Transcript Developing a Process: Applying Wyckoff Theory to Stocks (or “How Do I Evaluate 7,500 Stocks Every Night”) Presented by Thomas Hamilton Special Risk Capital.

Developing a Process:
Applying Wyckoff Theory to Stocks
(or “How Do I Evaluate 7,500 Stocks Every Night”)
Presented by Thomas Hamilton
Special Risk Capital Management, LLC
Disclaimer:
The sole purpose of this presentation is to present possibilities and
educate / entertain the audience. It is NOT intended to promote any
strategy, indicator, technique or software. It is the responsibility of
each investor / trader to research, evaluate and test ideas before
incorporating them into their own trade plan. Neither Mr. Hamilton,
or Special Risk Capital Management, LLC make any implied value
as to the content herein. You and you alone are responsible for
due diligence.
Information About SRCM and
This Presentation
 Weekly Market Commentary at www.Special-Risk.net
also on this site:
 Monthly Client Newsletter
 This Presentation and other articles
Disclosure I am an Engineer.
I am a Technician.
I am a “Quant”.
Introduction
 My Background
BS Engineering, MS Business Management, 12 Years RIA
 Goal Of This Presentation
To Provide at Least One Idea You Can Use Monday
Morning and to Provide “Food for Thought”
 Goal of My Strategy
- Think Like an Institution: Find Growth & Ride It
- Combine Proven Fundamental Characteristics with
Technical Analysis (emphasis: Wyckoff Theory)
“Essentially all models are wrong, but some are useful.”
George Box
“Understanding that trading systems are not perfect, my hope
is to help you develop systems that are useful.”
Dr. Howard Bandy
“Don’t gamble! Take all of your savings and buy some good
stock and hold it till it goes up, then sell it.
If it doesn’t go up, don’t buy it”
Will Rogers
Prospecting For Candidates
What Draws The Attention of “Smart Money”?
Using The Research of Others . . .
 William O’Neil –
The CANSLIM method and its derivatives
 Charles Kirkpatrick –
“Beat The Market: Invest by Knowing What Stocks to Buy
& What Stocks to Sell”
 O’Shaughnessy, Dreman, Graham, etc.
And other studies that have identified the
fundamental attributes of high performance stocks
before they launch. They are in the public domain.
Tools to Identify Candidates
 High Growth Stock Investor
 AAII Stock Investor Pro
 MarketSmith / IBD
 Vector Vest, Stock Finder (?)
 numerous internet sites & services
- FINVIZ, Y Charts, Stock Rover, etc.
(But these usually require you to know your criteria.)
I recommend avoiding the “black box” services;
tend to be pure momentum “shoot from the hip”.
High Growth Stock Investor
- Pro’s
 Combines Fundamental & Technical analysis.
 Data Updates 4 times + 15 minute delayed prices.
 Use pre-written filters or write you own.
 Spreadsheet & Chart based.
 Active user base; good tech support; improving.
 Easy back testing of strategies, any time frame.
- Con’s
 Limited formula sets, can’t write unique ones.
 Cost: $599 / yr.; subscription based.
AAII Stock Investor Pro
 Pro’s
- Covers a wide variety of strategies.
- Easy to use; easy data updates.
- Performance back tested, results in Excel.
- Strategies with open formulas & can write your own.
- Inexpensive; $198 / yr.; subscription based.
 Con’s
- User base is subdued.
- Manual back testing of strategies via Excel.
- Limited technical analysis; No charting.
Selecting the Strategies
 Pick out the past time frame that best represents the
current market environment.
- Why? because not all strategies do well in all
environments. Which work in: Up markets / Down markets?
 Select the top stock selection strategies that performed
in that environment.
- Why? because we want diversity in our candidates.
Criteria: Return vs. market, Max Drawdown, % Profitable
Where did the performance come from? (a few or many)
 Combine the results to form your selection candidates.
- Why? Because they may need additional filtering.
Performance Report Example: HGSI
Performance Report Example: AAII
Examples of Stock Investor Pro Strategies
Add a Custom Filter: Your Criteria
An example of an HGSI Filter –
Line #
Criteria
Purpose
1
Close <= 20% above 50 sma
Stock not extended
2
Market Capitalization > 500 mil $ Avoid micro cap stocks
3
Close > $8.50
Intuitional interest
4
21 sma volume > 500K shares
Liquidity
5
Ave. daily $ volume > $20 mil
Liquidity
6
Issue a common stock
No Preferred, ETF, Indexes
Analysis of a Trading Range
(attempts with formulas)
Wyckoff Labels on LCI
LCI with My Strategy using HGSI
Characteristics of Strength
 Accumulation (green shading)
Force Index-13 day > 0
5 day change > S&P 500
Up/Down Vol-30 day >.90 10 day change > S&P 500
%A/D > -20
15 day change > .9 S&P 500
A/D Velocity Increasing 21 day change > .8 S&P 500
Looking for signs of strong Accumulation:
Price and Volume strength relative to the market.
Price Breakout Bar
(upper green bar)
Force Index-2 day > 0
5 day change > S&P 500
Force Index-13 day > 0
10 day change > S&P 500
Bollinger %B >.45
%B 1day change >.24
Up/Down Vol-30 day >.90 Close in Range > 50%
Vol. x1.25 > 20 sma Vol.
Days since Bongo ‘No’ <=20 (see appendix)
Days Since Force Idx cross zero <=15
Looking for:
Major price move up with volume coming in after a
pullback i.e. Early strength with weakness in background.
Monitoring- Exit Warnings:
1. Pink chart shading Force Index- 5 day < 0
Bollinger %B < .40
Bongo is False / No (see appendix)
2. Low of Significant Bar – Break Support level
(the art of chart reading, “where are the sellers?”)
3. Mechanical Stops –
Weekly Wyckoff Significant bars, see Appendix
Chandelier Stops – “Super Trend”, see Appendix
4. Above All Else Change in Price Structure toward Distribution
Summary of My Technique
A four step process run daily
Step 1: Identify Candidates
 Download data (fundamental & technical).
 Run pre-selected criteria scans (based on current
market environment) for candidates & combine them.
 Filter out stocks not meeting your personal criteria.
This is my daily stock candidate universe.
Step 2: Identify Change in Price Character
 Using Comparative Relative Strength and short term
Accumulation / Distribution formulas to further filter
out poor structural stocks.
 Looking for Wyckoff Price Structure on the Chart in
the background.
“The best computer for recognizing pattern
recognition is the one between your ears.”
Dr. Hank Pruden ?
Step 3: Identify the Breakout
 Price Structure in the Background (critical).
 Signs of Strength (SOS) :
- average to widening bar spreads with Close in the
upper range; increasing bar volume.
 Last Point of Support (LPS) :
- Narrowing bar spreads with Close in the upper
range; increasing bar volume.
Selling is drying up, evidence of buyers stepping in.
Step 4: Monitor the Position
Consider Exiting if:
 Accumulation is not Continuing or Confirmed
 Cull Out the Weak or Stagnate Stocks
 Sell on Distribution
 Scaling out if Price is Extended
 Stops as a Warning:
- Wyckoff Weekly Significant Bar Lows
- Modified Chandelier Stops
- Support & Resistance levels
- Signs of Weakness (SOW)
What Could Possibly Go Wrong ?
Price Problems
 Wyckoff Price Formation not Fulfilled
 False or Premature Breakouts
AKA:
- when an LPS does not develop into a Breakout
- when Re-Accumulation becomes Distribution
 News Flashes, Earnings & “The Unexpected”
- negative aberrant behavior occurs
(sounds better than: “shit happens”)
Infrastructure Problems
 Most effective with Supply & Demand securities (stocks)
- Stocks have finite amount of supply; Float Shares.
- ETF’s & Futures are derivatives. Their value is derived
from the underlining securities (cash) value; thus Demand
Volume effects price, but Supply is not limited.
(shares / contracts are created).
 Volume may not be accurate
- Off exchange, private sales and dark pool volume may not
be reported or reported late.
 Volume May Not Reflect “Pure” Supply or Demand
- Flash / Algorithmic Trading; short term computer
driven & arbitrage cause temporary distortions.
A Final Thought
(A saying in Hatha Yoga)
On The Edge of Discomfort,
is Where Change Happens.
Become Uncomfortable:
Think & Explore
Appendix
Definitions & Clarifications
 What is %A/D ? (proprietary)
Uses relationship of price to 4, 9, 17 sma over the past 4
days, and
Volume compared to 30 sma of volume over past 4 days, and
Chaikin Money Flow (21 day) over past 4 days.
 What A/D Velocity ?
The change in the # A/D indicator.
 What is a “Super Trend” Chandelier Stop ?
highest High price last x days – (Wilder MA of true range times
a multiplier factor) Google “Super Trend” for formula
Definitions & Clarifications
 What is “Bongo”? (unique to HGSI)
The Bongo ‘Yes’ criteria are as follows:
1. Close > 9 SMA
2. RSI 8>14>19
The Bongo ‘No’ criteria are just the opposite.
 What is %B?
%B is derived from the formula for Stochastics and tells you
where you are in relation to an upper Bollinger Band and a
lower Bollinger Band.
%B = (Last Close – Lower Bollinger Band) / (Upper Bollinger
Band – Lower Bollinger Band)
Is The Stock Ready to Move ?
1) Market Analysis:
- Is the market moving (or ready to) move in your
favor?
- Low risk moves when you’re in sync with the
market.
2) Sector / Group Analysis:
- Low risk moves when you select the strongest stock
in the strongest sector.
3) Stock Analysis:
- Relative Strength.
- Wyckoff Price Analysis.
- Is the stock ready to move?
- Defined Risk, use Stop Stops !
Resources & Thanks
 Online Course: http://www.informedtrades.com/blogs/stockjock/
 Stock Market Institute: www.wyckoffstockmarketinstitute.com
 “The Three Skills of Top Trading”, by Prof. Hank Pruden
(Behavioral Systems Building, Pattern Recognition & Mental State
Management)
 “Charting the Stock Market”, edited by Jack Hutson
 “How I Trade and Invest in Stocks & Bonds”, et al, by
Richard Wyckoff
 Wyckoff Associates, LLC
“Advanced Wyckoff Course” by Roman Bogomazov
 The importance of staying “in the now”: “The Power of
Now” and “A New Earth”, by Echart Tolle
Presentation Content & Credit
 High Growth Stock Investor (HGSI)
www.highgrowthstock.com
 American Association of Individual Investors (AAII)
http://www.aaii.com/store/sipro
Bar charts courtesy of MetaStock and HGSI; used with permission.
Tool #1: Action, Reaction, Failure
Action, Reaction, Failure – Big Picture
Definition of Significant Bars
They Have Two Primary Characteristics –
 1) A Wide Range Bar and
 2) Closes near the Top of the Range (Up bar) /
Closes near the Low of the Range (Down bar)
Important:
The Low of a Significant Up bar defines the Support
Level
The High of a Significant Down bar defines the
Resistance Level
Tool #2: Significant Bars
Example of Significant Bars
Thoughts:
- Works in all time frames, best on weekly for position traders.
- Need to use discretion during low volatility / congestion areas.
- It’s not perfect, but does provide confirmation and guidance.
Tool #3: Comparative Relative Strength
APKT
NASDAQ 100 Index
APKT: a Closer Look at
Comparative Relative Strength
Advanced Concept: Formularizing Wyckoff
A Study of Comparative Relative Strength &
Accumulation/Distribution Days
Swing Nomenclature
Swing “A” is the current swing move; “B” is the previous
completed counter move, “C” is 2nd move back (in the same
direction as “A”). All swings must be a minimum of x% (5 or
8%), though they can be more.
Comparative Relative Strength (stock to an index)
• CRS is compared over a 5% swing of an Index (NASDAQ Composite).
• CRS is the % price move in the swing, peak to trough, comparing change in % of
stock to change in % of the index.
• CRS Swing Signal –
A AND B > 0 = Bullish
A AND B < 0 = Bearish
Observations: I find the A/D days count and the CRS value of the current swing to be
very helpful in monitoring a position and is a good early warning or confirming signal to
exit the position.
Using the swing comparison method is good, but tends to be much more selective in
defining entry candidates. These would likely be low risk stocks, though be prepared
to “miss some good ones” too.
Measuring Accumulation & Distribution of a Stock
Definition of Accumulation Day = C in upper 1/3 of bar range AND C > C[1] AND H > H[1]
Distribution Day =
C in lower 1/3 of bar range AND C < C[1] AND L < L[1]
• A/D Swing Count Signal –
A >= C AND A > B = Bullish
A<= C AND A < B = Bearish
Counts are compared over an 8% price swing of the stock