Welcome back fellow Wyckoffians! We covered lots of material in our first six (6) blogs. Hopefully, we are all recovered from the head-spinning introduction of the Wyckoff Structural Scanning methodology and its perspective on price movement. Our October Scanning Special was a hit and is available on demand for those who missed it.
As promised, this installment will be a deeper look at “accumulation” and “distribution”. In order to do this, let’s briefly look at the laws of Wyckoffian price movement.
- THE THREE LAWS OF WCYKOFF.
There are three (3) fundamental laws of Wyckoffian Price Movement:
- The Law of Supply and Demand;
- The Law of Cause and Effect;
- The Law of Effort versus Result.
Pruden, The Three Skills Top Trading, page 132, (Wiley, 2007).
Who cares about the law! I just want to scan. Cool your jets and let’s work the mind muscle for a minute.
Supply and Demand. As Professor Pruden notes, “[t]he law of supply and demand determines the price direction.” Pruden, supra. at 132. In its simplest incarnation, the law of supply and demand means that when demand is greater than supply, price will increase. Conversely, when supply is greater than demand, price will decrease.
Cause and Effect. This law is a bit more complex, but suffice it to say, the bigger the cause, the bigger the effect. As Dr. Puden states, “[i]n order to have an effect you must first have a cause, the effect will be in proportion to the cause.” Pruden, supra. at 132.
Effort and Result. As Dr. Pruden notes, the law of effort versus result provides an early-warning indication of a possible change of trend. Disharmonies and divergences between volume and price often signal a change in price direction. Pruden, supra. at 132.
How do we apply the Wyckoff Laws in our scanning?
Great question! There are many ways that we can apply the Wyckoff Laws to our scanning and trading. Let’s look at the Law of Supply and Demand and its impact on price analysis for scanning purposes. Let’s start with the basics.
- When demand is greater than supply, what would we expect to happen with price? Price should move up, of course.
- When supply is greater than demand, what would we expect to happen with price? Price should decline, silly.
- When supply is roughly equal to demand, what would we expect price to do? Price should stay about the same.
Let’s take a look at price movement in the context of accumulation.
As we noted in Blog No. 5, Working with Structural Elements, accumulation (Type 1) is the gradual acquisition of large positions, and it looks like this:
A summary of these accumulation price movements looks like this:
- Price moved down,
- Price stopped going down,
- Price went sideways,
- Price briefly fell under support, and
- Price then moved up and out above resistance.
Distribution is the sale of large stock positions and it looks like this:
Here is what price has done during a Type 1 Distribution formation:
- Price moved up (prior uptrend),
- Price stopped going up,
- Price went sideways,
- Price briefly overcame resistance, and
- Price then moved down and below support.
Let’s simply our price movement concepts even further and look at accumulation and distribution price movements as expressions of the Law of Supply and Demand.
- Price moves down (Supply > Demand);
- Price stops and moves sideways (Supply ≈ Demand);
- Price moves up over resistance (Demand > Supply).
- Price moves up (Demand > Supply);
- Price stops and moves sideways (Demand ≈ Supply);
- Price moves down and below under support (Supply > Demand).
Think about these simplified price movements of accumulation and distribution in terms of the Law of Supply and Demand. Focus only on supply and demand for the time being. Dig into how Supply and Demand fluctuate during structural price movement. We will draw on these concepts heavily in the future.
Next time, Supply and Demand will be further studied to prepare ourselves for translating price movements into scans. Why? Because it’s the Law! All kidding aside, we will explore the first law of all price movement, Supply and Demand, and look at it as a fundamental building block of all scanning.
See you next time.