After rallying off the lows at the bottom of the trading range (point Z), the Wyckoff Wave ran out of steam and moved sideways for a couple of days.
In last week’s Market Letter I questioned that point Z was a spring. My logic was that the expected bounce from the spring (good demand coming into the market) didn’t occur. While I still stand by that conclusion, the stock market, as represented by the Wyckoff Wave, still had the opportunity to rally further.
After rallying off the bottom of the range, the Wyckoff Wave was certainly entitled to test the top of the trading range. In addition, the Technometer moved into a clearly oversold position. Finally, it certainly appeared the entire trading range was much more accumulation than distribution.
Last Monday, the Wyckoff Wave continued its negative response from point Z. The day’s market action is marked by the red arrow. The decreased spread and volume suggested demand was being withdrawn. However, the Technometer moved into a dangerously oversold condition. Its reading was 35.61. A reading of 38 is considered very oversold.
In last week’s market letter, we reported the Technometer was also in an oversold condition. At the time it was 38.66. A decrease of three points, on Monday’s poor quality rally, gave the Wyckoff Wave another opportunity to test the top of the trading. As I mentioned last week, while the price spread and volume relationship test indicates supply and demand, the Technometer can be a very useful tool in identifying potential turning points.
The next day, Tuesday, it finally happened. After weeks of a dull trading range, the Wyckoff Wave sprang into action and broke out of the trading range to the upside. This breakout is also called a Jump Across the Creek, in honor of Mr. Robert Evans’ wonderful story.
Mr. Evans tells of a little boy who comes to a Creek and wants to get to the other side. He’s going to jump across the water, so he starts to run, leaps into the air and lands safely on the other side. That’s what happened on Tuesday. Look at the dramatically increased price spread and the high-volume. Demand came into the market and propelled both the market and the little boy out of the trading range and into new high ground.
However, this is only half the story. The little boy was so pleased with his success that he decided to go back to the Creek and look at what he had accomplished. If the little boy was careful, he only went back to the creek bank shore, looked around and then continued his journey away from the Creek. Sometimes, he wasn’t careful and stepped into the water. Then, if he wasn’t careful he would get caught up in the current and be swept back to the far bank.
As of today, Mr. Evans’ analogy is only half complete. The Creek has been jumped, but we can still expect a reaction back to the creek bank. This will determine whether the jump was successful or if the Wyckoff Wave will fall back into the Creek and return to the trading range.
Every Creek has to banks. I have drawn the Creek on the attached chart and shown both banks. Remember, the boy can get a little wet and still be able to continue his journey.
So, where are we now? After the Creek jump, supply did appear and the Wyckoff Wave’s advance has slowed. Then on Friday (the last day shown on this chart), good supply came into the market. The Wyckoff Wave experienced an intra-day failure to the upside. It closed at the bottom of a narrower trading range on increased volume. This suggests the backup is about to begin. This observation is enhanced by the dangerously overbought Technometer reading. It is now 56.38. Anything over 50 is considered overbought.
Based on the above, it is reasonable to assume that the Wyckoff Wave will react this week and return to the Creek. The question is, will it hold at the near bank or fall back into the Creek and return to the trading range.
If the Wyckoff Wave holds at or near the bank of the Creek (marked by the support/resistance line drawn from point W), we will see a major Last Point of Support. This will change all the trends to up and most probably, signal the next phase of the bull market. If this happens, we will see reduced spread and volume and a dramatically lower reading from the Technometer. It will also be helpful to watch the Optimism – Pessimism Index to see if it is able to continue its relative strength relationship with the Wyckoff Wave.
If the Wyckoff Wave reacts on good spread and volume, this increases the probability it will fall back into the Creek and we will begin another phase of the trading range.
On Friday, the Wyckoff Wave closed at 31,118. A count from the spring on October 4, 2011 back to the original selling climax, gives the Wyckoff Wave an objective of 37,200. This does not include any counts taken from tests of the spring or Last Points of Support. These accounts will increase the objective substantially. While it is best to stick with conservative counts, it appears likely that if this bull market continues, the Wyckoff Wave has the opportunity to move into new all-time highs.
It is also important to note that support line H – P is converging with the support/resistance line drawn through point W (edge of the Creek). This support line has been respected and may well become the support line of the long-term up trend channel.
While I drew this line after the Wyckoff Wave reacted to point P and put in a higher bottom, I was reluctant to call this an intermediate uptrend for the following reasons.
The reaction to point P took the Wyckoff Wave through the Creek and back into the trading range. The price spread of the reaction from point L was reasonably wide and the relative volume didn’t decrease. Finally, the very low volume at point P came on the day after Thanksgiving, when the market was only open for three and half hours.
However, this uptrend channel has held and, if we see a good Last Point of Support on the expected reaction, will become the long-term up trend channel.
This week will be most interesting and we will be receiving some very important Wyckoff signals.