Did We Spring The Trading Range?

Click Here For Wyckoff Wave Chart 03-09-12

For the last six weeks the Wyckoff Wave has confined its price movement to a relatively narrow trading range. It has been a frustrating period as the Wave, and the stock market in general, simply seems content to move sideways without effort or enthusiasm.

While this is difficult for intermediate and long-term investors, it is driving short-term and swing traders crazy. They have had no good opportunity to enter the market and take either a long or a short position.

Then, last Tuesday, at point Z, the Wyckoff Wave penetrated the trading range on good spread and volume. It appeared that something was about to happen. Would we see the long-awaited spring of the trading range, or was the Wave going to break out to the down side in a fall through the ice?

If we were seeing a spring, then the next day good demand would come into the market. Short-term positions to the upside could be taken and intermediate term investors could begin to either identify good prospects or even add to existing positions.

If we were seeing a fall through the ice, short-term traders could look for opportunities to the down side on a rally back to the ice (support/resistance line drawn from V). There was enough count on the 100 Point & Figure chart to take the Wyckoff Wave back down to the 29,400 level. That is in the area of the support/resistance line drawn from point K.

If we had seen reduced spread and volume, indicative of a drying up of supply, the bottom of this reaction could become an important Last Point of Support (LPS).

In other words after a long quiet stretch, perhaps the market was beginning to move and new trading opportunities would abound. So what happened?

On the day following point Z, supply did not commit and the Wyckoff Wave did not break out of the trading range or fall through the ice. Instead it rallied. So, was this a spring?

The reason a spring is called a spring is because after penetrating the bottom of a trading range it acts like a spring and bounces up. In the stock market, the way things bounce up is for demand to strongly enter the market. We saw a classic example of this at point H. This was the spring at the end of the initial trading range. As you can see on the attached chart, the Wyckoff Wave opened lower (right at the bottom of the trading range), reacted some more and then look what happened. Demand came in and the Wyckoff Wave rallied strongly and closed at the top of a wider price spread.

This was a classic spring and many Wyckoff traders jumped all over this and went long during the trading day. Many of them are still holding on to those positions.

So, how does that wonderful spring compare to this week’s action at point Z? Well, the next day’s rally was on reduced spread and slightly increased volume. That is certainly not the definition of demand and, in addition, suggests that some supply was present.

The next day was even worse. The price spread was narrower and volume substantially decreased. This is indicative of a lack of demand. There was no bounce in the spring.

Finally on Friday, the Wyckoff Wave experienced an intraday failure to the upside. It closed near the bottom of a reduced price spread on slightly increased volume. Again, this suggests some supply was present. After three days, the expected demand had not appeared.

In light all this, can we honestly call the action at point Z a spring? I don’t think so. The two characteristics of a spring are penetration of the support line and bouncing up on good demand. Patently, the second characteristic has not been present. This would suggest that the Wyckoff Wave is not ready to rally and will, most probably, continue in the trading range with point Z merely establishing a new phase.

However, nothing is easy in this market. On Friday the Technometer reading was 38.66. This number suggests a seriously oversold condition. In addition, the Optimism – Pessimism index has reacted and is now weaker than the Wyckoff Wave. This has created a positive short term divergence with points Z and X. These are positive indications.

The other Wyckoff indicator, the Force Index, is at its lowest level since late November, 2011. This would suggest that any rally would be difficult to sustain. This is not a positive indication.

While the Technometer and Force Index are excellent tools, they are not mechanical indicators and should never take the place of the price and volume analysis we have all learned as Wyckoff students. It is a major mistake to look at an oversold condition on the Technometer and, with only that indication, automatically expect a strong rally.

So, where do we go from here? It would appear to me that the Wyckoff Wave seems to be content to continue in the trading range. While it can certainly attempt to continue its rally towards the top of the trading range, the presence of supply and the negative Force Index suggests it will be difficult for the Wyckoff Wave to breakout to the upside.

There is a possibility that the Wave can react again and spring the trading range. However, the oversold condition of the Technometer would seem to make it difficult for this to happen.

The next question is are we in a period of accumulation or is this trading range distribution? While the actual answer will come with the ending action, signs point to accumulation. Accumulation is most often a quiet, dull time. Price spreads are narrower and relative volume tends to get smaller. Therefore, I would expect that ending action, for this trading range, will come in the form of a spring or breakout to the upside.

In the meantime, this is a great opportunity to identify new candidates and be prepared to act when the time is finally right.