Let’s Go Long. What Does A Longer Term View Of The Market Tell Us?

Click Here For Wyckoff Wave Chart 08-17-12

This week, the Wyckoff Wave rallied slightly and weakened the newly drawn short term down trend channel. This happened on Thursday and that day’s market action was not particularly impressive.

Then on Friday, the Wyckoff Wave ran into supply. It now seems the Wyckoff Wave will have a difficult time continuing to rally and penetrate the resistance line at the top of the trading range and the highs at point S.

In most cases, when supply comes in near the top of a trading range, the index or stock will react on good spread and volume. This has happened throughout the trading range starting at point A and continuing through points I, M, O and even point S.

Now we have seen a bit of a change in character. The reaction from point U was on relatively decreased spread and volume. While Friday’s action saw supply coming into the market, the narrower price spread indicates much of it was taken in by strong buyers.

While the market may well react next week, its beginning suggests that the reaction will not be steep and particularly dramatic.

In fact, the Wyckoff Wave may react and put in an important Last Point of Support. While this is definitely not a certainty, the scenario must be considered and preparations made if it comes to pass.

While some Wyckoff students are short term traders, many view the market on a more intermediate or long term basis. Often, it is helpful to look at the market from a longer-term perspective. Therefore, I have also attached a weekly chart of the Wyckoff Wave that shows the long term up trend channel in orange.

The up trend channel began at the bottom of the 2008 bear market, when the Wyckoff Wave reached the low of 14,750.

While it is going through a few trading ranges, the Wyckoff Wave has consistently honored its up trend channel. We saw accumulation in 2010 (A through D). Distribution in (G through U) and a long trading range, that appears to be accumulation in 2012 (U through the present).

In fact, this last trading range has lasted six months and we have not yet seen any ending action. While there were a few attempts, the most prominent being the attempt to leave the range to the down side at point X, none have been confirmed and the intermediate trend remains neutral.

Each time the Wyckoff Wave moved into an overbought or oversold position relative to the up trend channel, a period of re–accumulation or re-distribution brought things back into harmony.

In its most recent trading range, the Wyckoff Wave rallied to point U ran into supply right at the long term supply line. With one minor exception, when the up trend channel was weakened at point X, the Wyckoff Wave simply moved sideways while staying within the long term uptrend channel. The closer we get to the channel’ s support line, the closer we should be to ending action and a definitive move.

Will that move be up or down?

While some bears could point to the fact that since the Wyckoff Wave reached the supply line at point U, it has been unable to rally. That may make it vulnerable to testing the support line and having that test fail.

I would suggest we need to look at two critical factors.

The first is the amount of overhanging supply that is present. The second is the relative volume over the past six months.

Presently the Wyckoff Wave is at a little over 32,000. This is right at the bottom of the old distribution area that preceded the 2008 bear market. Naturally, there is (or was) a large amount of supply. Investors who purchased stocks in that area thinking they would go higher are finally able to get out even or at a small loss. Naturally they are dumping stocks on the market. The future of the stock market depends on whether this overhanging supply forces the market to react or if it is taken in by strong hands who anticipate a continued advance.

The second question appears to provide an answer to the first. I have drawn a line over the weekly volume that shows a steady decrease in the relative volume since the trading range began at point U. This reduction in volume is a sign of accumulation and strongly suggests that stronger hands are happily taking in the overhanging supply.

This has also been confirmed by a change in the price spread. After the rally to point A on the weekly chart, the Wyckoff Wave has begun a long slow reaction.

Those who thought point A might’ve been an upthrust did not see the Wyckoff Wave react sharply and weakene the support line of the long-term uptrend channel.

This might’ve been the final clue that we were in accumulation and distribution. If that assumption is correct, we will continue to see the Wyckoff Wave react on reduced spread and volume and put in a Last Point of Support.

I have also attached an updated Wyckoff Wave 100 Point & Figure chart. The counts are still based on July’s support point. This is because we have not seen the LPS. However, the action since July has added 1700 points to the upside objectives. This puts us well into all time new high ground.

Will this be accomplished? The bullish accumulation scenario is looking better and better with each passing day.

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