While the last two blog posts have discussed the probability of a future reaction, the stock market, as measured by the Wyckoff Wave continues to be positive. Even though the Wyckoff Wave has been in a fairly long sideways trading range, the long-term trend has continued to be up.
In addition, the inability of the Wyckoff Wave to upthrust this trading range, suggests any significant reaction is still in the future. In fact, the next move is expected to be to the upside.
This week’s post will focus on just that and discuss both the Wyckoff Wave and one of its components, Union Pacific.
This week, the Wyckoff Wave reacted off last week’s high at point T and returned to the trading range. It is important to understand that even though the highs at points P, R and T moved the Wave slightly into new high ground, they were not upthrusts. Those characteristics were not present.
The Wyckoff Wave simply tested the resistance at the top of the trading range, found there was not enough demand to continue the rally, and reacted.
This means the Wyckoff Wave is still waiting for ending action and the start of a more significant move. The next opportunity is to the upside.
Except for Wednesday, the Wyckoff Wave reacted on relatively narrow price spread. Volume was moderately high. This suggests that while supply was present, it was not dominating the market.
The Wyckoff Wave has moved into a significantly oversold position relative to its short-term uptrend channel. It is also testing support in the area of point O and the support/resistance line drawn from point B.
If the Wyckoff Wave moves through that support, it will quickly meet additional support at point M and the line drawn from points H through L. Just below that is another significant area of support at point I.
The Wyckoff Wave’s Technometer has spent the week in a dangerously oversold condition. While this condition is mitigated by an extremely weak Force Index, it is difficult for an index or stock to continue to react in the face of an oversold Technometer.
The Wyckoff Wave could simply rally off one of these support areas and continue the trading range or it could react and spring the entire range or, more likely, the phase beginning at point I. For that to happen, the Wave could spring either points M or I.
Regardless, it is important to remember that the Wyckoff Wave is simply moving within a trading range with resistance at point T and support at point E. Until there is ending action, the trading range trend is neutral.
Union Pacific (UNP) has been in a strong up move since the bottom of the 2008 – 2009 bear market. Last November it reached a high of $123.61 and then began to move sideways. It has also became weaker than the Wyckoff Wave.
Resistance and support lines have been drawn from points A and B.
UNP attempted to move into new high ground at point G, but met resistance and reacted back into the trading range. Although UNP reacted back into the trading range and put in a poor close, the wider price spread and reduced volume suggests this was not an upthrust. It appears UNP simply met supply and was unable to leave the trading range to the upside. This was confirmed five days later with a successful test and UNP reacted back into the trading range to point H.
Union Pacific then rallied to point I. This was a poor quality rally and UNP moved into an overbought position on it’s Technometer. This was an excellent place to take a short term position to the downside.
In fact, on March 19th, one day before point I, Todd Butterfield, CEO of the Black Bay Group, who has built a successful Blended Strategy fund using Wyckoff strategies and techniques, put out a Trade Alert to short UNP.
UNP reacted quickly and put in a new low. This changed the short-term trend to down.
The reaction continued and UNP moved below the trading range support areas. Was this a spring for a continued down move within the trading range? Maybe not.
While UNP has a chance to rally on Monday, Thursday’s increase supply and Friday’s relatively weak response suggest UNP could test the October low at point 1. In addition, one should always beware of Springs in a downtrend.
Counts along UNP’s 1 point figure chart give it an objective of between 101 and 95. The low at point 1 is 96.
While UNP’s Technometer is in an extremely oversold condition, the Force Index is exerting a major mitigating impact on the Technometer.
However, the O – P Index is quite interesting. Presently, UNP is in a significant positive inharmonious action when compared with point 1. It is almost a positive divergence. While that does not indicate a turning point, the tremendous effort to the downside, is not being matched by the results.
Both the Wyckoff Wave and Union Pacific are moving within trading ranges. It is quite possible both will experience positive ending actions and begin a new rally.
Short-term, UNP producing nice profits. You will be hearing more from Todd Butterfield in the very near future.