This past week the Wyckoff Wave basically moved sideways, but closed at a slightly higher level.
Despite the modest gain, the week was more negative than positive. On Tuesday at point X-1, the Wyckoff Wave tested the previous high at point X. On Thursday, at point X-2, the Wave tested Tuesday’s high
Both times, supply came into the market and the Wyckoff Wave closed near the bottom of its price spread. This indicates there is overhanging supply at the 43,500 level.
Let’s analyze the tests. Tuesday’s wide gap opening to the upside caused the Wyckoff Wave to put in a higher price than it did at point X. This is a poor quality test which, in most cases, needs to be repeated.
That’s what happened on Thursday. This time the high at point X-2 was lower than the high at X-1. This indicates the test was successful and the Wyckoff Wave can now react deeper into the trading range. With one small adjustment, this also leaves the Spring scenarios, discussed last week, in place.
When the Wyckoff Wave rallied off the low at point W, it moved into an extremely overbought Technometer and a negative inharmonious actions with the Optimism – Pessimism Index.
The Wyckoff Wave did not react, but instead moved sideways. This created one more phase in this long, seemingly never-ending, trading range. This was probably helped by the extremely strong Force Index.
Therefore, if the Wyckoff Wave reacts and test the low at point W, this support area could produce a Spring. This means Wyckoff Wave would not have to reach point K and I for a successful Spring scenario.
That does not mean the Wyckoff Wave is expected to put in a Spring. It is simply one scenario that needs to be closely watched.
On Tuesday, at point X-1, the Wyckoff Wave moved past point X for the poor quality test. The move was strictly on a gap opening to the upside, which became the high for the trading day.
Gap openings are tricky. When doing market analysis, Wyckoff students should consider at both price spread and volume. Mr. Wyckoff’s primary contribution to market studies was volume analysis. He borrowed some of his price spread concepts from his good friend Charles Dow. Until Mr. Wyckoff began his studies, volume was not considered a particularly significant indicator.
In my opinion, volume analysis is slightly more important than price spread. Each of the Wyckoff tools, the O – P Index, Technometer and Force Index are all based on volume.
Gap openings are based on pre-market emotions, not supply and demand. Because information is so readily available, gap openings are more common than they were 30 or 40 years ago.
Because of this, both Craig Schroeder and I eliminated gap openings from our market analysis.
I find it is much more important to watch the days price spread and volume unfold after the gap opening, then to let the gap itself dominate my thinking.
In most cases, as preached by Mr. Robert Evans, gap openings are usually filled back in. That means a subsequent rally or reaction will take a stock or index back to where it was prior to the gap.
That was the case on Tuesday as the Wyckoff Wave met supply and reacted to its poor close. The meeting of supply, as shown on both the daily and intra-day charts, was the most important concept of the day. By the time the market closed, the strong gap opening to the upside was negated and forgotten.
The only times that this does not happen is when an index or stock begins a strong move in either direction. When that happens, after the gap opening, depending on the direction, there will be continued demand or supply. That will be presented as increased price spread and volume. This can be found on both the daily and intra-day charts.
However, that happens on less than 5% of all gap openings. The Wyckoff student usually has indications that a strong move will take place and test already taken positions.
This week’s market action is a classic example of what usually happens when there is a gap opening in the market. It’s not the gap opening, but what immediately follows, that is important.