Have We Tested The Spring?

Click Here For Wyckoff Wave Chart 05-11-12

The Wyckoff Wave spent most of this week finding support at the 30,742 level. This is the support level of the original trading range that began in January. It is marked by a support line drawn from point V.

On Monday (marked by the red up arrow), the Wyckoff Wave experienced a gap opening to the down side and spent the day rallying back to just below the previous Friday’s close. The day’s action suggested a lack of demand. This meant that the Wyckoff Wave was vulnerable to continuing its reaction.

And react it did. The following day brought in good supply and the Wyckoff Wave reacted to the above-mentioned support line. However, the reaction could not be sustained and the afternoon brought in good demand. The Wave rallied to close near the top of a wider price spread.

This was significant as support came in exactly where it was expected. Then the question became, would the support hold or would this be a minor rally followed by a reaction that drove the Wyckoff Wave through the support line? The Wyckoff Wave spent the rest of the week trying to answer that question.

Wednesday brought a gap opening to the down side. However, once again the support line held and the Wyckoff Wave rallied in intra-day. While it closed off its highs, in the bottom half of the day’s price spread, the quality of supply was reduced. This second day of support and the slight drying up of supply, made the Wyckoff Wave vulnerable to rally.

Cover up the last two days of the week. Then ask yourself, could this have been a successful test of the spring or even a Last Point of Support (LPS)?

If you look at the price spread and volume, the answer is most probably not. Notice the wide price spread and more importantly, the relatively high volume. Wednesday’s volume was even higher than Tuesday’s.

In addition, there was no help from the Technometer as it remained in a neutral condition.

Only the Optimism – Pessimism Index was somewhat bullish. There was a positive divergence with point H.

An analysis of all this should conclude that we needed to see more drying up of supply before the Wyckoff Wave could begin to put in a more serious rally.

The next two days (Thursday & Friday) on the chart did not bring us much more clarification. On Thursday, a move to the upside on reduced price spread and volume suggested a lack of demand. This made the Wave vulnerable to supply and it looked like it was making an appearance on Friday.

The Wyckoff Wave was now in a very vulnerable position. On Thursday, it tried to rally off the support but ran out of demand. Friday morning brought a gap opening to the down side. The Wyckoff Wave actually opened right on the support line. Any follow-through here would have driven the Wave through the support and down to its next support area. This is the top of the November – December trading range.

However, that didn’t happen. The Wyckoff Wave rallied off the bottom on good intra-day demand. It tried to go up, but late in the morning, supply came in stifling the rally. It then tried to go down. However, the supply, while certainly very present, was not strong enough to push the Wyckoff Wave all the way back to the support line. It closed in the middle of a wider price spread and on increased volume.

Robert Evans gave this phenomena a name. He called it “tried to go up, tried to go down, closed in the middle on increased volume”. More importantly, he suggested that when this happened the affected stock or index was probably going to make a move rather quickly. The question is which way will the Wyckoff Wave go?

The fairly wide price spread and relatively increased volume make it difficult to conclude we have seen a test of the spring or a LPS. This would suggest the next move might be to the down side.

However, for the last four days, the Wyckoff Wave has been supported, where expected, at the bottom of the original trading range.

The Optimism – Pessimism Index is still in its up trend channel and there is that minor positive divergence with point H. The Force Index is not particularly negative and also is in a positive divergence with point H.

Unfortunately, the Technometer is of no help as it is, and has been, neutral.

It appears that one of three things can happen.

1. Strong supply can enter the market and drive the Wyckoff Wave sharply downward. In my opinion, this is the least likely of the three scenarios.

2. The Wyckoff Wave can react on decreased spread and especially decreased volume and complete the test sometime early next week. Even if the Wyckoff Wave moves below the support, as long as it holds above point F, and does so on reduced spread and volume, we would have a successful test of the spring.

3. The Wyckoff Wave can rally off the support and test support line F – H. If the test is successful, the Wave could then react and put in a successful test at a later date. This may well be the most likely scenario.

It seems to me that the stock market, as measured by the Wyckoff Wave, still needs to take in more supply. The widespread and relatively high volume is somewhat bearish. The support is somewhat bullish. The fact that neither supply or demand can grab control of the market suggests we are not yet ready for a definitive move in either direction.

When I see a standoff in supply and demand, as shown in the price spread and volume, I often look to the Technometer as a significant indicator. The fact that the Technometer continues to be in a neutral condition tells me the stock market is not quite yet ready to rumble.