Conflicting Signals

Click Here For Wyckoff Wave Chart 11-30-12

As the Wyckoff Wave rallied off its support line at point G, it sent out some rather confusing signals as to its future direction.

The week before last, as the Wave approached supply line D – E, we saw reduced spread and volume. This suggested a lack of demand. Therefore, the Wyckoff Wave was expected to test the supply line and react to test point G and the bottom of the trading range.

The reduced price spread and volume was also accompanied by the Technometer’s overbought condition. This seemed an excellent time to take a short term position to the downside.

I wanted to do just that, but there was a small problem. None of my short candidates met my requirements for trade.

As we now know, the Wyckoff Wave penetrated the supply line on increased spread, but reduced volume. This suggests a lack of supply and the wave rallied to begin to test the halfway point of the reaction from point D to G. However, as this was the day after Thanksgiving and the market closed early, relatively good demand was present.

The halfway point is also in the same area as the lows at point W. This former support area is now a resistance line.

There was no follow through on Monday. This suggested the Wyckoff Wave was going to have a difficult time penetrating the resistance described above. In addition, the Technometer, with a reading of 74, moved into historically high territory. In addition, the Optimism – Pessimism Index was in a significant negative inharmonious action with points F and D. This was an even better place for aggressive short-term traders to take short positions.

As one of my short candidates now met my criteria, I entered the market to the downside.

Tuesday gave us an intra-day failure to the upside and it appeared the market was ready to react. At least for awhile, there was a good follow through on Wednesday. Then the market rallied and we had an intra-day failure to the downside.

While the Wyckoff Wave was still in an overbought condition, this wasn’t going to last long as the high overbought numbers fell off the moving average.

The Wyckoff Wave now was in a position to penetrate the resistance. On Thursday, that didn’t happen. The Wave rallied on reduced spread and volume, suggesting a lack of demand. On Friday, the Wyckoff Wave experienced an intra-day failure to the upside and closed in the lower half of a narrower price spread. Volume was again slightly lower. This intra-day failure suggests a lack of demand.

When there is a lack of demand for two days, just under an important resistance area, a reaction should be expected. However, the Technometer has moved into a low neutral condition and is expected to open in an oversold condition on Monday.

An analysis of the vertical line chart tells us there’s a good chance the Wyckoff Wave will react. The Technometer is telling us the Wyckoff Wave can be expected to rally.

This isn’t supposed to happen – but it does. It’s contrary indications have popped up before and certainly will pop up again. While it makes life difficult, nothing worthwhile is ever very easy. So what to do?

In situations like this it is often helpful to drill down into the individual Wyckoff Wave stocks and see where they are positioned. But before that, let’s make a quick visit Optimism – Pessimism Index.

The O – P Index is still in a negative inharmonious action with the Wyckoff Wave when compared to points F and D. The O – P Index has put in a great deal of effort that has not been matched by the results of the Wyckoff Wave. This adds credibility to the downside scenario.

In addition, if we look at the O – P Index of the Wyckoff Wave stocks, we see that five of them are in negative divergences with their vertical line chart. Six are in harmony and only one is experiencing a positive divergence.

The Technometer readings of the 12 Wyckoff Wave stocks are also interesting. Four are overbought. Five are neutral and only three are oversold.

Finally, let’s look at the Wyckoff Wave’s weekly chart. While the long-term trend is up, it is noticeably weakened. The Wyckoff Wave has moved sideways since point U and we have both resistance and support lines drawn on the chart.

If the Wyckoff Wave is unable to continue the rally from point D, the long-term trend will be at least temporarily broken and will change to neutral.

If one looks at the weekly chart, this past week gave us decreased price spread and increased volume. This suggests the presence of supply and is one more indication that the market will have a difficult time continuing to rally.

It also suggests that point D was not a spring and that the bottom of the trading range is probably at the support line drawn from point X.

This has been a fairly short term discussion of the Wyckoff Wave. However, there are some bullish indications. The inability of the Wyckoff Wave to react sharply, continues to suggest, despite the long reaction from point C on the weekly chart, that the entire move is more accumulation and distribution.

While I expect the market to react next week (and I will quickly execute stop orders if it does not), the Wyckoff Wave has a higher probability of successfully testing the lows at the bottom of the range.

We might even see ending action in the form of the spring and the beginning of a new up trend.

Regardless, it’s going to be a very interesting month of December.