Let’s Talk Trading Ranges

Click Here For Wyckoff Wave Chart 07-13-12

This week the stock market, as measured by the Wyckoff Wave, put in two significant days, one in each direction. Tuesday gave us one of the largest down days of the year. Friday’s market action closed out the week with a strong rally to the upside. While by themselves these were important days, what messages were they sending?

Tuesday’s strong down move suggested the Wyckoff Wave had an opportunity to react all the way to and test point L. However, the next day the shortening spread and slightly reduced volume suggested some demand was coming into the market and it would be to continue this move to the down side. In addition, the Technometer became dangerously oversold.

These two factors suggested that it would be difficult for the Wyckoff Wave to move much below point N. Once again, our old friend the Technometer sent us an important message.

On Thursday, the Wave slightly penetrated point N and began to rally. While Friday’s strong action to the upside was positive, the Wyckoff Wave moves quickly into an overbought condition on the Technometer. In addition, we are seeing negative divergences with the Optimism – Pessimism Index when compared to points M and O.

This would suggest this rally may not have the legs to turn into something significant. It is going to run into some supply at both support lines L – N and resistance at points M and O.

If the Wyckoff Wave is unable to penetrate the resistance line drawn through points M and O, the Wave is beginning to define a new and tighter trading range. This would have a support line at point M and a supply line at point N. These lines have been drawn in green on the accompanying chart.

While the larger trading range (support drawn from point L and resistance drawn from point A) is still in effect, the fact that the Wyckoff Wave has now tested the support at point N and resistance at point L, we can be justified in drawing this tighter trading range.

If that is done, did we have a spring at point P? Technically we did. The Wyckoff Wave did push through the low at point N and then rally. However, I would’ve liked to have seen another reaction or two to test that support level, before calling a spring.

In addition, the Technometer’s overbought condition early in this rally suggests there may not be enough follow-through to get the desired results one usually sees from the spring.

Regardless. The fact that the Wyckoff Wave has successfully tested both support (point N) and supply levels (point M) does allow us to draw in this tighter trading range.

In addition, we can look for ending action as the Wyckoff Wave approaches either the top or the bottom of this new trading range.

Despite this, the point L support line and the point A resistance line are still extremely important and must not be ignored.

We have been in a trading range for little over six months. It has been a most interesting trading range as both the support and resistance points have changed as new phases have been added to the range.

It now appears we have another phase. A tighter phase may well give us an opportunity to find some intermediate opportunities to either the upside or the down side.

Stock market traders love action. For intermediate-term traders, it’s been a long 2012.