Last week’s post, entitled “A short-term down trend with some bullish scenarios”, underestimated the bullish scenarios.
Last week the Wyckoff Wave reacted to point W, on the daily chart, and began a week rally. While supply was not completely in charge, it appeared dominant and the Wyckoff Wave is expected to continue to react and test the lows at points K and I.
Instead, on Monday the Wyckoff Wave rallied and tested the supply line of the short term down trend channel. On Tuesday, the Wave’s up move continued, but on reduced price spread and volume, plus a poor close. This suggested a lack of demand.
The Wave moved into an overbought position relative to its short-term down trend channel. On Wednesday, the Wyckoff Wave moved sideways, with supply coming into the market during the afternoon. Even though the Wyckoff Wave appeared ready to react, it should have already returned to its short-term down trend channel.
Wednesday’s Wyckoff Pulse of the Market Letter advised short-term short-sellers to close their positions if demand returned. It did and short positions to the downside were closed.
Despite that, supply seemed to have the upper hand in its ongoing battle with demand.
Then came Friday. The Wyckoff Wave experienced a sharp gap opening to the upside and rallied on good price spread and volume to a strong close. For now, demand had won the battle. However, that victory may be very short-lived.
The Optimism – Pessimism Index, and index of Wyckoff Wave volume, has moved into a substantial negative divergence with the Wyckoff Wave. While the Wyckoff Wave remains below points T, R, P and most importantly H, the O – P Index is higher.
This indicates a great deal of effort has gone into moving the Wyckoff Wave higher, but has not achieved the desired results. This is a negative indication.
The Wyckoff Wave’s Technometer is in a very interesting position. Friday’s reading of 55.66 puts the wave in an extremely overbought condition. However, there is a caveat.
Over the past 2 weeks, Force Index has rallied strongly. It is now producing moderately positive readings. When this happens, there is a mitigating impact on the reaction forecast by the Technometer. It means the reaction should be shorter and shallower.
More importantly, once the Technometer moves into an overbought position, it is difficult for the Wyckoff Wave to continue its strong rally. This indicates, at the very least, the Wyckoff Wave will be unable to move into new high ground.
Of even more significance is the relationship between Friday’s Technometer reading and its reading at point T. To point T the Technometer was less overbought than it is now.
Wyckoff says that “when the market rallies into an overbought condition on the Technometer and then subsequently rallies into another overbought condition, it is especially important to determine the level achieved by the Wave on the second rally. If the Wyckoff Wave becomes overbought at a lower level, on the second rally, the indication for the future is negative”.
A view of the weekly chart indicates the Wyckoff Wave simply reached the long-term uptrend channel’s supply line, at point G on the weekly chart, and rallied off the supply line. This is normal and not unexpected action.
While we were a bit premature in the timing, the move to the downside continues to have the best probability of success.
As it will be difficult for the Wyckoff Wave to continue its rally, there is a good possibility that some week will bring a reaction to test the lows at point W and possibly below.
A note on our website and some new and exciting features.
Todd Butterfield, owner of BlackBay Capital Advisors, who exclusively uses Wyckoff methodology trading for his very successful Blended Strategy, has joined the Wyckoff Stock Market Institute.com family.
He will be posting Trade Alerts on both the Website and, in real-time on the Wyckoff-SMI Twitter feed.
We welcome Todd to our little Wyckoff family and look forward to a long, exciting and enjoyable relationship.
In the next two weeks we will be updating our Wyckoff Stock Institute.com website. One feature is to make it more compatible with handheld devices.
Finally, over the next few months we will making improvements and modifications to the software on our Pulse of the Market Charting Service. Stay tuned for further details.