This past week the stock market, as measured by the Wyckoff Wave continued its reaction back towards the top of the trading range. The top is marked by a support/resistance lime drawn from point J through points U and A.
This was a resistance line that marked the top of the trading range. It is now a support line as the Wyckoff Wave reacts and tests the top of the trading range.
Until Friday, the Wyckoff Wave was reacting on reasonable price spread and fairly high volume. This, in itself, is an indication that supply continues to be present in the market.
A successful test of the top of the trading range or an important Last Point of Support is identified by decreased price spread and volume. Therefore, as of Friday morning, it appeared the reaction would continue.
Unfortunately, in the stock market, nothing is easy. Instead of continuing to react, the stock market rallied. The S&P 500 gained 20 points and the Dow rose by almost 199 points. The news was full of positive reports about reduced unemployment and possible growth in the GDP. Since, according to the media, this news could have an impact on the Federal Reserve’s actions, it was trumpeted that the market was beginning to ignore this and, instead, focusing on increased corporate profits.
While this made for great headlines, let’s look a little closer at what actually happened.
Even though I am a bit of a political junkie, as a Wyckoff purist, I only focus on price spread, volume and their relationship when analyzing the market. So, when I looked at Friday’s market action, it didn’t quite measure up to the media’s gleeful predictions.
First of all, much of Friday’s advance was in the gap opening to the upside. As no volume is involved, and a gap opening is more emotional than quantitative, it is not included as part of Wyckoff market analysis.
With that in mind, Friday’s price spread was a mere eight points more than Thursday’s already narrow spread. Volume, while relatively high, was slightly reduced. Increased price spread and reduced volume suggests a lack of supply. However, a review of the intra–day waves suggests Friday was more of a lack of demand or even a supply dominated day.
After the wide gap opening, which was 50% of the difference between Thursday’s and Friday’s closing prices, the Wyckoff Wave struggled to continue the advance. The gap opening is between the two horizontal red lines on the intra-day chart.
The Wyckoff Wave then continued to advance, but demand was gradually withdrawn and supply returned towards the end of the trading day. If the advance continues on Monday, the Wyckoff Wave will be testing the supply line of the intra-day down trend channel.
In most cases, after a successful Last Point of Support the a stock or market index advances strongly on wide spread, good volume and a strong close. So far, this hasn’t happened.
Friday’s rally also had an impact on the relationship between the Wyckoff Wave and the Optimism – Pessimism Index. The O – P Index is an index of Wyckoff Wave volume and represents effort. The Wyckoff Wave represents results. When these are not in harmony, there is the potential for a change in market direction.
As of Friday’s close, the O – P Index above point D, while the Wyckoff Wave remained below point D. This is a negative divergence and shows that despite the effort made to move the Wyckoff Wave higher, the results did not match the effort.
Again, this is not typical of a rally off a Last Point of Support, as in these situations, the O – P Index usually leads the Wyckoff Wave.
What about the Technometer? This past Monday, the Technometer moved into an oversold condition. The Force Index was producing reasonably high negative numbers. This would suggest the Wyckoff Wave was vulnerable to rally and this oversold condition would not be mitigated by a strong Force Index.
Instead, the Wyckoff Wave continued to react and put into consecutive down days on reasonably wide price spread and good volume. The Technometer remained in an oversold condition throughout the week. While it is not uncommon for the Technometer to indicate a change in direction a few days before the event, the continued reaction, coupled with a rising Technometer is not normal.
The Technometer is an excellent Wyckoff tools and does a terrific job of identifying changes in direction. However, it is not a mechanical indicator and must be analyzed in concert with the rest of the market indicators.
Wyckoff is a study of price, volume and the relationship between the two. Wyckoff’s primary contribution was in the area of volume. He was the first to use volume in market analysis. When I am in doubt, I always look to the volume for answers.
In this case, the Wyckoff Wave has reacted on relatively high volume. Even though the daily volume decreased as the week progressed it is still high and certainly not that of an index or stock approaching a Last Point of Support.
While the indicators can argue both scenarios, the high daily volume and Friday’s poor follow through after the gap opening both suggest we still have a ways to go to the downside.
Monday is a critical day. If I am wrong, the message will be delivered early Monday morning.
If I am right, the Wyckoff Wave will successfully test the support line of its short-term uptrend channel and the reaction will continue.