This week, the Wyckoff Wave tested an important support area marked by a creek (support/resistance area) drawn from point B on the daily chart.
The rally off the support has not been particularly impressive. Short-term traders, who took positions on Wednesday or Thursday, have seen small profits, but need to watch their trades carefully.
Sometimes we get caught up in the market’s short-term behavior and overlooked the larger picture. While this is of more interest to intermediate and long-term investors, we can also find clues that can help their short-term brethren.
The Wyckoff Wave has been in a long-term up trend since the bottom of the 2008 – 09 bear market. The uptrend channel is marked in orange on the weekly chart.
In December 2012, the Wyckoff Wave began an intermediate term up trend. This channel is marked in blue on the weekly chart.
The Wyckoff Wave moved into overbought positions relative to the intermediate trend at both points I and K (point J on the daily chart). At point K it was also briefly in an overbought position, relative to its long-term trend. The Wyckoff Wave then reacted back into both trend channels and saw support at point L.
The nature of this reaction is important. The move to point K (point J on the daily chart) was not climactic. There was no “whooping it up” before reaching the highs. More importantly this was not a buying climax, but simply a move to an overbought position followed by a normal corrective reaction.
Point L on the weekly chart (point Q on the daily chart) is also important. While it does not appear on the weekly chart, the daily chart shows a rally to point R and a reaction to point S. The reaction was on reduced price spread and volume and held nicely above point Q.
It is also important to note that there was a possible climactic action at point Q. Noticed that this was also at the creek area drawn from point B. The support area seems to be becoming quite important as it was respected and both points Q and X.
The Wyckoff Wave then rallied to point M. The week before the high at point M saw reduced price spread and increased volume. This indicated some supply was coming into the market.
The Wyckoff Wave then reacted and even though it stayed within the long-term trend channel, it moved into an oversold position relative to the intermediate up trend channel.
It is also important to note that the high at point M was lower than the high at point K. The Wyckoff Wave was unable to move into new high ground.
The inability of the Wyckoff Wave to move above point J suggests point J is an area of resistance. This gives us a very wide trading range with resistance at point J and support at point Q on the daily chart. Since point J occurred back in late May and the intermediate up trend was significantly weakened, the intermediate trend was changed to neutral and it is defined by these support and resistance points.
The reaction from point M (point U on the daily chart) has been long and slow and on relatively reduced volume. In fact it took one full month for the Wyckoff Wave to react to Wednesday’s lows.
All this would suggest, regardless of its present position, the Wyckoff Wave is not going through distribution and preparation for a substantial move to the downside. There was no climactic action and over the summer price spread and volume have been relatively reduced. This is especially noticeable on the daily chart when one compares price spread and volume on the reaction from point J to the reaction from point U.
This is of interest to intermediate and long-term bulls, who are perfectly content to hold positions taken earlier and to add to these positions on reactions.
It also sends a signal to any bears that it does not appear there are any opportunities to the downside in the near future.
While the Wyckoff Wave is holding substantially above the halfway point of the last rally (marked on both the weekly and daily charts), there are indications that the Wyckoff Wave is not prepared to begin a strong reaction.
1. Presently, on an intermediate term basis, the Optimism – Pessimism Index is in a positive divergence with the Wyckoff Wave, when compared with point Q on the daily chart. While the Wyckoff Wave is holding above point Q, the O – P Index is not. This indicates a the supply that is being dumped on the market is being taken in by buyers. The effort to the downside (O-P) is not equal to the results (Wyckoff Wave).
2. The Technometer has been in an oversold condition for several days and is now moving into a neutral condition as the Wyckoff Wave rallies. Any sharp move to the downside would return to the Technometer to an oversold condition.
3. While the Force Index is producing high negative numbers, which has a mitigating impact on a potential ralliy, it is still difficult for the Wyckoff Wave to react while the Technometer is in an oversold condition.
Next week the Wyckoff Wave may continue to rally or it may react to test the lows at point X. Either way, it still appears intermediate and long-term investors should maintain their positions and look for them to grow in the future.