R. D. Wyckoff or: How I Learned to Stop Worrying and Love the Bomb
Updated: Jun 3, 2021
Now everyone's an expert on Bitcoin Wyckoff cycles, using these models to "prove" Bitcoin must see lower prices soon. These folks say the Composite Man has sold off its holdings, Bitcoin is in the markdown phase, and prices are headed to much lower prices. While in Crypto, we must always be prepared for lower prices. But are these confidently bearish price predictions worth anything? After all, they're calling for an 18 month bear market or for Bitcoin prices between $16-25kUSD.
This article will go through what Wyckoff theory actually says, the fallacies of these FUD inducing articles, and highlight how Wyckoff can actually help your Bitcoin balance grow. To do so, we'll explore some crypto examples where Wyckoff accumulation and distribution cycles violate these bearish assumptions. This article also provides ideas on how to monitor Wyckoff accumulation and how different scenarios could play out. Hopefully, this discussion will actually help you feel better with all the FUD out there.
Let's talk about Wyckoff, baby
Yo, I don't think we should talk about this. (Come on, why not?) People might misunderstand what we're tryin' to say, you know? (No, but that's a part of life) Come on. - Salt-N-Pepa
Richard D. Wyckoff is one of the founders of financial market trading theory and technical analysis. He invented basic terms and methods traders use everyday - like "Resistance" and "Support". He coined the theory of a "Composite Man" (i.e. Whales) that work against average traders in what sound like massive conspiracies. The Composite Man create massive price swings, whose results are discussed in bullish/bearish media (i.e. 'FUD' and 'CCC').
A recent article summarized how Wyckoff's Three Laws govern markets. Unfortunately, learning how the Composite Man "manipulates" markets and the basics modes of Accumulation and Distribution are only the beginning of the discussion. This is where most of posts stop. We can dive deeper.
First, instead of viewing these actions as evil, behind the curtain conspiracies and manipulation, we could see Composite Man as a Super Hero, without whom assets would not rush up in price. After all, big institutions cannot accumulate large positions with their billions of dollars without acting this way.
Let's understand two important pillars of the Wyckoff Methodology:
Rule 1: Price action never follows the same course as it did in the past and that makes the market never behave the same way. Every move of the market is unique.
Rule 2 : As every move of the price action and market is unique, its analytical importance relies on its comparison to past behavior.
Source: Pattern Wizards - The Definitive Guide to the Wyckoff’s Method
Using Rule 1 alone, any trader of Bitcoin is warned that the most obvious Accumulation-Distribution cycle that is most commonly discussed on YouTube, Reddit, and Twitter is unlikely to play out. With Rule 2, we can conclude that a Composite Man has always operated behind the scenes for Bitcoin, removing any fears that this operator has now decided to kill the market. Past cycles show that simple wave-like moves - up and down - with easy and obvious starts and stops have never occurred. Bitcoin has always kept its traders guessing.
So then, how does the Composite Man operate? Wyckoff taught:
The Composite Man carefully plans, executes, and concludes its campaigns.
The Composite Man attracts the public to buy an asset which it has accumulated. It does so by making many transactions, involving a large number of shares. This advertises its asset by creating the appearance of a “broad market.” This price action is what is generally referred to as "manipulation," though it is simply a matter of fact and always active.
To play with - or against - the Composite Man, a trader must study an assets' charts with the purpose of judging the behavior of the asset 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.
Source: Stock Charts - The Wyckoff Method: A Tutorial
We can study and learn their game!
Remembering that the Composite Man creates campaigns that are not simple market cycles that resemble Sine Waves, it should be obvious to see that we cannot make quick assumptions from the type-charts. Yet most articles simply show the Accumulation and Distribution events, ignoring the rest of the cycle. These are a styles of movement - examples. Asset prices do not simply repeat these two phases in a series. Price action does not begin and end with the most commonly shown Up-then-Down cycle. One cannot cut and paste this diagram onto a chart and predict future prices. The other commonly shown pattern - two step up, then two step down - is also not appropriate. This pattern is meant for channel trending assets, and is generally used for high frequency, short-time frame FOREX traders.
For a longer term, multi-year cycle asset like Bitcoin, we should consider longer term trends and cycles, along with the other Wyckoff trading modes. These include: Markup, Re-accumulation, Distribution, Markdown, and Re-distribution. In particular, these articles are missing any discussion of Re-accumulation. It's also important to not ignore trade volume to monitor and adjust your understanding as the move progresses. Remember, Wyckoff's Three Principles describe using Cause and Effect to find price targets, where cause can be witnessed by the Volume signature of the Composite Man and the Effect is the Price movement.
Using these basic example charts is great for making easy-to-write articles and videos that introduce the topic. But using these to advertise price predictions creates FUD and presents a false, pessimistic view. These price predictions do not actually incorporate understanding of the market of Wyckoff theory.
Bitcoin in Re-accumulation?
Experts and teachers of this methodology provide many examples of this style of cycle repetition (ex. Wyckoff Analytics: Website and YouTube). Just going so far as their second class on Wyckoff Analysis - Analyzing and Trading Markets Using the Wyckoff Method, one can find a perfect analogy for today's Bitcoin price action with a re-accumulation period followed by a later blow-off top run. On page 12 of their easy to find Advanced Wyckoff Trading Course (AWTC) notes, any trader can learn about re-accumulation and its four distinct patterns. After a sharp correction, Bitcoin seems to be matching the "Re-accumulation after decline" mode through its price action and volume spikes.
If Bitcoin were to continue to trade with this "Re-accumulation after decline" mode, we should see a range-bound price for a time - bouncing between support and resistance. Take stock that this type of re-accumulation is scattered throughout each of Bitcoin's bull runs, as we'll see later in this article. The Supply and Demand lines can easily be drawn on a log-price chart, while volume growth and spikes are characteristic of actions by the Composite Man. The Throw Over marks the trigger for the Distribution Events, with volume spikes showing an intensity only the Composite Man can provide. The several tests for higher prices signal to Institutions the end of the up trend. Mark down occurs and a spike in volume shows the hand of the Composite Man, reaching in to catch price and halt further declines.
Zooming in reveals further details. The Markdown enacted an A-B-C corrective pattern, establishing long-term, diagonal resistance lines. Substantial buying began to provide support at the Preliminary Support (PS), then Volume increased and price spread widened to signal the down-move was approaching its end. The downtrend continued further, as the widening spread and selling pressure climaxed with heavy, panicked selling by the public. Here the Composite Man stepped in and absorbed these sells at or near a bottom to create a Selling Climax (SC). Notice the price closed well off the low, SC, while volume increased to a 130-day high. This reflects the buying by large interests. The volume spike resulted in an Automatic Rally (AR) because intense selling pressure greatly diminished and a wave of buying easily pushes prices up while shorts covered. The high of this rally will help define the upper boundary of a subsequent accumulation. Afterwards, a secondary test revisited the area of the SC, testing the supply/demand balance at these levels. A bottom was confirmed because volume and price spread significantly diminished. Note, it is not only possible, but common to have multiple STs after an SC. The several tests that make higher lows with decreasing volume set a firm support range.
Simply using these resistance lines, we can extrapolate how Bitcoin would act if it continued to act in "Re-accumulation after decline" mode. Firstly, we might expect a trading range between $30k and $45k USD well into June, though most of the time price should remain between $33k and $41k. We can expect several test attempts of both the top (AR & PS) and bottom (ST & SC) levels. If price closes below SC on the daily, then this mode of accumulation will likely be void, likely resulting in further selling. At some point, the upper resistance diagonal lines may be broken resulting in a "Jump Across the Creek" and upward price action. A subsequent extrapolation from the previous Strides put the next test of the upper, Demand Line as late as mid-December. Such a pattern would mean Bitcoin price could be over $200k! That said, the previous bull runs went hyper-parabolic and ended faster, while over shooting further and collapsing faster than this pattern implies.
Springs and shakeouts usually occur late within a re-accumulation stage. These allow the Composite Man to make a definitive test of available supply before a markup campaign unfolds. A “spring” takes price below a recent accumulation low, only to then reverses to close within the accumulation zone. This move allows the Composite Man to mislead the public about the future trend direction, yet again giving it additional shares at bargain prices. A terminal shakeout at the end of a accumulation is like a spring with a Power Up. Shakeouts may also occur once a price advance has started, with rapid downward movement intended to induce Retail with long positions to sell their shares. However, springs and terminal shakeouts are not required elements. (Source: StockCharts - The Wyckoff Method: A Tutorial)
Re-accumulation is a shakeout. This mode of re-accumulation pattern is one of the most uncertain, as it creates the belief in the masses that lower prices must be ahead. The pattern is stage whose function is to first shake out weak hands, then drive to disinterest through side-ways trading and boring price action. The key to this level is patient, re-accumulation.
Wyckoff cycles throughout Crypto
Can we find evidence of these Wyckoff cycles in other cryptocurrencies or in Bitcoin's past? Experts seem to think so! Googling "Wyckoff+Bitcoin" yields articles from every single Bitcoin bull run. Meanwhile, Wyckoff Analytics has over 50 videos on YouTube providing examples of these cycles in Cryptocurrency. In the next sections, let's review a few other examples.
XRP since 2020
Ripple's XRP is quite a volatile cryptocurrency that pumps out of sync to Bitcoin. The intensity of its moves - ups and downs - enable one to quickly check for Wyckoff cycle behavior. Without going too much into the details, here's a quick-look at XRP. Notice at least four distribution cycles since the crash of Spring 2020. Cycle repeat major moves -up and down - finding predictable support and resistance, with effort and results shown from volume spikes, and timed according to repeated stride lengths. This example demonstrates that Wyckoff cycles appear up in other places, and understanding how the Composite Man behaves can give you a leg up.
Bitcoin - Longer Term
When looking back into Bitcoin, the Bull Run that best matches today's price action occurred in 2013. A massive correction of 80% had a quick bounce back. However, price stalled afterwards, and another correction led to a 76% correction from peak to trough. It was easy to say Bitcoin was in a Bear Market, but would it surprise you that Wyckoff Re-accumulation was in effect then?
Looking into the Bull Run of 2016-2018, we find the hand of the Composite Operator again. After committing a massive Accumulation campaign during the Bear Market, it seems as though there were as many as six Re-accumulation activities during this long Bull Run.
Is it any wonder that researchers claim that a single whale was able to operate behind the scenes and induce the entire bull run (Source: Cointelegraph - One Whale Was Behind Bitcoin’s 2017 Bull Run). Others blame Tether printing as the source of manipulation (Bitcoin.com - New Report Blames Tether for Bitcoin’s Bull Run). Perhaps both of these theories are FUD and can be de-bunked, but still they represent the inherent suspicion of the actions of the Composite Man.
Knowing that the Composite Man has been behind Bitcoin's and Cryptocurrency's Mark Up and Mark Down, and that it is supporting these new ventures through Re-accumulation should actually give any Crypto Investor a feeling of relief. It is, after all, why the HODL strategy works so well! Seeing evidence of massive buys and support holding gives evidence to say the current market might ALSO be in re-accumulation.
But what do you think? Are we in a Bear Market? Is the Composite Man just a conspiracy theory? When moon?