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Wyckoff Part 3: Recognizing Potential

05/11/00 04:26:16 PM
by Sean Moore

Horizontal formations in point & figure charts can help to signify when a security is likely to make a move. The longer the stock moves in a sideways fashion, the greater the potential for a move. This concept was an important building block for Richard D. Wyckoff's stock analysis method.

Security:   C
Position:   N/A

In the third step in Wyckoff's stock analysis procedure, the trader uses point & figure charts to further pinpoint those securities with the greatest opportunity to yield a profit. Parts 1 and 2 of the Wyckoff method began identifying those potentially profitable securities by establishing the market trend, then analyzing the relative strengths of various overperforming sectors and securities.

A point & figure chart can be quickly analyzed. A horizontal formation after a decline indicates that operators are willing to support the stock and stem the decline. After a rally, a horizontal formation uncovers the supply that's being offered and signals a downturn in prices as soon as the supply meets the demand. One general rule of point & figure charting states that the number of times a figure is repeated in a horizontal formation is the number of points a stock will advance from its low or decline from its peak. Figure 1 shows a horizonal formation on the point & figure chart for Citigroup Corp. This formation follows a slight downtrend and spans 21 divisions, signifying a potential for a 20+ point rise. This rise was realized in the few months that followed the horizontal formation.

Figure 1: Point & figure chart for Citigroup Inc. shows the buildup of a horizontal formation and the associated uptrend that followed.
Graphic provided by: TradeStation.
 
Wyckoff states that those stocks with the largest horizontal ranges represent the best candidates in which to establish positions. Using this in combination with Step 2 of the Wyckoff method (determining which securities are outperforming the market) help the trader ease closer to making a trading decision.

Related Articles:

Wyckoff Part 1: Defining A Trend

Wyckoff Part 2: Determining Relative Strength And Weakness




Sean Moore

Traders.com Staff Writer.

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Seattle, WA 98116
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E-mail address: smoore@traders.com

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Date: / /Rank: 3Comment: nice chart. just a test
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