On Thursday, the Wyckoff Wave reacted on increased price spread and reduced volume. While it closed slightly higher than the possible Spring at point M, it was in a position to continue to react and negate the Spring.
A more in-depth look at Thursday’s market action suggested a lack of supply. Moderate supply came into the market, early in the trading day, and then dried up during the afternoon. This gave the Wyckoff Wave an opportunity to rally on Friday. If the rally was on strong demand, there could’ve been a successful test of the Spring.
The Wyckoff Wave also could’ve reacted and experienced an intra-day failure to the downside. If demand came in then, there would’ve been a poor quality test of the Spring. Poor quality tests always need to be tested again.
Thursday’s lack of demand suggested that one of these two scenarios at a reasonable probability of success. What does the Wyckoff trader do in these situations?
It is always important to identify every possible scenario and, based on the scenario, make a trade decision. If the scenario plays out and a position is warranted, it can be taken. If the scenario does not happen, the conclusion is ignored.
Short-term traders had already taken positions to the downside in the area off point N. If the successful Secondary Test scenario took place, these position should be closed and new positions to the upside can be entered. This would happen if strong demand came into the market early Friday.
The poor quality Secondary Test would be confirmed if there wasn’t intra-day failure to the downside on Friday. If that happened and strong demand came into the market, the short term positions to the downside should be closed. However, it is quite risky to take new positions to the upside on a poor quality secondary test.
If the Wyckoff Wave continued to react, there were no short-term opportunities to the upside. In addition, short-term bears should continue to maintain their positions and watch how the Wyckoff Wave behaves as it approaches its next support level.
If one identifies all possible scenarios and what should be done if they play out, investment decisions are made on logic, not on emotion.
Friday brought a different conclusion. The Wyckoff Wave reacted on increased price spread and volume. This negated the two testing scenarios and eliminated the possibility that point M was a #1 Spring (Shakeout).
The Wyckoff Wave now appears to be on its way towards the support area defined by the line drawn from point E.
This is an extremely important area of support. The trading range, which began at point E, produced three support areas. They are marked on the chart as lines drawn from point W, I and E.
The Wyckoff Wave tried twice to spring that support at points G and M. It failed both times. This makes that third support line the last bastion before a more significant reaction.
That reaction could be a normal corrective reaction from point T to an area halfway between that and the 2011 accumulation.
While anything is possible, that scenario has a low probability of success.
The moderate level of supply that has been during the reaction from point T has been discussed in earlier posts. Normally, a downturn after distribution would see stronger supply. This would present itself with a faster reaction that featured wider price spread and higher volume.
Today, I’d like to focus on the three Wyckoff Wave indicators. They are the Optimism – Pessimism Index, the Technometer and the Force Index.
The O – P Index is a measure of volume. It represents an effort. The Wyckoff Wave represents results. If you compare the movement of the Wyckoff Wave since point F with that of the O – B Index, it is readily apparent that the O – B Index is stronger than the Wyckoff Wave. This would support the moderate level of supply concept.
It is extremely helpful to analyze the relationship between the O – P Index and the Wyckoff Wave. Right now, when compared with point M, the O – P Index is higher than the Wyckoff Wave. This is a short term positive divergence and suggests it will be difficult for the down move to continue.
This bullish relationship is shown on both intermediate and long-term levels. When compared with point I, the O – P Index is higher. The Wyckoff Wave is lower. This is an intermediate term positive divergence.
Notice, when compared to point E, that the O – P Index is noticeably stronger than the Wyckoff Wave. This is a positive in harmonious action and is also a bullish indications.
On Friday, the Technometer reading was 35.78. This is an extremely oversold condition. When the Technometer is oversold, it is an indication the market will attempt to rally. It may not happen immediately, but should within a few trading days.
The Force Index is stronger than it was at any time since point F. This Index reflects the downward pressure on the market. Therefore, it usually produces negative readings. The Force Index’s strong rally following the low at point M, suggests a change in character. Another bullish indication.
If the Force Index readings are extremely negative, there can be a mitigating impact on an oversold Technometer. This means the expected rally will be shorter and smaller than expected. The rallying Force Index has substantially reduced any mitigating impact there may be on the Technometer.
These bullish indications from the Wyckoff indicators are rarely, if ever, seen during a bear market.
The Wyckoff Wave is approaching the next support level. It could Spring the support. It could simply rally off the bottom and continue the trading range, or it could react through the support and continue its down trend.
The relatively low level of supply and the bullish Wyckoff indicators suggest one of the first two scenarios have the highest probability of success.