Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review August 12, 2016
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This past week the Wyckoff Wave moved sideways on relatively narrow price spread and volume. Every day it successfully tested the previous Friday’s low. For much of the week, the price spread and volume suggested a lack of demand. While the Wyckoff Wave had several opportunities to rally, demand did not come into the market and these attempts failed.
Friday’s market action brought a slight change in character. While demand did not return, an analysis of the intra-day price spread and volume indicated that Friday featured a lack of supply. A drying up of supply could certainly mean that the Wyckoff Wave was prepared to put in some sort of rally.
Today’s Weekly Review will discuss the possible scenarios that may play out during the next week. They are listed in order of their probability of success.
1. The Wyckoff Wave will rally and successfully test the area around the resistance line drawn from point C.
2. The Wyckoff Wave will rally through the resistance and retest the earlier high at point E.
3. The Wyckoff Wave will continue to react back into the trading range and test the low at point D.
Let’s review these three scenarios using Wyckoff methodology.
Gap openings need to be filled on the vertical line chart. Last Friday’s wide gap opening to the downside left a wide empty space between the sideways movement marked by point E and this week’s market action. This suggests some sort rally is necessary to fill that gap opening.
The Technometer is working into an oversold condition. This suggests the next move will be to the upside.
Demand has had ample opportunity to come into the market and there have been no early indications that it is poised to make a strong statement. This suggests the Wyckoff Wave will have a normal corrective rally. That rally should end somewhere in the area of point C. There the Wyckoff Wave would encounter supply and react back into the trading range. This would also create a change in the short-term trend from neutral to down.
Despite the fact that demand has not come into the market, a drying up of supply could allow the Wyckoff Wave to make a move to the upside. Lack of supply is not only identified by reduced price spread and volume on a reaction. It is also seen when there is increased price spread and reduced volume on a rally. This lack of supply can often appear in the early days of a strong move to the upside. Therefore, even if demand is not come into the market, the Wyckoff Wave could rally on a lack of supply.
The Technometer is in a low neutral or nearly oversold condition. If the Wyckoff Wave reacts and penetrates the support that developed this week, we could see a minor Spring. If strong demand returns, then the Spring would be confirmed.
However, there is only a count of 1100 points on the 100 Point & Figure chart. If the Wyckoff Wave rallies immediately, this gives the Wyckoff Wave an objective of around 42,500. This is right in the area of the gap opening. This also supports scenario #1.
This scenario has the lowest probability of success, because the Wyckoff Wave has found support at the 41,250 level. In addition, the relative volume level has been extremely low.
Last Friday, the Wyckoff Wave had an opportunity to react back into the trading range. The fact that the reaction did not continue, but the Wave moved sideways, makes it difficult to conclude the Wyckoff Wave will continue to react.
While the reaction may come at a later date, the Wyckoff Wave probably needs to put in a minor corrective rally before reacting further into the trading range.
If the Wyckoff Wave is going to continue to react more supply should have been present during the past week.
Based on the above, a minor rally to fill in Friday’s gap opening has the highest probability of success. If that rally indicates a lack of demand, this will give supply an opportunity to return and the Wyckoff Wave should react back into the trading range.
These scenarios are more focused on short-term trading. The stock market, as measured by the Wyckoff Wave, continues in a major trading range that has lasted for almost one year. While nothing will be confirmed until we see final ending action. The trading range’s market action suggests we are seeing accumulation.
Intermediate and long-term traders should have made any adjustments in the area of point E. This would involve closing trades that have reached objectives or were doing poorly. This would free up cash that will be available to take new positions when the market puts in an important ending action.
If they haven’t already done so, another opportunity will present itself if the Wyckoff Wave puts in some sort of a rally in the coming week.