Surf Report: The Wyckoff
Issue 47: 08.15.2021 (Free Version)
INTRODUCTION
August 15, 2021
Hi everyone—I’m so glad to have you here. What a week.
Let’s have a look at a slice of how the world really works. Like most reality checks, it’s not pretty. The truth rarely is.
There’s a secret trading strategy from the 1930’s that the big hedge funds don’t want us little guys to know about. It was originally laid out by a legendary trader named Richard Wyckoff. He wrote a manifesto that gained a cult following on Wall Street, and large fund managers still swear by it. One of the key takeaways was this:
Watch the big operators. Recognize who the pros are and what they’re doing.
You see, the biggest market participants can, and do, move markets. With a single buy or sell order they can immediately shift the trading price of an equity in a big way. For a massive position size, even a tiny move in either direction can be the equivalent of millions of dollars of profit or loss.
Wyckoff explained how big operators will manipulate a stock up or down, and shows how traders can identify the telltale chart pattern in the future and react accordingly.
I’d like to draw our attention to a particular piece of his strategy. Read this carefully and never forget it:
“First, he’ll ‘shake out’ the little guys by forcing the stock lower in order to get a better price.”
“He prefers to do this while the market is weak, dull, inactive and depressed. To the extent that they are able, he, and the other interests with whom he works, bring about the very conditions which are most favorable for accumulation of stocks at low prices…”
“When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers.”
This is happening today, all over the place, in all markets of sufficient size.
And people can still spot these “Wyckoff” signals in chart patterns, which allows analysts to identify the difference between a price move that isn’t just a result of bad sentiment or a disappointing earnings report, but rather: a big player deliberately forcing a stock below key support levels, eliminating leverage in the system by forcing margin call liquidations of option traders, and initiating a cascade of subsequent selloffs that cause low-key panic among the unaware… but a ripe buying opportunity for those who know what’s going on.
These big players will then capitalize on the other end of the trade: when the quality of this stock or asset is more fully understood (remember, the intent was to buy it at a lower price, which means it’s on some level a desirable investment) and a wider circle of market participants begin buying it it, driving up the price and singing its praises in the news… that’s when the big dogs sell. “Buy the rumor, sell the news.” Wyckoff explains:
“You have often noticed that a stock will sell at the highest price for many months on the very day when a stock dividend, or some very bullish news, appears in print. This is not mere accident.
The whole move is manufactured. Its purpose is to make money for inside interests — those who are operating in the stock in a large way. And this can only be done by fooling the public, or by inducing the public to fool themselves.”
Inducing the public to fool themselves. That’s the useful insight.
Your first reaction to all of this might have been to throw your hands up and think, “I knew it! The markets are manipulated. What’s the point? We have no chance against these guys.” But that’s not the right lesson to learn.
This is actually a lesson in the importance of conviction and equanimity. This is about not allowing your emotional reactions to daily price movements interfere with your fundamental understanding of what something is worth to you.
When dealing with something of great value that many people want, large market participants will do what they can to drive its price lower. This may mean seeding “fake news” (a.k.a. FUD: Fear, Uncertainty, & Doubt), or simply a tried-and-true Wyckoff trade to try to shake out weaker hands into fooling themselves into selling.
A lower price doesn’t necessarily mean something is worth less. It might mean it’s worth more. A lot more.
It’s just another counterintuitive life principle from the world of markets, and a reminder that when it comes to trading and investing: you are your own worst enemy, not “them.”
“The first principle is that you must not fool yourself, and you are the easiest person to fool.”
—Richard Feynman, Nobel prize-winning physicist, educator, and bongo enthusiast
Until next time 🤙,
“It is easier to produce ten volumes of philosophical writing than to put one principle into practice.” —Leo Tolstoy
Breaking News 🌊
🤑 Fed’s $8,000,000,000,000 Balance Sheet Will Only Grow [Bloomberg]
📈 July consumer prices jump 5.4%, but core inflation rises less than expected [CNBC]
📉 Consumer sentiment measure falls to pandemic-era low, sees one of largest drops on record [CNBC]
🙃 S&P 500 grinds to another record to close out winning week [CNBC]
Bitcoin News 💱
₿ Senate Fails to Amend Crypto Tax Provision in Infrastructure Bill [Blockworks]
₿ Washington wakes up to crypto influence amid infrastructure fight [Politico]
₿ President of Argentina is open to adopting bitcoin as legal tender [Bitcoin Magazine]
₿ Black Rock Petroleum has plans to install up to 1 million #Bitcoin miners in Canada's Alberta province [Bitcoin Magazine]
₿ Digital insurer Metromile follows through with $1M Bitcoin purchase [Cointelegraph]
₿ Circle, creator of USDC, intends to become a full-reserve national commercial bank. [Circle]
₿ AMC says it will accept bitcoin as payment for movie tickets by year-end [CNBC]
₿ Fundstrat says bitcoin is headed to $100,000 by year-end as a trading rule kicks in [CNBC]
From The Tweetbox 🐦
“Microsoft was 20 years old when Windows 95 shipped. Intel was 25 years old when Pentium came out. Apple was 31 years old when iPhone launched. All were still run by their founders.” [Tweet]
“The median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points. 12.9% is pretty close to the actual inflation rate too. What a coincidence.” [Tweet]
“Space Force officer at MIT researching Bitcoin Mining as ‘more powerful war-deterrent protocol’ than nukes” [LinkedIn post]
“Bitcoin energy usage is cleaner than every major industry and represents a rounding error in total energy consumption.” [Tweet]
For The Pros 😎
At 40, Jim Simons left a famed math career to launch the most successful hedge fund ever: Renaissance Tech. Here’s how he did it. (Link available to Pro subscribers)
An operationally excellent CEO shares data (he maniacally tracked his time down to 15 minute blocks) on how he spent the first 2 years building his startup, Levels: (Link available to Pro subscribers)
Worth A Read 📃
“Any abuses that a central bank digital currency is vulnerable to, so too is Ethereum, especially based on the history of its ruling class intervening to change the rules to always make things better for themselves and keep them in power.”
PNGs 🖼
Space Force MIT guy responds to comments on his recent LinkedIn post making the case for Bitcoin as critical national security infrastructure and war deterrent.
Pods & Schools 🐬🐠
Recent podcasts + books I highly recommend, and upcoming courses + seminars that look promising
📚 Radical Uncertainty: Decision-Making Beyond the Numbers, by John Kay & Mervyn King
“Radical uncertainty cannot be described in the probabilistic terms applicable to a game of chance. It is not just that we do not know what will happen. We often do not even know the kinds of things that might happen.”
🔊 Bitcoin: The Future of Money?, on the Jordan B. Peterson Podcast. Jordan speaks to four veterans in the space speaking to different aspects of bitcoin’s benefits to society and human flourishing.
“It’s a very interesting idea that bitcoin provides an incorruptible language of value, preferable to gold.”
Tools of the Trade ⚒
Products I use to make money
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StockCharts. I easily make back the small monthly subscription fee with the superpowers it gives me.
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Disclaimer
Nothing in this email is intended to serve as financial advice. Do your own research.