Surprises & Scenarios

Click Here For Wyckoff Wave Chart 12-12-2014

This week, the Wyckoff Wave surprised many traders, including myself, and reacted back into its long and ever changing trading range.

The prevailing scenario, that the Wave was reacting back to a Last Point of Support, didn’t work out. The Wyckoff Wave is now solidly back in its trading range and waiting for new ending action before its next important rally or reaction.

While last week’s post reasonably argued the Last Point of Support scenario, it also mentioned that the Wyckoff Wave could possibly fall back into the trading range. While, at the time, it had a low probability of success, it always needed to be considered.

Last Friday, the Wyckoff Wave ended the week on an up day, marked as point J on the daily chart. The Wave was in the process of testing high at point H before reacting to a potential Last Point of Support.

Then on Monday, things changed. The Wyckoff Wave reacted on good price spread and moderately high volume. On Tuesday, it tested the support at the top of the trading range (near end of the creek) and briefly rallied off that support.

Because the Wave moves lower than at point I, the short-term trend was changed from neutral to down. The Wyckoff Wave needed to rally, strongly back into its newly formed down trend channel, or the Last Point of Support scenario was doomed.

That didn’t happen and reaction back into the trading range continued.

Why did things not go as planned? A Monday morning quarterback and could say that the Wyckoff Wave never put in a test of the shakeout at point E. It could also be mentioned that there was not a strong move to the upside (wide price spread and good volume) as the Wyckoff Wave move past F into new high ground. In hindsight, were these early indications that suggested that the Wyckoff Wave would be unable to leave the trading range to the upside?

While I wondered about them, the relative strength of the Wyckoff Wave and the Optimism – Pessimism Index overcame those concerns.

Overall, the Wyckoff Wave’s behavior still suggested the Last Point of Support scenario had the highest probability of success.

However, the falling back into the trading range scenario was always on the radar. In fact, members of the Wyckoff Pulse of the Market Charting Service received a short-term go short recommendation in the area of point H.

The lesson here is not to become totally infatuated with your primary scenario. It is important to always have secondary scenarios to consider.

This is true for two important reasons. The first is that the stock market can be a cruel mistress. It never does things exactly like as we would like it to do.

Secondly, alternative scenarios keep us from becoming emotionally attached to the expectation of a particular event. When we are only looking in one direction and things go wrong, there is a tendency to find something that will justify your expected outcome. This attitude leads to failure and loss of capital.

There is no place for emotion in the stock market. It is simply an easy way to pay more tuition to the University of Wall Street.

Wyckoff Charting Service members who, last month, took positions to the downside are enjoying good profits.

Intermediate and long-term bulls were advised to hold their positions and take new ones in the area of a Last Point of Support.

While the Last Point of Support never happened, these are the ups and downs that intermediate and long-term investors endure as they grow their portfolios.

It should also be noted that the Wyckoff Wave is still in its long-term up trend channel. This trend has been in existence since the bottom of the 2008 bear market and there is nothing to suggest we are getting ready for an intermediate or long term reaction.

This week’s action was a disappointment to the intermediate and long-term bulls, who thought they would be getting ready for a new up leg in this wonderful bull market.

Now, we’ll just have to wait and see if the Wyckoff Wave reacts toward the bottom of the trading range and puts in another spring. That would signal the possibility that we will begin the process (successful secondary test of the spring, Sign of Strength and Last Point of Support) one more time.

If that happens, everyone should ensure they are considering alternative scenarios.