Testing the Selling Climax – Success or Failure?

Click Here For Wyckoff Wave Chart 09-04-2015

It may be reasonable to conclude that the sharp move to point Q, on the daily chart, was a Selling Climax. However, there is also a possibility we may have seen Preliminary Support and the climactic action lies ahead at a lower level.

This weeks post examines those possibilities in detail and offers our take on the stock market’s future action.

On August 24th and 25th, the Wyckoff Wave reacted sharply on wider price spread and substantially higher volume. The market action was certainly climactic in nature and the initial conclusion was a Selling Climax.

An automatic rally follows a Selling Climax. This happened on the move from point Q to R. Then comes the critical Secondary Test. If the Wyckoff Wave reacts and if it holds above the low at point Q, the Secondary Test will be a success.

That would suggest the Wyckoff Wave will move sideways in a new trading range and establish new lines of support and resistance.

If the secondary test is not successful, two things can happen.

1. The Wyckoff Wave could simply rally and then react in an attempt to put in a second secondary test. If the second test a successful the trading range will begin.

2. The Wyckoff Wave will react sharply through the low at point Q. The reaction will be on increased price spread and volume. This would suggest the market action at point Q was preliminary support. That means the Wyckoff Wave will continue to react and, most probably put in a Selling Climax at a lower level.

As of Friday’s close, the action of the Wyckoff Wave suggests we are moving towards a successful Secondary Test. While the other scenarios can be slightly discounted, they should not be forgotten.

There are several reasons for this positive outlook. The most important is the comparative price spread and volume between this past week’s market action and the move to point Q.

On Thursday, August 27th, the Wyckoff Wave completed its automatic rally to point R.

On the reaction from point P to Q lasted for trading days and there was increasing price spread and volume. Strong supply was coming into the market.

The automatic rally, which is primarily an adjustment of the oversold position, lasted four days on relatively high volume and decreasing price spread. This is what is normally expected from an automatic rally.

The type of reaction to a potential Secondary Tests is extremely important. So far, it has taken five days and yet reached the halfway point of the automatic rally.

More importantly, both the price spread and volume are decreasing. This is an indication that supply was drying up and there will not be enough left to drive the Wyckoff Wave into new low ground.

The Wyckoff tools are also beginning to exhibit positive indications.

The Optimism – Pessimism Index, which is an indicator of Wyckoff Wave volume, is showing both short and long-term positive signs.

At Friday’s close, the O – P Index reading was only 18 points higher than it was at point Q. As mentioned above, the Wyckoff Wave has not even reached the halfway point of the point Q – R rally. This is a positive in harmonious action and suggests that despite strong effort to the downside (volume) the results (price) are not responding.

There are also positive indications on a longer-term basis. Presently, the O – P Index is higher than it was at points E and I. The Wyckoff Wave is substantially lower than it was at points E and I. This is a positive divergence and, on a longer term basis suggests the effort to the downside is not matching the results.

Unless, the Wyckoff Wave and O – P Index are in harmony, it will be difficult to make substantial progress to the downside.

The Technometer, which indicates short-term changes in direction, is also beginning to exhibit positive indications. At Friday’s close it had moved into an oversold condition and, if the Wyckoff Wave continues to react will become even more significantly oversold. It is very difficult for the Wyckoff Wave to react in the face of an oversold Technometer.

The Force Index is the only Wyckoff indicator not presenting positive indications. Presently, the Force Index is producing high negative readings. When this happens, there is a mitigating impact on an oversold Technometer. This suggests any rally will not be particularly strong or long.

However, over the last four trading days, the Force Index has begun a change in character. While it is still producing high negative readings, they may decrease over the next few trading days
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Regardless, even if the Force Index continues to produce high negative readings, it will be difficult for the Wyckoff Wave to react into new low ground in the face of strong O – P Index and Technometer readings.

This will suggest the Wyckoff Wave will hold above the low at point Q and begin a new phase of this long trading range.