This past week, the stock market, as measured by the Wyckoff Wave, put in two definitive days to the downside. The long-awaited reaction appeared to begin on Wednesday, as the Wyckoff Wave reacted on wide price spread and sustain volume. More supply came into the market on Thursday as both price spread and volume increased.
The Wyckoff Wave also returned to its intermediate down trend channel and appeared to be in a position to, not only test the lows at points Y and W, but the support line of the short-term up trend channel.
Then came Friday. Instead of a continuation to the downside, demand reappeared and the Wyckoff Wave rallied on good price spread and volume. The price spread was less than on Thursday. This will be discussed later in this blog post.
Regardless, the Wyckoff Wave decided it was not ready to continue the reaction and appears to be retesting the highs at point Z and X. This continues the short-term sideways movement that began at point W.
The stock market is not a long relatively straight road like an interstate highway. Instead, it is more like a a backwoods mountain road. It is full of twists, turns and switchbacks. While there are some straight stretches that allow for high speeds and good momentum, the driver always needs to watch for hidden curves and soft shoulders. Friday was a hidden curves.
What does this mean? Is the Wyckoff Wave ready to put in a good rally? Is he going to continue to move sideways, or was Friday’s market action simply a bump in the reaction road?
When this happens, it is worth looking at the market from both long and short-term perspectives. Wyckoff teaches that all market moves begin with a small, relatively unnoticeable, waves. These are found on the intra-day chart. This, first the three charts, it is a line chart that presents intra-day waves from the past nine trading days. The two horizontal green lines identify the resistance and support areas from an intra-day trading range. The two red lines identify and intra-day down trend channel.
At 10 AM on Wednesday morning, the Wyckoff Wave reached point A on the chart. As you can see, strong supply came into the market and the Wyckoff Wave reacted through the trading range to point E. This was on Thursday at 2:45 PM. The Wyckoff Wave finished the trading day in a poor quality attempt to return to the intra-day down trend channel. Then came the Friday surprise.
Supply disappeared and demand came in as the Wyckoff Wave reacted strongly to point G. The rally was on wide price spread and high volume. It lasted for 25 min.
While the Wyckoff Wave continued to rally, it was slowed by the support, now resistance line at the bottom of the intra-day trading range. That was absorbed and strong intra-day up waves moved the Wyckoff Wave to point H. However, a few things began to change.
While the intra-day wave was on good price spread and high volume, it lasted for three hours and 20 min. This was noticeably longer than the 25 min. intra-day wave to point G. The intra-day waves were roughly the same length (316 versus 348). While the volume was higher on the move to point H, the noticeably longer length of the wave suggested a slowing of demand.
The move from the opening bell to point H lasted three hours and 45 min. During the next two hours and 45 min., the Wyckoff Wave only gained four points. The last intra-day wave lasted for 20 min., and gained 55 points. It had the highest volume of the trading day. While it is perfectly normal for strong volume to commend at the end of the trading day, when put together with the market action after point H, it suggests supply is coming back into the market.
Supply is not appearing at the top, but in the middle of the trading range. This suggests the Wyckoff Wave will have a difficult time continuing this intra-day rally. Even if it continues the probability is quite high that the Wyckoff Wave will put in a successful test of point A and react.
On the daily chart, the Wyckoff Wave ran into an important support area, marked by the line drawn from point E. While it briefly entered the intermediate-term downtrend channel (drawn in red), Friday’s rally moved the Wyckoff Wave back into an overbought position, relative to that channel.
On Friday, the Wyckoff Wave rallied on narrower price spread and very slightly increased volume. This suggests the presence of some supply. As discussed above, while demand was in control during the first half of the trading day, it appears some supply is, indeed, coming into the market.
The most significant reading on the daily chart is the Technometer. Though Friday’s reading was neutral, it will open on Monday in a high neutral, or nearly overbought condition. A follow-through to the upside should place the Technometer in an overbought condition and make it difficult for any rally to be sustainable.
The weekly chart provides a longer-term view of the developing trading range that began with the Selling Climax at point L. While the Wyckoff Wave has certainly been impacted by the support line drawn from point A (point E on the daily chart) it has not been able to break the intermediate-term downtrend channel. As mentioned last week, it will be extremely important to watch the Wave’s relationship with that trend channel, in the coming weeks or months.
The weekly chart shows there is plenty of room to the downside and for the Wyckoff Wave did test the lows at points N and, possibly L. These gaps are usually filled.
As it appears it will be difficult for the Wyckoff Wave to move much higher than the short-term resistance, the reaction back into the trading range scenario continues to have the highest probability of success.
The Friday surprise may not have been so surprising. Watch for those tricky turns in the road.