READING PRICE & VOLUME ACROSS
Begin With the Background: Weekly Chart
MULTIPLE TIME FRAMES: APPLICATION OF THE WYCKOFF METHOD BY DR. GARY DAYTON In this article, I highlight how reading price bars and volume across multiple time frames can give both the swing trader and the day trader a substantial edge in their trading. This approach was first described by Richard D. Wyckoff early in the Twentieth Century. Considered the ‘father of technical analysis,’ Wyckoff distinguished market phenomena like support and resistance, climactic action, and testing.
Despite the many changes since Wyckoff’s time, understanding how supply and demand is revealed through price action and volume can be of high value to the technical analyst in assessing today’s markets.
Chart 1: Weekly Chart Beginning with the weekly chart, we use recent trading activity in the Canadian Dollar (CD) currency futures (Chicago Mercantile Exchange) to illustrate some of the skills of chart reading. The weekly has been trading
within the high and low of July and October 2011, respectively. Although CD
held two higher lows at A and C, the market failed to follow through to the upside at D. Instead, a Wyckoff Upthrust (UT) occurred when price closed
below the resistance level at B. This UT was tested at F on comparatively APRIL 2013
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lighter volume indicating a lack of buying just under the old resistance level, B. The test at F was also an UT, more clearly defined on a daily chart, and a choice location for the swing trader to initiate a sell‐short trade.
Going Deeper: Daily Chart
From the test at F, the market moved lower on increasing volume and wide range, indicating active selling. The selling stopped just below the support level at E with the next week closing above that support. The failure to follow through to the downside at a support level is the opposite situation of a Wyckoff Upthrust. When price closes above support after dipping underneath it, it is known as a Wyckoff Spring. The swing trader is now presented with a dilemma. Having sold short, a bullish spring begins to unfold. Should the short be covered, and perhaps a long position initiated? The answer may be found in the lower time frame charts.
Chart 2: Daily Chart The daily chart shows the Wyckoff UT at F viewed as a test on the weekly chart. The price bars at 1 and 2 show buyers unable to hold price above recent resistance. Instead, sellers entered and closed these days in the
middle of their ranges and underneath resistance. The elevated volume reinforces the weakness seen in the price bars. Subsequent days paint lower highs, lower lows, and all but one lower closes—indicative of a market
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unable to rally. Sellers aggressively drive price down beginning at 3 with
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wide ranges, poor closes and increased volume to the low at G, indicating
dominated, the high volume also indicates the presence of buying. The
heavy liquidation.
market may test these areas to assure itself that buyers have indeed been
And then the downdraft stops. It is normal for a descending market to pause and rally at support. The key question for the swing trader is whether the rally is simply a technical pullback off of support or the start of a bullish move up. There are a few things to consider.
removed and avoid opposition to lower prices. Thus, we want to look at this area carefully. A bar‐by‐bar assessment can reveal much about the market’s strength here. The rally from the lows at G shows a good move up with firm and rising
Traders tend to rivet their eyes on the last few bars at the right edge of the chart. To read a chart correctly, it is important to go deeper than a few bars and, instead, take in a more holistic view. Thus, the first consideration is seen on the weekly chart. At B, D, and F, buyers had three opportunities to take this market higher, but failed. Although possible, it is less likely that a strong rally would begin with this background. On the daily chart, we see a swift fall from F to G. Volume expands on this large move down. Selling is clearly dominant, as it should be when ignited by a weekly upthrust; this is a strong sign of weakness. Compare this down move to the up move from G to H. Although there two or three strong days on the rally from G to H, the daily ranges and overall volume is comparatively weaker than the ranges and volume from F to G. Buyers will have to mount a much greater effort to overcome the recent supply.
closes. At bar 5, volume increases. This is not alarming as good progress is made on this day, and the range is wide, proportionate to the volume. The next day, bar 6, tells a different story. On nearly the same amount of volume as 5, the range on this day narrows. It is about half the range of bar 5, and its range remains inside the range of bar 5. Although there was certainly buying on bar 6, selling kept the buyers from making the kind of progress they made the previous day. In the Wyckoff Method, this is known as “effort vs. result.” Volume represents effort and price is the result. Here we see large effort with little result, a strong indication that sellers have again become active. The next day, bar 7, tries to rally above the highs of 5 and 6, but fails on light volume, indicating buyers are becoming exhausted. The sudden high volume and subsequent lack of progress displayed by bars 5, 6 and 7, suggest a minor buying climax has occurred. The last two days on the chart—bars 8 and 9 do show that buyers were able to close these days on their highs, so the market
We also see the rally from G to H stop around the lows of mid‐December
can be expected to push a little higher. Volume on both days is the lightest
where the market found support at that time. Because this support was
of the last three weeks. This adds to the developing story of weakness.
knifed through so easily by bar 4, we would now anticipate it to be resistance
Thus, we want to be alert to any weak rally up to, just above, or just below
as the market returns to that level at Markets frequently return to areas of
the high of bar 7.
accelerated movement on high volume, such as bar 4. Although supply APRIL 2013
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We will next take on the perspective of the day trader. For intraday assessment, I use a tick‐bar chart. Many periods in the near 24‐hour markets are lightly traded, making time‐based charts more difficult to understand. Tick charts compress this data into a more reader‐friendly format while at the same time retaining price bar characteristics that show demand and supply. We also use an analytic tool developed by David Weis based on Wyckoff’s original wave and tape reading charts called the Weis Wave. This tool plots the swings—what Wyckoff called waves—as an overlay onto the price bars. It also plots the volume of each wave along the bottom histogram. In his day, Wyckoff plotted his charts by hand from data read off the ticker tape. This is no longer practical in today’s markets. The Weis Wave does this useful job for us. Chart 3: Intraday Chart #1 Intraday Chart 1 includes data showing the daily highs of bars 7, 8, and 9 and their associated resistance line. The next day, the market rallies above the high of bar 7. We immediately note that the up move is suspect because the volume on wave B is comparatively light. We note the up waves two days ago (A) showed greater demand than we are now seeing on the break out. 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, indicating the presence of significant selling as higher prices above the recent daily highs are rejected.
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High downside volume comes in on wave C showing strong selling. We note that wave C is also larger than recent down waves and up waves; another indication supply has entered the market. The weak rally on wave D stops just below resistance. This up wave and its associated volume are small. It is a test of the upthrust. As the market turns back down at the red arrow, the day trader can initiate a short trade. Price moves through the intraday support level that caused wave C to stop. Both waves and volume remain stronger to the downside than the upside. Thus, the very weak rally to the underside of the intraday support line at E offers another opportunity for a short trade. In general, the minimum profit target for an upthrust is the opposite side of the trading range. Price travels to this level on wave F, coming to the multi‐ day low, which is a good location to cover shorts for the day trader who wants to go home flat. In reviewing the day’s trading, we note that supply
has been stronger than demand, as seen by both the length of the waves (down compared to up waves) and the down volume. We anticipate lower
Turning to Intraday Chart 2, we see that the next day begins with a weak rally
prices in the near future.
that is unable to push above the intraday support line from yesterday (at C), which has now become resistance, just as we saw on the daily chart at H.
Chart 4: Intraday Chart #2
The poor rally ends in an intraday upthrust at the top of wave G, where a day trader can enter short as the market starts down. Note that volume increases on wave G without much advance in price. The effort made by buyers on wave G was met by a superior force of selling limiting upside price progress and adding to the conviction of a short sale on the upthrust. The market makes good progress down on good downside volume through the support level of F down to H. Why does the market stop here? The low
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of wave H is at the same level as the weekly support at E. It is an obvious and
analyst would recognize that the volume at J has lessened (compared to
logical location for the intraday market to at least pause. The minor down
waves F, H and the wave after I). As the market turns up from wave K, the
wave between wave H and wave I shows that selling has abated. A rally
signal to cover shorts and prepare for a rally is clear.
would now be expected.
The rally ends at the top of wave L. An uptrend channel highlights the
The market pulls back on wave I. A standard trend channel highlights an
oversold position of price. Price has risen close to the top of the down trend
overbought condition at the top of wave I. We also see the characteristic
channel and just below resistance that has formed from the lows of wave H.
effort vs. result in the high volume, little price progress of wave I. As the
Given the down trending conditions of this market, it is unlikely price will rise
market turns back down to and under the supply line of the trend channel, a
through this combination of resistance. A short may be taken here, and price
short trade can be entered.
moves down returning to yesterday’s lows at the bottom of waves J and K.
Shorts can be covered as the market is unable to fall below the day’s low if
Note carefully the rally from the lows at J‐K to the high at L. Although this
the trader prefers to flatten at the end of the day. There is, however, strong
rally did not break the supply line, it is the largest up move since the down
evidence for further follow through to the downside for the next day. This
trend began at B. We also note that more upside volume came in on this
day’s action clearly shows sellers in control. Down waves remain larger than
move than we have seen in this downtrend. These two conditions indicate
up waves and downside volume predominates. The day began on its highs;
that demand is beginning to enter the market. On the subsequent down
broke yesterday’s low, and closed near on its lows. The two attempts to rally
wave M, we see large downside wave volume, but price is unable to push
(waves G and I) were both feeble. These are all characteristics of a weak
through yesterday’s lows. This is an effort to go lower without a
market.
proportionate result, indicating the buyers are absorbing selling. The time
The market does follow through to the downside the next trading day. We notice, however, that price has reached an oversold position in the down trend channel, the supply line of which was drawn from the tops of waves B and G. A parallel line would then have been drawn from the low at wave F, but the market was so weak that it exceeded that line (not shown) rendering it useless. In this case, a parallel demand line is drawn from the low of wave
period is also important. We have not seen such high intraday volume during this period. These conditions alert us to a change in market behavior. At the bottom of wave M, price dips underneath the support of yesterday’s low and closes back above it. With the strength seen in the immediate background, a long trade may be initiated at this Wyckoff Spring (green arrow). Conclusion
H. Wave J reaches the bottom of the trend channel. The astute Wyckoff 10 | ATMASPHERE
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This article highlights the application of the Wyckoff Method in the modern Canadian Dollar currency futures market. Although the principles of reading supply and demand highlighted here were first described over 80 years ago by Richard Wyckoff, they continue to serve the technical analyst and trader 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 underlying all freely traded markets. Reading supply and demand continues to be a valuable guide to the market’s next likely action and should be a part
of every analyst’s skill set.
Dr. Gary Dayton is an active trader and a psychologist. He created a training program called
‘Deep Practice’ based on psychological research in expert performance to help traders acquire the skills of the Wyckoff Method. Dr. Gary is currently
writing a book on trading psychology to be published by John Wiley & Sons.
www.TradingPsychologyEdge.com
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