Rotation Is Helping the Market

Jim OBrien Week In Review 0 Comments

Click Here For Wyckoff Wave Chart 05-10

Since last November, the Wyckoff Wave has been in an intermediate up trend channel. The advance has been somewhat unique, in that there have been no significant reactions. The Wyckoff Wave would advance to the uptrend channel’s supply line. Then it would move sideways towards the supply line on narrow price spread and moderate volume. This process has been completed three times and we appear to be in the middle of the fourth occurrence.

A sideways move after a rally is a signal that the market or individual stock is strong. There is not enough supply to force a reaction. There is also plenty of demand available that is happily taking in this overhanging supply.

This week, we have seen the Wyckoff Wave rally again and start to begin a sideways move. We are also seeing strength in the Wyckoff tools. The Optimism – Pessimism Index is stronger than the Wyckoff Wave. Even though the Technometer is in an extremely dangerously overbought condition, this danger signal is mitigated by a very positive Force Index.

In addition to being in an intermediate and long term up trend channel, the Wyckoff Wave has also established a short term up trend channel. From every perspective the market is relatively strong.

What we are seeing is a bit like accumulation, where the operators move the stock up slightly to gauge the amount of overhanging supply. They then let the stock fall back towards the bottom of the trading range. The process is continued until the supply is taken in and the stock (market) is ready to advance.

This is why we are seeing a nice advance, but a dull market. I would suggest the stepping stone advances we are seeing are a result of rotation. One group of stocks accumulate and then advance, while others remain weaker than the market. When it is their turn to advance, the rotation into new strength results in a positive market move.

Caterpillar Tractor (CAT), a Wyckoff Group Leadership Stock, is an excellent example of rotation.  Caterpillar is in the Industrial Equipment Group. Each Wyckoff Wave stock is a group leadership stock and by watching how they move, the Wyckoff trader can identify investment opportunities within that group.

The 2nd attached line chart, compares Caterpillar with the Wyckoff Wave. From February through the middle of April, Caterpillar has been substantially weaker than the Wave. Then there was a change in character. On a short-term basis, Caterpillar is in harmony with the Wyckoff Wave. This suggests we may be seeing some rotation and Caterpillar, and the other stocks within the Industrial Equipment Group may be poised to advance.

First, a little history. Last June, Caterpillar began to complete a reaction with Preliminary Supported at point F. This was followed by a Selling Climax at point F. CAT then began a trading range that ended with a spring at point P. If you refer back to the relative strength comparison chart with the Wyckoff Wave, you will see that Caterpillar is stronger than the Wyckoff Wave. This is an excellent buying opportunity.

The spring was followed by a Secondary Test and a second buying opportunity. The Sign of Strength was the rally to point I. There was a last point of support at point J and Caterpillar rally to point K.

Caterpillar then Jumped the Creek and rallied to point K. On the surface everything looks terrific. Those who bought at point P, H and J had nice profits. However, trouble was on the horizon. Notice how after point I, even though CAT put in a good Last Point of Support at point J, it did weaken the uptrend channel. More importantly, Caterpillar never again reached the supply line of the uptrend channel. The short term up trend channel was broken at point K. This was a logical place to take profits and close trades.

That Caterpillar was in trouble was confirmed by an overbought Technometer and a negative divergence with the O – P Index. This also gave the short-term bears an opportunity to enter the market to the downside.

Caterpillar then experienced a change in character. It fell back into the trading range and we now need to wait for new ending action. It also became weaker than the Wyckoff Wave.

The relative strength changed again in the middle of April when CAT , once again penetrated the trading range at point L. Look at the volume that came in on the rally off the spring. Caterpillar then rallied to point M and reacted for a successful test of the spring at point N. This was a more powerful Spring that the earlier one at point P.

Caterpillar was back in harmony with the Wyckoff Wave and had established a short-term up trend channel. CAT also appears to have put in a a Sign of Strength on the rally to point O. The halfway point of the rally from point L to O is $85.00. It will be interesting to watch Caterpillar as it reacts back to test the supply line of the short term up trend channel.

Caterpillar is a classic example of how these important Group Leadership Stocks can point us in the direction of stocks that are ready to move. In this example, CAT did just that at point P and may be doing it again at point L. How many other stocks in the Industrial Equipment Group are experiencing the same potential to advance?

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