Approaching The Bottom Of The Range. Sign of Weakness or a Spring?

Click Here For Wyckoff Wave Chart 04-11-2014

This was not a great week for the Wyckoff Wave. Even though Wednesday was a good day for the bulls, the Wave lost ground on the other four days.

At Friday’s close, the Wyckoff Wave was at the support line of its intermediate term up trend channel and just above the support at the bottom of the trading range.

This would suggest that this week, one of three events will take place.

1. The Wyckoff Wave would penetrate the trading range’s support line and then rally strongly back into the trading range. This would be a spring and could be an important ending action. If successful, the spring could be the catalyst for a nice move to the upside.

The amount of penetration would determine the type a spring.

2. The Wyckoff Wave will drive through the bottom of the trading range to the downside and fall through the ice. This would be an important Sign of Weakness and if followed by a successful Last Point of Supply (a poor quality rally that could not bring the Wyckoff Wave back into the trading range), would make the Wyckoff Wave vulnerable to a nice move to the downside.

3. The Wyckoff Wave could simply encounter support at the bottom of the trading range and continue its sideways movement.

With the help of the Wyckoff indicators and tools, this blog post will examine all three possibilities and rank them in order of probability.

If a stock is going to spring a trading range, it must first display a reduction in supply. A spring happens when a stock penetrates the bottom of a trading range and, all of a sudden, there are no sellers. This lack of supply can cause the stock to bounce back and as it does, good demand returns and the stock rallies.

On Thursday, the Wyckoff Wave reacted strongly from point B on wider spread and increased volume. However, on Friday, while the volume was increased, the spread narrowed. By itself, this suggested some demand was coming into the market.

A review of the intra-day waves suggests that the amount of supply decreased over the past 2 trading days. Simply compare the reaction from point K to L, with the reaction from points M to N. The first occurred primarily on Thursday. The second on Friday.

If the Wyckoff Wave was going to fall through the ice, Friday should have brought a wider price spread and good volume.

While this is not conclusive evidence that a spring will occur, it does place the spring scenario high up on the probability list.

Now let’s look at the Wyckoff tools. Since its February high at point R, the Optimism – Pessimism Index has been substantially weaker than the Wyckoff Wave. The tremendous amount of effort put in by the O – P Index has not been matched by the results found in the Wyckoff Wave.

While there is a substantial positive divergence with the Wyckoff Wave when compared to points W, U and S, it is even more important to look at point Q.

While the relationship here is only a positive inharmonious action, the O – P Index has almost reached point Q. The Wyckoff Wave is substantially higher.

All this suggests that even though a great deal of supply has been put into the market, it has been rather easily taken in by those expecting the market to rally.

The Force Index has changed its trend and is in a positive divergence with the Wyckoff Wave when compared with point Y. The trend change is more significant. While the Wyckoff Wave and the O – P Index reacted, the Force Index, which is a longer-term indication of investor sentiment, rallied. While it did react on Thursday and Friday, that reaction was less than what we saw in the Wyckoff Wave.

While the Technometer is neutral, it will open on Monday in a nearly oversold condition and if the Wyckoff Wave reacts, could become oversold.

Do all these indicators mean that the Wyckoff Wave is going to spring the short-term trading range on Monday and we will see that long-awaited ending action?

It simply means, that of the three scenarios, the spring has the highest possibility of success. That would be followed by a successful test of the trading range’s support.

Finally, the scenario with the lowest probability of success is the fall through the ice.

The stock market is a cruel mistress and one important key to success is identifying the possible scenarios and their probability of success. Once that is done, students can sit back and let the market tell them which one will play out.

If there is a spring, positions can be taken to the upside on the spring or the secondary test.

If the worst-case scenario plays out and we have a fall through the ice, short positions can be taken on the Last Point of Supply.

As the Technometer is not in an oversold condition, it would not be prudent to take a position on a successful test of the support. This is because the Wyckoff Wave could put in a one or two day move to the upside and then react again. This would bring the first two scenarios back into play.