Wyckoff Stock Market Institute

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Wyckoff Stock Market Selling Tests - Part One

Wyckoff identified nine selling tests. They are developments in the price and/or volume action
of the market or an individual issue that suggest an opportunity on the short side is developing.
As the tests are passed, the odds of a mark down phase beginning increase. When the price
moves into a primary selling position such as an up thrust, test of an up thrust, rally back to the
ice or completes a normal correction, the trader should examine the action to that point to see
how many of the tests have been passed. If all or most of them have been passed, the trader can
take advantage of the primary selling position with confidence that he will be rewarded with an
opportunity to take a profit as the action continues to unfold.

The first thing the trader wants to do is determine whether the up side objective has been
reached. The indicated up side objective is provided by the figure chart. It was set in place
during the trading range that developed before the advance that the Wyckoff trader believes is
nearing an end. The danger in taking a position before the indicated up side objective has been
reached is that the advance may have one more thrust left it that could result in the trader being
stopped out of a position just at the time when it should be entered. There is nothing more
frustrating than to be taken out of a position just before the price goes on to do exactly what was
anticipated. Many times, an up side potential will have more than one clearly defined phase.
Each time the objective of one of those phases is reached, the move is potentially over. However,
the trader should not automatically assume that it is. An indication that the advance has been
completed can be found in the character of the price and volume action.

The second test that the Wyckoff trader wants to apply is to judge the character of the action.
The activity needs to be bearish in order to justify taking a position on the short side. Bearish
activity is indicated by particular combinations of price action and volume. Wide price spreads
to the down side on increased volume leading to poor closes represent bearish activity. The
indication is that supply is present. Wide spreads to the down side on reduced volume leading to
a poor close can also represent bearish activity. These indicate a lack of demand. A lack of
demand is also indicated by narrow spreads to the up side on reduced volume. If narrow spreads
to the up side are accompanied by increased volume, the indication is that supply is present. This
is also seen as being bearish activity. Bearish activity can be present on a day to day basis, or it
can be seen over a series of days that form a reaction or rally within the overall action. It is not
necessary that every day provide an indication of bearish activity. Early in an advance, most
days will exhibit bullish activity. However, as the price reaches or approaches an objective, the
number of days that demonstrate clearly bullish activity will begin to diminish and the number
that indicate bearish activity will start to increase. When this shift is seen, this selling test has
been passed.
The Wyckoff trader also wants to see a clearly defined stopping action at the top of an advance.
This involves four steps. They are the meeting of preliminary supply, a buying climax, an
automatic reaction and a secondary test. As an advance is approaching an objective, a reaction
will develop over several days where the activity is clearly bearish. This is preliminary supply. It
represents the first wave of bulls who bought at lower levels taking their profits. The meeting of
preliminary supply is an early warning that an opportunity on the short side may start to develop
soon. After preliminary support has been met, there will be one more thrust to the up side usually
on wide spread and increased volume into an up side objective. This is the buying climax. It
provides a clearer warning to the potential short seller that an opportunity is beginning to
develop. The stopping action is completed by the automatic reaction and the secondary test. The
automatic reaction is the decline that immediately follows the buying climax. It is caused by the
exhaustion of demand on the buying climax. As the automatic reaction unfolds and the price
retreats from the high recorded on the buying climax, some bulls will be re-energized and will
begin buying again. However, at this point, they will be in the minority. The rally that their
activity is able to accomplish will have less volume than wad present as the price rallied to the
buying climax. It will also tend to have narrower price spreads to the up side and it will put in a
lower top than was recorded on the buying climax. This is referred to as being the secondary test
of the buying climax. It completes the stopping action and allows the price to begin preparing for
the next move.

Although the stopping action at the top of an advance is vital to the development of an
opportunity to begin a campaign on the short side, it does not guarantee that the next move will
be down. In longer term bull markets, there will likely be a series of advances each being
preceded by the stopping of the previous advance. For the Wyckoff trader who is looking for an
opportunity on the short side to know that a resumption of up side progress is not likely, he looks
for the passing of additional selling tests as the action continues to unfold.