On the week ending March 16, 2012, the Wyckoff Wave broke through the resistance of the short term trading range or area of re-accumulation. It reached a new high at point A and then began to react back towards the top of the trading range.
As Wyckoff students know, this is a reaction back to the creek and, if successful, will become a major Last Point of Support (LPS). If the backup is successful, the Wyckoff Wave can be expected to rally and the bull market will continue.
There are several indications that suggest this scenario will be successful.
1. As the Wyckoff Wave reacted, the price spread was relatively narrow and the volume was reduced. The reduction in volume was not as great as I would’ve liked to have seen it, but it was indeed reduced. An analysis of the intraday waves, from the daily data report, shows that demand was present and supply was drying up.
2. While the Wyckoff Wave, like the little boy in Mr. Evans’ delightful analogy, who dipped his toe back into the creek, the Wave did not react far enough to be swept away back into the trading range. This, of course, is assuming that the reaction is completed. That will only be confirmed if the Wyckoff Wave rallies strongly early next week.
3. The Wyckoff Wave has respected the ½ point of the rally from point Z to point A. This halfway point is marked on the attached chart. It is always a bullish indication when an index or an individual stock holds above the halfway point on a reaction.
4. There is a short-term positive divergence between the Wyckoff Wave and the Optimism – Pessimism Index. This week, as the Wyckoff Wave reacted, the O – P Index fell below its low at point V. This suggests that the amount of effort to the down side has not produced the expected results.
5. The Technometer has become dangerously oversold. The Friday reading of 33.9 is the lowest it has been since point P and this suggests the Wyckoff Wave is extremely vulnerable to rally.
6. While the Force Index has weakened its support line, it is not generating strongly negative numbers. An extremely negative Force Index can reduce or cut short the expected rally suggested by the Technometer.
It is important to understand that the readings of the Technometer and Force Index are not mechanical indicators to buy or sell, but help confirm or question the deductions we make from the action on the vertical line chart.
If the Wyckoff Wave is prepared to rally, how far will it go?
A count taken along the 31,500 line of the Point & Figure chart gives us a maximum objective of 34,700. There is also a minimum objective of 33,800 taken from the bottom of the trading range. This is another stepping stone count on the way to its long-term objective area beginning at 37,200. This objective is obtained by taking a count along with 24,800 line from the spring at point H to the buying climax at point X.
While the above establishes good justification for a continued rally, it is not a guarantee. The Wyckoff Wave is in a position where it must go and go now. Next week, it must rally and take out the highs at point A and confirm that the uptrend channel, drawn through support points H and P, with the parallel supply line drawn through point K is, in fact, a valid up trend channel.
If the Wyckoff Wave does not rally strongly and decisively, it runs the risk of returning to the trading range and continuing its sideways movement.
It is also important to keep an eye on the Technometer. If the Wyckoff Wave rallies poorly, it is quite possible the Technometer will quickly become overbought, while the Wave has not broken out into new high ground. This would be a negative condition at just the wrong time.
While it is nearly impossible to identify exact turning points, the risk/reward ratio seems good enough to allow Wyckoff students to take both short term and intermediate to long term positions. Actual or mental stops should be placed below the halfway point of the last rally and the lower edge of the creek. The creek bed should be marked on everyone’s charts of individual stocks.
Wyckoff teaches us there are only a few times during the year when it is optimal to take positions. While there is always risk, this appears to be one of them. Select your best candidates. Take positions. Watch your stop orders carefully.