The Wyckoff Wave rang in the new year with a strong move to the downside. The long-awaited, reaction back into the trading range, scenario finally happened. The Wyckoff Wave has reacted through the support areas of the sideways movement that began at point W on the daily chart.
It did so on increasing price spread and volume.
The Wyckoff Wave also reacted through its short-term uptrend channel. This caused the short-term trend change from up to neutral. It is testing the supply line of the intermediate-term downtrend channel.
This reaction gives the Wyckoff Wave an opportunity to put in an important support point in the developing trading range. It would be expected that this point would be in the area of point U or even the Selling Climax at point Q.
The big question is, is that scenario correct? Or, will the Wyckoff Wave react through point Q and put in an extended move to the downside?
While the relatively high price spread and volume suggest that the Wyckoff Wave still has some room to the downside, the internals are suggesting we are closer to the end then to the beginning.
The Optimism – Pessimism Index is in a short-term positive divergence with the Wyckoff Wave, when Friday’s close is compared with points C, A and Y. The Wyckoff Wave is noticeably lower than those points. However, the O – P Index is holding above those points. This indicates that there is not a great deal of effort (volume) to the downside as would normally be expected in a significant reaction.
If the market was going to put in a strong reaction, the O – P Index should be leading the Wyckoff Wave, not following.
On Friday, the Technometer closed in a low neutral condition. On Monday, it will open in an oversold condition. While the Technometer may become oversold before a turning point, it is difficult for the Wyckoff Wave to continue a decline in the face of an oversold Technometer.
The Force Index is reacting and putting in a low to moderate negative readings. These negative readings are not strong enough to have a mitigating impact on an oversold Technometer.
An analysis of this week’s intra-day waves showed that on the three days last week, there were wide gap openings to the downside. In fact, on those days, much of the loss was in the gap opening. While the Wyckoff Wave certainly did react, the strong intra-day supply, that would be expected, did not appear.
However, the intra-day analysis also indicated a noticeable lack of demand. Until some good demand comes into the market, the Wyckoff Wave is expected to continue its reaction.
Finally, it’s always nice to see bad news during a reaction. As a bit of a contrarian, it often seems that bad news is a great way to convince weak holders to liquidate their positions. This allows movement of stock in the stronger hands. Those strong hands (profrssionals) would not be buying a stock unless they felt they were opportunities to the upside.
That is why Wyckoff teaches that students should not pay attention to the news when making buying and selling decisions in the stock market.
If this analysis is correct and the Wyckoff Wave meets that support, what happens next. For some answers, let’s review the Wyckoff Wave’s weekly chart.
The Selling climax is shown as point L on the weekly chart. The Automatic Rally was to point M. The Secondary Test was made at point N. The Wyckoff Wave then began to search out resistance and support points that will define the developing trading range. It found its initial resistance point in the area of point O. It is now reacting and searching for an area of support.
Once both the areas of both resistance and support are defined, the Wyckoff Wave is expected to move sideways until there is ending action. That will complete the trading range. Then, the Wyckoff Wave would be expected to begin a significant rally or react. So far, the trading range appears to be accumulation, not distribution.
It will also be important for the Wyckoff Wave to weaken and then break the intermediate-term downtrend channel, which is shown in red on the weekly chart. This will not happen immediately. It would not be bullish if there was ending action in a down trend channel..
While short-term traders can enjoy trading the trading range, longer term bulls should be content to hold, or on rallies, slightly adjust their positions and wait for the next move to the upside.
While we may have to wait for a while, it is quite possible the stock market has one more strong move to the upside.