Are We Backing Up To The Creek?

Click Here For Wyckoff Wave Chart 09-21-12

Over 50 years ago, the incomparable Mr. Robert Evans gave us a wonderful analogy about how a stock behaves when it penetrates the resistance at the top of a trading range.  He called it a “A Jump Across The Creek” and it has become an extremely important part of our Wyckoff tradition.

The story goes like this.  A little boy is walking across a field when he comes to a small creek.  Not wanting to get his feet wet, he realizes he must jump over the creek.  In order to get a running start he walks away from the creek, turns around and sprints towards the water’s edge.  He then jumps and easily clears the creek.  His momentum takes him past the creek and he has successfully crossed over without getting wet.

The boy is so pleased that he walks back to look at his handiwork before continuing his journey across the meadow.

In order to be successful, the little boy must get a good start.  Sometimes, he can run up to the creek and realize he doesn’t have enough speed to get over the water.  Then he has to go back and try again.

Since the end of July, the Wyckoff Wave has beautifully demonstrated this wonderful analogy.

The Wyckoff Wave approached the creek at point S.  Like the little boy, it moved back to get a running start to point T.  The first attempt didn’t seem to go well.  It got to the edge of the creek (point U), realized it didn’t have enough speed and and reacted back to point W.

The Wave then got a much better running start, jumped the creek and landed on the other side at point X.  Like the little boy, the Wyckoff Wave is now walking back to the creek bank to enjoy its success.

There is one final part to the story.  Sometimes, the day is so hot and the water look so inviting that the little boy takes off his shoes and wades back into the creek.  After cooling off he leaves the creek to continue his journey.

Sometimes, he walks too far back into the creek, gets caught in the current, and is washed back to the other side.  Then he has to begin the process all over again.

That is why Wyckoff students draw both banks of the creek on their charts.  The near bank (where the little boy walks back to enjoy his success) is the resistance line at the top of the trading range.  The far bank (where the little boy began his jump) is drawn through the lower resistance points in the trading range.

On the attached chart the near bank is drawn from point S.  The far bank is drawn from point S through points U and V.

At this writing, the Wyckoff Wave is still reacting back to the near branch of the creek.  We don’t know if it will stop at the edge of the creek or “get its feet wet” or even if it will get caught up in the current and be washed back to the other side.  The scenarios will be discussed later in this article.

The creek bank is simply a point of resistance.  It is the price where certain investors or traders choose to sell the stock.  They may be shorter term traders taking profits or longer-term investors, who have purchased at a higher level, and are now anxious to get out even or at a small loss.

As the stock approaches the resistance level (creek), supply is being thrown on the market.  The stock then moved back taking in the supply.  Its success, or lack thereof, is shown in the price spread and volume.  The narrower the price spread and lower the volume is an indication that the supply is being rapidly exhausted.  Wider price spread and volume suggests it is still present.

The move to point T was on good price spread and volume.  This would suggest that, on the next rally the stock would have a difficult time jumping the creek as good supply was still present.

That turned out to be the case as the Wyckoff Wave was unable to penetrate the resistance (jump the creek) at point U.  That simply meant that the supply had not yet dried up.

As we watch the reaction from point U to point W, we see lower price spread and relatively lower volume.  In addition, it was long and slow.  This time, the Wyckoff Wave was taking no chances that overhanging supply would be waiting when it took a second run at the resistance (creek).

This proved to be correct as the Wyckoff Wave rallied strongly to point X and successfully penetrated the resistance (jump the creek).

So far, this has been a classic example of the “Jump Across The Creek” phenomena.

Now the Wyckoff Wave is backing up towards the creek.  Up until yesterday, we have seen reduced spread and volume.  In addition, the Technometer was moving towards oversold condition.  Friday brought wider spread and increased volume.  This change of character needs to be explored as the Wyckoff Wave may be in danger of falling back into the creek and even returning to the trading range.

Friday’s action is the last recording on the attached chart.  If you notice, we had an intra-day failure to the upside.  Volume noticeably increased.  This would suggest that supply had reared its ugly head and could destroy the backup scenario.

Was this happening?  In situations like this, it is helpful to look inside the day’s market action to see if the answers reveal themselves in the intra-day activity.

Notice the large gap opening to the upside.  This was also the high price of the day.  Then, the Wyckoff Wave began a slow, quiet reaction.  The last intra-day wave, which contained over half of the day’ s volume, was a long down wave that lasted 2 hours and 30 min. However, in all that time the Wyckoff Wave only lost 149 points.  This would suggest that while supply certainly did come into the market, a great deal of it was being taken in by stronger hands.

It is important to note that even if you are not a short-term trader, there are times when intra-day can be extremely helpful.  Friday’s market action looked as though strong supply was very present.  The intra-day analysis suggests it wasn’t quite the way it appeared.

In addition, the Technometer moved into an oversold condition.  This diminishes the probability that the Wyckoff Wave will fall back into the trading range.

Finally, a look at the 100 Point & Figure chart shows a count of 400 points.  This count is taken from point L over to point X.  This gives the Wyckoff Wave a short term objective of between 32,000 & 32,400.  The Wyckoff Wave is already in that objective area and the 32,400 objective is just barely below the near edge of the creek.

As of right now, this suggests the backup will be successful and the Wyckoff Wave will respect the resistance line (now support line) that is the near edge of the creek.

While Mr. Evans’ wonderful story has helped thousands of Wyckoff students over the years, we must never forget it is not a mechanical solution, but a way to understand our analysis of supply and demand.  Wyckoff is not a mechanical system but a study.  These beautiful stories and the Wyckoff tools are helpers, but everything always goes back to supply and demand.