This past week the stock market, as measured by the Wyckoff Wave, reversed course and continued its rally within the trading range.
At Friday’s close, it was testing the top of the range (line drawn from point H). When the market reaches these critical points, the Wyckoff student needs to analyze at every possible scenario.
Will the test be successful and cause the Wyckoff Wave to react back into the trading range?
Will the Wyckoff Wave upthrust the trading range?
Will the move from point G become a Sign of Strength as the Wyckoff Wave moves strongly and decisively into new high ground?
Will the Wyckoff Wave move into new high ground, but in a manner that simply raises the resistance level of the trading range? As you can see on the attached daily vertical line chart, this has already happened three times in the past year.
Before addressing these important questions, it might be helpful to drill down and look at the individual stocks that make up the Wyckoff Wave.
Of the 12 Wyckoff Wave stocks, 4 are stronger than the Wyckoff Wave, 7 are weaker than the Wyckoff Wave and 1 is in harmony with the Wyckoff Wave.
According to the Position Sheet, 4 are in a short term up trend. Four are in a short term down trend. Four are in a long-term uptrend and 2 are in a long-term downtrend. The remaining positions are neutral.
These all suggest the market is in a fairly neutral position, with a small short-term bias to the downside. This is because four Wyckoff Wave stocks are in a short-term downtrend and seven are weaker than the Wyckoff Wave.
It is also important to look at the Wyckoff tools. Although the Wyckoff Wave is almost at the same level as point H, the Optimism – Pessimism Index is noticeably higher. This negative divergence indicates that the effort to the upside (O – P Index) is not being matched by the results (Wyckoff Wave). Even if the Wyckoff Wave moves into new high ground, the negative divergence will be changed to a negative inharmonious action.
A week ago Thursday, the Technometer became extremely overbought. It has remained in an overbought condition for the past six trading days. It is very difficult for an index or stock to advance in the face of an overbought Technometer.
The Force Index has noticeably strengthened. It is now producing moderately positive readings. This strength has a mitigating impact on the overbought Technometer. It indicates that while it will be difficult for the Wyckoff Wave to continue to rally, the expected reaction will not be particularly long or deep.
Finally, and most importantly, the last four trading days has seen a rather poor quality rally. After Tuesday’s strong rally, there was no follow through and demand began to be withdrawn as the Wyckoff Wave approached the top of the range. If the Wyckoff Wave is going to move into new high ground, Wednesday probably would have been a strong demand day, with the Wyckoff Wave advancing on wider price spread and strong volume. That didn’t happen.
In addition, while the Wyckoff Wave is in the upper quarter of its long-term up trend channel, this week’s market action was on reduced price spread and volume, signaling a lack of demand.
Based on the above, the scenario with the highest probability of success has the Wyckoff Wave simply reacting back into the trading range.
If the Wyckoff Wave moves into new high ground, a new top of the trading range scenario has the highest probability of success.
While an upthrust is always possible, the relative strength of the market (higher tops and higher bottoms since the low at point I) and this past week’s poor quality rally suggests that a huge amount of supply is waiting as the Wyckoff Wave penetrates the top of the trading range.
Finally, the overbought Technometer and this past week’s poor quality rally, make it extremely difficult to see this rally suddenly turned into a Sign of Strength.
The answers to these important questions will arrive next week. In order of their probability, look for:
1. A reaction back into the trading range
2. A rally into new high ground, but only to establish a new top of the trading range.
3. An upthrust.
4. A Sign of Strength that signifies the beginning of a new mark up phase.
There is a major reduction in probability between items two and three.