This week, while the Wyckoff Wave did see some support at the halfway point of the rally from point Z to point A, on the daily chart, it finally moved through the support on its way to perhaps test point Z at the bottom of the trading range.
While Friday’s rally moved the Wyckoff Wave above the halfway point, it was of poor quality. This would suggest the Wyckoff Wave is still vulnerable to react further.
Short-term bears, who took positions just before the high at point A, have been rewarded with profits. There may be even more to come.
However, there are many intermediate and long-term bulls who have taken positions at lower levels and are now watching some of these profits slip away. Should these intermediate and long-term positions be closed, or is the Wyckoff Wave simply working through the sideways movement in preparation for a further advance?
To answer those questions, let’s look at the market from a longer-term perspective.
As shown on the weekly chart, Wyckoff Wave is still in its long-term up trend channel. This long-term rally, which began with the lows of the 2008 – 09 bear market, has provided Wyckoff investors with substantial profits over a five-year period.
The Wyckoff Wave briefly moved into an overbought position relative to this uptrend channel at point K and has moved sideways ever since. The sideways movement has lasted five months and has changed the intermediate-term trend from up to neutral.
The Wyckoff Wave appears to be in a neutral trading range with support at points L and N and supply at points K, M and O, on the weekly chart.
The move to point O, while it penetrated the resistance, did not perform like an up thrust. It appears that it was a failed “Creek jump” as the Wyckoff Wave fell back into the trading range. This simply adds another leg to the Creek.
Despite the long-term uptrend, are there any indications that we are seeing a change in character in the Wyckoff Wave that could signal a new bear market? These changes would require intermediate and long-term traders to liquidate their long positions.
To do that, let’s drill down into the Wyckoff Wave.
The 12 stocks that make up the Wyckoff Wave are what I call Group Leadership Stocks. Each represents an industry group and the stock’s action gives us a very good idea of the group’s relative strength/weakness and its future direction.
First, let’s review the individual stock trends.
Of the 12 Wyckoff Wave stocks, 8 are in long-term up trends trends. None are and long-term down trends. 4 are neutral.
5 of these stocks are in intermediate term up trends. None are in intermediate term down trends and 7 are neutral.
The picture looks totally different when comparing the relative strength or weakness of each of these Group Leadership Stocks to the Wyckoff Wave.
5 are stronger than the Wyckoff Wave, while 7 are weaker than the Wyckoff Wave.
On the surface, this could appear to be a very negative indication. The message could be that the market is turning down. However, a close review of these 7 stocks paints a slightly different picture. The picture is about rotation.
Rotation is the process in which certain groups rally and react at different times. It appears that groups, like Industrial Equipment (CAT) and Transportation (UNP) that have been stronger than the Wyckoff Wave are now re-accumulating.
Caterpillar, which has advanced five-fold since the bottom of the bear market, as the moving sideways in the trading range for little over 1 year. For quite a while, it was relatively stronger than the Wyckoff Wave but the long sideways movement and some lower tops have changed that assessment.
While Caterpillar has tried to leave the trading range to the upside on two occasions (point K & point S), it is stayed in a fairly narrow trading range for quite some time. It has also broken two short-term downtrend channels within the range.
There’s been no sign of a buying climax or of an upthrust. Price spread and volume are relatively low, especially on reactions. There are some short term positive divergences. The Technometer is in a high neutral condition, but was very oversold last week. The relatively strong Force Index also will mitigate the Technometer’s potentially overbought condition.
The above do not indicate CAT is ready to rally, but suggest it will most probably continue in the trading range waiting for ending action. So far, there is little indication that ending action will be negative.
After some climactic action at point G, UNP has moved sideways. The Optimism – Pessimism Index is in a major positive divergence with the Wyckoff Wave. It is in a solidly oversold condition on the Technometer and on Friday, UNP saw good support as it tested the resistance at the bottom of the trading range.
While we are still waiting for ending action, UNP does not appear to be in a distribution mode.
These two examples, plus the Wyckoff Wave do not suggest preparation is being made for a substantial decline. Until there are more negative signs, intermediate and long-term traders should continue to hold their positions and ride out the sideways movement.