A Short Term Trading Lesson

Click Here For Wyckoff Wave Chart 06-03-2016

Last Friday, the Wyckoff Wave appeared to have run into some supply. It seemed that the Wave was putting in a successful test of point X and was ready to react. The prevailing scenario had the reaction returning the Wyckoff Wave to its short-term down trend channel and even testing the earlier lows at points U and S.

On Monday, the Wyckoff Wave rallied on reduced price spread and volume. This suggested a lack of demand and seemed to have confirmed Friday’s conclusion. The short term reaction seemed imminent and it appeared this was a good short-term entry to the downside.

This decision was confirmed on Tuesday as the Wyckoff Wave made one attempt to rally and then encountered supply. It closed near the bottom of a wider price spread. Volume was noticeably increased.

On Wednesday, the Wyckoff Wave was basically unchanged and analysis of the price spread and volume suggested a lack of demand. This was consistent with the prevailing scenario and short-term sure traders could maintain their existing positions for take new positions to the downside.

The price spread and volume analysis was supported by a negative divergence with the Optimism – Pessimism Index, when compared with points X and V. In addition, Wednesdays Technometer reading was in a clearly overbought condition.

The only contrary indicator was the Force Index. It was producing low positive readings. When this happens and the Technometer is in a clearly overbought condition, the expected reaction will not be as long or deep.

That also fit the prevailing scenario, as it did not call for the Wyckoff Wave to put in a significant reaction.

So far, everything seemed to predict that the Wyckoff Wave would react.

Then, on Thursday, the Wyckoff Wave surprised. It rallied on increased price spread and decreased volume. It also closed slightly above point X This suggested a lack of supply. Thursday’s lack of supply, at exactly the place where strong supply should have come into the market, was a flashing warning sign.

The stock market can be a cruel mistress. Conditions can change in a heartbeat and scenarios, that seemed perfectly plausible, can be destroyed in an afternoon.

That’s reality. The best way to combat that is to exercise strong market discipline. One cardinal rule of investing is: “it’s not how much you make that’s important, it’s how much you don’t lose”.

This is especially true for short-term traders. Before any short-term trade is made, the trader should write down exactly what the stock is expected to do. It should be written down on paper or typed into a computer. It should not be simply a thought or a mental note to the brain.

This is especially true during the trade’s first few days. If the market actions are contrary to your written scenario, the trade should be closed. Don’t wait for the stop order to be executed. Close the trade.

On Friday, the Wyckoff Wave continued to rally, but on reduced price spread and increased volume. This suggests the presence of some overhanging supply that could come into the market this coming week.

Instead of closing their positions, they wishing and hoping trader could decide that even though the trade is going against me, I can expect supply that come into the market as the Wyckoff Wave approaches point V. Then I will get my expected reaction.

Because the Wyckoff Wave has and rallied much past the highs at point X and there is a strong possibility it will not rally past point V. Sound logical?

That’s exactly what poor market discipline produces. Could that happen? Sure. However, the Wyckoff Wave could also rally past the high at point V and that would result in substantial losses. Lack of market discipline produces wishing and hoping. Wishing and hoping invariably increases losses.

Bottom line, On Thursday, when the Wyckoff Wave did not act as expected, any short-term traits the downside should be immediately closed.

If the Wyckoff Wave finds support at point V, there certainly could be an opportunity to reenter the market to the downside. That entry will be based on a new scenario that will develop in the coming week.

I would much rather lose my costs and a tiny portion of my investment then hold onto a stock where I have lost control and am simply wishing and hoping it will do what I hope it will.

The Wyckoff traders who closed their short term positions to the downside can now view the market in a more objective manner.

During this coming week, it will be important to watch the level of supply that comes into the market. If the new short-term positions to the downside are to be considered, it needs to be strong and sustained.

The Technometer will most likely continue in an overbought condition, as will the O-P Index ‘s negative divergence, when compared with point V.

It will also be important to watch and see if the Force Index begins to recede. This will open the door for the supply to continue and the reaction to begin.

Will that happen? While I believe there is a good chance it will, I would certainly need more concrete information before considering new short-term positions to the downside