Testing The Bottom Of The Trading Range
This past week the stock market, as measured by the Wyckoff Wave, slowed its decline and found some support. If it holds, the support level is between the August Selling Climax, at point Q on the daily chart, and the initial trading range support area at point U. Right now, that support level is marked as point G.
Although the Wyckoff Wave has met some support, the rally off point G has not been particularly impressive. Although, both Thursday’s and Friday’s volume was relatively high, price spread narrowed and volume was reduced when compared to Wednesday.
This suggested a reduction of demand and confirmed that the penetration of the low at point U was not a Spring. That was because strong demand did not come into the market.
This, and the relatively strong reaction off point D, suggests the Wyckoff Wave may need to successfully test Wednesday’s low before it can put in a trading range rally.
In addition to rallying off the bottom of the trading range, other possible scenarios should be considered. They are:
1. The Wyckoff Wave will successfully test point G and rally back towards the top of the trading range.
2. The Wyckoff Wave will react to test point G, but the test will fail. The Wave will then react through the support at point Q and Spring the entire trading range.
3. The reaction from point D has been a Sign of Weakness. The Wyckoff Wave will react through the bottom of the trading range (fall through the ice). The Wave will fail to return to the trading range on the subsequent rally. This would be a Last Point of Supply. Then the Wyckoff Wave would continue its reaction on good price spread and volume.
Let’s look at these scenarios from a short and intermediate term view.
Scenario 1 is a short-term scenario. On the reaction to point G, the Wyckoff Wave moved into an oversold position relative to the short-term down trend channel, that is drawn in red, from points D and E. Thursday’s and Friday’s rally returned the Wave to the channel. The Wave is presently testing its supply line. It would be a short-term positive indication if, next week, the Wyckoff Wave weakens the short-term down trend channel. If that is followed by a reaction on narrowing price spread and reduced volume, the chances are good that the test of point G would be successful.
In addition, the Technometer is in a slightly oversold condition. The Force Index is starting to rally. However, the high negative readings still have the mitigating impact on any rally. It will be important to watch the Force Index if the Wyckoff Wave reacts to test point G.
Finally, the Technometer will become increasingly oversold on any reaction. It is difficult for the Wyckoff Wave to continue a reaction in the face of an extremely or dangerously oversold Technometer.
Scenario #1 has the highest probability of success.
Scenario #2 is interesting. In this scenario, the lack of demand on the Thursday and Friday rally opened the door for supply to come into the market. The Wyckoff Wave would then react through point Q on good price spread and volume. Then, strong demand would return and the Wyckoff Wave would rally back into the trading range. If that is going to happen, these events will probably take place next week or early the week after next.
Look at the short-term down trend channel. The Wyckoff Wave would go through the Spring scenario in a short-term downtrend. Remember the old Wyckoff adage, “beware of Springs in a down trend”.
This would suggest that if the Wyckoff Wave does react through the trading range support, it will probably not put in a Spring. Instead, we would see scenario #3. That is why scenario #2 has the lowest probability of success.
Finally, the longer-term scenario of a Sign of Weakness and continued reaction to the downside, cannot be cast aside.
In addition to the above comments about the extremely or dangerously oversold Technometer reading, it is helpful to look at the relationship of the Optimism – Pessimism Index and the Wyckoff Wave.
If the Wyckoff Wave were going to react strongly through the trading range and move into a major reaction, the O – P Index would be sending signals of strong supply. That isn’t happening.
When comparing the O – P Index and the Wyckoff Wave to the August Selling Climax at Point Q, the Wyckoff Wave is presently slightly above point Q. However, the O – P Index has not made that much progress to the downside. This suggests that there is not that much effort pushing the Wyckoff Wave into a strong reaction. This is exactly when strong supply needs to quickly enter the market. So far, that hasn’t happened.
Finally, on the weekly chart, there has been reduced price spread on the sharp January reaction. Volume remained high. That is not uncommon in the early stages of an accumulation trading range. That is because there is a great deal of supply that needs to be transferred from weak hands to stronger hands. That is the purpose of an accumulation.
The intermediate downtrend channel is also shown on the weekly chart. Presently the Wyckoff Wave is in an oversold position relative to that channel. However, last week’s rally puts it close to the channels support line. If the Wyckoff Wave rallies back into this downtrend channel and is able to weaken the channel to the upside, it would be a positive indication and put the Sign of Weakness scenario in serious jeopardy.
Even so, in my opinion, this scenario has a relatively low probability of success.
The Wyckoff Wave is in a trading range. It will probably be in this trading range for another few months. January sharp decline, coupled with all the negative news regarding a collapsing stock market, may well have been a situation where shareholders exited the market to look for other opportunities. More of this is probably necessary before the market can put in another sustained move to the upside.