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READING PRICE & VOLUME ACROSS
MULTIPLE TIME FRAMES: APPLICATION
OFTHEWYCKOFFMETHODBYDR.GARYDAYTON
Inthisarticle,Ihighlighthowreadingpricebarsandvolumeacrossmultiple
timeframescangiveboththeswingtraderandthedaytraderasubstantial
edge in their trading. This approach was first described by Richard D.
WyckoffearlyintheTwentiethCentury.
Considered the fatherof technical analysis,Wyckoffdistinguishedmarket
phenomena like support and resistance, climactic action, and testing.
Despite themanychangessinceWyckoffs time,understandinghowsupply
and demand is revealed through price action and volume can be of high
valuetothetechnicalanalystinassessingtodaysmarkets.
BeginWiththeBackground:WeeklyChart
Chart1:WeeklyChart
Beginning with the weekly chart, we use recent trading activity in the
Canadian Dollar (CD) currency futures (Chicago Mercantile Exchange) to
illustrate someof the skillsof chart reading. Theweeklyhasbeen trading
withinthehighandlowofJulyandOctober2011,respectively.AlthoughCD
heldtwohigher lowsatAandC,themarketfailedtofollowthroughtothe
upsideatD. Instead,aWyckoffUpthrust (UT)occurredwhenpriceclosed
below the resistance levelatB. ThisUTwas testedatFon comparatively
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lightervolumeindicatingalackofbuyingjustundertheoldresistancelevel,
B.ThetestatFwasalsoanUT,moreclearlydefinedonadailychart,anda
choicelocationfortheswingtradertoinitiateasellshorttrade.
FromthetestatF,themarketmoved loweron increasingvolumeandwide
range, indicatingactive selling. The selling stopped justbelow the support
level at Ewith the next week closing above that support. The failure to
followthroughtothedownsideatasupportlevelistheoppositesituationof
a Wyckoff Upthrust. When price closes above support after dipping
underneathit,itisknownasaWyckoffSpring.
The swing trader is now presentedwith a dilemma. Having sold short, a
bullishspringbeginstounfold. Shouldtheshortbecovered,andperhapsa
longposition initiated? Theanswermaybe found in the lower time frame
charts.
GoingDeeper:DailyChart
Chart2:DailyChart
Thedailychart shows theWyckoffUTatFviewedasa teston theweekly
chart. Thepricebars at 1 and2 showbuyersunable toholdprice above
recent resistance. Instead, sellers entered and closed these days in the
middle of their ranges and underneath resistance. The elevated volume
reinforcestheweaknessseeninthepricebars.Subsequentdayspaintlower
highs, lower lows, and all but one lower closesindicative of a market
unable to rally. Sellers aggressively drive price down beginning at 3with
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wide ranges,poor closesand increasedvolume to the lowatG, indicating
heavyliquidation.
Andthenthedowndraftstops.Itisnormalforadescendingmarkettopause
and rallyatsupport. Thekeyquestion for theswing trader iswhether the
rallyissimplyatechnicalpullbackoffofsupportorthestartofabullishmove
up.Thereareafewthingstoconsider.
Traderstendtorivettheireyesonthe lastfewbarsattherightedgeofthe
chart.Toreadachartcorrectly,itisimportanttogodeeperthanafewbars
and, instead, take in amoreholistic view. Thus, the first consideration is
seenontheweeklychart.AtB,D,andF,buyershadthreeopportunitiesto
takethismarkethigher,butfailed. Althoughpossible, it is less likelythata
strongrallywouldbeginwiththisbackground. Onthedailychart,weseea
swiftfallfromFtoG. Volumeexpandsonthis largemovedown. Selling is
clearlydominant,asitshouldbewhenignitedbyaweeklyupthrust;thisisa
strongsignofweakness.ComparethisdownmovetotheupmovefromGto
H. Although there twoor three strongdayson the rally fromG toH, the
dailyrangesandoverallvolumeiscomparativelyweakerthantherangesand
volume from F toG. Buyerswillhave tomount amuch greater effort to
overcometherecentsupply.
Wealso see the rally fromG toH stoparound the lowsofmidDecember
where themarket found support at that time. Because this supportwas
knifedthroughsoeasilybybar4,wewouldnowanticipateittoberesistance
asthemarketreturnstothat levelatMarketsfrequentlyreturntoareasof
accelerated movement on high volume, such as bar 4. Although supply
dominated, the high volume also indicates the presence of buying. The
marketmay test theseareas toassure itself thatbuyershave indeedbeen
removedandavoidoppositiontolowerprices.Thus,wewanttolookatthis
areacarefully.Abarbybarassessmentcanrevealmuchaboutthemarkets
strengthhere.
The rally from the lows atG shows a goodmove upwith firm and rising
closes. Atbar5,volume increases. This isnotalarmingasgoodprogress is
madeonthisday,andtherange iswide,proportionatetothevolume. The
nextday,bar6,tellsadifferentstory.Onnearlythesameamountofvolume
as5,therangeonthisdaynarrows.Itisabouthalftherangeofbar5,andits
rangeremainsinsidetherangeofbar5.Althoughtherewascertainlybuying
onbar6,sellingkeptthebuyersfrommakingthekindofprogresstheymade
thepreviousday.IntheWyckoffMethod,thisisknownaseffortvs.result.
Volume representseffortandprice is the result. Herewe see largeeffort
with little result,a strong indication that sellershaveagainbecomeactive.
Thenextday,bar7,triestorallyabovethehighsof5and6,butfailsonlight
volume,indicatingbuyersarebecomingexhausted.Thesuddenhighvolume
andsubsequentlackofprogressdisplayedbybars5,6and7,suggestaminor
buyingclimaxhasoccurred.Thelasttwodaysonthechartbars8and9do
showthatbuyerswereabletoclosethesedaysontheirhighs,sothemarket
canbeexpectedtopushalittlehigher. Volumeonbothdaysisthelightest
of the last three weeks. This adds to the developing story of weakness.
Thus,wewanttobealerttoanyweakrallyupto, justabove,or justbelow
thehighofbar7.
DayTrading
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We will next take on the perspective of the day trader. For intraday
assessment,Iuseatickbarchart.Manyperiodsinthenear24hourmarkets
are lightly traded,making timebased chartsmore difficult to understand.
Tick charts compress thisdata intoamore readerfriendly formatwhileat
the same time retaining price bar characteristics that show demand and
supply. We also use an analytic tool developed by DavidWeis based on
WyckoffsoriginalwaveandtapereadingchartscalledtheWeisWave.This
toolplots the swingswhatWyckoff calledwavesasanoverlayonto the
price bars. It also plots the volume of each wave along the bottom
histogram.Inhisday,Wyckoffplottedhischartsbyhandfromdatareadoff
the ticker tape. This is no longer practical in todaysmarkets. TheWeis
Wavedoesthisusefuljobforus.
Chart3:IntradayChart#1
IntradayChart1includesdatashowingthedailyhighsofbars7,8,and9and
theirassociatedresistance line. Thenextday, themarketralliesabove the
highofbar7.Weimmediatelynotethattheupmoveissuspectbecausethe
volumeonwaveB iscomparatively light. Wenote theupwaves twodays
ago (A)showedgreaterdemand thanwearenowseeingonthebreakout.
We also see the market reverse and push easily down through and
underneath the resistance line along the daily highs. Just like D on the
weekly chart and F on the daily chart, this, too, is a Wyckoff Upthrust,
indicatingthepresenceofsignificantsellingashigherpricesabovetherecent
dailyhighsarerejected.
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HighdownsidevolumecomesinonwaveCshowingstrongselling.Wenote
thatwaveC isalso larger than recentdownwavesandupwaves;another
indicationsupplyhasentered themarket. Theweak rallyonwaveDstops
justbelowresistance.Thisupwaveanditsassociatedvolumearesmall.Itis
atestoftheupthrust.Asthemarketturnsbackdownattheredarrow,the
daytradercaninitiateashorttrade.
Pricemovesthroughthe intradaysupport levelthatcausedwaveCtostop.
Bothwavesandvolume remain stronger to thedownside than theupside.
Thus,theveryweakrally totheundersideofthe intradaysupport lineatE
offersanotheropportunityforashorttrade.
Ingeneral,theminimumprofittargetforanupthrustistheoppositesideof
thetradingrange.PricetravelstothislevelonwaveF,comingtothemulti
day low,which is a good location to cover shorts for the day traderwho
wantstogohomeflat. Inreviewingthedaystrading,wenotethatsupply
hasbeen stronger thandemand, as seenbyboth the lengthof thewaves
(downcomparedtoupwaves)andthedownvolume. Weanticipate lower
pricesinthenearfuture.
Chart4:IntradayChart#2
TurningtoIntradayChart2,weseethatthenextdaybeginswithaweakrally
thatisunabletopushabovetheintradaysupportlinefromyesterday(atC),
whichhasnowbecome resistance, justaswe sawon thedaily chartatH.
ThepoorrallyendsinanintradayupthrustatthetopofwaveG,whereaday
trader can enter short as the market starts down. Note that volume
increasesonwaveGwithoutmuch advance inprice. The effortmadeby
buyersonwaveGwasmetbyasuperiorforceofsellinglimitingupsideprice
progressandaddingtotheconvictionofashortsaleontheupthrust.
Themarketmakesgoodprogressdownongooddownsidevolume through
thesupportlevelofFdowntoH.Whydoesthemarketstophere?Thelow
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ofwaveHisatthesamelevelastheweeklysupportatE.Itisanobviousand
logical location for the intradaymarket toat leastpause. Theminordown
wave betweenwaveH andwave I shows that selling has abated. A rally
wouldnowbeexpected.
Themarket pulls back onwave I. A standard trend channel highlights an
overbought conditionat the topofwave I. Wealso see the characteristic
effortvs. result in thehighvolume, littlepriceprogressofwave I. As the
marketturnsbackdowntoandunderthesupplylineofthetrendchannel,a
shorttradecanbeentered.
Shortscanbecoveredasthemarket isunabletofallbelowthedays low if
thetraderpreferstoflattenattheendoftheday.Thereis,however,strong
evidence for further followthroughtothedownside forthenextday. This
daysactionclearlyshowssellersincontrol.Downwavesremainlargerthan
upwavesanddownsidevolumepredominates. Thedaybeganon itshighs;
brokeyesterdayslow,andclosednearonitslows.Thetwoattemptstorally
(wavesG and I)wereboth feeble. These are all characteristicsof aweak
market.
Themarketdoesfollowthroughtothedownsidethenexttradingday. We
notice, however, that price has reached an oversold position in the down
trendchannel,thesupplylineofwhichwasdrawnfromthetopsofwavesB
andG.AparallellinewouldthenhavebeendrawnfromthelowatwaveF,
butthemarketwassoweakthatitexceededthatline(notshown)rendering
ituseless.Inthiscase,aparalleldemandlineisdrawnfromthelowofwave
H. Wave J reaches thebottomof the trend channel. TheastuteWyckoff
analyst would recognize that the volume at J has lessened (compared to
wavesF,Handthewaveafter I). AsthemarketturnsupfromwaveK,the
signaltocovershortsandprepareforarallyisclear.
The rally ends at the top of wave L. An uptrend channel highlights the
oversoldpositionofprice.Pricehasrisenclosetothetopofthedowntrend
channelandjustbelowresistancethathasformedfromthelowsofwaveH.
Giventhedowntrendingconditionsofthismarket,itisunlikelypricewillrise
throughthiscombinationofresistance.Ashortmaybetakenhere,andprice
movesdownreturningtoyesterdayslowsatthebottomofwavesJandK.
Notecarefullytherallyfromthe lowsatJKtothehighatL. Althoughthis
rallydidnotbreakthesupply line, it isthe largestupmovesincethedown
trendbeganatB. Wealsonote thatmoreupsidevolumecame inon this
movethanwehaveseen inthisdowntrend. Thesetwoconditions indicate
that demand is beginning to enter themarket. On the subsequent down
waveM,we see largedownsidewavevolume,butprice isunable topush
through yesterdays lows. This is an effort to go lower without a
proportionate result, indicating thebuyersareabsorbing selling. The time
periodisalsoimportant.Wehavenotseensuchhighintradayvolumeduring
thisperiod.Theseconditionsalertustoachangeinmarketbehavior.Atthe
bottomofwaveM,pricedipsunderneaththesupportofyesterdayslowand
closesbackaboveit.Withthestrengthseenintheimmediatebackground,a
longtrademaybeinitiatedatthisWyckoffSpring(greenarrow).
Conclusion
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ThisarticlehighlightstheapplicationoftheWyckoffMethod inthemodern
CanadianDollarcurrencyfuturesmarket.Althoughtheprinciplesofreading
supplyanddemandhighlightedherewerefirstdescribedover80yearsago
byRichardWyckoff,theycontinuetoservethetechnicalanalystandtrader
well. In this modern era of advanced technologies where we tend to
emphasize indicators, statistical models and other derivatives, is easy to
overlook the straightforward behavioral principles of buying and selling
underlyingallfreelytradedmarkets.Readingsupplyanddemandcontinues
tobeavaluableguidetothemarketsnextlikelyactionandshouldbeapart
ofeveryanalystsskillset.
Dr. Gary Dayton is an active trader and a
psychologist.Hecreatedatrainingprogramcalled
DeepPracticebasedonpsychologicalresearch in
expert performance to help traders acquire the
skillsoftheWyckoffMethod.Dr.Garyiscurrently
writingabookontradingpsychologytobepublishedbyJohnWiley&Sons.
www.TradingPsychologyEdge.com