Are We In A New Trading Range?

Click Here For Wyckoff Wave Chart 04-05-12

This week, the Wyckoff Wave rallied to point E and then reacted back to test the lows at point D. Does this mean we are beginning a new trading range?

There are positive signs that we are and negative signs that present the possibility of a deeper reaction. Let’s take a look at both scenarios and see if we can come to some sort of a conclusion.

First the negative arguments. After breaking out of the original W – V trading range, the Wyckoff Wave reacted from point A back to the edge of the Creek at point B. It then rallied briefly to point C. Notice that we now have a lower top. The reaction to point D not only pushed the Wyckoff Wave back to the far bank of the creek, but it put in a lower bottom. We now have lower tops and lower bottoms.

The Wave then rallied to point E. The major portion of this rally was on last Monday. Interestingly, the highs at both points C and E were the same at 32,044. However, this rally did not create a new high and break the trend of lower tops.

The reaction to point D had dramatically weakened the H – P support line. The brief rally to point E was unable to move through the support line, but instead reacted. This breaks the support line and any up trend channel. The breaking of the trend is an important development and gives the Wyckoff Wave an opportunity to put in a noticeable reaction.

Now, let’s investigate the positives. The three day reaction from point E has been on reduced spread and, on Thursday, reduced volume. The fact that the volume began to dry up as the Wyckoff Wave approached the bottom of the new trading range is a positive indication. In addition, the reaction from point E, when compared to the reaction from point C, is on relatively reduced spread and volume. This gives the Wave a reasonable opportunity to test the lows at point D and rally back to test the highs at point E and the top of the trading range.

There is not a great deal of potential for a sustained reaction. There is a count of 800 at the 32,000 level on the 100 Point & Figure chart. This gives us a present maximum objective of 31,200. Thursday’s low, on the Wyckoff Wave was 31,362. This puts the Wyckoff Wave in the objective area.

It is important to understand that this is not necessarily a complete count. So far, there has been no ending action and before that happens we will, most probably, see a larger count play out.

Although the Technometer is in a high neutral condition, any reaction will, most probably, move into an oversold condition. This is because the Technometer has been in an overbought position for several days.

The red horizontal line, drawn just below point D is the resistance line drawn from last Spring’s highs. Once this line was definitely penetrated, as it was on the rally to point A, it becomes a significant area of support.

An examination of the Wyckoff Wave stocks shows that most of them are in an intermediate term uptrend channel. Of the 12 stocks, 10 are in an intermediate uptrend channel and 2 are neutral.

Short-term, 3 stocks are in an uptrend channel, 1 is in a downtrend and 8 are neutral.

While many of the individual stocks are in a preparation period in anticipation of a potential advance, none appear to be ready for a significant decline.

While one should never say never, it appears the market is in a watch and wait period not ready to move in either direction until we have a more definitive ending action. It also seems that, unless we have more evidence to the contrary, that direction will be up.

The breaking of the intermediate-term support line simply confirms that the intermediate term trend of the Wyckoff Wave is neutral. The short term trend is also neutral.

What can we expect in the coming weeks? I suspect the Wyckoff Wave will continue to move sideways. However, there is always a possibility that it can spring the trading range. If the Wyckoff Wave reacts through the lows at point D, it could be springing the trading range. However, just penetrating the support isn’t enough. The spring will only be confirmed if strong demand drives the Wyckoff Wave back into the trading range on strong and increased spread and volume.

Remember the action at point Z. There was not strong demand after the reaction to point Z and while the Wyckoff Wave put in a nice move to point A, the rally did not continue.

It is also possible we have not seen the actual support levels of the new trading range. Remember, that old resistance line from last spring is lurking just below the bottom of the trading range at point D. It is possible the support area of the trading range could end up between that line and the lows at point D.

We do not appear to be in a position where many trading opportunities abound. While short-term traders should be alert for a spring, unless it happens, Wyckoff traders should continue to look for good candidates and enjoy the spring weather.

Intermediate-term traders who are looking to add to their positions can certainly do so in this area. I would suggest waiting until the Technometer moves into an oversold condition.

Finally, in this discussion we have not mentioned the Optimism – Pessimism Index. That is because it is in reasonable harmony with the Wyckoff Wave and is not presenting any significant divergences. There is a minor positive divergence when compared with point B, but a reaction could easily and quickly eliminate the divergence. If the Wyckoff wave rallies to test point A, it will be important to watch the O – P Index to make sure the effort of the O – P Index matches a result of the Wyckoff Wave.