TECHNI CALL

06 April 09

SPECIAL REPORT
NIFTY - Ready for Mark Up
Richard Wyckoff, one of the most successful Wall Street traders in the early 1900s, developed a method
or sequence known as Wyckoff method of technical analysis. It analyses the price and volume
movement of the market or a tradable item according to the principles of mass psychology. This method
is based on the theory that the market tops and bottoms are generally the result of series of events
occurring in a particular sequence. These events include; the preliminary supply vs. demand imbalance
which instigates the price movement; the selling or buying climax; an automatic reaction to that climax;
a secondary test of the climax; and the result of that secondary test(a show of strength or weakness
generating movement in the opposite direction). Wyckoffs underlying concept was that all economic
movements, by their very nature, are motivated by crown psychology.

The different market phases as mentioned in Wyckoff technique are -

Accumulation : The establishment of an investment or speculative position by professional
interests in anticipation of an advance in price.

Mark-up : A sustained upward price movement.

Re-accumulation: Momentary stopping or pausing points in the up-trend.

Distribution : The elimination of a long investment or speculative position.

Re-distribution : Momentary stopping or pausing points in the downtrend.

Markdown : A sustained downward price movement.




Following are the excerpts of behavioral points/phases as explained in Wyckoff studies about the
Accumulation phase.


Trading Range Support: Defines support in the range.
Trading Range Resistance: Defines resistance in the range.

1. (PS) Preliminary Support is where substantial buying begins to provide support after a
prolonged down move. Volume and spread widens and provides a signal that the down move
may be approaching its end.
2. (SC) Selling climax is the point at which widening spread and selling pressure usually climaxes
and the larger professional interests at prices near the bottom are absorbing heavy or panicky
selling by the public.
3. (AR) Automatic Reaction: Selling pressure has now been exhausted. A wave of buying can
now easily push up prices. This is further fueled by short covering. The high of this rally will
help define the top of the Trading Range.
4. (ST) Secondary test(s): Revisit the area of the SC (selling climax) to test the supply-demand
balance at these price levels. If a bottom is to be confirmed then significant supply should not
resurface, and volume and price spread should be significantly diminished as the market
approaches support in the area of the SC.
5. The Creek is an analogy to wavy line of resistance and floating supply drawn loosely across
rally peaks within the Trading Range. There are, of course, minor lines of resistance that will
have to be crossed before the market journey can continue onward and upward.
6. Springs, Shakeouts and Tests usually occur late within the Trading range and allow the
market and its dominant players to make a definitive test of available supply before a mark up
campaign will unfold. If the amount of supply that surfaces on a break of support is very light
(low volume), it will be an indication that the way is clear for a sustained advance. Heavy supply
here will usually mean a renewed decline. Moderate volumes here may mean, More testing of
support and to proceed with caution. The Spring or Shakeout also serves the purpose of
providing dominant players with additional supply from weak holder at low prices. Springs and
shakeouts are, many times, accompanied by a Test.
7. (Jump) Jump across the Creek is a continuation of the Creek analogy. The market jumps
resistance very deliberately. In a Jump, it is a good sign if it is done on good spread and volume,
thus, depicting sign of strength (SOS).
8. (SOS) Sign of strength: An advance on good (increasing) spread and volume. The market
moves very easily upward.
9. (LPS) Last Point of Support and (BU) Back Up to the Edge of the Creek. A pull back to
support (that was resistance earlier) on diminished spread and volume after a SOS. This is a
good place to initiate long position or pyramid profitable ones the positions bought at Spring,
Test or on the SOS.









A series of SOS and LPS is good evidence that a bottom is in place and Price Markup has begun.

In Accumulation Phase there are sub-phases e.g. A to E. These are sub-phases, through which Trading
Range passes, as conceptualized by Wyckoff methods.

Phase A: - Shows us the preliminary support (PS) and a Selling Climax (SC) with the exhaustion of
supply, as the steep downtrend is broken. The Automatic Reaction (AR) and Secondary Test (ST) set
the boundaries of the Trading Range that follows.

Phase B: - In the early stage, we see a wide swing and higher volume and the first sign of demand
asserting its dominance, as professionals absorb supply. Late in phase B, low volume shows supply has
reduced at the Trading Range lows.

Phase C: - Gives us a final and unconvincing test and break of the Trading Range lows on extremely
light volume. This followed by SOS on dramatically increased volume.

Phase D: - We see a consistent and pronounced dominance of demand over supply on widening spread
and increased volume to the upside. Reactions are comparatively weak and on light volume.

Phase E: - The stock is marking up on rising volume. Demand remains in control.

We give below a model sample of Accumulation Phase which is been explained by Wyckoff years
back in his studies.




Now look at the daily chart of Nifty from J uly 2008 to 2
nd
April 2009.




Look at the amazing similarity between the two charts. Most of the behavioral points shown in the Nifty
chart are matching with the model chart.

In Nifty chart, Phase A was completed in the 3rd week of November 2008 with PS (preliminary
support) taking place on 10
th
October and SC (selling climax) on 27
th
October. AR (automatic reaction)
took place on 5 November. ST (secondary test) was seen on 20 November. A Trading Range is now
formed between 2500-3150, which was maintained until fourth of April 2009.

After that, Phase B started where the volume increased in the rising market but reduced drastically when
levels were near the low of the Trading Range. This phase was over by beginning of March.

Phase C was seen during 16 February to 9 March. During this phase, we have seen very low volume
and a final assault was made on sixth and eighth of March to break the low of the Trading Range but
volume was very low and was absorbed perhaps by dominant players (FII, MF and Insurance funds).
The assault was unsuccessful.

Now, the Phase D seems to have started with all characteristics mentioned in Wyckoff studies. From 12
March, onwards the bulls are in complete control of the market and bears seem to be retreating.
Volumes are rising and corrections are sub-normal.



If the current working of our market is further to be matched with the model sample, then we can
presumably say that we have moved out the Trading Range with first SOS (Sign of strength). We may
have seen the LPS (Last point of support) on. We may or may not see series of SOS and LPS in
coming days. However, we are seeing the rise in price levels with increasing volume. This development
can lead to Mark-up. Nifty can go up to 3500 3800 or even up to 4000.

The stark resemblance of the two charts has encouraged us to write this report, which is purely to
explain and understand the Wyckoff methods in the current context.