Are We Falling Back Into The Creek?

Click Here For Wyckoff Wave Chart 09-28-12

For the past few weeks I have been writing about classic Wyckoff Last Points of Support (LPS), Signs of Strength (SOS) and a Back up to the Creek.

At point W the Wyckoff Wave put in an LPS.  It then rallied to point X.  This rally was both a SOS and a Jump across the Creek.

The stock market, as measured by the Wyckoff Wave, then began the expected back up to the Creek for a final LPS.  While volume was a touch high, the reduced price spread and the long slow reaction, back towards the Creek, certainly fell within Wyckoff criteria.

On Wednesday, the Wave entered the Creek on very reduced spread and relatively lower volume.  Again, the volume could’ve been lower.  The Wave then rallied off the very short-term support line, drawn in red, and tried to rally.

Then, along came Friday.  The Wyckoff Wave opened to the down side and stayed there all day.  We saw increased price spread and slightly increased volume.  A review of the intra-day waves suggests that supply was still present.

This was a surprise.  Does Friday’s market action mean the backup has failed and the Wyckoff Wave will react back into the trading range?  Or, will the Wave be able to take in the supply and begin a new move to the upside?

The answer, that seemed so clear earlier in the week, now need to be revisited.

I have always found that when the market does something unexpected, two concepts are extremely helpful.

The first is to go back and look at the market from a longer term view.  There is a natural tendency to look at the day’s market action and lose perspective because we are only taking a short term look at the market.

The second is to stay true to Wyckoff strategies and techniques and trust that, if used correctly, will allow you to come to profitable conclusions.

With that in mind, let’s look at the weekly chart of the Wyckoff Wave.  This is on page 2 of the accompanying chart.

The Wyckoff Wave continues in its long term up trend channel.  The weekly chart does a good job of presenting the entire trading range that began last March at point W.  For reference, point W on the weekly chart is point A on the daily chart.

On the weekly chart the trading range is established between points U and V.  A resistance line drawn from point U now becomes the near edge of the Creek.  A second resistance line drawn from point U, but through point W and T, forms the far edge of the Creek.

The Wyckoff Wave has moved sideways from point U and has respected the long-term support line drawn in orange.  The Creek was jumped definitively on the rally from point B to C and the Wave is now backing up to the Creek.

On the longer-term chart the Wyckoff Wave saw support at the near bank of the Creek and, so far is still above this important support area.

However, this week brought increased price spread and the relative volume is higher than the first reaction to a last point of support at point B.  This would suggest that even on the weekly chart supply has not been completely taken in and the Wyckoff Wave still may have to move lower before the supply can be absorbed.

However, there is still room for the Wyckoff Wave to react, before the backup to the Creek fails.

In addition, after moving briefly to an over sold position relative to the long-term uptrend channel at point K, the Wyckoff Wave has put in higher bottoms at point Z and point B.

Finally, so far the backup has lasted for two weeks.  In that time, the Wyckoff Wave has only lost less than half of the SOS from points B to C.  This is consistent with a normal back up.

There is nothing on the weekly chart that would suggest the Wyckoff Wave is poised for a significant move to the down side.

Let’s return to the daily chart and see what the Wyckoff Tools are telling us.

The Optimism – Pessimism Index is an extremely important Wyckoff Tool, especially when it is compared to the Wyckoff Wave.  The O – P Index, which is strictly a volume index and measures effort, has reacted to a point below point W.  So far, the reaction of the Wyckoff Wave has held substantially above point W.  The Wyckoff Wave measures results.  When this much effort is put into moving the market down and the market doesn’t respond, we are in what is known as a positive divergence.  This would suggest the market will rally.

The Technometer is an amazing tool.  It has the uncanny ability to identify turning points in the market.  If you’ll notice, the Technometer reached a new low at point W.  It measured 31.32.  Any reading below 38 is considered significantly oversold.  A reading of 31 is considered dangerously oversold.  This positive indication is compounded by the fact that the Wyckoff Wave is substantially higher than it was at point W, yet the Technometer put in the same low reading.

The Force Index, which measures investor sentiment is also helpful when compared to the Wyckoff Wave.  Like the Optimism – Pessimism Index it is in a positive divergence with the Wyckoff Wave.  It is also substantially lower than it was at point W.

All three of these Wyckoff Tools suggest the market is ready to rally.

Will the market rally strongly on Monday and begin the next leg of the bull market?  While it is possible, I would suggest it needs to move either slightly lower or sideways to work off some supply.  If volume decreases, that will be a good indication that we are getting towards the LPS.

Friday’s market action did not warm the cockles of my heart, but I am still bull and I have put my money right next to my mouth.