This past week, as expected, the Wyckoff Wave rallied off the early March high at point R. In Wyckoff speak point R was a poor quality test of the February high at point P.
Poor quality tests usually need to be retested.
On Thursday and Friday, the Wyckoff Wave tested the support line of its short-term uptrend channel (drawn in blue) and appears to be rallying for the retest.
Price spread and volume analysis, along with the Wyckoff indicators, suggests the test will be successful and the next rally will at least weaken the short-term uptrend channel.
While that is the short-term prognosis, there is a great deal of discussion about the longer-term future of this marvelous bull market. The stock market has been rallying for over six years, without a significant reaction.
The reaction is not supported by a robust economy or tranquility overseas. It is primarily the fact that due to low interest rates, the stock market is one of the last places one can get a reasonable return on one’s investment. That is not the formula for a sustained robust market.
Not only is America’s economy hindered by an overabundance of regulations and assaults on our country’s ability to produce self-sustaining energy resources. This has created an uncertain business environment that results in a lack of hiring and normal business expansion.
Overseas, the European house of cards is beginning to crumble. This is significant as Europe is our largest trading partner. This has resulted in a strong dollar, which makes our goods and services, that are sold overseas, more expensive.
There is also great turmoil in strategic parts of the globe, specifically the Middle East. Religious extremists, supported by Iran, could dramatically impact oil production and cause energy prices to soar. This could lead to inflation and shortages. The end result is rising interest rates.
In addition, our huge national debt needs to be supported. As interest rates rise it will become more difficult to not only sustain, but increase our national debt.
All these have a negative impact on the economy and could lead us to severe recession and a stock market crash.
The question is not whether, but when?
In the late 1920s, Richard D. Wyckoff saw the stock market was going to crash. He advised all his clients to sell their stocks and wait until the market had bottomed. Those that did, survived the Great Depression.
At the time, the leading index was the New York Times 50 stocks. Mr. Wyckoff missed calling the bottom of the depression by only 50 points.
Since then there have been several bear markets, the latest being in 2008 – 2009. In every case, Wyckoff principles have forecast the crash and Wyckoff students have not lost money.
A key element in this analysis is the comparison between the Wyckoff Wave and it’s Optimism – Pessimism Index (an index of Wyckoff Wave volume).
In June, 2007 the Wyckoff Wave reached a high of 38,000. As its Optimism – Pessimism Index also moved into new high ground, they were in harmony. That would last.
The Wyckoff Wave reacted for the rest of 2007 and early 2008. It then rallied to test the June high.
All of a sudden, things changed. The Wyckoff Wave was unable to reach the June high. The Optimism – Pessimism Index moved strongly into new high ground. This created a major negative divergence.
What it really meant was that strong sellers were quietly unloading shares, at a nice profit. Weak buyers, who thought the market would rally forever, were happily taking them in.
The stock market had moved out of strong hands and into weak ones. With the major interests on the sidelines, buying ceased and the market reacted. As always, it happened quickly as the weak buyers realized their mistake and triedto unload their stocks as fast as possible.
The market crashed and order wasn’t resolved until March of 2009.
The good news for Wyckoff students was that warning signs of the impending bear market showed up on their charts before the crash. They were able to liquidate long positions and either adjourn to the sidelines or go short.
Will this happen again? Probably, actually most certain.
However, the Wyckoff indicators are not providing any clues that this will happen in the immediate future.
This corner continues to be bullish. There easily could be one more move to the upside. However, when the Wyckoff indicators become bearish, it’s time to head for the sidelines. It just hasn’t happened yet. Him him him