This past week the Wyckoff Wave continued in its long-term trading range. While it did lose some ground, it was supported at the supply line of its short-term trading range. If this support holds, as it did on Wednesday, Thursday and Friday, the Wyckoff Wave will put in two consecutive higher low prices.
Conversely, on consecutive rallies, the Wyckoff Wave put in two consecutive lower prices at points J and L.
This suggests an apex (drawn in purple) is developing. An apex is formed as supply and demand battle for supremacy. Good supply comes in on the rallies, but the subsequent reaction is unable to be sustained. This allows demand to return to the market and continue the battle between supply and demand.
Usually, near the end points of the apex, there is a breakout to one side or the other. In this case, as the apex is developing in the middle of the trading range, the breakout could well lead to ending action and the beginning of a sustained move in the winner’s direction.
It is extremely important to understand that a developing apex is not a mechanical signal that the stock will either quickly rally or react. It is simply another scenario that should be filed in the back of every Wyckoff traders mind. It also needs to be used in conjunction with the developing relationship between price spread and volume.
If the Wyckoff Wave is going to break out of this apex, recent price spread and volume could be quite helpful in determining the breakout’s correct direction.
With the exception of the holiday season, the Wyckoff Wave’s price spread and volume have increased after the November rally to point H. In addition, as noted by analyzing the intra-day waves, neither demand or supply can be sustained as the Wyckoff Wave works its way through the trading range.
Generally, relatively wide price spread and high volume in a trading range suggest the presence of supply. We have pretty much seen that since the low at point K. On Wednesday Thursday and Friday, the Wyckoff Wave reacted on relatively high volume, but the supply was not sustained. While the Wyckoff Wave may rally back to the apex’s supply line, the presence of supply is an early indication that the Wyckoff Wave is more susceptible to a move to the downside, than a rally to the top of the trading range.
It is important to note point I is at a fairly important support point that was discussed in last week’s logbooks. If the Wyckoff Wave reacts, another scenario would have the Wave spring the support at point Y. This could be significant ending action.
The brief move to the downside would also be in concert with more positive longer-term Wyckoff indicators.
The Wyckoff Wave’s weekly chart continues to show a long-term up trend. For the most part, over the past six years, the Wyckoff Wave has remained true to its long-term up trend. A reaction to spring the low at point C (on the weekly chart) coincide with a successful test of the long term up trend channel’s support line.
Finally, both the Optimism – Pessimism Index and Force Index are in a short-term positive divergence with the Wyckoff Wave. This indicates the effort of both the O – P and force Indexes to the downside is not being matched by the results, as shown on the Wyckoff Wave.
The successful Wyckoff trader identifies every possible scenario and analyzes market action against those scenarios. This accomplishes two important goals.
The first is there is a tendency to identify the correct scenario before it actually happens, or be poised to take action when it does.
Secondly, and I think most importantly, it keeps the Wyckoff trader from emotionally investing in a particular scenario. When that happens there is a tendency to attempt to justify that scenario no matter what the market actually tells us. Been there, done that.
This week (don’t forget the markets are closed on Monday) the Wyckoff Wave will continue to work out the apex scenario. I wonder if it will be part of next week’s blog post.