The Force Index & The Wyckoff Wave
Click Here For Wyckoff Wave Chart 10-09-2015
On Tuesday, after rallying off a trading range low at point U, the Wyckoff Wave appeared to run out of demand and seemed ready to react. That didn’t happen.
Instead, the Wyckoff Wave continued its poor quality rally and, as of Friday’s close, had moved through the important resistance line drawn from point E. It is also testing the support line of the old short-term, now intermediate term downward trend channel.
Despite its relatively reduced price spread and volume, which continues to suggest a lack of demand, the Wyckoff Wave refuses to react. The purpose of this post is to drill down and find some clues as to why this unexpected and continuing rally is happening.
First, I believe the Wyckoff Wave is going to react back into the trading range. It’s just a matter of when. This observation is supported by the following:
1. The Technometer is an extremely overbought position. It is very difficult for a rally to continue in the face of an extremely overbought Technometer.
2. The Optimism – Pessimism Index has moved into a negative divergence with the Wyckoff Wave when compared with points P and N. It is also in a negative in harmonious action, when compared with point L. This indicates the strong effort to the upside, as demonstrated by the O – P Index, is not being matched by the results from the Wyckoff Wave.
3. These two important Wyckoff indicators are in concert with an analysis of this weeks supply and demand. In addition to the withdrawal of demand, the poor performance by the Wyckoff Wave, when compared to the O – P Index, suggest supply is creeping into the market.
While these indicators and observations support the reaction back into the trading range scenario, what’s helping the Wyckoff Wave continue its poor quality rally?
The answer may well I and the Force Index. The Pulse of the Market Charting Service provides individual Force Index readings for the Wyckoff Wave and over 200 stocks. The purpose of the Force Index is to measure the amount of pressure on the market. The index is represented by a line chart and it appears at the very bottom of the daily chart. In most cases, Force Index readings are negative.
If it’s Force Index is recording positive or low negative readings, the downside pressure on the Wyckoff Wave is lessened. This, not only has an impact on reducing the coming reaction, but it also can enhance or continue a rally that is already in progress.
This is why the Force Index is extremely helpful when used in conjunction with the Technometer.
How does that apply to this week’s market action?
On Tuesday as the Wyckoff Wave reached and begin to test the high at point T, it’s Technometer moved into a clearly overbought condition. The Force Index was producing moderate negative readings. The O – P Index was in harmony with the Wyckoff Wave.
As the advanced continued, the Force Index moved into positive territory and its negative bias on the Wyckoff Wave was substantially reduced. This allowed the Wyckoff Wave to continue its advance.
However, and this is important, despite positive Force Index readings, a stock or index will not strongly advance in the face of an overbought Technometer. This is why, while the Wyckoff Wave continued to advance, the rally was of extremely poor quality and it continues to be very vulnerable to a reaction.
In this instance, the Force Index has probably helped the Wyckoff Wave as much as it can.
Friday’s poor quality market action makes it difficult to forecast a move back into the downward trend channel (marked in red). This would suggest the Wyckoff Wave is at a trading range high and will react back into the trading range.
These observations are also supported by the weekly vertical line chart. This weeks price spread and volume was less than last week’s. This supports the lack of demand observation.
In addition the Wyckoff Wave is attempting to reenter its intermediate downtrend channel. It is also at the halfway point of the reaction from point F. This would be a normal corrective rally in response to the strong reaction to a Selling Climax at point L.
All this seems to indicate that the Wyckoff Wave will react next week. It also will establish an important resistance point in the developing trading range.