Onward and Upward?

Click Here For Wyckoff Wave Chart 09-07-12

Last Thursday, the Wyckoff Wave took a significant step to the upside.  After a long, slow 19 day reaction, the Wave rallied strongly and is making an effort to move into new high ground.

Is this an actual attempt to break out of the trading range to the upside, or will Wyckoff bulls be disappointed as we see an upthrust or continued sideways movement?

While the latter is always a possibility, Wyckoff trading concepts suggest a more bullish scenario.

Today, let’s analyze the Wyckoff Wave using both the daily and weekly vertical line charts, plus the 100 Point & Figure chart.

The first chart is the daily chart of the Wyckoff Wave that begins in late January, 2012 and includes the long sideways movement.

This trading range, or period of re–accumulation, has been analyzed in depth in previous blog posts.  However, there are several significant concepts that should be addressed.

1.  A short-term down trend channel (support line S – U, parallel supply line through point T) was in August..  The Wyckoff Wave was unable to react into the down trend channel.  Last Wednesday, after weakening the channel for most of the reaction, the Wave finally he broke the trend at point W.

2.  Several weeks ago I drew tentative support line L – P.  This line was tested successfully at point R.  It appeared that there would be a good probability that this support line would be respected at what became point W.  It was not.  The reaction to point W weakened the support line and move the Wyckoff Wave into and over sold position relative to the support line.

I am very hesitant to move support and supply lines once they have been established.  However, since it apears that point W is a very important Last Point of Support, I moved the support line slightly to reflect that important Wyckoff concept.  I then drew a parallel supply line through point S.  One very important consideration in making this decision was that the short term down trend channel was broken at point W.

As point L occurred on June 4th, this is an intermediate up trend channel.  Therefore, both the short and intermediate-term trends of the market are now up.  We’ll get to the long-term trend on the next chart.

3. The Technometer has been extremely valuable in determining turning points in the market.  Last Tuesday, the Technometer became extremely oversold at 35.88.  That was followed by a reading of 31.32 on Wednesday.  Wednesday is marked by point W and was the bottom of the reaction.

As you can see on the attached chart, the Technometer turned in its lowest reading since April of 2009, when we began accumulating Technometer data.  It is extremely important to note that while the Technometer was at this historical low, the Wyckoff Wave was just off its highs for that same period.  This is an extremely bullish indication.

Now, let’s take a look at the weekly chart of the Wyckoff Waves.  The weekly chart shows the reason why I believe the Wyckoff Wave is the very best market index there is.

The job of a market index is to identify market trends and turning points.  Since the bottom of the 2008 bear market, the Wyckoff Wave has done this beautifully.

I have drawn, in orange, a long term up trend channel that began with the lows at the end of the last bear market.  For the last four years, the Wyckoff Wave has given us a wonderful indication of where the market is and where it is going to go.

The Wyckoff Wave has stayed true to its long-term trend channel.  When it became overbought we saw some distribution and a reaction.  When it became oversold we saw accumulation and a continued rally.

Last January the Wyckoff Wave rallied to reach the supply line at point U.  It then has spent the last year moving sideways, within the up trend channel.  Notice how, at point B, it respected the support line just before it rallied.

In hindsight, on the weekly chart, we probably saw a shakeout at point X and a Sign of Strength to point A.  The reaction to point B appears to be a Last Point of Support.

If the bullish scenario is correct, what is the upside potential?  To answer that, let’s look at the 100 Point & Figure chart, which is the third chart in this series.

To determine objectives, I have broken up this year’s trading range into five separate phases.  They are marked on the chart.

If the Wyckoff Wave achieves its maximum objective, of 46,600, it will gain just about 49% or 15,300.  This is also 6, 600 above its historical high.

While all this appears to be very exciting, the good Wyckoff student is always vigilant.  The next major objective is to penetrate the resistance and move into new high ground.

While this is quite probable, we should watch for an upthrust or a reaction that drives the Wyckoff Wave back into the trading range.

If this happens, the bulls go back to the drawing board.

If not, nice profits certainly lie ahead.