Many years ago a delightful children’s story was written about a small railroad engine in a large railroad yard. The engine’s name was Tootle and, despite being small, he made up for everything with his unbounded determination to deliver his cargo. He chugged. He pulled. He overcame all the obstacles in his way.
For the past few months, the Wyckoff Wave has been the little market index that could. Ever since the middle of November, 2012, the Wyckoff Wave has continued to rally, despite the obstacles (supply) that it is met along the way.
Ever since its first reaction to point M, every time the Wyckoff Wave has met resistance and has moved sideways, it gathered itself and continued chugging along to the upside.
While this is all positive, it is frustrating to short-term traders who would like to see the market move definitively in one direction or the other. The days of narrow price spreads and sideways movements are not conducive to short and profitable forays into the market.
On the other hand, during the sideways moves, the intermediate and long term traders have a nice period of time to assess potential candidates and take long positions. Once having done that, they can sit back and happily count their profits.
However, the stock market is in a “this is what I did for you yesterday” place. It’s all about “what are you going to do for me tomorrow”. Will the Wyckoff Wave continued to rally? Will it finally react and put in a Last Point of Support or will it be overcome by supply and react back into the-year-old trading range?
Let’s look for some clues within the Wyckoff Wave stocks. The Wyckoff Wave closed on Friday in short, intermediate, and long term trends. Of the 12 stocks that make up the Wyckoff Wave, 6 are in harmony with the Wave, 5 are weaker and 1 is stronger.
If we look at the stocks as specific groups we find the following:
The transportation group is stronger than the Wyckoff Wave.
Chemicals, Financial, Industrial goods, Manufacturing and Technology are the same as the Wyckoff Wave.
Communications, Consumer Goods, Energy and Industrial Equipment are all weaker than the Wyckoff Wave.
However, every Wyckoff Wave stock, except one (Caterpillar), that is weaker than the Wyckoff Wave is in a short term up trend.
This presents a very positive view of the market’s future direction.
While the weekly Market Letter tries to take a longer-term view of the Wyckoff Wave and the stock market in general, something happened on Friday that was interesting and potentially very important.
On Friday, the Wyckoff Wave only gained 56 points on volume of 564,301,853 shares. At first glance this would appear that the Wave encountered supply.
However, what really happened was and intra-day failure to the downside, as shown on the intra-day chart. Strong supply (108,846,566 shares) came in to the market during the first 5 min. of the trading day. However, the Wyckoff Wave only lost 8 points. This strongly suggested that this large amount of supply was easily taken in. Score one for the bulls.
The Wyckoff Wave then rallied and moved sideways for the next two hours. Then supply returned again. This time the intra-day wave lasted 3 hours and 45 min., but only lost 125 points, or 3/10 of 1% of its value. Volume was even higher at 145,548,324 shares. Once again, the supply thrown on the market was easily absorbed.
Up until this point, the day’s market action pretty much mirrored how the Wyckoff Wave behaved every time supply came into the market. It took it in without reacting and continued to move sideways.
At 3:25 PM on Friday, things changed. In the last 35 min. of the trading day, the Wyckoff Wave gained 10 more points than it lost in the previous 3 hours and 45 min. and did so on extremely high volume of 154,309,841 shares. This is the first time, in quite some time, that strong demand has come into the market after the supply has been taken in. The volume of the last 35 min. wave was 27% of the total daily volume.
While this is a very minor change in character, it has the potential to be significant.
Is the market going to rally strongly and begin a nice markup phase, or will supply take control and drive us back to a Last Point of Support or even into the original trading range?
For the past several days the Technometer has been in a dangerously overbought condition. Despite that, the Wyckoff Wave has refused to react.
That doesn’t make sense, unless one includes reaction of the Force Index when analyzing the Technometer. When the Force Index is producing positive numbers, it has a strong mitigating effect on the Technometer. This means that even if the Technometer is overbought, a strong Force Index will minimize, or even prevent the expected reaction.
If you look at the daily chart, you will see that in the area around points H, and P the Technometer was in an extremely overbought condition. Yet the Wyckoff Wave did not react, but moved sideways. During that time, the Force Index numbers were extremely positive. This is an example of how powerful the Force Index is and how important it is to use it in conjunction with the Technometer.
It would appear that the best possible reaction scenario would only be to put in a Last Point of Support.
All this suggests that the Wyckoff Wave may well continue to be like the little engine called Tootle and continue to deliver its cargo to the railroad station at the top of the rally.