Take a Rest?

Click Here For Wyckoff Wave Chart 06-27-11

Our last post ended with the Wyckoff Wave at point Y. The Wave was in an overbought position relative to the long-term uptrend. It was also overbought on the Technometer. However, things weren’t all that bleak. The Optimism – Pessimism index was leading the Wave. The Force index was in harmony. There was a reduction in spread and volume as the Wyckoff Wave rallied to point Y. A normal corrective reaction back into the trading range could be expected. That’s what happened. There was good spread and volume on the reaction. This certainly suggested the presence of supply. The Wave saw support at point Z and briefly rallied. It then tested point Z and rallied back to the supply line of the long-term uptrend up channel at point A.

The O– P Index, while showing some weakness, is still in harmony with the Wyckoff Wave. However, the appearance of supply and the position of the Wyckoff Wave near the supply line of the long-term uptrend up channel suggests the Wyckoff Wave may need to do some more reacting or at least move sideways. While we could draw a short-term down channel with a supply line through points Y and A, with a parallel support line through point Z the successful test of point Z suggests a short-term neutral position.

The Wyckoff Wave then reacted to point B. It broke through the support line created at point Z. It did so on strong spread and volume. The reaction to point B was either a number one spring (shakeout) or a fall through the ice. The immediate rally answered the question. It was a shakeout. The rally point C is a minor sign of strength and the reaction to point D is a successful test of the shakeout. Remember, all number one and number two springs must be tested. We can now draw a short-term up channel with support line B – D and a parallel supply line through point C. Short-term traders should beware that we are still close to the supply line of the long-term uptrend.

The Wyckoff Wave rallied to point E. We are now beginning to see some problems arise. The Wyckoff Wave is in a slightly overbought position relative to the long-term uptrend. However, there are more significant indications that problems are arising.

The Technometer moved into an extremely over bought condition as the Wave approached the supply line of the long-term uptrend. The overbought condition is mitigated by a strong Force Index which has moved into positive territory.

The Wave moved into new high ground at point E, but the O–P did not. This negative divergence is a significant change in character that needs to be watched carefully. The short term uptrend was weakened and broken by the time the Wyckoff Wave reached point E. However, the Bulls still have additional opportunities. The minor trading range defined by points Z and A created a Creek for the Wave to jump as it rallied from point D. This also provides an opportunity to have a quick discussion about the Creek.

Many Wyckoff students look at the Creek as a single line drawn along the resistance at the top of a trading. Like any stream, the Wyckoff Creek has two banks. The near bank and the far bank. Notice point C. Not only is this the top of the rally before the required secondary test of the shakeout, but it is also a minor resistance point. These minor resistance points become the far bank of the Creek. This gives us a much better definition of the actual Creek. While a reaction can cause the Wyckoff Wave or an individual stock to back up to the Creek, this provides a better definition of how far a stock can penetrate the single-line of the near Creek bed before it falls into the Creek itself. Look at it this way. The depth of the water near the bank is usually quite shallow. It only gets deeper and the current get stronger as you move out into the Creek itself. This concept also applies to individual stocks. A backup can enter a little bit of the Creek without being washed away, but as it gets closer to the center of the current, which happened here, supply takes over and the backup will fail.

The Wyckoff Wave began to react at point E. It began to back up to the Creek in a fairly natural manner. It reached the Creek, had a brief today rally and fell back into the Creek at point F. Notice how the spread and volume increased.

Point F was the low point on the back up to the Creek. However, the wide spread and increased volume makes this look more like a spring then a Last Point of Support. This is not a normal back up to the Creek. However, the Technometer is in an oversold condition and the Optimism– Pessimism Index and the Force Index are not showing any divergences with the Wyckoff Wave. In addition, good demand came in at point F and the Wave rallied strongly point G. This is where things start to get interesting.

Regardless of the spread and volume at point F, the Wave began to rally off the support. It is reasonable to draw a new set up trend lines as this could well be a major last point of support. A support line is drawn through points B and F with a parallel supply line through point E.

As we reach point G, let’s take a hard look at the stock market as represented by the Wyckoff Wave.
1. The Wyckoff Wave is in an over bought position relative to the long-term uptrend.
2. It is also in an overbought condition (52.03) relative to the Technometer.
3. There is a negative divergence with the Optimism – Pessimism Index between points G and Y. The Wyckoff Wave has moved into new high ground, but, for the first time, the O – P Index has failed to lead the Wyckoff Wave. The difference is quite small (61,963 at point Y and 61,929 at point G), but the message is very clear. Demand simply did not follow the Wave into new high ground.
4. The Force Index is positive and in harmony with the Wave at points E and G. This should be a positive indication. However, like the O – P there is a negative divergence when compared with point Y (+398 at point Y and +119 at point G).
5. Look at the difference in the thrust (price movement) between the move from point B to point E. Then, compare it with the move from point F to point G. See how the thrust has been greatly reduced.
6. The Wyckoff Wave was unable to reach the supply line, drawn through point E, of the new uptrend channel.
7. The Wyckoff Wave is reaching its objective area of 32,000-33,000.

Unfortunately for the bulls, everyone of those points suggests the market is in trouble. However, where do we go from here?
Long and intermediate term investors should continue to maintain their positions, unless their point and figure chart objectives have been reached. Short-term investors should become concerned and at the very least, crowd their stops.

The Wyckoff Wave then reacted sharply to point H. It did so on widespread and somewhat increased volume. The Wave found support at the top of the last rally, marked by the resistance line drawn from point E. The appearance of demand here is expected and normal. It is the next rally that needs to be carefully watched.

Look at the rally to point I. See how the volume decreased and little or no demand was really present. The Technometer did remain in a neutral condition, but the Optimism – Pessimism Index moved into new high ground and created a negative divergence with the Wyckoff Wave. The day following point I answered a lot of questions. Supply came in on increased spread and volume. We can immediately draw a short-term down trend channel with the supply line through points G and I. A parallel support line is drawn through H. The Wyckoff Wave tested the highs at point G and the test was successful. Any short-term traders who had not already closed their positions should close them now and look for new positions to the down side.

While intermediate to long-term traders may be a bit uneasy, the Wyckoff Wave is strongly in the long-term up channel. This is not the time to arbitrarily close positions, but individual stocks should be examined closely to see if they are in their objective areas or they have weakened or broken their long-term uptrend channels.

In the interests of full disclosure, I would like to share my opinions on the Wyckoff Wave on the day after point I. I was not pleased with the action at point F and felt the Wave needed a reasonable reaction to put in a more traditional last point of support. While my short-term trend was down, my long-term trend was still up and I was fairly comfortable with the situation. I had drawn in and extended the Creek as marked on the attached chart. The halfway point of the move from B to G was right at the top of the Creek and these two important areas where we could expect supply, was probably going to be met near the support line of the long-term uptrend. In my opinion, previous reactions had not moved deep enough into the long-term up channel to give the wave a chance to strongly rally before experiencing an oversold position. This was a needed and helpful market reaction.

The Wyckoff Wave continued to react strongly to point J. It did so on sustained spread an volume to the down side, strongly suggesting good supply was entering the market. Besides being in and oversold position, the Wave was also dangerously oversold on the Technometer. Another rally was expected and the Wave had a brief today rally to point H. It was unable to reach the supply line of the short term downtrend and put in a lower top. The action following point I was anything but bullish. Short-term traders were happily making profits while long-term traders were still looking for a drying up of supply on the next reaction which would most probably take the Wyckoff Wave back to the Creek.

The reaction to point L was not a good one for the long-term bulls. There was no long, slow drying up of supply but a quick two day move on sustained spread and volume. The day before the lows at L was extremely interesting. The Wyckoff Wave opened at its highest point of the day and closed near the bottom of a wider spread and increased volume. It was now in an oversold position relative to the short term downtrend. There was also a problem with the Technometer. When the Wyckoff Wave moves to a new low and the Technometer is not as oversold as the previous low, this is a negative indication. That is exactly what happened at point L. The Wyckoff Wave had backed up to the Creek but not in the way it should have for a good last point of support. This is the time for long-term traders to seriously review and evaluate their positions.

The rally to point M was of poor quality. Notice how the spread and volume decreased as the Wave advanced. Again, the Wave was unable to weaken the supply line of the short term downtrend channel. While the wave was not overbought relative to the Technometer, it was only a half point away. The extremely poor rally is the real key that the backup to the Creek scenario most probably is not going to happen.

Any doubts were certainly answered the next day when a great deal of supply entered the market. The Wyckoff Wave experienced its largest combination of spread and volume to the down side in months and it was quite evident that the Wave would fall back into the Creek and the support line of the long-term uptrend channel was in danger of being at least weakened or perhaps broken.

The Wyckoff Wave then fell into the Creek and weakened and penetrated the support line of the long-term uptrend channel. The increased volume is certainly not a bullish indication. This, coupled with the heavy down side on the Force Index, suggest the next rally will not be strong or sustained.

The Wave continued to react to point N. It was now in an oversold position relative to both the short term downtrend and long-term uptrend. There was a one-day rally to point O and the Wave reacted again to point P. The Technometer is extremely oversold. It has also been oversold for several days. As the Technometer is a five day moving average, it is quite possible that the next rally could take it into an overbought condition.

The Wave then rallied to point O and tested the supply line of the short term downtrend. While the Technometer did not become overbought, it only missed by about a half a point. The rally was not particularly strong and done on decreasing spread and volume. It also saw resistance right at the support line of the long-term uptrend.

The Wave reacted, had an intraday failure to the down side and may make another attempt to weaken the short term down channel and return to the long-term uptrend. The events that unfold over the next several days will answer some important questions.

The Wyckoff Wave has definitely weakened and probably broken the long-term uptrend up channel and is now searching for a new direction. The long term trend is now neutral. The short-term trend is down.

On May 2, 2011, The Wyckoff Wave reached a high of 31,002. The maximum objective was in the 32,000 to 33,000 area. So far, there has been no buying climax or “whooping it up”. However, the Wave’s over bought position as it came close to the objective area and the lack of its ability to find support for its final move to the objective area suggests the Wyckoff Wave and the stock market, in general, may need some time to rest and determine its next move.

While the short-term traders are still holding shorts and puts, long-term traders should be looking to take profits and close out positions.

In future posts we will be looking at the stock market as represented by the Wyckoff Wave in smaller segments as we watch and wait for future developments.