A Tale of Two Markets

Click Here For Wyckoff Wave Chart 09-19-2014

In Richard D. Wyckoff’s day most investors took intermediate and long-term positions. Short term trading was measured more in weeks than days and weeks, as we do today. Day trading was practically nonexistent.

Because of that, Mr. Wyckoff’s strategies and techniques were used in more intermediate and long-term situations. While they are absolutely effective in short term and intra-day trading situations, most Wyckoff students, including myself, have made more money in intermediate and long-term positions.

I would suggest that when analyzing both long and short-term strategies, we are really looking at two markets.

The short-term or intra-day trader often looks for trading ranges and ending actions that develop on the intra-day chart. While the general trend of the market is confirmed by the daily chart, short-term traders are attempting to time both the entry and exits as they move nimbly to accumulate profits during the trading day.

Often times they must anticipate market turns and sometimes their analysis is incorrect. This results in the market moving in the opposite direction or, missing a short term or intra-day move.

On the other hand, before taking poor closing positions, the intermediate and long-term trader pays attention to the long-term trends found on the weekly chart and trading ranges found on the daily chart.

In addition, they rely more on Point & Figure charts to gauge a stock’s objective and when to close their position.

Wyckoff students who began taking intermediate and long term positions to the upside, after the 2008 bear market, have enjoyed six years of profits.

After the initial purchases were taken, they were able to add to positions during the trading ranges that took place in 2010, 2011, 2012 and 2014. Each of these is marked on the weekly chart.

As individual stocks reached the objectives or were not performing as well as expected, some positions should be closed and the available cash set aside to reenter the market on a spring, a test of the spring or a last point of support. This would include stocks that have met their objectives and those that are not performing as strongly as expected.

In addition, the phenomena of rotation helps identify industry groups that are ready to join the bull market and make a substantial contribution to the upside. These strategies resulted in profits that greatly exceeded the S&P 500 averages.

As a card-carrying senior citizen, I am more concerned about maintaining capital than aggressively adding to it. However, with the bull market showing no signs of slowing down, I am continuing the Wyckoff strategies rather than moving to fixed income investments.

However, old habits are hard to break, and I still enjoy the excitement of shorter term trading. I don’t short-term trade as much as I used to, but I am always on the lookout for some low hanging fruit and am happy to take short term positions in either direction.

I know the risks are higher and strong discipline, staying within the trend and scrupulous attention to both placing and executing stop orders is paramount to success. Still, the risk is higher and mistakes can be made.

While my long term positions were gaining in value as the Wyckoff Wave rallied from point W to the top of the trading range, the quality of the rally was not particularly terrific.

Then the Wyckoff Wave ran into supply at point X, put in a brief reaction on reduced price spread to point Y and then tried to move into new high ground at point Z.

Point Z even appeared to be an upthrust. In addition, the Technometer was in an overbought condition, the Wyckoff Wave was in a negative divergence with the O – P Index and the Force Index was receding and producing negative readings.

This strongly suggested the Wyckoff Wave would react back into the trading range and at least test the halfway point of the point W – point Z rally and had the possibility of reacting all the way to the bottom of the trading range.

The Wyckoff Wave complied and reacted. All looked well, until it didn’t look well. While the reaction began on reasonable price spread and higher volume, demand suddenly appeared at point A. Suddenly the Wyckoff Wave rallied and all of a sudden it had rallied through the resistance at the top of the trading range (jumped the creek) and destroyed the reaction back into the trading range scenario.

Needless to say, I executed stop orders on my short-term trades. As the market reacted towards point A, I had moved my stops to cover costs and was able to exit with an extremely small profit.

This rally produced a higher short-term low (point A was higher than point W) and when the Wyckoff Wave rallied above point C, the short-term trend was changed from neutral to up. The new trend lines are drawn on the daily chart marked in blue.

On Friday, the Wyckoff Wave tested the supply line of the new trend channel and reacted slightly. This would suggest it was ready to react back towards the top of the trading range.

A reaction would signal the beginning of one of three scenarios that were outlined in the daily Pulse of the Market Report.

As a short-term trader, I am still not comfortable with the Wyckoff Wave’s direction. While the market is relatively strong, there has been no strong demand that has come in to take over the market and drive it definitively into new high ground. At this point, especially when my scenario turned against me, it is best to wait and let the market give a better indication of its next short-term move.

As a long-term trader, additional profits were made in the move from point A. Even if the Wyckoff Wave reacts back into the trading range, which is certainly a possibility, intermediate and long-term positions should continue to be held as intermediate and long-term investors are in the market for the long haul.

While the market is expected to react during the coming week, the real question is how far? Where it would be when this market letter is written next weekend.

I don’t know, but I’m looking forward to finding out.