For you students of technical analysis arcana: Today’s action is what could be described as a Wyckoff Spring.
Richard Wyckoff was a trader from the 1920s. He wrote several books on the Market, and eventually set up the “Stock Market Institute” in Phoenix.
Today’s action could be part of a so-called Wyckoff spring, which occurs when a market average (or stock) falls below its trading range, makes a new “panic low” and then “springs” back into its previous range.
“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:
Source: San Francisco Technical Securities Analysts Association
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.
Sounds about right to me.
For more about Richard Wyckoff, see these books:
How I Trade and Invest in Stocks and Bonds
Sources:
TSAA Review
Technical Securities Analysts Association
Summer 2003
http://www.tsaasf.org/tsaa-review-03-2.doc
‘Rebound’ Suffers Relapse; ‘R’ Word Is Uttered Anew
Aaron L. Task
The Street.com, 3/28/01 6:26 PM ET
http://www.thestreet.com/markets/aarontaskfree/1367305.html
Mr. Ritholtz, the image in this post is the BMP format and is 500 kbytes in size. If you convert graphics like that in either GIF or JPG format, they would be smaller, transmit faster for the folks using modems (yes, there are people still using modems) and would keep your website bandwidth usage low.
Just suggestion.
(editor’s note: Done!)
Wyckoff’s observations come from the 1920’s, and the springing action reflected true buying. Check the ISEE index figures. Going into the sell-off day it was lowest in over a year, meaning many players were long a short market. The next day it bounced 100 basis points, indicating they were simply taking profits, not really exhibiting buying interest. These products were not widely available in Wyckoff’s time and will obscure the implications of the real buying interest he observed.