Crossing the Creek and the Optimism – Pessimism Index

Click Here For Wyckoff Wave Chart 12-23-11

This week, the Wyckoff Wave attempted to cross the creek, marked by the resistance line at point K, and leave the trading range to the upside. Will this effort be successful or will we have what Mr. Robert Evans called an Oops?

For those who are not familiar with the Oops story, it is when a stock or index tries to leave the trading range to the upside and fails. It breaks through the resistance. Everything looks good and then all of a sudden oops. The stock or index returns to the trading range or, even worse experiences an upthrust.

Are we leaving the creek and beginning a strong rally or is this an oops? To find some answers, let’s go back and look at the trading range from a longer-term perspective. Sometimes, and I have found myself to be guilty of this more often than I care to admit, we find ourselves too involved with the short term action of the Wyckoff Wave for the individual stocks we are following. When we do that, we often miss the major clues that only seem to come to light when it’s too late.

Many of these excellent clues can be found by studying the Optimism – Pessimism Index, the Force Index and the Technometer. Until the Wyckoff Pulse of the Market Charting Service software was developed, these excellent tools were not available for individual stocks. This is because all the calculations were manual and, because of the enormous amount of data that need to be calculated, was impossible to complete in a timely manner. Now, the software programs allow all the complex calculations to be completed just a few hours after the market’s close.

Let’s start with the Optimism – Pessimism Index. The O – P Index is simply an index of volume. Throughout the day, the value from up waves is added to the O – P Index. The volume from down waves is subtracted. We look at the volume activity as effort. The price activity is the results. As long as the results are matching the effort, everything is in harmony and the existing trend is expected to continue. If this changes, there is a divergence and the reasons need to be closely examined.

In the beginning of October, the Wyckoff Wave experienced a spring. This is marked by point H. It then rallied to point I, and then moved sideways with a low at point J. A short-term uptrend channel can be drawn on both the vertical line chart and the Optimism – Pessimism Index chart.

The Wyckoff Wave rallied to point K. It then weakened the short term uptrend channel at point L and broke it when the rally to point M failed to return to the short term uptrend channel. But, look at the O – P Index. While the Wyckoff Wave broke the up trend channel on the rally to point M, the O – P Index returned to its uptrend channel on the rally to point M. While this created a short-term negative divergence, which signaled the eventual reaction to point P, it also showed that the O – P Index was trending stronger than the Wyckoff Wave.

In addition, for short-term traders, the O – P Index helped identify a turning point. While it returned to the short term uptrend channel at point M, the Optimism – Pessimism Index weakened the channel at point N and broke it at point O. Look what happened. Short-term traders who entered the market to the down side at point O reaped some excellent profits in less than two weeks. Keep this action in mind as it will be significant later in this article.

The Wyckoff Wave then reacted to point B. There it tested the support line of the new short-term down trend channel that I have marked in red. The Optimism – Pessimism Index was in harmony with the Wyckoff Wave when compared to points H, L and N.

However, look at the Technometer and the Force Index. At point P, the Technometer was dangerously oversold at 33. Technometer readings above 50 are considered overbought. Technometer readings at 38 or below (some believe 42 and below) are considered oversold. The Technometer has even more credibility when compared with the Wyckoff Wave or its individual stock. If at the bottom of a reaction the Technometer is more oversold than a previous low, but the Wyckoff Wave or the individual stock remains higher, we can look for a rally.

Look at points P and H. The Wyckoff Wave was substantially higher at point P, but the Technometer was at its lowest point since just before the Selling Climax at point X. The same was true for the Force Index. The Wyckoff Wave immediately rallied to the top of the trading range. It then slowly reacted back and saw support just above the halfway point of the rally from point P to point Q. This Week the Wyckoff Wave has rallied and penetrated the resistance drawn along the high at point K.

What is the Optimism – Pessimism Index telling us about this present rally. Notice how the O – P has stayed in its short-term uptrend channel. Unlike the rally to point O, it has stayed in the uptrend channel and is in reasonable harmony with the Wyckoff Wave. In addition, the Technometer is still in a neutral condition. These are both positive indications that the rally has a good chance of continuing and can put enough distance between itself and the near edge of the creek to allow it a reasonable chance to back up for a major Last Point of Support.

At this time, the only potential negative is the Force Index which is not as strong as we would like. However, a positive week can alleviate that condition.

Does this guarantee we are seeing the beginning of the next bull market? Absolutely not. Only the market will answer that question. However, the indications that we are seeing seem to indicate a bullish bias. The Wyckoff Wave can still have an oops. However, if we do, it’s going to happen in the next trading day or so.

A few final observations:

As it has progressed through both phases of the trading range, the Wyckoff Wave has behaved more like it is in accumulation than distribution.

We have seen a long slow reaction from point Q to point R. This reaction respected the halfway point of the previous rally and is a reasonable Last Point of Support.

The Technometer and Force Indexes have given us a strong positive signal at point P.

The Wyckoff Wave and the Optimism – Pessimism Index are both respecting their uptrend channels.

While the dreaded oops can always foil our best laid plans, the Wyckoff price and volume signals couples with our Wyckoff trading tools strongly suggest we are headed up.

The short term trend of the market is up.

The intermediate term trend of the market is still neutral, but that may change.

All of us at Wyckoff Stock Market Institute.Com send our very best holiday greetings and wish each of you and your families a joyous and prosperous New Year.