Did the Wyckoff Wave back up to the Creek?

Click Here For Wyckoff Wave Chart 11-05-11

In last week’s Market Letter, I suggested that the Wyckoff Wave would be backing up to the Creek. A successful back up would be an important last point of support (LPS) and the beginning of the markup phase.

This Tuesday, November 1st, the Wave reacted to point L. It then has rallied in a fairly unimpressive manner. Was the reaction to point L really a last point of support?

Before that discussion, let’s review gap openings and how they are treated in Wyckoff methodology.

Gap openings to the up side or to the down side are usually a result of either fear or greed that has developed since the previous day’s close. They are often driven by news and in many cases automatically corrected during the trading day.

Wyckoff students are taught to ignore the gap. In other words, the day’s price spread calculation in a stock or index does not start at the previous day’s close, but at the day’s opening. The gap is not included when the price spread and volume are analyzed to determine whether the days action was predominantly demand, supply, lack of demand or lack of supply. Unless we adhere to that rule we can totally misread the day’s market action.

With that in mind, let’s return to the reaction from point K. Last Friday, there was a gap opening to the down side and the subsequent action resulted in reduced spread and volume as the Wyckoff Wave rallied after the opening. This suggests a lack of demand.

On Monday, the Wyckoff Wave reacted on increased spread and decreased volume. This suggests a lack of demand. As the week went on, we would then expect to see reduced spread and volume as supply dried up when the Wyckoff Wave backed up to the creek. That didn’t happen.

On Tuesday, the Wyckoff Wave had a huge gap opening to the down side. In fact, it was the low for the day. It then rallied during the morning hours and, in the afternoon, reacted back to close near the days lows. Tuesday’s price spread was less than Monday’s, but by only 36 points. While arguments can be made that the day was dominated by supply, I would suggest it was a bit of a Mexican standoff. The real point is that whether or not supply or demand was present, supply was certainly not drying up. Based on that, it is very difficult to call point L a successful backup to the creek.

It appears as though demand was at least the temporary winner as the Wyckoff Wave rallied on both Wednesday and Thursday. So far, the rally has not been overly impressive. Wednesday gave us reduced spread and volume, suggesting a lack of demand. While spread and volume increased on Thursday, and the Wave closed near the top of its price spread, the relative volume was not particularly strong.

If there had been a successful backup and major last point of support, the Wyckoff Wave would have been expected to rally strongly and begin the markup phase. The poor quality of the rally was again demonstrated on Friday when the Wyckoff Wave experienced a gap opening to the down side, reacted to the day’s lows and rallied to close near the gap opening and the highs of the day. The day’s action, which was on reduced spread and volume, can be interpreted as a lack of supply. Again, like on Tuesday, some supply came in the early part of the day and then there was a long slow rally to the close. Therefore, an argument can be made that the day’s action may have been a lack of demand. I would suggest that the inability of the Wyckoff Wave to continue to rally strongly and attempt to return to the short term uptrend channel is a concern.

Notice that the rally to point K was unable to reach the supply line of the short term uptrend channel. If the Wyckoff Wave is unable to rally past point K and return to the short term uptrend channel, the creek jump may be doomed to failure. At the very least, the Wyckoff Wave will need to react back to the creek, this time on reduced spread and volume.

A review of the Trend Barometer shows there is a short-term negative divergence with the highs at point K on the Optimism – Pessimism Index. This suggests that the effort, as shown by O – P is not being matched by the Wyckoff Wave. While a strong rally next week can eliminate this, it is another reason to be a bit concerned. On a more positive note, the Technometer is in a neutral condition and the Force Index is trending upward.

If the Wyckoff Wave is unable to rally past point K and return to the short term uptrend channel, all is not lost for the Bulls. This gives the Wyckoff Wave a chance to once again back up to the creek and this time present a drying up of supply through reduce spread and volume.

The Bears may consider a failed test of point K a signal that the market will react strongly. I would suggest that the worst-case scenario would be a return to and continuation of the trading range. This would create another phase in the figure chart count.

What To Do?

This is a time to watch and let the Wyckoff Wave send us some more definitive signals on its future direction. Both Bulls and Bears should review their stop orders and make sure their trades do not get away from them if the market moves in the wrong direction.

Both the short term and intermediate term trends of the market are still up, but this may change in the coming week.