Bulls vs. Bears – The Battle Continues

Click Here For Wyckoff Wave Chart 01-25-13

This week the stock market, as measured by the Wyckoff Wave, rallied out of one resistance area right into another. The week gave us a change of character, as a market that appeared ready to react suddenly rallied and is in a position to move into new high ground.

However, in the stock market, nothing is simple. On Thursday, the Wyckoff Wave rallied and slightly penetrated the resistance at the top of the trading range drawn from point X. The move was on moderate volume.  Was the Wyckoff Wave prepared to jump the resistance (Creek) and move into new high ground?

There were some very conflicting signals.
Some positives were:
1. While the volume was sustained, Thursday’s price spread increased. This suggested, at just the right time for the Bulls, some demand was coming into the market.
2. The Optimism – Pessimism Index was leading the Wyckoff Wave, which is certainly an encouraging sign.
3. While the Technometer was in a dangerously overbought condition, the positive numbers emanating from the Force Index somewhat mitigated the overbought situation.
4. On the Weekly Chart, the Wyckoff Wave has penetrated the long-term support line and is attempting to return to the up trend channel.

There were also negative indications:
1. As the Wyckoff Wave approached final resistance, the relative spread on Wednesday, Thursday and now Friday was narrowing. Price spread usually increases when a stock or index is trying to move through resistance.
2. Instead of increased volume we saw relatively decreasing volume.
3. Regardless of the positive Force Index numbers, the Technometer was dangerously overbought. When a major resistance line is about to be penetrated, it is not good for the Technometer to be in that condition.
4. While it can be a positive sign when the O – P Index leads the Wyckoff Wave, the O – P Index is also in a negative divergence with the Wyckoff Wave. The results (price) is not matching the effort (volume). This conundrum is usually resolved by the Wyckoff Wave making a quick definite move. In other words, it needs to “go and go now”.

Another negative was added on Friday. The Wyckoff Wave did not “go and go now”. Instead, after some early demand dried up, supply came into the market. Then there was a relatively bleak rally for the rest of the trading day.

This is a difficult and confusing market. Based on the above, it is very difficult to draw conclusions as to where the market will go during the coming week.

When this happens, it’s often best to drill down into the Wyckoff Wave stocks to see how they are behaving.

1. The Wyckoff Wave is in an overbought position relative to its up trend channel.
2. On a short-term basis eight of the 12 stocks are in a short term up trend. one is in a short term down trend and three are neutral.
3. On an intermediate term basis they are split. Six are in up trends and six are neutral. None of the Wyckoff Wave stocks are in an intermediate term down trend.
4. The Technometer readings are quite interesting. Eight stocks are in an overbought conditions. two are oversold and two are neutral.
5. Two of the Wyckoff Wave stocks are in a positive divergence with their O – P Index. Eight are in a negative divergence and two are in harmony.

In addition, several of the market leaders are either backing up for a possible last point of support or appear to be in a position where the backup will be beginning.

In general, the Wyckoff Wave stocks, while very bullish from an intermediate or long term perspective, do not, as a group, seem poised to make a strong move to the upside, in the immediate future.

The rally that began in mid-November, at point G, has been long, slow and sprinkled with bearish indications that, for the most part, did not come to fruition. It would be difficult to be surprised if the Wyckoff Wave once again surprises.

While the overall market appears strong, from a short-term perspective it does not seem ready to make that final, breakout, push to the upside.

Instead, the Wyckoff Wave may choose to react back towards the highs of the brief N – O trading range. The dangerously overbought Technometer, should then quickly move to oversold. If that reaction happens and is on reduced spread and volume, we may see an important last point of support (the move from point G would be a sign of strength) and the Wyckoff Wave will be in a much better position to rally into new high ground.

If this happens, there would be good short-term opportunities to the upside.

More importantly, the intermediate and long-term bulls, who have been happily counting their profits would have an excellent opportunity to take positions.

This may also be an opportunity for aggressive short-term bears who, if the market begins to react, can take a brief short term positions to the downside. This is a very aggressive, high risk trading opportunity and should be watched very carefully.

For most of us, this is a period of watching and waiting and letting the market answer these difficult and somewhat confusing questions.