The Rally That Just Won’t Quit, Or Will It?

Click Here For Wyckoff Wave Chart 01-10-2014

In August 2007, the Wyckoff Wave reached a high of just over 40,000. The subsequent bear market chopped 56% of those highs before it ended in March of 2009. The Wyckoff Wave has spent the better part of five years recovering and, last month, finally returned to the 40,000 level.

To return to those old highs, the market had to take in a huge amount of overhanging supply coming from large investors who, back in 2007, had bought in, near or at the top and were now able to sell those stocks and recover some or all of their loss.

This lack of overhanging supply is one reason why the Wyckoff Wave is now able to advance without the help of a great deal of demand.

As the stock market, as measured by the Wyckoff Wave, is relatively strong, we do not appear to be approaching the end of the bull market. As mentioned last week, the Wyckoff Wave may have a 25% move left and 2014 should be a good year for the Bulls.

One of the preliminary signals that this long bull market could be ending, is a phenomena known as “whooping it up”. This is when the market advances sharply on extremely widespread and strong volume. The last-minute bulls think the rally is not going to go on forever and rushed to join the party.

Unfortunately, for many of them it will be too late and they will eventually create the overhanging supply that will appear during the next bull market.

As we are seeing exactly the opposite, it is reasonable to conclude that the bull market is far from over.

Presently all the market trends (short, intermediate and long term) are up. In addition, we are not seeing any other signs of ending action.

It is expected that the Wyckoff Wave will continue to advance. The advance will most probably contain short-term reactions and sideways trading ranges that will serve as areas of re-accumulation.

This gives intermediate and long-term traders the luxury of watching existing positions grow and the opportunity to add to these positions on minor dips or reactions.

There is work ahead for the short term trader as they are going to find it more difficult to identify turning points, before a new intra–day or short-term trend is established.

This is where the Wyckoff tools (Optimism – Pessimism Index, Force Index and the Technometer) can be very helpful in identifying changes in direction.

Presently, the Wyckoff Wave is in the upper part of the short term up trend channel. It is also in an overbought position (above the supply line) of its intermediate and long-term up trend channels.

It is normal to assume that these overbought positions need to be corrected. The question is when.

A look at the Wyckoff tools may provide some helpful clues. While the Optimism – Pessimism Index is in harmony with the Wyckoff Wave, the Technometer is in a clearly overbought condition.

This overbought condition can be somewhat mitigated by a strong Force Index. However, the Force Index after approaching its 0 level reacted sharply on Friday. Any mitigating impact it may have on the clearly overbought Technometer, is diminished by Friday’s decline.

While there is no definite count on the 100 Point & Figure chart, a cause is being built. Presently that cause has the potential to take the Wyckoff Wave back to test the highs at point D and the support line of its short-term uptrend channel.

These clues would suggest the Wyckoff Wave is getting ready to correct those overbought positions. It appears to indicate we could be seeing a normal corrective reaction within the next several days.

It is difficult for the short term trader to wait until a new trend is established before taking a position. Almost always, a good portion of the move has already transpired before the new trend can be established.

Therefore the short term trader must anticipate changes and trends. While this certainly increases risk (welcome to the world short-term trading), the Wyckoff tools can help improve the probability of success.

There are two additional strategies that may help the short term trader reduce risk and increase profits.

The first is that the trader must accept the rationale that he or she does not have to always be in the market. Sit back, pick your spots, make your profits and return to the sidelines. This takes a lot of discipline, because it’s fun to be in the market, but the traders who carefully pick their spots always make more money.

Secondly, trade with the intermediate and long-term trends. Right now, they are both up. Therefore, as a short-term trader, while I may expect the market to react, I will not take a bearish position. I will not go against the overall trend of the market.

First of all, the market may not react until my stop is caught in the trade. Secondly, the reaction may not be particularly long and my risk/reward ratio would be extremely high.

I would rather watch the reaction develop and look for a new opportunity to the upside.

In a bull market, rallies are longer than reactions. Therefore, I can still miss the exact bottom of the reaction and still make money on the rally. My risk/reward ratio is not nearly as tight and I have more flexibility both entering and ending my short-term trades.

Bottom line, an important key to short-term trading is using the Wyckoff tools correctly. They are excellent indicators and identify when a market is about to turn.