A Contrarian’ s Point of View

 Click Here For Wyckoff Wave Chart 10-05-12

Richard D. Wyckoff was a bit of a contrarian. In the late 1920′ s, after making his fortune on Wall Street, he became quite ill and moved to the South of France to recuperate.

Despite being in Europe, he continued to pay attention to the stock market. Despite the tremendous market rally during the latter part of the “Roaring 20′ s”, Wyckoff realized that the market was heading for a major collapse.

He was so concerned that he returned to the United States and tried to convince his friends to sell their stocks and avoid financial ruin. Few listened.

Soon after, the 1929 market crash occurred and the country entered into the Great Depression.

Not only was Wyckoff right about the 1929 crash, he also forecast the depth of the market reaction to within 50 points of the New York Times Index. This index was the standard of the day.

What would Mr. Wyckoff say about today’s market?

Conventional wisdom says that if we fall off the so-called fiscal cliff, the market will collapse and we will enter into a second recession. Some even suggest we should sell all our stock, buy gold and head for the hills.

However, if one looks at the market from a Wyckoff point of view, a different story emerges.

The stock market actually had an opportunity to collapse this fall. After trying to leave the trading range to the upside at point X on the daily chart, it reacted back to, and slightly through, both support/resistance lines that marked the top of the trading range.

The Wyckoff Wave reacted strongly to point E and rallied to point F. This could have been called a last point of supply and given the market a great opportunity to strongly react.

Instead, the Wyckoff Wave reacted back towards the bottom of the trading. It now appears that there was a spring at point G. The Wyckoff Wave penetrated an important support line drawn from point F.

The spring was confirmed by a nice rally off the spring and a secondary test at point I. The Wyckoff Wave continued to rally and appears to have topped out at point L.

While the move from point G to point L had days of rather poor quality to the upside, it was persistent and certainly could be considered a sign of strength.

Therefore, we may well have seen ending action in the form of a spring at point G and a sign of strength on the rally to point L. The Wyckoff Wave may now be reacting to put in an important last point of support.

It will be important to watch how the Wave behaves as it approaches the halfway point of the rally between points G and L.

This is not the behavior of a stock market that is on the brink of collapse.

The Wyckoff Wave has been moving sideways since early last year. If point G is indeed the ending action spring, there is a very large count along the 29,900 level.

The count can be divided into three phases that are marked on the attached 100 Point & Figure chart. The three phases give us objectives of 35,200, 42,000 and 46,800. The last two objectives put us into all-time highs and will continue what has been since late 2008, a strong bull market.

Will we see a last point of support in the area between point K and the halfway point? While that is certainly possible and would add another phase to the Point & Figure chart, there is one additional scenario.

There is one last a level of support that is marked on the chart. It is drawn from point L, along the 29,450 level. It is quite possible the Wyckoff Wave will react and spring that support level before rallying.

That would give us a new ending action and an even more positive count on the point and figure chart.

Regardless, despite all the doom and gloom surrounding the “fiscal cliff”, the stock market doesn’t seem to be all that unhappy.

All of us at WyckoffstockmarketInstitute.com send joyous holiday greetings to you and your families. May you encounter peace, joy and happiness during this blessed season. Best wishes for a happy and prosperous New Year.