The Elusive Secondary Test – What’s Up?

Click Here For Wyckoff Wave Chart 09-25-2015

I have received several e-mails, over the past several days, asking about my logic in not calling the two lows at points S and S-1 successful Secondary Tests of the Selling Climax at point Q.

I’m quite sure that several months from now, most people, including myself, would look at the daily chart and quickly determine the following:
1. Point Q was a Selling Climax
2. The move to point R was and Automatic Rally
3. The reaction to point S or S-1 was a Secondary Test.

It is very easy to look at a chart, with the benefit of hindsight, and easily identify those three Wyckoff principles. However, Wyckoff students work in real time, without being able to look into the future.
What did the reactions to points S and S-1 look like in real time?

The purpose of a Secondary Test is to confirm the Selling Climax and that the down move has stopped. It is the beginning of a trading range and ultimately, a new market direction.

To confirm that, there needs to be a drying up or at least a reduced level of supply. If one covers up everything to the right of point S and simply looks at the price spread and volume on the reaction from point R, supply is certainly present. Point S was on increased price spread and noticeably increased volume. There was no indication that the Wyckoff Wave was going to rally.

In addition, the Technometer was in a high neutral condition and the Force Index was producing high negative readings.

Using that information and without the benefit of future market action, it would be difficult to call point S a successful Secondary Test.

Then, the Wyckoff Wave put in a two-day rally and ran into more supply. On the day of point S-1, the Wyckoff Wave reacted on increased price spread and volume. It also put in a slightly lower low then point S.

While the volume was lower than at point S, supply was certainly present and there was no indication that the Wyckoff Wave would immediately rally.

The market being the market, that’s exactly what it did. The day after point S-1 was a positive day, but volume was slightly decreased. It suggested a drying up of supply. This also indicated the Wyckoff Wave might react on reduced price spread and volume and finally put in that successful Secondary Test.

Of course, that didn’t happen either. Instead the Wyckoff Wave reacted on increased spread and reduced volume. This suggested a lack of demand. So far, we have not seen any drying up of supply.

The Wyckoff Wave then put in a poor quality rally to point T. The narrowing price spread and increasing volume suggested more supply was coming into the market. That was quite logical as the Wyckoff Wave was testing the old support, now resistance line drawn from point E.

At point T, supply did come into the market and the Wyckoff Wave reacted. On Thursday, it tested the lows at points S and S-1. As it did, demand came into the market. However, it was quickly withdrawn on Friday as the Wyckoff Wave was unable to continue its rally. After a wide gap opening to the upside, demand was withdrawn and supply came back into the market. This suggests the Wyckoff Wave will continue to react and put in a low somewhere between points S and Q.

This will most probably define the first support point of the new trading range. It will also confirm point Q was a Selling Climax and the down move has been stopped. It would be even more confirming if the Wyckoff Wave reacted next week on reduced price spread and volume.

That’s the difference between looking at a situation with the advantage of hindsight and making market decisions on a day-to-day basis. I have found it is best to be conservative and let the market confirm the scenarios you have developed.

In the overall market analysis, it doesn’t really matter whether points S, S-1 or some point in the future becomes the Secondary Test. Our Wyckoff indicators and the general behavior of the market give the Secondary Test scenario and extremely high probability of success.

What is important is to develop the beginning resistance and support points that will help us to find a trading range. Then we can simply wait for ending action and the beginning of an exciting new rally or reaction.

Today’s lesson is to make sure we have confirmation of what we suspect is going to happen. Another example would be the hay beer of the Wyckoff Wave as it approached the support lines drawn from point’s W, I, and E. The Spring scenario was a good possibility on each of those three occasions.

However, a Spring is confirmed after strong demand comes into the market. Just because a stock penetrates a support area does not automatically produce a Spring. In each one of these cases, when the Wyckoff Wave penetrated the support strong demand did not come into the market.

It is important to let the market speak to you then make mechanical determinations or hang onto in proper scenarios. Those can be expensive lessons.

So far, this new trading range is looking a bit like accumulation. If so, we would probably see the final rally in this wonderful bull market. While this is a nice scenario, remember, it needs to be confirmed.