This week the Wyckoff Wave continued moving sideways in the developing apex. The apex is shown in purple on the attached daily vertical line chart.
An apex is an interesting, and sometimes frustrating, part of our Wyckoff stock market analysis. It forms as neither demand or supply has taken charge to move the Wyckoff Wave in one direction or the other.
Apexes also have a tendency to play out until the last possible moment. Eventually, there is no room to rally or react within the apex formation. At that time, there is usually a sharp move in one direction or the other.
The frustration of an apex formation is that it is difficult to forecast that direction. One day supply dominates the market. The next day, it’s demand. Because the Wyckoff Wave is staying within a confined space, that is shrinking with every passing day, it is almost impossible to take a position as the risk/reward ratio is beyond terrible.
While it is frustrating, especially for short-term traders, this is not a time to take new positions in either direction.
That does not mean the Wyckoff student should ignore the markets. Instead, I would suggest that scenarios be developed, and written down, as to what might possibly happen once the Wyckoff Wave leaves its apex formation. A few are below.
The Wyckoff Wave breaks out of the apex to the downside.
If the Wyckoff Wave reacts sharply to the downside, it will probably take out the lows at points M and K. This would give it an opportunity to test the bottom of the latest trading range phase at point I.
If this happens there are three probable scenarios:
1. The Wyckoff Wave successfully tests the low at point I and rallies back up towards the top of the trading range. This would happen if the Wyckoff Wave reacts out of the apex and supply is reduced as it approaches the low at point I.
2. The Wyckoff Wave reacts and springs the low at point I. This would happen if supply remains steady and then, when point I is penetrated, strong demand comes back into the market. The spring could be important ending action and, if its test is successful, the Wyckoff Wave could rally and put in a Sign of Strength. There is a good count on the 100 Point & Figure chart for a sizable move to the upside.
3. The Wyckoff Wave reacts on wide spread and high volume through point I and tests the low at point E. The Wyckoff Wave could then spring the support at point E and rally. It could also react through the support for a Sign of Weakness. The Sign of Weakness scenario has a fairly low probability of success, as there was no upthrust at the top of the trading range. In addition, the Technometer is already moving into an oversold condition. This would make it extremely difficult for a strong reaction to occur.
The Wyckoff Wave breaks out of the apex to the upside:
If the Wyckoff Wave rallies sharply, it will probably take out the earlier highs at points N and L and J. It will then run into more important resistance at the top of the trading range (point H).
If that happens there are two probable scenarios:
1. The Wyckoff Wave will run into resistance at the top of the trading range and react back into the range.
This would happen if the rally has sustained strong demand. That would be shown in wide price spread and strong volume once the Wyckoff Wave moves out of the apex.
2. The Wyckoff Wave will break through the top of the trading range and move into new high ground.
If the Wyckoff Wave penetrates the top of the trading range, it could go through an upthrust or jump across the creek (Sign of Strength into new high ground).
As there has been no spring or ending action to the upside, the upthrust scenario would have a higher probability of success. An upthrust scenario would contain relatively high volume, a narrow spread and poor close as the Wyckoff Wave penetrates the top of the trading range.
When the Wyckoff Wave leaves the apex, there is a strong probability that one of the above scenarios will play out. It is important for the Wyckoff student to keep an open mind and consider every probability.
Prejudging what will happen adds emotion and self-justification to any market analysis.
However, while supply is most certainly still present, the Wyckoff indicators are beginning to exhibit positive signs.
Regardless, while that may suggest a brief reaction before a rally, it is extremely important that the other scenarios be watched carefully and not eliminated, until they take themselves out of consideration
It is extremely important to keep an open mind, analyze the market against every scenario. It will tell us where and when it is going to move.