Springs, Shakeout’s and the Short Term Trader

Click Here For Wyckoff Wave Chart 10-24-2014

This past week, the Wyckoff Wave continued its strong response to its shakeout (#1 spring). This is marked as point E on the daily chart and point A on the weekly chart.

This response has moved the Wyckoff Wave into and through its short-term down trend channel. It is now in an area where it can test the resistance line drawn from point D on the daily chart.

In addition, the rally has exceeded the halfway point of the reaction from September’s high at point B to the shakeout at point E.

This, plus the weakening of the short term down trend channel are good bullish indications. These suggest the secondary test of the shakeout has a good chance of success. This can prepare the Wyckoff Wave for the next up leg in this wonderful bull market.

Of the seven days following the shakeout, five have been up days and only two caused the Wyckoff Wave to react. This continues the relative strength the market has shown throughout the trading range.

That’s the good news. The bad news is that short-term traders are looking back on potential profits that were lost by not taking positions at point E. I was one of those traders.

Everything looks better in hindsight. However, the question is should short-term long positions have been taken at point E?

To answer that question, let’s review the bidding.

The Wyckoff Wave has reacted fairly sharply from point D. However, supply was moderate and didn’t increase. This suggested the spring scenario had a good possibility of success. Normally, in a situation like this, we would expect a #2 or #3 spring.

Instead, the Wyckoff Wave reacted strongly through the support at the bottom of the trading range before rallying.

While Wyckoff strategies and techniques condone taking a position on the spring, in my opinion, this is a good strategy for #2 and #3 springs. Initially, a shakeout or #1 spring is quite similar to a Sign of Weakness (fall through the ice). Taking a position on a shakeout is extremely risky. I would much rather see a successful secondary test before entering the market to the upside.

In this case, there was one additional caveat. Always beware of springs in a downtrend. Many years ago, I learned that lesson the hard way and added more money to my tuition bill at the University of Wall Street.

These two reasons suggest that, despite the fact that an opportunity was lost, Wyckoff discipline requires students should have passed on this opportunity.

The Wyckoff Wave will either react to attempt to put in a successful secondary test or it will combine the response to the shakeout with a Sign of Strength and rally into new high ground.

The former scenario has the highest probability of success. The Wyckoff Wave also has to reach the resistance line that forms the top of the trading range, drawn from point B. It is already showing indications of a slowing rally and we could see the reaction begin next week.

Then it will be extremely helpful to watch the relationship of the Wyckoff Wave with the Optimism – Pessimism Index, Technometer and Force Index. These will help us determine if the secondary test is going to be successful and, if so, when to take new positions to the upside.

My Wyckoff discipline tells me to stay away from taking positions on shakeout or #1 springs, especially in a downtrend. I strongly suspect that any minor profits that would’ve been made by taking those positions, were more than offset by losses when the shakeout turned into a Sign of Weakness.

Sometimes it’s not how much you make, but how much you don’t lose.