Reviewing Wyckoff Principles

Click Here For Wyckoff Wave Chart 06-29-12

Sometimes, the Wyckoff principles can be a bit tricky. It is fairly easy to find them after the fact. Unfortunately, that’s like closing the barn door after the horse got out. It is a bit more difficult to identify them during a developing market. In my opinion, the past six weeks have been one of those more difficult times.

Previously we discussed the spring at point Z and how it was unable to evolve into an up trend and return to the trading range. The Wyckoff Wave sprung the market again at point F and, while it did establish a short-term up trend channel (support line F–H, parallel supply line G), failed to penetrate the resistance at point A.

However, there was no ending action in the form of an upthrust. The Wyckoff Wave simply reacted to point J. Was this a poor quality test of the spring at point F, or did the Wyckoff Wave fall through the ice?

When we have conflicting principles, it is often best to go back and look at basic supply and demand. That is best analyzed by using the price spread and volume on the daily charts. Let’s start from point I.

When the market for individual stock reacts, it is much more orderly than when it rallies. Reactions happened faster and more definitively than rallies.

As the Wyckoff Wave first reacted from point I it did so on good price spread and reasonable volume. However, it ran into trouble as it approached the bottom of the original trading range (support line drawn from point V). This is marked by a red line drawn on the vertical line chart.

Notice how the Wyckoff Wave first saw support and then moved sideways for three days. If this was a Sign of Weakness and fall through the ice, there should not have been that much demand present in the market. The Wyckoff Wave should have driven through the support on widespread and good value.

Instead, the Wyckoff Wave penetrated the support and moved sideways for two days before reacting to point J. While lower than the spring at point F, if we were seeing a fall through the ice and a major Sign of Weakness (SOW), the Wyckoff Wave would have reacted farther and more definitively.

This all suggests we are not seeing a fall through the ice, but a poor quality test of the spring at point F.. However, the Wyckoff Wave has one more chance to prove us wrong. That would be on the rally to point K.

If the rally to point K was a rally back to the ice for a Last Point of Supply (LPSY), we would see a drying up of demand. This would be presented on the vertical line charts has reduced spread and volume on the rally. This rally is underlined in green on the vertical line chart.

Instead, we saw reasonable demand and on the day before point K, the Wyckoff Wave actually reacted on reduced spread and significantly reduced volume. This would suggest a lack of supply, just when supply should be coming into the market. In addition, at point K the Wyckoff Wave actually returned and closed back in the trading range. This would unusual for a LPSY.

After reaching point K, the Wyckoff Wave reacted again. However, based on this analysis and the conclusion that point K was not a LPSY, we can expect a strong move to the down side.

In addition, subscribers to the charting service and the daily market report saw there was an important objective on the 100 Point & Figure chart right in the area of point L. This was also an important support area as it was at the top of last Fall’s trading range.

This conclusion was confirmed by the strong rally to point M that returned the Wyckoff Wave back to the upper portions of the trading range, The rally was on good spread and volume and more typical of a rally than the move from point I to point J was typical of a reaction. At least for a while, demand was back in control.

However, let’s not forget about the spring at point F and the two poor quality tests at point J and L. I would suggest that the rally to point M and the return to the trading range simply negates these Wyckoff principles. The poor quality tests suggest that supply was not dried up and the Wyckoff Wave was not ready to begin an up move.

The poor quality reaction from point I and the fact that point K was not a LPSY suggests there is still plenty of demand present. In other words, the rally to point M tells us the Wyckoff Wave is not ready for ending action. It needs to continue its he sideways move and let the forces of supply and demand continue to do battle.

This scenario seems to have been confirmed by the market action following point M. Supply dominated on the move to point N, but good demand came in right in the area of the halfway point. The good price spread and volume on this brief reaction makes it difficult to conclude that supply has dried up.

This week the Wyckoff Wave had good demand come in to stop the reaction at point N. The next three days were not overly spectacular as the Wyckoff Wave made little progress on reducing volume.

The nature of the reaction and, until Friday, the poor quality of the rally, suggested the rally would be short and the Wave could react to test point N and even point L.

Then along came Friday. The Wyckoff Wave experienced a strong gap opening to the upside and continued rallying throughout the day. While this suggested demand might be back in control, some obstacles are ready to possibly slow or stop the advance.

1. Because of the good spread and volume on the reaction to point N, it would be difficult to suggest that: Point L was a shakeout, the rally to point M was a Sign of Strength and point N was a Last Point of Support.
2. On Monday morning, the Wyckoff Wave will begin the week on an overbought condition relative to the Technometer.

During the past several months the Wyckoff Wave has tried to leave its trading range in both directions. However, we have never seen a Wyckoff principle that has been confirmed by the drying up of either supply or demand.

This would suggest the trading range will continue until we see ending action. It is most likely this ending action will be in the form of an upthrust or a spring.

Remember, even if we see one of those important Wyckoff principles, it needs to be confirmed before it is actually true.

Enjoy a safe and relaxing Fourth of July.