Richard Wyckoff, an early 20th-century stock trader, developed a method of charting market trends to determine future price movements. His approach is simpler than many other technical market analyses, such as Elliott Wave Theory. Wyckoff was an unusually successful trader. Whether his method led to his great success or was his attempt to rationalize remarkable trading intuitions remains uncertain.
The Wyckoff method begins an analysis by charting the dominant market trend. Use any broad market index, like the S&P 500 Index, and make a graph showing closing prices along the vertical axis and successive trading days along the horizontal axis. If the graph shows a price uptrend accompanied by strengthening price peaks and troughs, this indicates an early uptrend. A graph that shows an uptrend with weakening peaks and troughs suggests an aging trend that is due for reversal.
Major Tops and Bottoms
Wyckoff looked for chart movements indicating an impending reversal -- a major market top or bottom. In a bear market moving steadily downward, for example, a graph of closing prices showing a sudden downward acceleration indicates the approach of a market bottom followed by a major upward trend. In a bull market, a graph showing increased buying activity after a prolonged uptrend indicates an approaching top followed by a major downward trend.
Wyckoff used what he called point and figure patterns to determine the strength of the new price movement. To create the P&F chart, use graph paper with lines at 1/8th inch intervals. Prices go upward along the vertical axis; time moves to the right along the horizontal axis. For each day along the horizontal axis fill in the squares from the daily low price to the daily high. Once you do this over a given time period -- 30 days for example -- you will see both the general trend -- upward, flat or down -- and whether the movements are increasing in strength with greater high to low swings or whether they are losing strength with decreasing price swings. Wyckoff generally opposed trading on weaker price movement signals.
Wyckoff notes five different trend positions where you can profitably buy a stock. One is the "spring," where after a series of downward movements, a graph of closing prices reveals a greater downward thrust, signalling a near-term strong upward spring. The second is the "breakout," where a graph of buying volume in an upward trend shows steady increases over a period of days, signalling a near-term upward breakout. The third is the "throwback," where after weak downward movements in an overall uptrend, there is a more significant downward movement, signalling a near-term reversal to the upside. The fourth is the "re-accumulation," where the graph of closing prices over successive days shows a series of jittery lateral moves in an upward trend. The re-accumulation signals a decisive near-term upward trend. The fifth is the "correction," a pullback that retraces a portion of the earlier upward movement before resuming the overall upward trend.
- Charting the Stock Market: The Wyckoff Method, Jack K. Hutson
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.