Wyckoff Analysis: Yearly, Quarterly, Monthly.

Below are two presentations of the monthly data. The first chart is calendar based and the second is adjusted to display bars based on the CBOE's monthly option cycle. First, the calendar analysis.

Back in March 2001 as a lower low was made, the volume increased from the previous month which was the at that time the lowest low. In April 2001, prices reversed but the volume dried up. Again prices rose in May 2001 but volume increased slightly over April's levels but they were still way lower than March's levels. The market then dropped and made a new low in Sep 2001. However, this low was made with less volume than that was made at the previous low of March 2001. So volume increased slightly from Aug 2001, but more importantly, the volume was much less than the volume at the previous low set in March 2001. The market rallied and volume increased. This was now a bullish sign and the trend was perhaps about to change. Wyckoff theory was pointing the way to higher prices. But then when prices in March 2002 retested the highs of Jan 2002 with less volume, Wyckoff traders became bearish again. April 2002 brought a new low and an increase in volume to the downside which confirmed that the uptrend was temporarily suspended and prices dropped with volume increasing on the way down. July 2002 saw a massive increase in volume as a new monthly low was made. The market bounced but Wyckoff traders knew that the July lows needed to be retested and they were still bearish until Oct 2002. In Oct 2002, prices went lower than in July 2002 but volume didn't increase. This was a signal that the trend was changing once again and traders saw prices rise the following two months. The problem was that as prices rose during Nov and Dec 2002 volume decreased. Then prices went back down again to retest the lows of July 2002 and Oct 2002 because these two months had explosive volume. However, this time volume didn't increase nearly as much as prices dropped and the lows of July and Oct 2002 held. Now Wyckoff traders were able to unload their bearish positions and go long. So now a test of the highs was needed and the high of Dec 2002 was penetrated in May 2003 with greater volume giving the all clear ahead signal to Wyckoff traders. June 2003 also produced a higher high and its volume was greater than May's but it fell short of the volume needed for Wyckoff traders to remain bullish. The problem with the June 2003 high was that it penetrated the high of July 2002, and July 2002's volume was enormous. So the advance of 2003 was now suspect as prices now were pushing higher with less volume. So July and Aug 2003 saw prices retreat but so did the volume and as a matter of fact Aug 2003 made a lower low than July 2003 with less volume. This gave a bullish signal to Wyckoff traders but there still was the bearish signal from the penetration of the July 2002 high made in June 2003. What should a trader do? Well, Sep 2003 settled the issue. Prices made a new high and closed back within the trading range with a decrease in volume as compared to the volume of June and July of 2003. Sep 2003's volume increased from the previous month, but September's volume failed to increase above the levels set during the previous highs. This was now the bearish signal needed by Wyckoff traders. So long positions were exited and short positions were put on. The problem however is that prices reversed in Oct 2003 and volume increased from September's levels. Plus the closing price of Oct. was above the high of September's. This wasn't good for Wyckoff traders who had reversed their positions during the month. All they needed was a retracement so that they could get out of their losing positions and break even. The problem as you can see is that prices in Nov. and Dec. 2003 went straight up. These trader's weren't given an opportunity to break even. So they have either taken losses or they're still holding on to losing short positions. The good news is that the volume is decreasing rapidly as prices are rising, but it is no guarantee that prices will go down. This has all the makings of an old fashioned short squeeze rally. But if one follows the Wyckoff theory in the strictest sense, then lower prices are due to come.

The scenario above described follows theWyckoff theory as it is traditionally interpreted, but what if we were to make one critical change. How would it alter the traditional interpretaton? What's interesting to note here is that Wyckoff theory used the volume set by the July 2002 bar as the barometer for a retest of the subsequent low and the highs. This is unusual but does occur sporadically throughout history. However, if Wyckoff traders were to use the previous bar's volume (Jun 2002) as the comparison bar then Jun 2003's volume was actually greater than Jun 2002's volume. This difference in the interpretation would then be bullish rather than being bearish. However, it wouldn't change the fact that Sep 2003 high was made with less volume as compared to the previous high set in July 2003. But it was only 3.6% less, so some analysts believe that volume must shrink by at least 10% for a signal to occur. In that case, the prices and volume of Sep 2003 didn't cancel the current bullish signal. Oct 2003 then was bullish as that month created a higher high with an increase in volume. In this new interpretation, Nov 2003 was the first month to give a bearish signal as volume decreased while higher highs were made. However, since November's closing price was above the previous high. Higher prices were likely in December 2003. And so here we are. Dec 2003 did bring higher prices and an increase in volume from the previous month. This is of course bullish once again, but December also crossed the highs of May and June 2002 with less volume. These facts are what Wyckoff traders are now considering. So while the volume increased from Nov 2003, the volume is much lower than it was just two months ago (Oct 2003) and back in May 2002. This is a signal to exit long positions and look for new short positions.

So in this alternate Wyckoff interpretation, December 2003 is the first month to yield a bearish signal rather than back in Sep. 2003. But what if prices continue to rise and volume increases, then the bears will be forced to capitulate. The million dollar question remains, will prices rise enough to force any remaining bears to buy back their losing positions? Or, will Wyckoff's theory prove to be correct in forecasting lower prices? The good news is that if you put on a short position now you only have to wait for the market's reaction to penetrating the high of 2002 which is 1177. This is of course better than those who went short around the 1000 level based on the first interpretation's bearish signal set on Sep 2003.

The bad news is that the will be another group of traders who will buy at the beginning of each year. They are basing their investment decisions on another model. They are banking on the fact that the market will go at least 1% to 5% higher. This is illustrated in the 4 part history lesson discussed later on this page. But consider this. If you invest in the stock market 1/2/04 and the market rises 3% it will put the SPX at 1143. 6% higher equates to 1177 which is where the market will be retesting the 2002 highs. So if you went long 1/2/04 and made 3% to 6% and the market's reaction to the 2002 highs is negative you can exit your long postion at a 5% profit and still put your money into a T-Bill or T-Note for the remainder of the year at a guaranteed return of 1% to 3%. You'd have earned 5% from the market and 1% from a T-Bill. These aren't Wyckoff traders, these are investors playing the odds. And of course if the market continues higher, they would stay in the market longer. In, out, done for the year. As you can see these aren't long term investors, they are in and out of the market in less than a year every year.

The chart below was created so that the influence of options could be evaluated. Please compare the monthly bars displayed below to the monthly bars displayed above The exercise presented to you is for you to find alternate interpretations and if those interpretations violate any of those manifested by the calendar periods. If they do, then perhaps the classic interpretations are weakened by the influence of the option market.

created 12/28/03, ©2003 The Small Investors Software Co.