TECHNI CALL 06 April 09
SPECIAL REPORT
NIFTY - Ready for Mark Up Richard Wyckoff, one of the most successful Wall Street traders in the early 1900s, developed a method or sequence known as Wyckoff method of technical analysis. It analyses the price and volume movement of the market or a tradable item according to the principles of mass psychology. This method is based on the theory that the market tops and bottoms are generally ge nerally the result of series of events occurring in a particular sequence. These events include; the preliminary supply vs. demand imbalance which instigates the price movement; the selling or buying climax; an automatic reaction to that climax; a secondary test of the climax; c limax; and the result of that secondary test(a show o f strength or weakness generating movement in the opposite direction). Wyckoff’s underlying concept was that “all economic movements, by their very nature, are motivated by crown psychology”. The different market phases as mentioned in Wyckoff technique are Accumulation : The establishment of an investment or speculative position by interests in anticipation of an advance in price. Mark-up
: A sustained upward price movement.
Re-accumulation: Momentary stopping or pausing points in the up-trend. Distribution
: The elimination of a long investment or speculative position.
Re-distribution
: Momentary stopping or pausing points in the downtrend.
Markdown
: A sustained downward price movement.
professional
Following are the excerpts of behavioral points/phases as explained in Wyckoff studies about the Accumulation phase.
Trading Range Support: Defines support in the range. Trading Range Resistance: Defines resistance in the range.
1. (PS) Preliminary Support is where substantial buying begins to provide support after a prolonged down move. Volume and spread widens and provides a signal that the down move may be approaching its end. 2. (SC) Selling climax is the point at which widening spread and selling pressure usually climaxes and the larger professional interests at prices near the bottom are absorbing heavy or panicky selling by the public. 3. (AR) Automatic Reaction: Selling pressure has now been exhausted. A wave of buying can now easily push up prices. This is further fueled by short covering. The high of this rally will help define the top of the Trading Range. 4. (ST) Secondary test(s): Revisit the area of the SC (selling climax) to test the supply-demand balance at these price levels. If a bottom is to be confirmed then significant supply should not resurface, and volume and price spread should be significantly diminished as the market approaches support in the area of the SC. 5. The “Creek” is an analogy to wavy line of resistance and floating supply drawn loosely across rally peaks within the Trading Range. There are, of course, minor lines of resistance that will have to be crossed before the market journey can continue onward and upward. 6. Springs, Shakeouts and Tests usually occur late within the Trading range and allow the market and its dominant players to make a definitive test of available supply before a mark up campaign will unfold. If the amount of supply that surfaces on a break of support is very light (low volume), it will be an indication that the way is clear for a sustained advance. Heavy supply here will usually mean a renewed decline. Moderate volumes here may mean, “More testing of support” and to proceed with caution. The Spring or Shakeout also serves the purpose of providing dominant players with additional supply from weak holder at low prices. Springs and shakeouts are, many times, accompanied by a Test. 7. (Jump) Jump across the Creek is a continuation of the Creek analogy. The market jumps resistance very deliberately. In a Jump, it is a good sign if it is done on good spread and volume, thus, depicting – sign of strength (SOS). 8. (SOS) Sign of strength: An advance on good (increasing) spread and volume. The market moves very easily upward. 9. (LPS) Last Point of Support and (BU) Back Up to the Edge of the Creek. A pull back to support (that was resistance earlier) on diminished spread and volume after a SOS. This is a good place to initiate long position or pyramid profitable ones the positions bought at Spring, Test or on the SOS.
A series of SOS and LPS is good evidence that a bottom is in place and Price Markup has begun. In Accumulation Phase there are sub-phases e.g. A to E. These are sub-phases, through which Trading Range passes, as conceptualized by Wyckoff methods. Phase A: - Shows us the preliminary support ( PS) and a Selling Climax (SC) with the exhaustion of supply, as the steep downtrend is broken. The Automatic Reaction (AR) and Secondary Test (ST) set the boundaries of the Trading Range that follows. Phase B: - In the early stage, we see a wide swing and higher volume and the first sign of demand asserting its dominance, as professionals absorb supply. Late in ph ase B, low volume shows supply has reduced at the Trading Range lows. Phase C: - Gives us a final and unconvincing test and break of the Trading Range lows on extremely light volume. This followed by SOS on dramatically increased volume. Phase D: - We see a consistent and pronounced dominance of demand over supply on widening spread and increased volume to the upside. Reactions are comparatively weak and on light volume. Phase E: - The stock is marking up on rising volume. Demand remains in control.
We give below a model sample of Accumulation Phase which is been explained by Wyckoff years back in his studies.
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Now look at the daily chart of Nifty from July 2008 to 2 April 2009.
Look at the amazing similarity between the two charts. Most of the behavioral points shown in the Nifty chart are matching with the model chart. In Nifty chart, Phase A was completed in the 3rd week of November 2008 with PS (preliminary th th support) taking place on 10 October and SC (selling climax) on 27 October. AR (automatic reaction) took place on 5 November. ST (secondary test) was seen on 20 November. A Trading Range is now formed between 2500-3150, which was maintained until fourth of April 2009. After that, Phase B started where the volume increased in the rising market but reduced drastically when levels were near the low of the Trading Range. This phase was over by beginning of March. Phase C was seen during 16 February to 9 March. During this phase, we have seen very low volume and a final assault was made on sixth and eighth of March to break the low of the Trading Range but volume was very low and was absorbed perhaps by dominant players (FII, MF and Insurance funds). The assault was unsuccessful.
Now, the Phase D seems to have started with all characteristics mentioned in Wyckoff studies. From 12 March, onwards the bulls are in complete control of the market and bears seem to be retreating. Volumes are rising and corrections are sub-normal.
If the current working of our market is further to be matched with the model sample, then we can presumably say that we have moved out the Trading Range with first SOS (Sign of strength). We may have seen the LPS (Last point of support) on…. We may or may not see series of SOS and LPS in coming days. However, we are seeing the rise in price levels with increasing volume. This development can lead to Mark-up. Nifty can go up to 3500 – 3800 or even up to 4000. The stark resemblance of the two charts has encouraged us to write this report, which is purely to explain and understand the Wyckoff methods in the current context.
