A Wyckoff Dilemma

Click Here For Wyckoff Wave Chart 05-20-2016

This past week the stock market, as measured by the Wyckoff Wave, reacted and tested the resistance, now support, line that formed the top of the trading range that began last August.

In March, the Wyckoff Wave rallied through the resistance and put in a high at point V. A green resistance line has been drawn through points V, X, Z, B, D, R and T. They mark the top of the early phases of the trading range.

Because the rally was not of particularly good quality, it was difficult to call it a Sign of Strength. Instead, it appeared the Wyckoff Wave was establishing a new resistance level in the developing trading range.

Because a resistance line can also become an important area of support, the resistance line was extended past point T to the right side of the daily vertical line chart.

That rally ended at point V and the Wyckoff Wave began to react back towards the top of the first part of the trading range.

On Thursday, the Wyckoff Wave reacted back into the trading range, but quickly rallied and closed above the support line. It met support, at an expected area, which was the continuation of the resistance line past point T.

The reaction off point V was not particularly strong. Supply was, at best, moderate and was not sustained. While that could be an initial bullish indication, very little demand came into the market. This is shown on the poor quality rally from point W to point X.

After reaching point X the Wyckoff Wave began another slow reaction back towards that support line. While supply was certainly present, once again it was not overpowering and the Wyckoff Wave met support, at the expected area.

Despite the poor quality reaction, the lower tops and bottoms have caused a change in the short term trend of the market. The short-term trend is changed from neutral to down. The intra-day trend of the market is also down. The intermediate and long-term trends remain neutral.

All this suggests the Wyckoff Wave will be supported in an area between the above-mentioned support line and the lows at points U and S. This will form a new resistance and support areas in a new phase of the trading range.

There are some other indications that support this scenario. Notice that the Wyckoff Wave has been unable to reach the support line of its new trend channel. This is often a bullish indication that that suggests a rally that could weaken the channels supply line.

One additional Wyckoff tool is the Point & Figure chart. This the width of trading ranges. This width supports any rally or reaction. The Point & Figure chart forecasts these objectives.
A count on the Wyckoff Wave’s 100 Point & Figure chart from point X over to point V, provides a downside objective of between 40,200 and 39,400. The low at point S is 38,932.

While all this seems to present a logical scenario for a new trading range phase, on Friday, the Wyckoff indicators sent an interesting message.

The three Wyckoff indicators are the:
1. Optimism – Pessimism Index – this is strictly a measure of volume and represents the effort that is placed in moving the Wyckoff Wave in a particular direction.
2. Technometer – this is an excellent indicator that identifies when the Wyckoff Wave is in either an oversold or overbought condition.
3. Force Index – the Force Index is a gauge of longer-term investor sentiment. It usually produces low to moderate negative readings.

These three tools are invaluable in helping Wyckoff students adjust to market changes and the intensity of rallies and reactions.

On Friday, the Technometer moved into a clearly overbought condition. This, not only suggests the market will react, but it is difficult for the Wyckoff Wave to advance in the face of an over bought Technometer.

The Force Index is quite valuable when used in conjunction with the Technometer. In this case, it’s moderately negative readings have no mitigating impact on the overbought Technometer.

Finally, the Optimism – Pessimism Index moved into a minor short-term negative divergence, when compared with the Wyckoff Wave, when compared with point V. The O – P Index is higher than it was at point V, while the Wyckoff Wave is substantially lower. This suggests that the O – P Index is putting in a tremendous effort to the upside. However, the results of this effort are not being matched by the Wyckoff Wave. This also suggests the Wyckoff Wave is vulnerable to a reaction.

These indicators suggest a more significant reaction then simply a meeting support between Thursday’s levels and points U and S. This suggests the Wyckoff tools are sending different signals then we see in the Wyckoff analysis.

When there is a bit of a conflict between the Wyckoff tools and the Wyckoff analysis, the overall analysis needs to prevail.

While, in the overall scope of market trading, these scenarios really only apply to aggressive short-term traders, there is an important point to be made.

Wyckoff traders and investors should use all the tools in the Wyckoff handbook to identify trends, their strength and where the market is headed. There are no automatic or mechanical indicators.

Too many students attempt to use the readings from the Wyckoff tools, especially the Technometer, to automatically call a change in direction. When there’s a conflict, I feel it’s important to stick with basic Wyckoff analysis.