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09/28/2022 |

Cestrian Capital Research Presents: How To Spot Big Money At Work


How To Spot Big Money At Work

If you have enough money, you can make money in up markets, down markets, or, best of all, sideways markets. In this post, we’ll use TrendSpider’s Volume By Price indicator to illustrate how Big Money can use the Wyckoff Cycle to generate realized profits in any environment. The Wyckoff Cycle is an idealized version of what’s possible if you move large amounts of money around the chessboard.

The Wyckoff Cycle, Explained

It has four stages. Stage One – Accumulation. You spend months, years sometimes, quietly accumulating a position in this or that stock. You never buy so much that anyone notices or causes the stock to break out of the tight range in which you are buying – and if they do notice you quell the breakout by selling a little. If the stock starts to drop below your Accumulation Zone, you support it by buying a little more.

Stage Two – Markup. This is a breakout move. Somehow the market has found out your little plan – perhaps an intrepid analyst spotted it or perhaps somehow your domestic staff overheard you talking to your boss about it on the phone (maybe that time you left the home office door open and shouted just a little bit in the direction of those guys) and have told their friends and colleagues and posted it on the Internet and … whoa! … thar she blows. So now you are sitting on a tidy paper profit.

Stage Three – Distribution. Sideways action once more and volume spikes. You sell down your holdings in your nicely marked-up stock. Who’s buying? Why Chad of course! Because he saw on CNBC how this stock was GONNA BE BIG and he could get in early. Ker-ching! You cashed your gains in.

Stage Four – Markdown. The lack of anyone buying means … the stock slowly sinks back to earth. Chad’s one through four hundred and seven are puzzled as to why this hot ticket stock isn’t mooning. But the answer is … there are no buyers, no volume to support the price. So the price slides – it becomes marked down. At this point, you really don’t care because you sold out months ago. Maybe the trick can be played again with this stock, maybe it can’t, no matter, always another one around the corner. Time for a long lunch!

Here’s a worked example – this is the Russell 2000 proxy ETF, IWM. You can open a full-page version here:

This is an image of the Wyckoff Cycle on the chart, presented by Cestrian Capital Research
From early 2017 through to late 2020 you can see the index moving pretty much sideways in the price range of $131-173. And if you look on the right-hand side of the chart, the upper and lower bounds of that range are defined by a ‘high volume area’ of stock traded – that’s shown by the dark blue ‘Volume By Price’ indicator bars. That’s the “Accumulation Zone”. Note there is very little buying of the Covid dip. But once the dip is passed and the IWM moves up? Note again, very little volume in that blue-bar indicator even though the price is mooning from $173-205 in little more than a month. That’s not institutions buying. That’s Chad. The Markup Zone.

At this point, Big Money smells an opportunity and starts to distribute its holdings – in a sideways pattern once more. Volume spikes up bigly and the distribution zone looks to be between $208-232 for the most part. Duly cashed out, Big Money retires with a big cigar. That’s the Distribution Zone. Finally, the stock drifts downwards. Big Money watches it fall, having already cashed out, and Chad is wondering just what on Earth happened. Low volume, the Markdown Zone. Presto! Big Money conjured up some free gains from nowhere. All you need is a big ol’ checkbook and a not-soundproof home office. Easy!

Cestrian Capital Research, Inc – 27 September 2022


DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.