Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review September 9,, 2016
This past week, the Wyckoff Wave attempted to rally on a noticeable lack of demand. The rally was from point I to point J. Notice that point J was lower than the previous high at point H. In addition, the low at point I was lower than point G. This drifting sideways movement, with a downside bias, was a result of little demand coming into the market. This made the Wyckoff Wave extremely vulnerable to a good dose of supply.
That happened on Friday. The Wyckoff Wave reacted sharply on wide spread and high volume. It is now ready to test the earlier lows at points D and Z.
This confirmed the reaction back into the trading range scenario. Friday’s market action also changed the short-term trend from neutral to down. A new short-term trend channel has been drawn on the attached vertical line charts.
In addition, the resistance line forming the top of the trading range, that began in August 2015, has been adjusted to include the high at point E.
Finally, two tentative support lines have been drawn from points D and Z. As the Wyckoff Wave is expected to test at least one of these support areas, it will be especially important to watch the price spread and volume during the coming week.
To attempt to determine the Wyckoff Wave’s future direction and how this extended trading range will end, it is helpful to look at a longer-term view of the market.
First, let’s explore the phases that make up this long trading range. At this point, there is a phase from Friday’s market action over to point Z. A second phase extends from point Z back to point G. The third phase is from point G to point U. The fourth phase is from point U to point Q.
While the second, third and fourth phases are established, future market action will confirm or extend phase number one.
These phases and their support points are important in determining the future trend of the market. While the short-term trend is down, the market action since the sideways movement in the area around point E has been relatively dull. With the exception of Friday’s market action, neither demand or supply has been present in a strong or sustained manner.
After the August, 2015 Selling Climax, the Wyckoff Wave has held above that low. For the most part, it is also put in higher tops and higher bottoms. In addition, with the exception of the move from point M to point V, market action is the relatively dull. These are all signs of accumulation and unless there is a change in character, ending action and an intermediate term move to the upside has the highest probability of success.
That’s why it’s important to pay attention to these support areas. The Wyckoff Wave does not have to react all the way down to the area around point M to go through ending action. It can Spring the areas of support that make up the phases described above.
That means, the Wyckoff Wave could react through points D and Z. If strong demand comes into the market and the Spring is successfully tested, we could have the beginning of a new intermediate term trend to the upside. The first objective would be the count taken from the Spring and it’s Secondary Test over to point Z. A second count could be taken from the Last Point of Support. If those counts are achieved, the remaining phases of the trading range can come into play when determining final upside objectives..
There is also a possibility that the Wyckoff Wave could react through these support areas and continue towards the bottom of the trading range. If that happens, the next important support area is at points M and G.
For this to happen, the Wyckoff Wave would need to react strongly through the support at points D and Z. This would be on a follow-through to Friday’s supply and be on wide spread and high volume.
As the Wyckoff Wave’s Technometer is already in an oversold condition and, it will be difficult to duplicate Friday’s wide price spread and high volume, this scenario has a lower probability of success.
The Wyckoff Wave could also simply rally off the support and continue this trading range phase.
Finally, if the Wyckoff Wave reacts below the support at points D and Z and demand is not come into the market, the Wyckoff Wave could simply be putting in a new a new and lower support point in the developing phase of the trading range.
It is extremely important to remember that just because an index or stock moves below a support area, it is not a Spring unless strong demand comes into the market resulting in a direction reversal and noticeable move to the upside.
While these are the possible scenarios, the Wyckoff Wave will give us the answer. Our job is to identify the market action, decide which scenario is being played out and, based on our investment objectives take it vantage of some, possibly exciting, market moves.