what is Wyckoff’s “Composite Man”?

what is Wyckoff’ “Composite Man”?

Wyckoff proposed a heuristic device to help understand price movements in

individual stocks and the market as a whole, which he dubbed the “Composite

Man.”

“…all the fluctuations in the market and in all the various stocks should be studied

as if they were the result of one man’s operations. Let us call him the Composite

Man, who, in theory, sits behind the scenes and manipulates the stocks to your

disadvantage if you do not understand the game as he plays it; and to your great

profit if you do understand it.” (The Richard D. Wyckoff Course in Stock Market

Science and Technique, section 9, p. 1-2)

Wyckoff advised retail traders to try to play the market game as the Composite

Man played it. In fact, he even claimed that it doesn’t matter if market moves “are

real or artificial; that is, the result of actual buying and selling by the public and

bona fide investors or artificial buying and selling by larger operators.” (The

Richard D. Wyckoff Method of Trading and Investing in Stocks, section 9M, p. 2)

Based on his years of observations of the market activities of large operators,

Wyckoff taught that:

• The Composite Man carefully plans, executes and concludes his

campaigns.

• The Composite Man attracts the public to buy a stock in which he has

already accumulated a sizeable line of shares by making many

transactions involving a large number of shares, in effect advertising his

stock by creating the appearance of a “broad market.”

• One must study individual stock charts with the purpose of judging the

behavior of the stock and the motives of those large operators who

dominate it.

• With study and practice, one can acquire the ability to interpret the

motives behind the action that a chart portrays. Wyckoff and his

associates believed that if one could understand the market behavior of

the Composite Man, one could identify many trading and investment

opportunities early enough to profit from them.

PSY—preliminary supply, where large interests begin to unload shares in

quantity after a pronounced up-move. Volume expands and price spread widens,

signaling that a change in trend may be approaching.

BC—buying climax, during which there are often marked increases in volume

and price spread. The force of buying reaches a climax, with heavy or urgent

buying by the public being filled by professional interests at prices near a top. A

BC often coincides with a great earnings report or other good news, since the

large operators require huge demand from the public to sell their shares without

depressing the stock price.

AR—automatic reaction. With intense buying substantially diminished after the

BC and heavy supply continuing, an AR takes place. The low of this selloff helps

define the lower boundary of the distribution TR.

ST—secondary test, in which price revisits the area of the BC to test the

demand/supply balance at these price levels. For a top to be confirmed, supply

must outweigh demand; volume and spread should thus decrease as price

approaches the resistance area of the BC. An ST may take the form of an

upthrust (UT), in which price moves above the resistance represented by the BC

and possibly other STs before quickly reversing to close below resistance. After a

UT, price often tests the lower boundary of the TR.

SOW—sign of weakness, observable as a down-move to (or slightly past) the

lower boundary of the TR, usually occurring on increased spread and volume.

The AR and the initial SOW(s) indicate a change of character in the price action

of the stock: supply is now dominant.

LPSY—last point of supply. After testing support on a SOW, a feeble rally on

narrow spread shows that the market is having considerable difficulty advancing.

This inability to rally may be due to weak demand, substantial supply or both.

LPSYs represent exhaustion of demand and the last waves of large operators’

distribution before markdown begins in earnest.

UTAD—upthrust after distribution. A UTAD is the distributional counterpart to

the spring and terminal shakeout in the accumulation TR. It occurs in the latter

stages of the TR and provides a definitive test of new demand after a breakout

above TR resistance. Analogous to springs and shakeouts, a UTAD is not a

required structural element: the TR in Distribution Schematic #1 contains a UTAD,

while the TR in Distribution Schematic #2 does not.

Distribution: Wyckoff Phases

Phase A:- Phase A in a distribution TR marks the stopping of the prior uptrend. Up

to this point, demand has been dominant and the first significant evidence of

supply entering the market is provided by preliminary supply (PSY) and the

buying climax (BC). These events are usually followed by an automatic reaction

(AR) and a secondary test (ST) of the BC, often upon diminished volume.

However, the uptrend may also terminate without climactic action, instead

demonstrating exhaustion of demand with decreasing spread and volume; less

upward progress is made on each rally before significant supply emerges.

In a redistribution TR within a larger downtrend, Phase A may look more like the

start of an accumulation TR (e.g., with climactic price and volume action to the

downside). However, Phases B through E of a re-distribution TR can be analyzed

in a similar manner to the distribution TR at the market top.

Phase B:- The function of Phase B is to build a cause in preparation for a new

downtrend. During this time, institutions and large professional interests are

disposing of their long inventory and initiating short positions in anticipation of the

next markdown. The points about Phase B in distribution are similar to those

made for Phase B in accumulation, except that the large interests are net sellers

of shares as the TR evolves, with the goal of exhausting as much of the

remaining demand as possible. This process leaves clues that the supply/demand

balance has tilted toward supply instead of demand. For instance, SOWs are

usually accompanied by significantly increased spread and volume to the

downside.

Phase C:- In distribution, Phase C may reveal itself via an upthrust (UT) or UTAD.

As noted above, a UT is the opposite of a spring. It is a price move above TR

resistance that quickly reverses and closes in the TR. This is a test of the

remaining demand. It is also a bull trap—it appears to signal the resumption of the

uptrend but in reality is intended to “wrong-foot” uninformed break-out traders. A

UT or UTAD allows large interests to mislead the public about the future trend

direction and, subsequently, sell additional shares at elevated prices to such

break-out traders and investors before the markdown begins. In addition, a UTAD

may induce smaller traders in short positions to cover and surrender their shares

to the larger interests who have engineered this move.

Aggressive traders may wish to initiate short positions after a UT or UTAD. The

risk/reward ratio is often quite favorable. However, the “smart money” repeatedly

stops out traders who initiate such short positions with one UT after another, so it

is often safer to wait until Phase D and an LPSY.

Often demand is so weak in a distribution TR that price does not reach the level

of the BC or initial ST. In this case, Phase C’s test of demand may be represented

by a UT of a lower high within the TR

Phase D:- Phase D arrives after the tests in Phase C show us the last gasps of

demand. During Phase D, price travels to or through TR support. The evidence

that supply is clearly dominant increases either with a clear break of support or

with a decline below the mid-point of the TR after a UT or UTAD. There are often

multiple weak rallies within Phase D; these LPSYs represent excellent

opportunities to initiate or add to profitable short positions. Anyone still in a long

position during Phase D is asking for trouble.

Phase E:- depicts the unfolding of the downtrend; the stock leaves the

TR and supply is in control. Once TR support is broken on a major SOW, this

breakdown is often tested with a rally that fails at or near support. This also

represents a high-probability opportunity to sell short. Subsequent rallies during

the markdown are usually feeble. Traders who have taken short positions can trail

their stops as price declines. After a significant down-move, climactic action may

signal the beginning of a re-distribution TR or of accumulation.

Crypto Traders: Smarten Up

It’s not just the little guys anymore… the big players are here and BTC is, sadly,

now a market like anything else. Be safe out there. Cheers

Source :-