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READING PRICE & VOLUME ACROSS

MULTIPLE TIME FRAMES: APPLICATION
OFTHEWYCKOFFMETHOD
BYDR.GARYDAYTON

In this article, I highlight how reading price bars and volume across multiple
time frames can give both the swing trader and the day trader a substantial
edge in their trading. This approach was first described by Richard D.
WyckoffearlyintheTwentiethCentury.

Considered the father of technical analysis, Wyckoff distinguished market

phenomena like support and resistance, climactic action, and testing.
Despite the many changes since Wyckoffs time, understanding how supply
and demand is revealed through price action and volume can be of high
valuetothetechnicalanalystinassessingtodaysmarkets.

BeginWiththeBackground:WeeklyChart

Chart1:WeeklyChart
Beginning with the weekly chart, we use recent trading activity in the
Canadian Dollar (CD) currency futures (Chicago Mercantile Exchange) to
illustrate some of the skills of chart reading. The weekly has been trading
withinthehighandlowofJulyandOctober2011,respectively.AlthoughCD
held two higher lows at A and C, the market failed to follow through to the
upside at D. Instead, a Wyckoff Upthrust (UT) occurred when price closed
below the resistance level at B. This UT was tested at F on comparatively
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lightervolumeindicatingalackofbuyingjustundertheoldresistancelevel,
B.ThetestatFwasalsoanUT,moreclearlydefinedonadailychart,anda
choicelocationfortheswingtradertoinitiateasellshorttrade.

From the test at F, the market moved lower on increasing volume and wide
range, indicating active selling. The selling stopped just below the support
level at E with the next week closing above that support. The failure to
followthroughtothedownsideatasupportlevelistheoppositesituationof
a Wyckoff Upthrust. When price closes above support after dipping
underneathit,itisknownasaWyckoffSpring.

The swing trader is now presented with a dilemma. Having sold short, a
bullish spring begins to unfold. Should the short be covered, and perhaps a
long position initiated? The answer may be found in the lower time frame
charts.

GoingDeeper:DailyChart

Chart2:DailyChart
The daily chart shows the Wyckoff UT at F viewed as a test on the weekly
chart. The price bars at 1 and 2 show buyers unable to hold price above
recent resistance. Instead, sellers entered and closed these days in the
middle of their ranges and underneath resistance. The elevated volume
reinforcestheweaknessseeninthepricebars.Subsequentdayspaintlower
highs, lower lows, and all but one lower closesindicative of a market
unable to rally. Sellers aggressively drive price down beginning at 3 with
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wide ranges, poor closes and increased volume to the low at G, indicating
heavyliquidation.
Andthenthedowndraftstops.Itisnormalforadescendingmarkettopause
and rally at support. The key question for the swing trader is whether the
rallyissimplyatechnicalpullbackoffofsupportorthestartofabullishmove
up.Thereareafewthingstoconsider.
Traders tend to rivet their eyes on the last few barsat the right edge of the
chart.Toreadachartcorrectly,itisimportanttogodeeperthanafewbars
and, instead, take in a more holistic view. Thus, the first consideration is
seenontheweeklychart.AtB,D,andF,buyershadthreeopportunitiesto
take this market higher, but failed. Although possible, it is less likely that a
strong rally would begin with this background. On the daily chart, we see a
swift fall from F to G. Volume expands on this large move down. Selling is
clearlydominant,asitshouldbewhenignitedbyaweeklyupthrust;thisisa
strongsignofweakness.ComparethisdownmovetotheupmovefromGto
H. Although there two or three strong days on the rally from G to H, the
dailyrangesandoverallvolumeiscomparativelyweakerthantherangesand
volume from F to G. Buyers will have to mount a much greater effort to
overcometherecentsupply.
We also see the rally from G to H stop around the lows of midDecember
where the market found support at that time. Because this support was
knifedthroughsoeasilybybar4,wewouldnowanticipateittoberesistance
as the market returns to that level at Markets frequently return to areas of
accelerated movement on high volume, such as bar 4. Although supply
dominated, the high volume also indicates the presence of buying. The
market may test these areas to assure itself that buyers have indeed been
removedandavoidoppositiontolowerprices.Thus,wewanttolookatthis
areacarefully.Abarbybarassessmentcanrevealmuchaboutthemarkets
strengthhere.
The rally from the lows at G shows a good move up with firm and rising
closes. At bar 5, volume increases. This is not alarming as good progress is
made on this day, and the range is wide, proportionate to the volume. The
nextday,bar6,tellsadifferentstory.Onnearlythesameamountofvolume
as5,therangeonthisdaynarrows.Itisabouthalftherangeofbar5,andits
rangeremainsinsidetherangeofbar5.Althoughtherewascertainlybuying
onbar6,sellingkeptthebuyersfrommakingthekindofprogresstheymade
thepreviousday.IntheWyckoffMethod,thisisknownaseffortvs.result.
Volume represents effort and price is the result. Here we see large effort
with little result, a strong indication that sellers have again become active.
Thenextday,bar7,triestorallyabovethehighsof5and6,butfailsonlight
volume,indicatingbuyersarebecomingexhausted.Thesuddenhighvolume
andsubsequentlackofprogressdisplayedbybars5,6and7,suggestaminor
buyingclimaxhasoccurred.Thelasttwodaysonthechartbars8and9do
showthatbuyerswereabletoclosethesedaysontheirhighs,sothemarket
canbe expected topushalittlehigher. Volumeon bothdaysis thelightest
of the last three weeks. This adds to the developing story of weakness.
Thus, we want to be alert to any weak rally up to, just above, or just below
thehighofbar7.
DayTrading
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We will next take on the perspective of the day trader. For intraday
assessment,Iuseatickbarchart.Manyperiodsinthenear24hourmarkets
are lightly traded, making timebased charts more difficult to understand.
Tick charts compress this data into a more readerfriendly format while at
the same time retaining price bar characteristics that show demand and
supply. We also use an analytic tool developed by David Weis based on
WyckoffsoriginalwaveandtapereadingchartscalledtheWeisWave.This
tool plots the swingswhat Wyckoff called wavesas an overlay onto the
price bars. It also plots the volume of each wave along the bottom
histogram.Inhisday,Wyckoffplottedhischartsbyhandfromdatareadoff
the ticker tape. This is no longer practical in todays markets. The Weis
Wavedoesthisusefuljobforus.
Chart3:IntradayChart#1

IntradayChart1includesdatashowingthedailyhighsofbars7,8,and9and
their associated resistance line. The next day, the market rallies above the
highofbar7.Weimmediatelynotethattheupmoveissuspectbecausethe
volume on wave B is comparatively light. We note the up waves two days
ago (A) showed greater demand than we are now seeing on the break out.
We also see the market reverse and push easily down through and
underneath the resistance line along the daily highs. Just like D on the
weekly chart and F on the daily chart, this, too, is a Wyckoff Upthrust,
indicatingthepresenceofsignificantsellingashigherpricesabovetherecent
dailyhighsarerejected.
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HighdownsidevolumecomesinonwaveCshowingstrongselling.Wenote
that wave C is also larger than recent down waves and up waves; another
indication supply has entered the market. The weak rally on wave D stops
justbelowresistance.Thisupwaveanditsassociatedvolumearesmall.Itis
atestoftheupthrust.Asthemarketturnsbackdownattheredarrow,the
daytradercaninitiateashorttrade.
Price moves through the intraday support level that caused wave C to stop.
Both waves and volume remain stronger to the downside than the upside.
Thus, the very weak rally to the underside of the intraday support line at E
offersanotheropportunityforashorttrade.
Ingeneral,theminimumprofittargetforanupthrustistheoppositesideof
thetradingrange.PricetravelstothislevelonwaveF,comingtothemulti
day low, which is a good location to cover shorts for the day trader who
wants to go home flat. In reviewing the days trading, we note that supply
has been stronger than demand, as seen by both the length of the waves
(down compared to up waves) and the down volume. We anticipate lower
pricesinthenearfuture.
Chart4:IntradayChart#2

TurningtoIntradayChart2,weseethatthenextdaybeginswithaweakrally
thatisunabletopushabovetheintradaysupportlinefromyesterday(atC),
which has now become resistance, just as we saw on the daily chart at H.
ThepoorrallyendsinanintradayupthrustatthetopofwaveG,whereaday
trader can enter short as the market starts down. Note that volume
increases on wave G without much advance in price. The effort made by
buyersonwaveGwasmetbyasuperiorforceofsellinglimitingupsideprice
progressandaddingtotheconvictionofashortsaleontheupthrust.
The market makes good progress down on good downside volume through
thesupportlevelofFdowntoH.Whydoesthemarketstophere?Thelow
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ofwaveHisatthesamelevelastheweeklysupportatE.Itisanobviousand
logical location for the intraday market to at least pause. The minor down
wave between wave H and wave I shows that selling has abated. A rally
wouldnowbeexpected.
The market pulls back on wave I. A standard trend channel highlights an
overbought condition at the top of wave I. We also see the characteristic
effort vs. result in the high volume, little price progress of wave I. As the
marketturnsbackdowntoandunderthesupplylineofthetrendchannel,a
shorttradecanbeentered.
Shorts can be covered as the market is unable to fall below the days low if
thetraderpreferstoflattenattheendoftheday.Thereis,however,strong
evidence for further follow through to the downside for the next day. This
daysactionclearlyshowssellersincontrol.Downwavesremainlargerthan
up waves and downside volume predominates. The day began on its highs;
brokeyesterdayslow,andclosednearonitslows.Thetwoattemptstorally
(waves G and I) were both feeble. These are all characteristics of a weak
market.
The market does follow through to the downside the next trading day. We
notice, however, that price has reached an oversold position in the down
trendchannel,thesupplylineofwhichwasdrawnfromthetopsofwavesB
andG.AparallellinewouldthenhavebeendrawnfromthelowatwaveF,
butthemarketwassoweakthatitexceededthatline(notshown)rendering
ituseless.Inthiscase,aparalleldemandlineisdrawnfromthelowofwave
H. Wave J reaches the bottom of the trend channel. The astute Wyckoff
analyst would recognize that the volume at J has lessened (compared to
waves F, H and the wave after I). As the market turns up from wave K, the
signaltocovershortsandprepareforarallyisclear.
The rally ends at the top of wave L. An uptrend channel highlights the
oversoldpositionofprice.Pricehasrisenclosetothetopofthedowntrend
channelandjustbelowresistancethathasformedfromthelowsofwaveH.
Giventhedowntrendingconditionsofthismarket,itisunlikelypricewillrise
throughthiscombinationofresistance.Ashortmaybetakenhere,andprice
movesdownreturningtoyesterdayslowsatthebottomofwavesJandK.
Note carefully the rally from the lows at JK to the high at L. Although this
rally did not break the supply line, it is the largest up move since the down
trend began at B. We also note that more upside volume came in on this
move than we have seen in this downtrend. These two conditions indicate
that demand is beginning to enter the market. On the subsequent down
wave M, we see large downside wave volume, but price is unable to push
through yesterdays lows. This is an effort to go lower without a
proportionate result, indicating the buyers are absorbing selling. The time
periodisalsoimportant.Wehavenotseensuchhighintradayvolumeduring
thisperiod.Theseconditionsalertustoachangeinmarketbehavior.Atthe
bottomofwaveM,pricedipsunderneaththesupportofyesterdayslowand
closesbackaboveit.Withthestrengthseenintheimmediatebackground,a
longtrademaybeinitiatedatthisWyckoffSpring(greenarrow).
Conclusion
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This article highlights the application of the Wyckoff Method in the modern
CanadianDollarcurrencyfuturesmarket.Althoughtheprinciplesofreading
supply and demand highlighted here were first described over 80 years ago
by Richard Wyckoff, they continue to serve the technical analyst and trader
well. In this modern era of advanced technologies where we tend to
emphasize indicators, statistical models and other derivatives, is easy to
overlook the straightforward behavioral principles of buying and selling
underlyingallfreelytradedmarkets.Readingsupplyanddemandcontinues
tobeavaluableguidetothemarketsnextlikelyactionandshouldbeapart
ofeveryanalystsskillset.

Dr. Gary Dayton is an active trader and a
psychologist.Hecreatedatrainingprogramcalled
Deep Practice based on psychological research in
expert performance to help traders acquire the
skillsoftheWyckoffMethod.Dr.Garyiscurrently
writingabookontradingpsychologytobepublishedbyJohnWiley&Sons.
www.TradingPsychologyEdge.com