The stock market is a never-ending battle of supply vs, demand. This battle is at its most intense within trading ranges. Whether accumulation or distribution, the eventual winner of this battle will take the Wyckoff Wave on a significant rally or disappointing reaction.
Every now and then, this battle is nicely defined on the vertical line chart. The formation is called an apex. An apex is simply a series of lower tops and higher bottoms within a sideways movement.
The lower tops indicate that supply is gaining the upper hand. However, higher bottoms are an indication that good demand is present. As these two conflicting forces move towards the closed end of the apex, something has to give. When it does, one of the two competing forces collapses and stock or index moves quickly in the winner’s direction.
Over the last three weeks, the Wyckoff Wave has developed this apex formation. It is drawn on the vertical line chart in red. The apex’s supply line is drawn through points V and X. Its support line is drawn through points U and W.
In addition to the apex formation, the Wyckoff Wave is also in a short term trading range. The range is drawn in green with the resistance line drawn from point R and a support line from point S.
In early March, the Wyckoff Wave tried to leave this trading range to the upside on the rally to point V. As it approached the January highs at point L, supply came in and drove the Wyckoff Wave back into the trading range. This was a failed attempt to leave the trading range to the upside or “jump the Creek”.
When this happens, the Wyckoff Wave usually continues in the trading range, waiting for ending action.
Instead, the Wyckoff Wave saw support at point W and rallied through the resistance to point X. Point W was higher than point U.
Even though the Wyckoff Wave left the trading range to the upside, it was not a “jump across the Creek”. The move was on reduced price spread and volume and the high at point X was lower than the previous high at point V. Point X was lower than point V. The rally was on a lack of demand and became a test of point V.
The test, which was successful, happened last Tuesday and the Wyckoff Wave immediately turned around and reacted back into the trading range.
Now that the higher bottoms and lower tops have been established, the apex formation was drawn on the vertical line chart.
On Thursday the Wyckoff Wave experienced an intra-day failure to the downside. It reacted and tested the apex’s support line and then rallied to test its supply line. Was the Wyckoff Wave finally going to leave the trading range to the upside.
Friday was a critical day. When a stock or index leaves the apex it does so on either strong demand or equally strong supply. Like a train leaving the station, it keeps on going and never looks back.
Friday morning looked like one of those days. The futures market suggested the market would open at a higher level. That’s exactly what it did.
However, it was a gap opening. That meant there was no volume to the upside. If there is no volume, demand cannot be present.
After its strong opening, the Wyckoff Wave advanced by a paltry 30 points. Then strong supply came into the market and drove it back into the apex formation.
Like many gap openings, this was a false signal. We are still waiting for the move out of the apex formation.
We are also waiting for ending action from the short-term trading range. As we get to the end of the apex, these two important events could happen together.
The Wyckoff Wave tools are sending positive signals. The Optimism – Pessimism Index is in a short term positive divergence. The Technometer is approaching an oversold condition. The Force Index is also in a positive divergence with the Wyckoff Wave.
These indicators suggest the ending action will be a positive and the Wyckoff Wave could be getting ready to advance.
As we are getting very close to the end of the apex formation, this should happen sometime next week. Stay tuned.