When is a test not a test?

Click Here For Wyckoff Wave Chart 09-23-11

A review of the stock market’s action, as represented by the Wyckoff Wave, gives us an opportunity to discuss tests of upthrusts. In this case, what we thought was a test, in fact was not. We did not see the true test until Tuesday of this week.

To review: The Wyckoff Wave reacted strongly and experienced a selling climax at point X. The rally to point Y established a new trading range. This range is presented on the chart with two parallel blue lines.

After the reaction to point Z, the Wave rallied nicely and up thrusted the trading range at point A. There was then a nice reaction to point B and a two day rally to point C. Even though the rally was brief, the second day was on decreased spread and volume, suggesting a lack of demand. The Wyckoff Wave then reacted to point D.

Since we had a second rally top (C) that was lower than the first rally top (A), we are entitled to draw a new down trend channel (A – C) with a parallel support line through B.

Until shown differently, C is the test of the upthrust and we should closely watch how the Wave behaves as it moves along the new short-term down trend channel. We certainly can expect to see support in the area between points Z and X. What happened?

On September 8th, the Wyckoff Wave experienced an intraday failure to the upside on increased volume. This suggested supply was present. The following day, the Wave continued to react on increased spread and volume. Supply was definitely present and the Wyckoff Wave appeared ready to test the support at the bottom of the trading range. This is what would be expected after a successful test of the upthrust.

However, things aren’t always as they seem. After this two day reaction, the Wave experienced an intraday failure to the down side. It held above point Z. The intraday failure, on increased volume, indicates demand has returned to the market. Instead of continuing to react, the Wyckoff Wave began a six day rally that ended at point E. Let’s investigate this rally on a day to day basis.

On the day following point D, the Wave rallied on decreased spread and volume. This suggested a lack of demand and opened the possibility of continuing the reaction. However, that didn’t happen. The next day, the Wave continued to rally on increased spread and slightly increased volume. Demand was still present. However, it was not dominant and the rally was not off to a terrific start. On the next day, Thursday, September 15th there was dramatically reduced spread and slightly increased volume. While an argument could be made as to whether today represented the presence of supply or a lack of demand, the bottom line was that the Wyckoff Wave put in another weak performance.

The Wyckoff Wave was now approaching the top of the trading range. It was either going to jump the creek or react back into the trading range. The poor quality of the rally suggested the latter. As expected, on Friday, September 16th, the Wave rose on reduced spread and increased volume. Again, the day’s action indicated the presence of supply. This weeklong rally back to the top of the range was of extremely poor quality. It also put in a top that was higher than point C. Unlike the short, two day, rally from B to C, this was a more traditional rally to test the upthrust. It not only dried up the demand, but allowed supply to enter the market.

This Monday, supply came in strongly as the Wave reacted on increased spread and decreased volume. This lack of demand pretty much confirmed the rally was over. The Wave made one last attempt to rally on Tuesday. The reduced spread and volume coupled with the intraday failure to the upside again suggested a lack of demand. In addition, an examination of the intraday waves would have shown good supply came in during the afternoon.

This was the real test of the upthrust at point A. This allowed Wyckoff students to move the short term down trend channel from points A – C (with a parallel support line at B). The supply line of the new down trend channel is now drawn through points A and C. The parallel support line is drawn through point D.

On Wednesday, the Wyckoff Wave reacted strongly on increased spread and volume. It was now headed for the bottom of the trading range, where it would see support, spring the trading range, or fall through the ice. The reaction continued on Thursday, but on decreased spread and increased volume. This suggested some demand was present. However, some demand should be expected at the bottom of the trading range.

As I mentioned in Thursday’s Pulse of the Market daily report, we should expect to see a minor rally off the bottom of the trading range. That began on Friday. It got off to a poor start as the spread and volume were both less than on Thursday. This rally should give the Wave a little space before it, again, tests the bottom of the range.

The short term trend of the market, as measured by the Wyckoff Wave, is down.
The intermediate-term trend is neutral.

What to do?

Earlier in the week, traders were advised to look for opportunities to the down side. These positions should be held until a final determination is made as the Wave tests the bottom of the trading range. No long positions should be considered at this time.