News and the Stock Market

Click Here For Wyckoff Wave Chart 11-11-11

This Tuesday, the stock market opened higher, and then reacted. In the afternoon, it rallied strongly and closed near the day’s high. The “expert news analysts” attributed the rally to the news that Italian Prime Minister Silvio Berlusconi would be resigning and that this was positive news for the pending Italian financial crisis.

The following morning, the market had a huge gap opening to the down side. It continued to react during the day and closed just off the day’s lows. Again, the “experts” weighed in. Their rationale was that the market was terribly concerned about the Italian financial situation.

Now I’m not the smartest bulb on the chandelier, but it’s difficult to understand why the same news could cause a rally one-day and less than 24 hours later a large market reaction.

I would humbly suggest that the answer is simply ignore the news when analyzing the stock market. This is hard to do, but is one of the core Wyckoff principles. The news can be a catalyst that will take the market where it was already going to go. It will just get there faster.

I read the newspaper every day. I am very aware and very concerned about the financial situation in Europe and the United States. However, when I analyze individual stocks or the markets in general, I leave my feelings about the world financial situation at the door. They do not and cannot factor into my decision-making when selecting potential trades.

The news does create a specific problem for market traders. That is, those pesky gap openings. Years ago, markets basically opened where they closed the previous day and in entry and exit points were a bit simpler. Today, after a student spends am evening doing some analysis, a 20 point gap opening in the S&P 500 can raise havoc with his or her trading strategies.

In the last 15 trading days, the Wyckoff Wave has seen 15 gap openings. Seven of those have been significant. You can see them on the attached chart. Short term day and swing traders, who have done their Wyckoff analysis the previous evening, wake up to a 20 point gap in the S&P futures. It is difficult to chase entry points. It is often better to wait for the next opportunity.

Intermediate and longer term traders should be analyzing the market to determine the direction of the next significant trend. The first question to answer is: Is the market behaving in a bullish or bearish manner?

Let’s look at the market from a long-term perspective. In 2008 the Wyckoff Wave peaked at 39,960. A few months later, at the end of the bear market, it had reacted all the way back to 14,960. An awful lot of people lost an awful lot of money. The great deal of this money was in paper profits that turned into paper losses.

Since the end of the bear market, the Wyckoff Wave went through a period of accumulation and then rallied to 31,038, which is marked as point G on the attached chart.

It then reacted to point X, where it experienced a buying climax that stopped the reaction. The low at point X was 25,033. This is just above the halfway point of the rally from the 2008 lows to point G. This would be considered a normal reaction in an uptrend.

The Wyckoff Wave then moved sideways in a trading range. It sprung that range at point H. It rallied to point I and then went through some absorption before it rallied strongly out of the trading range to point K. Since then the Wyckoff Wave has not behaved as many of us would like.

At first, it reacted strongly back to the creek or the resistance/support line drawn at point A. This would lead us to expect the Wave would react back into the trading range and continue its horizontal movement.

It didn’t do that. Instead, there was a weak five day rally to point M. It seemed like more good news for the bears as:
A) the reaction to point L was not done on reduced spread and volume, so we could not have seen a last point of support.
B) the subsequent rally to point M was of poor quality and put in a lower top than at point K.

The following day, the strong reaction seemed to vindicate the bear’s position. But there was no follow-through, although Thursday’s action, a rally on decreased spread and increased volume, suggested supply was still present. Then on Friday, a large gap opening and a quick follow-through took the Wave to its highs for the day and was testing the supply line of the short term down trend and point M.

While the Wyckoff Wave has not put in a classical last point of support, it is certainly not acting like it is going to be reacting strongly in the near future. Reactions and bear markets happen quickly and decisively. Rallies and bull markets have a tendency to wander a bit and take more time.

Please look at the following markups on the attached chart. Notice that the halfway point of the 2008 bear market is right around the top of the trading range. Also notice that it is in the same area as the halfway point of the reaction from point G to point X.

In this area we can certainly expect two types of investors to lead the market. There are still many investors who lost a great deal of money in the bear market of 2008. They hung on and saw a fair portion of their profits recovered as the market rallied to point G. All of a sudden, last summer’s reaction “stole” a portion of these gains. When the market rallied up to and past the halfway point of both the summer’s reaction and the 2008 bear market, they saw a wonderful opportunity to exit. And they did.

However, stronger hands are quietly taking in the supply. This is why we saw the absorption at the top of the trading range and probably why we are seeing the up-and-down movement we have experienced for the last two weeks. The market is quietly moving from weak hands to strong hands.

Will the market rally tomorrow and take out the highs at point K? Or, will we see another reaction and a more traditional last point of support? Either one is possible. However, it would appear the markets are preparing for a strong move to the upside.