APRIL2013 ATMASPHERE|5

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