Where’s The Test Of The Shakeout?

Click Here For Wyckoff Wave Chart 10-31-2014

The stock market, as measured by the Wyckoff Wave, has spent most of 2014 in a trading range.

This trading range has been quite interesting. It has been fairly long and somewhat boring. It has also experienced a great deal of relative strength. This is shown by the large number of higher tops and higher bottoms.

What is most interesting is that on many rallies within the trading range, the price spread and volume suggested the Wave would react, but it didn’t. It simply moved on to put in a higher top and then went through a minor reaction. Often the reaction lasted for just a few days and the Wyckoff Wave then rallied or simply moved sideways.

These higher tops resulted in an ever changing top of the trading range. The resistance line had to be adjusted when the Wyckoff Wave rallied to points Z, D, H and, in September, to point B.

These advances were not failed attempts to move into new high ground (“jump the creek”), but simply the adjustment of trading range resistance.

After reaching point B, the Wyckoff Wave finally put in its first good reaction in months. It dropped sharply to the bottom of the trading range and went through a shakeout at point E.

After a shakeout, one expects a normal reactive rally and then the reaction to test the shakeout.

The Wyckoff Wave certainly rallied off point E, but we are still waiting for the reaction and a Secondary Test.

Twelve days have passed and eight of those have been up days. Only four have been down days. On two of those days, it appeared the reaction towards a secondary test was beginning, but there was absolutely no follow through. The Wyckoff Wave continued to advance.

It is now testing the resistance at the top of the trading range (line drawn from point B).

Compare the reaction off point B to the rally off point E. Both traveled the same distance. The reaction took 18 days. The rally only 12.

There was one brief pause in the reaction as the Wyckoff Wave rallied to point D. This also established a new short-term trend to the downside.

The Wyckoff Wave has not paused or reacted on this last rally.

This has made it very difficult for the bulls to enter the market to the upside.

As mentioned in past posts, positions probably should not be taken on shakeout. This was especially true in this situation. That’s because it is extremely dangerous to take positions on springs or shakeout in a downtrend.

This left the short-term bulls without an entry point. Intermediate and long-term bulls, who had weeded out poor performers and those stocks that had achieved their objectives at point B, with some cash and no opportunity to spend it.

Is the market simply going to continue to rally and not provide the bulls an entry opportunity? The answer is, most probably not. Here are some thoughts.

I will maintain Wyckoff discipline that says that all shakeouts (#1 Springs) need to be tested. I also am not comfortable with those tests happening in a downtrend.

If the Wyckoff Wave reacts, the strong Force Index suggests the reaction will not be particularly long or deep. There is an excellent chance a successful secondary test will also break the short term down trend and create a new short-term uptrend.

The Technometer, which is an excellent indicator of change in market direction, is quite overbought. This suggests a reaction is in the near future. An overbought Technometer also makes it difficult for the market to advance.

While it is unusual, it is acceptable for the normal rally off a spring, to also be a Sign of Strength. The rally from point E has certainly exhibited strong relative strength. This would also allow a successful secondary test to be a Last Point of Support.

This may well put the Wyckoff Wave in a position to change the trend and put in a Last Point of Support with a substantial count, on the 100 Point & Figure chart, to the upside.

This is the best of all possible scenarios and the one most likely to succeed.

However, the wise Wyckoff student knows that every possible scenario, regardless of its probability, must be considered and analyzed.

Despite all bullish indications, the Wyckoff Wave could upthrust the trading range. This means it would penetrate the top of the trading range on a narrower spread, higher volume and poor close.

If that happens, the Wyckoff Wave will react strongly back into the trading range and probably return to its short-term down trend channel.

The Wyckoff Wave could also continue to rally and move into new high ground (jumped the creek). This would confirm the Sign of Strength scenario and bulls would have to wait for the next reaction (backup to the creek) before taking new positions.

What will the Wyckoff Wave do? Monday could be an extremely important day that will provide answers to the success of these scenarios. Watch closely, it could be fun.