Stepping Back And Looking The Market

Click Here For Wyckoff Wave Chart 11-08-2013

This week, the Wyckoff Wave gained 255 points or .66%. For the last 9 trading days it has been testing the supply line of the short term up trend channel.

Until Thursday, we had seen relatively narrow spread and relatively reduced volume. This suggested a lack of demand and indicated the Wyckoff Wave would react at least back to the top of the trading range. That would be the support/resistance line drawn from point U through point A.

On Thursday the Wyckoff Wave reacted on good price spread and volume. It certainly appeared that the long-awaited reaction was beginning. Then, on Friday, the Wave turned right around, rallied, and almost reached Thursday’s high price. Both Thursday’s reaction and Friday’s rally were on increased price spread and volume.

This is a change in character. From a poor quality, lack of demand attempt to rally, it appears we are now seeing some absorption. Absorption is a battle between demand and supply. It is identified by a wide price spread and high volume. That is exactly what we have seen on the last two trading days.

The problem with absorption is that while we know there will be an eventual winner, it is difficult to identify the victor until the market starts to move.

In addition, the market action of the last two weeks has been complicated and difficult to analyze. There is also a tendency to pay too much attention to what the market is going to do tomorrow, rather than what is the general direction of the market.

At times like this it is best to step back and look at the market from a longer-term perspective. This gives us an opportunity to not only see things we miss when focusing on the previous week or two, but also to identify the particular character of the market or of each individual stock we are following.

Even if I am considering a short-term trade, I always take a longer-term view first. I do the same when I am uncertain of the market’s future direction. It allows me to take a deep breath and look at the stock market from an entirely different perspectives.

When that happens, I turn to the weekly chart.

The Wyckoff Wave has been in an up trend for the past five years. The trend began at the bottom of the 2008 – 09 bear market and is marked on the weekly chart in orange., With few exceptions, the Wyckoff Wave has always remained in that long term trend channel.

The Wyckoff Wave went through some distribution and a quick reaction in 2011. That was immediately followed by some re-accumulation, beginning at point X on the weekly chart and subsequent rally to point U.

The Wyckoff Wave then moved sideways and went through a second period of re-accumulation beginning at point X. The wave then rallied to point K

The Wyckoff Wave again moved sideways and appears to going through a third period of re-accumulation beginning at point L. While it would’ve been nice and neat if the Wyckoff Wave had experienced a spring, there was no ending action at the bottom of the trading range.

Instead the Wyckoff Wave rallied to point O, reacted to point P and now appears to have jumped the Creek (penetrated the resistance at the top of the trading range). This could be the long-awaited ending action.

It is also testing the supply line of its long-term up trend channel. This is helpful as it may help us understand the market’s future direction

Two weeks ago, Wyckoff Wave jumped the Creek. It did so on reasonable price spread and volume. However, it was not the high level of volume that is normally associated with a Creek jump.

This past week, on the weekly chart, the Wyckoff Wave experienced an intra-week failure to the downside. It closed at the top of a narrower price spread on sustained volume. The Technometer is in an overbought condition.

The sustained volume indicates that neither supply or demand was dominant during the week. The narrowing price spread indicates the Wyckoff Wave is bumping up against some resistance.

This would suggest it may react back to the top of the trading range or the Creek. This is drawn from point K through points M and G.

A look at Friday’s 100 Point & Figure chart shows a maximum count of 1,100 points along the 39,000 line. As of Friday, the objective to the downside was 37,900. The high at point capital O was 38,070. If the Wyckoff Wave was to react from those highs, on reduced price spread and volume, this would be a normal backup to the Creek. It could also be him him a significant Last Point of Support.

Will that happen? We won’t know that until demand and supply finish their battle, but the weekly chart suggests that is an extremely plausible scenario.

While the short-term bears may enjoy some quick profits, the real winners are the long-term bullish investors who, not only will add to their profits, but will also have an excellent opportunity to clean out under performing stocks and add new ones to their portfolios.

The long-term trend of the market is up and that’s where the money is.