Testing the Highs. Are Technometer Readings and Trend Channels Providing the Answers?

Click Here For Wyckoff Wave Chart 08-10-12

The stock market, as measured by the Wyckoff Wave ran into some resistance at point U, as it attempted to test the top of the trading range and the highs at point S. It then spent two days reacting on relatively reduced spread and volume. This suggested that the Wyckoff Wave would make another attempt to rally and test the above named resistance points.

Friday brought an intra-day failure to the down side. The Wyckoff Wave then rallied and closed near the top of a wider price spread. However, the reduced volume suggested that the rally was caused more by a lack of supply than of good demand coming into the market.

We are now at a stage where the Wyckoff Wave should attempt to complete its test of point S. The real question is, will the test succeed or fail?

Perhaps some Wyckoff tools coupled with an important Wyckoff trading concept can help provide the answer.

First, let’s look at the Technometer (a Wyckoff Tool that shows when the market for individual stock is either overbought or oversold). When the Wyckoff Wave reacted sharply to point T, the Technometer moved into a slightly oversold condition. This suggested the Wyckoff Wave could rally and it did. It would also be expected that the rally would’ve moved the Technometer into a neutral or even overbought condition. It did not.

On the day after point T the Technometer actually became more oversold. The next day also produced an oversold condition. Finally, last Tuesday, when the Wyckoff Wave reached its highest point of the week, at point U, the Technometer reading was 43.9. This is a low neutral condition. It takes a reading of 50 for the Technometer to be overbought.

Despite a rally of over 800 points, the Technometer did not come close to becoming overbought. This would suggest that despite the poor performance we were not yet ready to see a sharp move to the down side.

Over the next two days that concept was confirmed as the Wyckoff Wave traded lower on relatively decreased spread and volume. That brings us back to Friday’s market action.

On Friday the Wyckoff Wave turned in a Technometer reading of 49.82. That is about as close to overbought as a neutral reading can get. In addition, the Wyckoff Wave will open on Monday in an overbought condition relative to the Technometer.

Unless the Wyckoff Wave puts in an extremely strong day on Monday and moves into new high ground, the Technometer will be overbought at a lower level when compared to point S. This is a negative indication and strongly suggests a reaction will occur.

Therefore, according to the Technometer, there is a good probability that the test will be successful and the Wyckoff Wave will react back into the trading range.

Now, let’s look at the trend channels. Trend channels are an important (in my opinion critical) Wyckoff concept that helps us determine both the present and future direction of the market for individual stocks. Once established, trend channels should be extended. Often, it is not as important for an index or stock to remain in a channel as it is to examine how it behaves when it reaches either the support line or the supply line.

The Wyckoff Wave’s recent activity underscores this concept.

Back in June, at point L, the Wyckoff Wave tried to leave the trading range to the down side. It failed, rallied to point M and then reacted to point N. This gave us an opportunity to draw a short-term uptrend channel with a supply line through point L and N. A parallel support line was drawn through point M.

Almost immediately, the up trend ran into trouble. The rally to point O did not come near the supply line before reacting. This suggested weakness. The weakness was confirmed as the Wyckoff Wave weakened the trend on its reaction to point P. Because the Wyckoff Wave had an opportunity to rally back into the short term uptrend channel, the trend did not change.

Then the Wyckoff Wave rallied to point Q. It barely returned to the up trend channel before reacting to point R. This inability to return to the up trend channel, broke the trend and changed it to neutral. However, it is still important to keep the up trend channel in place until either a neutral direction is confirmed or we see a new down trend channel develop. That is why, even though that uptrend channel was broken, I extended the channel and still kept an eye on it.

Once again the Wyckoff Wave rallied to point S. This rally was a better quality and barely reentered the old up trend channel. Once again it left the channel and reacted sharply to point T. The rally to point U was not of good quality and again did not approach the up trend channel.

These three failures to reenter the short term up trend channel suggest that we will see a new down trend channel develop.

However, we are also seeing higher lows at points P, R and T. This is a bullish indication.

Where does all this take us?

We now have a Technometer that is possibly about to become overbought at a lower level than the top of the last rally.

We have a short-term neutral trend, that is possibly going to become a downtrend.

We are seeing good rallies, higher tops and the last rally from point U has been on relatively reduced spread and volume.

The Technometer is a shorter term indicator than the other Wyckoff concepts. Are we seeing the coming of the short term reaction that may take us to a very important last point of support?

In anticipation of that possibility, I have drawn an orange support line between point L and P. As mentioned earlier, I do not think it wise to draw new trend channels just to make things fit. Therefore, I am not changing the trend. I am just drawing in the line to see what happens.

As I drew the orange support line, I thought it was interesting that the support at point R was right at this support line.

The Last Point of Support scenario may well include this support line. If it does, we could be looking at a new, more important up trend channel that may even be intermediate in nature.

Is the market sending us a bullish message? Stay tuned and find out.