This past week began with a poor quality, one-day rally that appeared to be testing the previous week high at point R. A successful test would set the stage for a continued reaction back into the trading range.
On Tuesday and Wednesday morning, the Wyckoff Wave reacted, as expected and on Wednesday morning tested the supply line of its short-term uptrend channel.
The above scenario was eliminated, or at least delayed, when the Wyckoff Wave rallied sharply on Wednesday afternoon and closed slightly higher than at point R.
Wednesday’s afternoon rally was a direct result of comments by the chairman of the Federal Reserve that there was no urgency in raising interest rates. The news took over the market and the Wyckoff Wave put in a strong rally.
The news simply gets the market to a place it was already going to go, only faster. While that happened on Wednesday, an analysis of the intra-day waves showed that more supply was present than would normally be expected with this wide price spread and high volume.
On Thursday the Wyckoff Wave reacted on reduced price spread and volume. This suggested a lack of supply and put the Wyckoff Wave in a position to rally into new high ground. This was a change in character.
Then on Friday, the Wyckoff Wave attempted to rally and ran into supply at the top of the trading range. Friday afternoon saw good supply and a weak close. This would suggest supply could be back in control and the Wyckoff Wave could begin to react to at least test the short-term uptrend channel’s supply line.
Maybe not. The Wyckoff indicators have turned bullish. The Technometer has moved into an oversold condition. There is a short-term positive divergence with the Optimism – Pessimism Index.
The only negative is a Force Index that is producing moderate negative readings. This will have a slight mitigating impact on the oversold Technometer.
These contradictory signals are appearing at a very critical point. Before coming to a conclusion, let’s take a quick look at the market from a more fundamental perspective.
The Federal Reserve comments were music to the bulls ears. Continued low interest rates mean that the stock market is, not only the best, but probably the only place to get a good return on one’s investment. Investors buying on those comments, represent the demand coming into the market.
On the other hand, many investors are quite concerned about the American economy and our receding influence throughout the world. A weak America, both domestically and internationally, does not inspire confidence in the intermediate to long-term future. Those who are concerned about this, our sellers, are beginning to look for a safe haven They are represented by the supply that is coming into the market.
Wyckoff teaches that when a market turns, strong hands have already left the market, leaving weak hands to suffer the losses. In this case the interest rate buyers are the weak hands.
Right now, a battle is being waged and the timing has yet to be determined. The Wyckoff Wave could rally and put in one more move to the upside. It could also react back into the trading range and continue to move sideways.
The most critical option would be an upthrust of the trading range. There is a possibility, but not a certainty, that this could signal the end of the bull market and a significant correction.
However, the Wyckoff Wave is firmly entrenched in the upper portion of its long-term up trend channel, as shown on the weekly chart. This is a bullish indication.
When conflicting signals arise, as they are now, I always go back to price spread and volume – demand versus supply.
So far, the Wyckoff Wave has not moved into new high ground, or an upthrust of the trading range. It has rallied to the resistance at the top of the range and encountered supply. This would suggest we could see another resurrection of the react back into the trading range scenario.
Therefore, next week should bring some sort of reaction and another test of the uptrend channel supply line. How the Wyckoff Wave approaches that supply line will answer some of these questions.
It is also important to note that the Wyckoff Wave has never been able to test the short term up trend channel’s support line since it was created. This is generally considered an indication of relative weakness.
For over a month, the Wyckoff Wave has moved sideways in a fairly narrow trading range. It is also in a bit of an apex. The apex is formed by the support line of the short-term uptrend channel and the resistance line at the top of the trading range. We are getting close the apex’s point.
Usually when this happens, a strong move, in either direction, ensues. That could make for an interesting Spring.