Is The Stock Market In Sync With The News?

Click Here For Wyckoff Wave Chart 11-09-12

President Obama’s reelection was not great news for corporate America. The stock market reacted, causing the S&P 500 to react by over 50 points on Wednesday and Thursday.

The wife of a good friend, who works for a gold and precious metals broker/dealer reported that clients were buying gold in record numbers.

The news was full of speculation about the “fiscal cliff” and a possible double dip recession. Finally, a fight between Republicans and Democrats about how to resolve our fiscal crisis seems imminent.

Many traders and investors are uncertain about the future. They feel that the above news may drive the markets substantially lower. They are ready to take profits and, in many cases, bought just before the 2008 crash and are looking to get out even. This market letter has discussed this overhanging supply several times over the past couple of months.

The question is, will the supply drive the markets into a major reaction, or will stronger hands happily take in the supply and prepare the markets for a new up trend?

As they say in bridge, “let’s review the bidding”.

Before we start, an interesting tidbit. The two days following Pres. Obama’s election saw the S&P 500 react by over 100 points. Since then it has gone up 86%.

The Wyckoff Wave’s weekly chart presents a fairly uncluttered picture of the stock market’ s action since last January. As previously mentioned, it rallied to the supply line of its long term up trend channel at point U and then moved sideways in a trading range.

It tried to leave the range to the downside at point X and failed. It then rallied, reacted and penetrated the resistance at the top of the range as it “jumped the creek” to point C. Once the jump is completed, a rally back to the resistance is expected.

When this happens, one of two things can be expected. The first is a drying up of supply and a major Last Point of Support. This would happen right around the resistance area.

The second is that the markets are not yet ready to rally and supply does not dry up. This is what happened and the Wyckoff Wave fell back into the trading range. It is now testing the bottom of the trading range which is marked by a support line drawn from point V.

Once the Wyckoff Wave returned to the trading range it began a new phase and we must wait for another ending action. This will determine the future direction of the market. Therefore, how the Wyckoff Wave behaves as it tests the support at the bottom of the trading range is extremely important.

As the Wyckoff Wave tests the support, one of three scenarios can unfold.
1. The Wyckoff Wave can spring the support. It can successfully test the spring and rally towards the top of the trading range.
2. The Wyckoff Wave can simply test the bottom of the range, rally and continue it sideways movement.
3. The Wyckoff Wave can penetrate the trading range on strong price spread and volume. This would define the move from point C as a potential sign of weakness. The Wave would then rally back towards the support, but would be unable to return to the trading range and react again. This rally would be a Last Point of Supply.

Scenario number one is a bullish scenario. Number two is neutral. Number three is a bearish scenario.

However, there are some clues that may give us an insight into the Wyckoff Wave’ s future direction.

The most important is the relationship between price and volume. Price, is measured by the Wyckoff Wave. Volume as measured by the Wave’ s Optimism – Pessimism Index. The O – P Index measures effort. The Wyckoff Wave measures results. This is probably best viewed by looking at the Wyckoff Wave’ s daily chart.

Presently the Wyckoff Wave is at a lower level than it was at point W. However, the Optimism – Pessimism Index is at a settlement higher level than it was at point W. This suggests we are not seeing as much effort to the downside as the results would suggest.

Finally, a look at the 100 Point & Figure chart since its shows that the Wyckoff Wave is in an objective area of the count taken along the 32,800 line (Phases 2 & 3). In addition, if we take the first phase of the count along the 31,900 line (marked in red), we get the same objectives.

There are more aggressive objectives to the downside. If all three phases are included in the count, we have an objective area of between 29,300 to 28,100. It is important to note that point L, where the Wyckoff Wave met support when it tried to leave the trading range last April, is at 29,447. Finally, on the weekly chart, the halfway point of the rally from point X to point C is 29,033. Notice how they line up together.

These would suggest that, worst-case, the Wyckoff Wave is experiencing a normal corrective rally in an uptrend.

The best case scenario is a spring, followed by a successful secondary test, sign of strength, last point of support and the beginning of a new markup phase.

The news may be predicting gloom and doom. The Wyckoff Wave seems to say otherwise