This past week the Wyckoff Wave reacted on relatively narrow spread and slightly increasing volume. More importantly, it encountered demand as it reached the halfway point of the rally from points Z to A.
The relatively reduced price spread and slightly increasing volume suggest some demand was present throughout the reaction. That was confirmed on Thursday as the Wyckoff Wave reacted to the halfway point and then appeared to put in a nice intra-day rally to a strong close.
However, Thursday’s demand was not sustained. Supply returned Friday morning and the Wyckoff Wave experienced an intra-day failure to the downside. The supply was withdrawn after the first two hours of trading, but the Wyckoff Wave could only put in a poor quality rally for the rest of the trading day. This was an excellent chance for strong demand to come into the market and it simply did not.
All this suggests that the Wyckoff Wave could retest Thursday’s low. It also suggests, that if the Wyckoff Wave rallies next week, it will be difficult to move substantially into new high ground.
It appears the Wyckoff Wave is sending different signals. A successful test at or above the halfway point of an earlier rally is a positive indication. In addition, the Technometer has moved into a clearly oversold condition. These two signals are bullish and suggest the Wyckoff Wave is ready to rally.
Last week, the Force Index was discussed in detail. It is especially useful when used in conjunction with overbought or oversold Technometer readings. If the Technometer is in an oversold condition, but the Force Index is producing moderate or high negative readings, the expected rally may not be as strong as expected.
This is what happened during the past week. The Force Index, which had a positive rating of 161 at point A has plummeted to -250 as of Friday’s close. This suggests there is a fair amount of downward pressure on the market.
The declining Force Index was a leading indicator that suggested Friday’s follow-through to the upside would not be particularly successful.
In addition, the Optimism – Pessimism Index is in a negative divergence with the Wyckoff Wave, when compared with point V. However, this is not a totally negative indicator.
First of all, the negative divergence is not that great and could be eliminated with a small rally. Secondly, since the August Selling Climax (point Q), the O – P Index has been relatively strong. It has been leading the Wyckoff Wave. This suggests that, quietly, a fair amount of stock is being accumulated. This argument is also supported by the new phase of the trading range that began at point V. It is substantially higher than earlier phases and supports the indication that stock is being accumulated by important interests.
What is the Wyckoff Wave going to do next week? While I doubt there will be significant movement, a reasonable scenario would be a retest of the halfway point, followed by a test of the recent high at point A. This would continue the trading range, with resistance drawn through points T, V, X, Z, B, D, R, T, V again and now A.
The trading range support areas began with a Selling climax at point Q and continue through the trading range at points G, I and M.
Stock Market Institute legend Robert Evans often spoke about the importance of adjusting resistance and support lines to frame the tops and bottoms of the trading range. If, within a trading range, a stock or index puts in a new high or low, without ending action, the top or bottom of the range needs to be adjusted. A trading range is not a straight line, but a crooked line that marks exactly where demand or supply came into the market. The trading ranges on the daily chart reflect Mr. Evans’ teachings.
The stock market is in an unusual situation. It used to be said that the stock market is the last great bastion of the free enterprise system. Unfortunately, rightly or wrongly, government, especially the Federal Reserve has tinkered with the stock market. This tinkering has resulted in artificially low interest rates and an uncertainty as to what the Fed will do next and how it will impact corporate America. The low interest rates are balanced by this corporate uncertainty.
However, the American economy is the greatest engine ever created. If returned to private hands, it will roar again and good things will happen. I believe this is an opinion shared by many large interests and professional trader. I would suggest that this is the reason for this quiet accumulation and relatively strong trading range.
Whether the market rallies or reacts next week isn’t nearly as important as what is developing and where this trading range, which appears to be accumulation, will take us.