On Friday, the stock market, as measured by the Wyckoff Wave, finally reacted through the support points of the sideways movement that began at point W. It is now testing the short-term uptrend channel’s support line. If the reaction continues on Monday, as expected, the Wyckoff Wave has a good probability of continuing to react and putting in another trading range support point in the area of point U, on the daily chart.
For the purpose of reducing clutter for this blog post, I have temporarily removed the intermediate downtrend channel and two support lines drawn from earlier areas of support. They will return in future posts.
There was a very interesting happening this week that provides an opportunity to discuss an important Wyckoff strategy. It is the creation of several alternative scenarios and then letting the market tell you which one is correct.
Over the past few weeks I have written that I believe the Wyckoff Wave’s move to the right of point V is a sideways movement, not a trading range. I have also commented that my highest probability of success scenario was a reaction back into the trading range that began with the Selling Climax in late August.
My Wyckoff studies have taught me that I could certainly be wrong and should always look for alternative scenarios and not be wedded to my original concept. This past week, that concept was put to the test.
On Monday, at point A on the daily chart, the Wyckoff Wave experienced and intra-day failure to the downside. Could this have been a Spring? The intra-day failure was on wider price spread and increased volume. This suggests the presence of demand.
When an index or stock Springs the trading range, strong and persistent demand must, into the market. That’s why it’s called a Spring. A look at the intra-day chart could confirm the presence of strong demand.
The market action for Monday, December 14, 2015 begins at point Y on the intra-day chart. As you can see there was good supply that drove the Wyckoff Wave through the bottom of the trading range and ended at point Z. Then, demand came into the market and rallied to point A. So far, so good.
Suddenly supply returned. The Wyckoff Wave quickly reacted to point B. This was only one intra-day wave and, if strong demand returned, could be discounted.
Point B was at 1:45 PM. The stock market spent the next two hours and 15 min. in a rather poor quality rally ending at point A-1. The day’s market action suggested the Spring scenario, while still under consideration, was in trouble. For it to be validated, strong demand, on wide price spread and good volume, needed to come into the market on Tuesday.
On Tuesday morning, the Wyckoff Wave rallied to point C, on the intra-day chart. While this looks like strong demand, almost all of the rally shown on the chart was in a gap opening. In fact, the Wyckoff Wave only gained 13 points after Tuesday’s gap opening. Patently, Tuesday was not a demand day. This suggests the spring scenario was in serious trouble. There needed to be increased price spread and volume on Wednesday for the Spring scenario would not succeed.
Guess what? The Wyckoff Wave rallied on Wednesday, to point B on the daily chart, on wide price spread and increased volume. This is exactly what the Spring scenario needed to continue its validation. Or was it?
Before drawing final conclusions, it is always important to look at the intra-day market action.
Wednesday began with another fairly wide gap opening to the upside at point F, on the intra-day chart.
Supply came in to the market and the Wyckoff Wave reacted to point G. Point G was at 11:30 AM.
Then, the Wyckoff Wave began a poor quality rally to point G-1. The rally was on relatively low volume and narrow price spread. This suggested a lack of demand. A lack of demand does not belong in a successful response to a Spring scenario. The rally to point G-1 ended at 1:40 PM.
Suddenly strong demand came into the market and the Wyckoff Wave rallied for the rest of the trading day. What happened? With the exception of two gap openings, the Wyckoff Wave had made little progress to the upside since the possible Spring. It certainly was not meeting the definition of a response to a Spring.
Right around 1:30 PM the Federal Reserve announced the small interest-rate increase. The stock market responded positively to the news and buyers entered the fray. The Wyckoff Wave rallied sharply to point H on the intra-day chart (point B on the daily chart). However, this was probably weak hands purchasing stock on the news, as strong hands were liquidating.
The intra-day analysis strongly suggested the afternoon market action was not a continuation of strong demand off the Spring, but an artificial move to the upside.
This pretty much eliminated the Spring scenario from consideration. The only question was, with the Wyckoff Wave continued to react and possibly Upthrust the sideways movement. Now, an Upthrust scenario had to be considered.
However, it was not considered for long. Point H was the end of the rally. Supply came into the market and the Wyckoff reacted on good price spread and reduced volume. This suggested a lack of demand and completely confirmed the Wyckoff Wave did not experience a Spring.
On Friday, the Wyckoff Wave follow-through to the downside on reduced price spread and increased volume. This suggested some demand was coming into the market. However, the Wyckoff Wave was testing, and slightly penetrated, the support line of the short-term uptrend channel, shown in blue on the daily chart. This is an expected place for some demand to come into the market.
The poor close suggests the Wyckoff Wave still has a future to the downside. It might not be in a straight line, but the Wyckoff Wave has a good chance of weakening the short-term uptrend channel and testing the low at point U.
This past week, the Wyckoff Wave experienced a possible Spring, responded to some significant news and suggested there might be a Upthrust. The successful Wyckoff trader should identify and seriously consider each one of those scenarios and their impact on the market.
One big reason for this is that often we become wedded to a particular scenario and find ways to justify its continuing existence. We allow emotions and our ego to impact market decisions.
Bad plan, but we’ve all been there and done that. The key is, don’t let it happen again.
As the market will not be particularly active over the next couple of weeks, I will be taking some time off. The blog will resume on the weekend of January 9th and 10th.
My very best Christmas wishes to you and your families. May you enjoy a blessed holiday season.