HOW TO INTERPRET WYCKOFF POINT-AND-FIGURE

CHARTS

The procedures for the interpretation of the Wyckoff-oriented point-and-figure

Start with a bar chart and a point-and-figure (P&F) chart covering the same
patterns and time. Wyckoff prefers the one-point reversal chart—for example, the
DJIA blocked in boxes of 100 points each. But Wyckoff insists that at least two
entries must appear in each and every column. That leads to occasionally
combining X’s and O’s or up and down price movements to meet the minimum
standard of two entries per column.

The box size is important. For the DJIA the Wyckoff/Stock Market Institute uses
50 and 100 points. Please note that those are generated by the actual tape prints
within a day. Hence, a very volatile day may produce many point-and-figure ups
and downs.

1. Use the bar chart to identify one, or usually two or three, potential reversal
patterns—for example, an inverse “head-and-shoulders” (H&S) bottom followed
by a “cup-and-handle” on the same chart.
2. The point-and-figure count will be taken from the right shoulder or from the
handle identified on the bar chart—in other words, from the last pullback before
the price advance or markup stage.
3. On the P&F chart count the number of boxes across the accumulation formation
(for example, inverse head-and-shoulders, from shoulder to shoulder).
4. Count the number of boxes (columns) and multiply that number by the value
found in each box (for example, 50 points). Note that though some columns may
have only two boxes, one after the other, and other columns may contain several
boxes, the same per box value applies. In our case, the 2002–2003 bottom had 72
boxes (columns) each worth 100 points, for a total of 7,200 points.
5. Add the total count to the lowest price on the P&F chart itself and to the count
line itself. Thus, in the 2002–2003 example 7,200 points were added to the low
price (the “head” of the inverse head-and-shoulders of 7,200) for an upside
projection of 14,400.
6. Conservative is the guiding principle. Project the minimum price first; use the
minimum projection to estimate the reward-to-risk ratio.
HOW TO MAKE PRICE PROJECTIONS USING A POINT-AND-
FIGURE CHART

The average ticker hound—or, as they used to call him, tapeworm—goes wrong, I
suspect, as much from overspecialization as from anything else. It means a highly
expensive inelasticity. After all, the game of speculation isn’t all mathematics or
set rules, however rigid the main laws may be. Even in my tape reading, something
enters that is more than mere arithmetic.
—Edwin Lefèvre, Reminiscences of a Stock Operator
Cause and Effect
According to the Wyckoff law of cause and effect, the trader analyst measures the
extent of the cause built up during a trading range on a P&F chart and then projects
a price objective representing the potential effect of that cause. The relationship
between the cause and the subsequent effect is one-to-one, which means that every
unit of cause that is measured horizontally in a trading range translates into an
expected one unit of vertical effect.

For readers who recall their high school physics lessons, the law of cause and
effect can be likened to Hooke’s law of elasticity. Hooke’s law declares that
agitations up and down build up energy; the cause (for example, agitating a metal
coat hanger back and forth) and the resultant effect (bend the hanger out of shape)
expend energy in an exactly one-to-one proportion to the preceding energy built
up.

In trading, the cause is created during the up and down buying and selling waves
that occur during a trading range. The cause is measured and projected on the
figure chart according to the Wyckoff Count Guide, which appears below
(courtesy of the Wyckoff Stock Market Institute).

The Wyckoff Count Guide

• After having identified a sign of strength (SOS) on the vertical line chart, locate
the last point at which support was met on a reaction— the last point of support
(LPS). Locate this point on your figure chart also and count from right to left,
taking your most conservative count first and moving further to the left as the
move progresses.
• In moving to the left, turn to your vertical line chart and divide the area of
accumulation into phases, adding one complete phase at a time. Never add only
part of a phase to your count. Volume action will usually show where the phase
began and ended.
• As the move progresses you will often see a lateral move forming at a higher
level. Very often such a move will become a “stepping stone confirming count” of
the original count. Thus, as such a level forms, you can often get a timing
indication by watching the action of the stock as the potential count begins to
confirm the original count. A resumption of the upward or downward trend could
begin at such a point.
• For longer-term counts you should add your count to the exact low, or at a point
about halfway between the low and the count line. You will thus be certain that the
most conservative count is being used.
• Counts are only points of “stop, look, and listen” and should never be looked
upon as exact points of stopping and turning. Use them as projected points where a
turn could occur, and use the vertical line chart to show the action as these points
are approached.
• In the case of a longer-term count, often the LPS comes at the original level of
climax, and this level should be looked at first in studying the longer-term count.
The climax itself indicates a reversal. The subsequent action forms the cause for
the next effect. For the LPS to come at such a level of climax usually makes it a
more valid count. Preliminary support and the LPS often occur at the same
price level.
• A number three spring, or the secondary test of a number two spring, quite often
constitutes the SOS and the LPS in the same action which is reached at the same
point and at the same time. Usually, a spring will be followed by a more important
SOS, and the reaction following that SOS is also a valid LPS.
• Frequently, long-term counts on three-point and five-point charts are confirmed
by subsequent minor counts on the one-point chart as the move progresses. Watch
for this confirmation very carefully as it often indicates when a move will resume.
• In case of three-point or five-point charts, the same count line should be used as
for the one-point chart. Analysts who wish to use the Wyckoff Count Guide must
appreciate and comprehend certain philosophies and procedures unique to the
Wyckoff figure chart. Three key elements of Wyckoff figure chart analyses are
function, procedure, and perspective.
Function Figure charts play a special supplementary and complementary role in
the Wyckoff method. The key law of supply and demand relies on the vertical
chart to diagnose the present position and future trend of the market. The figure
chart is not used for determining the trend of the market per se, because the volume
information provided by the vertical chart makes it a superior tool for determining
the trend. Philosophically, Wyckoff analysts believe the vertical chart ought to be
used for trend analysis; however, determining the potential extent of the move is
the special province of the figure chart, sometimes referred to as the cause and
effect chart.
Procedure The building blocks of the figure chart are box size, intraday data,
number of reversal points, and full-unit crossing. Most commonly the box size is
one point. Hence, intraday price action must meet or exceed the full price levels to
trigger a figure chart entry. Reversal points are normally one point or three points.
For the one-point figure chart, a very special consideration to keep in mind under
the Wyckoff figure chart procedure is the necessity of having at least two entries in
any column. Many software programs change columns when price changes
direction, even if only a single entry exists in a column. To compensate for this, the
analyst must shift prices to create a column with at least two entries before price
can move to the next column. Hence, a quick down, up, down of one point each
would remain in a single column. For larger moves, the analyst has the option to
either rely on the three-point reversal or to increase the box size.
Perspective The analyst can visualize horizontal counts as fitting within a saucer-
shaped bottom and a dome-looking top. The first count line should be
conservative, nearest the lows, and be considered as the minimum possible. The
next count line will usually be within the trading range, broader, and considered
the likely objective. Finally, the pullback following the upside jump or valid
breakout creates the widest count and the highest upside count, and is thus the least
conservative measurement; this is the LPS that follows a more important SOS.