There is a Wyckoff Equation that includes “three laws” and “nine tests.” The Wyckoff schematics complete the equation.
My father, Robert G. Evans, carried on the teachings of the Wyckoff Method after the death of Mr. Wyckoff in 1934. He did much of his teaching by newsletter, and printed charts that were hand drawn, and was one of the first users of the reel-to-reel tape, sending his lectures by mail to his clients.
What my Dad was good at was taking the complications of the Wyckoff Method and was able annotate and explain the Wyckoff way through analogies.
Now, at www.bluechipoptions.com and www.oexoptions.com I’ve continued my interpretations of portions of Wyckoff schematics.
This is for the student of stocks. Options are a secondary part of the process presented here.
1. Accumulation-know when there is enough accumulation and volume to see where the stock could springboard, or break out. Accumulation, to Wyckoff, creates CAUSE, as a subsequent move will now occur.
2. Distribution-this is where there has been enough accumulation (resistance lines) and EFFECT occurs, with the market distributing.
In understanding Wyckoff distribution it knows when the supply has reached its peak of exhaustion. Often there can be panicky selling or heavy volume as Wyckoff selling climaxes. Once the selling pressure is exhausted to Wyckoff there is an AR (Automatic Rally).
From this rally is often a secondary test, with the downside showing less volume, less selling and a shorter drop off.
Note the Automatic Rally has occurred from the sell off, another selling climax occurs, and the high of the AR is now the base of the trading range for this stock.
This is the basis of Wyckoff.
My father, Robert G. Evans, who piloted the Wyckoff Associates business as the sole licensee of Mr. Wyckoff, became well known for his lectures and tapes that analogized some of the harder.
The Jump Across The Creek Analogy
The term “jump” was first coined by my Dad, and is now part of Wyckoff. In this story he would tell how a market was trying to break out of its trading range. In the story the market is symbolized by a Boy Scout (this is me), and the meandering creek, with its "upper resistance line” defined by the rally peaks within the range. After probing the edge of the creek and discovering that flow of supply was about to dry up the Boy Scout (still me) would “retreat” in order to get a running start to “jump across the creek.” The power of the movement by the Boy Scout would be measured by price spread and volume.
Defining the Jump
A jump is a relatively wider price-spread move made on comparatively higher volume that penetrates outer resistance or support. A back up is a test that immediately follows the jump—a relatively narrow price-spread reaction or rally on comparatively lighter volume that tests and confirms the legitimacy of the preceding jump action.
The Wyckoff Method instructs you to buy after a back up following an upward jump (a sign of strength) or to sell short after a back up following a downward jump (a sign of weakness). To Wyckoff, you should not buy breakouts because they leave you vulnerable to swift moves in the opposite direction if the breakout turned out to be false. Hence, at first glance, the Wyckoff Method appears to be telling you to buy into weakness and sell into strength.
William O’Neil in How to Make Money in Stocks uses a portion of the Wyckoff method, but defines a specific pivot point at which to buy, and holds to a strict 7-8% stop loss. We have made great money at Blue Chip Options using a combination of O’Neill’s “breakout thinking,” Wyckoff cause and effect/supply and demand and PNF charting, and a combination of stop loss methodology depending upon the stock.
In today’s highly volatile market it’s easy to lose 7 to 8% on a stock in a day, on a blip in the market.
