Last week, the Wyckoff Wave appeared ready to react and, once again, test the #3 spring at point G. Writing in last week’s post, I suggested that the test would be completed by now and, in all probability, it would have been successful.
Unfortunately, the stock market moves at its own pace and as of Friday’s close, the Wyckoff Wave was in a precarious position. It was hovering slightly above point G and appeared ready to make a definitive move early next week. With apologies to William Shakespeare, to successfully test or not to test, that is the question.
Will the Wyckoff Wave rally on Monday and confirm the Secondary Test has been concluded? Or, will the Test fail with a sharp reaction through the support at the bottom of the trading range?
Perhaps the Wyckoff tools can shed some light on the market’s future direction.
These tools are the Optimism – Pessimism Index, the Technometer and the Force Index. Each one is based on volume. The up and down volumes from the daily intra-day waves are collected and entered into a formula that helps determine the days reading.
The Optimism – Pessimism Index simply adds up volume and subtracts down volume The Technometer and Force Index are moving averages. Each tool plays an important role in helping the Wyckoff student analyze the market. Initially, only available for the Wyckoff Wave, the online charting service provides these readings for every stock, where volume is available.
Let’s review these tools for bullish or bearish indications.
The O – P Index is an index of volume. It represents the effort it takes to move the market in one direction or the other. It is best used in conjunction with the vertical line chart of the associated index or stock. In this case that if the Wyckoff Wave. That price represents results. When the effort and results are in harmony, there is a high probability the existing trend will continue. When they diverge, that is an indication the trend is vulnerable to change.
On Friday the O – P Index closed at 71,254. This is noticeably below it’s reading at point I (71,472) and point G (71,443).
On Friday, the Wyckoff Wave closed at 41,992. This is higher than it’s reading at point I (40,040) and point G (41,896).
This indicates that the O – P Index’s substantial effort to the downside is not being matched by the results of the Wyckoff Wave. This is a positive indication.
Now, let’s compare the O – P Index and the Wyckoff Wave at point W. On Friday the O – P Index closed at 71,254. This is noticeably above it’s reading at point W (70,918).
On Friday, the Wyckoff Wave closed at 41,992. This is lower than it’s reading at point W (42 131). This indicates that results of the Wyckoff Wave are not being matched by the effort from the O – P Index.
I call this a double divergence. Past history indicates that double divergences are a good indication that a change in trend is close at hand.
This positive indication is echoed by the Technometer. A Technometer reading of 42 is an initial sign the stock or index is becoming oversold. At 38 it is clearly in an oversold condition. Any reading below 32 is considered a dangerously oversold condition.
The Wyckoff Wave began moving into an oversold condition on Tuesday (41). It became dangerously oversold on Thursday (31) and at Friday’s close was extremely oversold (37). This is another indication the Wyckoff Wave is prepared to rally.
It is also difficult for a reaction to continue in the face of an oversold Technometer.
The Force Index is an indication of downward pressure on the market. That is why it is often produces negative readings. The Force Index readings are helpful when compared with the Technometer and the Wyckoff Wave.
If the Technometer indicates the rally is on the horizon and the Force Index is producing strong negative readings, this can often have a mitigating impact on the strength and length of the rally. On Friday the Force Index produced a reading of -414. This does have a mitigating impact on the oversold Technometer. If the Force Index rallies, that mitigating impact will be eliminated.
It is also helpful to compare the Force Index to the Wyckoff Wave. At point G the Force Index reading was -360. The Wyckoff Wave higher than it was at point G. This is a positive divergence and a bullish indication.
These, plus the slowing of the downward thrusts on the intra-day chart continue to suggest the test will be successful and the Wyckoff Wave will rally.
While my Wyckoff logic suggests a successful Secondary Test, there is a 500 pound gorilla in the room. That gorilla is called Greece.
Wyckoff students have learned to ignore the news, as it simply takes the market where it was originally going to go, only faster. It also requires stock traders to add emotion to their analysis.
So far this weekend, the news has not been positive. Could this lead to a reaction, first thing on Monday?
I don’t know the answer, but I will stick with my Wyckoff logic.