This past week, the Wyckoff Wave reacted past the low of the spring at point F. While the reaction, with the exception of one day (Thursday), has not been on strong spread, the relatively high volume has confirmed the presence of supply. It is also suggesting that demand has not “left the building”. In addition, the Wyckoff Wave is reacting within a short-term down trend channel.
Despite the poor performance of the past week, there are several positive indications that suggest we are not yet ready to move into a intermediate or long term down trend. The presence of demand is best shown in the Optimism – Pessimism Index. As of Friday’s close, there was a positive divergence with the Wyckoff Wave with every support point, beginning with point V. Point V was the first support point in the trading range and happened back on February 1st. This suggests that despite the poor results of the Wyckoff Wave, there has not been much effort behind those results.
In addition, the Wyckoff Wave is reaching a significant objective area as shown on the 100 Point & Figure Chart. A 2,500 point count can be taken from point I over to point A. This presents an objective of between 29,700 and 29,500. Friday’s Wyckoff Wave low was 29,934. This objective is right at the next important support area which is the top of the November – December trading range.
On a short-term basis, it will be important to watch how the Wyckoff Wave behaves in its short term down trend channel. Weakening the channel would suggest continued weakness. Of more significance, is how the Wave reacts when it rallies to test the supply line of the short term down trend channel. A poor quality rally could signify a rally back to the ice and an important Last Point of Supply. It would also provide an additional phase to the Point & Figure chart count and some additional objectives to the down side.
If the Wyckoff Wave is able to rally back into the trading range, this will be considered a poor test of the spring and will need to be re-tested.
As you can see, there are many options for the future direction of the stock market, as measured by the Wyckoff Wave. Sometimes it is helpful to step back and look at the market from a longer-term perspective. This is why the Pulse of the Market Charting Service also provides weekly and monthly charts that allow the Wyckoff student to step back from the day-to-day market fluctuations.
A look at the weekly chart shows the “recovery rally” ended at point G in May, 2011. The Wyckoff Wave then went through a minor distribution period and reacted. There was a nice selling climax at point X and then a spring at point H. The Wave then rallied to point U.
In my opinion, there are two important pieces of information that help put today’s market action in perspective.
1. The reaction to point X held above the halfway point of the rally from the bear market low to point G. This is a bullish indication.
2. The rally to point U took the Wyckoff Wave to the bottom portion of the 2007 – 2008 distribution area that preceded the bear market.
As we all know, the bear market of 2008 had a devastating impact on our economy and we have yet to recover completely. Many people who expected the market to continue upward in 2007 – 2008, acquired new positions or at best held onto existing positions.
After a 4 to 5 year wait, they are in a position to get out even. This is placing a tremendous amount of supply on the market. This is also exactly where supply would be expected to come into the market.
Considering the amount of supply that must’ve been dumped into the market since point U (March 12, 2012) it is interesting that the Wyckoff Wave has only reacted by 2,326 points or about 7%.
3. The halfway point of the rally from point H to point U is just above supply line G – S. This is the supply line of the long-term down trend channel. Even if the Wyckoff Wave reacts to test this halfway point, and the test is successful, this would simply be a normal corrective reaction in an up trend.
While I have been wrong before and certainly will be again, I do not see significant Wyckoff principles in place to justify a significant move to the down side.
As I mentioned in my daily report to subscribers, I would expect the Wyckoff Wave to rally some time in the coming week. It is also important to note that the Wave is in an oversold position relative to its down trend channel on the weekly chart. The quality of this rally will be extremely important and should be watched carefully.
If the Wyckoff Wave is unable to return to the trading range, this would be a major disappointment to the bulls and certainly require some additional analysis on my part.