This past week, after a poor quality advance on Monday, the Wyckoff Wave reacted and is now testing the bottom of the major trading range. The support line is drawn from a low on March 3, 2014, which is marked as point U on the daily chart.
Breaking through the support on good spread and volume could certainly be seen as a Sign of Weakness. A poor quality rally back to the bottom of the trading range would be seen as a Last Point of Supply. This would open the door to a significant decline.
The last eight trading days have also brought a change in character. Price spread has widened. Volume has increased. This suggests good supply is coming into the market making the Wyckoff Wave vulnerable to react.
This week the Wyckoff Wave, the S&P 500 and the Dow Jones put in some strong days to the downside. In addition, the news brings us concerns about Europe and the turmoil in the Middle East.
Superficially, it appears the market is ready to react.
However, a deeper look into the price spread and volume and an analysis of the Wyckoff tools seems to paint a bit of a different picture.
Wyckoff students understand that a bear market happens faster and is more orderly than a bull market. This is because the professionals have cashed out at the top and the ensuing concern or panic results in a significant stock liquidation.
Once the process begins, usually with an upthrust, the market reacts quickly and strongly, with few interruptions.
Did that happen here?
The move through the top of the trading range, to point B, did not display the characteristics of an upthrust. Spread stayed relatively narrow. Volume remained moderate. Then the Wyckoff Wave reacted back into the trading range. This reaction took seven trading days and briefly saw some support at the back edge of the creek (line drawn through point N).
The rally to point B appears to have been a failed creek jump (Sign of Strength) and the Wyckoff Wave simply returned to the trading range to continue its sideways movement. It certainly did not display the characteristics of an upthrust.
The Wyckoff Wave then reacted to point C and then, on Monday completed a two-day rally to point D. This changes the short-term trend to down and the new trend channel is drawn in red.
The intermediate-term trend remained neutral and the long-term trend continued to be up.
As of Friday, the Wyckoff Wave is testing the support line of its long-term up trend channel. Any further reaction will put it in an oversold position relative to this five year trend.
At point D, the Technometer moved into an overbought condition. In addition, there was a short-term negative divergence with the Wyckoff Wave when compared with point B. This was an indication of short-term weakness.
However, as shown on the daily chart, the O – P Index has been relatively stronger than the Wyckoff Wave for quite some time. This would indicate intermediate and long-term buyers have been active in the market.
The Wyckoff Wave then reacted and on Wednesday reached and tested the new support line drawn from point C. Wednesday was an intra-day failure to the downside and the Wyckoff Wave rallied strongly off that support.
This type of market action does not usually occur during a Sign of Weakness. If the Wyckoff Wave falls through the bottom of the trading range and rallies for a Last Point of Supply, the Sign of Weakness would begin at point D.
Finally, the Technometer has moved into a dangerously oversold condition. On Friday, it was at its lowest level since August 2013. While this condition is slightly mitigated by a relatively weak Force Index, the Technometer reading makes it difficult to forecast a continued strong move to the downside.
Next week will be both interesting and important. The Wyckoff Wave could begin ending action with a Spring of the trading range. It could also simply rally off the bottom of the trading range and continue its sideways movement. Finally, it could fall through the trading range and begin an important move to the downside.
These scenarios are written in order of their probability of success.
Whatever happens, it should happen early next week and fairly definitively. My money’s on the spring.