldconditions indicate that the Wave is vulnerable to corrective action. Most of the time thatcorrective action comes in the form of a rally or reaction. However, it can unfold as a period ofhorizontal action. As the Technometer moves higher above 50 or farther below 38, it becomesmore over bought or more over sold. That means the Wave becomes more vulnerable tocorrective action. It down not necessarily mean that the Wave becomes vulnerable to a biggercorrection. A figure chart should be consulted to judge what the magnitude of the indicatedcorrection is likely to be.

Some Wyckoff traders try to use the Technometer in a mechanical manner in an effort to bypassall of the other concepts that Wyckoff teaches. Traders who fall victim to this trap try to useTechnometer readings of 38 and 50 as automatic buy and sell signals. Traders who use thisapproach usually find that the market rewards them for a while. Since July of 2007, there havebeen relatively few clearly over sold and over bought conditions. In every case, the market hasrewarded to some degree the trader who has used the Technometer in a mechanical mannerproviding the trader was willing to ride out the gyrations that occurred between the entry pointand the point at which the reward was offered by the market. However, it has never failed to bethe case that at some point the market wants to get paid back by those who have used toTechnometer mechanically. In these situations, the Technometer usually tells the mechanicaltrader to take a position and then fails to provide an indication to exit the trade until it is deep inthe red.

The Force Index has no limits as to the readings it can reach. Its extremes are determined by theaverage level of volume. Higher average volume allows for greater extremes and lower averagevolume allows for lesser extremes. There are two ways in which the Force can be helpful inkeeping a Wyckoff trader on the right track. One is by the development of divergences betweenthe Force and the Wave. The other is by the tendency of the Force to trend.

In column six of the vertical chart, the Force put in a peak as the Wave approached its Octoberhigh. In column nine the Wave put in a higher high, but the Force put in a lower peak. This was adivergence between the Wave and the Force. The up side result on the part of the Wave did nothave enough up side pull from the Force to sustain it. The Wave responded by turning downwardeventually reaching the November low. At the November low there was another divergence. TheWave made a lower low than it had in August, but the Force did not. In that case, the indicationwas that the down side result experienced by the Wave did not have the down side pressure fromthe Force to sustain it and the Wave responded with a rally

The Force Index exhibits a tendency to trend. The high in the Force in column one and the highas the action crossed from column three into four can be used to define a down trend. The downtrend indicated that there was a bearish tone to the action confirming that the short side was theone to be trading and indicating that some one still trading the log side was likely in trouble. Incolumn five, the down trend was broken indicating that the bearish tone to the action had endedencouraging those still short to be more defensive and encouraging the bulls to be moreaggressive. This change in tone occurred as the Wave was recovering from its August low andmoving toward its October high. The tone of the action changed again in column nine when theup trend in the Force was broken. In that case, the change in tone was indicated just as the Wavestarted down from its October high. The tendency of the Force to trend is not a timing tool. Itdoesprovide indications as to which side of the market the trader should be trading. As a rule,traders who are trading against the tend of the Force will end up paying for their mistake just asthose who try to trade against the trend of the Wyckoff Wave are likely to have to pay for theirerror.

The points of interest outlined in the third part of this series should be viewed as being secondaryto the character of the price and volume action. They should be used to confirm indicationsprovided by the price an volume action. Trying to use any of them mechanically in lieu of anongoing study of the price and volume will likely lead to unintended consequences.

The effort to leave that range to the up side failed resulting in an up thrust. The high point of anup thrust is a point from which a down count may be taken. Since there is only one posting at the40000 level, it appears that there is no potential. Making this conclusion is the result of an overlymechanical approach to taking counts. Since the July high was an up thrust and an ending action,it is acceptable to count the potential created by the entire trading range even though there isonly one posting at the high. In this case, it appears that the Wyckoff Wave began moving intothe trading range during May when it first reached the 38500 level in column one of the figurechart. The potential built during the period from May to July was 4500 points for an objective of35500. This objective was reached as the Wave approached its August low in column three ofthe figure chart.

After the Wyckoff Wave made its initial break to the down side from the July high, it made acorrective rally that ended at the 38500 level at the beginning of column three. This rallyrepresented the test of the up thrust. The high point of the rally provided a place to take anotherand more aggressive measure of the potential in the trading range. This count began at the top ofthe test of the up thrust and extended to the left to where the Wave was rallying into May to the38000 level in column one of the figure chart. The potential measured by this count was 7000points indicating a down side objective range of 31000 to 33000. This objective was reached onthe decline to the January 2008 low.

The August low in column four of the vertical chart was the end of the first major thrust of theentire decline from the July high to the present. Although it was not clearly defined, a tradingrange did develop following the August low. If the low in column four was interpreted to be theselling climax of that phase of the decline, the preliminary support can be seen as having beenmet at the low in column three of the vertical chart. If these two points had been defined, the

high as the action crossed from column four into column five of the vertical chart would havebeen labeled as the top of the automatic rally making the low in column five the secondary test,which confirmed a new trading range. Since the action immediately left the range to the up sideafter the secondary test, it could be seen as also being a last point of support. Wyckoff tells usthat the maximum count to the up side stretches from the last point of support to preliminarysupport. If that rule was used in this case, the result would have been a 3500 point potential atthe 36000 level indicating an up side objective range of 38000 to 39500. The top of the objectiverange was reached at the October high.

An up trend was defined on the vertical chart off of the lows in column four and five. This trendwas broken in column six. At the end of that column, the Wyckoff Wave made an attempt toreenter the up trend that failed. The failure confirmed the breaking of the up trend and began thedefining of the next trading range. The failed attempt to reenter the up trend was used to definethe resistance level of the new trading range and the low in the next column was used to definethe support level. The action in column eight of the vertical chart provided an obvious endingaction in the form of an up thrust of the resistance level. At the end of column three of the figurechart and extending into column four, the potential for the next decline was established. It wasonly 1500 points. However, when the up thrust was tested in column nine of the vertical chart,the potential had grown to 3000 points for an objective of 36500 to 35000, which was reachedand over run on the decline to the November low.

The character of the trading range that developed during September and October points out thevalue of maintaining more than one figure chart. That trading range was relatively short term andwas confined to a relatively narrow range. Frequently, the potential in trading ranges like thiscan be underestimated if the figure chart being used is long term in nature as is the case with thefive hundred point chart. Keeping a one hundred point figure chart in addition to the fivehundred point chart provides an intermediate interpretation of the action that can better estimatethe potential developed in shorter term trading ranges.

The next trading range that developed was defined by the November low in column four of thefigure chart and by the December high in column five. After the limits of this range weredefined, the action moved into an apex. The action broke from the apex in column five of thefigure chart as the Wyckoff Wave began its decline to the January low. When the apex wasbroken, a new down side potential could have been measured. This count was taken at the 35500level and indicated an objective range of 29500 to 30500. This objective has not as yet beenreached. It may or may not be reached based on the outcome of the current trading range.

The current trading range was defined by the January low and the February high. It wasconfirmed when the February low respected the support level of the range. After a trading rangehas been defined and confirmed, the expectation is for an ending action to develop to signal thattrading range action is being completed and to provide an indication as to the direction of thenext move. Thus far, there has been no ending action relative to the new tradingrange. Therefore, taking a count in either direction cannot be justified. However, it is acceptableto periodically measure how much potential might be developing so as to have a feeling as tohow significant the next move might be. If the potential of the current range is measured at itswidest point as of the last trading day in February, the potential could be as much as 8000 points

if it is measured back to where the action was declining to the January low. The potential issomewhat less if it is measured only since the January low. If the anticipated ending actionrelative to the range points to additional down trend activity, the 29500 to 30500 objective rangewill likely be overrun by a wide margin. However, if the ending action points to an advance, it islikely that the lower objective mentioned will never be reached. The objectives that the action intrading ranges forecast should be seen as being indications only subject to being confirmed ordenied by the character of the price and volume action.

Note: Part three of this series will focus on other points of interest that have developed since theall time high of the Wyckoff Wave was put in place last July.


Stock Market Analysis Tools & StrategiesWyckoff Wave, Optimism-Pessimism Index & Trend Barometer

Part 3 - Points of Interest

In addition to helping analyze stock market trends and trading ranges, the Wyckoff Wave and itsrelated indicators the O.P. and the Trend Barometer provide other points of interest that can behelpful in determining when to consider taking new stock market positions, how to manageexisting positions and when to consider exiting those positions.

It can be argued that each stock market trading session provides a point of interest because it provides a piece of additional information about the move that is underway or being prepared. This examination will be limited to three particular points of interest. They are thrusts,inharmonious actions/divergences and Trend Barometer indications. These three tend to providethe most useful information as to the character of the action that is unfolding at the moment orthat is likely to project stock market action in the foreseeable future.

Like the stock market, the Wyckoff Wave seldom moves from point "A" to point "B" in astraight line. The moves that most stock traders trade are made up of a series of thrusts. The sizeof these thrusts, the amount of new progress that each makes and the extent to which each thrustis corrected indicate the overall health of an unfolding move. Ideally, each thrust in a movewould be bigger than the previous thrust, make more new progress than the previous thrust andcorrect less than the previous thrust. In reality, this is very seldom how events unfold. The longerterm down trend that has been guiding the stock market and naturally, the Wyckoff Wave sincelast July has had three completed thrusts and is working on thrust number four. The first thrustbegan in column two of the vertical chart and ended in column 4. After that thrust wascompleted, the second thrust began in column nine and ended in column twelve. The third thruststarted in the next column and ended in column sixteen. The current thrust had its beginning incolumn seventeen and appears to still be underway.

In most cases, the first thrust of a move will make the largest amount of new progress because itis starting at the very beginning of the move and is all new ground gained or lost. The firstdownward thrust of the Wave in the decline that began last July was 5700 points in roundnumbers from its top to its bottom and all of that was new ground gained to the down side.

The second thrust was bigger than the first when measured from its top to its bottom. However,it only made 800 points of new down side progress after completing a decline of 6100points. These observations provide several indications. The fact that the second thrust was biggerthan the first suggested that the market became weaker during the second thrust than it had beenin the first. The fact that the second thrust only made 800 points of new down side progress



indicated that the bulls had been able to fight back against the bears on the correction of the firstthrust. They made up almost all of the ground lost on the first thrust. On the correction of thesecond thrust. the bulls were considerably weaker than they had been on the first correctivephase. When the second correction was completed in column twelve, the Wave had recoveredless than half of the ground covered by the second thrust compared to having recovered almostall of the ground covered by the first thrust. With the second thrust to the down side having beenbigger than the first and with the second correction having corrected a smaller portion of thethrust before it, the indication as of the high in column twelve was that the market wasweakening and that the decline would likely continue.

During the third thrust to the down side, the Wyckoff Wave made more new down side progressthan during the second thrust. This observation indicated that the Wave was still weaksuggesting that the decline was not over. However, the third thrust and the correction thatfollowed it provided indications that the Wave was not as weak as it was during the period of thesecond thrust and its correction. These indications were made by the fact that the third thrust wassomewhat smaller than the second and by the fact that the Wave was able to regain a largerportion of the third thrust than had been the case on the correction of the second thrust.

The current thrust of the decline began on February 1. As of March 7, it appeared to be a work inprogress. Therefore, any conclusions as to any indications it provides have to be subject tochange when the thrust has been completed. However, as of now, the fourth thrust has beensubstantially shorter than any of the first three and no new down side progress has beenmade. The conclusion that comes from these observations is that the Wyckoff Wave is not asweek as it had been during the previous thrusts in the decline. This conclusion suggests that animportant stock market change in character may be developing. Therefore, the market bearswould do well to be more defensive with respect to managing existing positions or consideringnew ones and the bulls should be vigilant so as not to miss any new opportunities that may bepresented during the weeks ahead.

The thrusts outlined above were all of what most Wyckoff market traders would consider to beintermediate in nature. It should be noted that each of those thrusts was made up of smallerthrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorterterm trader looking to realize as much profit as possible from each thrust rather than beingcontent to ride out the entire decline with one set of positions. Due to the process of rotation, theleaders during one thrust of a larger move may not be the leaders in the next thrust. Studying theindications from the smaller thrusts within the bigger moves can be helpful when one set ofpositions should be replaced by a new set.

Inharmonious actions between the Wyckoff Wave and O.P. Index are always points ofinterest. They indicate that there is an unstable relationship between the result expressed by theWyckoff Wave and by the effort expressed by the O.P. The indication when one of theseunstable relationships develops is that the Wave is likely to change direction from the direction itwas moving when the inharmonious action or divergence first appeared. Inharmonious actionsand divergences should not be considered to be timing tools. In other words, if one of thoserelationships develops today, do not assume that the Wave will respond tomorrow. There is,however, a general relationship between the magnitude of an inharmonious action or divergence

and the amount of time it will take for a response to begin and be completed. If an inharmoniousaction or divergence develops over a long period of time, the response to it is likely to takelonger to begin and complete. Those that develop over shorter periods of time should produce aquicker response and one that is completed sooner.

Since July of 2007, there have been several cases of inharmonious action or divergence. The firstcame in column three of the vertical chart when the stock market reflected by the Wyckoff Waverallied to a lower top than had been recorded during July and the O.P. rallied to a highertop. That divergence was a case of up side effort unconfirmed by result. It suggested thelikelihood of a reaction in the Wave. In that case, the response was immediate and severe as theWave declined to its August low. When the Wave put in its October high in column twelve, itwas only 400 points from its July high. However, the O.P. was approximately 1000 points belowits high. This was a bearish inharmonious action. The response by the Wave was unconfirmed bythe effort. The indication was for a decline in the Wave. In that case, the response also camequickly and it was substantial. At the November low in column twelve, the Wyckoff Wave wasin new low ground relative to its August low. However, the O.P. was not. In that case, the downside result was unconfirmed by the effort indicating the likelihood of a turn to the up side by theWave. As the Wave was putting in its December high, the O.P. was higher than it had been inOctober, but the Wave was not. This was another bearish divergence suggesting that a reactionin the Wave was likely and it declined to the January low. In the case of this divergence, itshould be noted that the O.P. continued to try to pull the Wave higher into column fourteen. Thiswidened the divergence and possibly helped the Wave make more down side progress than itmight have made.


The Trend Barometer is the final point of interest that will be examined. It is the name given tothe Technometer and the Force Index. The Technometer indicates to what degree the market isover sold or over bought. The Force Index indicates whether the Wyckoff Wave is beinginfluenced by down side pressure or up side pull.

Theoretically, the Technometer can have values as low as zero and as high as onehundred. However, neither of those numbers have ever been recorded and it unlikely that either

will ever be recorded. Observations over the past seventy plus years have indicated that theTechnometer spends most of the time below a reading of 50 and above a reading of38. Therefore, readings at or above 50 are seen as indicating an over bought condition andreading at or below 38 are seen as indicating an over sold condition. An over sold conditionindicates that the Wyckoff Wave is vulnerable to a rally and an over bought condition indicatesthat the Wave is vulnerable to a reaction. To be more precise, over bought and over soldconditions indicate that the Wave is vulnerable to corrective action. Most of the time thatcorrective action comes in the form of a rally or reaction. However, it can unfold as a period ofhorizontal action. As the Technometer moves higher above 50 or farther below 38, it becomesmore over bought or more over sold. That means the Wave becomes more vulnerable tocorrective action. It down not necessarily mean that the Wave becomes vulnerable to a biggercorrection. A figure chart should be consulted to judge what the magnitude of the indicatedcorrection is likely to be.




The Force Index exhibits a tendency to trend. The high in the Force in column one and the highas the action crossed from column three into four can be used to define a down trend. The downtrend indicated that there was a bearish tone to the action confirming that the short side was theone to be trading and indicating that some one still trading the log side was likely in trouble. In

column five, the down trend was broken indicating that the bearish tone to the action had endedencouraging those still short to be more defensive and encouraging the bulls to be moreaggressive. This change in tone occurred as the Wave was recovering from its August low andmoving toward its October high. The tone of the action changed again in column nine when theup trend in the Force was broken. In that case, the change in tone was indicated just as the Wavestarted down from its October high. The tendency of the Force to trend is not a timing tool. Itdoes provide indications as to which side of the market the trader should be trading. As a rule,traders who are trading against the tend of the Force will end up paying for their mistake just asthose who try to trade against the trend of the Wyckoff Wave are likely to have to pay for theirerror.


© The Jamison Group, Inc.: Stock Market Analysis Tools Strategies

Trade the Wyckoff Wave in '08

Wyckoff traders have a trading tool available to them that is unfamiliar to most traders. Its calledthe Wyckoff Wave. The Wyckoff Wave is a narrowly defined general market index designed tohelp Wyckoff traders keep in step with the all important trend of the market. Many traders spendhours sifting through hundreds or even thousands of individual issues trying to find the smallhandful that will produce better than average profits.

Seasoned Wyckoff traders know that the Wyckoff Wave is made up of a handful of individualissues that year in and year out provide many attractive opportunities with no sifting required.

During 2007, the eight components of the Wyckoff Wave provided eighteen opportunities torealize a gross profit of 20% or more.

Five of the opportunities produced profits of more than 30% and two yielded more than 40%.

While there is no guarantee that the Wyckoff Wave components will duplicate this performanceduring 2008, there is reason to anticipate that there will be many similar opportunities. An indexthat is the composite of only eight weighted components cannot contain any dead wood. Thecomponents of the Wyckoff Wave exhibit varying degrees of volatility. All eight of the stock inthe Wave had at least one of those 20+% moves and one had five of them. Before sifting throughanother mountain of individual stocks, consider an approach that can help minimize effort andmaximize results. Trade the Wave in '08.

As of the beginning of 2008, the components of the Wyckoff Wave are General Electric, MerrillLynch, IBM, Exxon, Bristol Myers, Dupont, General Motors and Union Pacific.

The goal in selecting these issues to be the components of the Wave has been to capture a largeportion of the diversity and volatility of the market while keeping the group of issues smallenough so that the Wyckoff Wave trader can always be familiar with exactly what his potentialtrade candidates are doing. Those who are routinely attempting to monitor the action of hundredsor thousands of issues know little if anything about the action of any of them. The WyckoffWave trader can easily keep abreast of the trend, position, relative strength or weakness,potential and all the factors that the Wyckoff Course teaches are important.

During each twelve month period, the Wyckoff Wave normally makes at least two andsometimes four intermediate sized moves. During 2007, the Wave beat its normal average andcompleted five intermediate moves.



When the Wyckoff Wave signals that it is ready to make a move, the Wyckoff Wave traderknows exactly where to look for the individual issues that are most likely to participate. Manytimes, all eight of the Wave components participate when the Wave makes an intermediatemove. However, the Wave trader can always depend on substantial participation from at leasttwo or three of the eight. Frequently, those two or three will actually out perform the Wavemaking the effort required in identifying them even more rewarding.

Wyckoff Wave traders do not turn to the Wall Street Journal, the TV or the inter-net to get theirinformation about the Wyckoff Wave and its components. They turn to the Pulse of theMarket. The Pulse of the Market provides price and volume action on the Wave and itscomponents. It also provides intra-day point and figure change data on the index andcomponents. In addition, the Pulse of the Market includes indicators unique to the Wyckoffmethod. These include Optimisim-Pessimism indexes, the Technometer and the Force. The priceand volume data allows the Wyckoff Wave trader to determine the trend and position of theindex. This is what Wyckoff teaches traders to do in step one of the Wyckoff method. The priceand volume data on the individual components helps the trader determine which components arein harmony with the market as indicated in the second step of the method. Point and figurechange data is an essential element in working through step three. All of the data is important inimplementing the all important fourth and fifth steps of the Wyckoff Method.

The Wyckoff Wave ended 2007 working on a test of the November low. The test of an importantlow or high frequently marks the start of an intermediate move. That means the first meaningfulmove of 2008 may already be underway. If not, the preparation for that move isunderway. Either way, some or all of the components of the Wave will participate.

Why not participate along with them and trade the Wave in '08.

© The Jamison Group, Inc.: Trade the Wyckoff Wave in '08

Stock Market Trading StrategiesStep One of the Wyckoff Method

In the Wyckoff Course, Wyckoff teaches that the most important thing anyone can know about amarket or an individual issue is its trend and the position that it occupies in the trend. The trendis the line of least resistance. It indicates the direction in which the price wants to move. Profitsare more likely to be realized when positions are established that are in harmony with thedirection in which the price has already indicated it wants to move.

Once a trend has been established, the future trend is likely to be the same as the current trenduntil the price reaches a position in that trend or exhibits price and volume action that indicatesthat a change in the direction of the trend should be anticipated.

Wyckoff classifies trends by the direction in which they point and by the duration for which theyendure. From the standpoint of direction, trends are either up, down or neutral also knownas a trading range. Up trends are best suited for long positions. Down trends are best suited forshort positions. Trading ranges lend themselves to both long positions and short positionsdepending upon the position of the price in the trend. Trends come in a wide range ofsizes. Trends can emerge and run their course within the period of one trading session, or theycan last for years. A market or an individual issue will be in more than one trend at any onetime.

For trading purposes, Wyckoff identifies four trends that matter most. There is the immediatetrend, the short term trend, the intermediate trend and the long term trend. When these fourtrends are all pointed in the same direction, the price is likely to experience its most dynamicmovement. However, profitable trading can consistently be realized even if all four trends arenot pointed in the same direction.

The key to success is to have the trend that is being traded clearly and correctly defined and toknow at all times where the price is in that trend. Knowing how the other trends are defined andwhat the position of the price is in those trends can be helpful because the position of the price ina trend not being traded can have an influence on the action in the trend that is beingtraded. However, positions should be opened, held and closed based solely on developments inthe trend being traded. Wyckoff would frown on the idea of using the fact that the long termtrend is up to justify taking a short term position on the long side, or any other combination ofusing the direction of one trend to justify a trade in a different trend.



To be used effectively, trends must be defined correctly. Wyckoff tells us that trends are definedby two consecutive support points or resistance points of equal importance. An up trendtraditionally is defined by two support points. Down trends are defined by two supplypoints. Trading ranges may be defined by support points or resistance points depending whetherthey develop after the completion of an advance or the completion of a decline. Support pointscombine to form demand line for up trends. Resistance points combine to form supply line fordown trends. In trading ranges, the support points combine to form support levels and theresistance points combine to form resistance levels. Trend channels develop when parallel linesare constructed through the appropriate points. The parallel line to a demand line in an up trendis the over bought line. The parallel line to a supply line in a down trend is the over sold line. Intrading ranges, the parallel line to a support level is a resistance level and the parallel line to aresistance level is a support level.

Not every position in an up trend is suitable for establishing a long position. It is also true thatnot every position in a down trend is suitable for establishing a short position. Trading rangesmay be used to establish either long positions or short positions. Here again, the position in thetrend channel determines whether long or short positions are appropriate. There is one positionin all trend channels that is generally considered inappropriate for establishing positions.

The Wyckoff Course instructs students how to identify what are called primary tradingpositions. These are those areas in the various trend channels where the taking of positions ismost advised so as to best limit the possibility of a loss and to best enhance the likelihood ofrealizing the maximum profit possible. By limiting trading to these key areas, the Wyckoff tradercan remain true to the duel goals of preserving capital and making a profit.

© The Jamison Group, Inc.: Trade the Stock Market- Step one of the Wyckoff Method

Stock Market Trading StrategiesStep Two of the Wyckoff Method

Step two of the Wyckoff method is very simple, but yet so very important in achievingconsistent success in the market.

Wyckoff teaches us to always trade stocks that are in harmony with the market. The trend of themarket as indicated by the Wyckoff Wave indicates the line of least resistance. It reflects thedirection in which most of the individual issues are moving. Traders who take positions that arein harmony with the line of least resistance are more likely to experience positive results than aretraders who try to fight the trend. It is always better to have the market working for you than against you. There are alwaysindividual issues that make huge moves against the trend, but these are relatively rare.

The odds of finding one of these counter trend wonders are much smaller than are the odds of selecting an issue that is going to perform as well or better than the trend of the market.

Trading in harmony with the market means taking long positions when the market as measuredby the Wyckoff Wave is in a defined up trend channel. It means taking short positions when themarket is in a defined down trend channel. When the defined trend is neutral or a trading range,trading in harmony with the market can mean standing aside and let the bulls and bears battle forcontrol of the action, or consider opportunities on both sides of the market.

However, Wyckoff discourages being in positions on both sides of the market at the sametime. Theoretically, trading both sides at once while the market is in a trading range is possible,but it is emotionally difficult. Whenever emotions enter the picture, the odds of making costlymistakes increases. To avoid these errors make a commitment to never be long and short at thesame time.

Just because the trend of the market and that of an individual issue are pointed in the samedirection does not mean that the trader automatically has a green light to take a long position ifthe trends are pointed upward or a short position if the trends are pointed downward.

Remember what Wyckoff teaches in step one of the Wyckoff method. Knowing the position ofthe price in the trend is as important as knowing the direction of the trend. Situation where themarket and an individual issue under consideration for a long position are both located near thetop of their up trend channels should be avoided in favor of those where the positions are nearthe bottom of the trend channels. When short positions are being considered in down trends, it isbest to locate those situations where both the market and the individual issue are positioned nearthe top of their down trend channels. If trading ranges are going to be traded, look for those



instances where both the general market and the individual issue are positioned near the very topor the very bottom of their trading ranges.

An important concept in applying step two of the Wyckoff method is relative strength and/orweakness. Although most individual issues will be in the same trend as the general market andmany of them will even be in the same position in their trends as the market, not all of these arethe best candidates for new positions. All up trends and down trends are the result of a series oftrusts in the direction of the trend separated by corrections. Some individual issues that are inharmony with the market from the stand point of the direction in which their trends are pointedwill make relatively larger thrusts and experience relatively smaller corrections than the marketas a whole.

These are the issues that are most likely to have the best potential to produce a profitabletrade. Relative strength or weakness can be measured as soon as the first thrust in a trend hasbeen completed. This will likely be even before the trend channel has been clearlydefined. Those issues that have made larger thrusts than the market are the ones that should bewatched closely as the prices make their first correction. The issues that have made the largestthrusts relative to that made by the market and that then make the smallest corrections relative tothe market are most likely to perform well on the next thrust in the direction of the trend. Theseare the stocks that deserve the most consideration for new positions. This technique can also beused later in the development of an advance or decline when there are additional thrusts andcorrections to consider. Those issues that most consistently out perform the market are mostlikely to produce a profitable trade.

The concept of relative strength and weakness can be helpful in locating trade candidates whenthe market is in a defined trading range. If the market is in a trading range, most individualissues will also be in trading ranges. However, some will be in up trends and some will be indown trends. Those that are trending up or down are relatively stronger or weaker than themarket. These are the issues to consider first when looking for new positions. However,consideration must always be given to the position of the market in its trading range and theindividual issue in its up or down trend. If both positions do not favor the likelihood of a rally orreaction, opening a position in that individual issue is discouraged. After the stocks that aretrending up or down, attention can be directed to those that like the market are also in tradingranges. Here again, the positions of both the market and the stock are important issues toconsider before opening a position.

The merits of trading in harmony with the market may seem obvious. However, most traders areexposed to a stream of market noise from brokers, friends, relatives, co-workers and themedia. This bombardment of frequently conflicting information and misinformation can cause atrader to get distracted from those things that are really important. Step two of the Wyckoffmethod is one of those really important things. It along with the other four steps of the methodare the best foundation on which to build a successful market operation.

© The Jamison Group, Inc.: Trade the Stock Market- Step two of the Wyckoff Method

Stock Market Trading StrategiesStep Three of the Wyckoff Method

Step three of the Wyckoff method is intended to help traders avoid marginal trades. Wyckoffteaches us to select only those issues that have built a cause. A cause can be defined in more thanone way.

In step three, Wyckoff is referring to the use of a figure chart to get an indication as to how farfrom its current level, the price of an issue is likely to move. This indication is derived by takinga count on a figure chart.

While an issue is in preparation for a move, its action produces a horizontal formation on afigure chart. The horizontal formation contains the count. When the price has completed itspreparation and begins to move out of the area in which the preparation was done, the count hasbeen completed and can be measured. To measure the count, the trader selects the appropriateprice level within the horizontal formation and simply counts the number of horizontal divisionson the chart beginning at the right side of the formation and ending at the left side of theformation. The trader counts all the horizontal divisions both those that have a posting in themand those that do not. The total number of horizontal divisions is the count. It provides anindication as to how far from the level at which the count was taken the price is likely to move.

If the price leaves the zone of preparation, normally referred to as the trading range, to the upside, Wyckoff says to add the count to the level at which it was measured to get an indication asto how high the price is likely to go. If the price leaves the trading range to the down sideWyckoff says to subtract the count from the level at which it was measured to get an indicationas to how low the price is likely to go.

The anticipated ending point of a move indicated by a count is called its objective. An objectivemay be a single level, but is more often than not a range of values referred to as the objectiverange. If a count for an advance is taken at the very bottom of the trading range, it will indicate asingle level as the objective of the move. However, if the count is taken at some other levelwithin the trading range, the result will be an objective range.

This range is determined by adding the count to the level at which it was measured and byadding it to the lowest level in the trading range. If a count for a decline is taken at the very topof the trading range, it will indicate a single level as the objective of the move. If the count istaken at a lower level in the trading range, the result will be an objective range. In this case, the



objective range is determined by subtracting the count from the level at which it was measuredand by also subtracting it from the highest level in the trading range.

Individual issues are not the only place were counts are taken and objectives are measured. Theycan also be taken and measured for a general market index. If a trader is operating in the optionsor futures derived from an index, it is essential that the trader take a count and determine anobjective for the index that is being traded. When the index reaches its objective range, the moveis likely to end and the position in the derivative trading vehicle can be closed. Measuring countsand determining objectives on the underlying index usually provides more reliable indicationsthan does taking the counts and determining objectives on the particular trading vehicle that hasbeen selected.

Traders who only operate in individual issues should not ignore the indications for the generalmarket. Situations where both the general market and an individual issue are indicating anobjective above or below current levels are the most desirable. If the market and an individualissue both have higher or lower objectives, the movement of the market as a whole is likely tohelp the individual issue reach its objective. If the general market does not have an objective thatis in harmony with that of an individual issue being considered, the individual issue may stillreach its objective, but the odds of that happening are not as good as they are when the markethas a similar objective to that of the individual issue.

Wyckoff does not provide specific directions as to how large of a count an issue should have tobe considered for a trade. In making this determination, the trader needs to be realistic. If thetrader only wants to hold positions for a short period of time, smaller counts should be identifiedwith relatively nearby objectives. Identifying much larger counts with much higher or lowerobjectives and expecting those objectives to be reached in a short period of time is notrealistic. Traders who are comfortable with the idea of holding a position for an extended periodof time should also be realistic. It is a waste of time and effort for these traders to focus on smallcounts and nearby objectives. A trader who is willing to wait for his reward to develop shoulddemand a larger count and more distant objective before taking a position.

All Wyckoff traders should always remember what Wyckoff says about figure charts, counts andobjectives. They provide indications only. Above all else is the character of the price and volumeaction. If it supports the idea of the indications being realized, positions can and should beheld. However, if the character of the action does not support the idea of the indications beingrealized, positions should be closed.

© The Jamison Group, Inc.: Trade the Stock Market- Step three of the Wyckoff Method

Step Four of the Wyckoff Method

In step four of the Wyckoff Method, Wyckoff tells us to determine a stocks readiness tomove. Taking a position in an issue that has not or has not nearly completed it preparation for itsnext move is wasteful and dangerous. It is wasteful in that funds committed to a position that isnot making progress in the intended direction could be better used in a position that begins tomove in the desired direction quickly.

It is dangerous in that time spent waiting for an issue to begin moving in the intended direction istime during which the character of the action can change making the desired move less likely ornot likely at all.

Determining an issues readiness to move involves two considerations. The first consideration isthe position of the price in its trend. The second consideration is the character of the price andvolume action that has brought the price to its current position.

Wyckoff teaches that there are a relatively small number of what have come to be called primarytrading positions. These are places in the unfolding stream of the action where a worthwhilemove in one direction or the other has a high probability of beginning. There is a set of primarytrading positions that favor the start of moves to the up side and another set that favor the start ofdown moves. Those that favor advances are the spring position, the test of the spring, the backup to the edge of a creek and the normal correction of a previous advance. Those that favordeclines are the up thrust position, the test of the up thrust, the rally back to an ice level and thenormal correction of a previous decline. In each case, the primary trading position represents alast point of support following a sign of strength if an up move is anticipated, or a last point ofsupply following a sign of weakness if a down move is anticipated.

Each primary trading position is worthy of a detailed presentation. In future installments in thisseries each primary trading opportunity will be discussed in greater detail. For now, only a briefintroduction of each position will be given.

Wyckoff identifies a potential spring position as a price penetration of a previously definedsupport level. For a potential spring position to be worthy of consideration of an entry point onthe long side, the price spreads should narrow on a day to day basis as the price approaches andpenetrates the support level. Generally, this type of price action in combination with decliningvolumes results in the highest quality springs. If the price responds to a spring position as itshould with a rally. the response will in the overwhelming number of cases be followed by a testof the spring. The purpose of the test of the spring is to confirm the bullish indication providedby the spring. This is accomplished by a narrowing of the price spreads as the price approaches



the low point of the spring. As was the case with the spring itself, a higher quality test generallyresults if the test of the spring unfolds on declining volumes. It is also desirable for the low pointof the test of the spring to be higher than the low point of the spring and for the average volumeduring the testing phase to be lower than the average volume as the price approached the springposition.

The jump across the creek is defined by Wyckoff as an advance that takes the price through azone of resistance defined by the tops of earlier rallies. The characteristics of a jump are widespreads to the up side with strong closes and high volumes. The jump across the creek is not aprimary trading opportunity. However, following the jump across the creek there will likely be aback up to the creek that can provide a primary trading opportunity. This is the phase in theaction when the price reacts back toward the zone of resistance that was overcome on the jump.

The purpose of the back up is to confirm that the former zone of resistance has been converted toa zone of support. The confirmation is provided by a combination of narrowing price spreads anddeclining volumes as the price approaches the former resistance. The up trend that is defined asthe price of an issue leaves a trading range to the up side will normally consist of a series ofthrusts. Following the completion of each thrust, there will be a corrective reaction. A normalcorrection will result if the price returns to the vicinity of the halfway point of the previousadvance. A primary trading opportunity exists if the price approaches the halfway point onnarrowing spreads and declining volumes.

The first primary trading position that is likely to develop on the short side is identified byWyckoff as being the up thrust. The price of an issue enters an up thrust position when itpenetrates a previously defined resistance level. A high quality up thrust is one from which theprice begins a prompt decline. A high quality up thrust is one that develops on narrowing pricespreads as the price approaches and penetrates the resistance level. Generally, a high quality upthrust will also unfold on declining volumes. After the price has responded to the upthrust with adecline, there will almost always be a test of the up thrust. The test is another primary tradingposition for the short side. The characteristics of a high quality test of an up thrust are narrowingprice spreads to the up side on decreasing volumes. It is also desirable for the test to not put in ahigher high than the up thrust and for the average volume as the price makes the test to be lowerthan was the case on the up thrust it self.

When the price of an issue leaves a trading range to the down side, there will frequently be whatWyckoff refers to as a fall through the ice. Ice is identified as the zone of support defined thebottoms of previous reactions in the action. The fall through the ice occurs when the price tradesthrough this zone on widening spread and increasing volumes. The fall trough the ice is not aprimary trading opportunity. However, the rally that follows the fall through the ice can developinto a primary trading position. This advance is identified as the rally back to the ice. Thepurpose of the rally back is to confirm that the former support provided by the ice has beenconverted to resistance. When this confirmation is in place, the price can resume down sideprogress. The rally back that is likely to provide the best entry point on the short side if it unfoldson narrowing price spreads to the up side and declining volumes as the price approaches thezone of former support. Down trends that develop as the price leaves a trading range consist of aseries of thrusts and corrections. The correction of each thrust can provide a primary trading

position if it is completed in the vicinity of the halfway point of the previous thrust to the downside and if it unfolds on declining volumes.

Primary trading positions in individual issues should not be considered to be automatic buy orsell points. Although most will provide an opportunity to take a profit, there are some that arelikely to be more profitable than others. One consideration that goes into determining whichprimary trading positions are better than others is the indication provided by the figure chart ofthe issue. Those that indicate the largest potential are likely to provide the biggestprofits. Another consideration that is involved in judging which primary trading positions shouldbe acted upon and which should not is covered in the fifth and final step of the Wyckoff method.

© The Jamison Group, Inc.: Trade the Stock Market-Step four of the Wyckoff Method

Stock Market Trading StrategiesStep 5 of the Wyckoff Method

The final step of the Wyckoff method is the one that actually results in a position beingestablished. Wyckoff tells us to time trades in individual issues to anticipated trends in thegeneral market. While it is true that there are always individual issues that make substantialmoves in the opposite direction of the general market, most move with the market to somedegree.

By identifying a point in the general markets action from which it is likely to turn in thedirection of an established trend or begin the development of a new trend and taking a position inan individual issue at that time, the Wyckoff trader has a better chance of realizing a profit fromthat position and realizing a better profit than if the position is established in a more randommanner.

The market is most likely to make a turn that can benefit a position in an individual issue if itlocated near but not below the demand line of an up trend, near but not above the supply line of adown trend, or near the support level or resistance level of a trading range.

It is not necessary that the individual issue in which a position is being considered be in thesame position as the general market. It is necessary that the positions of both the individualissue and the general market compliment each other. For example, the general market may be ina trading range and positioned in a potential spring from which an immediate response to the upside is anticipated. If the individual issue under consideration is also in a trading range but istesting an earlier spring, the two positions compliment each other and a position in thatindividual issue is likely to perform better than it might otherwise perform because of theanticipated turn in the general market.

The general market and the individual issue do not have to be in the same trend to complimenteach other. For example, the general market may be in a trading range and testing an earlierspring position. The test assuming it has been constructive is a position from which the marketis likely to make an immediate turn.

At the same time, an individual issue that has already begun to trend higher by jumping theresistance level of a trading range may be backing up toward the former resistance. As thegeneral market begins to respond to its bullish position, it is likely to help the individual issuecomplete its back up and resume up side progress possibly moving into new high ground.

The above examples are both cases in which the individual issue is ahead of the market in thedevelopment of a bullish scenario. These situations should be considered first. The second set



of situations that should be considered are those where the market and the issue are in the sameposition that is likely to produce an immediate move at the same time.

The third set of situations that should be considered are those where the general market is aheadof the individual issue in the development of its bullish or bearish scenario. In the aboveexamples, the positions of the market and the issue could be reversed and establishing a positionin the individual issue could be justified because the markets position suggests an immediateturn.

Wyckoff traders have three tools that can assist them in judging whether a turn in the marketshould be anticipated. These tools are the O. P. Index. the Technometer and the Force. The O.P. Index when used in combination with the Wyckoff Wave indicates whether the resultindicated by the Wave is in harmony with the effort indicated by the O.P. If they are and themarket is in a position from which an immediate turn can be anticipated, the harmony betweeneffort and result is likely help a position in an individual issue perform as anticipated.

However, a lack of harmony between the Wyckoff Wave and the O.P. Index can be even morehelpful in assisting the market make an anticipated turn. For example, consider the situationwhere the Wyckoff Wave has previously been in a spring position and is now testing the springwith a higher potential bottom. If at the same time the O.P. is making a lower low than it didwhen the Wave was in spring position, a bullish divergence is in place. The indication is thatthere has been too much down side effort for the result. This situation leaves the Wyckoff Wavemore vulnerable to making a turn than one where the Wave and O.P. are in harmony.

Divergences should be used to confirm indications provided by the position of the market.Divergences that develop when the Wyckoff Wave is not in a position from which an immediateturn may be anticipated are interesting, but they do not provide a reason to establish a position inan individual issue.

The Technometer and the Force are like the Wyckoff Wave/O.P. relationship in that they areintended to confirm an indication of an impending turn by the Wave. If the Wave is in a primarybuying position, it is most likely to make an immediate response out of that position if theTechnometer is indicating an over sold condition at the same time. These situations are whentrades on the long side in individual issues are more attractive. The same is true if there is abullish relationship between the Wyckoff Wave and the Force.

Divergences between the Wave and the Force develop in a manner similar to the divergencesthat develop between the Wave and O.P. Primary buying or selling positions in the Wave thatdevelop in conjunction with bullish or bearish divergences between the Wave and the Force aremore likely to result in an immediate turn in the general market than those that develop withoutsuch divergences. The ultimate in confirmation that there is likely to be an immediate turn in themarket is when it is in a primary trading position and all three of the confirmations mentionedare in place. At that point, a position in an individual issue can be established with the greatestdegree of confidence that it will yield a profit.

© The Jamison Group, Inc.: Trade the Stock Market- Step 5 of the Wyckoff Meth

Wyckoff Stock Market Selling Tests - Part One

Wyckoff identified nine selling tests. They are developments in the price and/or volume actionof the market or an individual issue that suggest an opportunity on the short side is developing.As the tests are passed, the odds of a mark down phase beginning increase. When the pricemoves into a primary selling position such as an up thrust, test of an up thrust, rally back to theice or completes a normal correction, the trader should examine the action to that point to seehow many of the tests have been passed. If all or most of them have been passed, the trader cantake advantage of the primary selling position with confidence that he will be rewarded with anopportunity to take a profit as the action continues to unfold.

The first thing the trader wants to do is determine whether the up side objective has beenreached. The indicated up side objective is provided by the figure chart. It was set in placeduring the trading range that developed before the advance that the Wyckoff trader believes isnearing an end. The danger in taking a position before the indicated up side objective has beenreached is that the advance may have one more thrust left it that could result in the trader beingstopped out of a position just at the time when it should be entered. There is nothing morefrustrating than to be taken out of a position just before the price goes on to do exactly what wasanticipated. Many times, an up side potential will have more than one clearly defined phase.Each time the objective of one of those phases is reached, the move is potentially over. However,the trader should not automatically assume that it is. An indication that the advance has beencompleted can be found in the character of the price and volume action.

The second test that the Wyckoff trader wants to apply is to judge the character of the action.The activity needs to be bearish in order to justify taking a position on the short side. Bearishactivity is indicated by particular combinations of price action and volume. Wide price spreadsto the down side on increased volume leading to poor closes represent bearish activity. Theindication is that supply is present. Wide spreads to the down side on reduced volume leading toa poor close can also represent bearish activity. These indicate a lack of demand. A lack ofdemand is also indicated by narrow spreads to the up side on reduced volume. If narrow spreadsto the up side are accompanied by increased volume, the indication is that supply is present. Thisis also seen as being bearish activity. Bearish activity can be present on a day to day basis, or itcan be seen over a series of days that form a reaction or rally within the overall action. It is notnecessary that every day provide an indication of bearish activity. Early in an advance, mostdays will exhibit bullish activity. However, as the price reaches or approaches an objective, thenumber of days that demonstrate clearly bullish activity will begin to diminish and the numberthat indicate bearish activity will start to increase. When this shift is seen, this selling test hasbeen passed.



The Wyckoff trader also wants to see a clearly defined stopping action at the top of an advance.This involves four steps. They are the meeting of preliminary supply, a buying climax, anautomatic reaction and a secondary test. As an advance is approaching an objective, a reactionwill develop over several days where the activity is clearly bearish. This is preliminary supply. Itrepresents the first wave of bulls who bought at lower levels taking their profits. The meeting ofpreliminary supply is an early warning that an opportunity on the short side may start to developsoon. After preliminary support has been met, there will be one more thrust to the up side usuallyon wide spread and increased volume into an up side objective. This is the buying climax. Itprovides a clearer warning to the potential short seller that an opportunity is beginning todevelop. The stopping action is completed by the automatic reaction and the secondary test. Theautomatic reaction is the decline that immediately follows the buying climax. It is caused by theexhaustion of demand on the buying climax. As the automatic reaction unfolds and the priceretreats from the high recorded on the buying climax, some bulls will be re-energized and willbegin buying again. However, at this point, they will be in the minority. The rally that theiractivity is able to accomplish will have less volume than wad present as the price rallied to thebuying climax. It will also tend to have narrower price spreads to the up side and it will put in alower top than was recorded on the buying climax. This is referred to as being the secondary testof the buying climax. It completes the stopping action and allows the price to begin preparing forthe next move.

Although the stopping action at the top of an advance is vital to the development of anopportunity to begin a campaign on the short side, it does not guarantee that the next move willbe down. In longer term bull markets, there will likely be a series of advances each beingpreceded by the stopping of the previous advance. For the Wyckoff trader who is looking for anopportunity on the short side to know that a resumption of up side progress is not likely, he looksfor the passing of additional selling tests as the action continues to unfold.

Selling Tests - Part 2

Wyckoff teaches that an individual issue should only be considered as a potential short candidateif it has demonstrated that it is weaker than the market. There are two ways in which an issueprovides this indication. One is based on price action and the other is based on volume. TheWyckoff trader is looking for those issues that under perform relative to the market on rallies andout perform the market on reactions.A trader may wish to make these comparisons by calculating the percentage moves of the marketand the issues being considered. This will eliminate the judgment factor from making thedetermination as to which issues are weaker than the market. However, the process ofdetermining and comparing percentages will be time consuming and will likely limit the numberof issues that can be considered. An alternate approach is to look for those situations where theindividual issue is obviously weaker than the market. If the market rallies to a higher top on arally verses the previous rally and an individual issues rallies to a lower top, the individual issueis weaker than the market. If the market reacts to a higher bottom verses the previous reactionand an individual reacts to a lower bottom , the individual issue is weaker than the market. Anissue can have the same pattern of lower tops and lower bottoms and still be weaker than themarket. This can be determined by locating the halfway points of the rallies and reactions forboth the market and the individual issues. Even if both the market and an individual issue make alower top on a rally or a lower bottom on a reaction, it is likely that one of them will fail to reachits halfway point or will over run the halfway point by a smaller margin. If the one that performsin this manner is the individual issue, it is weaker than the market.

The volume factor in determining relative weakness will help to confirm the indication providedby the price action. If an issue makes a lower top or a lower bottom on a rally or reaction thandoes the market, it is providing an indication of relative weakness. If the volume on the rally tothe lower top is relatively lower than that of the market, the indication is of a lack of demand andthat tends to confirm the indication of relative weakness. If the price of an issue is putting in alower top on relatively higher volume than the market, the indication is that supply is being metand that also tends to confirm relative weakness. The level of volume on lower bottoms can alsoconfirm relative weakness. If the individual issue makes a lower low than the market on reducedvolume relative to that of the market, the indication is of a lack of demand. If the volume isrelatively higher than that of the market, the indication is that supply has been entering themarket.

It is possible for an individual issue to be demonstrating relative weakness when compared to themarket and for the issue to be in an up trend. Wyckoff traders want to avoid these issues. Thetrend represents the line of least resistance. It is the most important thing that any trader canknow about an issue. Trading against the trend greatly reduces the odds of realizing a profit.Wyckoff traders want to be certain that a previously defined up trend has been broken before



considering an entry on the short side. The breaking of an up trend will frequently have fourdistinct steps. The first step is an initial weakening of the demand line. This can be observed as aday or several days where the price action spends part of the time but not all of the time belowthe demand line of the up trend. The second step is an effort to rally back into the up trend. Thisaction can be used to make a further judgment as to the relative weakness of an issue. Those thatrally to a lower position in the previously established up trend are demonstrating a higher degreeof relative weakness. The third step in the process of breaking an up trend is for the price actionto decisively break the demand line. This is indicated by several days where all of the priceaction is below the demand line. Those issues that make the most decisive breaks are the mostattractive potential short candidates and among those, the ones with the highest volumes are evenmore attractive. The final step in the process is when the price rallies and is unable to reenter theup trend channel. This confirms that the trend has been broken.

Lower tops on rallies is a necessary test for a potential short candidate to pass before a positionshould be considered. They were a factor in determining relative weakness and they were afactor in breaking a previously established up trend. The Wyckoff trader should also watch for apattern of lower tops in trading ranges as the price prepares for its next move. If the price ismaking lower tops in a trading range, the indication is that demand is being withdrawn or thatsupply is being met at progressively lower levels. This increases the odds that the price will fallthrough the support level of the trading range and begin a mark down phase. There is one placein the development of a trading range where a higher top can be a negative development. Thatplace is on an up thrust. If the price has been making lower tops on rallies within a trading rangeand then rallies above all those previous tops an makes a small penetration of the resistance levelof the range, the action is a potential up thrust. It has likely caused many of those who havealready taken short positions to run for cover. An up thrust leaves the price unusually vulnerableto down side progress and is a good spot to enter a short position even though it represents a hightop.

When examining the action of an issue to see if it has passed the three selling tests presentedhere, it is important that the Wyckoff trader look for indications that are consistent with the timeframe of his or her market operation. Using longer term indications to justify short term trades orusing shorter term indications to justify longer term investments usually will producedisappointing results. If both shorter term and longer term indications are consistent with thetrade under consideration, the results are likely to be the most satisfying.

Wyckoff Stock Market Selling Tests - Part Three

Moving on to selling test number seven, Wyckoff advises traders to look for a pattern of lowerbottoms on reactions. If the market or an individual issue is making lower lows on reactions, theindication is that bulls are requiring lower prices before they are willing to enter the market andthat the bears are being rewarded and may continue to be rewarded for entries they made on theshort side earlier. A pattern of lower supports may be identified within a trading range as theprice prepares for a mark down phase, or it may be seen after the price has left a trading rangeand is trending lower. Ideally, it will be seen in both places. Within the trading range, lowerbottoms suggests that the price is preparing to leave the range to the down side. After the tradingrange, lower bottoms indicates that additional down side progress is possible following the nextcorrective rally.

Before any short position is considered, there must be what is referred to as a crown. This iscreated by the development of a trading range following an advance. It will present itself as anobvious period of horizontal action on both the vertical chart and the figure chart. If a figurechart is being used, the size of the crown will provide an indication as to the down side objectivewhen the price leaves the range and begins its mark down phase. Wyckoff provides no rules as tohow large the crown must be before the trader considers an entry on the short side. Thisconsideration is left to the discretion of the trader. In making this determination, the tradershould be consistent with the type of market operation that is being undertaken. If the trader is anactive shorter term trader looking to hold a position from several weeks to a couple of weeks, acrown that indicates a ten to fifteen percent potential may be seen as being acceptable. However,if the trader is less aggressive and wishes to hold a position for several months to perhaps asmuch as a year, he may want to require that a crown offer a potential several times larger thanthe short term trader might accept before entering a position.

The final selling test is to make sure that the position being considered can be adequatelyprotected with a stop order. Wyckoff tells us to never risk more than one point for every threepoints of anticipated profit when placing a stop. Some Wyckoff traders elect to risk less than onepoint for each three points of potential profit. This is acceptable. However, the trader needs torealize that as the ratio of potential profit verses indicated risk is increased, the odds of beingstopped out increase. Therefore, the trader who requires a very close stop may be stopped out somany times that the total in losses over time is greater than it is for the trader who elects to use awider initial stop. The trader who feels the need to use a very close initial stop may be reflectinga lack of confidence or ability. The cure for this is practice trading. Once an initial stop or anystop for that matter has been placed, never change that stop so as to increase the size of the risk.



Selling tests should be used in conjunction with primary selling opportunities. This can beaccomplished in one of two ways. The Wyckoff trader may choose to make a list of the tests andcheck them off as the market or an individual issue passes each. When all of the tests or anumber of them that has been selected as being acceptable have been passed, the trader shouldwatch the action closely for the development of a primary selling position. When one isidentified, a positions may be opened with confidence. A trader may also choose to do theprocess in reverse. First, find the primary selling opportunity and then back track to see if all oran acceptable number of selling tests have been passed. If so, the position under considerationhas a good chance of providing the anticipated profit

Stock Market Trading StrategiesStep 5 of the Wyckoff Method

The final step of the Wyckoff method is the one that actually results in a position beingestablished. Wyckoff tells us to time trades in individual issues to anticipated trends in thegeneral market. While it is true that there are always individual issues that make substantialmoves in the opposite direction of the general market, most move with the market to somedegree.

By identifying a point in the general markets action from which it is likely to turn in thedirection of an established trend or begin the development of a new trend and taking a position inan individual issue at that time, the Wyckoff trader has a better chance of realizing a profit fromthat position and realizing a better profit than if the position is established in a more randommanner.

The market is most likely to make a turn that can benefit a position in an individual issue if itlocated near but not below the demand line of an up trend, near but not above the supply line of adown trend, or near the support level or resistance level of a trading range.

It is not necessary that the individual issue in which a position is being considered be in the sameposition as the general market. It is necessary that the positions of both the individual issue andthe general market compliment each other. For example, the general market may be in a tradingrange and positioned in a potential spring from which an immediate response to the up side isanticipated. If the individual issue under consideration is also in a trading range but is testing anearlier spring, the two positions compliment each other and a position in that individual issue islikely to perform better than it might otherwise perform because of the anticipated turn in thegeneral market.

The general market and the individual issue do not have to be in the same trend to complimenteach other. For example, the general market may be in a trading range and testing an earlierspring position. The test assuming it has been constructive is a position from which the market islikely to make an immediate turn.

At the same time, an individual issue that has already begun to trend higher by jumping theresistance level of a trading range may be backing up toward the former resistance. As thegeneral market begins to respond to its bullish position, it is likely to help the individual issuecomplete its back up and resume up side progress possibly moving into new high ground.

The above examples are both cases in which the individual issue is ahead of the market in thedevelopment of a bullish scenario. These situations should be considered first. The second set ofsituations that should be considered are those where the market and the issue are in the sameposition that is likely to produce an immediate move at the same time.



The third set of situations that should be considered are those where the general market is aheadof the individual issue in the development of its bullish or bearish scenario. In the aboveexamples, the positions of the market and the issue could be reversed and establishing a positionin the individual issue could be justified because the markets position suggests an immediateturn.

Wyckoff traders have three tools that can assist them in judging whether a turn in the marketshould be anticipated. These tools are the O. P. Index. the Technometer and the Force. The O. P.Index when used in combination with the Wyckoff Wave indicates whether the result indicatedby the Wave is in harmony with the effort indicated by the O.P. If they are and the market is in aposition from which an immediate turn can be anticipated, the harmony between effort and resultis likely help a position in an individual issue perform as anticipated.

However, a lack of harmony between the Wyckoff Wave and the O.P. Index can be even morehelpful in assisting the market make an anticipated turn. For example, consider the situationwhere the Wyckoff Wave has previously been in a spring position and is now testing the springwith a higher potential bottom. If at the same time the O.P. is making a lower low than it didwhen the Wave was in spring position, a bullish divergence is in place. The indication is thatthere has been too much down side effort for the result. This situation leaves the Wyckoff Wavemore vulnerable to making a turn than one where the Wave and O.P. are in harmony.

Divergences should be used to confirm indications provided by the position of themarket. Divergences that develop when the Wyckoff Wave is not in a position from which animmediate turn may be anticipated are interesting, but they do not provide a reason to establish aposition in an individual issue.

The Technometer and the Force are like the Wyckoff Wave/O.P. relationship in that they areintended to confirm an indication of an impending turn by the Wave. If the Wave is in a primarybuying position, it is most likely to make an immediate response out of that position if theTechnometer is indicating an over sold condition at the same time. These situations are whentrades on the long side in individual issues are more attractive. The same is true if there is abullish relationship between the Wyckoff Wave and the Force.

Divergences between the Wave and the Force develop in a manner similar to the divergencesthat develop between the Wave and O.P. Primary buying or selling positions in the Wave thatdevelop in conjunction with bullish or bearish divergences between the Wave and the Force aremore likely to result in an immediate turn in the general market than those that develop withoutsuch divergences. The ultimate in confirmation that there is likely to be an immediate turn in themarket is when it is in a primary trading position and all three of the confirmations mentionedare in place. At that point, a position in an individual issue can be established with the greatestdegree of confidence that it will yield a profit.

© The Jamison Group, Inc.: Trade the Stock Market- Step 5 of the Wyckoff Method

Bond Index TradingA Bond Trading Introduction Using the Wyckoff Method

There are times when the action of the stock market is dull providing only marginalopportunities to realize a profit. There are other times when the action of the stock market isconfusing resulting in an unacceptable level of uncertainty making new positions too dangerousto consider and existing positions too dangerous to maintain.

During these periods, the Wyckoff trader has two options: 1. The trader can move to the side lines and take a vacation from market activity, or 2. Look to other markets for other opportunities.

The Pulse of the Market provides Wyckoff oriented data on one of these other markets. It is the interest rate market and the vehicle that provides the basis for finding trading opportunities inthis market is the Bond Index.

The Bond Index was created in 1985 to assist Wyckoff traders in the business of trading treasurysecurities locate and manage positions for themselves and their customers.

The Bond Index is a composite picture of the long term, intermediate term and shorter termsegments of the interest rate market. It is defined by the action of the thirty year bond future, theten year note future and the five year note future.

These three futures contracts are monitored through out each trading session of the CBOT just asthe Wyckoff Wave components are monitored throughout each session of the NYSE.

This monitoring allows for intra-day buying and selling waves to be determined and for an O.P.,Technometer and Force to be calculated. With these tools, the Wyckoff trader can apply the fivesteps of the Wyckoff method and make intelligent decisions as to when to enter and exitpositions.

There are a variety of ways that the Wyckoff trader can use the Bond Index to take and managepositions. The simplest way is to actually trade the index itself. This is accomplished by takingpositions in all three components of the index at the same time making all positions of the samesize.



The trader who buys or sells one contract of each of the components of the Bond Index will seehis position change in value by $1000 every time the index moves one point. This approachallows for maximum participation in the movement of the index. Those who prefer a morecautious approach can leg into a position.

For example, if the index moves into a potential spring position, a trader might opt to beginbuilding a position with one five year note contract. Later when the spring is successfully tested,the trader could consider adding one ten year note contract to his position to enhance hisparticipation in the movement of the index. A third entry point might develop on a back up to theedge of a creek allowing the trader to add one thirty year bond contract and fully participate inthe action of the index at a point where the certainty of correctness of the position is the greatest.In a similar manner, a Wyckoff trader might choose to leg out of a position reducing the odds ofleaving a large portion of the potential profit on the table due to exiting too early or too late.

There are other trading techniques that can be used with the bond index to suit a Wyckoff traderstolerance for volatility. One possibility would be to establish a position only in the ten year notecontract either all at once, or at three different points. This can be seen as being a middle of theroad approach. It would reduce the volatility of the position somewhat by not taking a position inthe bond contract. However, it would put some of that volatility back into the position by nottaking a position in the five year note contract.

Other combinations of the three components of the index might also be considered. Doubling thesize of the ten year note portion of the position and avoiding the short term or long term portionof the position would increase or decrease the volatility of the position and increase or decreasethe participation of the position relative to the movement in the index depending upon whichcontract was not traded. Another option to consider would be to spread trade the bond contractand the ten year note contract. Other combinations could also be considered depending upon thetolerance for volatility of the trader and the degree to which he wishes to participate in themovement of the index.

Those who have never operated in a futures market should not do so without first engaging in aperiod of practice trading. Those who refuse to use the protection of a stop order should neveroperate in a futures market period. Futures trades are highly leveraged. They require only a smallpercentage of the value of the position to participate.

However, the trader who does not trade defensively could lose all or even more than all of hisinitial commitment of funds. These cautionary statements are not presented to scare the traderaway from a trading vehicle that has the potential to be very rewarding. Rather, they arepresented to help prevent the trader from focusing solely on the $1000 per point potential profitfrom the movement of the Bond Index and to encourage the use of defensive measures at alltimes.

© The Jamison Group, Inc.: Bond Index Trading



Stock Market Analysis Tools & StrategiesWyckoff Wave, Optimism-Pessimism Index &

Trend Barometer

Part 3 - Points of Interest

In addition to helping analyze stock market trends and trading ranges, the Wyckoff Wave and itsrelated indicators the O.P. and the Trend Barometer provide other points of interest that can behelpful in determining when to consider taking new stock market positions, how to manageexisting positions and when to consider exiting those positions.

It can be argued that each stock market trading session provides a point of interest because itprovides a piece of additional information about the move that is underway or being prepared.This examination will be limited to three particular points of interest. They are thrusts,inharmonious actions, divergences and Trend Barometer indications. These three tend to providethe most useful information as to the character of the action that is unfolding at the moment orthat is likely to project stock market action in the foreseeable future.

Like the stock market, the Wyckoff Wave seldom moves from point "A" to point "B" in astraight line. The moves that most stock traders trade are made up of a series of thrusts. The sizeof these thrusts, the amount of new progress that each makes and the extent to which each thrustis corrected indicate the overall health of an unfolding move. Ideally, each thrust in a movewould be bigger than the previous thrust, make more new progress than the previous thrust andcorrect less than the previous thrust. In reality, this is very seldom how events unfold. The longerterm down trend that has been guiding the stock market and naturally, the Wyckoff Wave sincelast July has had three completed thrusts and is working on thrust number four. The first thrustbegan in column two of the vertical chart and ended in column 4. After that thrust wascompleted, the second thrust began in column nine and ended in column twelve. The third thruststarted in the next column and ended in column sixteen. The current thrust had its beginning incolumn seventeen and appears to still be underway.

In most cases, the first thrust of a move will make the largest amount of new progress because itis starting at the very beginning of the move and is all new ground gained or lost. The firstdownward thrust of the Wave in the decline that began last July was 5700 points in roundnumbers from its top to its bottom and all of that was new ground gained to the down side.

The second thrust was bigger than the first when measured from its top to its bottom. However, itonly made 800 points of new down side progress after completing a decline of 6100points. These observations provide several indications. The fact that the second thrust was biggerthan the first suggested that the market became weaker during the second thrust than it had been

in the first. The fact that the second thrust only made 800 points of new down side progressindicated that the bulls had been able to fight back against the bears on the correction of the firstthrust. They made up almost all of the ground lost on the first thrust. On the correction of thesecond thrust. the bulls were considerably weaker than they had been on the first correctivephase. When the second correction was completed in column twelve, the Wave had recoveredless than half of the ground covered by the second thrust compared to having recovered almostall of the ground covered by the first thrust. With the second thrust to the down side having beenbigger than the first and with the second correction having corrected a smaller portion of thethrust before it, the indication as of the high in column twelve was that the market wasweakening and that the decline would likely continue.

During the third thrust to the down side, the Wyckoff Wave made more new down side progressthan during the second thrust. This observation indicated that the Wave was still weaksuggesting that the decline was not over. However, the third thrust and the correction thatfollowed it provided indications that the Wave was not as weak as it was during the period of thesecond thrust and its correction. These indications were made by the fact that the third thrust wassomewhat smaller than the second and by the fact that the Wave was able to regain a largerportion of the third thrust than had been the case on the correction of the second thrust.

The current thrust of the decline began on February 1. As of March 7, it appeared to be a work inprogress. Therefore, any conclusions as to any indications it provides have to be subject tochange when the thrust has been completed. However, as of now, the fourth thrust has beensubstantially shorter than any of the first three and no new down side progress has beenmade. The conclusion that comes from these observations is that the Wyckoff Wave is not asweek as it had been during the previous thrusts in the decline. This conclusion suggests that animportant stock market change in character may be developing. Therefore, the market bearswould do well to be more defensive with respect to managing existing positions or consideringnew ones and the bulls should be vigilant so as not to miss any new opportunities that may bepresented during the weeks ahead.

The thrusts outlined above were all of what most Wyckoff market traders would consider to beintermediate in nature. It should be noted that each of those thrusts was made up of smallerthrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorterterm trader looking to realize as much profit as possible from each thrust rather than beingcontent to ride out the entire decline with one set of positions. Due to the process of rotation, theleaders during one thrust of a larger move may not be the leaders in the next thrust. Studying theindications from the smaller thrusts within the bigger moves can be helpful when one set ofpositions should be replaced by a new set.

Inharmonious actions between the Wyckoff Wave and O.P. Index are always points ofinterest. They indicate that there is an unstable relationship between the result expressed by theWyckoff Wave and by the effort expressed by the O.P. The indication when one of theseunstable relationships develops is that the Wave is likely to change direction from the direction itwas moving when the inharmonious action or divergence first appeared. Inharmonious actionsand divergences should not be considered to be timing tools. In other words, if one of thoserelationships develops today, do not assume that the Wave will respond tomorrow. There is,

however, a general relationship between the magnitude of an inharmonious action or divergenceand the amount of time it will take for a response to begin and be completed. If an inharmoniousaction or divergence develops over a long period of time, the response to it is likely to takelonger to begin and complete. Those that develop over shorter periods of time should produce aquicker response and one that is completed sooner.

Since July of 2007, there have been several cases of inharmonious action or divergence. The firstcame in column three of the vertical chart when the stock market reflected by the Wyckoff Waverallied to a lower top than had been recorded during July and the O.P. rallied to a highertop. That divergence was a case of up side effort unconfirmed by result. It suggested thelikelihood of a reaction in the Wave. In that case, the response was immediate and severe as theWave declined to its August low. When the Wave put in its October high in column twelve, itwas only 400 points from its July high. However, the O.P. was approximately 1000 points belowits high. This was a bearish inharmonious action. The response by the Wave was unconfirmed bythe effort. The indication was for a decline in the Wave. In that case, the response also camequickly and it was substantial. At the November low in column twelve, the Wyckoff Wave wasin new low ground relative to its August low. However, the O.P. was not. In that case, the downside result was unconfirmed by the effort indicating the likelihood of a turn to the up side by theWave. As the Wave was putting in its December high, the O.P. was higher than it had been inOctober, but the Wave was not. This was another bearish divergence suggesting that a reactionin the Wave was likely and it declined to the January low. In the case of this divergence, itshould be noted that the O.P. continued to try to pull the Wave higher into column fourteen. Thiswidened the divergence and possibly helped the Wave make more down side progress than itmight have made.


The Trend Barometer is the final point of interest that will be examined. It is the name given tothe Technometer and the Force Index. The Technometer indicates to what degree the market isover sold or over bought. The Force Index indicates whether the Wyckoff Wave is beinginfluenced by down side pressure or up side pull.





The Force Index exhibits a tendency to trend. The high in the Force in column one and the highas the action crossed from column three into four can be used to define a down trend. The down

trend indicated that there was a bearish tone to the action confirming that the short side was theone to be trading and indicating that some one still trading the log side was likely in trouble. Incolumn five, the down trend was broken indicating that the bearish tone to the action had endedencouraging those still short to be more defensive and encouraging the bulls to be moreaggressive. This change in tone occurred as the Wave was recovering from its August low andmoving toward its October high. The tone of the action changed again in column nine when theup trend in the Force was broken. In that case, the change in tone was indicated just as the Wavestarted down from its October high. The tendency of the Force to trend is not a timing tool. Itdoes provide indications as to which side of the market the trader should be trading. As a rule,traders who are trading against the tend of the Force will end up paying for their mistake just asthose who try to trade against the trend of the Wyckoff Wave are likely to have to pay for theirerror.


© The Jamison Group, Inc.: Stock Market Analysis Tools Strategies



Stock Market Analysis Tools & Strategies

Analyzing the Wyckoff Wave, O.P. Index and Trend Barometer

Part 2 - Trading Ranges

In order for the action of the Wyckoff Wave to have been dominated by down trends since thehigh in July 2007, there has to have been trading ranges in which the Wave was able to build thepotential that has fueled the decline. The most important trading ranges stand out most clearly onthe five hundred point figure chart of the Wave. The all time high of the Wave occurred incolumn two of the figure chart. The vertical chart of the Wave shows the July high to be thebeginning of the decline. However, the figure chart indicates that it was also the end of a tradingrange that had developed earlier in the year.

It can be argued that each trading session provides a point of interest because it provides a pieceof additional information about the move that is underway or being prepared. This examinationwill be limited to three articular points of interest. They are thrusts, inharmoniousactions/divergences and Trend Barometer indications. These three tend to provide the most useful information as tothe character of the stock market action that is unfolding at the moment or that is likely to unfold in the foreseeable future.

The stock market represented by the Wyckoff Wave seldom moves from point "A" to point "B"in a straight line. The moves that most traders trade are made up of a series of thrusts. The size ofthese thrusts, the amount of new progress that each makes and the extent to which each thrust iscorrected indicate the overall health of an unfolding ove.

Ideally, each thrust in a move would be bigger than the previous thrust, make more new progressthan the previous thrust and correct less than the previous thrust. In reality, this is very seldomhow events unfold. The longer term down trend that has been guiding the Wyckoff Wave sincelast July has had three completed thrusts and is working on thrust number four. The first thrustbegan in column two of the vertical chart and ended in column 4. After that thrust wascompleted, the second thrust began in column nine and ended in column twelve. The third thruststarted in the next column and ended in column sixteen. The current thrust had its beginning incolumn seventeen and appears to still be underway.

In most cases, the first thrust of a move will make the largest amount of new progress because itis starting at the very beginning of the move and is all new ground gained or lost. The firstdownward thrust of the Wave in the decline that began last July was 5700 points in round

numbers from its top to its bottom and all of that was new ground gained to the down side. Thesecond thrust was bigger than the first when measured from its top to its bottom. However, itonly made 800 points of new down side progress after completing a decline of 6100points. These observations provide several indications. The fact that the second thrust was biggerthan the first suggested that the market became weaker during the second thrust than it had beenin the first. The fact that the second thrust only made 800 points of new down side progressindicated that the bulls had been able to fight back against the bears on the correction of the firstthrust. They made up almost all of the ground lost on the first thrust. On the correction of thesecond thrust. the bulls were considerably weaker than they had been on the first correctivephase. When the second correction was completed in column twelve, the Wave had recoveredless than half of the ground covered by the second thrust compared to having recovered almostall of the ground covered by the first thrust. With the second thrust to the down side having beenbigger than the first and with the second correction having corrected a smaller portion of thethrust before it, the indication as of the high in column twelve was that the market wasweakening and that the decline would likely continue. During the third thrust to the down side,the Wyckoff Wave made more new down side progress than during the second thrust. Thisobservation indicated that the Wave was still weak suggesting that the decline was notover. However, the third thrust and the correction that followed it provided indications that theWave was not as weak as it was during the period of the second thrust and its correction. Theseindications were made by the fact that the third thrust was somewhat smaller than the second andby the fact that the Wave was able to regain a larger portion of the third thrust than had been thecase on the correction of the second thrust.

The current thrust of the decline began on February 1. As of March 7, it appeared to be a work inprogress. Therefore, any conclusions as to any indications it provides have to be subject tochange when the thrust has been completed. However, as of now, the fourth thrust has beensubstantially shorter than any of the first three and no new down side progress has beenmade. The conclusion that comes from these observations is that the Wyckoff Wave is not asweek as it had been during the previous thrusts in the decline. This conclusion suggests that animportant change in character in the action may be developing. Therefore, the bears would dowell to be more defensive with respect to managing existing positions or considering new onesand the bulls should be vigilant so as not to miss any new opportunities that may be presentedduring the weeks ahead.

The thrusts outlined above were all of what most Wyckoff traders would consider to beintermediate in nature. It should be noted that each of those thrusts was made up of smallerthrusts. Those smaller thrusts would have been the focus of attention of the somewhat shorterterm trader looking to realize as much profit as possible from each thrust rather than beingcontent to ride out the entire decline with one set of positions. Due to the process of rotation, theleaders during one thrust of a larger move may not be the leaders in the next thrust. Studying theindications from the smaller thrusts within the bigger moves can be helpful when one set ofpositions should be replaced by a new set.

Inharmonious actions between the Wyckoff Wave and O.P. Index are always points ofinterest. They indicate that there is an unstable relationship between the result expressed by theWyckoff Wave and by the effort expressed by the O.P. The indication when one of these

unstable relationships develops is that the Wave is likely to change direction from the direction itwas moving when the inharmonious action or divergence first appeared. Inharmonious actionsand divergences should not be considered to be timing tools. In other words, if one of thoserelationships develops today, do not assume that the Wave will respond tomorrow. There is,however, a general relationship between the magnitude of an inharmonious action or divergenceand the amount of time it will take for a response to begin and be completed. If an inharmoniousaction or divergence develops over a long period of time, the response to it is likely to takelonger to begin and complete. Those that develop over shorter periods of time should produce aquicker response and one that is completed sooner.

Since July of 2007, there have been several cases of inharmonious action or divergence. The firstcame in column three of the vertical chart when the Wyckoff Wave rallied to a lower top thanhad been recorded during July and the O.P. rallied to a higher top. That divergence was a case ofup side effort unconfirmed by result. It suggested the likelihood of a reaction in the Wave. In thatcase, the response was immediate and severe as the Wave declined to its August low. When theWave put in its October high in column twelve, it was only 400 points from its Julyhigh. However, the O.P. was approximately 1000 points below its high. This was a bearishinharmonious action. The response by the Wave was unconfirmed by the effort. The indicationwas for a decline in the Wave. In that case, the response also came quickly and it wassubstantial. At the November low in column twelve, the Wyckoff Wave was in new low groundrelative to its August low. However, the O.P. was not. In that case, the down side result wasunconfirmed by the effort indicating the likelihood of a turn to the up side by the Wave. As theWave was putting in its December high, the O.P. was higher than it had been in October, but theWave was not. This was another bearish divergence suggesting that a reaction in the Wave waslikely and it declined to the January low. In the case of this divergence, it should be noted thatthe O.P. continued to try to pull the Wave higher into column fourteen. This widened thedivergence and possibly helped the Wave make more down side progress than it might havemade.


The Trend Barometer is the final point of interest that will be examined. It is the name given tothe Technometer and the Force Index. The Technometer indicates to what degree the market is

over sold or over bought. The Force Index indicates whether the Wyckoff Wave is beinginfluenced by down side pressure or up side pull.





The Force Index exhibits a tendency to trend. The high in the Force in column one and the highas the action crossed from column three into four can be used to define a down trend. The downtrend indicated that there was a bearish tone to the action confirming that the short side was theone to be trading and indicating that some one still trading the log side was likely in trouble. Incolumn five, the down trend was broken indicating that the bearish tone to the action had endedencouraging those still short to be more defensive and encouraging the bulls to be moreaggressive. This change in tone occurred as the Wave was recovering from its August low andmoving toward its October high. The tone of the action changed again in column nine when theup trend in the Force was broken. In that case, the change in tone was indicated just as the Wavestarted down from its October high. The tendency of the Force to trend is not a timing tool. Itdoesprovide indications as to which side of the market the trader should be trading. As a rule,traders who are trading against the tend of the Force will end up paying for their mistake just asthose who try to trade against the trend of the Wyckoff Wave are likely to have to pay for theirerror.


The effort to leave that range to the up side failed resulting in an up thrust. The high point of anup thrust is a point from which a down count may be taken. Since there is only one posting at the40000 level, it appears that there is no potential. Making this conclusion is the result of an overlymechanical approach to taking counts. Since the July high was an up thrust and an ending action,it is acceptable to count the potential created by the entire trading range even though there isonly one posting at the high. In this case, it appears that the Wyckoff Wave began moving intothe trading range during May when it first reached the 38500 level in column one of the figurechart. The potential built during the period from May to July was 4500 points for an objective of35500. This objective was reached as the Wave approached its August low in column three ofthe figure chart.

After the Wyckoff Wave made its initial break to the down side from the July high, it made acorrective rally that ended at the 38500 level at the beginning of column three. This rallyrepresented the test of the up thrust. The high point of the rally provided a place to take anotherand more aggressive measure of the potential in the trading range. This count began at the top ofthe test of the up thrust and extended to the left to where the Wave was rallying into May to the38000 level in column one of the figure chart. The potential measured by this count was 7000points indicating a down side objective range of 31000 to 33000. This objective was reached onthe decline to the January 2008 low.

The August low in column four of the vertical chart was the end of the first major thrust of theentire decline from the July high to the present. Although it was not clearly defined, a tradingrange did develop following the August low. If the low in column four was interpreted to be theselling climax of that phase of the decline, the preliminary support can be seen as having beenmet at the low in column three of the vertical chart. If these two points had been defined, the

high as the action crossed from column four into column five of the vertical chart would havebeen labeled as the top of the automatic rally making the low in column five the secondary test,which confirmed a new trading range. Since the action immediately left the range to the up sideafter the secondary test, it could be seen as also being a last point of support. Wyckoff tells usthat the maximum count to the up side stretches from the last point of support to preliminarysupport. If that rule was used in this case, the result would have been a 3500 point potential atthe 36000 level indicating an up side objective range of 38000 to 39500. The top of the objectiverange was reached at the October high.

An up trend was defined on the vertical chart off of the lows in column four and five. This trendwas broken in column six. At the end of that column, the Wyckoff Wave made an attempt toreenter the up trend that failed. The failure confirmed the breaking of the up trend and began thedefining of the next trading range. The failed attempt to reenter the up trend was used to definethe resistance level of the new trading range and the low in the next column was used to definethe support level. The action in column eight of the vertical chart provided an obvious endingaction in the form of an up thrust of the resistance level. At the end of column three of the figurechart and extending into column four, the potential for the next decline was established. It wasonly 1500 points. However, when the up thrust was tested in column nine of the vertical chart,the potential had grown to 3000 points for an objective of 36500 to 35000, which was reachedand over run on the decline to the November low.

The character of the trading range that developed during September and October points out thevalue of maintaining more than one figure chart. That trading range was relatively short term andwas confined to a relatively narrow range. Frequently, the potential in trading ranges like thiscan be underestimated if the figure chart being used is long term in nature as is the case with thefive hundred point chart. Keeping a one hundred point figure chart in addition to the fivehundred point chart provides an intermediate interpretation of the action that can better estimatethe potential developed in shorter term trading ranges.

The next trading range that developed was defined by the November low in column four of thefigure chart and by the December high in column five. After the limits of this range weredefined, the action moved into an apex. The action broke from the apex in column five of thefigure chart as the Wyckoff Wave began its decline to the January low. When the apex wasbroken, a new down side potential could have been measured. This count was taken at the 35500level and indicated an objective range of 29500 to 30500. This objective has not as yet beenreached. It may or may not be reached based on the outcome of the current trading range.

The current trading range was defined by the January low and the February high. It wasconfirmed when the February low respected the support level of the range. After a trading rangehas been defined and confirmed, the expectation is for an ending action to develop to signal thattrading range action is being completed and to provide an indication as to the direction of thenext move. Thus far, there has been no ending action relative to the new tradingrange. Therefore, taking a count in either direction cannot be justified. However, it is acceptableto periodically measure how much potential might be developing so as to have a feeling as tohow significant the next move might be. If the potential of the current range is measured at itswidest point as of the last trading day in February, the potential could be as much as 8000 points

if it is measured back to where the action was declining to the January low. The potential issomewhat less if it is measured only since the January low. If the anticipated ending actionrelative to the range points to additional down trend activity, the 29500 to 30500 objective rangewill likely be overrun by a wide margin. However, if the ending action points to an advance, it islikely that the lower objective mentioned will never be reached. The objectives that the action intrading ranges forecast should be seen as being indications only subject to being confirmed ordenied by the character of the price and volume action.

Note: Part three of this series will focus on other points of interest that have developed since theall time high of the Wyckoff Wave was put in place last July.




Stock Market Analysis Tools & Strategies

Analyzing the Wyckoff Wave, O. P. Index and Trend Barometer

Part 1 - Trends

Since the Wyckoff Wave put in its all time high back in July of 2007, its action has beendominated by down trends. Three of the down trends are of special interest because they have ormay have an impact on current and future action of the Wave. The most important down trendwas defined off the July high (Column 2).

The second rally top used to define this trend was the October high (Column 9). The parallelover sold line for this trend was constructed through the August low (Column 4). Since it wasdefined, the supply line of this longer term down trend has never been weakened or evenseriously challenged and it is unlikely that it will be in the near future due to the fact that thecurrent action of the Wyckoff Wave is more than 5000 points below the supply line. The actionof the Wave has had encounters with the over sold line of the down trend.

The action of the Wyckoff Wave first encountered the over sold line of the longer term down trend in November (Column 12). The resulting penetration of the oversold line produced an over sold position that needed to be corrected. The correction of an oversold position can unfold as a period of horizontal action that over time allows the Wave to moveback into the down trend channel.

However, the correction normally unfolds as a rally, which is what happened in this case as theWave rallied back to near the middle of the down trend channel (Column 13). With the Wavesolidly back in the middle of the down trend channel, it was free to resume down trendactivity. During January (Column 15), the Wave again encountered the over sold line of thedown trend and entered an over sold position.

This time, the ability of the Wave to correct the over sold line with a normal corrective rally wasless impressive. Instead of moving back to the middle of the down trend channel, the Wave hasmoved in more of a horizontal direction clinging to the over sold line. The inability of the Waveto make the normal corrective rally to the middle of the down trend channel indicates continuingweakness. It suggests that the bears are content with their short positions and see no reason to bepanicked into a short covering rally. It also suggests that the bulls that have been worn out orshaken out of the market are reluctant to return. If this thinking among the bears and the bullscontinues, the Wave may continue to move horizontally until a position near the middle of the

down trend channel is reestablished. Other possibilities include a gradual drift lower as the oversold line moves lower. If the bulls and the bears change their assessment of the action, a normalcorrective rally is another possibility.

In addition to serving as the second point for defining the supply line of the longer term downtrend, the October high (Column 9) also was a factor in defining the intermediate downtrend. The second point used to define this trend was the December high (Column 13). The oversold line was constructed parallel to the supply line from the November low (Column12). DuringJanuary (Column 16), the action of the Wyckoff Wave approached but did not reach the oversold line of the intermediate down trend. Normal down trend action would have penetrated orreached the over sold line of the down trend. The failure to reach the over sold line indicated thatthe intermediate down trend was in trouble and vulnerable to being broken. It was also a warningto bears whose positions were based on the existence of this trend to become more defensive inthe management of their positions. As the action of the Wave moved from January into February(Column 17), the supply line was penetrated. This action weakened the intermediate downtrend. Frequently, down trends are ended with a four step process that begins with the weakeningof the supply line. The second step is for the price to reenter the down trend, but not make alower low than the low that occurred before the supply line was weakened. In this case, step twowas completed during February (column 18). Step three is for the supply line to be decisivelybroken by a rally that takes out the high recorded when the supply line was weakened. The finalstep is for the price to confirm the breaking of the down trend with a reaction that is unable toreenter the down trend channel. As of the last day posted, the action was working on step three,but the outcome was inconclusive resulting in a conclusion that the intermediate down trend wasstill having an impact on the action.

The third significant down trend since the July high was defined off the highs that were recordedduring December (Columns 13 & 14). The over sold line that completed the definition of thisshorter term down trend was constructed through the low point of the reaction that separated thetwo rally tops used to define the supply line. The over sold line of this trend was penetratedtwice during January (Columns 15 & 16). The response to the first over sold position was anormal corrective rally. The response to the second over sold position was moreimpressive. After slightly weakening the supply line and briefly reentering the shorter term downtrend, the supply line was decisively broken (Column 16 & 17). The Wyckoff Wave could haveclearly ended the shorter term down trend by failing to reenter the short term down trendchannel, but it did not. During February (Column 17) the action of the Wave slipped back intothe down trend channel, but did not make a lower low. On the one hand, this action seemed toconfirm the breaking of the short term down trend by failing to make a lower low. However onthe other hand, the action seemed not to confirm the breaking of the down trend by reentering thedown trend channel. Conflicting signals such as these encourage traders to be moredefensive. Since the action of the Wave reentered the down trend, it has been horizontal in natureand has lifted the Wave out of the down trend channel. As horizontal action continues and thegap between current action and the supply line widens, it may be concluded that the breaking ofthe shorter term down trend has been confirmed even though there was the reentry into the trendafter the supply line was decisively broken.

The three down trends mentioned above are the ones that are having an impact on currentaction. However, there have been others that deserve to be noted. After the July high (Column2), there was a rally to a lower top during August (Column 3) that allowed a shorter term downtrend to be defined. An over sold position relative to this down trend developed at the Augustlow (Column 4). The correction of the over sold position began the process than lead to the endof the down trend being confirmed during September (Column 6). Another shorter term downtrend was defined near the end of October ( Column 9) when the Wyckoff Wave rallied to alower top relative to the high that had been recorded earlier in October. The Wave has moved outof this down trend. However, it should be noted that the stopping action was not the more classictype mentioned earlier.

Although the action since July 2007 has been dominated by down trends, there have been uptrends as well. There have to be up trends for down trends to be defined. The up trends that haveunfolded have all been short term in nature. They have been characterized by being relativelynarrow compared to the down trends discussed earlier and they have been steep. Trends that aresteeply inclined and narrow are difficult for the action to sustain. In this case with the actiondominated by down trends, the short, steep and narrow up trends likely were the result of bearsrotating out of some short positions and bulls rushing back into the market to avoid missing thenext advance and in the process setting themselves up to being shaken out or worn out later. Theup trends that stand out most clearly were defined off the August low (Column 4), the Novemberlow (Column 12) and the January low (Column 16).

Earlier it was noted that in order to have down trends there must be up trends. However, in orderfor there to be trends in either direction, there must be trading ranges that provide the potentialthat the fuel the advances and declines that lead to up trends and down trends. The trading rangesthat have developed since the all time high of the Wyckoff Wave will be the subject of thesecond part in this series.

© The Jamison Group, Inc.: Stock Market Analysis-Tools and Strategies



The Macro View of A. T. & TDecember 7, 2008

NOTE; For a better appreciation of the text of this article, the reader is encouraged to retrievea weekly chart of A. T. & T covering the past two years and a monthly chart covering the pasttend years at bigcharts.com and to number the columns from left to right. The weekly chart hastwenty-four columns and the monthly chart has ten columns.

The very long term view of A. T. & T. has been a story of three trends. The first trend was anaggressive down trend that began to form following the high in column 2. The second point thatdefined the supply line of the down trend was recorded in column 3 at the top of the relativelyweak rally that followed the initial decline from the high. The over sold line of the down trendchannel was constructed parallel to the supply line passing through the low near the beginning ofcolumn 3. This trend channel contained the action into 2002 in column 4 when the price enteredan over sold position relative to the down trend. Wyckoff tells us that over sold positions need tobe corrected. In this case, the correction could have taken the form of a corrective rally backtoward the supply line of the down trend or the form of a new trading range allowing the price toreestablish a position in the down trend over a period of time. A. T. & T. chose the correctiverally approach. The rally was completed at the end of column 4 and down side progress resumed.

After being aggressively bearish through the end of column 4, the character of the action beganto change in column 5. Wyckoff traders should always be alert to potential changes in thecharacter of the action because they indicate that an existing position needs to be more activelyand defensively managed. They also provide an early signal to the long term investor with aneutral position that there may be a new trading opportunity in the foreseeable future. In thiscase, the indication of a change in character was given near the beginning of column 5 when thedown side progress that had resumed in column 5 was unable to reach the over sold line of thedown trend channel. This failure to make what would have been a normal amount of down sideprogress suggested that the down trend was in trouble.

As the action progressed across column 5 in 2003, there were other more obvious indicationsthat the down trend was in trouble. The first came when the rally off the low in column 5weakened the supply line of the down trend. For the long term investor participating in the downtrend, the weakening of the supply line should have been seen as being an unacceptabledevelopment requiring an even more active management of an existing short position. Towardthe end of column 5, a higher bottom was put in on a reaction. This confirmed a new tradingrange to compete with the down trend for control of the action. By the end of column 5, thetrading range had won the battle for control of the action and the supply line of the down trendhad been decisively broken.

Long term bears had plenty of time to realize that the trend was no longer in their favor and toliquidate their positions as the trading range dominated the action in columns 6 and 7. At thebeginning of column 8, the action played what can be seen as a dirty trick on long term bearslooking to reestablish short positions. The first posting in column 8 produced a penetration of theresistance level of the trading range. When the price failed to follow through on the secondposting in the column with another strong performance to the up side, the Wyckoff investorcould have and should have concluded that the penetration was not a jump but rather a potentialup thrust. An up thrust is a primary selling position. Therefore, long term bears could havejustified reentering on the short side in anticipation of the potential that had been built during thetrading range would take the price much lower. Here is where the dirty trick entered the picture.

Mr Evans frequently mentioned on is recorded lectures that Wyckoff investors should alwaysbegin by anticipating what is normal because that is what happens most of the time. The normalresponse to an up thrust is a move back to at least the middle of the trading range. In this case,the price did move back into the trading range, but it was supported well above the middle of therange. When the action fails to unfold in a normal manner, investors need to see red flagwarnings and take defensive action. Abnormal behavior usually is an indication that adevelopment not anticipated by the investor when a position wad established may be about tounfold. The investor's response should be to protect the funds involved in any open positions. Inthis case, the unanticipated development was the failure of the test of the up thrust as the priceleft the trading range to the up side on wide price spread.

The departure from the trading range allowed for the second long term trend that has dominatedthe action since the high in column 2 to be defined. It was an up trend defined off the lows incolumn 5 and column 7 with the over bought line defined through the high in column 5.Unfortunately for the long term bulls, there was no clearly defined ending action to signal thatthe price was intending to leave the trading range to the up side. Therefore, they likely did nothave an opportunity to participate in the advance into column 9. If they had found an acceptableentry point, they would likely have spent much of the time in that position worrying about itsstatus. The reason for concern was the development of an over bought position that developednear the end of column 8 and worsened throughout column 9. The need for a correction of theover bought position is what lead to the development of the third long term trend that can be bestassessed on the weekly chart. It should be noted that the over bought position that developedduring 2007 was in the vicinity of the halfway point of the decline from the high in 2000.Therefore, there were two reasons to anticipate a new trend to try to take control away from theup trend.

The current long term down trend began to form in column 13 of the weekly chart. The high inthat column combined with the high in column 18 to define the supply line. The over sold linewas constructed through the low in column 15, The down trend has had three thrusts thus far thathave been of similar size. Usually, Wyckoff investors anticipate the thrusts in an extended moveto shorten as the move develops and more and more of the bears participating are satisfied. Thefirst thrust produced a 9.84 point decline as the price moved from the high in column 13 to thelow in column 15. The second thrust began in column 18 and ended in column 20 with a 10.98point decline. Down thrust number three began in column 21 and ended in column 23 with the

price in a severely over sold position relative to the down trend having completed a decline of10.73 points. Together, the three thrusts represent a sustained pattern of considerable weakness.However, nothing is forever. The action since the low in column 23 suggests that there is a newbattle for the control of the long term action underway.

As noted, the low in column 23 resulted in a severely over sold position that needed to becorrected. The correction has been underway for nearly two months at this point and the price isjust attempting to reenter the down trend channel. This is a critical point in the long term action.The normal expectation is for the price to continue horizontal action for many more months as itdid during 2004 and 200f allowing the price to reestablish a solid position in the down trendfrom which it could resume down trend activity. A second and less likely scenario is that theprice will resume down side progress immediately from the over sold line of the down trend andmove decisively into new low ground allowing an accelerated down trend to be defined. In thiscase, the bears would have a windfall profit added to the already substantial gains that haverewarded their patience. Either scenario suggests that the long term bears are still in control andthat long term bulls that are actively looking for opportunities should look elsewhere.

The Macro View of BoeingMarch 15, 2009

NOTE: For a better understanding of the text of this article, the reader is encouraged to accessthe following three charts at bigcharts.com: a monthly chart for the past ten years, a weekly chartgoing back three years and a daily chart covering the past twelve months.

Since its high in 2000, which can be seen on the monthly chart, Boeing has had three impressivelonger term moves. The cause for the first move began to form following the high in 2000. Earlyin 2001, the 2000 high and the low recorded during March 2001 defined the limits of a potentialtrading range. The trading range was confirmed during May when the price respected theresistance level. It left the trading range to the down side in a fall through the ice duringSeptember 2001. Wyckoff tells us that after a fall through the ice it is normal to get a rally backto or toward the ice level. The rally back was completed early in 2002 when the price returned tothe former support level of the previous trading range reaching that critical level on reducedvolume relative to that which had been experienced on the fall through the ice.

Viewing what happened following the rally back today with the advantage of hindsight, it ispossible to see a down trend channel defined off the high during 2001 and the top of the rallyback. At the time, however, the down trend channel would not have presented itself as clearly.Normally, Wyckoff investors look for aggressive down side progress following a rally back tothe ice with the down trend being revealed when the price takes out the low point of the fallthrough the ice on widening price spread and increasing volume. In this case, the price did makedown side progress for the balance of 2002, but at a more leisurely pace than might have beenanticipated in view of the fall through the ice and rally back. Therefore, a long term Wyckoffinvestor could have embraced an alternate interpretation that the price was actually working onthe creation of a new trading range under the original range with the limits of the new rangedefined by the low point of the fall through the ice in 2001 and by the top of the rally back in2002.

The investor who was monitoring the action throughout most of 2002 from the standpoint of itbeing an effort to confirm a new trading range was rewarded for his good judgment and patiencenear the beginning of 2003 when the price entered a potential major spring position bypenetrating the support level defined by the 2001 low. Mr. Evans use to encourage Wyckoffinvestors to buy all springs, or to at least consider buying them. This is a case where heeding thatadvice could have netted the investor one of those buys of a life time as the price used the springposition as the starting point for a four year advance resulting in a three hundred percent gain.

When an investor opts not to take a position on a potential spring, the thinking is that there is



likely to be a test of the spring and that the test will provide a safer entry point and a moredefendable position. Unfortunately, the monthly chart does not show a clearly defined test of thespring suggesting that those who chose not to buy the spring may have missed the entire advanceespecially if they were only viewing the action from the standpoint of the monthly chart. Thosewho were monitoring the action with a weekly chart may have found a convincing test on one ofthe five to ten point reactions that followed the initial response to the spring.

During 2006, the monthly chart shows the first signs of excessive bullishness as the price enteredan over bought position relative to the long term up trend defined off the low point of the springin 2002. Wyckoff investors expect over bought positions to be corrected. This one was correctedwith a move back to the demand line of the long term up trend that actually weakened the linewith a small penetration. The weakening of a demand line is an early warning signal that thetrend might be in trouble. In this case, the warning may have been overlooked due to the fact thatthe correction of the over bought position found support at the former resistance defined by the2000 high. The investor who noted the warning of the weakened demand line had severaldefensive options to consider. A portion of the position might have been liquidated to guaranteea portion of the profit no matter what happened from that point forward. The stop order on theentire position could have been raised to guarantee an even greater portion of the profit. A thirdstrategy would have been to use a combination of the first two.

Late in 2006, the price returned to an over bought position relative to the long term up trend. Itcontinued to maintain an over bought position during much of 2007. A potential buying climaxcan be identified late in 2007 when the volume spiked to its highest level of the entire advance.After that, it was only a couple months before markdown began. The monthly chart suggests thatthere was not much in the way of preparation for the decline that followed and that continues tounfold. However, the weekly chart reveals that the price defined the limits of a new trading rangeduring July and August of 2007 and confirmed the range during September. During the finalmonths of 2007, the price entered a potential spring position relative to the new trading range.Some long term investors might have rightfully used the spring as a signal to add to theirpositions. However, they and all other long term bulls who chose not to add to their positionsshould have quickly realized that the character of the action was changing. The first indicationcame when the response to the spring was less than normal. While this is a concern, mostWyckoff investors have learned that a less than normal response to a spring can still lead to asuccessful test and a substantial advance. This was not one of those times. 2008 began with thetest of the spring failing as the price fell through the ice and out of the trading range.

Since the high in 2007, Boeing has lost seventy-three percent of its value. The decline hasunfolded in two down trends. The original down trend was defined off the high that confirmedthe trading range at the top of the advance in 2007 and by the rally back to the support level ofthe trading range during May of 2008. As the general market was putting in its important low inNovember 2008, BA entered a severely over sold position relative to its down trend and began tocorrect that position. In view of the high volume on the move to the over sold position, someover anxious bulls may have concluded that the over sold position marked the beginning of theend of the decline. The recent action has not validated the bullish conclusion. When the priceencountered a the over sold line of the original down trend as it was correcting the over soldposition, it resumed down side progress making an additional twenty-five percent decline and in

the process defining an accelerated down trend.

If the trend lines of the accelerated down trend are extended, the indication is that the price willbe nearing zero in a few months. However, the figure chart suggests that things are not going toget that bad. The figure chart indicates that the price is nearing its objective range. Theindication is provided by a count that can be measured at the forty-three level from the actionjust before the accelerated down trend began. This count has a nineteen point potential for anobjective range of 24 to 28. The price recently traded as low as 29.05. Long term bears shouldbegin to ask themselves how much of their paper profit they want to risk to realize what mayonly be one more point of potential profit and then to activate an appropriate defensive strategy.

Wyckoff tells us that large professional traders looking to build big positions for importantadvances are frequently most interested in issues that have been beat up the worst because theycan quietly build their positions relatively unnoticed as the general public is licking its woundsfrom the previous decline or is simply too scared to consider an issue that has lost most of itsprevious value. Long term Wyckoff investors should be watching for signs that a change ofcharacter is beginning to take shape in Boeing. Ideally, it will begin with a clearly definedselling climax that hits bottom somewhere in the objective range mentioned above. The end mayalso come with the exhaustion of supply resulting in the price action simply flattening out andmoving into a trading range. Either way, long term bulls need to be patient. There are two downtrends that need to be broken and a new potential that needs to be built before the next significantadvance can begin. Will it be as big as the advance from the 2003 low? Probably not. However,even if it is only a normal correction of the decline from the 2007 high that will still be morethan a 100% advance from the down side objective.

Craig's Corner Phase 2The Micro View of Bank of America

December 14, 2008

NOTE: For a better appreciation of the text of this article, the reader is encouraged to retrieve afifteen minute intra-day chart covering the past ten days and a daily chart covering the pastmonth at bigcharts.com

During the past ten to thirty days, short term traders in BAC could have been viewing the actionand their trading opportunities from two very different perspectives depending upon how shortterm a view of the action they were taking. The Wyckoff trader viewing the short term actionfrom the perspective of the fifteen minute vertical line chart (Call him Trader A) saw a potentialjump and the possibility of an opportunity on the long side on the back up. The trader viewingthe action from the somewhat broader perspective of the daily chart (Call him Trader B) for thepast month saw the possibility of the jump, but then saw that possibility quickly deteriorate intoa potential up thrust providing an immediate opportunity on the short side.

When the price began the potential jump on December 8 moving into new high ground onwidening spread and increasing volume, Trader B was justified in defining an up trend on thedaily chart using the lows on November 21 and December 5. His anticipation would have beenthat the potential jump would take the price into an over bought position relative to the newlydefined up trend channel and that the back up would begin from that position. However, onDecember 9 there was no follow through to the up side. That action was inconsistent with thejump scenario. Trader B could have immediately concluded that the potential jump was morelikely a potential up thrust of the high on November 28 and established a short position. The overbought condition that had existed on December 8 (Tec of 52.5) and the relatively over boughtcondition that still existed on December 9 (Tec of 48.1) provided a measure of confirmation thatthe action actually was a potential up thrust and not a jump. It is not normal for clearly overbought conditions to develop on the first day of a potential jump. Since the price traded lower onDecember 9 in a narrower price spread and on lower volume, the wisdom of acting so quicklymight be questioned based on the possibility that the price might have resumed up side progressthe next day in another wide spread and on increased volume. That was a possibility, but it wasalso a possibility that the price would respond to the potential up thrust with down side progressresulting in a much less favorable entry point. When it comes to short term trading, Wyckofftraders need to act immediately when a potential opportunity develops, protect the position andthen see what happens. The short term trader who hesitates is likely to miss many and perhapsmost opportunities.

When Trader B took his short position on December 9, the one point figure chart indicated that



there was a four point down side potential for an objective of 14. On December 10, Trader B wasrewarded with a wider price spread to the down side on reduced volume indicating a lack ofdemand. On December 11, he received an even bigger reward in the form of another wide spreadto the down side on increased volume indicating that supply was entering the stock. Note that onthis day, the price penetrated the demand line that had been defined off the November 21 lowweakening the up trend. This was an important development for Trader B. If the action hadsuccessfully tested the demand line, his position would have been in jeopardy because thesuccessful test could have been followed by a new rally in the up trend back to and through hisentry point. On December 12, the demand line of the up trend was decisively broken and theanticipated objective was reached. Trader B should have closed his position and thanked themarket very much for giving him most of a four point move on a seventeen dollar stock in lessthan a week. Some might wonder why Trader B would not have stayed with his position sincethe action was moving the price in his favor. He should have gotten out because the market hadgiven him what he got in to get and there was no indication that there was any more to get. Theshort term trader who hesitates entering a position frequently misses opportunities and the shortterm trader who hesitates closing a position frequently misses out realizing the best profit.

Trader A who was only looking at the fifteen minute bar chart would not have seen the potentialup thrust, but would have seen the potential jump. Wyckoff does not identify any tradingopportunity as the jump is occurring. Therefore, Trader A needed to wait to see how the back upunfolded to consider an entry on the long side. A problem that Wyckoff traders in all time framesof market operation have is making a determination as to how far the price can back up afterjumping a creek before it is too far. In this case, Trader A should have identified the zonebetween the high on December 5 and the low on December 8 as being the best area for the backup to be completed. If he had done this, he would have known on December 11, that anopportunity to enter on the long side was probably not going to develop because the price hadtraded through the creek on wide spread and increasing volume.

As of the open on December 15, both Trader A and Trader B are looking for new opportunities.Trader A can see on his fifteen minute chart that the action is correcting an over sold positionthat developed relative to the down trend defined off the high on December 9. The price hasreentered the down trend channel and an opportunity on the short side may develop as the supplyline of the down trend is tested. However, Trader A needs to remember that the stock closed in aclearly over sold condition on December 12 with a Tec reading of 38.2. Therefore, immediatetrading activity is discouraged. Trader B is also looking for a new opportunity on the short side.In addition to knowing what Trader A knows, Trader B knows that the short term up thrust thatprovided his last opportunity will likely be tested. He also knows that the breaking of the uptrend that he defined will likely be confirmed. The combination of both of these developmentsmay provide a new entry point. However, Trader B like Trader A needs to pay attention to thecondition of the stock so that a new position is not actively considered until the conditionindicates that the price is vulnerable to another short term reaction.

Measuring Relative Strength/WeaknessMarch 1, 2009

One of the simplest Wyckoff concepts is one of the most important. It is the concept of relativestrength or weakness. Stocks that have established themselves as being relatively strong vs. ageneral market index or a fixed universe potential trade candidates like the components of theWyckoff Wave or the Dow Jones Industrials are more likely to be the best candidates for longpositions. Issues that are relatively weak to an index or group of other individual stocks are morelikely to be the best candidates for short positions. Relative strength or weakness can bemeasured in two ways. A trader can measure it by simple observation or by doing some simplemath.

The Wyckoff trader who is using the observational approach is comparing the tops of rallies andthe bottoms of reactions in individual issues to the similar rally tops and reaction lows in ageneral market index. Identifying the halfway points of rallies and reactions on the individualissues under consideration and a general market index can also be helpful. If the trader is bullish,he is looking for those individual issues that are demonstrating the most consistent pattern ofhigher tops on rallies and higher bottoms on reactions relative to the similar rallies and reactionin the market index. These observations are going to be most helpful in identifying potential longcandidates while the general market is still in a trading range, but early leaders have alreadybegun to trend. If the trader is bearish, he is looking for those individual issues that aredemonstrating the most consistent pattern of lower bottoms on reaction and lower tops on ralliesrelative to similar bottoms and tops in the market index. These observations are going to be mosthelpful in identifying early leaders to the down side and potential short candidates while thegeneral market is still in a trading range.

The same types of observations mentioned above can also be helpful in identifying tradecandidates late in a sustained advance or decline when the general market has moved into atrading range, but some issues continue to trend again demonstrating patterns of higher tops andbottoms to be identified as long candidates, or lower bottoms and tops to be identified as beingshort candidates.

When both the general market and individual issues are trending in the same direction,identifying the relatively strong and relatively weak issues by observation can be more difficultsince both the market and the stocks are doing the same thing. This is where identifying thehalfway points of previous rallies and reactions can be helpful. If both the market and individualissues are trending higher, the Wyckoff trader wants to identify those issues that are underperforming to the down side on reactions relative to the general market. These will be mostobviously revealed in cases where the general market reacts to or through its halfway point of theprevious advance and the individual issues hold above their halfway points. These are the issuesthat are more likely to participate well in the next rally. The same approach works in reverse



when both the market and individual issues are trending lower. Here, the trader wants to identifythose issues that are under performing to the up side on rallies relative to the general market andthe halfway points of the previous reactions can serve as a good guide in making theobservations.

Traders using the observational approach to measuring relative strength or weakness shouldfocus on the obvious and avoid the marginal. Trying to make a case for an issue as a tradecandidate where the issue is not clearly making the case for its self usually will lead todisappointing results if a position is taken.

Wyckoff traders who are looking for a more precise way to measure relative strength orweakness or who are looking for a way to confirm the results of the observational approachmight want to consider developing a weekly relative strength/weakness report. To do this, thetrader will need to determine the percentage change in price at the end of the current week fromthree previous points in time. Since most Wyckoff traders engage in market operations that areshort term to intermediate term in nature, determining the net change over the past week, the pastfour weeks and the past thirteen weeks is suggested. Traders who are more comfortable with alonger term market operation might want to use the changes over the past four weeks, thirteenweeks and fifty-two weeks. Percentage changes should be determined for both the universe ofindividual issues being considered and for the general market index that is used.

This approach to measuring relative strength or weakness is best suited for the trader whooperates in a fixed and limited universe of individual issues such as the twelve components ofthe Wyckoff Wave or the thirty Dow Jones Industrials. If the components of the Wave are beingused, the trader wants to rate them based on the percentage changes that were determined in thefirst step of this approach. To do this, the trader assigns a score to each component and to theWave for each of the three time frames. A score of zero is assigned to the issue that turned in themost bearish performance. A score of twelve is assigned to the issue that turned in the mostbullish performance. When this has been done for each of the issues and the index in each of thethree time frames, the three scores are added to determine the total for each. The totals will rangesomewhere between zero and thirty-six if the Wave and its components were used. If the DJIAand its components were used, the totals will range somewhere between zero and ninety-three.

Here are two recent examples of how a weekly relative strength/weakness report could havehelped identify two trading opportunities. When the report for the week ending February 20 wasprepared, it revealed that one component of the Wyckoff Wave had been among the threeweakest during each of the thirteen previous weeks. The issue was BAC. During the most recentweek, BAC rallied into a clearly over bought condition as measured by its Technometerindicating that it was vulnerable to a reaction. Wyckoff tells us to sell relative weakness onrallies. In this case, the sustained pattern of relative weakness allowed the price of the stock todecline two points in less than two days, which was a huge percentage move for an issue tradingunder six dollars per share.

Another example of how the relative strength/weakness report can be helpful in identifyingtrading opportunities can be found in IBM. When the report for the week ending February 20was prepared, it revealed that IBM had been among the three strongest components of the Wave

for eight of the previous thirteen weeks. It had reacted to the vicinity of the halfway point of itsprevious advance putting it in a primary buying opportunity. It was also in a clearly over soldcondition as measured by its Technometer. Wyckoff tells up to buy relative strength onreactions. The weekly report indicated that the stock was one of the strongest in the Wave. Bythe end of last week, the price had taken advantage of its relative strength and had rallied nearlyten points.

The two examples above should not be taken as an endorsement of the idea of being long andshort in the same market at the same time. Theoretically, this is possible to do especially if thepositions on opposite sides of the market are aimed at different time frames. However, mostWyckoff traders who try this approach tend to not do well at it. Therefore, traders areencouraged to only trade that side of the market that is most in harmony with its trend. Thatbeing the case, BAC would have been the better choice for a trade even though IBM rewardedthose who choose to take a position in it.

wyckoff stock market institute - trading successtradingsuccess.com/wyckoff-smi.pdf · to define the...

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