Changing Scenarios

Click Here For Wyckoff Wave Chart 10-26-12

Every day I receive e-mails from Wyckoff students and traders sharing their comments on the condition of the stock market.  They are logical and well thought out.

These comments fall into two different categories.  Some students have made a predetermined analysis of where the market is going to go and use Wyckoff concepts to justify that analysis.

Others seem to approach the market with a more open mind and use the Wyckoff concepts to determine its trend and future direction.

Who is to say who is right and who is wrong.  I remember listening to a lecture by Robert Evans who explain why his associates at SMI rarely discussed market direction among themselves.  He said that one person, who was an intermediate to long-term trader could have a long position in a stock, while a short term trader could take a position to the down side.  Both would be correct.  It simply depended on the trading perspective.

That is why it is so important to identify the trend of the market that is in sync with your trading philosophy.

The stock market is a cruel mistress and especially so to those who pre-judge the market.  It is critically important, not only to identify the present trend and the most probable future scenario, but to look for other scenarios and be prepared if the one you are expecting does not happen. The last few days of market action emphasize this point.

Until then, it appeared the Wyckoff Wave had jumped the resistance (Creek) drawn from point S and after completing a Sign of Strength (points W – X) was reacting back towards the resistance (now a supply) line for an important Last Point of Support.  If this was successful, the Wyckoff Wave would leave the trading range to the upside and the bull market would continue.

Everything looked quite promising as the Wyckoff Wave reacted to point A.  While the short term trend was down, it was on somewhat reduced price spread and volume. A positive divergence with the Optimism – Pessimism Index when compared to point W and a dangerously oversold Technometer added credence to the Back up to the Creek scenario.

In fact, in real-time, point A could’ve been considered a Last Point of Support.

However, the rally to point B ran into supply and the Wyckoff Wave reacted back into the Creek.  This was the first possible indication that the Wyckoff Wave would not immediately begin the markup phase.  However, the Wyckoff Wave still had one final chance to put in a Last Point of Support.

However, while things were still reasonably positive, other scenarios need to be explored.

If the Backup to the Creek for a Last Point of Support fails, the Wyckoff Wave could fall back into the trading range.  This scenario now needed to be considered.  All would depend on the ability to dry up the overhanging supply.

The Wyckoff Wave rallied to point D and moved into an overbought position relative to its Technometer.  Supply came in and the Wyckoff Wave reacted sharply.  The Last Point of Support scenario failed and was replaced by the Trading Range scenario.

In this scenario there are four possible areas of support.  The first is at point W.  The second is at the initial support area of the trading range at the first point X.  The third area of support is drawn from point F.  The final area of support is at point L.  All four support lines have been drawn on the chart.

If we take a look at the Wyckoff Wave’ s 100 Point & Figure chart, there are two phases in a count from point D over to point X.  The first phase is 1, 000 points, with an objective of between 32,000 and 31,800.  That objective has already been reached.

The total count of 1,400 points gives us an objective of between 30,700 and 30,400.  Those objectives take us to the support lines drawn from point X and F.

It would seem logical that the Wyckoff Wave would successfully test one of those support lines and begin a new phase of the trading range.

However, are there any other scenarios that should be considered?  The answer is, most definitely, yes.

What if the Wyckoff Wave rallies and runs into resistance just under point C?  That could mean the move down from point D was a Sign of Weakness and the rally to just under point C could be a Last Point of Supply.  Then a count could be taken from the top of the last rally all the way over to point X.  Naturally the potential to the down side would be substantially higher.

Will this happen?  While anything is possible, this scenario does present a high possibility of success.  Despite that, it would be foolish to ignore and one should pay careful attention to the quality of the next rally.

I am still quite comfortable that the move from point W to point X was a legitimate Sign of Strength and the market action from points X to D does not appear to be distribution.  It seems there was too much overhanging supply to allow the markup phase to begin.

Where will of the market go from here?  I’m not 100% sure.  I think it is much better to identify possible scenarios and let the market itself give us the answers.

Patently, I was wrong about the Last Point of Support scenario.  It’s okay to be wrong, if you have a reliever warming up in the bullpen.

A note to Pulse of the Market Daily Report subscribers.  As you probably know, a major hurricane, called Sandy, is about to descend on the Northeastern United States.  Widespread power outages are expected.  While our servers are well protected from power failures and the charting service will always be available, the daily report may be unavailable or delayed if our offices experience a power failure.  Our apologies for any inconvenience.

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