This past week, the Wyckoff Wave continued its strong rally on increased price spread, and slightly reduced, but relatively strong volume. It also is in an overbought position relative to both its short and intermediate term up trend channels.
Since the middle of November, 2012, when the Wyckoff Wave was at point D, it has rallied by 5826 points or 20%. It has accomplished that without one significant reaction. It is certainly a show of strength when a market reacts sideways rather than down.
These sideways reactions show that although a great deal of overhanging supply is still coming into the market, it is readily being absorbed by strong hands.
Now, in addition to being overbought on both a short and intermediate term basis, the Wyckoff Wave is now approaching the supply line of its long-term uptrend channel. This suggests that some sort of a reaction, or another sideways move, may be just around the corner.
The Wyckoff tools can be helpful in these determinations. I have drawn both the long and intermediate term trend channels on the chart of the Optimism – Pessimism Index. While the Wyckoff Wave is in harmony with the O – P Index, it has not been able to stay in the long term up trend channel. This is primarily a result of the long trading range that began in March 2012 and is marked by point U.
For quite some time the Wave has been in an overbought position relative to the intermediate-term uptrend channel and it is moving back towards the long-term channel.
It is important to note that in a rally, the Optimism – Pessimism Index almost always leads and is stronger than the Wyckoff Wave. There is nothing in the Optimism – Pessimism Index that suggests any kind of a lengthy reaction.
The Technometer is in an extremely dangerously overbought condition. This would suggest a strong reaction is imminent. However, the Technometer works in conjunction with the Force Index. A Force Index that is producing mildly negative or positive numbers has a mitigating impact on the Technometer’s overbought condition. At Friday’s close, the Force Index was at its highest level in 3 1/2 years and producing a reading of +671. Despite the overbought Technometer, it is difficult to anticipate any kind of a strong reaction.
Finally, there is no cause in the 100 Point & Figure chart that would indicate a strong reaction.
This does not mean the Wyckoff Wave will not react. It may well encounter supply as it tries to penetrate the supply line of the long-term uptrend channel. A minor reaction would keep the Wyckoff Wave in its up trend channel and return it to its short and intermediate term channels.
Unlike the Dow Jones Industrial average and The S&P 500, the Wyckoff Wave is not in new high ground. There is still plenty of overhanging supply from way back in the 2007 – 2008 distribution area that can be dumped on the market. This is what has caused both sideways movements and will continue to do so until the Wyckoff Wave is able to advance another 3, 000 points and take out the 2007 highs.
While the Wyckoff tools (O – P Index, Technometer & Force Index) and continue to be positive, they will probably be the first to let us know when this wonderful bull market is running into trouble.
Until then, intermediate and long-term investors are happily holding onto their positions and taking nice profits.
However, no one should be sanguine in thinking the advance will continue forever. The Wyckoff Wave in the Wyckoff tools should be watched closely for negative signs so those hard-earned profits made during the last five years can be protected.