This week the Wyckoff Wave rallied past the old highs that were set in March 2015. Like the other major indexes, it has found new high ground. Does this mean we are in a new bull market, or is the Wyckoff Wave simply putting in a new high in a developing trading range?
After my last Week in Review post, I received an astute comment from a Wyckoff student. He disagreed with my extension of the top of the trading range resistance line to include point V, A and C. He also felt that the resistance line should have been extended horizontally from the high at point R.
He went on to write that the rally from point G to point V should be a Sign of Strength. This would make the reaction to point Z a Last Point of Support. This would provide a significant count on the 100 Point & Figure Chart.
His observations are certainly reasonable, responsible and, especially in the light of this week’s market action, deserve to be included in our catalog of the scenario catalog.
My concern, with the initial Sign of Strength scenario, is that the Wyckoff Wave rallied on relatively low demand. It took the Wyckoff Wave just over 2 1/2 months to rally from point M to point V. This is a long time for a Sign of Strength that that should be defined by strong demand. In addition, price spread was relatively narrow and volume was relatively low. While the results were positive, this does not fit the Wyckoff definition for a Sign of Strength.
Regardless, the Wyckoff Wave did put in a nice move to the upside and then reacted. The reaction to point Z successfully tested the high at point R. However, the price spread was relatively wide and volume increased, especially in the five market days leading up to point Z. This is not characteristic of a reaction to a Last Point of Support as supply was certainly present.
Then the Wyckoff Wave put in a poor quality rally to point C. The reaction to point D was on wide spread and increased volume. Supply simply wasn’t drying up.
Point D was on June 27th. Since then the Wyckoff Wave has rallied and moved into new high ground. Once again, the rally has been on relatively narrow price spread and volume and the day by day analysis suggests an overall lack of demand.
If, as our old Wyckoff hand suggested, the rally from point M to point V was, indeed, a Sign of Strength, it is certainly logical to conclude the rally from point D is a second Sign of Strength or a Jump Across The Creek.
While this all looks great on the charts, Wyckoff analysis is always about the relationship between demand and supply. Right now, the present position of the Wyckoff Wave does not coincide with the demand levels we have been seeing over the past two months. Something may not be quite right.
How does this impact the Wyckoff trader and investor? As the Wyckoff Wave began rounding over at points V, A and C, this suggested the reaction was in the immediate future. That’s what happened, as the Wyckoff Wave reacted to point D.
The reaction was on good price spread and volume, indicating the presence of supply. This further suggested that any subsequent rally would probably be a test of point C and they would be another reaction. This made it difficult to suggest any short-term trades to the upside.
The picture was different for intermediate and long-term investors, of which I am one. Existing positions should have been maintained, with a little tweaking at the tops and bottoms of the trading range.
Therefore, as the market moves into new high ground, intermediate and long-term investors, who maintained existing positions are seeing profits.
It appears the move from point D is coming to an end and the Wyckoff Wave will react. The quality of the reaction will be extremely important and could answer some significant questions.
If the reaction ends in the area of the resistance line, drawn from point C, and the reaction is on reduced price spread and volume, the Wyckoff Wave would be putting in an important Last Point of Support.
However, if the Wyckoff Wave reacts on relatively wide price spread and volume and moves through that resistance line, that would signify a return to the trading range that began at point Q.
While my portfolio is delighted with the week’s events, the quality of both rallies is troubling. Something says there’s as little surprise just around the corner. I would like very much to be wrong.