Supply Friday – The Wyckoff Wave fell back into the Creek

Click Here For Wyckoff Wave Chart 10-19-12

Friday, the Wyckoff Wave had its largest down day price spread in over three months. It fell 595 points on increased volume. This was a big supply day and, among other things, eliminated the Last Point of Support scenario.

It now appears that we can probably expect the Wyckoff Wave to enter into a new phase of the trading range that began back in January. Despite the long slow reaction back towards the Creek (both support lines drawn from point S), the Wyckoff Wave was unable to take in all the overhanging supply.

While the poor quality of the rally from point C, coupled with the Technometer’s overbought condition, strongly suggested a reaction, Friday’s market action came as a bit of a surprise.

However, the Wave did send a definitive message that it was not prepared to begin its mark up face until the remaining supply was taken in.

Friday’s market action was also a test of point C. While the day’s low was just above the lows at point C, the strength of the reaction suggests the test will either fail or be of poor quality.

This was also an excellent example of the apex concept. On the daily chart, support line L – W joins supply line X – B in an apex formation. When an index or stock moves into an apex, there is an excellent chance it will move definitively and quickly in one direction. The Wyckoff Wave moved into the apex and moved down.

Short term bears who took positions in the area of point D are counting their profits. Short term bulls, who took positions at point C should have closed these positions or executed stop orders.

Intermediate term bulls who took positions in the areas between points A and C may have been a bit premature. These positions were taken in expectation of an intermediate term move to the upside. While that scenario is certainly not eliminated, it is most probably delayed. Since the market did not behave as anticipated, it probably is prudent to close those positions. This frees up capital and maintains market discipline. This is why we have stop orders.

One day does not gloom and doom make. Let’s look at possible scenarios.

It is always possible that the Wyckoff Wave could spring point C and begin a sharp move to the upside. While the probability is not high, it could happen. Problems with this scenario include an overbought Technometer and the fact that the Wyckoff Wave has been reacting from point X and not really in a trading range.

The more probable market action after an index or stock is unable to have a successful Last Point of Support after penetrating the trading range resistance is to simply continue the trading range.

The Wyckoff Wave began its sideways movement in January at point W. It then moved sideways and there was a spring at point F. However, when the Wave attempted to leave the trading range to the upside, it failed and fell back into the trading range. That was the first phase.

The Wyckoff Wave then penetrated the trading range to the down side at point J. It then rallied to point K on what could have been a Last Point of Supply and then reacted to point L. The Wyckoff Wave then returned to the original trading range and moved sideways to point R. Once again, the Wyckoff Wave was unable to follow-through and begin its mark down phase.

This sideways movement continued until we had a Sign of Strength to point S and a Last Point of Support at point W. The Wyckoff Wave then jumped the Creek to point X and attempted to react for its final Last Point of Support before the markup phase.

As you can see, the market is a cruel mistress. It gives off wonderful signals, but then disappoints. That is why discipline and patience are so important.

There has been no indication that the Wyckoff Wave is entering a mark down phase. There is no Upthrust, Sign of Weakness or Last Point of Support. Therefore, our focus should be on a new phase of the trading range and where its parameters will be.

I have also attached a 100 Point & Figure Chart of the Wyckoff Wave. The count from point D to point X is divided into two phases. The first phase from point D to B is 1,000 points. This gives us an objective of between 32,000 and 31,800. We are presently in that objective area.

A complete count from point D to point X is 2,400 points. This gives us an objective of between 30,000 and 30,400. This takes us to an area between the original support line drawn from the first point X and the support line drawn from point P.

There is also an important support level at point W that lies between these two objectives.

If the Wyckoff Wave continues to react, the intermediate trend will change from up to neutral.

Once again, the Technometer will become an extremely helpful Wyckoff Tool in determining when this reaction will stop. It is presently in an overbought condition. On Monday, the Technometer will open in a neutral condition, but still has a ways to go before becoming oversold.

As one who was looking forward to a successful Last Point of Support, I was naturally disappointed in Friday’s market action. However, the stock market is disappointed me before and will disappoint me again. One just needs to accept the fact that it can happen and, most importantly, maintain strong market discipline.

If that can be accomplished, the disappointments are fewer and the profits larger.