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The Basic Elements of Charting for the Wyckoff Method

The basic tools of the Wyckoff practitioner are the bar chart and the point-and-figure chart. Historically, students of the Wyckoff method have re-ferred to these two types of charts as the vertical line chart and the figure chart. In addition, students of the Wyckoff method use a third type of chart, the line chart.

This article explores the construction, value and application of these different charts as they are used in the Wyckoff method. Throughout this article I incorporate a wide variety of real-life examples. In addition to being introduced to the basic bar and point-and-figure charts, the trader-analyst will see how daily and weekly charts form into trends, and how trend-lines and trend channels can help the trader visualize trend continuation and trend reversal. The chapter also investigates the importance of price spread and volume, support and resistance, divergence, and Wyckoff’s unique construction and use of point-and-figure charts.

The Bar Chart

The bar chart’s graphic representation of price and volume on vertical bars, one above the other, makes it the most comprehensive tool available to the Wyckoff-oriented trader-analyst. The bar chart appears frequently in the Wall Street Journal and Investor’s Business Daily and is used widely in software programs and technical analysis publications.

Figure 5.1 shows a vertical line or bar chart with the high, the low, and the closing price on the vertical axis, and the total volume appearing as a separate bar immediately below the price bar. Time (in dates) appears along the horizontal axis at the bottom of the chart.

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FIGURE 5.1 Vertical Line or Bar Chart

The Point-and-Figure Chart

Figure 5.2 shows a figure chart, or point-and-figure chart. Precise procedures must be followed to properly construct this type of chart according to the Wyckoff method. The figure chart is very useful, though consider-ably less popular than the vertical line or bar chart.

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FIGURE 5.2 Point-and-Figure Chart

WYCKOFF MARKET CYCLE

Figure 5.3 shows two idealized representations of a stock or market movement over the four phases of accumulation, markup, distribution, and markdown. The upper diagram reveals that the action of a stock or the market fluctuates around a broad primary growth trend, in this case a primary bull market trend.

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FIGURE 5.3 Idealized Four Phases of a Market Cycle

The lower graph is an artificial line chart that traces out the broad con-figuration of price movement within trends and trading ranges. For the analysis of actual trends, trading range, and turning points, the trader-analyst can construct charts or obtain charts from any of the numerous data feeds available, such as Commodity Quote Graphics (www.cqg.com), StockCharts.com, and Worden Brothers (www.worden.com).

The movements from one phase in an uptrend in a market cycle to the next phase of the market cycle can be likened to connecting the dots from point A to point B in Figure 5.4. Likewise, connecting A to C reflects a sideways movement and connecting the dots from A to D a downtrend. These connections might be made by drawing a simple straight line from A to B, A to C, or A to D. Alternatively, these connections might be made by drawing a more elaborate zigzagging line, a bar chart, or other styles of charts.

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FIGURE 5.4 Connect the Dots

Figure 5.5 shows that a more elaborate bar chart could connect the dots at points A and B. This upward sloping zigzag line defines an uptrend-ing, bull market channel. As you can see, this charting method is equally applicable to long- and short-term time periods.

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FIGURE 5.5 Intraday Bar Chart, Yahoo! Inc.

An even more elaborate line chart for connecting the dots appears in Figure 5.6. The large arrow on the left-hand side of the chart points along an interim uptrend that could have been used to connect points A and B. At a lower degree, a more detailed level, we see that the larger swing is composed of shorter-term upward, downward, and sideways trends. Finally, the larger up arrow in Figure 5.6 defines a swing that could now con-nect point A to point D in Figure 5.4.

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FIGURE 5.6 Elaborate Line Chart

A complex set of swings similar to those in Figure 5.6 is presented in Figure 5.7. The difference is that Figure 5.7 is a daily or daily-basis chart. The solid vertical bar shows the range of price recorded during that day (low to high), and the small crossbar appended to that day’s price range indicates the closing price for the day. The price movement from A to B to C on the chart defines an uptrend while the movement C-F-G defines a downtrend. Note that the movement between points D and E denotes a brief upswing within the larger downtrend from C to G on Figure 5.7.

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FIGURE 5.7 Bar Chart with Complex Swings

A third type of chart commonly used in the Wyckoff Method is the figure chart or point-and-figure chart. An example of the figure chart is given in Figure 5.8. From the lower left corner of the chart around the 50 level to the upper right corner around the 85 level, price is seen to move upward in zigzag fashion. This figure chart could be used to connect the dots be-tween Points A and B on Figure 5.4.

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FIGURE 5.8 Figure Chart with Complex Swings
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