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Click Here For Wyckoff Wave 09-08-10

This is the first of many future posts about the Wyckoff Wave. These will include some history of past performance and analysis of its past action and future direction. Each post will contain a chart for the Pulse of the Market Charting Service. To open the chart, click this link. wave-1 It might be easier to print the chart ( 11″ x 8 1/2″ landscape) and refer to it as you read the post.

For the past 50 years the Wyckoff Wave has been a sensitive and very effective market indicator.

The Wyckoff Wave is a weighted index used by many Wyckoff students as their main market indicator. It is comprised of 12 stocks. They are AT&T, Bank of America, Boeing, Bristol Myers, Caterpillar, DuPont, Exxon – Mobile, IBM, General Electric, Ford, Union Pacific and Wal Mart. Each stock contains a multiplier, hence the weighted average. More about the Wyckoff Wave can be found at http://wyckoffstockmarketinstitute.com/wave.htm.

This post will begin with an analysis of the Wave’s re-accumulation period beginning in May of 2010 and ending with the major Last Point of Support that signaled the beginning of the bull market we have been enjoying for the past year. Vertical line charts of the Wyckoff Wave including the Trend Barometer (Optimism – Pessimism Index, Force Index, Technometer) are attached to this post. These charts are available on the Wyckoff Pulse of the Market charting service at http://wyckoffstockmarketinstitute.com/chart.htm.

The Wyckoff Wave experienced a selling climax on May 6, 2010. You may remember this was the day of the 1000 point drop in the Dow Jones Industrial Average. It is marked by point A on the chart. There was an automatic rally point B and a secondary test, of poor quality, at C. The wave then rallied briefly to point B and completed the testing at point E. Notice that the relative volume at point E was less than the relative volume at point C. This successful test of the selling climax strongly suggests we can expect some sideways movement. It will either be re-accumulation or distribution. The trading range is now established between point A and point B. The appropriate support and resistance lines have been drawn on the chart.

The Wyckoff Wave rallied to point F and then sharply reacted to point G. Point G is a Spring. I would interpret it as a number two spring, which means it needs to be tested.

This brings us to our first buying opportunity. Mr. Robert Evans has often written and lectured in his Evans’ Echoes series about buying on the Spring. This is also where the Technometer becomes an invaluable ally in helping determine whether we are experiencing a spring or a continuation of the downtrend (Fall through the Ice). If you look at the trend barometer (Optimism-Pessimism Index, Force Index and Technometer) at point G you will see two important indications.
1. The Technometer is dangerously oversold. It is 36. This is a dangerously oversold condition and strongly suggests that Wave is vulnerable to a rally.
2. The Force Index, while quite negative, is experiencing a positive divergence with the Wyckoff Wave. If you compare the Force Index reading at point A and point G, you will say that while point G is lower than point A, the Force Index is higher. This is a positive divergence and helps confirm the oversold condition on the Technometer.

This is an excellent example of the Trend Barometer helping us identify important turning points in the market.

The Wyckoff Wave behaved as expected and rallied to point H. It then reacted to point I for a successful test of the spring. Let’s look at the action around the secondary test.

Notice that two days before the low at point I, the Wave had a wide spread to the down side on high-volume. However, it was unable to follow-through and the next day’s action showed a much narrower spread and lower volume. This suggests the supply had been taken in and the Wave was ready to rally. It did so the next day with an intra day failure to the down side. The wide spread and decreased volume indicated more lack of supply.

Once again the Trend Barometer provides some additional clues. This time let’s look at the Technometer and the Optimism – Pessimism Index. Once again, the Technometer is in an oversold condition. In addition there is a positive divergence with the Optimism – Pessimism Index and the Wyckoff Wave. The O – P Index has moved into new low ground but the Wyckoff Wave has held above points A and G. In addition to the price and volume relationship, the Trend Barometer is also telling us the Wave is probably not going any lower and this is another good entry point for the Bulls.

We can now draw a short-term up trend channel with the support line through point G and I, with a parallel supply line through H.

The Wave then rallied to point J, which can be interpreted as a sign of strength. It also, very slightly penetrated the top of the resistance at point B. Do we have an upthrust? Where is the Wave going from here and what do Wyckoff traders do next?

The answer depends on your trading objectives. If you are a short-term trader there are several indications that suggest one should take profits and close the trade. First of all, the Wave was dangerously overbought eight days earlier. Then the rally to point J was on decreasing spread and volume. The Technometer was again overbought at point J. The Wyckoff Wave is also in an overbought position relative to the supply line of the short term up channel. It does not appear ready to jump the Creek. For the short term trader, this is definitely a take your profits and smile a lot moment.

The intermediate-term trader will, most probably, look at this situation a bit differently. There has been a spring and a successful test of the spring. The move from point G to point J can certainly be interpreted as a sign of strength. Therefore, the intermediate-term traders will most probably except the expected reaction and look to add to their positions at the last point of support.

While there is the possibility that point J was an upthrust, it was very minor and the previous action suggests we are in a more bullish situation. However, there may be an opportunity for short-term traders to the down side and the reaction should be watched closely by the intermediate-term traders.

The Wave then quickly reacted to point K and held above the halfway point of the move from G to J. However, the Technometer tells us the Wave is in a nearly overbought condition, suggesting this is not the last point of support that we are looking for. There is a brief rally two point L and then the wave turns downward. In hindsight the short term trader could begin shorting stocks. However, the Wyckoff Wave and the Trend Barometer do not present any strong suggestions of a move to the down side. In addition, and this is quite important, the wave is still in an up trend at point L. One of the most important Wyckoff rules is to never trade against the trend. If I were a short-term trader I would not have taken a short position at this point.

The Wave then reacted down to point M for a major last point of support. Let’s look at the action around point M and see what clues are in the Vertical Line Chart and the Trend Barometer.

First and most important of all, the Technometer is unbelievably oversold. It is in its most oversold condition than at any time during this study. There is a major positive divergence between the Wyckoff Wave and the Technometer. The Technometer is in new low ground, but the Wyckoff Wave is holding above points A and G.

There is also a positive divergence between the O-P Index and the Wyckoff Wave at points I and M. The O-P is lower than Point I at Point M while the Wave has held above Point I. In addition, the price and volume action around point M shows a lack of supply. For those who did not buy on a spring, but waited for the Last Point of Support, this is the moment.

How high can the Wave go? A count on the point and figure chart presents an objective area of between 32,000 and 33,000. That’s a move of almost 44%. If we look ahead, the May 2011 highs were 30,878. That Last Point of Support (Point M) was a wonderful and profitable place to enter the market.

We can now draw an intermediate up channel with a support line at G and M and a parallel supply line at point J. Isn’t it wonderful how the Wyckoff Wave has stayed true to that up channel through this exciting bull market. You will see this in more detail in the next post.

In our next post we will discuss the bull market markup and perhaps get to the interesting possible re-accumulation we have seen in 2011. Stay tuned.

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