The Long Reaction. When Will It End And Which Way Will The Market Move?

Click Here For Wyckoff Wave Chart 08-24-12

On Friday, the Wyckoff Wave was in the 18th day of its reaction from the highs at point S on the daily vertical line chart.  The Wave reacted briefly to point T and then rallied to point U.  This allowed the drawing of a short-term down trend channel.

Since then, the Wyckoff Wave has stayed quite close to the channel’s supply line.  In addition, it has weakened the supply line twice.  The first was the rally to point V.  The second was on Friday.

This long slow reaction has been on relatively decreased spread and somewhat decreased volume.  This, plus the inability of the Wyckoff Wave to even approach the support line of the short term down trend channel are bullish indications.

This week has done nothing to change the scenario that we are slowly reacting towards a Last Point of Support.

A few weeks ago, I drew support line L – P.  This line was respected at point R.  Point T held above the support line and on Friday, the Wyckoff Wave reacted slightly to the support line and rallied to a strong close.

I never added a parallel supply line to the L – P support line and never called it either a short or intermediate term uptrend channel.  This is because I am very hesitant to change up trend channels once they are drawn and a short term uptrend channel (L – N with a parallel supply line at point M) already in place.

Once that channel was weakened and broken at point U, the short term down trend channel was established.

It is possible that support line L – P could become part of the intermediate term up trend channel.  In order to confirm that, we would need to see the breaking of the short term down trend channel and see where the possible Last Point of Support ends up.

It is also extremely helpful to look at the long term up trend channel as it provides some interesting clues as to when the reaction will be completed and the next market direction.

Before analyzing the weekly chart, a couple of quick comments on Friday’s rally.

At first glance, it is reasonable to conclude that we may have seen a Last Point of Support.  The Wyckoff Wave tested the support line and then rallied to a strong close.

However, Friday’s Technometer reading is in a slightly overbought condition then it was at point S and U.  It is overbought at the same level as point V.  When an index or stock becomes overbought at a lower level, this is a bearish indication.

We also have negative divergences in both the Optimism – Pessimism Index and the Force Index.  While the O – P Index could be leading the market, these indicators suggest the reaction is not quite finished.

Now, let’s look at the weekly chart.  Since the bottom of the 2008 – 2009 bear market, the Wyckoff Wave has been in a long term up trend channel.  As mentioned last week, it tested the channels supply line at point S and then moved sideways.  This sideways move has lasted for seven months.  During that time, the Wyckoff Wave has taken in a great deal of overhanging supply and that is expressed with the relatively decreasing volume.

In addition, the rotation of groups of stocks to the upside has begun.  Within the Wyckoff Wave the following industries have begun this process.  Transportation (AT&T), Medical (BMY), Technology (IBM), Transportation (UNP) and Retail (WMT) are in up moves and are stronger than the Wyckoff Wave.  This, in itself, is an extremely positive indication.

After all this sideways movement, and a very nice count on the 100 Point & Figure chart, the Wyckoff Wave is approaching the support line of the long-term uptrend channel.  Interestingly enough, is also approaching the halfway point of the last trading range rally.  That is the move from point X to A on the weekly vertical line chart.  It appears that the Wyckoff Wave may well reach both these important indicators at approximately the same time.  In addition, it would give the Technometer a chance to move away from its overbought condition.

The attached 100 Point & Figure chart only shows approximate objectives as a Last Point of Support has not yet materialized.  The chart does show that if, in fact, we are ready for the next leg of the bull market, the potential objectives would take us into all time new high ground.  As always, the price spread and volume will give us the final answer.

Intermediate and long-term bulls should be carefully analyzing stocks and selecting good candidates to the upside.  This reaction is a great opportunity to identify stocks stronger than the Wyckoff Wave that are reacting towards excellent entry points.

Contrary to conventional wisdom, this could be an interesting fall season.

As I will be on holiday over the Labor Day weekend, the Weekly Market Letter will not be published next week.  It will resume with comments on the week ending on September 7th.