Studying Demand & Supply

Click Here For Wyckoff Wave Chart 05-06-2016

Wyckoff teaches that both market direction and it’s turning points can be best understood by studying the demand and supply, that comes into the market, and how they relate to each other.

While the Wyckoff tools, like the Optimism – Pessimism Index, Technometer and Force Index, provide helpful indicators as to the market’s relative strength or weakness, they’re all based on the interrelationship between demand and supply.

This week the Wyckoff Wave continued its reaction off the April 28th high, at point V. Last week, this blog post explored the different scenarios that could take place as a result of this reaction.

Let’s look at this week’s market action and see if we can determine if any of these scenarios can be eliminated.

This past Monday, following Friday’s reaction, the Wyckoff Wave experienced and intra-day failure to the downside, on decreased price spread and volume. This suggested a lack of supply.

However, an examination of the intra-day waves indicated a lack of demand. This opened the Wyckoff Wave up to more supply coming into the market and continuing the reaction. That happened on Tuesday as the Wyckoff Wave reacted and moved closer to the resistance, now support line, drawn through points R and T. This line forms the top of the trading range, that began last August. Once things clarify, this line may be changed and drawn through point V. But we’re getting ahead of the story.

Because demand was being withdrawn and supply was coming into the market, the Wyckoff Wave had an opportunity to continue its reaction and move through that support line.

Instead, on Wednesday and Thursday, the Wyckoff Wave reacted on reduced price spread and volume. This suggested supply was drying up. The drying up of supply offers an opportunity for demand to come into the market. This meant that the Wyckoff Wave could begin a new rally.

On Friday, the Wyckoff Wave rallied on increased price spread, but decreased volume. Because the gap opening to the downside was the low for the trading day, Friday’s market action was not an intra-day failure to the downside.

A widening of the price spread on decreased volume indicates a lack of supply. This was confirmed by an analysis of the intra-day waves.

Instead of demand coming into the market, at a very logical point, the Wyckoff Wave rallied on a lack of supply.

This week’s market action suggests that the sellers are not particularly interested in liquidating stock there aren’t too many buyers waiting to get into the market.

In addition, the Wyckoff tools are not providing any significant indications as to the market’s future direction.

How does all this relate to last week scenarios and what can we expect in the near future?

One of the scenarios was that strong supply would come into the market and drive the Wyckoff Wave back into the trading range. This week’s lack of supply has dramatically reduced that scenario’s probability of success.

A second scenario had the Wyckoff Wave backing up to the top of the trading range, on reduced price spread and volume. If the reaction ended in the area between the top of the trading range and the support at point U, and good demand came into the market, the Wyckoff Wave could put in a nice rally.

So far, that hasn’t happened. Demand is simply not present and has not come into the market when the opportunity presented itself. While the Wyckoff Wave could certainly rally next week, the lack of a strong response to this drying up of supply, reduces the scenario’s probability of success.

In addition, while the O – P Index is in harmony with the Wyckoff Wave, a rally could create a short-term negative divergence, when compared to point V. Finally, the Technometer could easily move into an overbought position on any kind of a rally.

The Wyckoff Wave could rally on relatively narrow price spread and volume and successfully test the high at point V. A successful test could be the beginning of a new phase in the trading range. Initially the resistance would be at point V and support at points S or U.

The final scenario would be a successful test at point V. However, in this scenario the Wyckoff Wave would encounter supply and react strongly back into the trading range. It could even test the lows at point M.

This scenario has a fairly low probability of success. When supply comes into the market to initiate a substantial reaction it does so quickly and strongly. The reaction off point V does not have any of these characteristics.

Therefore, it appears that the Wyckoff Wave will begin a new phase of the trading range, with the support at points S or U and resistance at point V.

This new phase would also allow for ending action at a higher level. The Wyckoff Wave would not have to react back to point M and put in ending action in the form of a Spring. It would only have to spring the support of the new phase of the trading range.

I continue to believe that this trading range is accumulation. We have seen little supply and, more importantly a relatively dull market. Distribution is shown on the charts with a wider price spread and higher volume, as sellers attempt to liquidate large positions.

When the market is accumulating there is a tendency, in general, to see narrower price spread and lower volume. If you are bullish, like I am, boring is good.