The shortened holiday week did not provide many answers to the market’s future direction. The Wyckoff Wave was unable to rally through the significant resistance area established at point X and the support lines of both the intermediate downtrend channel and short-term uptrend channel. However, the Wyckoff Wave only reacted by 210 points. That is a reminisce amount when looking at a 40,000 point index.
This also continues the market behavior we have seen at the top of trading ranges going back to last February. Although demand is present, it appears to be weakening. However, there is not enough supply to begin the expected reaction. This was seen on the rally to point P and the sideways move from points X to T (daily chart).
This is a relatively new phenomena, but one that could be with us as long as the government, specifically the Federal Reserve, continues to tinker with the stock market.
The Fed’s interest-rate policy makes the stock market the only place an investor can get some sort of return on investment. This means that even after the sharp reaction to point Q, on the daily chart, after a short period of time and a brief rally, many, who were scared out of the market, are beginning to return. Only when they are discouraged and withdraw, can the professionals take over the market and allow a more structured trading range to develop.
So, where does the market, as measured by the Wyckoff Wave, go from here? First, let’s review the previous market action on the daily chart.
As the Wyckoff Wave reacted off point F it began a fairly significant down move. It did this by reacting on relatively narrow price spread and moderate low volume. This did not suggest the presence of strong supply. Instead, the Wyckoff Wave reacted and saw some support at each the horizontal support lines that appear on the daily chart. The rallies off the support line allowed the establishment of a down trend channel. The supply line was drawn through points P and J. The parallel support line began at point I. While there were other tops and bottoms in which trend lines can be drawn, it is extremely important to establish a trend channel as close to the end of the sideways movement as possible. Point F ended a sideways movement that began at point X. The rally to point J ran into support at the bottom of that move. The move from points F two high could be a Sign of Weakness. The rally to point J could be a Last Point of Supply.
Once a trend channel is drawn, it needs to be continued. I am constantly amazed as how trend channels come into play months after they are thought to be irrelevant.
The Wyckoff Wave continued to react and then had a significant Selling Climax at point Q. There was an automatic rally to point R and a secondary test at point S. After that happens, a trading range is expected to develop and a series of both resistance and support points will be established.
This happened initially at points T (resistance) and point U (support). Then the Wyckoff Wave rallied to point V, which was another resistance point.
The expected reaction was basically a one-day move to point W. Then the Wyckoff Wave put in a rather poor quality rally to point X.
Once the Wyckoff Wave moved past point T to point V, the short-term trend changed to up and a new trend channel was drawn in blue. This does not mean the trading range has been compromised.
So far, there has been no ending action. The Wyckoff Wave has simply rallied, found new resistance points and is attempting to take in as much demand as possible before reacting.
It is not uncommon to have short-term trend channels in a trading range. If the Wyckoff Wave reacts to test point U or even the selling climax at point Q, the short-term uptrend channel will be broken. Is also possible that a new short-term down trend channel could be established.
As the trading range develops, it will be important to watch the intermediate-term downtrend channel. While the channel could certainly be weakened on any reaction, if we are seeing accumulation, the channel needs to be broken to the upside. It would be helpful if this happened before any ending action. Remember the “beware of Springs in a down trend” axiom.
Back in late August, the Wyckoff Wave put in a definitive Selling Climax. Since then it has been attempting to find the boundaries of the new trading range. Important trading ranges take time to develop. They require the Wyckoff student to take a longer-term view of the market, then our active minds would like.
Right now it appears that point X and last week’s high will probably form an important resistance area of this significant trading range. Unfortunately, were still waiting for the support areas to be established or confirmed.
Patience. Don’t look for things that aren’t really there. If they stay disciplined, short-term traders can trade the trading range. Intermediate and longer term investors should hold positions and simply wait for ending action. This will create a wonderful buying opportunity for the next important market move.