For the past six weeks, the Wyckoff Wave has been moving sideways in a short term trading range. In the process it developed an apex formation. The supply line of the apex started at point V. The support line at point U.
When an apex is identified, what usually follows is a strong up or down move out of the apex formation. This is a result of a battle between supply and demand and is a bit like compressing a spring. Finally, one overcomes the other and the stock or index moves strongly in the winner’s direction.
Up until Wednesday, the Wyckoff Wave appeared to be moving out of the apex to the upside. Monday’s market action saw demand come in at the apex’s support line. Tuesday pushed the Wyckoff Wave through the apex’s supply line. The Wyckoff Wave was in a “needs to go and go now” position.
A gap opening to the upside and some follow through on Wednesday morning appeared to suggest the Wave was off and running to the upside.
Then, a little thing happened on the way to new high ground. It’s called the resistance line at the top of the trading range. As the Wyckoff Wave reached that line, good supply came right back into the market and drove the Waves back down into the trading range.
The supply that seemed to have dried up as the Wyckoff Wave left the apex formation was still present.
In this case, the trading range trumped the apex.
On Thursday, the Wyckoff Wave returned to the apex. Friday brought a new attempt to leave the apex to the upside, but once again, supply came into the market as the Wyckoff Wave reached the top of the trading range.
Wednesday’s, Thursday’s and Friday’s market action showed that supply has not dried up and was still present in the market. This invalidates this apex formation.
What about the Wyckoff traders who took positions on Tuesday or Wednesday as the Wyckoff Wave left the apex to the upside? This is why we have stop orders.
It is also a good lesson in making decisions based on one’s expectations of the market. If those expectations, especially in a short-term or swing trade, are not immediately met, positions should be quickly closed.
In this case, when a stock or index leaves an apex to the upside, it does so without hesitation . That market day is a strong up day and leaves no doubt that the Wyckoff Wave will advance strongly and close at, or near, its high for the day.
When that doesn’t happen, it invalidates the apex concept. Positions based on those conclusions should be immediately closed.
As soon as the Wyckoff Wave ran into supply at the top of the trading range and hesitated, warning bells and whistles should have gone off in the Wyckoff trader’s head. The market wasn’t doing what was expected and, therefore, short-term or swing positions to the upside should be closed.
If that was done, most trades would have broken even or even made a small profit. If it wasn’t done, stop orders could have been eventually caught resulting in a loss of capital.
Even worse, no action was taken and the Wyckoff trader was left wishing and hoping the market would rally. This usually results in capital being tied up for a longer than expected time, or even worse, the trade being closed just before the Wyckoff Wave rallies.
The smart Wyckoff trader closed his or her positions and is now waiting for ending action within the trading range.
The Wyckoff tools suggest a rally. This is based on a positive O – P Index divergence with the Wyckoff Wave and an oversold Technometer. In addition, the Force Index that is putting in new lows, while the Wyckoff Wave remains substantially higher. These all suggest the ending action will begin a new move to the upside.
This gives intermediate and long-term bulls an opportunity to adjust portfolios and look for new long positions.
Short-term traders must be content to move to the sidelines and wait for the ending action.
Wyckoff strategies and techniques are not mechanical tools. They are simply logical, common sense ways to explore the relationship between supply and demand. They provide excellent clues to the markets present and future direction.
A successful trader combines those clues with strong discipline. Trades are made for specific reasons and each contains quantitative goals and objectives. If the market deviates from those expectations, that is a sign that they were flawed. When that happens, trades, especially the short-term variety, should be terminated.
When I make a short-term trade, I write down on paper, exactly what I expect my trades will do on the following day and for the next few days. If that doesn’t happen, my logic is flawed and those trades must be closed.
If this strategy is followed, the short-term trader needs only be correct 50% of the time to make substantial profits.
Often, it’s not how much you make, it’s how much you don’t lose.