On Monday, the Wyckoff Wave reacted and slightly penetrated the support at the bottom of the short term trading range. This is marked as point V on the attached chart. This was a #3 Spring. #3 Springs do not need to be tested.
On Tuesday the Wyckoff Wave rallied off the spring and broke through the resistance at the top of the trading range. This was a Sign of Strength or a Creek jump.
This rally took the Wyckoff Wave back to the January highs and marked a very nice recovery from the low at point T. On Thursday, the Wyckoff Wave briefly moved into all-time new high ground.
However, after Tuesday’s strong market action, the Wyckoff Wave moved sideways for the rest of the week.
Is the Wyckoff Wave ready to react back to the resistance, now support, line or is it undergoing a period of absorption that will allow it to move strongly into new high ground?
Absorption is a battle between supply and demand. It is natural for supply to come into the market at the top of trading ranges or earlier highs. This supply will either drive the stock back down or, it will immediately run into buyers who are ready to push the stock higher and happily take in all the overhanging supply.
Because of this, absorption is marked by a wider price spreads and high volume.
The last three trading days brought reduced volume and relatively high, but volume levels decreased. Narrowing price spread and decreasing volume are not normal indications of absorption.
In addition, the Optimism – Pessimism Index is in a short term negative divergence with the Wyckoff Wave. As you can see on the chart, the Wyckoff Wave is noticeably higher than it was at point U. However, the Optimism – Pessimism Index is lower than it was at point U. This indicates a lack of effort (volume) that does not match the Wyckoff Wave’s result (price). This is a short-term negative indication and a second strike against the absorption scenario.
Finally, on Tuesday the Technometer moved into an overbought condition. It stayed that way on Wednesday and moved back into a high neutral condition on Thursday and Friday. On Monday the Technometer will open in a nearly overbought condition.
The Force Index is producing low enough readings as to not have a mitigating impact on the Technometer.
The Wyckoff Wave is also in a slightly overbought position relative to its long term up trend channel (marked in orange).
These three indicators suggest the Wyckoff Wave has a higher probability of reacting back towards the top of the trading range (line drawn from point U) than it does rallying into new high ground.
The one argument in favor of the absorption theory is the relative strength of the market itself. The Wyckoff Wave has spent a good portion of the last few months in an overbought position relative to its long-term up trend channel.
The reaction to point T did not reach the support line of the long-term uptrend channel. After the rally to point U, the Wyckoff Wave was expected to react back and retest the lows at point T.
Instead it move sideways, established a trading range, and then broke out to the upside.
I have been commenting on the relative strength this market for quite some time. With few exceptions, it has continued to rally and this has brought considerable profits to intermediate and long-term investors.
When the market is strong, identifying short-term turning points can be a bit tricky. Despite that, it still appears the Wyckoff Wave is getting ready to react and should move back and test the top of the short term trading range.
If it puts in a successful Last Point of Support, we could be getting ready for another nice move to the upside.