The Rally That Just Won’t Quit – Or Will It?

Click Here For Wyckoff Wave Chart 11-07-2014

This past week the stock market, as measured by the Wyckoff Wave, continued its rally off the shakeout at point E.

The pundits, who just a few weeks ago, were forecasting gloom and doom are now celebrating the new highs achieved by the Dow Jones Industrial Average and the S&P 500.

While it was not mentioned by many, the Wyckoff Wave also put in an all-time high.

In doing so the Wyckoff Wave rallied through the top of the trading range.

Last Friday, the Wyckoff Wave had reached the top of the trading range at point F. Monday began a two-day reaction to point G. It appeared that this would be long-awaited reaction to test the shakeout and even be a Last Point of Support. However, on Tuesday supply quickly dried up and the Wyckoff Wave began putting in three consecutive days to the upside.

Was this move through the resistance a “jump across the creek”? Will the Wyckoff Wave continue to rally? If the Wyckoff Wave reacts back into the trading range, was this an upthrust, or is there another explanation?

A rally through the top of the trading range (“jump across the creek”) features strong demand. This is presented on the vertical line chart as wide price spread and high volume.

While the price spread was slightly wider on Thursday, the day the Wyckoff Wave moved through the resistance, it was not particularly impressive. In addition, volume, although slightly higher than on Tuesday, was relatively low.

Also, take a look at the price spread and volume on the move from point E to point F and then compare it with the price printed volume over the last three trading days. The price spread is narrower and the volume lower.

These both suggest a weakening of demand at exactly the time when strong demand needed to come into the market.

It is, therefore, difficult to conclude that the Wyckoff Wave is in the middle of the “creek jump”.

An upthrust is defined as a penetration of the top of the trading range on narrowing price spread, increased volume and a poor close. While Friday’s market action was on decreased price spread, it was also on decreased volume and the close was near the top of the day’s high. Friday’s market action may have been a lot of things, but it wasn’t in an upthrust.

Let’s go back and look at this long trading range. Notice that the resistance line at the top of the trading range has not been horizontal but has changed, as a result of several new highs. If we look at how those highs were achieved, we see the same type of market action. A poor quality rally move the Wyckoff Wave into new high ground, before supply came in and drove the Wyckoff Wave back into the trading range.

I would suggest that we are seeing that again and the resistance line drawn from point Z through points B and F, will be adjusted to reflect the rally off point G.

This observation is supported by an overbought Technometer and Force Index that is beginning to react.

While the Wyckoff Wave is expected to return to the trading range in the coming week, we are still waiting for a secondary test of the shakeout. If the test is successful and holds above the supply line of the short term down trend channel, we could see a Last Point of Support.

This would set the stage for another leg in this wonderful bull market.