Everyday I receive e-mails from Wyckoff students and other stock market aficionados, who have visited the website, that ask interesting questions and share opinions about the stock market’s future direction.
Recently, many of the opinions are becoming more bearish in nature. They are similar to e-mails I received last September and October that forecast a major decline in the market.
While I am quite bullish, especially about the intermediate and long-term trends, one can get too caught up in their opinion and miss important changes in direction. To avoid this, I often take some time and approach the market from the opposite point of view. In this case, my goal would be to find bearish indicators and trends that would justify this possible change in direction.
To do that, it is best to start with a longer-term perspective. The weekly chart shows the Wyckoff Wave in a long term up trend channel. This channel is marked by the orange trend lines.
In March of 2012, the Wyckoff Wave rallied on increased spread and volume to point U. This marked the beginning of the 11 month sideways movement we are still seeing today.
Could the move to point U be a Buying Climax? We saw increased spread and volume. The reaction to point V, even though it lasted a month, could have been a normal corrective reaction and the rally to point W, which was lower than point U, could’ve been a secondary test. Usually, these Wyckoff indicators happen quickly. These took almost 2 months.
Then let’s look at the reaction to point X. This took an additional five weeks. It also held above the halfway point of the rally from point H to point U.
We now have two possible scenarios.
1. We did see a Buying Climax at point U and are beginning a sideways movement that has could be distribution.
2. We saw the Wyckoff Wave rallied to the supply line of its long-term uptrend channel at point U and make a normal corrective reaction back down to the area of the trend channel’s support line. The Wyckoff Wave also held above the halfway point of the rally from point H to point U. This scenario would conclude that the Wyckoff Wave did meet supply at point U and began to move sideways in a trading range. Whether this trading range was accumulation or distribution, would be answered by both the price and volume relationship within the trading range and, most importantly, the ending action.
After reacting to point X the Wyckoff Wave rallied and slightly penetrated the resistance at point A. Was this an upthrust?
An upthrust means good supply is coming into the market and the Wyckoff Wave should have reacted fairly quickly back down to the bottom of the trading range. That would be the support line drawn from point V. Instead, for the next five weeks, the Wyckoff Wave reacted on reduced spread and volume to point B. The Wyckoff Wave also stayed in its long term up trend channel. Based on that, it is difficult to conclude that point A was an upthrust.
The Wyckoff Wave then rallied again. It penetrated the resistance line drawn from point U on increased price spread and volume. Could this have been the upthrust?
Once again the Wyckoff Wave reacted. The first four weeks was on reduced price spread and volume. This would strongly suggest point C was not an upthrust. In fact, the move to point C looks more like a Jump Across the Creek.
In this case, the Wyckoff Wave backed up to the Creek, tried to rally and encountered strong supply that drove it back down to point D. Following the bearish scenario, could this have been a Sign of Weakness?
Notice that point D was higher than point X. Also it is important to note that the Wyckoff Wave saw support as it reached the support line drawn from Point V. In fact, it could be argued that point D was a spring.
It would appear that the Wyckoff Wave tried to leave the trading range to the upside at point C. It was not able to do so and simply returned to the trading range to begin another phase of the sideways movement.
Point D occurred in the middle of November 2012. Since then, the Wyckoff Wave has rallied in an up trend channel. It moved through the original Creek area (lines drawn from point U) and penetrated the resistance line drawn from point C. It has now moved sideways for a little over two weeks. Could this sideways movement be distribution?
If it is, let’s look at the Point & Figure chart for cause and effect. Presently there is a count of 900 points along the 33,300 line of the Wyckoff Wave’s 100 Point & Figure chart. This gives us a downside objective of between 32,000 and 32,400. If the Wyckoff Wave reacted and reached these objectives, they would be either testing the support line of the present up trend channel or the resistance at the original Creek drawn from point U. There are no objectives below this area. This objective area becomes even clearer when looking at the daily chart.
More importantly, have we seen any ending action? Could point R has been an upthrust?
Once again, an upthrust means good supply is coming into the market and there should have been a strong reaction back into the trading range. This didn’t happen. Instead the Wyckoff Wave has moved sideways in a very narrow trading range for two weeks.
Until this week it moved sideways on reduced spread and volume. This is more indicative of accumulation than distribution. However, beginning last Tuesday it did increase. This suggests that supply is not completely dried up and the Wyckoff Wave may have to react.
The Point & Figure chart tells us this reaction should be relatively minor and may turn out to be an important Last Point of Support.
Despite trying to view the market from a bearish perspective, it is difficult to come to those conclusions. It would seem the worst-case scenario would have the Wyckoff Wave simply fall back into the trading range and begin another phase of the sideways movement.
Presently, the Wyckoff Wave is in the old 2007 distribution area. There is a tremendous amount of overhanging supply that was available after the 2008 bear market. The Wyckoff Wave spent almost one year taking in supply. Despite bearish opinions, it is probably ready to begin a new move to the upside.