The stock market, as represented by the Wyckoff Wave, experienced one of its most volatile two weeks since the last bear market. While Wyckoff traders are taught to basically ignore news, the fear investors saw in the United States debt ceiling crisis and European banking issues certainly changed the speed in volatility of the United States stock markets.
As Mr. Robert Evans often said; “News does not change the market’s destination, it just gets if there faster”.
We have seen the market react strongly to what I have marked at point X on the attached chart. It has then rallied off the lows and is now reacting to test those same lows.
I have taken Figure Chart counts from point U over to the highs at point G. Today, the Wyckoff Wave has reach the objective shown in the phases from point U to point Y. There is still potential for the Wave to react to the 25,100 level.
In this week’s review, I have included my daily observations from Wednesday, Thursday and Friday. I have also added my opinions as to the future direction of the markets.
Pulse of the Market Report, Wednesday, August 17, 2011
After an intraday failure to the upside, the Wyckoff Wave traded lower on increased spread and decreased volume. This suggests demand was withdrawn during the day. The day’s action, along with an analysis of the rally from point X, strongly suggest the Wyckoff Wave will react to test the low at point X. This reaction needs to be watched carefully as one of three different scenarios can easily evolve.
1. Point X was a selling climax. This will be confirmed if the Wave successfully tests the lows at X.
2. Point X was preliminary support. This will be confirmed if the Wave penetrates the lows on good strength and volume.
3. Point Y is a major last point of supply and we are beginning a significant markdown phase. This will be confirmed if the Wave penetrates the lows on good strength and volume and continues strongly to the down side.
What to do? As the Wyckoff wave can be expected to react between 1500 and 2000 points, short positions can be taken now. This is also true for intermediate-term traders who are opting for scenario number three. In any event, traits can be close if it appears there will be a successful test of the lows at point X.
Pulse of the Mark Report, Thursday, August 18, 2011
The Wyckoff Wave traded lower on increased volume. It closed in the lower half of a wider spread in a neutral condition relative to the Technometer. The price and volume make a negative statement and suggest good supply is present in the market. At this time, the O – P Index is in harmony with the Wave, but the Force Index is putting in stronger numbers continuing its positive trend.
The Wyckoff Wave is now in the process of testing the lows at point X. Due to the day’s strong decline the success of this test is in doubt. Tomorrow is a critical day. If the market is truly in new markdown phase and point Y was a last point of supply, the Wyckoff Wave should easily penetrate the lows at point X.
If we are seeing a selling climax or even preliminary support, we will see either an attempt to rally or the reaction will continue, but on reduced spread and volume. The key here is to see whether the supply that is very present in the market continues or begins to dry up, giving demand an opportunity to reappear.
I suspect the second scenario is more likely.
Pulse of the Market Report, Friday, August 19, 2011
The Wyckoff Wave experienced an intraday failure to the upside. It closed at the bottom of a sustained trading range on slightly decreased, but relatively high volume. The intraday failure suggests a lack of demand. There is a positive divergence with the O– P Index. However, a reaction on Monday could easily eliminate that divergence and it should not be taken into an analysis at this time. The Technometer is in a neutral condition. The Force Index is receding and slightly stronger than the Wave.
The Wyckoff Wave is now in a position to test the lows at point X. Good supply and the withdrawal of demand has taken the Wave to the test point faster than expected. If the trend continues, the test will either fail or at best be a test of poor quality. The best scenario for the Bulls is to have the Wave rally to give it some space to again react toward the lows at point X.
While I am not changing from my selling climax scenario, it appears now the test will be of poor quality and the selling climax will need to be tested again. However, it is now more possible that we are seeing preliminary support instead of a selling climax.
For the bears, the Wyckoff Wave is in a “needs to go and go now” position. It must react strongly on Monday and drive through the lows on good spread and volume. It will then need to quickly react and test the support line of the new down trend channel.
Where do we go from here?
As the Wyckoff Wave rallied from the lows at point X it approached to resistance points, which and SMI terms can be called the ice. This would make the top of this rally a possible last point of supply. We can also draw a short term down trend channel with the supply line point W and Y and a parallel support line through point X. While this is presently only a short-term down channel, if the Wyckoff Wave drives through the lows next week, it may well become an important intermediate downtrend channel. Regardless, the short term trend for the Wyckoff Wave is down. The intermediate trend is still neutral.
While the Wyckoff Wave showed strong demand in the area at point X, the rally to Y was on decreased spread and volume. This lack of demand was replaced by good supply on Thursday and Friday as the market reacted strongly toward the lows. Unless we see some good demand come in on Monday, it will be difficult for the Wyckoff Wave to successfully test the lows at point X. However, the test still can be of poor quality which simply means it will have to be repeated.
Continued increased spread and volume to the down side also brings in the preliminary support scenario. The Figure Chart count still has potential to the down side and scenario should not be forgotten.
Scenarios for next week
1. The Wyckoff Wave will rally slightly and then react to complete the test of the lows at point X. This will confirm point X was a selling climax.
2. The Wyckoff Wave will react and move into new low ground and then, through an intraday failure to the down side or will simply rally above the lows at point X. This will suggest a test of weak quality that will have to be repeated to confirm the selling climax scenario.
3. The Wyckoff Wave will penetrate the lows on good spread and volume. This will eliminate the selling climax scenario, but keep the preliminary support and rally to the ice scenarios in place. As mentioned above, if we have seen a major last point of supply, the market as measured by the Wyckoff Wave will react in a rather devastating manner.
If we have seen preliminary support, good demand will appear on very high volume in the 25,000 124,500 area.
What to Do?
None of these scenarios call for establishing a long position. Therefore, since the opportunity for short positions was in the area of point Y, stop should be moved to protect any short positions.