Are We Ready to Rumble?

Click Here For Wyckoff Wave Chart 07-27-12

This week the Wyckoff Wave put in an extraordinarily strong performance. After finding support at the bottom of the original trading range (line drawn from point V), the Wave rally strongly and returned to its short-term up trend channel.

More importantly, it moved through both the short term resistance (line drawn from M) and the intermediate term resistance (line drawn from point A) and closed at a four-year high. The strength in which it moved suggests we may be at a critical juncture. By penetrating the last resistance point and doing so in a definitive manner, suggesting strong demand, the Wyckoff Wave will most probably move in one of three directions.

Today, let’s examine these three scenarios and their probability.

Based on this week’s strong market action, there is a strong possibility that the Wyckoff Wave is beginning to jump the creek. If that is the case, we will see good follow-through on Monday and then a backup to a Last Point of Support. This will present the bulls with an excellent entry point.

There are several positives that support this analysis and only one area that needs to be watched. The Technometer, which was in an oversold condition at point R, has only moved into a moderate neutral condition as of Friday’s close. This is despite the strong move to the upside.

The price spread and volume has increased as the week progressed. This gives an excellent indication that good demand is coming into the market.

The Wyckoff Wave is in a long term uptrend channel. This channel is drawn from the lows of the 2008 bear market. It is shown in orange on page 2 of the attached chart.
While, during the past four years, the Wyckoff Wave has been in both overbought and oversold positions, relative to its up trend channel, the trend has not been broken.

The Wyckoff Wave has been in a trading range for over six months. It is had several opportunities to move through support and begin a downside move. Each time good demand has returned and the Wyckoff Wave has continued in the trading range.

The price spread and volume action of the trading range seems to be more in line with the accumulation than distribution. In addition, a creek has been established using a horizontal line drawn from point A as the far bank. A wandering line, also beginning at point A and continuing through points C, E, I, M, O and Q creates the near edge. This gives the Wyckoff Wave room to back up for a major Last Point of Support.
The only possible negative is the suddenly weak performance of the Optimism – Pessimism Index. The O – P Index is in a negative divergence with point Q. This is more significant as the O – P Index is not leading the Wave. Instead, the effort of the O – P Index is not meeting the results as shown by the Wyckoff Wave. While a couple of strong demand days can correct the negative divergence, this is troublesome and needs to be monitored.

An analysis of the Wyckoff Wave’ s 100 Point & Figure chart gives us strong objectives to the upside. If all the objectives are met, the Wyckoff Wave will move into all time new high ground. While the level will probably change, right now the count is taken from point R along the 30,800 line. The counts and their objectives can be found on page 3 of the attached charts.

This scenario appears to have the greatest possibility of success.

The second scenario is that the Wyckoff Wave will jump the creek, but will be unable to establish an intermediate term uptrend. Instead it will find support in the area of point A and began another sideways movement. This is what happened last March as the Wyckoff Wave jumped the initial creek (defined by points W and Y), but after reacting to point B, was unable to continue to rally. It put in a lower top at point C and then moved sideways.

While this is possible, the strength the market has shown in breaking through the resistance is relatively stronger than the move to point A. In addition, the Technometer had moved into an overbought condition as the Wyckoff Wave approached point A. As mentioned earlier, the present Technometer reading is neutral.

This scenario has a lower probability of success.

Finally, never, ever forget the bears. Just when you thought it was safe, along comes an upthrust.

While it has penetrated the resistance at the top of the trading range, the Wyckoff Wave has not moved high enough to eliminate the upthrust scenario.

It is important to remember that there is still some overhanging supply left over from the 2008 distribution area. Presently the Wyckoff Wave is at the bottom of the last distribution phase. While a great deal of supply has been taken in during the past six months, as Yogi Berra says “it ain’t over till it’s over”.

This scenario is supported by the negative O – P Index divergence described above and by an increasingly negative Force Index.

If we do see an upthrust, this would mean the trading range was distribution. An analysis of the 100 Wyckoff Wave Point & Figure chart gives us three objectives to the down side. Interestingly, the most aggressive objective is to the bottom of the 2010 trading range and the second most aggressive objective is to the bottom of the 2011 trading range. These are also marked on page 3 of the attached charts.

The good news about this scenario is that questions will be answered very early next week. If the Wyckoff Wave is going to upthrust the range, it will most probably happen on Monday.

While this can certainly happen, this scenario probably has the lowest possibility of success.

Conventional wisdom has this trading range continuing until after the November elections. If we are beginning the next leg of the bull market, do the major players know something that we don’t?