Did We Fall Back Into The Creek?

Click Here For Wyckoff Wave Chart 03-30-12

The stock market is always surprising us. There are times when it can move in a completely opposite direction than what was expected. However, if we go back and look at what happened using basic Wyckoff, these supposed contradictions can make a great deal of sense.

Just one week ago, it appeared the Wyckoff Wave and the entire stock market was ready for a significant advance. The Wyckoff Wave, on its way to point A, had dramatically penetrated the trading range on good price spread and volume.

The Wave became dangerously overbought at point A and we all expected a reaction. This is a normal situation, as illustrated by Bob Evans’ wonderful story about the creek jump. The little boy most definitely jumped the creek and happily landed at point A. He was quite proud of his achievement and went back to look at the creek he had just jumped over, before he continued his journey.

On the first part of trip back to the creek (marked on the attached chart with red arrows), things looked promising. While supply was certainly present during the first day, it appeared to dry up as relative price spread and supply was reduced. The second day, marked by the little arrow, had reduced spread and volume. On the third day, there was an intra-day failure to the upside. This, coupled with the reduced volume, suggested a lack of supply.

There was also a positive divergence with the Optimism – Pessimism Index when compared to point Z.

At this point, it appeared that the Wyckoff Wave could hold above the creek and begin to rally. That didn’t happen. Instead, the next day more supply came in and the Wyckoff Wave reacted back to and just into the creek. While we did see increased spread and volume, which was certainly not a positive, the Wyckoff Wave moved into a dangerously oversold condition on the Technometer. This was an indication that the reaction, most probably would not continue further into the creek bed and that we had even seen a Last Point of Support.

The next day (point B) the Wyckoff Wave put in an intra-day failure to the down side. The reduced price spread and volume suggested a lack of supply. In addition, a review of the intra-day waves showed good supply came in the afternoon. The Technometer was still in a dangerously oversold condition. It certainly looked like we were ready to rock ‘n roll to the upside. The little boy had gone back to the creek, in a reasonably constructive manner, dipped his toe in the water and decided everything was just fine. He was then ready to begin the rest of his trip.

It got off to a great start. A strong gap opening to the upside, coupled with an increased price spread, suggested the rally had begun. The slightly reduced volume suggested a lack of supply. This condition is not uncommon at the beginning of a rally. However, there was no follow-through. Our daily commentary suggested that the Wyckoff Wave needed to go and go now. That didn’t happen.

Instead the Wyckoff Wave reacted. However, the reaction was still positive in nature as it was on reduced spread and volume, again suggesting a lack of supply. However, if the market is going to move, it moves. At this crucial stage there should be no dillydallying. If the market hesitates, we have an OOPS.

The OOPS came in a day before point D. All of a sudden we had a widespread and slightly decreased volume to the down side. Demand was withdrawn. That weakness was followed through at point D where the Wyckoff Wave went all the way back across the creek. For some strange reason, the little boy decided one last time to revisit the creek and this time, fell in.

What went wrong? While hindsight is always 20/20, there are a couple of things that need to be revisited and added to our information base.

1. It appeared that the Wyckoff Wave sprung the trading range at point Z. However, as was mentioned in this column at the time, the rally off the spring (marked by blue arrows on the attached chart) was not strong. A spring should spring. This one certainly did not. This is an indication of trouble and should have been filed away in our mental databases.

The concern was mostly mitigated by the strong breakout to the upside (jump across the creek). As I look back on this I mentally canceled out the poor performance of the spring after the strong break out. This goes down as a lesson learned.

2. On the backup (marked by the red arrows), the relative volume was higher then it should have been. This is a bit of Monday morning quarterbacking. The relative reduced price spread and volume still looks like a positive drying up of supply. However, on the day between the last red arrow and point B, we did see some supply come into the market. However, this was also the day the Technometer moved into a dangerously oversold condition. While this would certainly suggest the market would rally, and it did, this was an important day. It said supply was still present and wasn’t dried up. This could suggest we would not put in a Last Point of Support ( LPS).

Despite that, as a short-term trader, I was happy to take a short-term long position to the upside. As an intermediate term investor, I was also happy to add to existing positions.

Even though my short-term positions were closed in just a few days, small profits were taken. As an intermediate term investor, I still feel this is a good level at which to add to my intermediate to long-term portfolio.

What does this mean for the future direction of the stock market, as represented by the Wyckoff Wave?

There was an intraday failure to the down side at point D. This suggests some demand has returned to the market. However, there was no follow-through on Friday. In addition, the Technometer has quickly moved into an overbought condition. In addition, the Wyckoff Wave has created a short-term down trend channel. There is a supply line drawn through points A and C. A parallel support line has been drawn through B. In addition, the Wave has weakened the intermediate term blue support line and is in the process of testing it.

Does this mean we are in for a significant reaction? I don’t think so. There is only a small count to the down side on the 100 Point & Figure chart and that objective has already been reached. In addition, we have seen good demand come in at point D.

This would suggest that the Wyckoff Wave, while not ready to rally strongly, may well be prepared to move sideways until we see a new attempt at ending action.

For this scenario to succeed, it would be helpful for the Wyckoff Wave to weaken its short-term down trend channel. Before that happens, there may be a small reaction to test point D.

It is not uncommon for a new trading range to begin just above an old one, when a jump across the creek fails

So far, we are still looking at accumulation and a potential strong rally to the upside. A second trading range simply means more upside potential..