This past week the Wyckoff Wave gained almost 1100 points or 3% of its value. It rallied back into and through the short-term down trend channel. It is now in an overbought position relative to that channel.
Despite that move it would have been extremely difficult or actually impossible for Wyckoff students to take any short-term long positions.
Taking a position to the upside necessitates that certain criteria be met. First and foremost, one needs to trade with the trend. Both the short term down trend channel and the down trend channel drawn with a reverse use of trend lines (light green) are down. Therefore, the short-term trader needs to identify that a change in direction is about to happen before the trader can “buck the trend”.
This would be some sort of ending action. It could be a spring or its secondary test. It also could be a secondary test after a sign of strength. Unless these important Wyckoff signals are identified, the disciplined Wyckoff student would find it extremely difficult to take a position.
It is also better to miss a move then to guess on one, without the Wyckoff indicators, and be wrong.
It’s really easy to be a “Monday morning quarterback” when doing market analysis. When the results are not evident the picture looks very different.
Let’s go back and look at the Wyckoff Wave between points X and last Friday’s action which is marked as 1.
As it was reacting down from point W the Wyckoff Wave saw some support at point X. This was a normal area for support to return, as it is at the top of the resistance, now support line, drawn from point B. This is a creek. The line drawn from point B is the near edge and the line drawn from point B through point F is the creek’s far edge.
The Wyckoff Wave then rallied to point Y and reacted back down to point Z. The inability for the Wyckoff Wave to return to the down trend channel at point Y is a bearish indication. The reaction to point Z took the Wyckoff Wave back into the Creek, but it held above the far edge.
More importantly it held above point Q which appears to have become an important support area in this sideways movement.
So far, the Wyckoff Wave has simply reacted to the bottom of a trading range. There is no ending action. Until there is ending action, even on a short-term basis, it is difficult to consider any short-term positions to the upside.
The Wyckoff Wave had three options. It could rally within the trading range. It could react and spring the trading range. It could react sharply and break through the support as it “fell through the ice”.
The Wyckoff Wave then moved sideways, with a slight upward bias until the day before point 1. There it attempted, once again, to return to the down trend channel and failed. It experienced an intra-day failure to the upside and was extremely vulnerable to a reaction.
Last Friday, at point 1, the Wyckoff Wave had another intra-day failure to the upside and closed in the middle of a substantially wider price.. While volume was not noticeably increased, it did indicate the presence of supply.
The Optimism – Pessimism Index showed there was a fairly important positive divergence, with the Wyckoff Wave when compared to point Q. The effort to the downside, as indicated by the O – P Index, was not matched by the results as the Wyckoff Wave remained higher than point Q. In addition, the Force Index was rallying. The Technometer was still in a neutral condition.
These all indicated that the Wyckoff Wave was not prepared to have a significant reaction and that the spring scenario was a reasonable probability.
A spring would have given short-term traders an opportunity to enter the market to the upside. That didn’t happen.
Instead on the Monday, the Wyckoff Wave had a large gap opening to the upside, but the rally was not sustained and the Wyckoff Wave closed on reduced price spread and volume. This indicated a lack of demand. The gap openings on Tuesday produced the same results. Although the Wyckoff Wave was rallying, the quality of the rally was poor.
In addition, the gap openings would have forced short-term bulls to chase stocks. While this is a bad habit by itself, it could prove disastrous during a poor quality rally.
The Wyckoff Wave continued to rally and moved into its present overbought position. The short-term trend is still down and this would be an extremely risky point for new short-term trades to the upside. The bulls may have missed an opportunity, but trading success is based on discipline. The most profitable traders are not in the market all the time, but pick their spots and make sure their risk/reward ratio is strongly in their favor.
The stock market is too hard a game to force the action.