Revisiting the Wyckoff Spring

For you students of technical analysis arcana: This past week’s action is what could be described as a Wyckoff Spring.

Who is Wyckoff, and what is is his spring? Richard Wyckoff was a trader from the 1920s. He penned several of my favorite Market books (mentioned previously here), before setting up the “Stock Market Institute” in Phoenix to study technicals and markets.

A Wyckoff Spring occurs when a market average (or stock) falls below its trading range, and makes a new “panic low” — and then “springs” back into its previous range.Its a relatively rare situation, one that is usaully associated with a sell off. That is a rather apt description of the entire week’s action.

Here is Wyckoff’s explanation:

“At its core, Wyckoff’s work is based on the analysis of trading ranges, and determining when stocks are in “basing,” “markdown,” “distribution,” or “markup” phases. Incorporated into these phases are the ongoing shifts between “weak hands” (public ownership) and “composite operators”, now commonly known as smart money.“

Using this chart as a guide, here’s a simplified overview of Wyckoff’s methodology:

Wyckoff’s World

Source: San Francisco Technical Securities Analysts Association

Explanation:

Phase A is characterized by a prolonged decline to “preliminary support” (PS on the chart), which provides temporary relief before the “selling climax” (SC). That climax is accompanied by sharply expanding volume as weak holders bail out in a panic. The climax is followed by an “automatic rally” (AR), suggesting the selling has been exhausted, and then a “secondary test” (ST) of the climax lows, during which volume is diminished.

Phase B contains basing action characterized by a series of rallies and secondary tests. The “creek” on the chart basically refers to a trendline connecting peaks of said rallies. A “jump across the creek” is a “sign of strength” (SOS) that provides evidence a bottom has occurred and buyers are emerging. These “jumps” occur in phases C and D on the chart.

Also in phase C, there’s another selloff and a marginal break of the selling climax lows. If such a test is accompanied by lower volume than that during the selling climax, it could be a setup for a Wyckoff Spring, a bullish pattern detailed here in March 2001.

Following the spring (no. 8 on the chart) and those “signs of strength” in phases C and D, there’s another selloff in phase D to the “last point of support” (LPS), after which this hypothetical example explodes higher.

I would put that first level at 8000 or so, and that next level at 7400.

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For more about Richard Wyckoff, see these books:

How I Trade and Invest in Stocks and Bonds

Stock Market Technique, No. 2

Sources:
TSAA Review
Technical Securities Analysts Association
Summer 2003
http://www.tsaasf.org/tsaa-review-03-2.doc