Springs and Trend Lines

Click Here For Wyckoff Wave Chart 10-07-11

This week the Wyckoff Wave sprung the trading range. The number two spring has brought the Wave to the supply line of the short term downtrend, with the potential for continued movement to the upside. This could be the beginning of a bull market or a bit of a disappointment as the stock market says it is not quite ready for its next move.

Let’s revisit the trading range and review what has happened with a special look at the trend channels that have formed during the trading range.

As we all know, in early August, the stock market, as represented by the Wyckoff Wave, experienced a selling climax. This is marked by point X on the accompanying chart. The rally to Y was the Automatic Rally. The reaction to Z was the secondary test.

We can now draw a new short-term uptrend channel with the support line through points X and Z. A parallel supply line is drawn through Y. This is a minor uptrend channel. We can draw it because we have a second low that is higher than the first low. However, it is a minor uptrend channel because it does not contain an important Wyckoff indicator.

The Wyckoff Wave rallied from point Z and seven trading days later we had an important Wyckoff indicator. Point A was an upthrust of the trading range. The Wave reacted two point B, had a brief rally and completed the reaction at point D. It then rallied and tested the upthrust at point E.

I did not extend the short term uptrend channel on the chart because it became a bit confusing. However, while this channel has been weakened it has not been broken. Then why do we have a new down trend channel?

This is because the new down trend channel is based on the upthrust and not simply on a second higher top or a second lower bottom. In my opinion, any time a trend channel can be drawn using one of the important Wyckoff indicators it always takes precedence over one that does not.

Why am I spending time on old news? Because as the days go on this new short-term down trend channel will play an important part in how we analyze the market’s future action.

After testing the upthrust at point E, the market collapsed. For two days the news was terrible and the market reacted strongly to the bad financial situation both in America and Europe. Mr. Wyckoff always said to ignore the news and that you just made what was going to happen, simply happen faster. This was exactly the case. More importantly, it drove many of the weaker holders out of the market, transferring a great deal of stock to stronger hands. This can especially be seen on Thursday, September 22nd. This is marked as point F. There was a huge gap opening to the down side. Even though the Wave was down strongly from the previous day, the gap opening created a narrower spread. As the volume increased substantially, we can actually see where good demand came into the market. This was right at, but not below, the bottom of the trading range.

Even though this was a bullish indicator, the Wave weakened the short term downtrend and after the rally to G did not reach the supply line of the short term downtrend. This is where Wyckoff students, while realizing we are in a short-term down trend, place this little tidbit of information in our memory bank and look for something that may confirm that the market may be prepared for possible action to the upside. It is amazing how good information can come from what many may consider “bad market days”.

After the rally to G, which was done on good spread and volume, the Wyckoff Wave began to react. There was a slight negative divergence with the Optimism – Pessimism Index and the Wave was moving into an overbought condition relative to the Technometer. The expected reaction proved to be important and gave us some good indications as to future action.

Look at the volume. From point G we saw decreased spread and volume. Even though the volume increased on the day before the spring, compare the move from point E to point F. It took over twice as long to move a shorter distance and, more importantly, the volume was dramatically smaller. We were drying up supply.

However, the market is not easy. The day before the spring we saw an intra day failure to the upside and a poor close on increased spread and volume. Everything is going so well and then, all of a sudden, supply appeared. Were we going to fall through the ice? Were these little positive indicators all for naught? No they were not. This is why the Wyckoff strategies are so amazing and have been so successful over the last 100 years. We were seeing the beginning of the spring.

The next day, the Wyckoff Wave sprung the trading range and began to rally. As mentioned earlier, this is a number two spring that needs to be tested. We are still waiting the test.

Despite the spring, we are still in a short term down trend. On Friday, the Wyckoff Wave tested and pulled back slightly from the supply line of the short term downtrend channel. The rally, so far, has not brought out a great deal of demand. More importantly, we are also not seeing any supply. The rally has been on decent spread and volume. The Wave has rallied past point G and may be prepared to go higher. Interestingly, the Technometer is still in a low neutral condition and not overbought. This is an important and bullish indication.

Until the Wave proves otherwise, we are still in a short-term down trend. It will be extremely helpful if the Wave can continue to rally and weaken the short term downtrend. In doing that we may see a creek jump. If that is the case, a successful backup could create a new uptrend channel that is based on not only a spring, but a last point of support. This would also be the test of the spring.

If the Wave is unable to rally and reacts back to the bottom of the trading range, we need to watch the price spread and volume quite carefully to see if we will have a successful test of the spring.

What To Do?

Short-term traders to the long side, who have purchased on the spring should hold positions and crowd stops. The wave will either go and go now or react. As the Technometer is in a low neutral condition, short-term trades to the down side, in anticipation of a reaction to test the spring are a bit risky.

There are no intermediate term trades to the down side. Intermediate-term traders to the upside should begin to closely examine candidates for a significant up move in anticipation of a successful last point of support or test of the spring.

Trends of the Market

The short term trend is down. The intermediate trend is still neutral.