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TABLE OF CONTENTS
INTRODUCTION
Why You Should Read This Book .....................................................................Page 5
What You Won't Find In This Book ......................................................................Page 7

C HAPTER 1: ANALYZING THE M ARKET

Basic Concepts .................................................................Page 8
Supply and Demand Drive The Market ................................................................Page 10

C HAPTER 2: THE M ARKET INDEX AND CORE STOCKS

The Wyckoff Wave ...................................................................Page 12
Group Leadership Stocks ....................................................................Page 13

C HAPTER 3: U SING CHARTS

Introduction ...................................................................Page 14
Vertical Line Chart ...................................................................Page 16
Point & Figure Chart ...................................................................Page 20
Line Charts ...................................................................Page 28

C HAPTER 4: STRENGTH AND WEAKNESS

Relative Strength ...................................................................Page 30
Relative Weakness ...................................................................Page 32

C HAPTER 5: WHEN STOCKS GET R EADY TO M OVE

Trading Ranges ...................................................................Page 34

C HAPTER 6: ACCUMULATION & ENDING ACTION

Accumulation ...................................................................Page 36
Ending Action ...................................................................Page 40
Springs ...................................................................Page 42
#1 Spring (Shakeout) ...................................................................Page 42
#2 Spring ...................................................................Page 46
#3 Spring ...................................................................Page 48
Sign of Strength ...................................................................Page 49
The Creek Story ...................................................................Page 49
Sign of Strength Within A Trading Range .............................................................Page 52
Major Sign of Strength (Creek Jump) ...................................................................Page 54
Sign of Strength Without a Spring ...................................................................Page 56
Re-Accumulation ...................................................................Page 58
Accumulation in two real world stocks...................................................................Page 64

3
C HAPTER 7: DISTRIBUTION & ENDING ACTION
Distribution ...................................................................Page 78
Up thrust After Distribution ...................................................................Page 80
Distribution Without an Upthrust ...................................................................Page 84
Upthrusts ...................................................................Page 85
Signs of Weakness ...................................................................Page 86
The Ice Story ...................................................................Page 86
Upthrust and a Sign of Weakness ...................................................................Page 88
Sign of Weakness Without An Upthrust.................................................................Page 90
Another Sign of Weakness ...................................................................Page 92
Re-distribution ...................................................................Page 94

C HAPTER 8: DETERMINING M ARKET TRENDS

Trends and Trend Channels ...................................................................Page 95
Weakening the Trend Channels ...................................................................Page 97
Braking the Trend Channels ...................................................................Page 98
Short Term Trends ..................................................................Page 100
Intermediate Term Trends ..................................................................Page 102
Long Term Trends ..................................................................Page 108
Other Trends ..................................................................Page 111
Using Trends in Your Market Analysis..................................................................Page 112

C HAPTER 9: ANALYZING THE STOCK M ARKET U SING THE WYCKOFF TOOLS

The Wyckoff Tools ..................................................................Page 114
The Pulse of the Market Data Report ..................................................................Page 114
The Optimism – Pessimism Index ..................................................................Page 116
The Force Index ..................................................................Page 122
The Technometer ..................................................................Page 128

C HAPTER 10:
10: FINDING THE WINNERS
Position Sheet ..................................................................Page 134
Buying Tests ..................................................................Page 136
Buying Tests Accumulation ..................................................................Page 138
Buying Tests Up Trend ..................................................................Page 140
Selling Tests ..................................................................Page 146
Selling Tests Distribution ..................................................................Page 148
Selling Tests Down Trend ..................................................................Page 152

C HAPTER 11: GETTING READY TO TRADE

Wyckoff Trading Philosophy ..................................................................Page 156
Stop Orders ..................................................................Page 157
Risk/Reward Ratio ..................................................................Page 158
Moving Your Stop Orders ..................................................................Page 158
Final Thoughts ..................................................................Page 159

4
I NTRODUCTION
WHY YOU SHOULD READ THIS BOOK

During the first third of the 20th century, Richard D. Wyckoff (1873 – 1934) was an extremely
successful trader in stocks, bonds and commodities. As his wealth increased he turned his attention
to understanding how the financial markets behaved and the forces that made them move.

Wyckoff believed that markets are made by the minds of men and that all the fluctuations in the
market should be studied as if they were the result of one man's operation. He called this his
Composite Man theory.

He also felt that the best way to make money in the financial markets was to identify which stocks
had attracted professional interest. Then, using his technical trading strategies and techniques, he
would wait until he saw the professionals were ready to move a stock, bond or commodity. This was
the time to take a position.

In Wyckoff's day the professionals were the great speculators like Jay Gould, Jesse Livermore and
James Keane. Today they are hedge, mutual and pension funds, along with other major financial
trading institutions.

The players may have changed, but Wyckoff strategies and techniques work as well today as they did
100 years ago.

Richard D. Wyckoff was the very first stock trader to include volume studies in stock market
analysis. He combined his knowledge of stock market volume with the price studies developed by
his good friend Charles Dow. The result were the Wyckoff stock market strategies and techniques
that are well detailed in the two courses produced and distributed by the Stock Market Institute
(SMI) through the website WyckoffStockMarketInstitute.com.

Most importantly, Wyckoff's concepts remain as valid today as they did in the first third of the 20th
century, when Mr. Wyckoff was actively trading. The fact that these strategies work as well today as
they did 100 years ago is testament to their validity in our different and ever-changing markets.

While the basic precepts have not changed, several important enhancements have been made to the
Wyckoff strategies and techniques. Many were introduced by Robert Evans, who owned the Stock
Market Institute from the 1940's through the 1960's.

Mr. Evans developed the Optimism – Pessimism Index. This is an index strictly of volume as it
appears on individual indexes and stocks throughout the trading day.

He also enhanced the Trend Barometer, which was conceived by a Wyckoff student in the 1930's.
Made up of the Technometer and the Force Index, this important trading tool helps Wyckoff
students better identify turning points and the relative strength or weakness of both rallies and
reactions.

5
These, coupled with the Group Leadership Stocks, are the Wyckoff Tools. They are the signposts
that help guide the Wyckoff student towards stocks, bonds, futures and commodities that are ready
to move and then, point out the appropriate entry and exit points.

This book studies the basic Wyckoff concepts and principles and then shows students how to get
the most out of their Wyckoff Tool Kit.

It also includes many of the lessons I have learned during my 40 years as a Wyckoff student. The
charts that accompany the text are of recent market action. Every concept is supported by an
accompanying chart that helps the reader understand and appreciate the value of these wonderful
trading tools.

Unlike many publications of this nature, I have not tried to find the perfect chart that portrays the
Wyckoff principle that is being studied. In the real world, those perfect charts are often not quite so
perfect. However, the Wyckoff principles, discussed in this book, appear on vertical line and point
and figure charts every day. It's simply a matter of an intelligently studying each chart, looking for
and validating these important Wyckoff concepts.

Successful Wyckoff investors and traders do not look for Wyckoff indicators discussed in this book
and then automatically take mechanical action. Instead they analyze the indicator in conjunction with
other Wyckoff tools and previous market action. Finally, they consider alternative scenarios and the
placement of stop orders, before taking a position.

My purpose in writing this book is to share, in a more pragmatic manner, how the Wyckoff
strategies and techniques work and more importantly, how you can profit from them.

I have learned many of these lessons through trial and error and as a result have paid a bit of tuition
to the "University of Wall Street". I hope this book substantially reduces yours.

6
WHAT YOU WON'T FIND IN THIS BOOK
If you are looking for an easy automatic method to make money in the stock market, this book will
disappoint. Too many traders spend a great deal of time and money trying to find easy mechanical
methods that will tell them when to buy and sell stocks. In truth, the only people that make money
are those that sell those "easy" automatic methods.

The Wyckoff strategies and techniques are filled with important indicators like Buying and Selling
Climaxes, Springs and Upthrusts, Signs of the Strength and Weakness, to name a few. If these are
treated like mechanical indicators, without a basic understanding of their supply and demand
relationships, opportunities will be lost and, even worse, bad trades will be made.

These indicators are simply signposts that tell the experienced Wyckoff student that a potential
opportunity lies ahead. It is that students responsibility to then analyze the stock's activity to see if
the price and volume relationships warrant taking a position.

The experienced Wyckoff student will use the criteria established in the Position Sheets, Buying and
Selling Tests and the other Wyckoff Tools to determine if a position should be taken.

They should also develop a trading action plan. The plan will include a written summary that
includes:
• Why the position was taken and what the stock will do in the immediate future
• An objective area where a successful trade can be terminated and profits taken.
• A specific price where the trade should be closed, if the stock does not behave as
expected.

Trading in the stock market is hard work. The stock market is a cruel mistress. If you are looking for
an easy way to make money and not committed to putting in the time for extra study and analysis,
this book is not for you.

7
CHAPTER 1 - A NALYZING THE MARKET

BASIC CONCEPTS

At first blush, the financial markets, appear to be a disorganized and uncontrolled mass of seemingly
unrelated activity. Often pundits will offer reasons as to why markets rallied or reacted. Sometimes
the given explanation for a market rally, appears a few weeks later to justify a reaction. However,
within these seemingly random fluctuations there is a logic to the chaos. The question is, how does
one make sense out of mayhem?

The answer is in the most fundamental of all trading concepts. The stock market is the last great
bastion of free market capitalism. It functions solely on the laws of supply and demand. When more
shares are bought than sold, the stock market goes up. When more shares are sold than bought, the
stock market goes down. The battle between supply and demand is being fought every single
second of every market day.

Every market move is comprised of a series of smaller fluctuations, which in turn are based on the
relationship of the price and its associated volume. These smaller moves occur throughout the
trading day. They are called waves. This is because they rise and fall like beautiful ocean breakers.
Like ocean waves, market fluctuations have powerful underlying forces that transform seemingly
quiet and peaceful swells into powerful giants that can distinctly and irrevocably alter the trading
landscape.

The secret to trading the stock market is learning to observe the minor wave fluctuations and
understand the relationships between price and volume. This knowledge helps the trader prepare for
future moves in either direction. Successful stock traders combine that basic understanding, with the
Wyckoff strategies and techniques, to better understand how the markets, and their individual stocks
are performing and, more importantly, how they can be expected to act in the future.

The Wyckoff Wave is the market index of choice for most Wyckoff students. Along with the Trend
Barometer, they are critically important tools that help analyze market action. They provide a
comprehensive package designed to help every trader reach responsible conclusions on what the
market has been doing and why. Then, they help the Wyckoff student predict what will happen in
the near, intermediate or long term future.

Why are these tools special and unique? Because, unlike other indicators the Wyckoff tools drill
inside the market action and examine the price and volume relationships of each intra-day wave. The
resulting data provides important clues that, if used correctly, can help make sense out of what to
many, seems like disorganized market activity.

The stock market rallies and reacts throughout every trading day. These minor up and down
fluctuations need to be tracked and monitored. These fluctuations are called intra-day waves.

Tracking each intraday wave's volume is extremely important. Many market analysts believe that if a
stock advances during the day, all its volume should be categorized as demand or up volume.
Conversely, all reactions consist of down volume.

8
Wyckoff realized that this was not correct. A stock could advance, but much of the up volume could
actually be supply. If a stock reacted some of the down volume could've been demand. The intra-day
volume provides the important data that comprises the Trend Barometer. The Trend Barometer
consists of the Optimism – Pessimism Index, Technometer and the Force Index. These important
indicators are often called Wyckoff Tools.

Even if the intra-day information is not available, the end of day volume can provide clues in
identifying the amount of demand or supply present in the stock or index.

Demand is considered to be present if a stock rallies on increased price spread and increased
volume, or reacts on decreased price spread and increased volume.

Supply is present if a stock reacts on increased price spread and increased volume, or rallies on
decreased price spread and increased volume.

If a stock rallies on reduced price spread and reduced volume, it is considered to have a lack of
demand. There is also a lack of demand on a reaction that has increased price spread, but decreased
volume.

Finally, if a stock reacts on reduced price spread and reduced volume, it is considered to have a lack
of supply. There is also a lack of supply if a stock rallies on increased price spread, but reduced
volume.

9
SUPPLY AND DEMAND DRIVE THE M ARKETS

Richard D. Wyckoff understood that the basic law of supply and demand governed all price changes
and they were the best indicator of the future direction of a particular stock or index. The concept
of rising prices when demand exceeds supply and the lowering of prices when supply exceeds
demand is universal. It is found not only in the stock market but in commodities, real estate, labor
and everything else that contains a monetary value.

The more Mr. Wyckoff learned about the stock market, the more he realized that the actions of
stocks exposed the plans and purposes of those who dominated the markets, or took large interests
in those stocks.

All of us indicate our future intentions by how we behave under a given set of circumstances. The
stock market does the same. It indicates its future direction by its current actions.

Stock markets are huge repositories of thousands of bits and pieces of miscellaneous information.
These can be news items, rumors, stock tips and even guesses and hunches. They are spread in
newspapers, telephone conversations, e-mails and through the Internet.

Consciously or subconsciously a great majority of these tidbits have an impact on traders and
investors who are making buying and selling decisions.

Whenever a trader buys a stock, or sells short, the trade makes a small impact on the overall market.
The amount of impact depends on the size of the trade. The larger the trade, the more impact it will
have on the stock's price. A 100 share or odd lot trade will have little impact on a stock's price. A
trade of 10,000 or 20,000 shares gets everyone's attention and could have an immediate impact on
the stock's price.

For example, a buyer wants to purchase 20,000 shares of a certain stock, but only 10,000 shares were
available within a 3-5 point range of the order. In this case, in order to complete the trade, the extra
10,000 shares of that stock would have to be purchased at higher prices. The demand created by the
purchase could not be met by the available supply. This caused the price to increase.

Conversely, if 20,000 shares of stock were available, the trade would be easily consummated and
have no impact on the stock's price.

The same happens when large quantities of stock are sold short.

10
Wyckoff understood that the plans of these large operators could be seen on the tape as they
unfolded. He could also see the eagerness or anxiety in individual trades and could also measure the
effort behind the buying or selling. This force was evident in the number of shares in each
transaction. This also helped Mr. Wyckoff understand the purpose behind a stock's market action.
Was it to:
• buy or sell without substantially impacting the price, or
• to force the price up or mark the price down, or even
• to discourage buying or selling by other traders or investors?

Each transaction was evidence. While it was not always possible to understand every minor event, it
was much harder for the dominant traders or institutions to hide their intentions from the ticker
tape or, these days, from the real-time data available over the Internet.

Mr. Wyckoff believed that future events could be seen on the tape, because these large interests
disclosed their anticipation of advances or declines by how much and when they bought and by how
much and when they sold. The Wyckoff strategies and techniques help traders learn to recognize
what is in the mind of these larger interests and how to take advantage of this important knowledge.

11
CHAPTER 2 - THE MARKET I NDEX AND LEADERSHIP STOCKS

THE WYCKOFF WAVE

The first step in any market analysis is to determine the existing trends (long, intermediate and short
term), the current market position and its probable future direction. Trends are created as the forces
of supply and demand tug and pull at each other throughout the trading day. The results of the
selling and buying pressures create price changes in the individual securities. These price movements
make up the general trend of the market.

Combining the price movements of every stock on every exchange is a Herculean task. It is also not
the best way to judge the market. A good trader needs an edge and that edge is created by using an
index made up of market leaders from important industry groups. These leaders will not only
participate in most market moves, but in almost every case they will also lead the way.

The Wyckoff Wave is just such an index. It is not simply an average of stock prices, but a weighted
index of 12 important market leading stocks. Leaders in their respective industry, they are also
known as Group Leadership Stocks. Presently, the stocks making up the Wyckoff Wave and their
weighted value is as follows:

AT & T 79 Caterpillar 35 General Electric 90

Bank of America 50 DuPont 57 IBM 21
Boeing 39 Exxon 32 Union Pacific 60
Bristol-Myers 119 Ford 25 Walmart 43

Unlike other indexes, the Wyckoff Wave is not simply calculated. It is also closely monitored.
Throughout the trading day these stocks rally and react. Based on a specific formula, these
fluctuations create the intra-day waves. The day's high, low and close are taken from these intra-day
waves. Depending on the intensity of the supply versus demand battle, the Wyckoff Wave can
produce anywhere from eight to over 30 individual, or intra-day, waves.

12
GROUP LEADERSHIP STOCKS

The market does not move in harmony, or as a single force. Instead, it is an amalgam of many
different issues, each independent of the others. They react individually to the forces of supply and
demand.

We have learned that stocks in specific industry groups do have a tendency to move together in
harmony. They can lead or follow the general market indexes. As one of these groups is in the
middle of a move, another group may just be beginning its markup or markdown phase. A bull
market is the result of the participation of these industry groups, each moving at their own time and
having their own objectives. This phenomenon is called rotation. Industry group rotation is an
important tool in the art of selecting stock. Group leadership stocks help Wyckoff traders select
stocks that are in a position to begin a significant move.

The Wyckoff Wave is made up of stocks from 12 important industry groups. They are Aerospace,
Automotive, Chemicals, Communications, Consumer Goods, Energy, Financial, Healthcare,
Industrial Equipment, Manufacturing, Technology and Transportation.

The Wyckoff Wave Group Leadership Stocks are listed below with their associated industry.

AT&T (T) Communications

Boeing (BA) Aerospace
Bank of America (BAC) Financial
Bristol Myers (BMY) Healthcare
Caterpillar (CAT) Industrial Equipment
DuPont (DD) Chemicals
Exxon Mobil Energy
Ford (F) Automotive
Gen. Electric (GE) Manufacturing
IBM (IBM) Technology
Union Pacific (UNP) Transportation
Walmart (WMT) Consumer Goods

13
CHAPTER 3 - USING CHARTS
Wyckoff market analysis uses three types of charts.

The Vertical Line Chart shows us how a stock is advancing or declining. It can be presented in a
daily, weekly or monthly format.

The Line Chart is a form of the vertical line chart. It is most often used on intra-day analysis. While
one can sometimes find Wyckoff indicators like Springs or Upthrust, it's primary purpose is to
identify the amount of demand and supply in the market and how that is impacting intra-day turning
points as well as resistance and support areas of indexes or stocks.

The Point & Figure chart identifies a cause (base) and helps the Wyckoff student identify objectives
(effect of the cause).

Let's discuss these in detail. This will help you better understand how these types of charts are an
important part of Wyckoff market analysis

14
15
VERTICAL LINE C HARTS

Vertical line charts are the eye into the soul of a stock. These charts help us identify a stock's
character and potential direction. They do this by helping us identify the amount of demand and
supply that is present at any particular time.

These charts can help us identify trading ranges and trends. They can also help identify when a stock
is preparing to change its direction, or when it is beginning a change in its character.

Vertical line charts are much more than simple vertical lines with small horizontal lines designating
the day's opening and closing prices. By analyzing price spread and volume, from day-to-day or week
to week, the Wyckoff student can analyze a stock's position and determine when to enter or exit
trades.

While much of this book is a primer on how to read and analyze vertical line charts, it is important
to understand the subtle changes that appear from day-to-day. These help us identify the continuing
presence or lack thereof, of both supply and demand.

The following guidelines are helpful in comparing each day's vertical line chart activity relative to the
amount of supply and demand in a stock at a particular time. These guidelines are marked on chart
#1 of the Wyckoff Wave.

If a stock rallies and has wider price spread and higher volume than the previous day, that
suggests the presence of demand. Point 1.

If a stock rallies and has a narrower price spread and lower volume than the previous day,
that suggests a lack of demand. Point 2.

If a stock rallies and has a wider price spread, and lower volume than the previous day, that
suggests a lack of supply. Point 3.

If a stock rallies and has a narrower price spread and higher volume, that suggests the
presence of supply. Point 4.

If a stock reacts and has a wider price spread and higher volume than the previous day, that
suggests the presence of supply. Point 5.

If a stock reacts and has a narrower price spread and lower volume then the previous day,
that suggests a lack of supply. Point 6.

If a stock reacts and has a wider price spread and lower volume than the previous day, that
suggests a lack of demand. Point 7.

If a stock reacts and has a narrower price spread and higher volume than the previous day,
that suggests the presence of demand. Point 8.

16
17
These guidelines change when a stock begins the trading day moving in one direction. Then, the
intra-day move is stopped and the stock reverses direction for the rest of the trading day. When that
happens, it is considered an intra-day failure. Intra-day failures can be either to the upside or
downside. It is important to understand that gap openings are not included in intra-day failures in
either direction. These guidelines are marked on chart #2 of IBM.

If a stock begins moving higher and then reacts and closes lower than the previous day, on
wider price spread and increased volume, that suggests the presence of supply. Point 1.

If a stock begins moving higher and then reacts and closes lower than the previous day, on
narrower spread and increased volume. That suggests the presence of demand. Point 2.

If a stock begins moving higher and then reacts and closes lower on wider price spread and
decreased volume, that suggests a lack of supply. Point 3.

If a stock begins moving higher and then reacts and closes lower on narrower price spread
and decreased volume, that suggests a lack of demand. Point 4

If a stock begins moving lower and then rallies and closes higher than the previous day, on
wider spread and increased volume, that suggests the presence of demand. Point 5.

If a stock begins moving lower and then rallies and closes higher than the previous day, on
narrower price spread and increased volume, that suggests the presence of supply. Point 6.

If a stock begins moving lower and then rallies and closes higher than the previous day, on
wider price spread and decreased volume, that suggests a lack of demand. Point 7.

If a stock begins moving lower and then rallies and closes higher than the previous day, on
narrower spread and decreased volume, that suggests a lack of supply. Point 8.

This analysis helps identify the amount of supply and demand in the market or a particular stock. It
helps identify early signs that a trend could be changing.

Is also important to watch the amount of supply and demand that is present when a stock or index
approaches resistance or support areas. These come in to play when an index or stock approaches
either support or resistance points within a trading range, or in trend channels.

Supply and demand should also be monitored when approaching both supply and support lines
within a trend channel. These concepts will be covered in more detail later in this book.

18
19
POINT AND FIGURE CHARTS

Point & Figure charts play an important role in technical stock analysis. Their primary purpose is to
provide a good indication how far a stock will rally or react as it moves towards its objective. These
charts are based on the rule of cause and effect. This rule states that the result (effect) of a move will
be in direct proportion to the amount of accumulation or distribution that is developed during the
preparation period (cause).

The value of the Point & Figure chart is similar to building a skyscraper. The wider the foundation,
the more floors can be constructed. This increases the building's height.. The wider the
accumulation (distribution) area, the higher (lower) the potential objective of the expected rally
(reaction).

In order to determine what is happening during an up trend or down trend, the cause must be
analyzed. This is a function of the vertical line chart. The point and figure chart tells us what the
stock is doing, not why it is doing it.

Vertical line charts help us find where to take the counts and signal the direction and timing of a
stock's next move. Once they do their work, a horizontal count can be taken on the Point & Figure
chart. The horizontal count is then transferred to a vertical objective line, which tells us how far a
stock is expected to move. It is extremely important to coordinate the vertical line chart with the
point and figure chart.

Instructions on where to take the count are found in the Count Guide, developed by the Stock
Market Institute (SMI). The Count Guide simply states that :

"After accumulation is completed, having seen a Sign of Strength, locate the Last Point of Support
on the Reaction off the Sign of Strength and take a count from right to left."

When a stock is being distributed the procedure is the same, just with different terms.

"After distribution is completed, having seen a Sign of Weakness, locate the Last Point of Support
on the Rally off the Sign of Weakness and take a count from right to left."

Just because a stock has a wide base, does not mean that the entire objective will automatically be
reached. It also does not mean the entire area of the base is accumulation or distribution. The base
should be divided into phases and counts and potential objectives should be achieved phase by
phase.

The following study of Union Pacific, on chart #3, examines this in more detail.

20
21
The 1 point Figure chart of Union Pacific (UNP) has an accumulation base that contains 5 phases.
While you may not be familiar with all the terms, they will be covered in detail later in this book.

UNP went through Preliminary Support at point A and a Selling Climax at point C. It then rallied to
point D, and moved sideways in an accumulation trading range. There was possible ending action, in
the form of a Spring point G.

After the rally to point H, UNP reacted to test the spring. The test was of poor quality. This
eliminated point G as ending action and negated the Spring.

UNP then put in a poor quality rally to point J and finally experienced conclusive ending action, in
the form of a Shakeout (#1 Spring) at point K. The rally to point L was a Sign of Strength and the
reaction to point M was a Last Point of Support. Point M was also a confirming secondary test of
the shakeout. Now that a Last Point of Support has been found, it is time to identify the phases and
take the counts.

A phase is identified by a level of support that occurs after a reasonable rally within the trading
range. There is usually some white space on the vertical line chart, between the beginning and end of
each phase.

As the low at point M was $88.33, we can take the Count along the $89 level.

Phase #1 is from the Last Point of Support at point M to the #1 Spring at point K. This gives us a
count of 15 points along the $89 line. The next phase is from point K to point I. The count for this
phase is 17 points. Phase 3 is from point I to point G. There is a count of 12 points. Phase 4, from
points G to C adds another 17 points. Finally, phase 5 from the Selling Climax at point C to the
Preliminary Support at point A adds 17 points to the total count.

UNP has a total count of 78 points. If this count is added to the $89 line, there is a maximum
objective of $167. As wonderful as it sounds, that does not mean that UNP will ever reach $167.
First, we need to watch how UNP behaves as it reaches the smaller objectives identified in each
phase. In addition, as it rallies, UNP will most probably move sideways, go through re-accumulation,
and develop some confirming counts.

While the highest objective is always based on the price at the Last Point of Support, it is much
better to establish a range. The bottom of the range is defined from the lowest point in the trading
range, most often the bottom of the Spring. In addition, it is extremely helpful to add a marker
halfway between these two points.

On the vertical objective line, a triangle signifies the count from the Last Point of Support. A circle
marks the bottom of the trading range and a square annotates the halfway point. The horizontal
count is then added to each and this marks the objective area for each phase.

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Let's examine each phase and determine its objectives. Phase 1 begins at the Last Point of Support
(point M) and ends at the #1 Spring (point K). The count along the $89 line is 15 points. When the
15 points is added to the $89 line, we get a maximum objective of $104. The objective is marked by
a black triangle on the Point & Figure chart.

In addition, a count must be taken from the bottom of the spring and the halfway point between the
Last Point of Support and the Spring. As the low for the spring was at $77.73, the objective is
measured from the $78 level. This gives us an objective of $93. This objective is marked by a black
circle

We'll place the halfway point between the two at $74. That objective is $99 and is marked by a black
square.

While these last two objective points are fairly irrelevant during the early mark up phases, they
become extremely helpful as the rally continues. While they don't always come into play during
Phase 1, placing them on the chart helps create good and consistent habits.

Now that we have established the objectives for Phase 1 of the count, it is helpful to return to the
vertical line chart and see how the rally develops. In order to do this it is important to draw in a new
trend channel. The support line of this uptrend channel is drawn through point K and M, with a
parallel supply line drawn through point L.

The Wyckoff Wave then rallied to $103.80 at point N. This is only $0.20 away from the Phase 1
maximum objective. Notice that UNP was unable to reach the up trend channel's supply line. This is
a caution signal that the rally may be in trouble or will, at least, pause and move sideways. Short-term
traders should close their positions and enjoy their 10 to 13 point profits.

The caution signal was confirmed as UNP reacted to point O and then rallied to point P. Because
UNP could not return to its up trend channel, the trend was broken. Short-term traders who did not
exit in the area of point N had one final opportunity to close trades and enjoy profits.

Now, we'll return to the Point & Figure chart and create the objective for the second phase. To do
that we simply add the Phase 2 count (17 points) to the Phase 1 count (15 points). This gives us a
total count of 32 points. The objectives are as follows:

1. From the Last Point of Support (point M) at the $89 level the objective is $121.
2. From the low at point K, at the $78 level, the objective is $110.
3. From the halfway point, at the $84 level, the objective is $116.

UNP then rallied and reached $117.40 at point T. This is right at the halfway point of the count over
to the beginning of phase 2. While that works out nicely, the objective area consists of an 11 point
range. Here are a few ways to narrow down the objective area.

On the reaction to point O, UNP was supported at the top of the original trading range. That
support is shown by the line drawn from point B.

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After the rally to point P, UNP reacted to point Q. It found support when it reached the top of the
trading range. This is a Last Point of Support. Again, these terms will be discussed in much more
detail later in this book.

We can now draw a new up trend channel with a support line through points Q and S. A parallel
supply line is drawn through point R.

The move from point N over to point S suggests that UNP was undergoing some re-accumulation.
Therefore, we should look for a confirming count. This count can be taken from point S to point Q.
That is a count of 17 points with objectives between $113 and $115. This helps to narrow the
objective area.

As UNP rallied to point T, it moved into an overbought position relative to the new up trend
channel. Overbought positions need to be corrected. This made UNP vulnerable to react and
presented another opportunity to close trades and take profits.

Notice that UNP did not reach its maximum objective. This is not uncommon. Therefore, it is
extremely important to monitor existing positions and when intermediate counts are reached, look
for indications that will cause you to close the position.

This is how confirming counts can validate and help better identify the objective area.

Union Pacific is an example of how a Wyckoff trader can make an excellent profit, even though the
stock did not reach its maximum objective.

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LINE C HARTS

Intra-day line charts help identify the minor price movements that can be the beginnings of more
important rallies or reactions.

When analyzing them it is important to remember that intra-day trends range from hours to a few
days. An intra-day change in direction does not necessarily mean an index or stock will follow suit.
Their most important use is to identify any changes in the demand or supply coming into an index
or stock.

Chart 2A is an intra-day chart of the Wyckoff Wave. It contains two intra-day up trend channels and
one intra-day down trend channel.

The first uptrend channel ended at point H. Notice that some supply came in to the market on the
reaction from points F to G. Then, the rally to point H was unable to reach the intra-day up trend
channel's supply line.

These two indications suggested a change in character and the Wyckoff Wave reacted back to point
O. This caused a new intra-day down trend channel to be drawn in red.

Notice that the reaction to point M was unable to reach the new down trend channel's support line.
Then the rally to point N moved slightly through the supply line. This is an initial indication that the
trend was in jeopardy. Equally important is the drying up of supply on the reaction off point I. The
one long intra-day wave to the downside was actually a gap opening. The remainder of the reaction
was on reduced price spread and volume, suggesting supply was drying up.

The trend was broken at point O and the Wyckoff Wave rallied to point V. It then weakened the
uptrend channel on the reaction to point W. The channel was broken on the rally to point X and the
Wyckoff Wave reacted to point Y.

It is now putting in a poor quality rally as it tests the highest at point H. The Wyckoff Wave will also
have a difficult time returning to its intra-day up trend channel. The poor quality rally indicates a lack
of demand.

This suggests the Wyckoff Wave will be unable to move past point H and will begin to react. The
reaction has a good chance of testing the lows back at point O.

The information gathered from the intra-day line chart is then applied to the broader analysis found
on the vertical line chart. Often, it provides wonderful early warnings as to changes in market
direction.

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Chapter 4 - Finding The Winners
The Wyckoff student always tries to select the most promising opportunities. These are the stocks
that are most likely to move the soonest, the farthest and the fastest.

The first place to look for these stocks is in the industry groups that are stronger then the market
during a rally or weaker than the market during a reaction. The Wyckoff Wave Group Leadership
Stocks are an excellent way to determine the relative strength or weakness of the group, when it is
compared to the Wyckoff Wave.

Relative Strength

On the chart #4, the Wyckoff Wave is compared to the Consumer Goods industry group, using
Wal-Mart (WMT) as the group leader. On this example, Wal-Mart is shown as a bar chart and the
Wyckoff Wave is presented as a line chart.

In April, 2012, Wal-Mart reacted to point A. Although the entire trading range is not shown on this
chart, point A was a Spring. This ended a trading range that began in February, 2012.

The reaction to the Spring, briefly made Wal-Mart weaker than the Wyckoff Wave. Its relative
strength changed on the rally to point B as Wal-Mart moved into new high ground and the Wyckoff
Wave was unable to follow suit. Wal-Mart continued to be stronger then the Wyckoff Wave as it
rallied to point C.

Then the relative strength began to change. The reaction following point C was weaker then the
corresponding reaction on the Wyckoff Wave. Wal-Mart then rallied to point D, but was unable to
move into new high ground. The Wyckoff Wave did move into new high ground, but has been
unable to sustain its relative strength on the move to point E.

In early October 2012, Wal-Mart reached a high of just over $77.00 per share. It then reacted and
moved sideways. Wyckoff students who selected stocks in the Consumer Goods group in the
spring and early summer of 2012 were rewarded with some nice profits that were made in a
relatively short period of time.

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R elative Weakness

Conversely, chart #5 shows Caterpillar (CAT), the leadership stock in the Industrial Equipment
Group, displaying relative weakness, when compared to the Wyckoff Wave. Caterpillar is shown in
a bar chart. The Wyckoff Wave is presented in a line chart.

In late January, 2012 Caterpillar rallied to point A, briefly reacted to point B and then continued its
rally to point C. At this point, Caterpillar was slightly stronger than the Wyckoff Wave. CAT then
reacted to point D. Notice that point D holds above the earlier reaction to point B.
However, the Wyckoff Wave is slightly lower. Caterpillar is still stronger than the Wyckoff Wave.

This changes on the rally to point E. Point E on Caterpillar is lower than point C. However, point E
is substantially higher than point C on the Wyckoff Wave. This is our first significant indication that
Caterpillar is undergoing a change in character, when compared to the Wyckoff Wave.

On the rally to point E, Caterpillar completed a head and shoulders formation. The head at point C
and the shoulders at points A and E. Further examination indicates a count of 31 points on CAT's
Point & Figure chart can be taken along the $114.00 line, from point P over to point A. This gives
Caterpillar a downside objective of between $85.00 and $83.00. The Point & Figure chart is not
shown in this example.

Caterpillar then moved below point D as it reacted to point F. The Wyckoff Wave held above point
D. This continues to confirm CAT's relative weakness when compared to the Wyckoff Wave.

Because point F was lower than point D, we can now draw the down trend channel that appears on
the chart. Caterpillar's trend is now down.

Caterpillar and the Wyckoff Wave moved back into harmony on the reaction to point H. The
Wyckoff Wave was slightly stronger than CAT on the rally to point I. However, since Caterpillar
remained in its down trend and the Wyckoff Wave was now putting in lower tops and bottoms the
trend had been established and Caterpillar was expected to continue its reaction.

Caterpillar then reacted all the way down to point K and moved into an oversold position relative to
its down trend channel. While the Wyckoff Wave also reacted, compare points F and K on both
CAT and the Wyckoff Wave. Caterpillar remained noticeably weaker.

In June 2012, at point K, Caterpillar reached $82.73. It continued to react all the way down to $79.64
in August, 2012. This completed a 36 1/2 point reaction that rewarded short-sellers with some nice
profits.

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CHAPTER 5 - W HEN STOCKS G ET READY TO MOVE
TRADING R ANGES

If an index or a stock is not in an up or down trend channel, it probably is moving sideways. This
would make the trend neutral.

A neutral trend can have one of three important characteristics. It is accumulating, in preparation
for a move to the upside. It is distributing, in preparation for a move to the down side. It is
wandering sideways, without a definable trading range. The third category should be ignored, as
there is probably no professional involvement in the stock. Therefore, we will focus on the first two.

A trading range gives the index or stock time to prepare for its next move. While it is rarely seen and
often ignored, a skyscraper could not reach its pinnacle without a strong foundation or base. This
concept defines accumulation.

An accumulation trading range often begins with a Selling Climax, which marks the end of a
significant reaction. Conversely, the end of a significant rally often results in a Buying Climax

These events are easily recognized by the wide increase in both price spread and volume. In
addition, they often move the index or stock into an oversold or overbought position, relative to its
trend channel.

Once the Selling or Buying Climax has been completed, there must be a rally or reaction to correct
this excessive activity. When this follows a Selling Climax this is called an automatic rally. An
automatic reaction follows a Buying Climax.

The final step in the process is the test of the climactic action. This is called the secondary test. After
the automatic rally or reaction is completed, the index or stock reverses direction and moves back
toward the bottom of the selling climax or top of the buying climax.

If the secondary test is successful a new trading range, or neutral trend has been established. In an
accumulation trading range, a resistance line can be drawn at the top of the automatic rally. A
support line can be drawn through the bottom of the selling climax. If there is a wide disparity
between the bottom of the selling climax and the secondary test, a second support line may be
drawn through the bottom of the secondary test. In a distribution trading range, the resistance line is
drawn through the top of the buying climax and the support line through the bottom of the
automatic reaction.

These lines do not need to be perfectly horizontal, but should be drawn through the resistance and
support points, as the trading range develops.

These lines are extended as we wait for what is known as ending action. Ending action can take
several forms, but the most common are springs and upthrusts. Trading ranges very in their length
and can last anywhere from a few days to a few months.

Charts #6 and #7 are examples of both accumulation and distribution. They will be discussed in
great detail in the next two chapters.
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Chapter 6 - Accumulation & Ending Action

Accumulation

Accumulation is the process by which professional traders establish large positions, in anticipation
of an advance in price. Their goal is to establish these positions before the market rises.

During Mr. Wyckoff's time, those professionals were the major speculators like Harriman, Keene
and J. P. Morgan. Today, in addition to major speculators, many of whom operate using
sophisticated computer programs, the professionals exist in mutual, hedge and even some pension
funds.

During accumulation, these professionals are buying stocks from the public, who, for many reasons,
have decided to sell. The stock is moving from weak hands into stronger hands.

This may happen when a stock has gone through Preliminary Support, a Selling Climax or a Spring.
This liquidation occurs because there is fear the stock may move substantially lower. It may also be
because the stock is inactive, moving sideways and, seeing no progress, it is sold as the trader moves
on to other opportunities.

A stock reacts because there is more selling than buying. Supply has taken over the market. This is
shown in section 1 of the Accumulation chart #8. The selling noticeably increases during
Preliminary Support (point 1) and the Selling Climax (point 2). The stock is being liquidated and
supply is in total control. This completes section 1 on the Accumulation chart.

Section 2 begins with an important change in character. Because so much stock has been liquidated,
little supply remains. This shortage of stock for sale causes a bounce, which is also known as an
Automatic Rally. That is point 3 on the chart.

While the bottom of the Selling Climax may signal the end of the reaction, it needs to be confirmed.
That confirmation is a successful Secondary Test. This is shown as point 4 on the chart.

The reaction to a successful Secondary Test needs to be on narrower price spread and lower volume
than the Selling Climax. It also needs to end at a higher level than the Selling Climax. Once there is a
successful Secondary Test, the end of the down move is confirmed and the stock can begin to move
sideways.

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This sideways movement creates a trading range. The trading range is defined by areas of support
and resistance. The support levels are at points 2, 6 and 8. The resistance levels are at points 3, 5, 7,
and 9. Support and resistance lines are drawn through these points. They are also extended past the
end of the trading range as they could continue to be important as the stock leaves the trading range
to the upside.

While much of the available supply was taken in during section 1, more selling lies ahead. This is
primarily due to the inactivity that happens during the trading range. Investors and traders see little
progress, liquidate their holdings and move on to other opportunities.

Much of this happens early in the trading range and can be seen in wider price spreads and relatively
higher volume. As the trading range develops, price spread and volume will increase on rallies and
decrease on reactions. This is shown on the Accumulation chart between points 4 and 9.

As more and more supply is taken in, price spread and volume decrease. This is shown on the move
from point 9 over to the end of section 2. Notice the noticeably reduced price spread. This also
creates a dullness in the stock, further encouraging more liquidation.

Section 3 is ending action. In this case it is a Spring. The dull period from point 9 has motivated
many of the remaining shareholders to liquidate their stock. This drives the stock through the
trading range support and completes the accumulation process. Controlling interest in the stock is
shifted from weak to strong hands. Very little stock is for sale and the price is easily marked up. The
demand coming into the market confirms that point 10 was a Spring. More detailed analysis of
Springs are covered later in this chapter.

Demand is now in control.

Most Springs must be tested. The quick reaction to point 11 is a successful Secondary Test. This
stock is now ready to advance. In this instance our stock rallied strongly back to the top of the
trading range at point 12. This is the initial Sign of Strength. Like Springs, Signs of Strength need to
be tested. If successful, the bottom of the reaction to test the Sign of Strength is called a Last Point
of Support. It is shown as point 13.

Positions can be taken on the Spring, it's Secondary Test and the Last Point of Support.

The stock has made great progress, but there is one final step. It must leave the trading range to the
upside and do so on good price spread and volume. This is called a second Sign of Strength or a
Jump Across the Creek. The Creek jump will also be discussed in more detail.

After achieving a second Sign of Strength, there is a reaction to a second Last Point of Support.
These are points 14 and 15 on the Accumulation chart.

Once free from the trading range and overhanging supply, the stock rallies towards its upside
objective.

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Accumulation is a sideways movement which takes in supply and creates strong demand. This
sideways movement has one last interesting attribute. It is the foundation of the move. Like a
skyscraper, the stronger the foundation the higher the building. The Point & Figure chart measures
the horizontal width of the trading range. It is uncanny how this measurement also equals the
distance of the subsequent rally.

Wyckoff traders and investors should look for accumulation and be prepared to take positions as
described above. They will not be disappointed.

ENDING ACTION

As an index or a stock moves horizontally through the trading range it is building a cause. The effect
of this cause is the eventual move to the upside or downside. This is called the mark up or mark
down phase. The ending action is an event that causes this to begin. As the stock reaches the end of
the trading range and prepares to leave it in either direction, it is said to be on the Springboard. The
term Springboard applies to action just before both a Spring and an Upthrust.

In most cases a Spring or an Upthrust signals the beginning of an important move. The next
significant step is a strong move towards either the resistance at the top of the trading range (after a
Spring) or the support at the bottom of the trading range (Upthrust). This is called a Sign of
Strength (rally) or Sign of Weakness (reaction). These moves may or may not drive the stock out of
the trading range.

When a stock leaves the trading range the Sign of Strength or Weakness is either called the Jump
Across the Creek or the Fall Through the Ice. These terms were coined by SMI legend Robert
Evans. Mr. Evans created wonderful analogies that helped thousands of students understand and
accept these important market concepts.

If the stock does not leave the trading range, this is called a Sign of Strength or Weakness within the
trading range. This also must be confirmed by a successful Last Point of Support or Supply.

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SPRINGS
PRING S

When the stock penetrates the support level of a trading range and then rallies, this is called a
Spring. Think of the market as a rubber band with one end anchored at the top of the trading range.
As we pull the rubber band through the range's bottom, it stretches. Then, when we let it go it
Springs back. This is the energy that propels the index or stock toward a substantial move to the
upside.

There are three (3) types of Springs. They are the #1 Spring (also called a Shakeout), the #2 Spring
and the #3 Spring. Each of these Springs has their own characteristics.

#1 SPRING OR SHAKEOUT

A #1 Spring or Shakeout drives the stock substantially below the support line on wide spread and
high volume. It can often be mistaken for a Sign of Weakness or Fall through the Ice. (The Ice story
is presented later in this book).

Then strong demand comes into the stock and drives it back into the trading range. Finally, there is
a reaction to test the #1 Spring. If the test is going to be successful, the reaction needs to be on
reduced price spread and volume. It must end above the bottom of the Spring. All Shakeout's must
be successfully tested, before new positions can be taken.

Since the #1 Spring substantially penetrates the support, the subsequent rally must be on wide price
spread and relatively high volume. If this, which indicates the presence of demand, is not present,
what was thought to be a #1 Spring, is actually a Sign of Weakness. The subsequent rally would
then be a Last Point of Supply.

When a stock moves through a support point, at the bottom of a trading range, it does not
automatically signal there has been a Spring. The key is if demand comes into the stock and it rallies
strongly back into the trading range.

The United Technologies chart, chart #9, gives us an example of a Shakeout or #1 Spring

After a rather steep decline, UTX experienced Preliminary Support at point A and a Selling Climax
at point B. It then moved into a trading range. A resistance line is drawn through the resistance tops
at points C and D.

UTX then reacted and penetrated the support line drawn from point B. The penetration was on
wide price spread and relatively high volume. Then the price spread began to decrease, but the high
volume remained. This was a preliminary indication that demand was coming into the market.

Then UTX rallied strongly, on wide price spread and volume, back towards the bottom of the
trading range. After absorbing some additional supply, it continued to rally to point F. The reaction
to point G was on reduced relative volume. The lower volume levels and the ability to hold above
the support line drawn from point B indicates this was a successful test of the #1 Spring.

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UTX then rallied to point H. In doing so it penetrated the resistance at the top of the trading range
for a Sign of Strength. It then backed up to point I for a potential Last Point of Support. However,
price spread and volume were still relatively wide and high.

The stock then rallied to point J, but ran into more supply. This meant United Technologies needed
to back up to the Creek and take in the remaining supply. The stock did that on the reaction to point
K. Notice that the relative volume was lower at point K then at point I. Point K was the Last Point
of Support.

An aside on stop loss orders. If UTX had been purchased at point I, the stop loss order should not
have been moved until UTX rallied past the high at point J. A premature move of the stop loss
order, would have resulted in the loss of an important opportunity.

A stop loss order is an order that is placed, to buy or sell, if a stock reached a certain price. This
price would be reached only if the stock didn't perform as expected. This limits the investor's loss
for a specific trade. A good Wyckoff student never trades without a stop order. However, if a trade
goes badly, it should be closed before the stop loss order is actually executed.

United Technologies then rallied to the $75.00 area. The best buying opportunities were at points G,
I and H.

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NUMBER 2 SPRING

A Number 2 Spring is a penetration of the support on more moderate price spread and volume then
is found on a #1 Spring or Shakeout. A Number 2 Spring also needs to be tested to confirm its
success. However, if strong demand is seen during the Spring, it is quite acceptable to "buy the
Spring". This demand will appear during the trading day. The Wyckoff trader needs to be fairly
nimble if they are going to take a position on the #2 Spring. The demand needs to return the stock
back into the trading range.

A successful test of a #2 Spring means that it holds above the Spring's low price. If it does not, this
is considered a poor quality test and the Spring needs to be retested successfully, before a Sign of
Strength rally can begin.

Chart #10, of Raytheon, is an excellent example of a #2 Spring.

Raytheon concluded a reaction with a Selling Climax at point A. In this case there was no
Preliminary Support. This was followed by the automatic rally to point B and secondary test to point
C.

RTN then began a trading range which ended with a #2 Spring at point F. Notice the increased
volume as Raytheon penetrated the support line at the bottom of the trading range. This is a classic
#2 Spring. The stock reacted sharply on the day before the Spring and good demand came into the
stock as it penetrated the support line. This was followed by wide price spread and good volume as
Raytheon rallied strongly to point G and then began to react to test the Spring.

While this is not your classic Secondary Test, it is important to understand that a test of the Spring
does not need to be perfect. Instead of reacting on reduced price spread and volume, it appears that
the test was on increased price spread and reduced volume.

However, a close look at the day marked H shows Raytheon experienced an intra-day failure to the
downside and closed almost at the top of the trading range. As the stock reacted on that day, supply
simply disappeared. No stock was for sale at these low levels and RTN rallied easily and put in a
strong close. This indicated a lack of supply, which was exactly what we are looking for during a
secondary test. Most important of all was that RTN held above the #2 Spring at point F. If it didn't,
this would have been a failed Secondary Test.

Then the stock rallied and jumped both the minor resistance line, drawn from point G and a more
important resistance line drawn from point E. It then rallied to point I and reacted back to point J.
Was this a Sign of Strength and Last Point of Support? The relatively high price spread and volume
on the reaction to point J says supply was not drying up and, therefore, this was not a Last Point of
Support (LPS).

Instead, the rally to point K was the Sign of Strength and the reaction to point L the Last Point of
Support. See how the price spread narrowed and volume, marked by the down arrow, was greatly
reduced. Positions in Raytheon could have been taken at points F, H, and L.

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NUMBER 3 SPRING

A #3 Spring occurs when the support, at the bottom of the trading range, is only slightly penetrated
on light volume. A #3 Spring does not need to be tested. If good demand comes into the stock, the
Sign of Strength rally will begin immediately.

Despite their subtleties, a #3 Spring can be extremely powerful and is often the beginning of a
strong move to the upside. Positions can be taken on #3 Springs.

Chart #11, of J. C. Penny (JCP), is an excellent example of a #3 Spring.

JCP completed a deep reaction with a Selling Climax at point A. The automatic rally was to point B
and the secondary test to point C. JCP then established a trading range with the resistance (Creek) at
points D, E, F and G. The support line was drawn from the bottom of the Selling Climax.

At point H, JCP briefly and very slightly penetrated the bottom of the trading range. The price
spread and volume were narrower and lower than the past few trading days. This was a classic #3
Spring.

Demand came in and moved the stock higher to point I. In the process, it crossed the resistance or
lower bank of the Creek (line drawn from point G). This is a Sign of Strength. It was immediately
followed by reduced price spread and volume. The reaction was very slight and actually moved
sideways. There was no supply present to come into the market and drive J. C. Penny back down
towards the bottom of the trading range. Point J is a Last Point of Support.

Positions could have been taken on the Spring at point H and on the Last Point of Support at point
J. As you can see, in the next two months J. C. Penney more than doubled in price. That is why #3
Springs can be unbelievably powerful and produce amazing results.

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SIGN OF STRENGTH

A rally that follows the successful completion of a Spring can be called a potential Sign of Strength
(SOS). Each Sign of Strength must be confirmed by a reaction that dries up any remaining supply.
This is called a Last Point of Support (LPS).

A Sign of Strength follows a successful test of a #1 Spring (Shakeout) or a #2 Spring. It will

immediately follow a #3 Spring, as it does not need to be tested.

Signs of Strength come in two forms. The first type begins with a rally off the Secondary Test or a
#3 Spring. It does not penetrate the resistance at the top of the range.

The second form penetrates the resistance at the top of the trading range and moves into new high
ground. This SOS can develop in two ways.

It can begin directly after a successful Secondary Test or

It can begin after a successful LPS from a Sign of Strength that stays within the trading
range.

A Sign of Strength is just that. A strong rally on good price spread and strong volume. Demand has
taken over the market.

THE C REEK STORY

The Creek story is a wonderful analogy that compares the rally through the top of a trading range to
a young boy walking across a field.

As the lad walks through the field he comes to a winding creek that stands in the way of his journey.
Naturally, the boy wants to cross the creek, but doesn’t want to get wet in the process. Therefore, he
walks up to the creek to see if he can make the jump. This corresponds to the initial Sign of
Strength. He then moves back away from the Creek so he can get a running start. This is the initial
Last Point of Support.

Then, the boy starts to run back toward the creek. Reaching the bank, the boy jumps as far as he can
and lands on the other side. His momentum has propelled him past the creek and into the second
field. He made it. He is safe, sound and dry.

In Wyckoff terms, this is called a major Sign of Strength and is what propels indexes or stocks out
of the trading range and into their mark–up phase. However, our little story isn’t quite finished.

The boy is quite proud of his accomplishment and walks back to the creek to see where he landed.
He sees that this side is quite muddy and slippery and he must be careful not to fall back in. He
knows that it is okay to get a little wet, but if he slips and falls the current will carry him back toward
the other bank and he will end up right back where he started.

The boy is careful. He walks slowly back to the creek, surveys his excellent landing and then
continues his journey across the field.
49
Walking slowly back towards the creek, without falling in, symbolizes a major last point of support
and confirmation that a major up move has begun.

What if the boy was careless and he stepped into the water? How does that scenario play out?

If the boy was careless and stepped back into the creek, several things can happen. The good
Wyckoff trader needs to be aware of them all and take appropriate action.

Like any Creek, the Creek line drawn along the tops of a trading range has two banks. The upper
bank and the lower bank. The lower bank can be found by drawing a second line, from the top of
the last highest resistance point, down through a lower resistance level at the end of the trading
range. The line then extends to the right, below the main creek line. When backing up, an index or
stock can, and often will, slightly penetrate the Creek before resuming its advance. This is okay if the
reaction doesn’t go too far back into the creek

If the reaction continues past the middle of the creek, like the boy, the index or stock can get
washed back to the original bank. This returns the index or stock to the trading range and negates
both the Spring and the Sign of Strength..

Lets analyze both Signs of Strength..

The first study of Verizon Communications (VZ), on chart 12, is an example of a Sign of Strength
within a trading range.

The second is of Precision Castparts (PCP). Both a Sign of Strength within a trading range and a
major Sign of Strength (Jump Across the Creek) are included in that analysis.

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SIGN OF STRENGTH WITHIN A TRADING R ANGE

In October 2008, Verizon (VZ) completed a 50% reaction with a Selling Climax at point A. There
was an automatic rally to point B and a secondary test at point C. Verizon then began a sideways
movement and formed a trading range, bounded by support at point C and resistance at point D.

Then Verizon moved sideways for almost 2 years before there was ending action at point G. While
this may seem like a long time, it is actually an excellent example of the rotation concept. The
Communications Group Leadership Stock is AT&T. It also went through an accumulation period
that ended at the same time. By following the Group Leadership Stocks in the Wyckoff Wave, the
Wyckoff investor would have seen the Ending Action in AT&T and then looked at other stocks
within that group.

Verizon had a Spring at point G. While the stock barely penetrated the trading range, it did so on
relatively high volume. This was a #2 Spring.

Verizon responded to the Spring with a rally to point I. The reaction to point J was the Secondary
Test. This Secondary Test was an opportunity to take a position in Verizon, if it was not taken on
the Spring, or add to an existing position.

While an aggressive trader may have taken a position at point H, just after the Spring, it was a high-
risk decision. Not enough demand had come into the stock to confirm the Spring. It is better to wait
for a correctly defined Secondary Test. Even if you miss out on a few points to the upside, you will
be more successful over the longer-term. There is an old sports axiom that says "Let the game come
to you". It also applies to the stock market.

Verizon then rallied to point K on good price spread and volume. This was the Sign of Strength
(SOS). It then moved sideways and reacted slightly to point L. This reaction took almost two
months, but Verizon only lost about two points. In addition, the relative volume was reduced. Point
L was the Last Point of Support.

Verizon then penetrated the top of the trading range (Jumped the Creek). It then moved sideways in
a re-accumulation trading range, before continuing the rally. Patient long-term investors who held
onto the stock have seen the price double. Shorter term traders took profits when they saw the
uptrend channel weakened at point Q and then broken at point S.

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SIGN OF STRENGTH WHEN LEAVING THE TRADING R ANGE (CREEK JUMP)

In October 2008, Precision Castparts, chart #13, completed a major reaction, with Preliminary
Support at point A and a Selling Climax at point B. After the automatic rally to point C and
Secondary Test at point D, PCP went into a trading range. The resistance was identified at points C,
E, G, I and K. Support was at points D, F and H.

PCP had a #2 Spring at point J. It rallied to point K and successfully tested the Spring at point L. In
addition to taking a position on the Spring, new or additional positions could be taken at point L.

While the response to the Spring was very strong, the rally from point L to M was even stronger.
PCP moved quickly through both branches of the Creek and continued all the way to point M. This
was a definitive Sign of Strength. The stock gained over 40% in three months.

Precision Castparts then began to react back to the Creek. The reaction took a month and PCP
found support, just below the top of the trading range, at point N. For the most part, the reaction
was on relatively reduced price spread and volume. This was especially true during the last six
trading days leading up to the bottom of the reaction at point N. This was a major Last Point of
Support. A reaction on reduced price spread and volume indicates that supply (shares for sale) is
reducing, drying up.

The stock continued its rally and in January, 2014 reached $272 a share. This was a 440% gain from
point J.

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A SIGN OF STRENGTH WITHOUT A SPRING

A stock is not required to experience ending action, in the form of a Spring, to move out of its
trading range and begin its next move. A Sign of Strength (SOS) is required.

In this instance, the Sign of Strength must be a major Sign of Strength. It can be identified as a
strong rally through the resistance at the top of the trading range. The earlier mentioned "Jump
across the Creek". The Sign of Strength must be confirmed by a Last Point of Support (LPS).

Chart #14 of Allergan examines this in more detail.

The 2008 bear market had a significant impact on Allergan (AGN). It reacted back to a five-year low
and experienced Preliminary Support at point A. The reaction ended with a Selling Climax at point
B. After an Automatic Rally to point C and a successful Secondary Test to point D, Allergan began
moving sideways in a trading range. The range's support line is drawn from point D and the
resistance line is drawn through points E, F, H and J. As Allergan moved to point H, notice the
higher tops and higher bottoms. This is one indication that the stock is being accumulated.

Allergan then reacted to point I. Some could argue that this was a Spring as the stock reacted below
point G. However, this would've been difficult to identify in the moment, as the real support was
based on the low at point D. In my opinion, point I was not a Spring.

Allergan then rallied back to point J and backed off slightly to point K. While, on the chart, it looked
like a good place to take a position, cover up everything to the right of point K.

There had been no ending action in the form of a Spring. Therefore, there was no reason to doubt
that AGN was still continuing the trading range. The Wyckoff trader needs to wait for ending
action. That would come in the form of a Spring or a Sign of Strength. Until then, it would not be
wise to take a new position.

Then, look what happened. There was wide price spread and extremely high volume to the upside.
Strong demand came into the market. This is a classic Sign of Strength or Jump Across the Creek.
After seeing this, the Wyckoff investor would look for a corrective reaction down to a Last Point of
Support.

That didn't immediately happen. Instead, Allergan still needed to take in some overhanging supply,
that was left over from the 2008 highs. The reaction to point M was on good price spread and
relatively high volume. This was not a successful Last Point of Support. However, it was a positive
indication as Allergan held above the trading range resistance line (Creek).

The reaction to point N was more positive. Notice the reduction in the price spread and volume
when comparing the reactions to points M and N. The reaction to point N was on noticeably
reduced price spread and volume. This indicated supply was being withdrawn, or drying up. This
opened the door for demand to come into the stock and cause it to rally. Therefore, point N was the
Last Point of Support.

After pausing one last time at point O, Allergan began a substantial rally. By July, 2015 it traded at
over $340 per share.
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R E- ACCUMULATION

Once a stock has gone through accumulation and experiences successful ending action, it begins its
uptrend. It is not uncommon for a stock to pause during this rally and, once again, begin moving
sideways. If, after this sideways trading range, the up trend continues, this trading range would be a
period of re-accumulation.

Re-accumulation can begin in one of several ways.

A stock can have a major Sign of Strength (Jump the Creek). Then, instead of reacting and
putting in a Last Point of Support, it moves sideways in a new trading range.

The stock can experience a normal corrective reaction, go through a period of re-
accumulation, experience successful ending action and resume its uptrend.

The stock can simply roll over and begin moving sideways. This is usually due to a
withdrawal of demand. If, at the end of the sideways move, the stock experiences successful
ending action, it would resume its upward trend.

The stock could go through a minor Selling Climax and establish a more traditional trading
range. Once again, successful ending action would result in a resumption of the upward
trend.

The following chart of American Express (AXP) is an example of re-accumulation.

Chart #15 is the weekly chart that shows the re-accumulation trading range that occurred in the
middle of a major up trend.

Notice that, at the end of the 2008 – 2009 bear market, there was no climactic action or an
accumulation trading range.

American Express simply rallied as it enjoyed the momentum of the new bull market. It wasn't until
the re-accumulation marked on the AXP charts that the professionals began to take an interest in
American Express.

This is not uncommon. Wyckoff teaches students to look for specific areas of distribution and
accumulation when considering new positions. These events suggest professional activity is taking
place in the stock. As professionals are not involved in all stocks, all the time, a stock can rally, react
or move sideways, more in relation to the market's activity, then to a professional interest in the
stock.

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In May, 2012 American Express completed its rally from the bottom of the bear market to point A
on the daily chart #16 of American Express. Then it reacted to point C, where it experienced a
Selling Climax. Point B was Preliminary Support.

American Express then moved sideways establishing the resistance and support points that
comprised the trading range. Since a well defined trading range was forming, AXP became a
candidate for a new position to the upside. The strategy was simply to wait for ending action, before
taking a position.

Ending action occurred at point O when AXP had a #2 Spring. It rallied to point P and experienced
a successful Secondary Test at point Q. The Secondary Test was on relatively wide price spread and
volume. While this was not your normal Secondary Test, AXP held above the #2 Spring and it
quickly returned to the trading range.

While this was not a textbook Secondary Test, these are not abnormal. The key to the successful test
was that it held above the Spring and good demand that came in to American Express at point Q.

It is also important to note that at both the Spring and its Secondary Test, AXP's Technometer was
in an oversold condition. The Technometer, which will be discussed later in the book, is an
important Wyckoff tool. It helps identify changes in a stock's direction. When a Technometer
reading is 42 or below, the stock is considered oversold. At the Spring, the Technometer read 37.56.
It was 34.38 at the Secondary Test. In both cases, the Technometer responded to an oversold
condition and the stock rallied.

AXP rallied to point R at the top of the trading range. This was a Sign of Strength. The reaction to
point S was a Last Point of Support. Notice the relatively reduced volume on the reaction, especially
when compared to point Q. In addition, the Technometer reading was 39.19. Once again, AXP
rallied out of the oversold condition.

On the rally to point T, American Express Jumped the Creek and left the trading range to the
upside. This was a major Sign of Strength. The subsequent reaction ended at point U, with a Last
Point of Support.

Notice the relatively long sideways movement in the area of point U. Volume stayed relatively high,
but price spread narrowed. A battle was being fought between demand and supply. The inability of
American Express to react back into the trading range indicated that demand had the upper hand.
This was confirmed by the Technometer reading of 35.06, at the end of the sideways movement.
Once again, American Express responded to the Technometer's oversold condition and rallied.

This study of American Express is an example of how one can use all the Wyckoff tools to help
make informed trading decisions, even though the stock is not acting in a perfect manner.

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As the re-accumulation trading range developed, AXP built a substantial cause to the upside. The
base count was taken along the $54 line from the Spring at point O over to point C. This was a
count of 21 points, which produced an objective of $75 per share.

A more aggressive 26 point count, taken from the Sign of Strength, along the $59 line, produces an
objective of between $80 and $85 per share.

In June 2013, American Express reached $78.28. It then went into a second re – accumulation
trading range which produced new objectives of between $90 and $92 per share. On July 1, 2014,
AEX reached $96.24.

The Wyckoff student who waited for the professionals to take an interest in the stock and then
followed their lead, received an excellent reward.

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Accumulation In Two Real World Stocks

The Accumulation line chart discussed earlier in this chapter, is a perfect example of accumulation.
Unfortunately, we live in a imperfect world. Therefore, real-world trading range accumulation
doesn't always fall into the "perfect" pattern.

The following two, real-life, examples will be analyzed in detail. They were selected because even
though they reached their objectives they did not do so in a traditional manner.

Exxon Mobil (XOM)

Chart #18 of Exxon Mobil is an excellent example of accumulation, with a tricky Secondary Test
and unusual Last Point of Support.

In August 2011, Exxon Mobil went through a Selling Climax that is marked at point A. There was
an Automatic Rally to point B and a successful Secondary Test at point C.

Then, Exxon Mobil began to move sideways in a fairly narrow trading range. The range is marked
by the support line drawn from point C and the resistance line drawn from point B. It is helpful to
extend these lines past any ending action as they often come into play after the stock leaves the
trading range.

In late September, Exxon Mobil had a #2 Spring at point I. It quickly rallied to the top of the
trading range, where it encountered some expected resistance. Then XOM reacted and completed a
successful Secondary Test. This happened at point K.

The traditional Secondary Test is on reduced price spread and volume. At first glance, on the day
marked point K, there was increased price spread and higher volume. This is totally contrary to the
traditional Secondary Test.

A Secondary Test is defined as a drying up of supply, as a stock reacts and tests the Spring. Once
supply is dried up, strong demand comes into the stock. Then the stock rallies and begins a Sign of
Strength. Usually this process happens over a couple of trading days.

A closer look at the days market action indicates that XOM experienced an intra-day failure to the
downside. After a gap opening to the downside, XOM only reacted slightly. It then encountered
demand, rallied sharply and put in a strong close.

In this case, the drying up of supply and demand coming into the stock all happened on the same
day. An intra-day analysis would show reduced volume, which indicated a drying up of supply,
between the opening and its low for the day.

Then strong demand came into the market. This is shown by the wide price spread and strong
volume.

Finally, at point K, XOM was noticeably higher than the Spring at point I. This represents a
successful, but unorthodox Secondary Test.

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How do the Wyckoff traders take a position in this unusual situation, without spending all day
monitoring their computers?

Many professionals prefer to trade in the afternoon. A quick check of XOM, later in the trading day,
would have shown the Secondary Test was successful and presented an opportunity to take a
position.

Then XOM rallied to point L. The rally was a Sign of Strength. Exxon Mobil rallied through the top
of the trading range on wide price spread, but reduced volume. This indicated a lack of supply.
Normally good demand is expected as a Sign of Strength develops. The strong demand easily takes
in any existing supply and drives the stock up.

In this case, the lack of supply eliminated any downward pressure on XOM and it easily rallied
through the top of the trading range.

However, it is often the case that when events don't happen in the expected manner, problems can
arise in the near future. This suggests, that in these situations, the Wyckoff trader needs to pay a bit
more attention than normal.

This Sign of Strength also included a "Creek Jump". This is because XOM rallied nicely through the
top of the trading range and continued to point M.

At point M, the stock closed at 81 7/8. That was the phase 1 objective on the Point & Figure chart.

Here was an opportunity to take some quick profits. Or, the stock could be held in expectation that,
eventually, the rally would continue.

After a successful Sign of Strength, XOM was expected to react and quite possibly put in a Last
Point of Support. A successful Last Point of Support would be another opportunity to take
additional positions to the upside.

A Last Point of Support is identified with reduced price spread and volume. In this case, the
reaction also needs to hold above the top of the trading range. A Last Point of Support, after a
major Sign of Strength, is also called a "Back up to the Creek".

XON reacted off point M, but did so on relatively wide price spread and increasing volume. This is
not what is expected from a Last Point of Support. This was the first "problem".

The overhanging supply that was not present when XOM rallied to point L came into the stock at
point M. XOM was not going to be able to continue its rally until the supply was dried up and a
successful Last Point of Support was confirmed.

If XOM continued to react and fell back into the trading range, it would be unable to continue the
mark up phase. In that case stop orders should be executed and positions closed.

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However, XOM held above the trading range and rallied to point O. This was an indication that
while some supply was still present, there was still an opportunity for a successful Last Point of
Support.

That opportunity came at point P. This time XOM reacted in a different manner off point O. The
price spread was relatively narrow and volume was reduced.

While at point P, XOM reacted slightly through the top of the trading range. It was very minor and
more importantly brief. The stock also successfully tested its upward trend channel. The fact that it
did so on reduced price spread and volume was an indication the test would be successful and XOM
would begin the next phase of its markup.

Supply was finally dried up. This confirmed that point P was a successful Last Point of Support. In
addition, the Technometer reading at point P was extremely oversold. This combination of reduced
price spread and volume, along with an extremely oversold Technometer made Exxon Mobil an
extremely good opportunity to the upside.

XOM continued to rally. It reached its second phase objective of $87 in January, 2012. In July, 2014
XOM closed at $104.28.

While XON did not perform in a perfect manner, Wyckoff students would've seen substantial
profits by taking positions in the stock.

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MasterCard (MA)
Another example is MasterCard (MA). MasterCard began its accumulation trading range in late
January, 2014. This occurred just after its major 10:1 stock split on January 9th.

The reaction to point A, on chart #20, was Preliminary Support. MA rallied to point B. It then
reacted and went through a Selling Climax at point C. The rally to point D was the Automatic Rally.
The reaction to point E was a successful Secondary Test of the Selling Climax.

MasterCard then began to move sideways within a trading range. The top of the range was defined
by a resistance line that began at point D and continued over to point Q. The trading range support
line began at point E and continued over to point R.

Now it would be easy to gloss over the trading range and move directly to the Spring at point T.
However, looking at this chart now is reviewing past history. When you are analyzing stocks, for the
purpose of taking new positions, events are happening in real time.

If you cover up everything to the right of point K, what do you see? MasterCard rallied past the
previous highs at points H and I. It is attempting to leave the trading range to the upside.

That attempt was on reduced price spread, increased volume and a poor close. These are the
characteristics of an Upthrust.

Then MasterCard reacted and rallied to point L. The rally was on reduced price spread and volume
and appears to be a Secondary Test of the Upthrust.

What is going on? Why is there an Upthrust in an example of Accumulation?

While this is not uncommon during Accumulation, the Wyckoff trader must take this scenario under
consideration.

While we will get into a more detailed discussion of Distribution and Upthrusts in the next chapter,
it is important to note that when a stock reacts after an Upthrust, it does so quickly and definitively.
In this case MasterCard took several days to react to point M. It is also important to note that the
stock found support at a higher level than it did at point J.

In addition, MasterCard is behaving like a stock should during accumulation and that, until proven
otherwise, that should be the prevailing scenario.

For example, if MasterCard did not experience a Selling Climax and there was not an Automatic
Reaction or Secondary Test, this would change the stock's outlook.. That could be indications that
MasterCard was beginning re-distribution.

Instead, it was just the opposite. The Wyckoff student should remember this when something
happens that doesn't quite match normal expectations. This doesn't mean it's wrong, but extra care
should be taken in analyzing the situation.

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Just to confirm that point, MasterCard rallied and tested point M at point N. This successful test
eliminated the Upthrust scenario from consideration.

While selling short at point K might've been an opportunity for an aggressive short-term trader, the
gain was only a few points and there was a fairly high risk/reward ratio.

Something else also happened on the way to the Spring. On the reaction to point R, MasterCard
moved below past earlier lows at points M and N. Was point R a Spring?

There are two factors that indicate it was not, but simply a reaction in the trading range.

The first is that MasterCard held slightly above an earlier low at point J. Also, notice the response to
the suspected Spring.

After reacting through support, a Spring is confirmed by strong demand coming into the market.
On the two days following point R, MasterCard rallied, but on reduced price spread and volume.
This indicated a lack of demand and eliminated any possibility that point R was a Spring.

This was confirmed by the reaction to point T, which was the long-awaited Spring.

After the Spring at point T, Mastercard rallied to point U and reacted to point V. The rally was the
response to the Spring and the one day reaction to point V was the Secondary Test.

Let's look at these in more detail. Most of the time a Spring occurs over one or two trading days.
This Spring took four days to complete. Volume remained constant on the first day, but increased
noticeably during the last three days. Then, MasterCard rallied to point U on relatively low volume.

This is not how your typical Spring plays out. It appears, as the professionals took MasterCard down
through the bottom of the trading range, more supply was present than anticipated. This caused a
three-day battle between supply and demand.

Demand won and, in the process almost all the supply was taken in. Since little supply was present,
there were very few sellers left and the stock was easily marked up.

As is often the case, the Secondary Test was brief, but on reduced price spread and volume. This
confirmed the Spring's success. It put MasterCard in a position to begin its Sign of Strength..

So far, there were two buying opportunities. The first was on the Spring at point T. The second on
the Secondary Test at point V. However, as the Spring and the rally off the Spring did not perform
in the expected manner, the Secondary Test offered the most logical entry point.

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After the successful Secondary Test, MasterCard rallied to point W. The rally was a definitive major
Sign of Strength. The Sign of Strength quickly took MasterCard through the trading range and into
new high ground.

Then MasterCard reacted to point X. The reaction was on reduced price spread and volume. This
indicated a drying up of supply. Point X was a Last Point of Support.

Once there was a successful secondary test, a trend channel can be drawn on the vertical line chart.
The channel's support line is drawn from the Spring point T through the Secondary Test at point V.
A parallel supply line is drawn from the high at point U.

MasterCard's strong rally kept it in an overbought position relative to the channel until it reacted
back to point X for the Last Point of Support. It then remained in the channel until it reached the
high at point Y.

What are MasterCard's rally objectives? Its Point & Figure chart #21 is an excellent way to
determine them.

The first count, marked as the initial phase 1, on MasterCard's Point & Figure chart, was 19.
This gave MA an initial objective of $89.00.

On December 5th, two months after the Spring, MasterCard reached point Y at $89.08. Those who
closed their positions and took profits enjoyed a 28% gain.

Let's return to the vertical line chart. MasterCard reacted on good price spread and volume to point
Z. It also dramatically weakened its up trend channel. The inability to return to that channel on the
rally to point AA signified the trend was broken. For now, it is changed to neutral.

The relatively high volume at point Z suggested some climactic action and it appeared MasterCard
was ready to begin a new trading range. In this case it was re-accumulation.

The same principles apply during re-accumulation as they did in the original trading range.
MasterCard moved sideways and established both support and resistance levels. It then went
through a Spring at point BB. This was followed by a one-day rally. While the rally was on good
price spread and volume, MA reacted during the afternoon. The day's market action was both the
response to the Spring and the beginning of the Secondary Test

The next day MasterCard experienced an intra-day failure to the downside and closed near the top
of its price spread. This was a completion of the Secondary Test. It was also the beginning of a Sign
of Strength. The Sign of Strength ended at point CC. MasterCard then reacted to point DD and put
in a Last Point of Support.

Notice that the reaction to point BB held at the halfway point of the rally from the Spring, at point
T, to point Y. Holding at, or above, the halfway point is a bullish indication. It helps confirm the re-
accumulation trading range and indicates there is more room to the upside.

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If MasterCard had not gone through re-accumulation, because it held at the halfway point of the
earlier rally, the reaction to point BB would be considered a normal corrective reaction.

The reaction to point BB provides an opportunity to draw a longer term up trend channel. It is
drawn in blue with the support line beginning at point T and drawn through point BB. A parallel
supply line is drawn from point Y.

Notice that MasterCard did not reach the supply line on the rally to point E and reacted into a
slightly oversold position at points FF and HH. This worsened on the reaction to point II. Finally,
the trend channel was broken at point JJ and the rally ended at $97.75

Let's return to MasterCard's Point & Figure chart. The complete count, along the $70 line, in the
initial trading range, was 29 points. That gave MA a maximum objective of between $98 and $99 per
share.

There was a confirming count, taken along the $84 line, in the re-accumulation area. This count
provided an objective of between $92 and $96 per share. In August, 2015, MasterCard slightly
exceeded that objective, before reacting.

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Chapter 7 - Distribution
Distribution is the process by which professional traders close large long positions, by selling their
shares to the public. The buyers are often buying on good news and they don't want to miss out on,
what they think, will be continued move to the upside. Unlike the accumulation process, stock is
now moving from strong back to weak hands.

An area of distribution is a trading range, that prepares a stock for a strong move to the downside. It
involves the elimination of those large long investment positions and short selling large blocks of
stock.

Distribution trading ranges are usually comprised of five sections. They will be discussed on both
the Upthrust After Distribution (Chart #22) and Distribution, No Upthrust (Chart #23).

As the stock reaches the end of its up move, the professionals attempt to stop the move by
beginning to liquidate shares of stock. Spurred on by good news and a rising stock market, the
buying public, imagining great profits lie ahead, are aggressively purchasing as much stock as
possible.

At the same time, the professionals are liquidating their shares. The selling can be seen on the chart
as both Preliminary Support and a Buying Climax. The Buying Climax completes section 1 on the
Distribution chart.

Often, these events are preceded by a sharp advance as the stock moves into a significant
overbought position relative to its upward trend channel. This phenomena is known as "whooping it
up".

Once the up move is stopped, the stock begins to move sideways in a trading range. Like
accumulation, both support and resistance lines are established. These form the trading range
boundaries.

It is important to understand that the trading range will not be completely confirmed as distribution,
until goes through ending action. This ending action, which will be discussed in detail, is found on
section 3 of the distribution line charts.

Despite the Buying Climax, the trading range that follows may not be distribution at all. Just because
strong hands liquidated stock and took profits, does not automatically mean they are distributing
stock in preparation for a strong move to the downside.

In addition, only a portion of the trading range may actually be distribution. That's why it is helpful
to divide trading ranges into phases and make sure the most conservative point and figure chart
counts are worked out before assuming the count will reach its maximum objectives.

A stock in distribution moves sideways, in a defined trading range, until there is ending action.
Once there is ending action, the markdown phase happens rather quickly. The stock will react hard
and fast. Bear markets don't last nearly as long as bull markets. That's because panic sets in and
everyone is selling, trying to get out even or with a small loss.

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Like accumulation, there can be different types of ending action. The most common forms of ending action, in
distribution, are the Upthrust and Sign of Weakness. The Upthrust is better known and more apparent. However, a
stock can simply experience a Sign of Weakness and begin its move to the downside. The following charts offer
examples of both.

Upthrust After Distribution

On chart #22, after completing Preliminary Support and a Buying Climax in Section 1, the stock experiences an
Automatic Reaction and then rallies for a Secondary Test. A successful Secondary Test confirms the Buying Climax
and indicates that the up move has been stopped. The rally, to a successful Secondary Test, should end below the top
of the Buying Climax and be on reduced price spread and volume.

The purpose of the Secondary Test is simply to confirm the up trend has been halted. If the Secondary Test ends at a
higher price than the Buying Climax, the process needs to be repeated, before it can be confirmed that the up move
has ended.

Once the up move is stopped, the stock can begin to move sideways in a trading range. Like accumulation, both
support and resistance lines are established. These form the trading range boundaries.

There are points of resistance at the top of the range and points of support at the bottom of the range. Once the
Secondary Test is confirmed, a stock can move slightly above the Buying Climax high as it establishes its trading range.

Notice the resistance and support lines are not horizontal. They are drawn to conform to the points of resistance and
support that are established as the trading range develops.

Generally, a distribution trading range features increasing price spread and volume on reactions and decreasing price
spread and volume on rallies. This doesn't always happen, but as the trading range develops it is important to watch for
increasing indications that supply continues to be present.

Remember, the trading range will not be confirmed as Distribution until it goes through ending action. Ending action
is found in section 3 on the Upthrust after Distribution line chart.

Ending action can be an Upthrust or a Sign of Weakness (SOW). This Sign of Weakness is discussed in more detail in
the Distribution, No Upthrust section.

The Upthrust creates a completely false impression as to the stock's real direction. Undisciplined traders think the
stock, after moving sideways, is beginning an important rally. They quickly enter buy orders, so they won't be left
behind as the stock begins this "wonderful new rally". When a stock tries to leave its trading range to the upside, it can
Upthrust the trading range. An Upthrust is identified by reduced price spread, high volume and a poor close. At a
critical time, the attempt to rally encountered strong supply and it failed.

This is what the professionals have been waiting for. They happily sell their stock to the inexperienced buyers. Soon,
the supply outweighs the demand and the stock collapses.

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81
Once again, an upthrust is defined as moving through the top of the trading range, but the price spread narrows,
volume increases and there is a poor closing price. Supply has taken over the stock.

While it can certainly occur, an Upthrust does not require a secondary test. This is because the large amount of supply
coming into the market will simply cause the stock to immediately react into a Sign of Weakness.

An Upthrust is the first opportunity to take a short position. Remember, the Upthrust is confirmed by the amount of
supply coming into the market. Wait for that supply to present itself, before taking a new position.

The Signs of Weakness are found in section 4. It is not uncommon for there to be two Signs of Weakness as the stock
begins to react.

The first Sign of Weakness can be confined to, or slightly below, the trading range. This would be a strong reaction on
wide price spread and good volume. The subsequent rally to a Last Point of Supply (LPSY) would be on reduced price
spread and volume. This occurred on the reaction to point 14 and the rally to point 15. This Last Point of Supply was
the second opportunity to take a position to the downside.

The rally to a Last Point of Supply can be extremely short and fast. It is not uncommon for it to last for only one
trading day.

It would be quickly followed by a second Sign of Weakness. This is shown in section 5 of the Upthrust After
Distribution line chart.

This Sign of Weakness would drive the stock down through the support at the bottom of the trading range. Again,
there would be wide price spread and good volume. This is also known as a "fall through the ice". This occurred on the
reaction to point 16.

The final step is the rally to a final Last Point of Supply. This rally will also be on reduced price spread and volume.
The stock will be unable to return to the trading range. Like the first Last Point of Supply, it can happen quickly.
Suddenly the stock will begin its markdown phase. The Last Point of Supply at point 17 was the last place to take a
position in this distribution trading range

Once the downtrend has begun and trend channels drawn, additional short positions can be taken on rallies within the
downtrend.

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Distribution Without An Upthrust

The first two sections of the Distribution Without an Upthrust line chart #23 are the same as on the
Upthrust line chart.

In section 3, at point 9, there is an effort to take the stock through the resistance at the top of the
trading range. That effort failed. There was no upthrust, but the stock reacted sharply to the bottom
of the trading range at point 10. This was a Sign of Weakness, without an Upthrust.

While we can call it a Sign of Weakness now, it is not really a Sign of Weakness until it is confirmed
by a rally culminating in a Last Point of Supply. That's what happened at point 11.

The rally from point's 10 to 11 was on reduced price spread and volume. Point 11 was the first place
in this trading range to take a position to the downside.

This was followed by a second Sign of Weakness to point 12. The stock "fell through the ice". Then
there was one more rally to the final Last Point of Supply, at point 13. Another position to the
downside could have been taken at the final Last Point of Supply

Once the downtrend has begun and trend channels drawn, additional short positions can be taken
on rallies within the downtrend.

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U PTHRUSTS

An Upthrust is the opposite of a Spring. This time the rubber band is anchored to the bottom of the
trading range. The result is the same, only it is to the down side.

While an Upthrust may look like an upside down spring, it actually functions in a very different
manner. There are two ways an upthrust can occur. While both are almost the same, they occur in
different situations. The most common is an upthrust after distribution.

After a Buying Climax, an index or stock can move laterally in a trading range. At the end of the
trading range, it can attempt to rally into new high ground. The quick rally is on an increase of
volume and a narrowing of the spread. Then it will reverse and fall back into the trading range.

There can also be an Upthrust without a buying climax. The definition is basically the same. In this
case, the stock simply begins to roll over and moves sideways without experiencing climactic action.
Unlike the Number 1 and Number 2 Springs, but like the Number 3 Spring, an Upthrust does not
require a secondary test.

Before discussing these in more detail, there is often a significant intermediate step that follows an
Upthrust. This is the Sign of Weakness (SOW). The Sign of Weakness is confirmed by a Last Point
of Supply.

Following an Upthrust, an index or stock doesn’t always immediately react and penetrate the
support at the bottom of the trading range. Rather, it approaches that support and then changes
direction. The reaction is called an initial Sign of Weakness. It is the opposite of a Sign of Strength
within a trading range.

The index or stock then reverses direction and does so on reduced price spread and volume. This
reversal often ends in the area of the halfway point of the preceding Sign of Weakness. Once this is
completed the index or stock is ready for a more important Sign of Weakness or "Fall Through the
Ice".

So far, the Wyckoff trader has three opportunities to take a position to the downside.

An initial position can be taken on the Upthrust. This is a higher risk entry point and should
only be used by intermediate or advanced Wyckoff students.

The Secondary Test of the Upthrust, if it occurs. Remember, is not necessary for an upthrust
to have a secondary test.

The Sign of Weakness

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SIGNS OF WEAKNESS

To review, a Sign of Weakness begins when strong supply comes in following an Upthrust, or when
a stock penetrates the support line of its trading range, on wide spread and volume. Like the Sign of
Strength, a successful Sign of Weakness must be followed by a weak rally to a Last Point of Supply.

Signs of Weakness, following distribution, can happen quite quickly. Therefore, the rally to the Last
Point of Supply is usually short and can often occur within a single trading day. There is also a
greater tendency for the Sign of Weakness to quickly penetrate the support at the bottom of the
trading range. The following Ice Story discusses this in more detail.

THE ICE STORY

Mr. Evans’ second story is about what happens when an index or stock breaks through the bottom
of a trading range. It is called “The Fall through the Ice”. What happens here is basically the
opposite of the Creek story.

Before a stock or index reacts through the support at the bottom of the trading range, there can be
an initial Sign of Weakness. This occurs when the index or stock reacts from the top of the range,
to a point just above the support levels at the bottom of the trading range. This reaction, which
normally follows the upthrust, brings out good supply in wider spread and increased volume. The
rally that follows is on narrower spread and reduced volume. The top of the rally is a Last Point of
Supply.

This scenario is not as common as the Sign of Strength and Last Point of Support that stays within
the trading range and follows a spring. This is because down moves tend to be faster and more
orderly, than a move to the upside. If the stock is going to take out the support or “Fall Through
the Ice”, it will usually move from the top of the trading range down through the support quickly
and decisively.

The “Fall through the Ice” story is a great way to better understand this concept. Picture a crisp
December day. You are standing on the shore of a small pond watching an ice skater glide across
the newly frozen ice. New ice often contains both thick and thin sections. Unfortunately, the skater
passes over a patch of thin ice. The ice cracks and skater falls through the ice and into the water.
The weight of his skates and winter clothing pull him down through the ice into the chilly water
below.

The skater tries to swim back up to the hole where he fell in. Because he is a bit disoriented he
misses the hole and hits his head on the ice. Sadly, the skater loses consciousness and falls all the
way to the bottom of the pond. The skater’s falling through the ice corresponds to a stock or an
index falling through the support at the bottom of a trading range. The failed attempt to recover,
which results in the skater hitting the ice with his head and losing consciousness, is the rally back to
the support level. This support has now changed to resistance. The rally is usually short and on low
volume. Therefore, a stock or index is unable to break through the ice/resistance. Like the poor
skater, the next reaction is fatal, and the stock or index experiences a large decline.

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DISTRIBUTION, WITH AN UPTHRUST AND A SIGN OF WEAKNESS
Charts #24 and #25 are a study of Agilent Technologies (A). It presents a distribution trading range
that was ended with an Upthrust. The upthrust was followed by a major Sign of Weakness and a
Last Point of Supply.

Agilent Technologies rallied and experienced a Buying Climax at point A. There was an automatic
reaction to point B and a Secondary Test at point C. The trading range was established between
points C and D.

Ending action happened when Agilent Technologies upthrusted the range at point G. This was not a
classic upthrust as supply did not come in until the following day. This was the beginning of the Sign
of Weakness and it took Agilent Technologies to the bottom of the trading range. There it
penetrated the support line at point H. This Sign of Weakness was also a Fall through the Ice.

Agilent Technologies then attempted to return to the trading range, but failed. The rally to point I
was on poor price spread and volume. Notice the substantially reduced volume that is marked by the
red arrow.

While the nimble Wyckoff trader could have taken a position when supply came into the stock after
it penetrated the resistance, at point G, the Last Point of Supply was an excellent place to take a
short position. Positions could be taken in the $47 area.

Then Agilent Technologies entered its markdown phase and reacted to point L. A review of the
Point & Figure chart (chart #25) identifies a maximum objective of $33 per share. This is based on a
count of 14 points, taken from the Sign of Weakness, along the $47 line.

In August 2011, Aligent reached $30.50 at point L. If this trade was made, the Wyckoff trader
would've enjoyed a 66% profit in just over 30 days.

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89
SIGN OF WEAKNESS, WITHOUT AN U PTRRUST

A stock can also react without experiencing an Upthrust. This is reflected in a study of Schlumberger,
found on charts #26 and #27. Schlumberger is also an example of a Spring that wasn't a Spring.

In 2011, Schlumberger completed a rally and entered into a trading range. Then, without the benefit of
an Upthrust, it experienced a 40 point decline.

In February, 2011 Schlumberger experienced a Buying Climax at point A. There was an Automatic
Reaction and a Secondary Test at point B. Schlumberger then began to move sideways in a trading
range defined by resistance at point A and support at point C.

The relatively wide price spread and volume, along with lower tops suggested this was distribution and
not accumulation. However, Schlumberger sprung the trading range point E. It then rallied to point F,
for what could be considered a minor Sign of Strength. The reaction to point G could have been
interpreted as a Last Point of Support. It would not have been unreasonable to take a long position,
either on the spring, or at point G.

Then Schlumberger rallied quickly to the top of the trading range and tested the resistance line drawn
from point A. The resistance line was not penetrated and Schlumberger reacted.

This was exactly the wrong type of market action, for those who had taken long positions.
Schlumberger was in a go and go now situation. When a stock approaches the resistance at the top of
the trading range it should then penetrate the range (jumps the Creek) and do so on increased price
spread and strong volume. Anything else should be interpreted as a huge red flashing danger sign.

When this happens, the position should be closed, or at the very least, stop orders should be raised to
protect profits.

The reaction from point H quickly picked up steam and there was both increased price spread and
volume. Schlumberger fell through the ice as it reacted to point I.

The rally back to point J was a Last Point of Supply and an excellent place to take short positions.
Schlumberger then reacted quickly down to point K, which was preliminary support. This was an
indication that the move was coming to an end and positions could have been closed on the Buying
Climax at point L.

The initial count on the Point & Figure chart is taken at the Upthrust, along the $95 line. The count is
divided into 4 phases that are marked on the chart. The maximum count is 69 points.

When a count of this size is taken, it is important to watch how the stock behaves as it approaches the
objective area of each phase. In this case Schlumberger's first three phases produced a count of 49
points. This created an objective of $55 per share. In early October, 2011, Schlumberger reached
$54.79 per share.

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91
ANOTHER SIGN OF WEAKNESS

Chart #28, of Starbucks, provides an excellent example of distribution, ending action with an
Upthrust, a Sign of Weakness and Last Point of Supply (LPSY).

Starbucks rallied and experienced a Buying Climax at point A. It then established a trading range
with a high at the top of the Buying Climax and a low at the bottom of the Automatic Reaction at
point B. Then, it moved sideways and upthrusted the trading range at point D.

Before we get to the Upthrust, it is helpful to review the action at point C. It is important to
understand that trading ranges are rarely wrapped up in perfect Wyckoff scenarios. It is not
uncommon to see things, in a trading range, that either don't make sense, or could send the
Wyckoff student in the wrong direction.

Point C was a Spring. There was a rally off the spring and, three days later, there was a successful
test of the Spring. Starbucks then rallied to the top of the range at point D. Were we seeing a Sign
of Strength? Was Starbucks getting ready to continue its rally?

As you can see by the chart, the answer was no to both questions. It is not uncommon to see a
Spring occur before an Upthrust, or an Upthrust occur before the Spring.

In this case, they tried to take Starbucks down to a lower level. There simply was too much
demand left in the trading range and that effort failed.

Point D was a critical day. Starbucks attempted to Jump the Creek, but the jump turned into an
upthrust. What we saw was decreased price spread, increased volume and a poor closing price.
The potential Sign of Strength was not confirmed and, in a few short hours, became an Upthrust.
Starbucks was ready to react.

Wyckoff traders, who logically bought the Spring, should have seen the Upthrust develop and
quickly closed their long positions and considered new ones to the downside.

Remember, an Upthrust does not need a secondary test and Starbucks certainly didn't have one.
Instead, a gap opening to the downside took the stock to the bottom of the trading range. It then
fell through the ice and continued down to point E. The move from point D to point E is a Sign
of Weakness.

The rally to point F is a rally to the first Last Point of Supply. Notice how Starbucks rallied to the
ice at point F. While it was only a two-day rally, the second day was on reduced price spread,
increased volume. Starbucks was in a situation where it had to "go and go now", if it was going to
rally back up into the trading range. Instead, there was too much supply present and Starbucks
moved sideway. Then, it reacted all the way down to point G. The rally to point H was a more
important Last Point of Supply. Instead of supply coming in, as it did at point F, demand dried up
at point H. Notice the relatively low volume. In addition, point H was lower than point F. This
proved that there was no demand left and the markdown phase could begin.

Starbucks reacted all the way down to $15.99. Anyone nimble enough to sell short at the Upthrust
(point D) would've almost doubled their money. Those who got in at either Last Points of Supply
saw a 57% profit.
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93
R E- DISTRIBUTION

Once a stock has gone through distribution and experienced successful ending action, it begins its
downtrend. Like a rally after accumulation, it is not uncommon for a stock to pause during this
reaction and, once again, begin moving sideways. If, after this sideways trading range, the down
trend continues, the trading range is considered a period of re-distribution.

Re-distribution, like re-accumulation, can begin in one of several ways.

The stock can experience a normal corrective rally, go through a period of re-distribution,
have a successful ending action and resume the downtrend.

The stock can simply roll over and begin moving sideways. This is usually due to a drying up
of supply. If, at the end of the sideways move, the stock experiences successful ending
action, it would resume its downward trend.

The stock could go through a minor Selling Climax and establish a more traditional trading
range. Once again, successful ending action, in the form of an Upthrust or Sign of
Weakness, would result in the resumption of the downtrend.

The following charts, #29 and #30, of Halliburton (HAL) are an example of re-distribution In July
and August of 2014 Halliburton went through a head and shoulders distribution. It reacted from a
high of $74.37.

The reaction was temporarily stopped with a Selling Climax at point A. Remember, a Selling Climax
simply stopped the move to the downside and allowed Halliburton to begin to move sideways. The
stock's next direction will be determined by the type of ending action.

Then, Halliburton rallied to point B and reacted to point C. This defined the resistance and support
areas of the new trading range.

While it is important to wait for ending action to determine the future trend, Halliburton did provide
some clues. Notice the relatively increased level of volume, just before and during the climactic
action at point A and the rally to point B. This suggests supply was still present and if we are going
to see accumulation, the supply needed to begin to dry up.

While relative volume did decrease after point B, notice that price spread was relatively wide on
reactions and narrow on rallies.

Then, at point F, Halliburton attempted to rally out of the trading range. Supply had not dried up
and this completely stifled the rally attempt. Point F did not fulfill all the requirements of an
Upthrust. The price spread was quite wide. However, despite the increased price spread, Halliburton
closed back inside the trading range. This suggested it might be on the verge of continuing its
reaction.

This was confirmed the following day, as Halliburton rallied on reduced price spread and volume. It
then reacted to point G. This was a Sign of Weakness. The rally to point H was on reduced price
spread and volume and was a Last Point of Supply. Then, Halliburton continued its downward
trend.

There is a count of 13 points along the $51 line. This provides a downside objective of between $44
and $38 per share. In December, 2014 Halliburton reached $37.21 per share.

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CHAPTER 8 - DETERMINING MARKET TRENDS
TRENDS AND TREND C HANNELS

Trends are the direction in which a stock or index is currently moving. Trends lines define the
trend channel's boundaries.

When a stock is advancing and meets resistance (selling) it must either overcome that
resistance or it will react. Naturally, the same is true when a stock is declining and meets
support (buying). It will either drive through the support or reverse direction and begin to
rally. These turning points are critical moments and provide excellent places for successful
entry and exit points. Trends are one of the most important market indicators. A core Wyckoff
rule is to always, always trade in harmony with the existing trend.

Believe it or not there are nine different trends that help us determine the direction of the
stock market and its individual stocks. They are identified by their direction and duration. The
direction of a particular trend can be up, down or sideways (neutral). Depending on their
duration they are short-term trends, intermediate-term trends or long-term trends.

Short-term trends last from a few days to a few weeks. Intermediate-term trends last from a
few weeks to a few months. Long-term trends last from a few months to a few years.

Naturally, the trend you focus on will match your trading objectives. The short term trader is
much more focused on short-term trends. The intermediate and long term investors pay much
more attention to those trends and are very comfortable holding long positions through short-
term trends that move in the opposite direction.

Regardless of individual trading objectives, it is still important to determine the short,

intermediate and long term trends of the market and the individual stock, which you are
trading.

An up trend is created when:

the low point of a second reaction is higher than the low point of the first reaction

then, on the subsequent rally the index or stock moves above its previous high.
,
The line drawn between, and continuing past, these two lows is the support line. A parallel
supply line is then drawn from highest point of the rally, between the two lows. These two
trend lines create the up trend's channel.

Conversely, a down trend is created when:

the high point of the second rally is lower than the high point of the first rally.

then, on the subsequent reaction the index or stock moves below its previous low.

The line drawn between and continuing past these two highs is the supply line. A
parallel support line is then drawn from the lowest point of the reaction, between
the two lows. These two lines create the down trend channel.

95
While not often thought of as a trend, a third one does exist. It is the neutral trend or trading
range. This trend is established when stock is moving sideways. Resistance points are established
at the top of rallies. Support points are at the bottom of reactions. Lines drawn through these
developing support and resistance points provide the trend's boundaries.

It is important to understand that every sideways movement is not a trading range. A trading
range develops when professional interests begin a campaign to eventually move a stock in a
specific direction. If these interests are not involved in a stock, the characteristics of the trading
range are not present and the stock simply wanders sideways. This is called a sideways
movement.

Because trends come in different time frames, it is possible, though difficult, for the Wyckoff
trader to have long and short positions at the same time.

If the intermediate-term trend is up, a long position may be taken with expectations the security
will be held for many weeks or months. If, in the meantime, a short-term downtrend appears, the
Wyckoff trader may take a brief short position in another security and continue to hold the long
or intermediate term trade.

While that is theoretically possible, it is extremely difficult to maintain the discipline necessary to
hold both positions at the same time. Only experienced traders should do this and only after
substantial practice trading.

Once the trend is established, it is important to see how it relates to the market's action and,
more specifically, the stock in which we are considering taking a position.

Once a position is taken, it is critical to pay attention to the trend. As long as the market action
keeps the stock within that trend channel, the position is secure and we can continue to
accumulate profits. It is when the stock weakens or penetrates either trend line and moves into
an overbought or oversold position, relative to the trend channel, that we must increase our
awareness and be prepared to act.

96
WEAKENING THE TREND C HANNELS

When an index or stock slightly penetrates or weakens a trend line, it is not necessarily a sign that the
trend is changing. It could simply be a case of over enthusiasm by sellers or buyers. In that case, there
will be a correction. This usually comes in the form of a rally or reaction back into the trend channel.
Then the original trend continues. Often, these are good entry points or opportunities to add to
existing positions. It is also not uncommon for a stock to simply move sideways and reenter the trend
channel.

This over enthusiasm is natural for a market that is driven by two strong, but conflicting emotions,
fear and greed. Fear and greed do not understand logic or structure. They are the cover used by the
professional trader to take, maintain and liquidate profitable trades. The professional trader, that the
Wyckoff strategies try to emulate, is totally aware of these emotions. He often begins to accumulate
his positions when the news is bad and closes profitable positions when “conventional wisdom” says
the markets are strong and this is the time to buy.

Sometimes you can get an early warning signal that the trend is about to be weakened. If an index or a
stock does not reach the support line on a reaction, that can indicate it may be ready to weaken or
break the corresponding supply line of the trend channel on the next rally. The same is true if a rally
does not reach the supply line, putting the support line of the trend channel in danger on the next
reaction.

These are caution signals that, when seen, require extra attention.

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BREAKING THE TREND C HANNELS

When an index or a stock aggressively penetrates a trend channel, on good price spread and
volume, warning lights should start flashing in the Wyckoff trader's brain. This may not just be a
case of over enthusiasm, but a change in the trend. When this occurs, the Wyckoff trader needs
to pay close attention to his or her positions and the placement of their stop orders.

When a trend channel is broken in this manner, the trend is not automatically changed. The
trader can expect a rally or reaction, back to the area of the original support or supply line, of the
existing trend channel. If this is on reduced price spread and volume and stops before the
channel is reentered, the original trend is broken and a new trend is established. Initially, the new
trend is usually neutral. The neutral trend will stay in place until a new up or down trend is
established.

Remember, if an intermediate or long term trend is broken, the new trend will only be a short-
term trend. In time, we will learn whether it is simply a short-term change in direction or a new
intermediate trend.

Once a trend is broken, and this is especially true of intermediate and long-term trends, extend
the trend channel lines on your chart. Intermediate and long-term up trends can contain several
short term down trend channels. These can be both up trends and down trends. The same is true
of intermediate and long-term down trend channels.

For example, an index or a stock can break the intermediate up trend channel and then form a
new short-term down trend channel. The intermediate trend is now neutral. After a period of re-
accumulation, it is not uncommon for a security to move back into and continue the old
intermediate up trend channel. This is a fairly common occurrence, but will be missed if, once it
is broken, the Wyckoff trader gives up on the intermediate or long term trend channel.

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99
SHORT TERM TRENDS

When drawing a short term up trend channel, we look for two consecutive reaction bottoms,
through which to draw the support line. We then draw a parallel supply line from the high between
those two points.

Conversely, we look for two consecutive rally tops to draw the supply line in a down trend channel.
The parallel support line is drawn through the low, between those two points. We do not need to
see Wyckoff principles, just two consecutive rally tops or reaction bottoms.

SHORT TERM U P TRENDS

On chart #31, Texas Instruments reacted to point A. Then, it rallied to point B and reacted to point
C. This process took eight trading days. Support point C is higher than support point A. Once Texas
Instruments rallied above point B it confirmed that a new short term up trend was in place and draw
its up trend channel. The support line is from point A through point C. A parallel supply line is
drawn through point B.

Texas Instruments then rallied all the way up to point D. It then became overbought, reacted back
into the trend channel and tested its support line at point E. The reaction met support at the up
trend channel's support line. This indicated that the test was successful . Then Texas Instruments
rallied to point F.

Notice that the rally did not reach the channel's supply line. This is an early indication that the trend
might be in trouble. Texas Instruments then reacted and weakened the short term up trend channel
at point G. The rally to point H broke the trend channel and changed the short-term trend from up
to neutral.

The trend channel lasted from the middle of December, 2011 through the middle of February, 2012.
That is within the parameters of a short-term trend.

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101
SHORT TERM DOWN TRENDS

Chart #32 is an example of a short-term downtrend. The Wyckoff Wave rallied to the top of its trading range at point
F. Then it reacted back into the trading range and, six trading days later, rallied to point H.

Since supply point H is lower than point F, once the Wyckoff Wave reacted below point G a short-term down trend
channel could be drawn. Then the Wyckoff Wave reacted down to point I. Then it rallied on wider price spread and
increased volume. This weakened the down trend channel.

While there was no reaction back to the channel's supply line to confirm the break, the rally back to the top of the
trading range confirmed the short term down trend had ended.

This was a reaction in a trading range. As the Wyckoff Wave rallied off point I an intermediate term up trend channel
could be drawn. The support line would go through points E and I. A parallel supply line is drawn from point F.

The intermediate trend channel does not appear on chart #32.

INTERMEDIATE
NTERMEDIATE T ERM T RENDS

When drawing intermediate and long term trend channels, it is helpful to use Wyckoff principles.

For example, when drawing an up trend support line, we should look for one of the following characteristics.:

A Spring and its Secondary Test.

A Secondary Test and a Last Point of Support.

A Last Point of Support within a trading range and the Last point of Support after an index or stock penetrates
the resistance (jumps the Creek) at the top of a trading range.

A Last Point of Support and a reaction to the halfway point of a significant market move.

Once the support line is determined, it is important to then draw the parallel supply line and create the trend channel.

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103
INTERMEDIATE TERM U P TRENDS

On chart #33, the Wyckoff Wave experienced a Selling Climax at point A and established a trading
range. There was a spring at point C and a Sign of Strength on the rally to point D. The Wyckoff
Wave then reacted to a Last Point of Support at point E.

This allows us to draw an intermediate term up trend channel, with the support line drawn from
point C through point E. The parallel supply line is drawn through point D.

The Wyckoff Wave then rallied all the way to point F. Then it moved sideways, and slightly
weakened the trend, as it reacted to point G. This, coupled with the inability to reach the trend
channels supply line, is an initial warning sign that the trend could be in jeopardy.

Then the Wyckoff Wave tried to continue the rally, but ran into resistance at point H. It reacted to
point I. This was a significant weakening of the trend channel.

The weak rally to point J confirmed the trend was broken and the intermediate trend was changed to
neutral. Then the Wyckoff Wave moved sideways in an extended trading range. This intermediate up
trend lasted for 5 1/2 months.

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INTERMEDIATE TERM DOWN TRENDS

On chart #34, FedEx went through an unusual trading range before putting in a fairly large reaction. In addition to
presenting an intermediate down trend, this is also an opportunity to discuss an unconventional trading range and
ending action.

In December, 2014, FedEx completed a rally to point A. It reacted to point B, which was a Selling Climax. The stock
then moved sideways for six months. It established the resistance areas at points C, E, G, I, & K. There were
corresponding support areas at points D, F, H, J & L.

Initially, point H could be viewed as a Spring. However, the necessary demand did not come into the stock and point
H simply became another area of support.

After reacting to point L, FedEx tried to move through the trading range to the upside. It encountered supply at point
M and reacted. Point M was not an Upthrust, but simply a meeting of supply. Remember, areas of distribution do not
need to end with an Upthrust.

Then FedEx reacted to point N. This was a Sign of Weakness. As the last support area was at point L, the rally to point
O could be called a Last Point of Supply (Rally back to the Ice). The rally was on relatively reduced price spread and
lower volume. Demand dried up as FedEx reached the support, now resistance line, that was extended from point L.

As there was a fairly large count from point O, on chart #35, new positions could be taken to the downside.

FedEx continued to react to point P, which was in the area of the support line continued from point H. This was a
more important Sign of Weakness. The rally back to point Q was a more important Last Point of Supply.

A note on stop orders. After the initial placement, stop orders, to the downside, should not be moved until the stock
has reacted to point P, rallied to test the previous high and reacted again into new low ground.

The intermediate down trend channel can be drawn from the high at point M. The supply line begins at M and
continues through the Last Point of Supply at point Q. A parallel support line is drawn through point P.

Then FedEx reacted and stayed within the intermediate downtrend channel until the stock market experienced an
important Selling Climax on August 24, 2015. On that day it briefly reached a low of $130.13 per share.

On chart #35, there was a count of 44 points, taken from the Last Point of Supply at point Q over to the third phase
of the trading range at point I. If this count is taken from the high at point M and the Last Point of Supply at point Q,
there are objectives of between $141 and $128 per share. In late August FedEx reached $130.13 a share.

The reaction from point M lasted a little over three months. This makes it an intermediate move to the downside.

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LONG TERM UP TRENDS

On chart #36, at the end of the 2008 bear market, Yum! Brands had a Selling Climax and entered a
trading range. After one failed attempt to spring the range at point E, there was a successful Spring
at point G. Yum! Brands then experienced a Sign of Strength to point H and then moved sideways
to a final Last Point of Support at point J.

The sideways movement from point H was not a traditional reaction to a Last Point of Support
(Back up to the Creek). The relatively high volume suggested there was still excess supply that
needed to be absorbed. Yum! Brands ability to do this, without reacting, is an indication of relative
strength.

The Spring was in early March, 2009. The Last Point of Support was not reached until February,
2010. This allowed for the drawing of a long term trend channel support line that began at the
Spring and extended through the Last Point of Support. The parallel supply line was drawn through
the top of the Sign of Strength.

For the most part, Yum! Brands remained in this trend channel for the next six years. After
becoming slightly overbought at point K and oversold at point L, YumBrands! rallied through the
up trend channel to point M. It then reacted back into the channel, but rallied and moved into a
slightly overbought position at point O. So far, this is been a relatively normal movement within a
trend channel. Throughout the rally, Yum! Brands moved into both overbought and oversold
positions, relative to the trend channel. Each time, the stock either rallied or reacted to adjust for the
excess move and returned to its trend channel.

There was a subtle change in character at points Q and S. For the first time, Yum! Brands was
unable to reach the trend channel's supply line. While not critical, this was a caution sign that the
stock was weakening and running into some supply.

That was confirmed at points T and U as Yum! Brands weakened the support line and became more
oversold than it had been in the past.

While Yum! Brands was able to rally back into the trend channel, it was consistently unable to reach
the channel's supply line.

Finally, Yum! Brands reacted to point V and moved sideways to point X. This was a significant
weakening of the trend channel. On the rally to point W, Yum! Brands was unable to return to the
trend channel. This broke the up trend channel and was a good place to close positions and take
profits.

While the move from points V to X may have been re-accumulation, it provided the impetus for the
final move to point Y. Regardless, point W was the best place to take profits and close positions.

The long-term trader who, back in 2009 – 2010, bought YUM at between $25 and $35 per share
enjoyed some substantial profits.

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LONG TERM DOWN TRENDS

When drawing a down trend channel, we should look for the following pairs of rally tops.

An Upthrust and its Secondary Test.

An Upthrust and a Last Point of Supply (not all Upthrusts have secondary test).

A Secondary Test and a Last Point of Supply.

A Last Point of Supply within a trading range and the Last Point of Supply after an index or
stock penetrates the support (Fall through the Ice) at the bottom of the trading range.

A Last Point of Supply and a rally to the halfway point of a significant market move. As
reactions are more orderly and happen faster than rallies, this is an unusual occurrence.

Alcoa was a major casualty in the 2008 bear market. In just a little over eight months, it reacted from
a high of $44.75 all the way down to $5.25.

On chart # 37, Alcoa reacted from point A and penetrated the support (Fall through the Ice) at the
$35 level. It then rallied back to point C for a Last Point of Supply. The stock then collapsed and
reacted down to point E, where it became slightly oversold. Alcoa then moved sideways and
weakened the long term down trend channel on the rally to point H. It then reacted and broke the
channel. This failure to re-enter the down trend channel, confirmed the trend was broken.

It is important to note that there was no climactic action, ending the reaction. Alcoa simply reached
its downside objective and began to move sideways. That would suggest there was no new
professional interest in the stock. Since then, Alcoa has continued to drift sideways, confirming this
lack of interest.

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OTHER TRENDS

The third trend is sideways or neutral. This is also another name for a trading range. We define a
trading range by identifying its support and resistance levels.

The support level is at the bottom of the trading range. The support line is constructed by drawing a
line through the low point of the first reaction. This is usually drawn from the bottom of the Selling
Climax or its Secondary Test, or an Automatic Reaction after a Buying Climax.

The line continues throughout the trading range. It is not always a straight line, but one that
connects the various support points that make up the bottom of the trading range.

The resistance level is the top of the trading range. The resistance line is constructed by drawing a
horizontal line through the high point of the first rally. This can also be drawn from the top of a
Buying Climax or its Secondary Test.

Like support lines, resistance lines are not always horizontal. They are drawn to connect the
resistance points at the top of a trading range.

The Optimism – Pessimism Index also has trends. They are established the same way we would
establish trends on a vertical line chart. The only difference is that the trends on a vertical line chart
reflect price. Those on the Optimism – Pessimism Index reflect volume.

It is quite helpful to try and draw trends from the same points on both the vertical line chart and the
Optimism – Pessimism Index. The relationship between the two are very helpful in market analysis.

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U SING TRENDS IN YOUR M ARKET ANALYSIS

Once we have established the trends, how do we use them in our market analysis and what effect do
they have on market action?

As long as the index's or stock's action is confined to the trend channel, it is appropriate to consider
maintaining or adding to existing positions. If an index or stock moves through either the support
line or supply line, more attention needs to be paid to that position.

If, on a rally, a stock moves through the trend channel's supply line, into an overbought position
relative to the trend, it is not particularly worrisome. The same is true for a stock penetrating the
trend channel's support line on a reaction. This is a sign of relative strength on the rally or relative
weakness on the reaction.

In most cases, the stock will return to its trend channel and continue towards its objective.

This is not true if a stock weakens its up trend channel's support line, or down trend channel's
supply line. This would suggest that a stock is reaching its objective area, or is ready to go through a
period of re-accumulation or re-distribution.

If the stock is in its objective area, this is a good time to close positions. If not, the stock should be
monitored closely as it moves into an oversold position relative to its up trend channel.

The same is true if it moves into an overbought position, relative to its downtrend channel.

These are important indications that the trend is in jeopardy. If positions are not closed, careful
attention should be paid to the next rally, in an uptrend, or reaction, in a down trend.

If the stock does not return to the trend channel on the subsequent rally or reaction, the trend is
broken and positions should be closed.

In case the market quickly changes direction, this is also a time to move stop orders into a position
to protect profits.

Finally, it is important to monitor the stock's relative strength or weakness with its market index.
This comparison can also provide an early indications as to the stock's future direction.

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CHAPTER 9 - A NALYZING THE STOCK MARKET
USING THE W YCKOFF TOOLS
THE WYCKOFF TOOLS

Because market action is measured in both price spread and volume, no single index average or
indicator is enough, for a trader to be able, to interpret what is actually happening in the stock
market. Each Wyckoff trading tool has a specific function. When used together, they provide
important clues that help the Wyckoff trader better understand market activity.

While the Wyckoff Wave reports both price spread and volume and, by itself, is a sensitive market
index, its most important aspect is presenting price. The same is true of the Group Leadership
Stocks. Market volume is measured by the Optimism – Pessimism Index.

The Force Index and the Technometer help bring everything together. They assist in measuring the
relationships between price spread and volume. These Wyckoff tools, which apply to market
indicators, like the Wyckoff Wave, as well as individual stocks, can lead us to a substantially better
understanding of market action and its future direction.

Individual indices and stocks, along with their respective Wyckoff tools, are updated every trading
day on the Wyckoff Stock Market Institute.com's Pulse of the Market Charting Service. Here,
subscribers can obtain an orderly, in-depth view of the stock market's daily activity.

PULSE OF THE M ARKET DATA R EPORT

The Pulse of the Market Data Report contains the prices, Wyckoff tool readings and Point and
Figure chart changes for the Wyckoff Wave, the S&P 500 and each Wyckoff Wave stock.
In addition, every intra-day wave is presented in detail, for the Wyckoff Wave and S&P 500.

This report along with vertical line and point and figure charts for 200 stocks and indices make up
the Pulse of the Market Charting Service. The Optimism – Pessimism Index, Force Index and
Technometer readings, which are the primary Wyckoff tools, are also presented in chart form on
individual line charts.

By analyzing the Pulse of the Market Report, the Wyckoff trader can gain extraordinary insight into
the market's present position, possible future trends and what, if any, trading decisions are
warranted.

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THE OPTIMISM – PESSIMISM INDEX

One of Richard D. Wyckoff’s primary contributions to the study of stock market science and
technique was the introduction of volume studies. Before Wyckoff, technical analysis was primarily
based on price fluctuations and volume was ignored.

Mr. Wyckoff realized the importance of volume in determining market direction and turning points.
These days, volume analysis is a must for all Wyckoff students.

The Optimism – Pessimism Index, which was developed by Robert Evans, has been an invaluable
Wyckoff market tool for over 75 years. An index of pure volume, the Optimism – Pessimism Index
reading can be calculated for every stock or index..

Many volume analytics are flawed. They assume every share traded on days, when the market
advances, is all up, or demand volume. Conversely, every share traded on days when the market
declines is all down, or supply volume. This keeps traders from seeing the true picture.

Wyckoff students understand that, just because a stock advanced, the entire day's volume is not up
or demand volume. Instead, throughout every trading day, stocks in every market experience
periods of up movement and down movement. These are called waves. The volume associated
with intra-day up moves is up volume. The volume associated with intra-day down moves is down
volume.

The Optimism – Pessimism Index represents effort. The price represents results. When a stock's
effort and results are in harmony, it is a good indicator that the index or stock will continue to move
in its current direction. If not, extra attention should be paid, as a turning point may lie ahead.

The total amount of volume is not as important as how the volume relates to the index's or stock's
movement, when it is compared to previous market action. For example, in most cases, good rallies
or reactions are made on increased volume. This suggests there is increased interest in the security.
Indexes or stocks with these characteristics have a tendency to move farther and for the move to last
longer. Conversely, a rally made on reduced volume is not supported by strong demand. A reaction
on reduced volume is not supported by good supply. This means the move will probably be of
shorter duration and not make very much progress.

The Optimism – Pessimism Index (O – P Index) helps us get a better grip on up volume and down
volume. As mentioned above, each intra-day wave contains volume. The O – P Index is a simple
compilation of each wave's volume. Throughout the day, the volume from each wave is added to, or
subtracted from, the O – P Index. Up volume is added to the index. Down volume is subtracted.

By adding all the positive volume and subtracting all the negative volume, we can uncover important
clues as to what really happened during the trading day. The O – P Index can warn us when up days
are actually negative and down days are positive. The index is also extremely helpful in evaluating the
relative strength and weakness of market, and individual stock, moves.

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As previously mentioned, the O – P Index incorporates the volume of every intra-day wave found in
the index or stock it represents. Its most important relationship is with the stock's price, as shown
on the vertical line chart. The two either move in harmony or one leads the other.

Often, when one leads the other, they are not in harmony. These are called divergences or
inharmonious actions. If the stock price is leading its O – P Index, that means results are exceeding
the effort. This is usually a temporary action and warns us that a turning point may be on the
horizon.

If the Optimism – Pessimism Index is leading the price, this means that the effort being put in to
move the stock is not being matched by results. Again, this is usually a temporary action and warns
us that a turning point may be on the horizon.

One important exception to this is the relationship of an index or stock to its O – P Index, in an
intermediate to long-term uptrend. In this case, it is not unusual for the Optimism – Pessimism
Index to lead the price. This is caused by buyers, who came late to the party and are trying to get in
on the action.

When used in conjunction with the vertical line chart, the Optimism – Pessimism Index can be an
extremely valuable tool.

Let's review chart # 38, which is the vertical line chart of the Wyckoff Wave, and its O – P Index.
Here, we can find clues that will help predict the Wyckoff Wave's future direction.

The Wyckoff Wave reacted from point E to point F. Then it rallied to point G and reacted again to
point H. The O – P Index is in harmony with the Wyckoff Wave.

On the rally to point I, the Wyckoff Wave moved into new high ground, but the O – P Index did
not. It held below point G. The amount of effort, as expressed by the O – P Index, did not match
the results of the Wyckoff Wave. This is called a negative divergence and is a clue that the Wyckoff
Wave is vulnerable to react. That's exactly what happened, as the Wyckoff Wave reacted down to
point J.

Notice that point J is just about at the halfway point of the rally from point H to point I. If the
Wyckoff Wave and the O – P Index were in harmony, the O – P Index would have reacted in the
same manner. It did not. The fact, at point J, the Optimism – Pessimism Index is actually lower than
it was at point H. This is called a positive divergence and suggests the Wyckoff Wave is vulnerable
to a rally. Then, the Wyckoff Wave rallied strongly to point K.

The Wyckoff Wave then reacted to point L. Look at the O – P Index. Strong supply came into the
market and drove it down almost to where it was at point J. Even though both held above the
previous low, the effort as shown by the O – P Index was substantially more than the results
produced by the Wyckoff Wave.

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This phenomena is called an inharmonious action. In this case it is a positive inharmonious action. It
suggests the Wyckoff Wave is vulnerable to a rally, but it may not be as significant as if it were a
divergence. In addition, when this much effort, to the downside, comes into the market, it will
impact the results for a longer period of time.

Then, the Wyckoff Wave rallied to point M and reacted back to point N. Point N is lower than
point L on both the vertical line chart on the O – P Index. However, Point N is now slightly lower
than point J. This is another positive divergence. The Wyckoff Wave responded to this by rallying to
point O.

Notice that the O – P Index is now higher than point M. The Wyckoff Wave is not. This negative
divergence indicated the O – P Index's effort was substantially more than the results of the Wyckoff
Wave. In my experience, when the effort is greater than the results the next move is usually stronger
than when the results are greater than the effort.

This is exactly what happened at point O. The Wyckoff Wave reacted strongly all the way down to
point P.

When the Wyckoff Wave reached point P it was back in harmony with its Optimism – Pessimism
Index. There were no divergences or inharmonious actions, that would indicate a change in
direction. However, the Technometer was in an extremely oversold condition and the Wyckoff
Wave was testing the support line of its down trend channel.

There was ample evidence to suggest a change in the trend. It just wasn't shown in the O – P Index
analysis, with its vertical line chart. This is an excellent example of why all Wyckoff tools should be
used when analyzing an index or stock. More on this later.

The Wyckoff Wave then rallied to point U and reacted down to point V. Even though the reaction
to point V held slightly above the low at point R, the Optimism – Pessimism Index moved
decisively lower. This was another positive divergence. Despite strong effort from the O – P Index,
to push the Wyckoff Wave lower, it did not respond, as the effort far outweighed the results.

This positive indication suggested that the rally off the low at point P would continue. It did, all the
way up to point A, where both the Wyckoff Wave and its Optimism – Pessimism Index moved into
new high ground.

Whether you are an intra-day, swing or long-term trader, the Optimism – Pessimism Index is an
invaluable tool that should be used by every Wyckoff student. As we have seen, it will not identify
every turn in the market. When the Optimism – Pessimism Index is used in conjunction with the
other Wyckoff tools, the ability to identify market turns and find new profitable opportunities
increases dramatically.

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THE FORCE INDEX

The Force Index is an indicator of investor sentiment. It measures the amount of positive or negative pressure that is
being placed on the market. The index is considered to be an indicator of investment attitudes. Therefore, it is not
subject to minor fluctuations, but represents a longer view of market trends.

If the market is starting to move in one direction and pressure from the Force Index is not in harmony, the market,
most probably, will experience little progress. If, on the other hand, the Force Index is in sync with the market, the
resulting move will be more substantial.

If, during a rally, the Force Index records increasingly negative numbers, it can be expected that the rally may be
weaker than expected, or coming to an end. If, at the start of a rally, the Force Index is quite negative, the chances are
good that the rally will fizzle out or make little progress.

On the other hand, if the Force Index is recording slightly negative or positive readings, the down side pressure is
reduced. This suggests that the related index or stock will make good progress to the upside.

These principles are reversed when analyzing the Force Index during a reaction.

An extremely negative Force Index reading is an indication that the reaction will be strong and it will be sustained. A
slightly negative Force Index reading suggests the reaction may be in trouble or is coming to an end.

It is also helpful to pay attention to the trend of the Force Index. If the index is presenting higher bottoms, the
outlook is positive. If we are seeing lower bottoms, things should be viewed in a more negative light.

It is important to understand, that since the Force Index measures market pressure, which has a natural tendency to be
negative, it is more important to pay attention to the lows rather than the high points on the Force Index chart.

The value of the Force Index is greatly enhanced when used with the Technometer. It is important to look at the
Force Index when the Technometer moves into either an oversold or overbought condition.

If the Technometer is oversold, but the Force Index is not particularly negative or trending upward, there is an
excellent chance a strong rally will be on the horizon.

If the Technometer is oversold, but the Force Index is quite negative or trending downward, the expected rally may
not be particularly strong.

If the Technometer is overbought and the Force Index is only slightly negative or positive, the expected reaction may
not happen or may not be particularly strong.

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If a strong negative Force Index reading accompanies an overbought Technometer, look for a rapid
reversal and a strong move to the down side.

It is also quite helpful to compare the Force Index to its related index or individual stock.

If the index or stock completes a reaction and puts in a lower low than its previous reaction, but the
Force Index reading is higher, this is a positive indication.

It is also positive if an index or stock completes a reaction and puts in a higher low than its previous
reaction, but the Force Index reading is lower.

Conversely, there is a negative signal if an index or stock puts in a higher high than the last rally, but
the Force Index records a lower reading.

It is also a negative if a rally brings out a less negative, or more positive Force Index reading then the
previous rally, but the index or stock does not make a new high.

On the accompanying chart #39, the Wyckoff Wave reacted to point A. Notice how the Force
Index held above the three previous lows. The Wyckoff Wave and Force Index are not in harmony.
This places the reaction in jeopardy and it was unable to continue.

Then, the Wyckoff Wave rallied to point B. The Force Index also rallied. This is a positive
indication. It was further enhanced, when the Wyckoff Wave reacted to point C. There, it held
above the lows at point A, but the Force Index did not. Again, the Force Index was not in harmony
with the Wyckoff Wave. This suggests the reaction would be slowed or stopped. It was stopped and
the Wyckoff Wave rallied to point D.

Notice what happened to the Force Index on the rally to point D. It is becoming weaker than the
Wyckoff Wave. This suggests that the rally will be unable to continue. The Wyckoff Wave reacted
down to point E.

The reaction to point E was on relatively decreased price spread and volume. In addition, the Force
Index is in harmony with the Wyckoff Wave. Supply appeared to have dried up and both the
Wyckoff Wave and the Force Index rallied strongly to point F.

Then, the Wyckoff Wave began to react back to test the support that was established by the highs at
point D. At point G, it held above the lows at point E. The Force Index was not in harmony with
the Wyckoff Wave. At point G it is substantially lower than it was at point E.

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This suggests the reaction will not continue. It did not. The Wyckoff Wave rallied to point H and then reacted to point
I. Once again the Force Index is not in harmony with the Wyckoff Wave. At point I, the Wyckoff Wave is lower than
point G. Point I is higher than point G on the Force Index. This suggests the reaction could become stalled.

Then, the Wyckoff Wave rallied to point J. Point J on the Force Index is noticeably lower than point J on the Wyckoff
Wave. This indicates the two indices are, once again, out of harmony. In response, the Wyckoff Wave reacted all the
way down to point K.

A final comment. The Force Index is most often expressed as a negative value. Therefore, it should be analyzed by
studying its trends, not by whether it is positive or negative. Receding Force, even if it remains negative can be a
positive indicator.

Each of the three Wyckoff tools are extremely helpful when used by themselves. They are much more powerful when
used in conjunction with the other tools and the vertical line charts of their related indices or stocks.

It is also important to remember that they are not mechanical or automatic indications. They are simply wonderful
tools that can be used in successful market analysis.

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THE TECHNOMETER

Market reversals are important entry and exit points. Maximum profits can be achieved by taking or
closing positions at, or near, these turning points. The Technometer is the Wyckoff tool that tells us
when a particular index, or individual stock, has become overbought or oversold. We call this an
overbought or oversold condition.

The Technometer measures the degree to which the market, or an individual stock is either
overbought or oversold. In Wyckoff “speak”, we say an index or stock is in an overbought,
oversold or neutral condition, relative to its Technometer. This is different from an overbought or
oversold position. An overbought position means that an index or stock has moved out of its trend
channel to the upside. An oversold position means it has moved out of its trend channel to the
down side.

On the Wyckoff Pulse of the Market Charting Service, the Technometer is displayed as a line chart.
It usually ranges between 60 and 30.

A reading of 50 suggests the related index or stock is in an overbought condition. A reading of over
55 suggests a dangerously overbought condition and a move to the down side can be expected.

Conversely, a reading of 42 suggests the beginning of an oversold condition. When the

Technometer declines to 35, this reflects a dangerously oversold condition and a move to the upside
can be expected.

These overbought or oversold conditions indicate the related index or stock may be subject to a
price reversal. During an advance, an overbought Technometer suggests the rally is ending and the
trader should be prepared for a reaction.

An oversold condition during a reaction suggest the down move is ending and a rally may lie ahead.

The more overbought or oversold the condition, the higher the probability that there will be a
significant change in direction.

While, by itself, the Technometer can provide valuable market information, it is even more powerful
when used together with the associated vertical line chart.

If the bottom of a reaction is accompanied by a Technometer reading that is more oversold than the
previous low, but the price holds above the previous low, the probability of a price reversal
improves substantially.

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If, on a reaction, the index or stock makes a new low, but the Technometer does not, we can also
look for a reversal in price. Naturally, the reverse is also true. When the top of a rally moves the
Technometer into a more overbought condition, but the price holds below the previous high, the
chances of a reversal to the down side improve substantially.

The Technometer is extremely helpful in identifying reversals. However, it is not an automatic or

mechanical indicator. It should be used in conjunction with Wyckoff principles and other Wyckoff
tools.

On the rally to point A, on chart #40, the Wyckoff Wave's Technometer became dangerously
overbought. This was an indication that it was vulnerable to a reaction. After moving sideways for
four days, the Wyckoff Wave reacted to point B. While there was a small rally to point A–1, the
Technometer returned to an overbought condition. This indicated the reaction would continue.

The Wyckoff Wave continued its reaction to point B, on good price spread and volume. While many
may have thought the reaction would continue, the Technometer reading was 35. This is a
dangerously oversold condition. The Wyckoff Wave rallied to point C.

There was an interesting development on the way to point B. It is marked as point B–1 on the chart.
There, the Technometer moved into an overbought condition, but the Wyckoff Wave did not react.
This is a classic example of why the Technometer should not be used as automatic or mechanical
tool.

Even though the Technometer was in an overbought condition, a more detailed analysis, using other
Wyckoff principles, gave us some clues as to why the Wyckoff Wave did not react.

The Technometer's overbought condition suggests supply is coming into the market. The
Wyckoff Wave is testing the high at point A–1. It would be normal to see some supply at
this level.

Notice the relatively increased price spread and volume. This is indicative of absorption. If
the Wyckoff Wave is going to continue to move higher, it would need to take in the supply.

The day after the overbought condition appeared at point A-1, supply came into the market
and the Wyckoff Wave reacted on good spread and volume. If the reaction is going to
continue, the Wyckoff Wave needed to "go and go now". It didn't. Instead, the Wyckoff
Wave rallied on reasonable spread and volume and continued to point C.

Wyckoff traders who went long in the area of point B, should have moved their stop orders
to protect profits. Because there was no reaction, the stop orders were not executed.

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The Wyckoff Wave moved back into an overbought condition at point C. Then, it reacted to point
D, where the Technometer became oversold. The Technometer was overbought at both points E
and G and oversold at points F and H.

On the rally to point I, the Wyckoff Wave's Technometer did not move into an overbought
condition. However, the Wyckoff Wave did not react sharply, but began a long slow reaction to
point J, where it became extremely oversold.

In addition, at point J the Wyckoff Wave was more oversold at a higher level, then it was at either
points F or H. This is a bullish indication and suggests the Wyckoff Wave will rally.

It did rally to point K, where it again moved into an extremely overbought condition.
Point K was a Buying Climax. The automatic reaction to point L and Secondary Test at point M
suggested the Wyckoff Wave was entering a new trading range and would move sideways for the
foreseeable future. That is exactly what happened.

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CHAPTER 10 - FINDING T HE W INNERS
Once the Wyckoff trader has become comfortable with the Wyckoff strategies, techniques and
tools described in this book, the next step is developing an organizational structure that helps
identify stocks that are being accumulated or distributed by professional interests.

Two organizational tools that can help accomplish this somewhat daunting task, are the Position
Sheet and the Buying & Selling Test forms. They are excellent administrative tools that will help
every Wyckoff trader find those elusive winners.

THE POSITION SHEET

The Position Sheet is a helpful method to identify and organize market trends, before taking new, or
adding to existing positions. It allows Wyckoff students to analyze several stocks, along with the
Wyckoff Wave, and the related Group Leadership Stock. The stock's short and long-term positions
are determined and placed on the Position Sheet.

Before taking a new position, it is extremely important for the Wyckoff student to determine the
stock's specific trend and if that is in sync with the goals and objectives for that particular trade.
Trends are categorized as follows:

A short term trend lasts for a day or two to a few weeks.

An intermediate term trend lasts from a few weeks to a few months.
A long term trend lasts for a few months to a year or more.

Position 1 indicates the stock is in a short term up trend.

Position 2 indicates the stock is in a long-term up trend.

Position 3 indicates the stock is in a short term down trend.

Position 4 indicates the stock is in a long-term down trend.

A stock can be in position 1 and position 2, or position 3 and position 4 at the same time.
It can also be in position 1 and position 4 or position 3 and position 2.
If a stock is in a neutral trend, no marks are made on the position sheet.

The sample Position Sheet, on the facing page, is simply an example. It does not represent the actual
position of any of the listed stocks.

A cardinal Wyckoff rule is to always trade with the trend. By posting a stock's trend on the position
sheet, the Wyckoff trader can quickly begin to identify candidates that match his or her investment
objectives.

It is also important to compare the positions of the individual group stocks with their Group
Leadership Stock (GLS). Look for stocks within groups that are trending with their Group
Leadership Stock.

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BUYING TESTS
Stock _______________Purchase Price __________ Purchase Date __________

Goal __________ Stop Order __________

Taking position at the end of an Accumulation Trading Range

_____ 1. Objective accomplished to the downside.
_____ 2. Preliminary Support and/or Selling Climax.
_____ 3. Base forming.
_____ 4 Down trend broken.
_____ 5. Activity bullish. Volume increasing on rallies in decreasing on reactions.
_____ 6. Ending Action (Spring, Secondary Test, Last Point of Support).

Taking position in an Up Trend

_____ 1. Objective accomplished to the downside.
_____ 2 Down trend broken.
_____ 3. Ending Action (Spring, Secondary Test, Last Point of Support).
_____ 4. Up trend established.
_____ 5. Stronger than the market.
_____ 6. Higher supports.
_____ 7. Higher tops.

Applies to both
_____ 1. Estimated probable profit exceeds indicated risk.

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B UYING & SELLING TESTS
The good Wyckoff trader always takes a structured approach, when making buying and selling
decisions. In addition to analyzing the perspective stock, it is important to look at the overall market
and study the related Group Leadership Stock or group index. Only after a quantitative analysis and
a meeting of specific criteria, should new positions be entertained.

One excellent way to do this is to develop a checklist. Once the criteria are met, there is a logical
reason to enter the market and the chances of success greatly increase.

The Wyckoff Buying & Selling Tests are ready-made checklists that will help you make better buying
and selling decisions. They are an excellent way to confirm your initial rationale for taking a position
and to help maintain that all-important market discipline.

The following is an in-depth review of both Buying and Selling Tests.

BUYING TESTS

Buying tests cover the two instances when Wyckoff students can consider taking new positions or
adding to old ones. They are:

At the end of an accumulation trading range on a Spring, its Secondary Test, or a Last Point
of Support.

Taking a position during an up trend.

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BUYING TESTS:
ACCUMULATION TRADING R ANGE

Once a trading range has been defined, the Wyckoff trader waits for ending action. This can come in
the form of a Spring or a Sign of Strength, followed by a Last Point of Support.

Before this happens, students considering a long position should begin to review their Buying Test
checklist. Once the criteria have been met, the chances of a successful trade noticeably increase.

Adobe Systems (ADBE) is an excellent example of how to use a Buying Test checklist to initiate a
successful trade to the upside.

In August, 2011, on chart #41, Adobe reached a low price of $22.67, during its Selling Climax at
point E. A 10 point count was taken from point D over to point A on Point & Figure chart #42.
This provided a downside objective of between $25 and $21, which was achieved at the Selling
Climax at point E. Hence, point E met the first requirement of the Buying Test checklist.

Point E was a Selling Climax. In this case there was no Preliminary Support. Preliminary support
does not always accompany a Selling Climax. This fulfilled the second requirement.

Adobe then began to move sideways in a trading range. There were higher tops and higher bottoms.
This suggested accumulation and satisfied the third requirement.

The trading range ended with a Spring at point G. While a Spring can be a buying opportunity,
purchasing a stock when it is in a down trend, can be a bit risky. However, it did fulfill the sixth
requirement.

While the aggressive short term trader may consider taking a position, the more conservative longer-
term investor will wait for the down trend channel to be broken.
.
That happened at point J. Adobe rallied off the Spring to point I, for a Sign of Strength. In the
middle of the rally, there was a one day reaction to point H. Some might call this a Secondary Test
of the Spring. Because Adobe rallied through the top of the trading range, the Sign of Strength
scenario must take precedence. This made the reaction to point J a Last Point of Support. The
down trend channel was broken, which fulfilled the fourth requirement.

Then, the Wyckoff Wave rallied to point K and reacted to point L for a more important Last Point
of Support. An intermediate term uptrend channel can now be drawn from points G through point
L. The parallel supply line is drawn at point K.

Then, Adobe rallied to point O, but was unable to reach the supply line of the intermediate-term
uptrend channel. The reaction to point P weakened the trend. It was broken on the rally to point Q.
This was a signal to close the trade, even though point O was slightly below the Point & Figure
chart objective of between $36 and $39 per share.

If the Wyckoff student had taken an intermediate term position at point J, they would've seen a 25%
return in five months. As an aside, Adobe moved sideways for five months, building an additional
cause. It then began to rally. By the fall of 2015, it exceeded $95.00 per share.

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BUYING TESTS: TAKING A POSITION DURING AN UP TREND

Once a position has been taken and the stock advances, there is an opportunity to increase one's
position during the subsequent rally. It is also possible that a trading range was missed or only
identified in hindsight. On these occasions, new positions can be taken during the up trend.

There are specific Buying Tests for these situations. They are shown on the Taking Positions in an
Uptrend section of the Buying Tests.

Amgen (AMGN) is an excellent example of taking new, or adding to, existing positions during an
uptrend.

In September 2005, at point 1 on chart #43 Amgen began a two and a half year reaction. The reaction
was completed in March 2008. Amgen lost 44 points and certainly accomplished its downside
objective. That satisfied the first Buying Test.

A long-term downtrend channel was established with its supply line drawn from point 1 through point
3. The parallel support line was drawn through point 2.

After the low at point 4, Amgen rallied to point 5, reacted to point 6 and rallied again to point 7. It
didn't establish a trading range until the reaction to point 8.

As the trading range developed, Amgen noticeably weakened its long-term down trend channel. The
downtrend was conclusively broken at both the reaction prior to point A and at point A. This satisfied
the second Buying Test criteria.

In August, 2011 Amgen had a Shakeout, or #1 Spring. It then began a long move to the upside. The
Shakeout is marked as point A on the weekly chart #43 and on the daily chart #44. Then, Amgen
rallied to point B and reacted to successfully test the Shakeout at point C. This met the third Buying
Test criteria.

Point C became a logical support point, or test, because the reaction was on relatively narrow price
spread and reduced volume. Amgen's Technometer was also at 33. This indicates an extremely oversold
condition. The extremely oversold Technometer confirms that point C was an excellent place to take a
new position to the upside.

After a rally to point B and reaction to point C, a new up trend channel can be drawn and Amgen
appeared ready to enter its mark up phase. So far, the first four requirements, of the Buying Test, have
been met.

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The next step is to determine relative strength. If a stock is going to rally strongly, it needs to be both
stronger than both the market (Wyckoff Wave) and its Group Leadership Stock. Amgen is in the
Healthcare Group. Wyckoff Wave component Bristol-Myers (BMY) is the leadership stock for that group.

The Wyckoff Stock Market Institute.com charting service provides the ability to compare the
relative strength or weakness of multiple issues. The relative strength chart #45, compares the
Wyckoff Wave, Bristol-Myers and Amgen. The letters on the chart are in the same position as the
letters on the Amgen vertical line chart #44.

After the rally from point A to point B, Amgen reacted to point C. Both the Wyckoff Wave and Bristol-
Myers had a small reaction. Amgen barely moved to the downside. This is the first indication Amgen is
slightly stronger than both the Wyckoff Wave and Bristol-Myers.

The rally to point D was also stronger than both the Wyckoff Wave and Bristol-Myers. When Amgen
reacted and successfully tested the support line of its upward trend channel, at point E, it was an excellent
time to take a new position to the upside. In addition, the Amgen's Technometer reading was 33. This is
an extremely oversold condition and confirms that point E was another excellent place to take a position.
It also satisfies the Stronger then the market Buying Test criteria.

Amgen had higher tops at points B, D and H. It had higher bottoms at C, E, F and G.

This satisfies the final two Buying Test requirements for taking positions in an uptrend.

Even though the Buying Tests checklist is complete, there are still additional opportunities to add to
existing positions. These came at points F and G.

In both cases, Amgen reacted and slightly weakened the support line of its long-term uptrend channel. At
point F, Amgen's Technometer reading was a clearly oversold 37. This was an excellent "take a position
here" signal.

Two weeks later, the Wyckoff Wave reacted to point G. Not only was the Technometer oversold, at a
reading of 33, but it was more oversold than at point F. Any time the Technometer reading is more
oversold, but the stock holds at a higher low, is an extremely bullish situation.

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Last, but certainly not least, does the estimated profit exceed the risk? This is a question for
the point and figure chart.

On Amgen's Point & Figure chart #46, there is a total count of 53 points along the $55 level.
That gave Amgen an objective of between $102 and $108. If only the first 3 phases are
calculated, there is an objective of between $85 and $91 per share.

The entry point in the area of point C is around $55.00. If Amgen reaches its minimum
objective of $102, that would be a gain of 47 points.

A reasonable place for stop order is slightly below the previous low or 51 3/8. This creates a
profit/risk ratio of 13/1.

If a position is taken around $67, in the area of point E, a stop order could be placed at 62
7/8. This provides a profit/risk ratio of 8.5/1. This is slightly lower, but perfectly acceptable.

Taking additional positions at points F and G, increases the Wyckoff trader's profits.

On the rally to point J Amgen barely put in a new high top and was unable to reach the trend
channel's supply line. The reaction to point K was lower than the one to point I. In addition,
Amgen also weakened its upward trend channel.

These were early warning signs that the trend could be in jeopardy. At point K, Amgen's
Technometer reading was only in a low neutral condition. This, plus the impending change in
character, suggested additional purchases would carry a higher risk

After barely returning to the trend channel, at point L, Amgen reacted to point M. The rally to
point N broke the channel and sent a strong signal that it was time to close all positions and
take profits. At point L, Amgen reached $90.81 This fell within the phase 3 objective on the
Amgen Point & Figure chart. If a position had been taken at point E and closed at point L,
one still would have enjoyed a 30% gain.

After breaking the long term up trend channel, Amgen reacted and went through re-
accumulation. It then rallied to point Q, which was four points above the original objective,
established on the Point & Figure chart.

Amgen then went through more re-accumulation and ultimately reached $191.00 per share.
The entire four year rally presented ample opportunities for Wyckoff traders to profit from
this absolutely wonderful move to the upside.

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SELLING TESTS
Stock _______________Purchase Price __________ Purchase Date __________

Goal __________ Stop Order __________

Taking position at the end of a Distribution Trading Range

_____ 1. Objective accomplished to the upside.
_____ 2. Preliminary Supply and Buying Climax.
_____ 3. Crown forming.
_____ 4. Upward stride broken.
_____ 5. Activity bearish. Volume increasing on reactions, decreasing on rallies.
_____ 6. Ending Action (Upthrust, Secondary Test, Last Point of Supply).

Taking position in a Down Trend

_____ 1. Objective accomplished to the upside.
_____ 2. Preliminary Supply and Buying Climax.
_____ 3. Crown forming.
_____ 4. Upward stride broken.
_____ 5. Activity bearish. Volume increasing on reactions, decreasing on rallies.
_____ 6. Ending Action (Upthrust, Secondary Test, Last Point of Supply).
_____ 7. Weaker than market.
_____ 8. Lower Tops.
_____ 9. Lower supports.

Applies to both
_____ 1 Estimated probable profit exceeds indicated risk.

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SELLING TESTS
Selling tests cover the two important instances when, on a reaction, Wyckoff traders can consider taking new
positions or adding on to existing ones. They are:

1. At the end of a distribution trading range on an Upthrust, Secondary Test , or Last Point of Supply
2. Taking a position during a down trend

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SELLING TESTS: DISTRIBUTION TRADING
RADING R ANGE

Like accumulation, when a distribution trading range has been defined, the Wyckoff student waits
for ending action. This can come in the form of an Upthrust or Sign of Weakness, followed by a
Secondary Test or Last Point of Supply.

During the trading range, good Wyckoff students can begin to identify potential candidates to the
downside. The Selling Test checklist is an excellent way to identify these potential candidates.

Caterpillar (CAT) is an example of how using the Selling Test checklist can identify an excellent
opportunity to the downside.

In January, 2015, Caterpillar experienced a Selling Climax at point A, on chart #47. This ended a
substantial move to the downside. Then, Caterpillar began to move sideways in a trading range.

There was ending action, in the form of a Spring, at point C. A count on the Point & Figure chart
can be taken at the $70 level. The count is divided into two phases. Phase 1 is 9 points. Therefore,
the first objective is between $78 and $79. At point H Caterpillar reached $79.94 per share. This
fulfilled requirement #1 of reaching the objective to the upside.

Point H could also be considered Preliminary Supply. After a brief reaction, Caterpillar rallied and
had a Buying Climax at point I. This fulfilled the second Selling Test.

Then Caterpillar moved sideways in a trading range, with support at points J and L. The resistance
levels were at points I, K and M. The trading range formed a crown and this satisfied the third
Selling Test.

When Caterpillar left the accumulation trading range, an up trend was created. The support line was
drawn through points E and G. A parallel supply line was drawn through point F.

Caterpillar was relatively stronger than the up trend throughout the rally. Notice that after the
Buying Climax, it reacted and weakened the trend channel. On the rally to point K, Caterpillar was
unable to reach the channel's supply line and reacted to point L. This is a preliminary warning that
the up trend was in trouble.

The up trend was broken on the very next rally to point M. This broke the upward stride and
satisfied the 4th Selling Test.

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Throughout the trading range, the activity was more bearish than bullish. The resistance tops were
lower. There was increased spread and volume to the downside, especially to point J. The rallies to
points K and M were on relatively reduced volume and relatively narrow price spread. They also
lasted longer than the reactions. This satisfied the 5th Selling Test.

Caterpillar was moving sideways in a trading range. It was exhibiting bearish characteristics. The
next step was ending action.

The ending action came in a Sign of Weakness as Caterpillar reacted to point N. This was also a "fall
through the ice", as Caterpillar reacted through the trading range. The rally back to point O was the
Last Point of Supply. The initial Selling Tests were now satisfied. This was the place to take a
position to the downside.

The final selling test is to ensure a good risk/reward ratio. A stop order can be placed, well into the
distribution trading range, at 87 3/8. As shown on chart # 48, there is a count of 19 points along
the $84 level. This provides an objective of between $69 and $64. That establishes a very satisfactory
risk/reward ratio of 5.5/1.

In late September, 2015, Caterpillar completed its reaction and experienced a Selling Climax at
$62.99 per share.

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SELLING TESTS: TAKING A POSITION DURING A DOWN TREND
Once a position has been taken and the stock declines, there are opportunities to take new ones, or
increase existing positions during the down trend. The Selling Tests provide helpful strategies that
help Wyckoff traders find and take new positions, during a reaction.

There are specific Selling Tests for these situations. They are shown on the Selling Tests checklist,
under Taking Positions in a Down Trend.

Walmart (WMT) is an excellent example of how, using the Selling Tests, one can take new or add to
existing positions during a down trend.

In 2014, on chart # 49, Wal-Mart went through accumulation around the $75 level. That trading
range is defined by a support line, beginning at point A and the resistance line, beginning at point D.

At point G, Wal-Mart had a Spring. It tested the Spring at point I and then left the trading range to
the upside. The rally to point J was a Sign of Strength. The reaction to point K was a Last Point of
Support. The Last Point of Support lasted one day and was on narrow price spread and very low
volume.

This allows us to take a count along the $79 line. This is shown on Wal-Mart's Point & Figure chart
#50. The count is broken into four phases. These phases are marked on the chart. The first two
phases have a 10 point count. That gave Wal-Mart an initial objective of between $83 and $89.

In January, 2015 Wal-Mart reached $90.97 per share at point N. The "Objective Accomplished to
the Up Side" criteria has been met.

An uptrend channel is drawn, with support lines running through points G and I. A parallel supply
line is drawn through point H.

As it rallied to point L, Wal-Mart moved into a substantially overbought position relative to its up
trend channel. Point L was also Preliminary Supply. This was the first indication that the rally may
be coming to an end.

Then, Wal-Mart returned to its up trend channel at point M. After a brief rally and reaction, Wal-
Mart rallied to point N. This was climactic action and successfully completed Selling Test #2.

However, Wal-Mart has not entered into an easily defined distribution trading range. In addition it
has not reached its objective to the upside. While Wal-Mart may be a candidate for new positions to
the downside, more confirmation is needed.

The reaction to point O, suggested a change in character. This was the first time Wal-Mart had
weakened its up trend channel, since it began to rally, at point G. While this is not a time to take a
new position, as the Selling Test checklist is not complete, it was a signal to watch Wal-Mart closely
as there might be new opportunities to the downside.

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The rally to point P was unable to reach the up trend channel's supply line. This is a confirmation
that a change in character has taken place. This was followed by a reaction to point Q and a poor
quality rally to point R. Wal-Mart's upward stride was broken and the up trend was changed to
neutral.

The wider price spread and relatively higher volume, on the reactions to points O and Q, are an
initial indication of bearish behavior. That behavior is confirmed by the poor quality rallies to points
P and R. Notice how the price spread and volume decreased, especially on the rally to point R. This
satisfies the bearish activity requirement.

The reaction from point P to point Q could be called a Sign of Weakness. The rally to point R could
be called a Last Point of Supply. While this may have been more difficult to identify in real time, the
reaction to point S and rally to point T was more definitive.

On that reaction Wal-Mart moved below the bottom of the trading range. This is a more important
Sign of Weakness, or "fall through the ice". As Wal-Mart rallied to point T, it was unable to move
through the resistance at point O. This confirmed the ending action and gave us one more Selling
Test check mark.

When considering taking a position in a stock, while it is in a trend, it's relative strength, compared
to the market, is extremely important.

As Wal-Mart is a Group Leadership Stock, it is compared with the Wyckoff Wave when considering
relative strength and weakness. This is presented on the relative strength line chart of both the
Wyckoff Wave and Wal-Mart. Wal-Mart is shown in green on chart #51..

Wal-Mart was stronger than the Wyckoff Wave on the move to point N. Then, there is a change in
character. On the reaction to point Q, Wal-Mart is weaker than the Wyckoff Wave, when compared
with point M. From that point on, Wal-Mart's reactions and rallies are lower than the Wyckoff
Wave.

This relative weakness not only satisfies the Weaker than Market requirement, but also indicates
Wal-Mart is not going to continue its move to the upside. This allows us to eliminate the Objective
Accomplished to the upside Selling Test requirement, from consideration.

Positions in Wal-Mart can be taken at points T (Last Point of Support), point V (rally in a down
trend channel) and even point X (also rally in a down trend channel).

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There is a count of 19 points along the $84 line at point T. This provides an objective of between $71
and $65. If a stop order is placed at $88 3/8, the profit/risk ratio would be 4/1. This is a very
acceptable profit/risk ratio and would reward the Wyckoff student with a nice profit.

Nice profit indeed. Wal-Mart reacted to $63 at point Y and moved sideways, weakening the trend
channel. Point Y also was somewhat climatic, in nature and could also be Preliminary Support.

WMT continued to react. It broke the channel at point Z and began to move sideways.

Even though Wal-Mart continued to react to point Z, trades should have been closed and nice profits
taken, at point Y.

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CHAPTER 11 - W YCKOFF TRADING P HILOSOPHY
The Wyckoff strategies and techniques are not simply mechanical indicators, that, if
automatically followed, can ensure success. Rather, they provide an insight into a stock's
present and future behavior. Wyckoff students use this knowledge to increase their
probability of success, when taking and exiting positions.

Every stock behaves differently and each one has its own unique characteristics. The ability
to identify them is an important part of the Wyckoff trader's success. A great way to
accomplish this is to always go back and study a potential candidate from a long-term
perspective. Getting a good "feel" for how a stock has behaved in the past, helps greatly
when anticipating the future.

It is very difficult to trade or develop an investment portfolio that contains 50 to 100 stocks.
In addition, all stocks do not move in harmony with each other, or at the same speed or
time. This means we must develop a plan to identify and then trade the very best stocks that
will enhance our portfolios. The following are strategies to do just that.

Determine the short (days to weeks), intermediate (weeks to months) and long-
term (months to years) trends of the market.

Decide the type of trade (short-term, intermediate-term or long term) you wish to
make. Focus on that particular trend.

Determine the relatives strength/weakness of the Group Leadership stocks when
compared to the Wyckoff Wave. This is done by making a visual comparison on the
vertical line chart of previous support and supply points.

Identify the strongest stocks, within your selected trend, compared to the related
Group Leadership stock.

Use the Wyckoff Position Sheet and the Buying and Selling Tests to find the best
stocks, at the best time to buy.

The Wyckoff Charting Service allows members to compare a stock's relative strength and
weakness with the Wyckoff Wave, a Group Leadership Stock or any other selected stock.
This allows the Wyckoff trader to quickly identify stocks that are ready to lead the market
during the next trend.

Once a decision is made to purchase a stock, market discipline becomes extremely

important. The Wyckoff trader should follow these guidelines.

On paper, write down why the buying decision was made and what specific Wyckoff
indicator or indicators, caused you to act.

Write down your goal for the stock, based on its Point & Figure chart.

Write down where you are going to place your stop order and the specific reasons
for that decision.

Write down exactly what you expect the stock to do, immediately after you
place the order.

Write down, what the stock would do, that would make you close your position.

Every day, write down a brief synopsis of the stock's performance and if it is
proceeding according to plan.

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STOP ORDERS

A very important stock market axiom states: "When trading the stock market, it's not how
much you make, but how much you don't lose. "

A stop order protects the Wyckoff student from two things:

A bad entry point

Unforeseen market conditions

If a trader is not careful and does not protect trades with stop orders, valuable capital can be
lost. This can take the trader out of the market, just when strong profits are on the horizon.

A stop order is a help mate. It allows the trader the flexibility to easily exit trades that have
not gone as expected. There is nothing worse than buying a stock, having the market go
against you, and being frozen, in a losing situation, for a long period of time.

This section not only emphasizes the importance of stop orders, but provides rules on when
and where to place stop orders and when they should be moved.

There are two important stop order rules:

1. Always, always use a stop order.
2. Never make a trade unless you can logically and safely use a stop order. It is important to
use a stop order to determine whether or not a trade should be made. If, using Wyckoff
principles, there is no logical place to enter a stop order, the trade should not be made.

If the stock moves in the expected direction, the stop order can be moved to protect profits.
That's the easy part.

However, if the stock moves against the trade, before it even reaches the stop order, the
trade should be evaluated. If the stock is not performing as expected the trade should be
closed. This should happen before the stop order is actually reached.

If a stop order is caught, the trader is selling from weakness and, most probably, trading
against the trend. These are the two best ways to lose money in the stock market.

After a position has been taken and the stop order placed, the next few days are quite
important. This is where the trader must pay close attention to the stock's performance and
watch for any unexpected action.

As mentioned in the previous chapter, one way to do this is to write down, on paper, why
the position was taken and how the stock is expected to behave during the next several days.
Every day, write down what the stock did and how it compares with the original
expectations.

As mentioned above, if the stock is not behaving according to expectations, consideration

should be made to close the trade, even before it reaches a stop order. The trader is acting,
from a position of strength and not being dominated by the market. Successful traders use
mental stop orders to close bad positions, without waiting for the actual stop order to be
executed. It is mentioned twice because it is really, really important.
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The good Wyckoff trader never lets stop orders be caught.

If the stock moves as expected, the stop order can also be adjusted to protect profits. Then,
after its initial move, a stock will experience a secondary test, a normal corrective reaction, or
will simply move sideways. Once the depth of the correction has been established, and the
stock begins to move again, the stop order should be moved to just below the lateral move
of the correction.

The importance of a stop order can never be overstated. The Wyckoff trader must not only
believe in these rules, but must always act on them.

R ISK/R EWARD R ATIO

Once your initial analysis is accomplished and you have identified a few possible candidates,
determine which stocks are likely to lead the market during the next trend. Make sure they
have a good risk/reward ratio and if they are ready to move with the market.

At an absolute minimum a risk/reward ratio is 1/3. Most Wyckoff students select a

risk/reward ratio of 1/4 or 1/5. A 1/5 risk/reward ratio means you are prepared to risk
$1.00 for every $5.00 you expect the stock to move.

For example, if you are prepared to purchase a stock at $30.00 and place your stop order at
$27.875, you are risking $2.125. Therefore, to satisfy a 1/4 risk reward ratio, you should
expect the stock to advance to $38.70. If the Point & Figure chart does not show that as a
minimal objective, the trade should not be acceptable under these risk/reward principles.

M OVING YOUR STOPS

Once your stock has moved as expected, stop orders should be moved to protect profits.
Initially, your stop order should not be moved until:

The stock has rallied (reacted) and digested the rally (reaction) by either moving
sideways or putting in a successful Secondary Test

And then it moves into new high (low) ground.

Once a trend channel has been established, the stop order should be placed slightly below
the trend channel's support line to protect long positions. If a short position has been taken,
the stop order should be moved slightly above the trend channel's supply line.

As the stock reaches an objective, the stop order placement can be more aggressive to
protect profits.

Remember, stop orders should rarely be executed. The Wyckoff student should be nimble
enough to identify trouble and close their positions, before the stop order is in jeopardy.

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FINAL THOUGHTS
A successful Wyckoff trader is a disciplined Wyckoff trader. As a novice learning about the
Wyckoff strategies and techniques and growing as a stock market trader and investor, I
realized that most of my mistakes came from a lack of discipline.

I would enter a trade with specific goals and objectives in mind. However, if the stock did
not do what I expected, I would find some way to rationalize its behavior to justify my initial
trade. It was an expensive lesson that, unfortunately, was not learned over one trade.

While I paid a fair amount of tuition to the University of Wall Street, once I became a
disciplined trader, my results changed dramatically.

With that in mind, I would like to share some of my strategies, when entering or exiting a
position. Some of these are found elsewhere in this book, but they are important enough to
be repeated.

Always use stop orders. If your trade is not behaving as expected, don't wait for the
stop order to be executed. Close your position and move on. Wishing and hoping is
an expensive endeavor.

When considering new positions, take some time to review several candidates. Look
at the stock from a longer term perspective and try to identify its unique
characteristics.

Use relative strength/weakness analysis, the position sheet and the buying or selling
tests checklists.

Once candidates are selected, write down, on paper or computer, why they were
selected and what would happen that would cause you to take a position. If that
specific cause doesn't happen, move on to another candidate.

If that cause occurs and the position is taken, write down, on paper or computer,
why the position was taken, where the stop order was placed and the objective price
where the position will be closed.

Every day write down what the stock did, any concerns that have arisen, and if it is
performing as expected.

As the move progresses, always include the stop order price in your daily review.
When the stop is moved note new price and justify the move.

As soon as possible, draw the trend channel on your vertical line chart. It is
important to pay extra attention to the stock's behavior as it approaches the
channel's supply and support lines. Include any relevant notes in your daily
commentary.

When the stock reaches its objective area, write down scenarios that will cause you to
close your position. If one plays out, close the position and take your profits.

You don't need to buy at the exact bottom or sell at the exact top. Getting between
90% and 95% of the total move is always a great trade.

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