Last week I wrote about the strong possibility that the Wyckoff Wave was about to continue another leg on the bull market that began in 2008. The market responded to my comments by moving sideways for the next five trading days.
Weeks like these are frustrating for short-term traders who need to see movement in one direction or the other. The market has not reacted enough to catch stops, but it has not rallied enough to produce profitable trades.
Longer-term investors have an opportunity to identify candidates that, should the market rally, would increase nicely in price.
Of course, in both these instances, the market needs to rally nicely to the upside.
Last week, my comments were fairly bullish. Despite the frustration of the sideways movement, this has not changed.
Last Friday, the Wyckoff Wave put in a very positive day and moved into new high ground at point R. This looked like a defining moment, but unfortunately the Wave was not ready to continue to the upside.
Tuesday brought an interesting phenomena. The Wyckoff Wave reacted and there was a substantial spread between Friday’s and Monday’s closing prices. Volume also increased. It would certainly appear that good supply came into the market and the Wyckoff Wave was in the process of reacting back into the trading range and dashing the bulls dreams of profits.
A closer look at the day’s market action gave us a different perspective. There was a huge gap opening to the downside. Gap openings are not included in price spread analysis. The opening price simply where the day started.
Decreased price spread and increased volume is associated with demand, not supply. A review of the intra-day waves showed that after the gap opening supply was gradually withdrawn. The Wyckoff Wave then rallied during the afternoon hours. If the gap opening is excluded, the afternoon rally was stronger than the morning reaction.
This market perspective, which was reported in Monday’s Pulse of the Market Report, strongly suggested the market was not yet ready to return to the trading range.
Tuesday brought a rally on increased price spread and volume. Wednesdays reaction was on decreased price spread and volume. Both are bullish indications.
However, Thursday and Friday gave us some indications that, while conditions were still positive, the Wyckoff Wave may not be ready to continue the rally.
On Thursday there was a potential spring as the Wyckoff Wave penetrated the low at point Q and then rallied. However, a rally off a spring is filled with demand and when looking at a spring on a vertical line chart, that demand is very apparent. That didn’t happen on Thursday and there was no follow through on Friday. In fact, Friday’s Wyckoff Wave rallied on reduced spread and reduced volume. This is indicative of a lack, or withdrawal of demand.
On Thursday, the Wyckoff Wave also returned to its up trend channel and on Friday it closed right at the channel’s supply line. This makes the Wyckoff Wave vulnerable to continue the reaction, which can be defined as a backup to the Creek for a possible Last Point of Support.
On Thursday the Wyckoff Wave Technometer reached 48.68. This is .32 away from being overbought. It is difficult to see the Wyckoff Wave beginning to rally in an overbought condition.
While the last two days were not bullish, there are still no indications the Wyckoff Wave is ready for a more significant reaction.
1. The Optimism – Pessimism Index continues to lead the Wyckoff Wave at a critical time.
2. Supply has had numerous opportunities to come into the market and drive the Wyckoff Wave back into the trading range. This has not happened. Even when some supply does appear, it is not sustained and easily taken in. This would suggest that professional buyers are happy to take in any supply that is dumped on the market.
3. Instead of a more defined reaction, the Wyckoff Wave has moved sideways. This in itself is a positive indication. Notice what happened when the Wyckoff Wave rallied to point N and moved sideways for 10 trading days. It then rallied strongly to its present position.
4. The Wave’s Technometer is working off its overbought numbers (only one remains) and can easily become oversold on a minor reaction.
5. The Wyckoff Wave has returned to its long term up trend channel on the weekly chart. It is also important to note that the channel’s support line is right in the middle of the resistance area drawn from point C. This is right where one could expect the Last Point of Support. I have also drawn in the uptrend channel from the daily chart.
These five points make a reasonable argument in favor of the no major reaction scenario. The bullish outlook remains. There is also one other significant, non-technical consideration.
Interest rates are extremely low. These days it is difficult to get much more than a 4% return when investing in fixed income securities. The uncertainty of the past few years has left a great deal of money not invested in the stock market. The strategy of a lower risk returns simply isn’t producing enough income to be an acceptable return on investment. Professionals are realizing this and adjusting their portfolios accordingly.
That is one reason why supply is happily being taken in and the future long-term outlook is encouraging.