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Wyckoff Spring!

Posted By Barry Ritholtz On May 12, 2004 @ 5:01 pm In Finance | Comments Disabled

For you students of technical analysis arcana: Today’s action is what could be described as a Wyckoff Spring.

Richard Wyckoff was a trader from the 1920s. He wrote several books on the Market, and eventually set up the “Stock Market Institute” in Phoenix.

Today’s action could be part of a so-called Wyckoff spring, which occurs when a market average (or stock) falls below its trading range, makes a new “panic low” and then “springs” back into its previous range.

At its core, Wyckoff’s work is based on the analysis of trading ranges, and determining when stocks are in “basing,” “markdown,” “distribution,” or “markup” phases. Incorporated into these phases are the ongoing shifts between “weak hands” (public ownership) and “composite operators”, now commonly known as smart money.

Using this chart as a guide, here’s a simplified overview of Wyckoff’s methodology:

Wyckoff’s World
wycoff_spring

Source: San Francisco Technical Securities Analysts Association [1]

Phase A is characterized by a prolonged decline to “preliminary support” (PS on the chart), which provides temporary relief before the “selling climax” (SC). That climax is accompanied by sharply expanding volume as weak holders bail out in a panic. The climax is followed by an “automatic rally” (AR), suggesting the selling has been exhausted, and then a “secondary test” (ST) of the climax lows, during which volume is diminished.

Phase B contains basing action characterized by a series of rallies and secondary tests. The “creek” on the chart basically refers to a trendline connecting peaks of said rallies. A “jump across the creek” is a “sign of strength” (SOS) that provides evidence a bottom has occurred and buyers are emerging. These “jumps” occur in phases C and D on the chart.

Also in phase C, there’s another selloff and a marginal break of the selling climax lows. If such a test is accompanied by lower volume than that during the selling climax, it could be a setup for a Wyckoff Spring, a bullish pattern detailed here in March 2001.

Following the spring (no. 8 on the chart) and those “signs of strength” in phases C and D, there’s another selloff in phase D to the “last point of support” (LPS), after which this hypothetical example explodes higher.

Sounds about right to me.

For more about Richard Wyckoff, see these books:

How I Trade and Invest in Stocks and Bonds [2]

sbs

Stock Market Technique, No. 2 [3]
technique

Sources:
TSAA Review [4]
Technical Securities Analysts Association
Summer 2003

http://www.tsaasf.org/tsaa-review-03-2.doc

‘Rebound’ Suffers Relapse; ‘R’ Word Is Uttered Anew [5]
Aaron L. Task
The Street.com, 3/28/01 6:26 PM ET

http://www.thestreet.com/markets/aarontaskfree/1367305.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/05/wyckoff-spring/

URLs in this post:

[1] San Francisco Technical Securities Analysts Association: http://www.tsaasf.org/tsaa-review-03-2.doc

[2] How I Trade and Invest in Stocks and Bonds : http://www.amazon.com/exec/obidos/tg/detail/-/087034093X/ref=ase_thebigpictu09-20/102-4529470-0078540?v=glance&s=books

[3] Stock Market Technique, No. 2: http://www.amazon.com/exec/obidos/tg/detail/-/0870340697/ref=ase_thebigpictu09-20/102-4529470-0078540?v=glance&s=books

[4] TSAA Review: http://www.tsaasf.org/tsaa-review-03-2.doc

[5] ‘Rebound’ Suffers Relapse; ‘R’ Word Is Uttered Anew: http://www.thestreet.com/markets/aarontaskfree/1367305.html

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