Taking Positions In A Trading Range

Click Here For Wyckoff Wave Chart 10-18-2013

This past week the stock market, as measured by the Wyckoff Wave, made little upside progress as it ran into an important resistance line drawn from point J on the attached chart.

The price spread and volume suggests we are encountering supply and yesterday, there was the beginning of what could become an up thrust on the intra-day chart.

In addition, the Technometer has moved into a slightly overbought condition and the Optimism – Pessimism Index is in a negative divergence with the Wyckoff Wave, when compared to both points A and U.

If a count is taken along the 37,600 line, on the 100 Point & Figure chart, over to point A, there is an objective of between 35,300 & 35,000. The support line at the bottom of the trading range is at 35,150.

If supply comes into the market on Monday, there is a good chance the Wyckoff Wave will react back to the bottom of the trading range.

The conditions seem right for short-term bears to take a look at new opportunities to the downside.

However, as short-term and day traders know well, the stock market is a tricky place to make money and always seems to have a surprise waiting around the corner.

Some short term traders will take positions in anticipation that Friday’s high was the top of the rally. Others, will wait for some confirmation in the form of supply coming into the market and the beginning of a move to the downside.

A wise old trader once said, “I don’t have to be greedy and participate in the entire move. If I just get 85% to 90% of the move, I consider it a great success.

What other opportunities were available earlier in this trading range, that began with climactic action at point Q?

After climaxing at point Q, there was an automatic rally to point R and a secondary test at point S. Notice the decreased price spread and volume at point S. In addition, the O – P Index was in a positive divergence with the Wyckoff Wave, when compared with point Q.

While the Technometer was still in a neutral condition, it was substantially oversold at point Q. This suggested that the Wyckoff Wave was expected to rally. As the secondary test at point S confirmed the climax, this was a good place to take short-term positions to the upside.

The Wyckoff Wave then rallied to point U. It was expected to see some resistance here as it was testing the highs at point J. Notice that a few days before point U volume increased, but the Wyckoff Wave made little progress. This was an indication of early supply.

However, we could also be seeing some absorption as the Wyckoff Wave could have been getting ready to penetrate the resistance and move into new high ground.

While the Technometer was in a high neutral condition, it was not overbought. The O – P Index was in a negative inharmonious action with the Wyckoff Wave when compared to point J.

While a very aggressive bear could have taken a short position, they could’ve been disappointed if demand returned and the Wyckoff Wave penetrated the resistance.

It is not necessary to be in the market every trading day. Successful short term traders pick their entry opportunities carefully and when in doubt, stays on the sidelines.

The Wyckoff Wave then reacted to point V and rallied to point W. All of a sudden, the picture became a bit clearer.

The rally to point W was on reduced price spread and volume. There was a negative O – P Index divergence with point U. The Technometer was still neutral.

The day after point W, the Wyckoff Wave reacted on reduced price spread and volume. While this was not an encouraging day for the bears, the Technometer moved into a high neutral condition. Two days later it moved into a solidly overbought condition. In addition, it weakened the intermediate-term trend line. The next day, it broke the trend line.

In addition, the negative divergence with the O – P Index remained in place.

Positions to the downside could now be taken with less risk than at point U.

The Wyckoff Wave then reacted back to the bottom of the trading range at point Z. It was either going to react off the bottom of the trading range, or penetrate the range, either with a spring or a strong move to the downside. The Technometer’s dangerously over sold condition at point X and the positive divergence with the O – P Index, when compared to the Wyckoff Wave at point Q, pretty much eliminated the strong move to the downside scenario.

This left two options: either a reaction off the bottom of the range or a spring. Both were good opportunities to the upside.

In addition, the Wyckoff Wave had been in an oversold condition relative to its short-term down trend channel for quite some time. This position needed to be corrected.

However, at point Z, the Technometer was still in a neutral condition. Many, including myself, were waiting for spring, which never came.

Instead, the Wyckoff Wave moved sideways and three days after point Z moved into an over sold condition on the Technometer. It was also in a positive divergence with both points Z and X. This presented a new opportunity to the upside.

The Wyckoff Wave then rallied back to point A. In the process, it penetrated the resistance line drawn from point J and “jumped the Creek”. It was also back at the support line of the intermediate-term uptrend channel.

Once this happened, the Wyckoff Wave needed to “go and go now”. That didn’t happen. Instead demand was withdrawn and the Wyckoff Wave reacted to point B.

This was an easy entry point for the bears. The O – P Index was again in a negative divergence with the Wyckoff Wave. The Technometer was solidly overbought.

The reaction to point B took the Wyckoff Wave back into the trading range. The failed Creek jump simply moved the trading range resistance line up to point A.

The reaction to point B put the Wyckoff Wave in position to test and possibly break the short term down trend channel. Was this a new opportunity for the short term bulls?

At point B the Technometer was neutral. The O – P Index and the Wyckoff Wave were in relative harmony and there was not a narrowing of price spread and volume.

It would have been very difficult to take a position at point B. The day after point B, probably a result of the news from Washington D. C., the Wyckoff Wave experienced a wide gap opening to the upside and followed through to a strong close.

Since then it has made little progress. Short-term bulls would’ve been chasing stocks and would have seen little profit and a fairly high risk/reward ratio.

When one is anticipating a change in market direction, it is best that all the Wyckoff indicators lineup in their favor. It is better to miss a move than be overaggressive and misread the markets future short-term direction.