Where Do We Go From Here?

Click Here For Wyckoff Wave Chart 09-05-2014

The hiatus has ended. I am looking forward to resuming the Wyckoff Week in Review blog post on a regular basis.

Before getting into stock market activities, I would like to explain why I was unable to write this blog for the past three months.

My wife, Marlene, is a 23 year cancer survivor. In the early 90s it was serious colon cancer. That was followed in 2004 by inoperable gallbladder cancer. Fortunately, through radiation and chemotherapy treatments, both cancers went into remission. We thought everything was behind us.

Last October we discovered the gallbladder cancer had returned and metastasized in her liver. Our oncologist told us that because gallbladder cancer so aggressive, once it has appeared in another organ, there is no cure. Marlene was placed on palliative care, which treats the patient with aggressive chemotherapy in order to simply extend life.

Happily, things didn’t work out as planned. Instead, after 6 months of chemotherapy, three of the four tumors disappeared and the largest one was reduced in size by 50%.

Based on these results and her excellent cancer survival history, we got a second opinion. There, we were told surgery was an option. On June 4th Marlene underwent a 10 1/2 hour surgery which removed 60% of her liver and with it all her cancer. She is now cancer free.

Fifteen days later, in her hospital room, we celebrated our 49th wedding anniversary. It was the best one ever and with the grace of God we will celebrate many more.

This is a difficult surgery for anyone, but we are in our 70s and there were complications. She experienced blood clots and infections, making her recovery even longer and more difficult.

The liver, which regenerates itself, has grown back to its normal size, but it will take several more months for Marlene to overcome the toll this ordeal has taken on her body.

Marlene and I would like to thank those of you who knew about her illness for your beautiful and heartfelt notes of encouragement and support. I cannot tell you how much they meant to us during this difficult time.

Now, back to the markets.

Since my last blog post in late May, the Wyckoff Wave has only risen by 360 points. While it mostly moved sideways there was one short term reaction from point T to point W. That was followed by a short-term rally to point X. Since then the Wyckoff Wave has moved sideways.

Back in May, the Wyckoff Wave was in a trading range, which probably began back in March. That same trading range is still in effect today. The Wyckoff Wave has moved sideways and, in doing so has built a fairly extensive count.

The question is whether that count represents accumulation or distribution. I have been bullish for quite some time and feel the Wyckoff Wave is going to re-accumulation.

The Wyckoff Wave is in the upper half of its long term up trend channel. This channel began after the 2008 bear market and the Wyckoff Wave has rewarded long-term bulls with excellent returns over the past six years.

The trading range is also shown on the weekly chart with the support and resistance lines in green. It is also important to note that the reactions to both points T and Y, on the weekly chart, did not reach the support line of the long term up trend channel. In fact, the Wyckoff Wave has spent much of this year testing and weakening the channel’s supply line.

The Optimism – Pessimism Index, which is the volume index of the Wyckoff Wave, is quite a bit stronger than the Wyckoff Wave. This indicates there are more buyers than sellers and demand remains in control of the market.

So far, the trading range has been mostly on moderate to low price spread and volume. Some could call it boring. This is characteristic of periods of accumulation or re-accumulation.

While everything looks bullish and the trading range certainly appears to be accumulation, nothing is confirmed until there is ending action.

Ending action is the final action of the trading range that precedes the markup or markdown of the market or individual stocks. It is the catalyst that sends the market moving in one direction or the other.

The most common forms of ending action are a spring (before an up move) and an upthrust (before a down move).

So far, we have not seen ending action in this trading range. If indeed it is re-accumulation, there are some strong objectives to the upside.

In 2011, the Wyckoff Wave went through an important accumulation and established a maximum upside objective of 50,300. On Friday, the Wyckoff Wave closed at 41,837.

A preliminary count on the 100 Point & Figure chart from Friday’s close over to point I (daily chart) adds another 6,000 points. If the count was extended all the way over to point R (daily chart), the Wyckoff Wave would reach the 2011 objective.

That does not mean that this is going to happen, but simply that the potential is there and the intermediate and long-term market indicators are very bullish.

Some may ask why wasn’t the market action around point W, on the daily chart, a spring?

The answer is in the definition of support and resistance lines in a trading range.

Obviously, support and resistance lines are drawn through points of support and resistance. That does not necessarily mean that the line must be horizontal and drawn from the first important level of support or resistance.

Instead, support and resistance lines should be drawn through these points and do not necessarily have to be straight horizontal lines.

An example of that is found in this trading range and noted on the daily chart. There are three different support lines. The first is drawn from the low at point U. The second from point U points W and C. The third is drawn from point C through point I, M, Q and U.

When the Wyckoff Wave penetrates any of these lines and then rallies, there is the possibility of a spring. This is not a mechanical action, but must be evaluated to see if the requirements that make up a spring are present.

Most importantly, we need to see relatively moderate supply that is not increasing. Then, we need to see strong demand come into the market causing the Wyckoff Wave spring or strongly rally off the bottom.

If we look at the market action in the area of point W, that didn’t happen. The support line was penetrated. Supply stayed relatively modest and unchanged. However, good demand did not come into the market as evidence by the reduced volume off the low at point W.

In addition the follow through was not particularly impressive and while the Wyckoff Wave rallied to the top of the range at point X, it did not do so in a very impressive manner. This makes it vulnerable for a reaction back down into the trading range.

Despite that rally, there has not been ending action and it appears the Wyckoff Wave will continue to move within the trading range until that occurs.

The next question is, will the Wyckoff Wave move through the resistance at the top of the trading range (jump the creek) or will it react back into the trading range.

On Thursday, the Wyckoff Wave attempted to move through the top of the range and ran into supply. The day’s market action appears to have been an upthrust. However, there was little follow through and the Wyckoff Wave rallied on Friday.

Like a spring, an upthrust must experience strong supply that generates a definitive move to the downside. So far, that hasn’t happened and the upthrust scenario is in jeopardy.

This makes next week an interesting and fairly important time. What will the market, as measured by the Wyckoff Wave, do? Will it rally or will it react?

While the intermediate and long-term indicators remain bullish, the short term indicators are becoming more bearish.

The first is simply the poor quality of the rally off the bottom of the trading range to point X. A daily analysis, as published in the Pulse of the Market daily report, indicated there was a fairly consistent lack of demand as the Wyckoff Wave advanced. This was certainly not a Sign of Strength that normally precedes a strong move through the top of the trading range.

It is also helpful to look at the relative strength of each Wyckoff Wave stock, compared to the Wyckoff Wave. Of the 12 Wyckoff Wave stocks, 9 were weaker than the Wave itself. Only Union Pacific (UNP) and Walmart (WMT) were stronger than the Wyckoff Wave. Bristol Myers (BMY) was in harmony with the Wyckoff Wave.

These suggest the Wyckoff Wave is not prepared to rally strongly and is expected to react back into the trading range.

Finally, we are looking at an overbought Technometer. While the Force Index is relatively strong, it is difficult for a stock or index to rally in the face of an overbought Technometer.

While in the stock market nothing is guaranteed, it appears that the long and short term scenarios described above have the highest probability of success.