On Thursday, the Wyckoff Wave penetrated the support line drawn from point S and then rallied back into the trading range. This gives us an excellent opportunity to discuss Springs and see how they apply to today’s market action.
The first rule in identifying a spring is that:
A Spring is not a Spring until it has Sprung. That means that just because a stock or index penetrates a support area it is not automatically a spring.
When a stock or index penetrates the support, the Wyckoff student needs to determine whether supply is truly present or if it isn’t there at all. If supply is not there, we are obviously seeing a lack of supply.
This presents an opportunity, but only an opportunity, for demand to come into the stock or the index.
Either demand will appear or it won’t. If it appears, we have a spring. If it doesn’t, there is no spring. A Spring cannot be confirmed until demand appears. Sometimes this happens in one day. Sometimes it can take two or three days.
When a support line is penetrated, one of three things are going to happen.
1. There will be a wide-open break to the downside which indicates the presence of supply. In other words, the stock will “fall through the ice”.
2. Supply will be inconsistent. It will appear, disappear and reappear in a more sporadic manner. In most cases, this leads to a wide-open break to the downside, but the stock or index can also continue a sideways movement.
3. Supply dries up as the support is broken and strong demand comes into the market. This is a spring. However, it is important to remember that a spring is not a spring until we see the appearance of good demand.
How significant are Springs? The answer is most always found in the Point & Figure Chart. If there is a good count from the Spring back to the trading range, the spring is significant. If there is a small count, the spring can be considered minor.
An example of a classic one day spring can be found on the second of the four attached charts. In August, 2011 the Wyckoff Wave went into a trading range at point X. The day before it penetrated the support at point X, the Wave reacted on increased price spread and volume. Supply was present.
On the day of the Spring, the Wyckoff Wave experienced a gap opening to the downside and penetrated the support. However, almost immediately, supply dried up and good demand came into the market. This was a classic Spring.
Sometimes Springs can be a bit messy and take some time to be confirmed. A good example of this is found on the third of the four attached charts.
In March 2012, the Wyckoff Wave completed its long rally to point A and began a trading range that is still in effect. The Wave then reacted to point F, which allowed us to establish an area of support.
Two months later, in May, the Wyckoff Wave penetrated the support to point J. This appeared to be a Spring. The day before the low at point J was on wide price spread and increased volume. Supply was present. However, the next day brought reduced spread and slightly reduced volume. This suggested a withdrawal of supply and also that some demand had come into the market.
If supply had dried up, the following day would have brought wide price spread and increased volume. Instead, there was wider price spread, volume was reduced. This showed that while supply had somewhat dried up, good demand was not coming into the market. This placed the Spring in jeopardy.
That concept was confirmed as the Wyckoff Wave could only rally to point K and then reacted sharply down to point L.
On this reaction the Wyckoff Wave penetrated the support on increased spread and volume. Supply was present. The following day brought increased price spread, but decreased volume. This suggested the presence of demand and that, at least temporarily, supply was being taken in.
On the day marked point L we saw increased price spread and decreased volume. This suggested a lack of demand. While supply has been withdrawn, no strong demand has come in to drive the Wyckoff Wave higher.
The day following point L was on reduced price spread and volume. Again we had a lack of demand. While supply had apparently been withdrawn, no demand had come in to fill the vacuum. This left the Wyckoff Wave vulnerable to a continued reaction to the downside.
So far, we have seen the withdrawal of supply, but it has not been replaced by good demand.
Demand did arrive at the last minute. The Wyckoff Wave rallied on good spread and increased volume and closed at the support line. It then rallied up to point M and reacted back to point N for a successful test of the spring.
While point L was a spring, it was not confirmed until two days after the low when demand came into the market. While this was a Spring, it was a bit uninspired.
This also showed a relative lack of strength, which was confirmed when the Wyckoff Wave was only able to rally back into the trading range and continued its sideways movement.
Finally, let’s return to today’s market. The day before the potential spring at point U, the Wyckoff Wave reacted sharply on wide price spread and increased volume. Supply was definitely present.
The following day, the Wyckoff Wave penetrated the support at point U. It did so on decreased price spread and increased volume. This suggests the presence of demand.
A review of the intra-day waves showed that supply dried up during the morning hours and was then replaced by decent demand. Because the Wyckoff Wave was unable to continue to react, we can once again conclude that the available supply was being taken in and drying up.
However, we still needed strong demand to come into the market. Friday gave us slightly increased price spread and decreased volume. This would suggest a lack of supply. Strong demand did not come into the market. So far, all the requirements of the spring scenario have not been fulfilled. The spring cannot be confirmed until we see good demand.
Even if the spring is confirmed, it must be considered a minor Spring. The attached Point & Figure chart only gives us a 600 point count with an objective of 33,600. While this count can be increased in the future with a successful secondary test and/or a Last Point of Support, right now the count is 600 points.
Will this Spring be Sprung? We’ll probably find out on Monday.