A Fascinating Friday

Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review August 5, 2016

Click here to view the Wyckoff Wave & S&P50 ETF (SPY) 3 Months 1 Year Daily Charts

On Friday, pre-market indicators suggested the market was going to rally. That’s exactly what the S&P 500 did. Conversely, the Wyckoff Wave reacted sharply and returned to the trading range that began last August.

Which of these two important market indices is signaling the market’s next direction? Today’s blog post explores this in detail and offers an opinion on what will happen next.

It is important to understand that the Wyckoff Wave’s significant decline was caused, in great part, by a huge gap opening caused by bad news from Bristol-Myers. Bristol-Myers reported a failed trial for its new chemotherapy drug to treat lung cancer. The stock opened down by over 12 points and remained there for the rest of the day.

Wyckoff teaches that news simply takes the market where it was originally going to go, only faster. The Wyckoff Wave’s market action, over the past few weeks, has suggested a significant lack of demand. This was at a time when the Wyckoff Wave had moved into new high ground and strong demand should have come into the market. For quite some time, the Wave has been sending signals that it would react back into the trading range. On Friday it happened.

In addition, after the wide gap opening to the downside and some follow-through, the Wyckoff Wave was unable to make much progress to the upside. Again, the intra-day action suggested a lack of demand. Finally some supply did return late in the trading day.

All this suggests that, while the Wyckoff Wave may put in a small rally and retest the top of the trading range (line drawn from point C), it will have a very difficult time rallying and testing the recent high at point E.

An analysis of the S&P 500 ETF (SPY) shows that, on Friday, it rallied on reduced price spread and increased volume. This indicates the presence of supply. That came at the end of a 16 day sideways movement, marked by relatively narrow price spread and reduced volume.

This past Tuesday SPY had an intra-day reaction that penetrated the bottom of the sideways move. This was a possible Spring. However, demand did not come into the market. Wednesday’s market action was on reduced price spread and volume. This suggested a lack of demand.

On Thursday, SPY tried again to Spring the sideways movement. Thursday’s market action was on increased price spread and decreased volume. This suggested a lack of supply. For the second time, demand was not present. Then, on Friday, supply returned in the form of decreased price spread and increased volume.

It appears that just at the time demand should have come into the market, SPY encountered supply. This makes it vulnerable to react and return to the top of its trading range, that also began last August. That top is marked by a line drawn from point B on both charts of SPY.

Based on the above, it appears the Wyckoff Wave is more accurately forecasting the market’s future direction. This conclusion is not drawn as much from the Wyckoff Wave’s wide gap opening and return to the trading range, but more from its market action as the Wave rallied to point E and then moved sideways from that high.

On Tuesday, supply came into the market and it appeared the Wyckoff Wave was ready to react through the support line drawn from point C. Wednesday brought a poor quality rally on reduced price spread and volume. This suggested a lack of demand and the Wyckoff Wave became even more vulnerable to a reaction.

The pattern continued on Thursday as both price spread and volume decreased. Demand was drying up and there appeared to be no way the Wyckoff Wave could rally up and through the high at point E.

Despite the terrible news for Bristol-Myers, this made Friday’s market action a logical conclusion to a lack of demand week.

Friday’s return to the trading range suggests that, even though it may rally and retest the top of the trading range, the Wyckoff Wave could certainly react and test the low at point D.

If that happens, which will definitively show a return to the trading range, the resistance line, at the top of the trading range will be adjusted to include point E.

While it appears the stock market wants to rally and this trading range appears to be accumulation, we need to be patient and wait for some sort of definitive ending action before new intermediate and long-term positions can be taken to the upside.