Support Lines & Trend Channels

Click Here For Wyckoff Wave Chart 07-10-2015

The Wyckoff Wave spent this past week testing a fairly important support area, marked by the line drawn from point I. It was also testing, and slightly weakening, the support line of its short-term down trend channel, drawn from the second point I.

The most interesting thing about the week’s market action was that little or no demand was present as the Wyckoff Wave reached those important support areas.

Instead, much of the intra-day’s advances came in the form of gap opening to the upside. There was little or no follow through. Then the Wyckoff Wave went though, intra-day reactions, in a way that suggested a lack of supply.

This should create an environment for either a rally off the trading range or the long-awaited Spring.

It is doubtful that the Wyckoff Wave will react strongly and begin a bear market. In addition to the Lack of Supply, the Wave’s positive divergences with the O – P Index, a Technometer that ended Friday in a nearly oversold condition and a Force Index that is rallying, are all positive indications that simply don’t support a bearish scenario.

Therefore, the Wyckoff Wave is expected to rally. The question is will there be a Spring or simply a rally off support?

This week’s market action continues to indicate that supply is still present. While it may be drying up, it is still coming into the market and not allowing the Wyckoff Wave to rally.

The inability of demand to come into the market, even when supported by a gap opening to the upside, is not conducive with a rally off support. Usually, when this happens, and index or stock reacts, it encounter support and quickly bounces off that support to the upside. The Wyckoff Wave had three chances to do that this week and three times there was no follow through to the upside.

This suggests there is more overhanging supply left and it may take a news event to stimulate the final bit of selling that would create a Spring situation. The negative news report may be the catalyst that will begin the process.

While, in my opinion, this scenario has the highest probability of success, the Wyckoff Wave could just as easily rally off the support. As a famous New York Yankee catcher once said, “we’ll know what happens, what happens”. I suspect we’ll probably have the answer in the coming week.

The weekend is a time for me to sit back with a cup of coffee and look at the market with a longer-term view. As many of you know, I am very conservative when changing trends and discarding trend channels. This is especially true when dealing with intermediate or long term trends and their channels.

A look at the weekly chart shows that the Wyckoff Wave has been in an upward trend since the end of the 2008 bear market. It has beautifully adhered to its upward trend channel and has given us no indication that the trend is about to change.

However, on the weekly chart, the Wyckoff Wave put in a lower high at point H, weekend the trend channel on the following reaction and technically broke the trend channel on the rally to point I.

These lower tops and lower bottoms offer the opportunity to draw a new down trend channel. The support line would begin at point F and go through point H. A parallel supply line would be drawn from point G.

Does this mean the long-term trend is now down? I strongly believe the answer is no.

For the Wyckoff Wave to change an important long-term trend, there needs to be ending action. The sideways move that began at point B was certainly not climactic in nature. There has been no upthrust or a sign of weakness.

These indicate there is absolutely no justification in changing the trend to down.

However, the trend channel has been noticeably weakened. Therefore, until the Wyckoff Wave is able to return to its upward trend channel, the long-term trend must be changed to neutral.

Changing a long-term trend is extremely important and should not be taken lightly. It took me a couple of weeks to come to this conclusion.

While I continue to be confident that the upward trend of the market will continue, Wyckoff disciplined requires that this change be made.