Anticipating the Stock Market

Click Here For Wyckoff Wave Chart 01-20-12

This week the stock market, as measured by the Wyckoff Wave, continued its slow advance. The individual trading day’s market action has produced indications of supply and lack of demand. Each time it appears the Wyckoff Wave may be ready to react, it continues its slow tedious advance. What does one make of this and, more importantly, how does one anticipate the market’s future direction?

One tried and true Wyckoffism is to “profit in what you anticipate, not in what you see now”. In order to do that it is important to look at a broader picture and reflect on the motives behind the market action. In determining why the stock market is behaving in this manner can be extremely helpful in anticipating its future direction.

To begin, let’s return to the May, 2011 highs that are marked on the attached chart at point G. Point G is the high found at the end of the bull market following the crash of 2008.

By rallying to point G, the Wyckoff Wave had nicely exceeded the halfway point of the Bear Market, which is marked on the attached chart. It then moved sideways and, in July, 2011, reacted to point X. Point X was a Selling Climax. There was an automatic rally to point Y and a secondary test at point Z. The trading range experienced a selling climax at point H and began to rally.

This was a well-defined trading range that certainly can be called a period of accumulation. If we investigate the counts on the 100 point figure chart at the 24,800 level, we can identify three phases. I originally only identified two phases but have added a first phase from Points H to F. Phase 1 gives us an objective of 27,600. This has already been accomplished.

Phase 2 is from point H to point C. The objective here is 36,000. Phase 3 is from the spring at point H all the way over to the selling climax at point X. This objective is 37,200. As you can see the last two objectives have not yet been made.

It can be argued that a count can be made from point P (Last Point of Support) over to the spring and then, through the trading range, to the Selling Climax at point X. While I have taken these counts, I would prefer to see the more conservative counts work out before anticipating these more aggressive counts.

Based on the period of accumulation and the Point and Figure Chart counts, we can anticipate the market continuing to rally. This does not mean it will, it only means it appears it may.

Let’s look at some additional clues. When the market reacted last spring and summer, we can draw a supply line through point G and the Last Point of Supply at point S. After the Wyckoff Wave rallied to point K, it moved sideways and then tried to continue the rally. It ran into trouble at point G. Notice that point G is right at the long-term supply line. Late arriving Bulls, who had bought in last Spring’s distribution area, were now trying to get out even. This caused a reaction to point R. This is a normal place for a reaction and one that could have been anticipated. Sometimes we spend most of our time looking at a shorter-term view of the market and miss the larger picture. I certainly plead guilty to the above charge.

On the way, the Wave weakened the long term supply line at point S. It then had a brief, one-day reaction to point T before it resumed the rally. The reaction to point T broke the long – term down trend channel and is another bullish indication.

What could the Wyckoff trader anticipate at both the rallies to point G and point S? These were potential upthrusts. The long term down trend channel was still in effect. There were reasonable counts from both potential upthrust to point K. A mitigating concerned was that the halfway point of the reaction from point G to point X had been exceeded. Even so it was reasonable to anticipate a significant reaction. If we anticipated a reaction, what would we expect to see? Supply. Supply. Supply. Supply would have quickly and strongly come into the market. The reaction would have been fast and strong. Remember, a bear market is much more orderly than a bull market. That didn’t happen. Instead, the Wyckoff Wave reacted for over two weeks and held above the halfway point of the previous rally.

The reaction from point S, as mentioned above, was even shorter and the Wyckoff Wave continued to advance.

Anticipation is not predicting what the market will do. It is looking for the market to behave in a particular manner that will justify your conclusion. If it does not behave that way, immediately look for answers and other options. Too many traders make decisions on the market’s future direction and then, when it goes against them, spend valuable time and money trying to justify their initial decision.

After the reaction to point R, the Wyckoff Wave began its long slow push to Friday’s close at 30,914. Look where it is. The old high at point G was 30,038. The Wyckoff Wave is knocking on the door of an important resistance level.

The Wyckoff Wave is at a potential turning point. We can anticipate three possible actions.

1. It can rally strongly through the resistance and continue its advance.
2. It can upthrust the resistance.
3. It can react to test the short term uptrend channel or even back to the support/resistance line drawn from K.

Let’s look at all three options.

1. While anything is possible, this looks like the least likely of the three scenarios. The Wyckoff Wave is in an overbought condition relative to its Technometer. The Optimism – Pessimism Index is in an overbought position relative to its up trend channel. In addition, there is a very short-term change of character, that is creating a negative divergence. Notice how Friday’s Wave moved into new high ground, but the O – P Index did not. The Force Index is not rallying to support the Technometer. Again, these are short term observations.

Those who anticipate this scenario should expect to see strong spread and volume to the upside early next week.

2. While the above items do not help support scenario number one, they are certainly helpful to those anticipating an upthrust. Those who expect this scenario should see supply come in as the Wyckoff Wave penetrates the resistance. This will be immediately followed by strong spread and volume to the down side.

3. Once again, the negatives expressed in scenario 1, are positives to those anticipating a corrective reaction. Those who expect this to happen can look for the inability of the Wyckoff Wave to penetrate the resistance. The Wave should then react towards the support line or even the resistance/support line drawn from point K on reduced spread and volume. This will not be a quick reaction.

What will the Wyckoff Wave do? I prefer to anticipate all three and then see what the market tells me. This is not a time to take new positions. It is a time to watch, wait and learn.