The Wyckoff Wave spent the week moving sideways in its trading range. It is presently in the upper half of the range, in a neutral condition relative to the Technometer.
Until there is ending action, unless they are aggressive short-term traders, it is difficult for Wyckoff students to identify new opportunities in either direction.
This week I received an e-mail from a Wyckoff student asking whether the trading range, that began in February is accumulation or distribution.
While trading ranges can surprise, there contain some basic concepts that signal whether the market is accumulating for its next advance or distributing for a decline.
If the market is accumulating professional interest are quietly taking in all the overhanging supply without driving the market into new high ground. They will gently move the market up until the sellers begin to unload their stock in anticipation of a decline.
Professional interests then take in the supply coming into the market. They may also do some extra buying, when necessary, to keep the market within the trading range.
This process continues until all the supply is taken in and the market is ready, through a spring or a shakeout, to begin its mark up phase.
As a general rule Wyckoff teaches that trading ranges in accumulation will have good price spread and volume on the rallies and lesser price spread and volume on reactions within the trading range. However, price spread and volume varies depending on the amount of supply present. The Wyckoff student should also look for higher tops and higher bottoms. A little bad news during the accumulation period also helps.
The opposite is true during distribution. Here the professional interests begin to liquidate their portfolios. The stock is happily taken in by the public, usually during the euphoria of good news. If the market declines towards the bottom of the trading range, these interests then purchase some additional shares, with the intent of selling them at the top of the range. This continues until the professional positions have been liquidated and no one is left to buy stock.
As a general rule, Wyckoff teaches that trading ranges in distribution will have wider spread and higher volume on reactions and lower spread and reducing volume on rallies. The Wyckoff student should also look for lower tops and lower bottoms.
With that in mind, let’s review the trading range on the daily chart.
So far, we are generally seeing higher tops and higher bottoms. This is one sign of accumulation. In fact, as the trading range developed, both the support and resistance lines have been changed to accommodate these higher tops and bottoms.
In one of his wonderful Evans Echoes lectures, Robert Evans discussed support and resistance lines that define trading ranges. One of his big concerns was that students drew straight lines and did not adjust them to accommodate the actual areas of resistance and support.
This is why the trading range’s support line wanders through points S, U, W and C. If the sideways movement continues, there could be additional changes. Notice that each support point is always higher than the previous point.
The resistance line is even more dramatic. It begins at point R and goes through point T, V, X, Z, D, F and now point H.
Each time a resistance line is penetrated to the upside, there may be either an upthrust or a jump across the creek. These scenarios must be eliminated before the resistance line can be changed.
Creek jumps and upthrusts have specific criteria and if these are not met, one can expect a return to the trading range and an adjustment of the resistance line.
The rally from points G to H is an excellent example. A creek jump is defined by wide spread and high volume as a stock or index moves strongly through the resistance to the upside.
As the Wyckoff Wave left point G, volume decreased and the price spread was not particularly impressive. It would be very hard to justify this move as a jump across the creek.
It was not and the Wyckoff Wave reacted back into the trading range. This simply adds another top tw our adjustable resistance line.
The reaction to point I took the Wyckoff Wave back to the middle of the trading range. It then spent the last three days in a poor quality rally.
So, accumulation or distribution?
In my humble opinion the trading range has been much more indicative of accumulation, rather than distribution. While the higher tops and higher bottoms are certainly a significant part of my analysis, two other factors have been an important part of this determination.
When accumulating, as professional traders try to move the market to the upside, they are looking to take in the overhanging supply. The Wyckoff Wave spent many days moving to the upside on reduced price spread and volume. While this suggests a lack of demand, the Wyckoff Wave also made itself vulnerable to supply coming into the market. This limited supply has allowed the Wyckoff Wave to advance and put in a higher tops throughout the trading range.
Note that when supply comes into the market, it is not sustained. The Wyckoff Wave may react for one or two days and then supply seems to disappear. This would suggest supply is drying up and the next step will be ending action in preparation for a move to the upside.
Accumulation is also identified with relatively low volume. While some days have exhibited strong volume, the relative volume is rather uninspiring.
This is why I believe the Wyckoff Wave is going through an accumulation phase and Wyckoff investors should wait for ending action and be prepared to take positions.
In my mind, the only question is when.