Backing Up To The Creek

Click Here For Wyckoff Wave Chart 04-26-13

This past week, the Wyckoff Wave rallied on both Monday and Tuesday. It then moved sideways in a small trading range for the remainder of the week. While this seems fairly uneventful, we are seeing a change in character that may provide some clues as to the market’s further direction.

These clues are found in how the Wyckoff Wave has penetrated resistance (Jumped the Creek) since the intermediate-term trading range began last November.

Before discussing the specifics, let’s review the Creek concept.

A Creek is the flow of supply across the top of a trading range. It is drawn using a freehand line that goes over the tops of rallies within a trading range.

When a Creek is “jumped”, it is a signal that demand has finally overcome supply. Instead of reacting back down into the trading range, the stock, or the market, has accumulated enough demand that it takes out the supply and moves into new high ground, relative to the trading range.

The Creek jump takes place where strong volume comes in on the vertical line chart. Without analyzing volume, it is impossible to identify when a Creek has been jumped (a resistance area has been penetrated).

Once a Creek has been jumped, in most cases there is a resting. This allows the stock to move back toward the Creek (resistance line) and take in any remaining supply.

There are often more than one branches of the Creek. These are major branches and later branches. They appear every time a stock encounters supply and begins to move sideways.

It is also important to understand that Creeks do not need Springs. A Spring is a backing up from the previous resistance, penetrating the support line and springing up and jumping a Creek. In many cases, enough supply has been taken in that the spring is not required and a stock simply either moved sideways or reacts down to the support line and then rallies to jump the Creek.

The reaction back towards the Creek for a Last Point of Support become successful when one of two things happen:

1. Supply dries up. This is shown by relatively reduced price spread and volume (especially volume).

2. Strong demand simply appears. The appearance of demand is accompanied by strong volume. Often this is found in the intra-day failure to the downside.

It is extremely important to understand the concept of relative volume. The reduced volume required on a reaction to a Last Point of Support only needs to be less than the volume on the rally across the Creek.

With all that in mind, let’s review the intermediate-term uptrend channel, which starts at point G. The Wyckoff Wave rallied off point G and saw resistance at points H, J and L. It then reacted back to point M on relatively reduced spread and volume. Volume was high the day before point M, but that was on strong demand coming into the market.

We then saw strong volume at point M. At point 1, the Wyckoff Wave jumped its first Creek on the rally to point N.  It then moved sideways, on relatively reduced spread and volume. Then, at point 2 the Wave jumped the second Creek (resistance line drawn from point N along the top of the minor trading range.

There were two successful Creek jumps. These were followed by sideways reactions, which led the way to the next jump. The Wyckoff Wave was moving easily towards the old 2008 distribution area.

Then, in early March, we began to see a slight change in character. When the Wyckoff Wave moved into new high ground on the rally to point V, strong volume did not come into the market. Instead, even though the Wyckoff Wave moved higher to point X, it was done on relatively reduced price spread and volume. Apparently, demand was beginning to dry up.

The Wyckoff Wave rallied to point Z. Supply came in and drove the Wyckoff Wave back down to point A. I have adjusted the Creek to run through point Z.

The reaction to point A gave the Wyckoff Wave another chance to take a run and jump the Creek. Once again, it failed and the Wyckoff Wave fell back into the trading range. It then rallied back up towards the top of the Creek and is moving sideways.

Notice the volume. On the rally from point A to point B it was less than on the reaction from point B to point E. It has remained higher ever since, suggesting a fair amount of supply continues to be present.

This is a change in character. The Wyckoff Wave is in the old 2008 distribution area. Tt is either going to move through the resistance into new high ground, or it is going to react back down into the trading range and continue it sideways movement.

Does this change in character mean all hope is lost for the Bulls?

These observations are made on short-term changes within an intermediate term trend. This means that the results of this change in character, will be short-term as well. It would appear that we are getting ready for a more defined back up to a major Creek.

The attached 100 Point & Figure chart gives us a rough objective to the downside of between 33,500 & 33,200.  If that objective is reached, it would take the Wyckoff Wave back to a major resistance line, drawn from point X, that is marked by the blue up arrow.

This would make the move back to the resistance part of a much longer term view of the market and if it happens, would be a very positive event.

It is also important to note that, so far, the Wyckoff Wave has not reached the supply line of the intermediate-term uptrend channel. This would be the first time since the channel is formed, that this didn’t happen. Another change in character.

Finally, the Wyckoff Wave is in a clearly oversold condition on the Technometer and the negative numbers being produced by the Force Index will not mitigate the Technometer reading.

If the Wyckoff Wave reacts, and that is the most probable scenario, it will be important to continue to watch its relative volume. That will tell us if supply is really drying up and we are ready for that longer-term Last Point of Support.