Driving Out Weak Shareholders. A Detailed Analysis of an Interesting Week

Click Here For Wyckoff Wave Chart 08-28-2015

The Wyckoff strategies and techniques are based on identifying what professional large interests are attempting to accomplish in the stock market. Once that is accomplished, Wyckoff students can simply follow in their footsteps and enjoy capital gains.

The professionals succeed when the public (weak shareholders) buys or sells stocks at exactly the wrong time. This transfer of shares from weak to strong holders is extremely important to the stock market cyclical existence. One of those transfers happened this past week.

Over the past few years, primarily due to low or nonexistent interest rates, the stock market has become the only place an investor can obtain reasonable returns. That meant everyone was in the market and both strong and weak hands were purchasing stock. This was not a good long-term solution, as the professionals were not really in control of the market.

It would appear that their first attempt to regain control began last October at point E. There the Wyckoff Wave experienced a Shakeout (#1 Spring) of its trading range and attempted to rally. While it made some progress, a month later, at point H, it began a long sideways movement.

Even though professionals were probably doing some selling, there were plenty of buyers and the market moved sideways with a bias to the upside.

During the past year, the Wyckoff Wave established three important phases. They are marked by support lines drawn from point’s W, I and E.

After its final and somewhat weak rally to point F, the Wyckoff Wave began to react. At each support level it attempted ending action, in the form of a Spring. Each time it failed. No one was interested in selling large quantities stock and those shares put up for sale were happily taken in by the public.

Finally, on Friday, August 21st, the Wyckoff Wave penetrated the final support line drawn from point E. As this was the final area of support, before a possible long decline, something significant was found happen.

There were three scenarios.

The first was a Spring or aged Shakeout. This would play out if strong demand came into the market on Monday or Tuesday and the Wyckoff Wave rallied through the support, now resistance, line drawn from point E.

The second was that reaction from point P was a Sign of Weakness and the Wyckoff Wave was falling through the ice. This would signify the beginning of a more significant reaction.

The third was the Wyckoff Wave would react and experience a Selling Climax. This, after a successful secondary test, would be the beginning of a new sideways movement or trading range.

Each one of these scenarios needed to be closely watched and their success would be based on the amount of demand that came into the market.

The Spring scenario requires strong demand. The Sign of Weakness scenario meant little or no demand. The Selling Climax scenario would bring moderate demand.

Monday was a most eventful day. The strong interests needed to shakeout the weak interests and take back control. They did just that as Mondays market action certainly got everyone’s attention. The huge wide gap opening to the downside resulted in many investors heading for the exits and their shares were happily taken in by the professionals.

However, the possible scenarios could not him be confirmed until the market rallied. The quality of the rally would be the final determination in the future direction of the market.

This week, the Wyckoff Wave made good progress to the upside, but volume was moderate.

This eliminated the Shakeout (#1 Spring) scenario. It also put the Sign of Weakness scenario in jeopardy.

It appears that Monday gave us a tried and true Selling Climax. The automatic rally began on Tuesday and may have been completed on Friday. If that is the case, this week should bring a reaction and a Secondary Test.

Will the Wyckoff Wave react past point Q and put in a strong move to the downside? While that needs to be confirmed, I would suggest it will not.

The Wyckoff Wave has quietly put in a corrective reaction. On the weekly chart, it is holding just above the halfway point of the rally from point H to point F (these letters are marked in black on the weekly chart).

Volume is an important part of the Wyckoff strategies and techniques. Volume is measured using the Optimism – Pessimism Index. The O – P Index has constantly remain stronger than the Wyckoff Wave. This suggests there is not been a tremendous effort to move the Wyckoff Wave lower. The Optimism – Pessimism Index is in a positive divergence with the Wyckoff Wave at both point I and E.

If the Wyckoff Wave was going to react strongly, we would be seeing a weaker O – P Index. In addition, these positive divergences are intermediate, not short term. This suggests we are not looking at a weak stock market.

If the Selling Climax is affirmed and we see a successful Secondary Test, we are still looking at a bit of the sideways movement and the elusive ending action.

I doubt we are looking at the “2015 Bear Market”.