Are We Ready to Rock and Roll? Ask the Technometer

Click Here For Wyckoff Wave Chart 12-30-11

Despite a week of holiday trading doldrums, the stock market as measured by the Wyckoff Wave, sent us an interesting message. It didn’t go down.

Over the last six trading days, when the Wyckoff Wave penetrated the resistance drawn at point K, supply had an ample opportunity to assert itself as investors and traders either took profits or exited long-held positions. This phenomena has been present since the Wyckoff Wave rallied off the spring at point H and first encountered this supply at point I.

There was some absorption from point I to point J. Point J could’ve been marked as a Last Point of Support. Then there was a rally to point K. This appeared to be a penetration of the resistance and a Jump Across the Creek. Instead, supply continued to the present and the Wyckoff Wave entered a new trading range.

Now, we have penetrated the new top of the range, but, so far, supply has not appeared. Are we finally ready to leave the two stage trading range that began in early August? There are a few important signs, especially a Technometer formation, that say 2012 could be a very good year.

Last week, we discussed the supply situation in detail and analyzed the Optimism – Pessimism Index. This week’s market action has done nothing to change that analysis. Now, let’s look at a few more positive indications.

After the last three short term rallies, the Wyckoff Wave has respected the halfway points. If you look at page 1 of the attached charts, you will see that on the reaction to point P, the Wave respected the halfway point of the rally from points H to K. The same was true of the reaction from points G to R. Finally, so far, the Wyckoff Wave has held above the halfway point of the R – S rally. Respecting halfway points is a significant bullish indication.

So far, with the lack of supply at the top of the trading range, we also find the Wyckoff Wave respecting the halfway points of its rallies. In addition, since the low at point P, we have also seen higher tops and higher bottoms.

Finally, let’s look at the Technometer. The Technometer is a volume based Wyckoff tool that is extremely helpful, when used with other Wyckoff indicators, in identifying important turning points in the stock market or in individual stocks. Each stock and index in our Pulse of the Market Charting Service has its own individual Technometer readings.

The Stock Market Institute (SMI) courses and lectures tell us that a Technometer reading over 50 consists of an overbought condition and the market or an individual stock may be ready to react.

Conversely, a reading between 42 and 38 suggests an oversold condition and the market or an individual stock may be ready to rally. I have seen both numbers presented as an oversold condition. While I have a tendency to use 38 as an oversold condition, when the Technometer falls below 42 I look very closely at other indicators like the Optimism – Pessimism Index and the Force Index to see how they are relating to the Technometer readings. Any divergences or inharmonious actions can be extremely helpful in confirming market turning points.

One of the most important uses of the Technometer is in comparing readings with previous highs or previous lows. For example, if the Technometer reaches a new low, when compared to a previous low, but the index or individual stock does not make a new low, this is an important indication that the market should begin to rally. The Wyckoff Wave gave us an important example of this just before the beginning of the 2010 – 2011 bull market.

Please look at page 2 of the attached charts. Notice the spring at point G and then the Last Point of Support at point M. At point G, the Technometer reading was 38.11. This is an oversold condition and preceded the expected rally to point H. The Wyckoff Wave then rallied to point J and fell back into the creek at point K. It then rallied to point I and reacted through the bottom of the creek at point M. We can even draw a short-term down trend channel through point J and L, with a parallel support line at point K. This was not a bullish scenario. Count to the down side could have certainly been taken from point L to point F and even to point B. The economic news was terrible. The country was in a recession and everything was going wrong. This had to be a continuation of the bear market of 2008.

Except, look at the Technometer. As the Wyckoff Wave reacted to point M, the Technometer put in a new low. It registered 35.66. This is a dangerously oversold condition.

Now compare points G and point M. M is substantially higher than point G, yet the Technometer is more oversold. We know, based on our Wyckoff teachings, that this important indication does not suggest we are approaching a bear market. It suggests we are going up.

Look what happened. Over the next seven months the Wyckoff Wave gained over 8,000 points. This was a 33 1/3% gain and greatly enhanced the portfolios of wise Wyckoff traders. I would suspect there were an awful lot of “experts” scrambling to cover their shorts.

Let’s move forward to some recent market action. At point H, the Wyckoff Wave’s Technometer reading was 38.04. The Wave then rallied strongly. After the highs at point K, the Wave moved sideways and then reacted to point P. Its Technometer reading was a dangerously oversold 33.65. Compare point P with point H. We have a lower Technometer reading and a more oversold condition at point P. But point P is quite a bit higher than point H. I would submit there are some substantial conclusions that can be drawn here.

Finally, let’s take a quick look at the Wyckoff Wave’s Point and Figure chart. The count from point R (which could be a legitimate Last Point of Support) to point P is 30 on the 100 point figure chart. This gives us a count of 3000 points that can be taken from the low at point P and the high at point R. This objective is from 30,000 31,400.

If this objective is reached we can then use the second phase of the account, which is from point R to point J. This is a count of 8,800. These objectives are from 35,800 to 37,200. This takes us back into the distribution area prior to the 2008 bear market.

While it is important to let the initial phases of counsel work out before looking at maximum objectives, if the Wyckoff Wave achieves all of the its count phases to go back to the August selling climax, we would be looking at a monster rally.

Will 2012 be a banner year for the stock market and the Wyckoff Wave? Honestly, I don’t know for sure. However, if we believe the Wyckoff analysis of supply and demand and use the tools in our Wyckoff tool kit, the future looks extremely promising.