Revisiting the Wyckoff Spring
For you students of technical analysis arcana: This past week’s action is what could be described as a Wyckoff Spring.
Who is Wyckoff, and what is is his spring? Richard Wyckoff was a trader from the 1920s. He penned several of my favorite Market books (mentioned previously here), before setting up the “Stock Market Institute” in Phoenix to study technicals and markets.
A Wyckoff Spring occurs when a market average (or stock) falls below its trading range, and makes a new “panic low” — and then “springs” back into its previous range.Its a relatively rare situation, one that is usaully associated with a sell off. That is a rather apt description of the entire week’s action.
Here is Wyckoff’s explanation:
“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
Source: San Francisco Technical Securities Analysts Association
Explanation:
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.
I would put that first level at 8000 or so, and that next level at 7400.
~~~
For more about Richard Wyckoff, see these books:
How I Trade and Invest in Stocks and Bonds
Sources:
TSAA Review
Technical Securities Analysts Association
Summer 2003
http://www.tsaasf.org/tsaa-review-03-2.doc
November 22nd, 2008 at 6:28 am
Try my method. I call it the Flipspice Lever chart. It is a nearly exact copy of the Wyckoff doo-dad. The difference is on the right, at the apex of the above chart.
Instead of looking like the right leg of a smashed middle W, headed north big time, it just continues to head south at the AB support trading range.
It results in much different results.
~~~
BR: Now all you have to do is study the markets for a few decades, become a wildly successful trader like Wyckoff, and then write a book on your methods.
Same thing!
November 22nd, 2008 at 6:37 am
hi Barry,
I have a question for you that is posted with the third SPX 60-minute chart in this chart thread from Friday.
appreciate it if you have the time to look at this chart thread and the question I have posted with a link to your site re: this Wyckoff Spring.
you always have quality material at your site, Barry.
thanks, Steve (hiker) and you may find the SPX monthly chart updated for Nov 21 here of interest with my comments -
chart thread containing my question for you Barry -
http://forums.technicalwatch.com/tool/post/fib_1618/vpost?id=3120844&trail=50#3
November 22nd, 2008 at 8:06 am
First, I would use the S&P500, not the Dow to make a market TA call. I looked at the S&P from mid Thursday to the end of trading Friday, and by eyeballing it, yes, I see that pattern pretty closely. Iit is fully completed, all the way back to the top of the W. It is kind of a generic bottoming…a fall…some sideways consolidation…and a rebound. I give it very little credence to predict future action because:
1) Time frame is way too short…it is like looking at a minute by minute chart and seeing a head and shoulder. It breaks and the pattern plays out…for a day or two…than its back to the major trend.
2) Volume on Friday was not that great…and remember, dollar volume is important too. C traded over a billion shares…but it is a $4 trade now. Because stocks are so much lower, we really need a massive volume capitulation day.
3) Geithner news triggered some stupid buying…this guy does NOT walk on water…he helped preside over the current mess anyway.
November 22nd, 2008 at 8:37 am
The past, especially the antediluvian 1920s past, is most definitely not Prologue and you ought to know that, n’est pas?
Many investment schemes, particularly Chartist Schemes have proven successful over short periods of time and many more over long periods, like Graham & Dodds. Many, if not all of them fail, including Graham, in times of bubbles. The best that can be said, even about the Flipspice Lever, is that they ALL intermittently work for a time. And then when the gamblers begin to use them in significant numbers, a new temporary paradigm forms.
These times are unlike any ever experienced in any downturn ever. There isn’t a reason in the world to expect that some solution from the lond dead past, occurring in a far different, light-years different, past will work this time not any more so than any other chart.
Let’s see if the Flipspice Lever Chart or if the Wyckoff Spring is borne out in the coming months or year. The book has already been written. I’m merely placing a temporary amendment in it. At the appropriate time Wyckoff Spring will also prove useful, which may or may not be this time. And that’s the point, isn’t it? Timing. Which few seem to have been successful with( other than insiders, unseen, invisible gazillionaires who aren’t so much placing bets as putting money on a sure thing).
2) Geithner’s appointment had nothing to do with the market going up or down. This is purely the media fitting the action of the market to some boneheads’ ideas. They do it every day in the WSJ. As if. They feel the need to pin it on something when any market watcher has seen that these late day rallies and collapses have been going on for months seemingly without rhyme or reason. I think it was a butterfly effect. An investment h0use had to close a short for options clearing and it cascaded from there with computers exercising predetermined buy orders. Anyone disagree?
November 22nd, 2008 at 8:38 am
Pssst…Hey Barry, over here. Yeah…keep it down, would ya?
Don’t listen to those skeptics above, Barry, for they know not of what they speak!
Hey, Barry—have you considered a pilgrimage to The Underpass in Chicago? If you are receiving “The Sign to Buy” from those Wyckoff squiggles—just wait until you get a look at the “salt-run off” beneath the Kennedy Expressway on The Southside! It’s going to blow your mind, Barry! But keep this between you and me, OK? No Non-believers Allowed!
Check it out:
CHICAGO (AP) — A steady stream of the faithful and the curious, many carrying flowers and candles, have flocked to an expressway underpass for a view of a yellow and white stain on a concrete wall that some believe is an image of the Virgin Mary.
“We believe it’s a miracle,” said Elbia Tello, 42, of Chicago. “We have faith, and we can see her face.”
Police have patrolled the emergency turnoff area under the Kennedy Expressway since Monday as hundreds of people have walked down to see the image and the growing memorial of flowers and candles that surround it. Beside the image is an artist’s rendering of the Virgin Mary embracing Pope John Paul II in a pose some see echoed in the stain.
Apparitions of the Virgin MaryTuesday morning, women knelt with rosary beads behind a police barricade while men in work shirts stood solemnly before the image, praying. A police officer kept the crowd of about three dozen from getting too close to the traffic but didn’t stop them gathering around the stain.
The stain is likely the result of salt run-off, according to the Illinois Department of Transportation. The agency does not plan to scrub it off the wall.
November 22nd, 2008 at 9:15 am
For S’s and giggles, the way I read the chart is:
Trading Range D = 9625
Trading Range B = 7882
We just made ST 7 this week.
I see Phase E as the next Bull Market. If you think it started on Friday, best of luck.
November 22nd, 2008 at 9:16 am
I am not a chartist but I do look at them a lot and I always keep technical analysis in the back of my mind, although in a market like this sometimes I wish it stayed there. I have been looking for a squeeze for a few days now and I think all of the ingredients are now here. Treasuries are liquid and represent a source of dry powder. Inverse ETFs are loaded (SKF=250).
The whole thing is like a dry forest in California. We just need a spark and the whole lot will go up. Once this ignites it will be a while before short positions can be re-established so it might rumble on for a while, and we should all remember that rallies of 10, 20 and even 25% are not unknown during bear markets, driven initially by short covering and sustained by “panic buying” often extending to quite remarkable levels. However big the rally, this doesn’t alter my bearish outlook for most sectors of the market. Barry highlighted SPX 1000 recently as a possible key technical in the future, and I concur with that. Any approach towards that level and I would get short, especially the usual suspects (banks, RE).
For me, the key to attempting to understand market movements is to pay attention to truly idiotic and utterly irrational buying and selling and how the unwinding of those positons will impact market dynamics. The recent selling of gold was an example of irrational activity. This week’s buying of Treasuries – especially the long bonds – reached truly irrational levels, reaching a crescendo late Thursday, at which time I added to positions in stocks and added to my short of the 10-year.
Surely some of those Treasury holders are going to feel pretty silly once yields begin to rise. Thursday’s buyers are already underwater, and any easing of BK concerns in F, GM or C will trigger buying of those credits, and that is going to spur liquidation of recent long Treasury positions. This might feed into buying of stocks, which in turn will begin to put pressure on shorts. As shorts begin to lock in profits it is more than likely we will see a squeeze develop that could be fairly substantial. I suspect we may already be seeing a squeeze of those who have been short gold and silver.
Looking at the Wyckoff Spring above gives you a reasonably good idea of what the resulting market trajectory might look like. If something like this begins to get in motion I think we will see heavily shorted sectors get a big bounce. Energy, basic materials, real estate, banks. Once this train pulls out of the station it will pick up speed. UYM, UYG, URE, DIG etc.. might be the vehicles du jour. All aboard…
November 22nd, 2008 at 9:25 am
Off the subject slightly, Barringo… but this will remind you of Ole Eclectic:
http://www.youtube.com/watch?v=zRfzOuGJGWs
November 22nd, 2008 at 9:33 am
Dan Duncan – For a wealth of further ideas consult the work of Carl Hiaasen
~~~
BR: I love Hiaasen!
November 22nd, 2008 at 9:44 am
Barry – since you introduced the Wyckoff figure above, can you please do the following for us?
1) Use SPX numbers in place of DJIA – I actually had to look up the Dow chart, I literally never look at it.
2) Indicate on the graph where you think we might be/have been in recent days/weeks?
November 22nd, 2008 at 9:46 am
Interesting…but I will give you a practical point of my life..
In the tech bubble, in October of 1998 I invested every nickel of my retirement in four stocks or funds. Every nickel. I sold everything in April of 2000. Delighted with what I’d done.
The people close to me know I made about 400%, but that is not really the story. Actually I made closer to 420%, but in the subsequent popping of the bubble, I kept thinking, “the market has dropped so much, I will just stick a toe in, just a little of what I’d made”….and every time, it turned out to be the wrong idea…so my 420 dropped just a little to 400…
The point? If I had just been satisfied, and the extra 20% had compounded by 6-8% per year the way the other has…I am still of course delighted with the way the tech bubble worked out…but I kept trying to outthink the market…and thank goodness I kept the sums low, but every bit as wrong as I had been right over the next year and a half…
Bear markets are the greatest teachers…and again my congrats to Steve Barry.
November 22nd, 2008 at 10:16 am
Bruce..thanks…my target is still 630 on S&P, 120 on QID. After that, I’m out and waiting to buy the gold miners (most were up 20-40% Friday in ONE day).
Smartest thing I have ever hear on Fox Bulls and bears just now…Tobin Smith pointed out that the cost of capital due to bond market blowing up has gone from about 7% to 15% for een the best corporations. Since you discount all future cashflows by that cost of capital, the market collapse makes total sense.
November 22nd, 2008 at 10:30 am
You could actually see GM and C go bankrupt or get bailed in the next week…WOW
November 22nd, 2008 at 10:36 am
Barry,
You have to post video of the smackdown between Cavuto and Ben Stein just seen on Fox if possible.
November 22nd, 2008 at 10:41 am
Geeze Barry, keep on searching for more historical events to justify your present bullish posture,
I am sure you’ll find more data to justify your position or outlook
November 22nd, 2008 at 10:55 am
If i understand you correctly we have just enter the spring w A being 7400 and B being 8000. I say that because the oct 10th low(8000) should be considered violated and the orginal A 7782 close. Or make my bids my offers.
November 22nd, 2008 at 11:28 am
Barry Ritholtz might have hit the rare so-called Taleb Trifecta (I just coined it): a narrative, ludic, and statistical regress fallacy all in one.
Amazing how people cannot accept randomness for what it is.
November 22nd, 2008 at 12:01 pm
I’m thinking the rally continues next week because of the Geithner news plus the “official” unveiling of Obama’s economic team and plan to revive the economy via infrastructure spending and alternative energy production equipment (stocks in both will probably be the market leaders when the next bull starts — got your shopping list?).
http://www.bloomberg.com/apps/news?pid=20601087&sid=aip_MC9nX0M0&refer=home
That plus a little holiday spirit could give us a another nice rally to short on Friday or the following week.
But C and the US automakers could continue to sour the mood, so maybe I’ll be wrong. As my wife always says about the market: Who can know what will happen?
November 22nd, 2008 at 12:14 pm
I agree with SB’s point (S.B. @ 8:06) that the “time frame is way too short”.
If you want to make a multi-month prediction, you should be analyzing a multi-month chart.
That being stated, I think we are almost due for a multi-week (6+ weeks) rally; but I think it’ll start from lower levels than where we are now.
November 22nd, 2008 at 12:21 pm
I agree with KJ Foehr’s point (KJF @ 12:01) about the rally continuing next week, and that it’ll create a shorting opportunity.
Also, Charlie Gasparino seems pretty emphatic that something BIG is going to happen with Citigroup this weekend.
November 22nd, 2008 at 12:27 pm
On the evening of Obama’s victory, QID was at 60 (I remember because I bought some, then sold it at 70, duh). Last night it closed at 90 after touching 102.60 during the day.
We need a huge rally just to get back where the market was after the first big crash early October. A 20% rally at this point would do what? Give us back last week…
November 22nd, 2008 at 12:55 pm
Steve Barry Said:
November 22nd, 2008 at 10:30 am
“Bruce..thanks…my target is still 630 on S&P, 120 on QID. After that, I’m out and waiting to buy the gold miners (most were up 20-40% Friday in ONE day). the cost of capital due to bond market blowing up has gone from about 7% to 15% for een the best corporations. You could actually see GM and C go bankrupt or get bailed in the next week…WOW”
Steve, first of all, congratulations and respect on all your good calls. I wish you continued success once you flip the switch to GDX. As you know I am already there, but I am always early. Friday was a good day and I think the miners have bottomed. Mish agrees, he is now bullish on gold.
I think your statement above on corporate credit is correct – this is a sign that we are passing through a discontinuity. We went from easy money – lending at 7% – through no lending at all – credit crunch – and we are now re-emerging with lending at 15%. Of course this has happened before in history and economic activity continued. Even if spreads come in from here, the almost inevitable drift upwards in Treasury yields and a slew of corporate BK will mean that junk bond rates may climb even higher. When we reach 20-25% I will stop shorting JNK and think about buying. It’s likely that will coincide with the bottom in the banks, and probably housing too. In other words, no time soon.
Your second statement about GM and C shows we are at a pivotal moment. Much as I loathe the management of both GM and C, we are clearly in Too Big To Fail territory here. The social and broad economic consequences of failure in these companies would be extraordinary, and I think we are about to see massive intervention. It is interesting to note that the US is retracing many of the steps of the Japanese, who were so heavily criticized here for their handling of their own deflationary crisis. You can talk all you want, but when you are in severe deflation, you print, ease and salvage whatever possible.
November 22nd, 2008 at 1:10 pm
leftback,
good luck with the miners…I am leery being there right now with the coming deflationary crash…but they will outperform worse investments at least. When the crash is over, it will be a race to get that gold out of the ground, and the cost to do so will be much lower than it has been.
November 22nd, 2008 at 1:36 pm
Steve B:
i am not all-in GDX as yet, mainly trading around a core in the miners right now. remember that all markets are forward looking so gold is already anticipating the printing and helicopter dumps.
November 22nd, 2008 at 1:39 pm
Flipspice – Fri close action was absolutely options driven. SPX 750 and SPX 800 levels were busted like clockwork (market makers gone wild) and look at volumes for those contracts. But SEC does not look at these things, they only worry about shorting of financials
November 22nd, 2008 at 2:01 pm
I caught a minute of Cramer’s rant yesterday. He was basically saying that the only reason that we’ve been getting selloffs in the last half hour is because of the ultrashort funds, and that if we could just ban those ETF’s, we wouldn’t get the selloffs.
He also railed against the uptick rule. He essentially implied that if we brought back the uptick rule, the DOW would be at 15K right now.
November 22nd, 2008 at 2:11 pm
leftback,
I think junk yields are already at 20% – although the junk ETF yields are not quite that high. Default rates haven’t reached previous peaks yet either; though I believe they are expected to. That might be a good time to start buying junk. Anyone know a good place to track default rates?
November 22nd, 2008 at 2:12 pm
@ DL: They are going to figure out a way to f*** the shorts. You can count on it. Everyone will cover, we will get a screamer and then eventually everyone will begin to get short again. It’s as traditional as Thanksgiving Day turkey. The alternative is sitting around with no trades for five years, like the 1970s.
November 22nd, 2008 at 3:27 pm
You’re very keen today, Left. Congrats on your GDX fortitude… that baby’s got legs now. I’m also enamored with the GLD breakout from that 73 handle.
November 22nd, 2008 at 3:45 pm
Re: DL’s comment at 2:01pm on Cramer’s rant against shortselling.
Yeah, those free markets are a real bitch. We should definitely ban all forms of short selling. But wait…they don’t allow shortselling in China and their market is down about 70%. Hmmm… well that must be an anomaly, we know Cramer is a genius so he must be right, right?
I don’t watch his show anymore, but I sometimes wonder, what is he selling these days after his capitulation and recommendation that everyone get out of the market a few weeks ago? Is every stock a Sell, Sell, Sell now? How can you do a show like his after you have told everyone to get out of the market? Perhaps he has called a bottom again, that would seem to be the only way to continue the show.
Last year I predicted his show would be gone by the end of 2008, after his bullishness and his stocks of the year crashed and burned in this bear market, but I underestimated his chutzpah.
November 22nd, 2008 at 5:41 pm
I don’t really understand this Wyckoff Spring thing but Mikaeel’s Tea leaves seem to be indicating DOW 6000 by years end.
November 22nd, 2008 at 6:19 pm
Yes to all above, on the downside global de-leveraging continues, destroying the yen carry trade potential to support equity prices and perhaps this de-exuberancing will all end at the same price point at which it was first identified by Greenspan in his December 5, 1996 “Irrational Exuberance” speech. That is DOW 6437.
But, let’s make a case for both the bear AND bull, not gather evidence to support only one view, and thus maintain the mental flexibility to deal with the ridiculous price volatility-since it’s likely to continue.
Technically speaking, with a nod to the Wyckoff analysis, and trying to keep it simple, viewing the Oct/Nov DOW action as a continuation triangle, with a 2000 point range, the break last Monday of the triangle bottom would continue down to project to the DOW 1996 price level, per Steve’s projections.
As counterpoint to this, since Thursday printed new, but marginal millenial price lows, a rally back up to test the old lows should not be a major surprise. If one is also bullish enough to consider that SPX might simply be in multi-year long term consolidation since the 2000 highs, a marginal new low would also be a natural buy point. In this instance, we might be at point 7 of the chart, if viewing the chart as daily closes.
As JY appears to be failing at a secondary high, suggesting reduced de-leveraging at current equity price levels, it’s hard to push the shorts. But global macro conditions continue to deteriorate, which to me precludes any forward-looking bullish equity price projections. Watch the JY futures to DOW correlation intra-day as a clue to equity price action
In respect to Fed actions and Treasuries, the best commentary I’ve read is that the credit crisis is the top of the ninth inning, the economic crisis is coming out of the bullpen and most people don’t even know the funding crisis is scheduled. As another commentator’s grandfather told him, “You only get three times in your life to sell Treasuries at 120 down to the 70’s.”
I’m pretty sure this will be one of them. That’s the beginning of what we’re seeing in gold and gold miners. But that doesn’t mean we can’t in the meantime have a decent equity sucker rally.
November 22nd, 2008 at 6:25 pm
Of course you could believe this is the reason for gold rally:
http://asburyresearch.blogspot.com/2008/11/following-green-highlights-is-excerpt.html
November 22nd, 2008 at 9:57 pm
Good to be the first one here looking for the biggest rally in over five years…
Crash? With the Democratic Party’s upcoming control of Washington just weeks away and great worry among The City and Wall Street about a return to policies associated with FDR? I think not. Despite every reason not to buy, European aristocrats and their American Loyalists have no other alternative if they wish to protect those bankrupt ideologies they’ve imposed upon the American Republic and which have brought us to this extraordinarily vulnerable point. Give it a couple years. Then they’ll be ready to destroy the Democratic Party (in similar fashion the other side has been) … and reek the kind of political havoc they are famous for imposing on Europe in the 1930s.
The Bank of England’s boy at the NY Fed … who gave away Lehman to Barclays … soon to become Treasury Secretary … might buy time giving away more of the store … but in the end, no scheme coming from a monetarist monkey will forever forestall a Great Calamity…
Well, at least this seems a reasonable possibility, anyway…
November 23rd, 2008 at 10:13 am
So, to paraphrase a great actor and financial genius, ‘Following the Spring, there will be growth.’
November 23rd, 2008 at 11:15 am
Its interesting to read the comments connected to technical analysis – everyone see’s something different – and that’s cool… the question becomes, “how do you make money with it?. While everyone is arguing about their stance – a rare and outstanding opportunity to make a lot of money right now and going into 2009 is presenting itself.
With the VIX between 70 and 80 and the SPX beaten down 50% ( hey – it can fall ANOTHER 20% ) I see and smell opportunity.
The SPY closed at 79.52 on Friday. You can buy it for 60.72 on Monday (for a 23.64% downside hedge) and 13.17% return over 16 weeks ( 42.82% annualized)
Walmart closed at 52.92 on Friday. Can be purchased for 41.62 on Monday (for a 21.35% downside hedge) and a 15.02% return over 16 weeks ( 48.82% annualized)
Consol Energy closed at 20.80 on Friday. Can be purchased for 11.30 on Monday (for a 45.67% downside hedge) and a 49.33% return over 20 weeks ( 128.7% annualized)
Conoco Phillips closed at 46.84 on Friday. Can be purchased for 35.29 on Monday (for a 24.66% downside protection and a 23.55% return over 12 weeks ( 102.05% annualized)
The above are just a few random examples – and of course – hard stops are always in place – but the probability (edge) is so much in your favor right now. Why the market bounced on Friday afternoon is completely irrelevant. I run my own TA also (by the way – my system tells me we have an unconfirmed intermediate bottom in place. It should be confirmed or non-confirmed over the next week or so) – my job as a trader is formulate trades – TAKE buy / sell signals without question – manage risk form there. Trading / investing is a game of PROBABILITY and RISK MANAGEMENT. Most – have no risk management. Great traders that have an edge and risk management – and the ones that are right about60% of the time – print money. Our opinions mean nothing.. and will usually cost us money. I choose to listen to what the market is telling me. Great quote, “Trade what you SEE – not what you THINK.”
November 23rd, 2008 at 1:47 pm
To Theta–
Regarding using reason and deduction to survive or prosper in the markets:
I read somewhere that Charley Darwin figured out that positive mutations in our prehistoric ancestors caused us to ‘evolve’ one way or another. For instance whales, which are mammals, used to live only in the sea but evolved legs to hunt or hide on land. But as food sources dried up on land whales developed larger capacity to ‘breathe’ for longer times under water seeking food or to hide from predators on land. This was considered a positive mutation for it propagated more whales. They eventually mutated, evolved, a blow hole that they sport today for permanent sea-dwelling and ‘de-volved’ legs that they no longer needed. Today they would die if they have to live on land.
To wit: There is now a small but growing coterie of folks who think that “rational thought”, deduction, induction, and logic instead of being a positive mutation may in fact actually be a “negative” mutation, and thus be our ruination.
November 23rd, 2008 at 2:01 pm
ahhh… yeah… OK… flipspiceland…. you should really try to get out more….