The stock market, as measured by the Wyckoff Wave, put in a short, but interesting week. The week’s action brought about a successful test of an up thrust and began a reaction that may go simply to the bottom of the trading range. There are also two other scenarios that will be discussed later in this letter.
On Tuesday, September 6th, the Wyckoff Wave experienced an intraday failure to the down side. The Wave reacted and bounced off the X – Z short-term support line.
Even though the Wave closed lower than it did the previous Friday, the large gap opening to the down side brought in good demand and the Wyckoff Wave rallied to close at the top of a wider spread. This rally was short-lived as demand was withdrawn on Wednesday. The Wave then reacted on both Thursday and Friday. Friday’s action slightly weakened the support line (X – Z) of the original short-term uptrend channel. The supply present on Friday, coupled with the poor close, suggests there is a good chance the support line will be further weakened when the market opens on Monday.
Presently, the Wyckoff Wave is in a neutral condition relative to the Technometer. It is not getting any support from the Force Index which is slightly lower than it was at point B. The Optimism – Pessimism Index is presently in harmony with the Wyckoff Wave.
Because we saw an up thrust at point A, that was successfully tested at point C, we can now draw a short-term down trend channel with the supply line through points A and C and a parallel support line through point B. In my opinion, since we have the confirmed Wyckoff principle of an up thrust and successful secondary test, the short term downtrend channel takes precedence over the short term uptrend channel. In addition the short term uptrend channel was slightly weakened on Friday and has a good chance of being substantially weakened on Monday.
Trend channels in trading ranges are helpful, but unless they involve possible ending action, like up thrusts and springs, they can be quite short lived.
Where Do We Go From Here?
The Wyckoff Wave should answer some definitive questions this week. There appear to be three possible scenarios:
1. The Wyckoff Wave reacts to the bottom of the trading range, which is also the support line of the short term down trend and then rallies to continue the trading range. At some point, the rally would need to weaken the supply line of the short term downtrend channel.
2. The Wyckoff Wave will spring the trading range. It is not uncommon to see a spring following an up thrust. If this happens, it will be helpful if the response to the spring weakens the supply line of the short term downtrend channel.
3. The Wyckoff Wave will fall through the ice and begin a significant move to the down side. As mentioned last week and shown on page 2 of the accompanying charts, point A was not only an up thrust but a possible rally back to the bottom of the May – July trading range. There is potential on the 100 point and figure chart for a significant downward move.
What To Do?
Short term traders had the opportunity to take short positions in the area of point C. In my opinion, there are no short term positions that should be taken to the upside.
Any short positions should be closely watched and the trader should be prepared to close them if and when demand returns to the market. Positions taken at the up thrust test should now be profitable and stops should be moved to protect those profits. Until proven otherwise, these are very short-term trades.
Interestingly, as I only trade Wyckoff Wave stocks, I only found one candidate that fits my qualifications for a short sale.
Intermediate term traders could have also shorted of the market on the secondary test. If scenario 3 plays out, they can add to their short positions at the last point of supply or rally back to the ice. Again, as these could be extremely short term trades, any short sales must be watched closely until the fall through the ice is confirmed.
This should prove to be a most interesting and eventful week. Trade carefully and watch closely.