A Short Term Down Trend, With Some Bullish Scenarios

Click Here For Wyckoff Wave Chart 04-03-2015

This past week the short-term trend of the Wyckoff Wave changed from neutral to down. This was a result of a poor quality rally to point V and the reaction to Wednesday’s low.

This confirms the long-awaited scenario of a reaction back into the trading range.

The Wave is presently testing support in the area of points O and M and the old resistance, new support line drawn from point H.

As there has yet been no strong presence of demand and Thursday’s market action suggested a lack of demand, the Wave is expected to continue to react within its short-term down trend channel.

This scenario is supported by the Wyckoff tools. The Technometer is in a neutral condition. The Force Index is producing strong negative readings, but is rallying. The Optimism – Pessimism Index is in a very short term positive divergence with the Wyckoff Wave, but is in harmony from a longer-term view.

The short-term trend is down. The intermediate term trend of the market is neutral and the long-term trend is up. However, the Wyckoff Wave is presently testing the support line of its long-term up trend channel.

When the Wyckoff Wave finally reacted off the top of the trading range at point T, it presented three different scenarios to the Wyckoff trader. They are as follows:

1. The Wyckoff Wave could react back into the trading range and spring a support area. A successful test would give it an opportunity to rally into new high ground.

2. Strong supply to come into the market and the Wyckoff Wave would react sharply through the trading range and into a Sign of Weakness or “fall through the ice”. A successful poor quality rally to a Last Point of Supply would signal a major down move.

3. The Wyckoff Wave could simply react back into the trading range and continue to move sideways waiting for new ending action.

Wyckoff students should be aware of each of the scenarios and always keep them in mind as the market develops.

Right now, scenarios 1 and 3 have the highest probability of success. Therefore, students should be on high alert for a possible spring and a new trading opportunity to the upside.

Scenario 2 has the lowest probability of success. This is because, so far, the reaction from point T has not had overwhelming supply. Instead, enough demand seems to be present to suggest the market is being prepared for a possible spring.

This observation is supported by an analysis of both the daily and intra-day charts and that there is no developing longer-term negative divergence with the Optimism – Pessimism Index.

The relationship between the Optimism – Pessimism Index and the Wyckoff Wave is extremely important when looking for a major changes in trends. In 2007, the O – P Index was in a negative inharmonious action with the Wyckoff Wave. This became more pronounced and developed into a negative divergence. The relationship between the Wyckoff Wave and it’s O – P Index was an important indicator in identifying the 2008 – 2009 bear market.

This leaves the spring and react back into the trading range scenarios. The support areas around points M, K, I and E are all possibilities for spring. The Wyckoff Wave should be watched closely as the support points are approached.

The Wyckoff Wave established a new trading range phase with the reaction to point I. There is another phase that began at point E. They should be given extra consideration.

So far, supply has been consistent and not increasing. This is an important indication when analyzing any spring scenario.

One last note on the spring scenario. The old Wyckoff adage “beware of Springs in a downtrend” should not be forgotten. If the Wyckoff Wave springs one of the above support areas, it will be extremely positive if the rally off the spring weakens the short-term downtrend channel and a successful secondary test breaks it and changes the trend.

Remember, these are all possible scenarios and each one must always be considered until proven otherwise.