Most part Springs need to be tested. The only exception involves a #3 Spring. Unlike the #1 and #2 Springs a Secondary Test is not required. However, it certainly can happen. The recent market action is certainly a case in point.
A successful Secondary Test is the final action that confirms a Spring was successful. It is required in #1 and #2 Springs because the index or stock moved below the support on good supply. Only after it penetrated the support good demand come in and initiated the response to the Spring.
The secondary test is confirmation that this initial supply has dried up and will not hinder a move to the upside.
Because a #3 Spring is on relatively narrow price spread and low volume, as was the case at point G on the attached chart, it is indication that supply has dried up and a Secondary Test is not required.
In this case it appears there was enough supply present during the reaction to the spring at point G to warrant a Secondary Test.
Last weekend’s post commented on that and looked at several scenarios. One was a successful Secondary Test of the Spring. Another was a poor quality Secondary Test.
A poor quality Secondary Test means the stock or index reacted below the Spring before demand came into the market. This means the process must be repeated and the Wyckoff Wave must find support above point G. This would confirm a successful Secondary Test and the Wave could rally and begin a Sign of Strength.
Monday’s market action eliminated the successful Secondary Test scenario. After a wide gap opening to the downside and a brief follow through, demand came into the market and the Wyckoff Wave rallied to a strong close. This is marked on the chart as point I.
The Wyckoff Wave then rallied to point J where it ran into resistance. It appears to be getting ready to react and retest the #3 Spring at point G. To do so, the reaction most hold above point G.
Thursday’s and Friday’s relatively high volume indicate supply has come into the market. If there is to be a successful Secondary Test the supply must dry up. This would be shown on the charts as a reaction on reduced price spread and lower volume.
There are several indications that favor a successful Secondary Test.
The first is that the rally to point J moved higher then the initial response to the Spring at point H. In addition, this gives the Wyckoff Wave more room to react and more time for supply did dry up.
It could also be helpful to compare the readings of the Wyckoff tools to point I.
The Optimism – Pessimism Index, which charts Wyckoff Wave volume, is already in a positive divergence with the Wyckoff Wave. The effort (O – P Index) to move the Wave lower is not being matched by the results (Wyckoff Wave).
There is also a positive divergence with the Force Index. The Force Index is a measure of downward pressure on the market. Once again the effort does not match the results.
Presently, the Technometer is in a neutral condition. It could move into an oversold condition on a reaction. If the Technometer becomes more oversold than it was at point I and the Wyckoff Wave holds above point I, it would be a very positive indication.
Do those positives mean that, this week, the Wyckoff Wave will put in a successful Secondary Test of the Spring?
Nothing is guaranteed. However, the indications are bullish. We will probably have our answer by this time next week.