Springs & Upthrust – What’s Going On?

Click Herre For Wyckoff Wave Chart 03-01-13

Last week, the Wyckoff Wave appeared to spring the support line of the short term trading range. However, as mentioned last week, good demand had not come into the market to confirm the spring. This suggested we have not seen a spring and were still waiting for ending action.

Then on Monday, strong supply came into the market and drove the Wyckoff Wave back through the support area. It closed at the bottom of a wider price spread and increased volume at point U. Could this be the Spring we were waiting for?

A poor attempt to rally on Tuesday indicated a lack of demand. Once again, demand did not come in after a potential spring. While the Wyckoff Wave put in a better performance on Wednesday, the increased price spread and decreased volume suggested a lack of supply. Still no demand.

Until strong demand came into the market the spring could not be confirmed. At this point the Wyckoff Wave needed to break through the resistance on strong demand and then react and test the Spring.

Instead, the Wyckoff Wave slightly penetrated the resistance and encountered strong supply. Did we see an upthrust?

An upthrust is defined as narrow price spread with increased volume and a poor close. Thursday’s market action brought the narrower price spread and the poor close. However, volume was sustained. However, a review of the intra-day waves showed that strong supply came into the market, especially near the end of the trading day. This added some credibility to the upthrust scenario.

Even though all the upthrust criteria was not met, this had to be considered a potential upthrust. Whether it was or was not would be proven by future market action.

If we were seeing an upthrust, the supply that came in on Thursday needed to be continued on Friday.

Friday morning looked promising for the bears. There was a strong gap opening to the downside, but then supply was quickly withdrawn and the Wyckoff Wave rallied. This put a bit of a crimp in the upthrust scenario.

It is also important to remember that if we need to be wary of Springs in a down trend, we must also be careful of Up thrusts in an up trend. While the short-term trend of the market is neutral, the intermediate term trend of the market is up.

For the past month, the Wyckoff Wave has moved sideways in a short term trading range and been in a short term neutral trend. All of a sudden it has attempted to both spring and upthrust the trading range. The response to both has not fulfilled their definitions. Good demand did not appear on the potential spring. Strong supply dried up on the potential upthrust.

What does all this mean and what is the market going to do next?

First, let’s look at market trends. The short-term trend of the market, defined by the trading range, is still neutral. The intermediate-term trend of the market, as defined by the uptrend, drawn in blue, on both the daily and weekly charts is most definitely up.

The long-term trend of the market, as defined by the uptrend, drawn in orange, on the weekly chart is also up. The Wyckoff Wave had been in an over sold position, but has returned to its long term up trend channel.

In addition, while there are substantial Point & Figure Chart objectives to the upside, there is only a count of 1,700 points. This only gives us a downside objective of between 31,800 & 31,700. This count would only be of interest to short-term traders.

It appears we are looking at one of four possible scenarios.

1. The Wyckoff Wave has upthrusted the trading range, reacted and is now testing the upthrust. This scenario would give us the short-term objective mentioned above.

2. Even though it was slightly above the resistance line, the Wyckoff Wave simply met resistance and is reacting to test the Spring. While this is contradictory to the upthrust scenario, it must be considered.

3. Both the Spring & upthrust failed and the Wyckoff Wave will continue to move sideways in its short term trading range and wait for future ending action.

4. After the Spring at point U, we are seeing some absorption at the top of the trading range. The Wyckoff Wave will work through the absorption and move into new high ground. It also may be drven back into the trading range. If so, scenarios 2 & 3 continue to be valid.

Intermediate and long-term bulls are not nearly as troubled by these events as short-term traders. The intermediate and long-term investors trade with the trend and, as both are up, could have used this sideways movement as an opportunity to add to their positions.

Conversely, the short-term trader is really struggling with the market. Because short term trades are short in both time and price movement, the short-term trader is focused on identifying new market trends just before or as they happen.

In other words, in this market the short-term trader sometimes needs to act before receiving absolute confirmation that we have seen an upthrust or spring.

When this happens, focused discipline is required. For example, on Thursday night or early Friday morning, it was reasonable for the short term trader to assume there was an upthrust. The short-term trader could then look to take position(s) in previously identified candidates.

However, and this is extremely important, the characteristics that define the upthrust must continue on Friday. In other words, supply needed to be present on Friday. This would result in increased price spread and volume to the downside.

That didn’t happen. Instead supply dried up and the market rallied. The disciplined short-term trader realizes that what should have happened, didn’t happen. The trader now has two choices. The disciplined short-term trader closes the positions and either breaks even or takes a very moderate loss. The wishing and hoping short-term trader holds the positions in hopes that the market may react in the future. More often than not, that simply increases the trader’s loss.

Are you a disciplined short-term trader or a wishing and hoping one?