The Reaction That Didn’t Happen

Click Here For Wyckoff Wave Chart 10-16-2015

In last week’s blog post I wrote, ” 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.”

The Wyckoff Wave did react. It closed that 39,118. That’s a loss of 64 points or less than 1/10 of 1%. Not exactly what I was forecasting.

In today’s blog post I will attempt to review the bidding and see if we can get some answers as to why the Wyckoff Wave didn’t react, but held near the top of the rally off point U.

The purpose of an accumulation trading range is the transfer of demand from weak to “strong hands”. Distribution is the opposite. While nothing will be confirmed until the trading range is complete and there is ending action, the market action from the Selling Climax at point Q appears to be accumulation.

This means “weak hands” need to sell their stock to professional “strong hands”.. As supply is taken in, demand is reduced as the major actors are attempting to take in as much supply as possible before beginning the mark up phase.

This process can take several weeks or even months. It will take as long as it takes and no one is in a big hurry. In fact, that is part of the overall strategy. Some investors and traders will get tired of the lack of action and these minor up and down moves and liquidate their holdings. Another example of weak hands selling to strong hands.

Because every traders recorded and shown to us in on the vertical line chart, Wyckoff students can analyze how this battle between supply and demand is proceeding. An early example of this is what happened this past week.

As the Wyckoff Wave rallied and arrive at some fairly important resistance points, the expected supply did come into the market. The first was the support, now resistance line that marks the bottom of a long sideways movement, which began last October (point E). The second was the support line of the intermediate downtrend channel that is marked in red on the daily chart.

This is a normal place where the Wyckoff Wave might supply. It could then react to put in another support point in the developing trading range.

The Wyckoff Wave seemed ready to react. The Technometer was in an overbought condition and there were some negative divergences between the Wyckoff Wave and the Optimism – Pessimism Index.

However, when the Wyckoff Wave began to react demand returned. Some traders, thinking this was a brief reaction before a continued advance took positions to the upside. However, there wasn’t enough demand to generate a rally. There was enough to stop the reaction.

The O – P Index presents this beautifully. It has rallied strongly out of its downtrend channel. Compare this with the inability of the Wyckoff Wave to enter the downtrend channel. Both trend channels are drawn from the same points. The supply lines are drawn through point F and J. The parallel support lines through point I.

The O – P Index is noticeably stronger than the Wyckoff Wave. This suggests a substantial effort is being made to push the Wyckoff Wave up. Unfortunately, the Wyckoff Wave is not helping that effort. This indicates the demand is being met with supply and, so far, it is a fairly even battle.

This is also demonstrated by the relatively high volume on Wednesday, Thursday and Friday. Wednesday’s volume was down volume and it suggested the reaction was about to begin. However, enough demand came in on Thursday to stop the reaction and actually push the Wyckoff Wave up.

Look at the narrow price spread. This indicates demand was running into trouble and trouble’s name was Supply. This trend continued on Friday with even narrower price spread and high volume.

This suggests that the Wyckoff Wave will have a difficult time continuing to rally. Demand needs to be taken in by “stronger hands” and dried up, before there is a noticeable reaction within the trading range.

This can also be shown on the intra-day chart. Friday’s intraday market action is an excellent example of this concept.

On Friday, the Wyckoff Wave had a fairly wide gap opening to the upside. It opened at point B, which was the high for the trading day.

The Wyckoff Wave then reacted to point C. The reaction was quite shallow, but notice the high volume. While the sellers were dominating, there was still a fair amount of buying going on.

Then, at point C, the roles were reversed. Demand got a slight upper hand and the Wyckoff Wave attempted to rally. However, at the close on Friday it had been unable to reach the high at point B. While demand was controlling the market action, there was enough supply to prevent any serious move to the upside.

If this trading range is accumulation, we should see less demand at the top of succeeding trading range rallies. The high volume we saw this week will be noticeably reduced. We will also see lower volumes on reactions which suggests, because more of the demand is taken in, strong hands don’t need to do is much selling and can hold on the shares that will turn a profit when the market advances. If they are sold they can be re-purchased at a later date.

Trading ranges can be boring and patience is important. Intermediate and long-term traders should maintain their long positions and wait for ending action. While aggressive short-term traders, may consider positions to the downside, the market might not react as quickly as expected and unless stop orders are jeopardy, these positions can be maintained.

We are in a trading range and this takes a lot of day to day excitement out of the market.