The Continuing Rally and the Force Index

Click Here For Wyckoff Wave Chart 11-21-2014

This week, the stock market, as measured by the Wyckoff Wave, continued its advance. The relative strength of the market is shown in several different ways:

• Since the Shakeout (point E) in mid-October, the Wyckoff Wave has only experienced six down days.
• The Optimism – Pessimism Index, which is strictly a measure of volume, is in harmony with the Wyckoff Wave and remains in its long term upward trend channel.
• The Wyckoff Wave remains in its long-term up trend channel and is presently in an overbought position relative to the channel.
• After leaving the trading range to the upside on the rally from point G, the Wyckoff Wave has been in new high ground since early November.

That’s the bullish good news. The troubling news is that the quality of the price spread and volume, on a daily basis, is not particularly good. In fact, the rally from the top of the trading range through Friday suggests an overall lack of demand.

In addition, the Wyckoff Wave has never put in a successful test of the Shakeout or, a reaction for a Last Point of Support.

The only thing supporting this was a two-day reaction to point G.

This week, it certainly appeared the Wyckoff Wave was getting ready to react. Price spread and volume were relatively low and the Wyckoff Wave began to roll over as it put in lower daily highs on Wednesday and Thursday.

While on the surface, Friday seemed like a strong market day, it actually wasn’t. The entire days again came from a gap opening to the upside, as the Wyckoff Wave opened at its high for the trading day. Then supply came into the market and the Wave closed in the lower half of its price spread. That is because Wyckoff teaches that gap openings are not included in price spreads.

So what is keeping this unusual rally in place, when is it going to end and what does it all mean?

Last week, this post reviewed the intra-day chart and identified potential intra-day upthrusts that might indicate a change in direction. The key was to see if supply came into the market and if it was sustained. It did not. Therefore, the possible intra-day upthrust scenarios were eliminated from consideration. That also eliminated any opportunity to take short term positions to the downside, during the past week.

Presently, there are no intra-day indicators that identify a possible change in direction. The only negative indications are the poor quality of the rally and the fact that the Wyckoff Wave has noticeably weakened its short term up trend channel.

So where can we look for clues?

An out-of-print Stock Market Institute publication, Judging the Market and How to Select a Stock, describes the Force Index as follows:

“The Force Index is a little used, but extremely helpful Wyckoff indicator. It is designed to measure the amount of pressure on the market and is represented as a line chart drawn up or down, with a 0 level in the middle. In most cases the Force Index produces negative readings.

If the Force Index is recording positive readings or only mild negative readings, the down side pressure on the market is reduced. This tends to diminish an indicated reaction over what it might otherwise achieve.”

The value of the Force Index becomes clearer when used in conjunction with the Technometer.

The most important readings of the Technometer are those that indicate extremely overbought or oversold conditions. If the Technometer is overbought, with a positive or even mildly negative Force Index, the indicated reaction is not likely to make much progress.”

Ever since the Wyckoff Wave moved through the top of the trading range, the Technometer has been in either overbought or extremely overbought conditions.

During that same period the Force Index has not only been positive, but turned in its most positive readings since February. The strong Force Index had a significant mitigating impact on the expected reaction that was signaled by the overbought Technometer.

During this past week, the Technometer has moved into a neutral condition. The Force Index has also receded, but is still producing strong positive readings. It would still have a mitigating impact on an overbought Technometer and certainly has reduced the downward pressure we would expect to see after this long rally that has noticeably reduced in quality.

So, how will this play out in the coming weeks?

The Wyckoff Wave is going to react. No rally goes on forever. Friday did see some supply, but until that supply is sustained, we won’t see the awaited move to the downside. It’s now a matter of watching, waiting and letting the market tell us what is about to happen.

The Wyckoff Wave has moved noticeably above the top of the trading range. As the strong Force Index readings continue, we can expect the reaction to be relatively short and shallow. It could certainly hold above the top of the trading range. If so, this would be a successful Last Point of Support and signal a new leg in this wonderful bull market.

Wyckoff tools, like the Force Index, provide us with clues that help create possible scenarios. They are not mechanical indicators.

The scenario strategy helps eliminate early entries or premature exits. In doing so, they help protect capital and increase profits.

The Force Index & Technometer scenario is another Wyckoff indicator that suggests the market may reverse direction. It is our responsibility to create the entry scenario and then let the market, by its own actions, confirm or deny its validity.