During the past month, I have received several well-written e-mails that proclaimed the market had reached a peak and we could expect a severe reaction.
Each time I receive one, I always go back and review my market analysis against the major reaction scenario. So far, I am still comfortable with the stock market, as measured by the Wyckoff Wave, continuing this wonderful and extremely long bull market.
This rally began in 2009 and has remained true to its long-term up trend channel, since then,
However, this certainly will not go on forever and when the reaction comes, it will probably be sharp and deep.
This is because the stock market, the last great bastion of our free enterprise system, has been the only real place to invest over the past six years.
Government interference, including thousands of stifling regulations, have substantially increased the risk of investing in America. Artificially low interest rates, controlled by the Federal Reserve have made the stock market one of the only places where one finds a good return on their investment.
This also creates a market that is dominated by weak hands. Because most every stock is advancing, the dartboard can be a reasonable analytical tool.
However, when the market turns, and it is going to, these weak investors will dump stocks and scurry to the exits. This will result in a severe reaction, where many will lose a large portion of their capital. The chickens will come home to roost.
The question is not whether, but when? That is why good Wyckoff students will continually have a reaction scenarios in mind and always include them when the Wyckoff Wave is in a position where it could put in a reaction.
This past week, we could have been in that position.
The Wyckoff Wave has been rallying since early January (point E on the weekly chart). It approached the top of the trading range (line drawn from B on the weekly chart.
As mentioned in earlier posts, it could have upthrust and the trading range. If that had happened and strong supply came into the market, this could be the first signal that the bull market had ended.
The other two options were to rally strongly through the trading range for a potential Sign of Strength, or simply react back into the trading range and continue its sideways movement.
While the Wyckoff Wave did slightly penetrate the top of the range, it was on decreased price spread and volume that suggested a lack of demand. Strong supply did not come into the market.
In addition, the Optimism – Pessimism Index was showing relative strength as it led the Wyckoff Wave. The Force Index was moving into positive territory. This had a mitigating impact on the overbought Technometer.
The Wyckoff Wave’s price spread and volume and the Wyckoff Tools did not indicate we were seeing an upthrust.
This past week, the Wyckoff Wave began its reaction back into the trading range. While it has an opportunity to react all the way back to the support line of its long-term up trend channel, this may not happen in the near future.
This is because both the O – P and Force Indexes remained strong. In addition, the Technometer will quickly become oversold as the reaction off the top of the trading range continues.
This brief analysis does not mean the Wyckoff Wave will not react, it simply suggests that we have not reached the end of the bull market.
This gives the Wyckoff Wave another opportunity to put in a good ending action to the upside, in the form of a spring or shakeout.
It also could react and then rally to test this week’s high and put in an upthrust.
So far, the relative strength of the market and the lack of bearish indications suggest the former has the highest probability of success.
Regardless of the final answer, the 100 Point & Figure chart has enough potential to move the Wyckoff Wave substantially in either direction.
One final note. I am not sitting on the sidelines pontificating on what the market may or may not do. As a senior citizen, I have a great deal invested in the stock market. If I am wrong and the market reacts, I probably don’t have enough years left to recover my present net worth.
That is why I pay a great deal of attention to bearish scenarios and take them very seriously. I think they’re coming, not just right away.