On Friday the stock market, as measured by the Wyckoff Wave, put in a strong day to the downside. This was the kind of day that certainly gets one’s attention.
The down day came at an excellent time for the bears, as the Wyckoff Wave rallied to the bottom of an old support (now resistance) line and reacted sharply.
It is certainly reasonable to call the reaction from points D to E a Sign of Weakness. This would make the rally back to point F a rally to a Last Point of Supply.
If we take a count from point F over to point D (Phase 1 of a count that could go all the way to point X), we have an objective of 30,700. That is also in the objective area of the original count along the 32,600 level that is marked on the figure chart. I did not place the Phase 1 count on the figure chart. I just included the maximum objectives. I will leave it to you to compute the initial phases.
The important point is that the first phase of the count along the 31,900 line equals the total count made along the 32,600 line. This is because both those objectives are in the area of two, very significant, support areas.
The most important of the two is the bottom of the original trading range that began back in January, 2012 (line drawn from point F). The other support area is the June shakeout of the trading range. That is marked by the support line drawn from point L.
If we are going to see a significant move to the downside, these important support areas will have to be taken out.
We are now able to draw a second, and probably more significant, short term down trend channel. The supply line is drawn from point D, through point F. The parallel support line is drawn from point E. It will be important to watch how the Wyckoff Wave respects support line E as it reacts.
I would suggest that while point F is certainly a valid Last Point of Supply, it needs to be viewed from a short-term perspective. In addition to the above Point & Figure Chart objectives, it is also important to look at the market action beginning at point X. The reaction to point A was on reduced spread, but slightly increased relative volume. While it appeared to be a normal backup to the Creek (resistance/support line S), the relatively high volume probably signaled that problems lay ahead.
We then saw a weak rally to point B and another reaction to point C. This reaction slowed as the Wave reached the support line drawn through S, U and V. After one strong down day, once again the spread was reduced.
While the rally to point B predicated the sharp decline to point E, the move from points X to D did not resemble distribution, but continued to look more like accumulation..
The Wyckoff Wave simply fell back into the trading range. This is not an uncommon occurrence when and index or stock backs up to the Creek and is then unable to rally. This scenario adds an additional phase to the trading range and leaves us waiting for ending action.
It is quite possible that this ending action could come in the form of a spring as the Wyckoff Wave reacts to test the bottom of the January trading range.
A review of the Wyckoff Wave stocks adds credence to this scenario.
First, let’s look at the trends. Of the 12 Wyckoff Wave stocks, nine are in long-term trends. The other three are neutral. 10 stocks that make up the Wave are in the intermediate term neutral trend. Two are in an intermediate up trend.
The short term trends are most interesting. While five stocks are in a short term down trend, five others are neutral and 2 are in a short-term up trend. The fact that five stocks are short-term neutral, while the short term trend of the Wyckoff Wave is down, is a positive indication.
It is also helpful to compare relative strength and weakness. Presently, five Wyckoff Wave stocks are stronger than the wave. Four are weaker and three are the same.
There are no leading stocks that are moving to the downside. Conversely, two stocks that have led the Wyckoff Wave (IBM and WMT) both are in long-term uptrends, neutral intermediate trends and short-term down trends.
There is nothing in this analysis that suggests a possible intermediate-term move to the downside.
On a short-term basis, the Wyckoff Wave’s Technometer is in a low neutral condition and will become quickly oversold if the Wave continues to react. There is also a positive divergence with the O – P Index, when compared to point W.
The Wyckoff Wave continues to be in a trading range. Until we see a more significant in reaction, it is difficult to suggest that the Wave will either rally or react. Unless you are a very short term trader who enters and exits on more minor turning points, it is best to relax and let the market come to you.