A Possible OOPS…

Click Here For Wyckoff Wave Chart 11-20-2015

Stock Mark Institute’s iconic Robert Evans had the wonderful ability to simplify market actions through his delightful stories. One of these was the Oops story.

Have you ever been headed in a certain direction and then, all of a sudden, you realized that it was the wrong way? When that happens, one often says “oops, I think I’ll do something else”.

That simple little story can be used in stock market analysis on a regular basis. In fact, it has been relevant twice in the last couple of months.

The oops story is shown on the first daily chart of the Wyckoff Wave. After the August Selling Climax, marked by point A, the Wyckoff Wave rallied to point C. It then reacted to point D and began to rally on reasonable price spread and volume. At that point, it was not unreasonable to expect the Wyckoff Wave would continue to rally and put in a nice move to the upside.

Then came the oops. As the Wyckoff Wave approached the resistance line, drawn in blue off point C, things changed. If the rally was going to continue, the Wyckoff Wave needed to “go and go now”. Instead, both price spread and volume began to decline and, just at the wrong time, demand began to dry up. This was an oops.

Most of the time, when there is an oops, supply comes in and there is a reaction. However, it is also quite possible for a slight, poor quality, advance. There was simply not enough demand to push the market forward, but there also wasn’t enough supply to cause a subsequent reaction. The Wyckoff Wave was not going to put in a strong advance. That was the oops message.

Instead of reacting, the Wyckoff Wave moved sideways and made one more attempt to rally. As suggested by the earlier oops, the rally was of poor quality and the Wyckoff Wave soon reacted. It tested the previous low at point G, held slightly above it and began to rally. As of Friday’s close, the wave was back testing the high at point J.

Is the Wave going to rally strongly through point G, or are we going to see another oops? I strongly suspect there will be another oops.

Before discussing that further, let’s look at some other options. It could be argued that the reaction to point E was a Spring. The Wyckoff Wave moved below an earlier support level at point B and then rallied. Even though, there was an oops at point E, the Wyckoff Wave held above the resistance and move sideways after its brief reaction to point G. Could the move from points D to H be a Sign of Strength? Could the reaction to point I, the a Last Point of Support?

As those market moves were developing, I evaluated these options, but rejected them. I didn’t feel demand was strong enough to justify a Sign of Strength. Then, the extraordinarily high volume on the reaction to point I, was not conducive with a Last Point of Support. Regardless, every possible scenario should be examined in detail. This keeps us from becoming emotionally wedded to a particular scenario and then justifying it regardless of how market conditions change. Been there done that – learned my lesson.

There are some other reasons why it will be difficult for the Wyckoff Wave to move substantially above point J. To review those, please move to the second, marked up, daily chart of the Wyckoff Wave. Here, we can compare the market action at point X with that of this past week.

First, look at the Optimism – Pessimism Index. On Friday, the Wyckoff Wave closed slightly higher than it did at point X. However, the O – P Index is noticeably higher. This continues to show the effort by the O – P Index to move the market higher is not being accepted by the Wyckoff Wave. This suggests overhanging supply.

Second, compare the Technometer readings. At point X, the Technometer reading is actually slightly oversold. On Friday, the Technometer reading was overbought. In addition, the receding Force Index indicated there was no mitigating impact on the overbought Technometer.

Finally, there has been a noticeable reduction and volume over the past three trading days. This suggests an overall withdrawal of demand.

While the Wyckoff Wave may not have been ready to react at point X, the conditions noted above indicate it could be poised for a reaction. If this reaction takes place, the Wyckoff Wave will probably test the lows at point U. If the test is successful it would create an important area of support. This would further define the trading range that began with a Selling Climax at point Q.

In my humble opinion, the key to everything mentioned in this article was the first oops. It sent a message that the Wyckoff Wave was not ready to rally and would continue to move sideways.