Preconceived Notions Can Get One In Trouble

Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review September 2,, 2016

Click here to view the Wyckoff Wave Three Month & Intra-day Charts

On August 17th, (point H on the three-month vertical line chart), the Wyckoff Wave went through an intra-day reaction, before demand came in to the market. The demand was not particularly strong. Even though the next day brought a follow through to the upside, the demand was not sustained and the Wyckoff Wave was unable to put in any kind of a rally. Instead, it continued to move sideways for most of the rest of the month.

The inability of the Wyckoff Wave to rally was a critical message that, in all candor, was missed by yours truly. I violated a cardinal rule of prejudging the market and then when the market did not move as expected, tried to justify my preconceived conclusion.

I was expecting the Wyckoff Wave to rally and overlooked the weakness that was quietly coming into the market.

The weakness began at point H (point E on the intra-day line chart). During the following analysis, I will refer to the intra-day chart.

While the Wyckoff Wave did rally to point F, the subsequent rallies to points L and N were on a lack of demand. This opened the door for supply to come in and the Wyckoff Wave reacted to point S.

The Wyckoff Wave also reached the support line of its intra-day down trend channel, drawn in red on the intra-day line chart.

Then, the Wyckoff Wave rallied to point T. Much of this rally was on a gap opening to the upside and a detailed analysis suggested a lack of demand. In addition, the Wyckoff Wave was unable to reach the resistance line, drawn in green, at the top of the intra-day trading range. This is another indication of weakness.

I paid more attention to the weakening of the intra-day down trend channel then the inability of the Wyckoff Wave to reach the resistance line.

Supply returned and the Wyckoff Wave quickly reacted to point U and, once again, successfully tested the intra-day down trend channels support line.

More importantly, the Wyckoff Wave reacted through the support found at points E, Q and S. In last week’s post I wrote we might be seeing either a Spring or Sign of Weakness. Unfortunately, I discounted the sign of weakness scenario.

After reacting to point U the Wyckoff Wave rallied to point V was on reasonable demand, but notice point V is lower than the previous high at point T. That, in itself, put the Spring scenario in significant jeopardy.

At point V, demand was withdrawn. The Wyckoff Wave encountered supply and reacted. The reaction took place over two trading days and ended at point C. This was a significant reaction.

On the reaction from point V, I realized that I had mistakenly discounted the Sign of Weakness scenario. The next step was to confirm the Sign of Weakness with a poor quality rally for a Last Point of Supply.

The Wyckoff Wave did rally off point C, but the rally was on relatively poor price spread and volume and indicated a lack of demand.

Supply returned and the Wyckoff Wave reacted to point E. Both these reactions barely returned the Wyckoff Wave to the intra-day down trend channel. This put the channel in jeopardy. The rally to point H change the intra-day trend to up. Remember, intra-day trends last from hours to days.

The intra-day up trend channel is proving quite helpful in measuring the relative strength of the rally off point E. After reacting to point I, the Wyckoff Wave was unable to rally back to test the trend channels supply line. This was quite significant and followed up by a noticeable weakening of the trend at point M.

At Friday’s close, the Wyckoff Wave had been unable to return to the trend channel and the rally off point M was of rather poor quality. This suggests the Wyckoff Wave will put in a minor Last Point of Supply. That should produce a reaction back into the trading range and, at least, test point D on the three-month vertical line chart.

This past week’s market action has greatly reduced the probability of success of my former favorite scenario, which called for a rally to test the highs at point E.

I write this because I firmly believe that mistakes are opportunities in disguise. If we accept our errors and then learn from them, we become better traders. Unfortunately, sometimes we have to learn the same lesson several times.

Over the last 45 years I have made many mistakes and they have caused me to pay some extra tuition to the University of Wall Street. However, by acknowledging them and learning from them, I have become a better Wyckoff trader.