Does A Minor Downturn Lie Ahead?

Click Here For Wyckoff Wave Chart 05-24-2013

This past week the Wyckoff Wave gained a total of 207 points or one half of 1% of its value. This would seem to make the last five trading days rather unimportant, but we may have seen a bit of a change in character.

Let’s start with the Wave’s weekly chart. Five weeks ago, the Wyckoff Wave began to rally from point J. An analysis of the weekly price spread and volume suggests the rally was not of particularly good quality. Weeks one and two suggested a lack of demand. On week three the Wyckoff Wave tried to leave the intermediate-term uptrend channel (drawn in blue) to the upside. It did so, but barely, on reduced spread and increased volume. This suggested the presence of supply.

The Wyckoff Wave finally gained a fair amount of ground during week four. While some demand was indeed present, the volume was slightly reduced. This suggested a lack of supply.

The Wyckoff Wave had left the intermediate-term uptrend channel and was about to test the supply line of the long-term up trend channel. This is where supply would be expected to appear. Unless the Wyckoff Wave was able to drive through the supply line on wide spread and increased volume, there was a good probability it would react back into the trend channel.

So far, the move from point J has not been particularly impressive. This made this past week’s market action fairly important.

As you can see on the attached weekly chart, things didn’t work out well for the bulls. The price spread decreased noticeably and volume remained relatively high. This is an indication of supply coming into the market at just the wrong place.

A look at the daily chart shows that on Wednesday (point I) the Wyckoff Wave made an attempt to rally. Strong demand came in during the morning, but when the Wave reached the supply line of the long-term uptrend channel, even stronger supply drove it back to close near the bottom of a wider price spread.

The wide price spread indicated point I was not an upthrust. Instead, the Wyckoff Wave was simply encountering supply at an expected location.

The next two days were interesting as each had a strong gap opening to the downside. This resulted in two poor quality intra-day rallies. Thursday and Friday’s reduced price spread and volume indicated a lack of demand.

This suggests the Wyckoff Wave is attempting to rally simply to test the highs at point I. If the test is successful, the Wyckoff Wave should begin to react.

The real question is, how far will the reaction go and how long will it last? Before addressing that, let’s step back and take a longer look at the market.

The Optimism – Pessimism Index is a key indicator in determining the market’s direction and, relative strength. Presently, it is in harmony with, but stronger than the Wyckoff Wave. As the Optimism – Pessimism Index often leads the Wyckoff Wave during
bull markets, this is an indication of relative strength.

The Technometer has been in and overbought condition since point G. In itself, this would suggest the Wyckoff Wave would be reacting rather than rallying.

This would be true if not for the extremely strong Force Index. When the Force Index puts in mildly negative or positive readings, there is a significant mitigating impact on any anticipated reactions indicated by the Technometer. The Force Index has put in an extremely high readings and this is telling the Wyckoff student that it will be difficult for the market to put in a decent reaction..

While the Force Index is declining, the positive numbers are still having an impact on the Technometer’s overbought condition.

Finally, there is a maximum count of 1,300  along the 37,000 line on the 100 Point & Figure chart. While the count is in three phases, there are maximum objectives of between 36,200 & 35,700. This takes the Wyckoff Wave back to the areas of the resistance/support lines drawn from point H and point B.

Reactions to these levels would be considered normal corrective reactions to Last Points of Support. If successful, this would prepare the Wyckoff Wave for another strong move to the upside.

It appears that the Wyckoff Wave is quite vulnerable to react. If it does, the reaction should simply return the Wyckoff Wave to its intermediate-term uptrend channel. If we see reduced price spread and volume we can expect a rather significant Last Point of Support.