Setting Up The Trading Range

Click Here For Wyckoff Wave Chart 10-02-2015

Finally, a little over a month after the Selling Climax (point Q), the Wyckoff Wave has confirmed it is in a trading range. While it certainly appeared that way for quite some time, with apologies to Yogi Berra, “it isn’t confirmed, until it’s confirmed”.

In other words, while it certainly seemed that the Selling Climax was the beginning of a new trading range, the initial support and resistance points needed to be confirmed. This was especially true of the first support area. Support here told us the market was going to move sideways.

The confirmation actually happened on Friday when, for the first time since the Selling Climax, strong demand came into the market. While it can be argued that either point S or point U was the Secondary test of the Climax, the important fact was that the Wyckoff Wave established a trading range. There it will remain until there is some sort of ending action.

As the range develops, the resistance and support points will probably not be straight horizontal lines. We also may see failed Upthrust that simply become resistance points. There could also be failed Springs that will become support points. When these happen, it will be extremely important to watch the price spread and especially the volume as they take place.

As this trading range develops it is extremely important to study the volume, especially when the Wyckoff Wave at the top or bottom of the trading range.

For example, during accumulation we like to see narrower spread lower volumes on reactions. On the reaction from point T, there was relatively narrow spread, but the volume remained high. That suggests supply is still present. It will be difficult for the Wyckoff Wave to put in a strong advance
until that volume dries up.

Therefore, on the next reaction back down towards point U it will be important to compare the volume present during that reaction with that during the point T – U reaction.

Some might say that point U was a Spring. The logic there is there was a Selling Climax at point Q, and Automatic Rally to point R and a successful Secondary Test at point S. Since point U was below point S on slightly increased price spread and volume, we had a #2 Spring.

However, on the day following point U, the Wyckoff Wave rallied on decreased price spread and volume. That suggested a lack of demand at exactly the time when demand needed to come into the market to confirm the #2 Spring. This is an example of the false spring referred to earlier in this blog post. “It’s not confirmed, on tell it’s confirmed”

In addition, there is a count of 1,000 points from point U over to point Q on the 100 Point & Figure chart. That gives the Wyckoff Wave a lofty objectives of 37,734. The price at the resistance line drawn from point E is 38,678. That means, that according to the 100 Point & Figure chart, the Wyckoff Wave does not even have the potential to rally through that resistance line and return to the old trading range.

This would suggest there is a fair amount of sideways movement ahead of us before any ending action precedes an intermediate or long term rally or reaction.

When viewed from an intermediate or long term perspective, the market is simply going through a normal corrective reaction and is developing a new trading range. There is a reasonable probability that the new trading range is re-accumulation and it will confirm un-fulfilled figure chart counts taken at lower levels. This means existing long positions should be maintained. Additional long positions can be taken, if there is ending action in the form of a Spring or Last Point of Support.

Where does that leave short-term, or swing traders, who look for minor market moves and fairly quick in and out trades?

Rule number one. Never, ever take a position in the middle of a trading range. There is little margin for error and it is much better to miss an opportunity then chase a stock. That is an almost guaranteed way to lose money.

An example of this is the market action around point U. It would’ve been incorrect to take a new position to the upside on the false Spring. A position could’ve been taken when demand came into the market. However, demand didn’t appear. Instead the Wyckoff Wave then rallied for three days on relatively poor price spread. An internal study of the day’s market action indicated a lack of demand.

It was now approaching the middle of the trading range. In addition, as discussed in the daily Pulse of the Market report, supply was still present. This suggested the Wyckoff Wave had a reasonable opportunity to react below point U.

Then, on Friday, after a fairly wide gap opening to the downside, the Wyckoff Wave, finally met demand, rallied and closed at its high for the trading day.

There has been no ending action. In addition there is a short-term negative divergence with the Optimism – Pessimism Index. The Technometer that is moving quickly towards an overbought condition. This, plus the 100 Point & Figure chart data mentioned above, indicates the Wyckoff Wave is closer to the and of the rally then it’s beginning.

Any new short-term positions to the upside would be extremely high-risk and, most probably, cost the Wyckoff trader money.

Profits can be made trading short-term in a trading range, but trades need to be entered at the top or bottom of the range.

It is better to miss an good opportunity then to take a bad one.

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