This past week the Wyckoff Wave continued its reaction from point S on the attached weekly vertical line chart. Before rallying, it slightly penetrated the resistance line at the top of the trading range and tested the support line of its long-term up trend channel.
The trading range is defined by a resistance line drawn from point K and the corresponding support line drawn from point L.
Using Robert Evans’ wonderful Creek analogy, the young boy, who jumped the Creek on the move from point P to point S, is now going back to view his accomplishment.
Continuing this analogy, he moved slightly back into the Creek but stayed close to the bank before resuming his journey. In this instance, the Wyckoff Wave has not moved far enough back into the Creek to get caught up in the current and swept back down into the trading range.
If that does happen, the sideways movement of the trading range will continue and we will need to wait for new ending action before the next move can begin.
While this is a possibility, falling back into the trading range is not the scenario with the highest probability of success.
As the Wyckoff Wave penetrated the resistance line, demand came into the market and the Wyckoff Wave rallied. It moved above the resistance and closed the week at the top of its weekly price spread.
While this is a very positive indication, there are additional signs the reaction is not yet complete.
The reaction from the highs at point S has lasted for three weeks. Two of those weeks brought a wide price spread. All three produce relatively high volume. There is a great deal of momentum that needs to be neutralized before the Wyckoff Wave can put in a successful backup and a Last Point of Support.
Think of a boy standing on a balcony with a rubber ball in his hand. He drops the rubber ball and it hits the ground below. As it fell it gained momentum and that helped the ball bounce back up towards the balcony. However, the ball did not have enough momentum to bounce back to the boy, and before reaching the balcony fell back toward the ground. It again tried to bounce back up but much of the men momentum was lost and it didn’t get very far. Then the ball fell back down toward the ground, but was unable to put in a third bounce and the event was over.
This is probably what we can expect from the Wyckoff Wave. We are seeing a bounce off the resistance and if the bullish scenario is correct and we are going to experience a Last Point of Support, we will see a reduction in both price spread and volume.
If the Wyckoff Wave is going to be “swept back into the Creek” the next reaction will bring continued high volume and a wider price spread.
When will this reaction occur? Readers of the daily Pulse of the Market Report know that there are two negative indications that suggest the reaction will happen fairly soon.
The Technometer is in an extremely overbought condition. There is also a significant negative divergence with the Optimism – Pessimism Index (which is a volume index of the Wyckoff Wave).
These two factors will make it difficult for the Wyckoff Wave to rally enough to test the highs at point S. Just like the bouncing ball, it is making some progress to the upside, but probably won’t get back to the balcony.
While the short-term indications are certainly negative the demand that came in during this past week is a significant positive and increases the probability of a successful Last Point of Support.
This week’s rally changed the intra-day trend from down to up to up and the short-term trend from up to neutral.
If the market is going to react, it usually does so quickly and definitively. That would suggest that any strong reaction should happen early next week. If that does not happen even more credibility is added to the bullish scenarios.
Will we be getting a new mark up phase or reacting back into the trading range and continuing the sideways movement? The answers should come in the next week or so.
My money continues to remain with the bulls.