The Rally That Keeps On Moving. Will It Stop And, If So When?

Click Here For Wyckoff Wave Chart 01-18-13

On November 16, the Wyckoff Wave completed a reaction to point G and began a rally that has now lasted for two months. Despite numerous short-term indications to the contrary, the Wyckoff Wave has rallied back towards the top of this long trading range. It is now in a position to begin to test the resistance area marked by the lines drawn from point X.

The last two months have been a trader’ s market. There have been no clear indications that would allow intermediate or long term investors to either add to or take new positions. This is because there was no specific confirmation of a new intermediate term up trend.

Instead the market rallied in short bursts and then either reacted or moved sideways in a manner that suggested a reaction was in the making.

The latest of these was the two-week sideways movement from point N as the Wyckoff Wave attempted to penetrate a resistance area formed by the January – July phase of the trading range. As it moved sideways, the Wyckoff Wave’ s Technometer became oversold. We saw negative divergences with both the Optimism – Pessimism and the force Indexes. Once again indications suggested a reaction.

However, on Friday the Wyckoff Wave surprised. It rallied out of the minor trading range, formed between points N and O on good spread and volume. It is now in a position to test the next and final resistance of the trading range.

Will the Wyckoff Wave move through the resistance and make the move from point M a Sign of Strength, or will it finally react back into the trading range? Also, how do short-term traders and intermediate term investors handle this confusing market?

First, let’s look at the short-term indicators.
1. The Wyckoff Wave is in an overbought condition relative to its Technometer and this condition will continue at Tuesday’s opening.
2. The Optimism – Pessimism Index is in a negative divergence with the Wyckoff Wave when compared to points X, Z, B and D.
3. The Force Index is also in a negative divergence with the Wyckoff Wave when compared to points Z, B and D.

This suggests the Wyckoff Wave will have a difficult time penetrating the next resistance level.

However, there are some emerging positive indicators. The Optimism – Pessimism Index which had been lagging behind the Wyckoff Wave is now leading it. This is more positive when associated with the markup phase. However, it should not be ignored.

A look at the 100 Point & Figure chart shows a count of 2, 900 points along the 31,000 line. This is the support area marked by point M. This count gives us three objectives. The first, from point G has already been reached. The third, from point M gives us an objective of 34,000. This would take the Wyckoff Wave back into the 2008 distribution area.

The third, which is halfway between the two and marked in blue, takes the Wyckoff Wave to just inside the lower resistance level. It will be quite important to see how the Wyckoff Wave behaves as it reaches this objective.

While, once more, the short term indicators argue against a penetration of the resistance and a reaction back into the trading range, this does not mean short-term positions should be taken. When the market sends mixed signals and the short-term trader is not totally comfortable, it is best to exit the market and wait for a clearer trading environment to develop.

For a look at the longer-term indicators, let’s go to the weekly chart.
1. In early November the Wyckoff Wave weakened the long term up trend channel that has been in place since 2009.
2. It has now rallied back to test the trend channels support line. The last two weeks have seen decreased price spread and increased volume. This would suggest some supply is coming into the market.
3. In addition to attempting to penetrate the long-term support line, the Wyckoff Wave will also be running into overhanging supply and the resistance area drawn from point C.

It would seem that the Wyckoff Wave would need to move strongly through the resistance if it is ready to break out to the upside. The coming week should help clarify the situation.

Regardless, since the bottom of the last bear market, the stock market has had a strong bias to the upside. Since then, the Wyckoff Wave has rallied by just over 121% or 30% per year.

The trading range that we have been in for the past 10 months has been more indicative of accumulation than distribution. While that needs to be confirmed throughthrough ending action, the bias continues to be quite bullish.

This would lead Wyckoff investors to continue to hold their positions and count their profits. If we see a breakout to the upside, which, in my opinion, is still problematic, new positions can be taken on the Last Point of Support.

Otherwise, if the market reacts, Wyckoff investors can investigate new opportunities as the W through ave reaches the bottom of the trading range.

The short-term trader should follow the axiom “when in doubt, get out”.

For me, this has been a difficult market period. The good news is my long-term positions have grown nicely. The frustration is the difficulty found in anticipating turning points and not having them come to fruition.

The Wyckoff Wave will either penetrate the resistance and breakout of the trading range or it will react back towards the bottom of the trading range. While I suspect it will be the latter, I am not ready to put my short term money where my mouth is.