Fall thru the Ice?

Click Here For Wyckoff Wave Chart 08-19-11

When my last post appeared, the Wyckoff Wave had reached a high at point G and was in an oversold position relative to the long-term up trend channel. It was also in an oversold condition relative to the Technometer.

The Wave reacted to point H and then rallied weakly to point I. In addition, the O– P Index moved into new high ground creating a negative divergence. We should immediately draw a short-term down trend channel. The supply line is drawn through points G and I. A parallel support line is drawn through point M. While there are warning signs and the short term trend has turned down, the Wyckoff Wave has several areas of support that could stop this, so far minor, corrective move.

The most important of these is the Creek, drawn through points A and C. The Wave has already backed up to this once and this could be a reasonable support area as the Wyckoff Wave enters a new trading range before its next move. However, more negative signs were quietly showing themselves.

Because the rally from point H point I put in a lower top, we can draw the supply line of the short term down trend channel through point G and I. The parallel support line is drawn through point H. The Wyckoff Wave weakened the support line at point J and L

The rally to point M did not bring out good demand and was stopped at the supply line. The next day, strong supply came into the market and the Wyckoff Wave reacted back to the demand line of the short term downtrend channel, weakened it and for about two weeks, remained in and over sold condition relative to the down trend channel.

The good news for the Bulls was the dangerously oversold condition of the Technometer. While it was somewhat mitigated by the strong downward pressure of the Force Index, it did indicate we should expect a rally. This was a critical juncture for the Bulls. They needed to see good demand and, at least, a good test of the highs at point G. There was also a minor positive divergence on the O – P Index at points N and P. However, remember that strong down side force at the bottom of a reaction suggests the following rally will not be terrific.

The Wyckoff Wave then rallied to point S. It did so on reasonable strength and volume. As it dramatically weakened the existing down trend channel, we can now draw a new short-term up trend channel with the support line through point B and R and a parallel supply line through point Q.

The O – P Index rallied nicely, but the Wave became dangerously overbought as it reached point S. The overbought condition, relative to the Technometer and position and relative to the new up trend channel suggested the Wyckoff Wave was going to have a difficult time reaching the new resistance established by point G.

Because point S was lower than point G and the Wyckoff Wave had been moving sideways for a little over two months, we now can draw an intermediate term down trend channel. The supply line is drawn through point G and S. The parallel support line is drawn through point P. This is a significant change in character and there is an exceedingly high probability the next move will be to the down side.

However, the Wyckoff Wave made one last attempt to continue its sideways movement, It experienced a long slow reaction to the old Creek top at point T. The Wave moved into an overbought position relative to the short term uptrend, but its condition relative to the Technometer remains neutral. The Wyckoff Wave now needed to rally strongly and we can the new intermediate term down trend channel. This didn’t happen.

The Wave was unable to reach the supply line of the short term uptrend channel and happily tested the supply line of the intermediate term downtrend at point U. Note the Force Index. Negative force started to appear. The Wyckoff Wave was signaling that it was going to react, at least to test the supply line of the intermediate down trend channel. This was also in the area of support created by the low at point P.

Let’s look at the Point and Figure Chart. If we take a count from point U back to point G on the 30,500 line, we see there are 4 phases. They are: point U to point S, point S to point M, point M the point capital I and point I to point G. This gives us a maximum objective of between 25,100 24,500. Of course, the Wyckoff Wave can react to and see support at any one of the phases.

The Wyckoff Wave then moved sharply to the down side. On increasing spread and volume it moved quickly through the old Creek and penetrated the final areas of support at point P and point B. This strong reaction was certainly helped along by the debt crisis news out of Washington. However, it is important to remember an old Wyckoff adage. News doesn’t drive the market, it just gets it there sooner. The seeds for this reaction were sown long before the debt crisis news hit the front page.

The Wyckoff Wave reacted strongly on extremely high spread and volume to point X at the 25,033 level. Is this a selling climax (the Wyckoff Wave has reached the objective from points U to I)? Are we seeing preliminary support (there is more objective to the down side) or are we seeing a fall through the ice and a new and even more important last point of supply that could signify a major bear market?

The Wyckoff Wave is in an oversold position relative to both the old short term downtrend (it’s important not to give up on those downtrend channels) and the intermediate term down trend channel. However, it has reached a nearly overbought condition on the Technometer. It is also approaching an important support turned resistance line drawn through point B. We are most probably coming to the end of the latest rally. If point X is a selling climax or preliminary support, this may be an automatic rally. The key will be the coming reaction. We are probably at the end of the rally and the reaction needs to be on reduced spread and volume to confirm the end of the downtrend and that point X was indeed a selling climax.

This, at least for me, was not an easy area of distribution to diagnose. I was fairly comfortable we were in a sideways trading range that would result in a stepping stone count until I had to draw the intermediate down trend channel at point S. That is when I started taking my counts to the down side. In hindsight, I also realized that, throughout this period, the down moves were long and persistent, while the up moves were short and could never really work up a good head of steam. The personality of the Wyckoff Wave had changed from the persistent up we saw during the bull market to a more persistent down. It is not a quantitative observation, but a lesson I will not forget.