The stock market spends most of its time in situations that are not always conducive to taking new positions. Trading ranges are one example of this phenomena.
Wyckoff students know that one important function of the trading range is to build a cause. This will result in effect as the symbol either rallies or reacts.
Therefore, when market action signals the end of the trading range, it is an excellent place to take new positions to either the upside or downside. What happens is known in Wyckoff terminology as ending action.
Ending action can come in the form of a spring or and upthrust. It can also be confirmed by a secondary test of a #1 or #2 spring. #3 springs and upthrust do not require a secondary test. These events send a signal that the trading range has completed its mission and the associated symbol is ready to move.
We may well have seen ending action, in the form of an upthrust, on Friday. The Wyckoff Wave had been moving sideways for a couple of weeks. Both intra-day and short-term trading ranges have been established and were drawn on the intra-day and daily charts. The market action was reasonably dull.
Then, on Friday, the Wyckoff Wave attempted to break out of the trading ranges to the upside. There was good demand during the morning, but right around noon time the demand was withdrawn and strong supply came into the market. The strong supply pushed the Wyckoff Wave back down into the trading range and this resulted in a poor close for the day. This was done on noticeably higher volume. Friday’s market action had the characteristics of an upthrust.
While it is more difficult to see on the weekly chart, I have drawn both the resistance and support lines in red.
It is important to note that this is a short term event. The intermediate and long-term trends of the market are both up and, as shown on the weekly chart the Wyckoff Wave penetrated the supply line of the long-term trend at point S and, on Friday, retested the supply line at point U.
Therefore, it is reasonable to conclude that while we may see a reaction, it is a short term event and nothing has happened that would put the intermediate and long-term trends of the market in jeopardy.
It is also important to note that the rally to point U was unable to move past point S into new high ground.
What can happen after an upthrust? There are several possibilities and Wyckoff students should watch the market carefully during the coming week.
1. The Wyckoff Wave can react sharply and penetrate the support at the bottom of the short-term trading range. If it does so on increased price spread and volume, we could be seeing a Sign of Weakness. Also known as a “fall through the ice”, it will be followed by a poor quality rally back to the area below the trading range’s support line. This rally is usually quite brief and results in a Lack of Supply.
2. Not all up thrusts result in a Sign of Weakness. The Wyckoff Wave could simply react and test the trading range’s support line. If it holds at or above the support line, this cancels out the upthrust and the trading range will continue until another attempt at ending action is made.
3. Over the years I have noticed that many times a spring is preceded by an upthrust. The Wyckoff Wave could penetrate trading range’s support line and experienced either a #1 or #2 spring. In most cases, when this happens there is a #2 spring. Therefore, if the Wyckoff Wave penetrates the support line, the Wyckoff traders should pay careful attention to good demand coming into the market. If we are seeing a “fall through the ice” there will be no demand present.
While all three can happen, scenario number one usually has the highest probability of success. If this is the case, how far can the Wyckoff Wave react?
Presently, the count on the 100 Point & Figure chart, from the top of the upthrust over to the beginning of the trading range, is a 1,200 points. Taken from the 40,400 level, this gives the Wyckoff Wave a downside objective of 39,200.
This would take the Wyckoff Wave down to test the support line of the intermediate term up trend channel (drawn in purple). If there is a drying up of supply, we would see a successful test of point T, which would prepare the Wyckoff Wave for its next move to the upside.
If the Wyckoff Wave fall through the ice and rallies to a Last Point of Support, a new count can be taken. This would give the Wyckoff Wave a larger downside objective.
If this happens, there is still plenty of room for a positive scenario. The Wyckoff Wave could complete a successful backup to the Creek (line drawn from point O) and a successful test of point T.
Regardless, it appears trading range is coming to an end and the coming week will bring some definitive answers to the market’s future direction.