A Good Week for the Bulls, but Still Lower Bottoms

Click Here For Wyckoff Wave Chart 06-08-12

The Wyckoff Wave completed its best week in quite some time. The Wave found good support at the top of the old November – December trading range. It rallied strongly off that support, weakened and most probably broke the short term down trend channel.

The rally came as the Wyckoff Wave reached an important 100 Point & Figure chart objective. The maximum count from point I to point A gave a maximum objective of 29,500. At point L, the Wave’s low was 29,447.

While it is possible to include the area all the way over to point U in a count, the move to point A, which was a jump across the creek that turned into a second trading range, established an important beginning area for a count on the Point & Figure chart.

If I was looking for additional counts to the down side, I would probably start the count from point K over to point A, rather than extending the initial count over to point W.

Regardless, this week’s strength in the Wyckoff Wave suggests that, for the first time since point F, we have encountered an important support point.

The rally off point L weakened the short term down trend channel. It also ran into trouble as it tried to reenter the original trading range and take out the high at point K. Thursday’s action saw demand being withdrawn and the day’s close was just barely above the I – K supply line.

The lack of demand came in at a very bad time and it appeared the Wyckoff Wave would fall back into the short term down trend channel. Friday’s gap opening to the down side on good supply seemed to confirm the Wave’s weakness. However, the Wave saw strong demand come in right at the I – K supply line. The Wyckoff Wave then rallied strongly on good spread and good relative volume to close, at the day’s high, right back at the bottom of the trading range.

This somewhat unexpected appearance of demand adds credibility to this week’s rally and suggests we may be seeing a change in character. The inability to return to the short term down trend channel was a major plus for the bulls.

This week’s market action, especially that on Friday, opens the door to allow the Wyckoff Wave to return to the trading range and, more importantly take out the highs at point K. This would be the first time since May 1st (point I) that the Wyckoff Wave has put in a new high after a minor reaction.

However, nothing, especially the stock market, is easy. While this week’s market action was certainly encouraging, there are still a lot of concerns and unanswered questions.

The first is the overbought condition of the Technometer. Friday’s Technometer reading was at 54. This is an extremely overbought condition and will only increase if the Wyckoff Wave continues to rally on Monday.

To continue its rally, the Wyckoff Wave needs to move through some important resistance/support lines. In addition to the bottom of the trading range (drawn from point V), if the Wyckoff Wave takes out the high at point K, it immediately runs into an important long-term resistance line – the 2011 highs.

When these factors are taken together, it would seem the Wyckoff Wave would have a difficult time moving substantially higher before it reacts.

In my opinion, this will be an extremely important reaction. The results will, quite probably, provide important clues to the future direction of the stock market, as measured by the Wyckoff Wave.

What happens is tied directly to the amount of supply that is still present in the market. As mentioned in previous posts, the Wyckoff Wave’s rally to point A took it to the bottom of the distribution area that preceded the 2008 – 2009 bear market. On that rally, people who had held on through the bear market and subsequent rally now had a chance to get out either even or at a small loss. This was probably why the rally from point F to point I was unable to jump the resistance at the top of the trading range.

The Wyckoff Wave then reacted. This caused an even greater concern as those who felt the rally would continue, instead saw a declining market. Not wanting to experience the bear market a second time, they closed their positions. This was probably the driving force that took the Wyckoff Wave down to point L. What happens now?

The expected reaction should be examined using three different scenarios.

1. The Wyckoff Wave will rally into the trading range and then react on decreased spread and volume. It would, most probably, hold above supply line I – K. This would the a positive test and give the Wyckoff Wave the opportunity to rally strongly and test the support/resistance line drawn from point A. This would indicate that most of the overhanging supply has been taken in and the long-term advance can continue.

2. The Wyckoff Wave will rally slightly and then react on good spread and volume. It will test and possibly break the lows at point L. This would suggest overhanging supply is not dried up and traders are developing a negative bias towards the market.

3. The Wyckoff Wave will react, but be supported at point L and again rally back to test the highs at point K. This would be the development of a new trading range that would cause the Wyckoff wave to move sideways until we see ending action.

Of the three scenarios, number two probably has the least possibility of success. The coming reaction will determine whether scenario number one or scenario number three leads us to the market’s future direction.

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