The Brexit, What Does It Mean For The Markets?

Click Here For Wyckoff Wave Charts 06-24-2016

An old Wyckoff axiom says: “News will only take the market where it was already supposed to go. It will simply get there fast”.

That’s exactly what happened this week as the surprising results from the Brexit referendum in Great Britain directed, the country’s withdrawal from the European Union.

The markets reacted strongly on Friday and the huge gap opening to the downside, which encompassed 86% of the days reaction, made it difficult for short sellers to enter the market on Friday.

Previously, this blog post had written that it would be difficult for the market to continue its advance and the Wyckoff Wave would probably react and at least test the lows at points B and Z.

On Tuesday, our daily market letter suggested aggressive short sellers take new positions. That was followed up by a second recommendation to go short on Wednesday. Wyckoff traders who took positions to the downside are having a very enjoyable weekend.

The decision to make a “time to go short” recommendation to Pulse of the Market Charting Service subscribers was based on an overall analysis of all the Wyckoff tools, not just a couple of mechanical indicators.

An analysis of the Wyckoff Wave’s intra-day chart revealed several worrisome factors. After moving into an oversold position relative to its intra-day up trend channel at point Q, the Wyckoff Wave was unable to reach the resistance line on subsequent rallies to points S, W and X. Every time demand came into the market, in the area of the trend’s support line, it was either weak or not sustained. The rally from point V to point W, which looks great on the chart, was nothing more than a gap opening to the upside. As you can see there was no follow-through.
If the Wyckoff Wave is going to rally to the upside, demand should have been more prominent. The fact that it wasn’t, is a bearish indication.

A look at the vertical line chart shows the Wyckoff Wave was at the resistance line that has been drawn from the tops of the trading range since last August. The line has been adjusted as the Wyckoff Wave found a new resistance points. An adjustment was made when the Wyckoff Wave put in a new high at point V and again at points A and C.

As it approached this resistance line , the Wyckoff Wave was in a “need to go and go now” situation. The overall lack of demand, noted on the intra-day charts was magnified on the daily vertical line chart, because the Wyckoff Wave was at the top of the trading range. This suggested it was either going to rally through the top for a Sign of Strength or react back into the trading range. The Sign of Strength scenario had a very low probability of success.

Interestingly, the Technometer, which is normally a great help in identifying turning points, spent the week in a neutral condition. It would’ve been difficult to justify a recommendation to short stocks if the Technometer have been used in a mechanical manner. This is why it is extremely important to use all the Wyckoff tools when making investment decisions.

The Technometer can be more effective when used in conjunction with the Force Index. When the Force Index is producing strong negative readings it is very hard for an index or stock to rally. This week the Force Index was producing strong negative readings. This suggested that, regardless of what the Technometer was indicating, a great deal of negative pressure was present. That pressure was confirmed on Friday.

With the exception of five trading days, for the last two months the Optimism – Pessimism Index has been in a negative divergence with the Wyckoff Wave, when compared to point V. The negative divergence suggested a great deal of effort was going in to move the Wyckoff Wave higher, but the expected results were not being achieved. This conforms with the intra-day analysis that demand was not particularly strong.

Based on the above an overall analysis of all the Wyckoff Wave indicators and tools suggested the Wyckoff Wave was going to react back into the trading range.

The reaction scenario was confirmed on Friday and the Wyckoff Wave is presently testing point B and the halfway point of the rally from point Z to A.

It is doubtful the reaction will stop here. The next support areas are the lows at points Z, U and S. After that, the next support area is the resistance, now support, line drawn from point L.

The Wyckoff Wave could also react back to the bottom of the trading range and test the August 2015 lows.

Interestingly, a look at the 100 Point & Figure chart shows a nice count to the downside, from Friday’s market action over to point V. The count is divided into two phases. The Wyckoff Wave is already reached the phase 1 objective. Interestingly, the phase 2 objective is 36,900. This is at the resistance line drawn from point L.

It is important to note that this is simply a count of a phase that is part of a major trading range. There is also no ending action from which to really begin the count. Therefore, this is a general indication of where the Wyckoff Wave could go, but does not carry the credibility of a count from an Upthrust or Last Point of Supply.

Another option is that the Wyckoff Wave would spring this last phase of the of the trading range and begin a new move to the upside. Remember, while the news could dominate our thinking, The Wyckoff Wave has been sending “this trading range is probably accumulation” signals for quite some time.

Where will the Wyckoff Wave go in the near future? While I believe it will continue to the downside, it’s best to let the Wyckoff Wave speak for itself. I will ride the down move and wait for the Wyckoff Wave to tell me when the reaction is coming to an end.