Making the Trend Your Friend

The Wyckoff Method is primarily a trend following system. The orientation and goal is
to discover and campaign the best leadership stocks for the biggest and best price
moves. The jumping of the stock price out of the Accumulation and into an uptrend is
an important event. Mr. Wyckoff developed a very thorough and thoughtful approach
to identifying and managing uptrends and downtrends using charting tools.
We have recently been studying the Accumulation Stage. In this post we will review
some techniques for evaluating uptrends. Uptrends and downtrends are where
investment returns really stack up. As important as Accumulation is in Wyckoff
analysis, trend analysis may prove to be the more important skill set. There are many
places in an uptrend to jump onboard for the ride and have meaningful success and
profit.

The Stride of an uptrend is often established early in the Markup stage (E Phase). The
stock is indicating the rate at which it intends to advance. This is a very valuable piece
of information. The trend then tends to follow the Stride, or rate of advance, for the
duration of the uptrend. The lows, circled in blue, (see above chart) at the June 13 low
and the April 14 low set the Stride of the future advance of AAPL. Draw this trendline,
which is called the Support Line. The intervening high of December 13 is the only
price point needed to draw the parallel Overbought Line. Notice how price climbs at a
rate that is consistent with the drawn trendlines. This rate of advance is referred to as
the Stride. A year later AAPL has a Throwover of the Overbought Line and is in an

Overbought condition. An eight week correction begins the following week. A

second Overbought condition occurs in February 15 and is a stopping action that
contained the AAPL advance for 4 months (so far).
The general procedure for drawing a trend channel is to identify two adjacent
corrections of approximately equal duration (the time of correction) and extent
(magnitude of the decline). Decline number 1 is about 9 points and is 7 weeks. The
second decline is about 8 points and is 19 weeks in duration. As an exercise try
drawing the Support Line using the February 14 low which was 8 weeks in duration,
you will discover that Support Line also has value. If you see a potential trend channel,
draw it!

Reverse use of Trendlines is a useful, but not well known, technique for constructing
trendlines. There are times when the traditional Wyckoff Method for trendline
construction is not possible. At such times try using this approach. Seek two adjacent
price peaks (red circles) and strike a trendline (see above chart). Next find the
intervening low price point and draw the parallel trendline. Note how IBB has four
oversold conditions (red arrows) that are tactically useful for initiating or adding to a
long position. At the conclusion of the advance a Throwover and Overbought condition
stands out (BCLX) on the chart as the upper trend channel line is breached. The
subsequent correction (labeled AR) is on expanding volume and sets the outer
boundaries of the trading range. Time will tell if this will become Distribution or a
Stepping Stone Reaccumulation for another advance (subject of a future blog).

Congratulations to Worapak Jitpakdee for winning the head and shoulders contest with
his submission of CENX (see the Greg Morris blog of April 30th Shampooing the
Market). I am always interested in what took place prior to the conclusion of a move
that contributed to the advance or decline. CENX had a dynamic run up into the head
and shoulders top. A classic trend channel formed with an Overbought condition
concluding the advance and beginning the top formation. CENX is plotted on a log
scale in this example. Convert the scale to arithmetic and try to draw the trend
channel. When drawing trend lines try switching between the two price scales to find
the one that works best. Long uptrends are usually best evaluated on a log scale, but
look at both.
Trends will become overheated and climax, but that does not mean the uptrend is over.
Often an extended trading range forms and then is resolved with a new uptrend. A
trading range that emerges into a new leg up is referred to as a Stepping Stone
Reaccumulation. In the CENX case a top forms, the trend is concluded, and a
downtrend begins. A Wyckoffian will develop the skills to distinguish between a
Distribution formation and a Stepping Stone Reaccumulation. We will study both
conditions and compare and contrast the distinctions between them.

Also at the risk of getting ahead of myself (apologies in advance) here is a point and
figure chart (PnF) of CENX. Mr. Wyckoff employed PnF charts to estimate potential
price objectives using a horizontal count methodology. It is beyond the scope of
todays post to explain the technique (more later). CENX is a wonderful case study to
blend trendline analysis and PnF price objectives. The purpose of PnF is to establish
the price potential of a campaign and then to track the unfolding of the trend. Here
CENX has a base count that takes it from the countline at $8 to a potential target price
of $28 to $30. At the target price, exhaustion sets in with a Buying Climax and a
Throwover of the trend channel (see vertical bar chart). Thereafter a top forms and a
PnF down count is established with the potential to drop to a target of between $5 and
$10. CENX is below $10 and has met the upper price objective. Point and figure is a
very powerful and not a well understood technique. In this example it complements the
trendline analysis very well. Many thanks to Worapak for sharing this fine example.
All the best, Bruce