This week the Wyckoff Wave left the minor trading range and rallied to its highest level since the 2007 – 2008 bear market. However, the last four trading days were on relatively reduced price spread and good volume. In addition, the Wyckoff Wave was unable to penetrate the supply line of the intermediate-term up trend channel.
This suggests the Wyckoff Wave has jumped the Creek and may well be preparing to react towards an important Last Point of Support.
But will the Wyckoff Wave react? The Wave began this latest rally in November, 2012 at point G. There was a nice rally to point O. Here the Wyckoff Wave ran into resistance at the bottom of the resistance area (Creek) drawn from point A. To point A marked the beginning of this long sideways movement and this resistance area was quite significant.
There was a normal corrective rally back to point M and the Wyckoff Wave rallied to point N. The rally took the Wyckoff Wave slightly above the resistance area (Creek). This is where there was an interesting change in character.
Instead of reacting, the Wyckoff Wave moved sideways for eight trading days before continuing the rally.
It then did the same thing as it rallied into and through the next resistance area (Creek) drawn from point X. At point R, the Wyckoff Wave could have been expected to react back to the Creek for a last point of support. Instead, it moved sideways on relatively narrow price spread and, in the beginning of the move, reduced volume.
Then we saw a possible ending action at point U. Point U penetrated the support for a potential spring. However, a spring needs to be confirmed with good demand and while the Wyckoff Wave rallied nicely, only one of the trading days following the spring could be defined as a demand day.
This week, the Wyckoff Wave rallied, tested the supply line and moved into an oversold condition on the Technometer. Once again, this would suggest a reaction. Once again, the Wyckoff Waves moved sideways on reduced price spread and sustained volume.
For several days this week, the Wyckoff Wave attempted to rally and saw supply come into the market Then the supply was quickly withdrawn. This left an opening for strong demand to return. It didn’t. Instead, the Wyckoff Wave had several poor quality intra-day rallies. Why didn’t the supply follow through and why is there no sustained demand?
The answer is probably in a five-year-old distribution area. Before the 2007 – 2008 bear market, the Wyckoff Wave experience climactic action around the 40,000 level. It then reacted and moved into a distribution area. The longest phase was between 32,000 & 36,000.
On Friday, the Wyckoff Wave closed at 34,111. This is smack dab in the middle of a 2007 distribution area. That pesky overhanging supply that has come into the market for the past year has not been taken in.
However, during this long sideways trading range, a lot of supply has been dropped into the market and now it is more readily taken in by stronger hands. This is probably why we are seeing sideways movement rather than the strong reactions we saw earlier in the trading range.
When reacting towards a Last Point of Support, Wyckoff teaches us to look for reduced price spread and volume. This is normal and expected.
Another, often forgotten, Wyckoff technique is that a sideways move is an even stronger form of a corrective reaction. In this situation, there is a great deal of interest in the supply that is being dropped into the market. There is so much interest that the bulls are more than happy to grab as much stock as they can.
We have seen this happen after the rally to point N and again on the rally to point R. It appears we are now seeing it again.
While the Wyckoff Waves can certainly react, it appears we are on the cusp of a strong move to the upside. We certainly haven’t seen an upthrust and the 100 Point & Figure chart has no count to the downside. We have seen a strong market moving through to important resistance areas, happily taking in supply as it goes.
I would suspect that at some point in the fairly near future, there is going to be no more supply left and we are going to see a strong rally that will take the Wyckoff Wave to and probably past historical tops.