V.9:3 (124-126): Wyckoff: Identifying Opportunities by Craig F. Schroeder

Wyckoff: Identifying Opportunities by Craig F. Schroeder

Completing the first two steps of the Wyckoff method provides the investor or speculator with information that is essential for success. At this point, he or she knows whether to consider establishing long positions for an anticipated advance or short positions for a projected decline. In addition, he has a group of candidates from which to select the issues in which positions will be established. The next two steps of the Wyckoff method provide the basis for identifying the best opportunities from among the group of potential candidates.

CAUSE AND SELECT

Step 3 of the Wyckoff method involves selecting those stocks that have built up a cause in keeping with your goals. Many aspects of the Wyckoff approach employ the concept of cause and effect. In this step, the concept is applied using a point & figure chart. A cause on a point & figure chart is identified as a horizontal buildup of postings that develops at one particular level or over a relatively narrow range while the stock or the market as a whole is in a trading range. The cause is measured by the number of divisions that it covers on the point & figure chart. Figure 1, which is a point & figure chart of Bristol-Myers, shows a cause at the 52 level.

The chart of Bristol-Myers begins on January 1, 1990. It shows that a trading range developed in January and lasted until April. During this period, the stock traded in a range from a low of approximately 51 to a high of approximately 55. The 52 level is selected as the level at which to measure the potential because it represents the bottom of the last reaction before the stock broke out of the trading range to the upside. ...