The Wyckoff Wave had an interesting week. The highlight was the large reaction on Wednesday (point F). The increased price spread and volume drove the Wyckoff Wave through the bottom of the original trading range and into new low ground.
What was happening? Recently, it appeared the Wyckoff Wave was in a new trading range after the rally from points Z to A. Then, after a rally to point E, the Wave reacted to test the lows of the “new trading range”. It seemed this would be at point D, the support/resistance line drawn from the May, 2011 highs or the support line of the original trading range drawn through point V.
Instead, the Wyckoff Wave reacted on decreased price spread and slightly decreased volume. Then, on Wednesday, strong supply came into the market. The Wyckoff Wave penetrated all the potential support areas on increased price spread and volume and appeared to be headed for a significant reaction.
As I studied the Wyckoff Wave that Wednesday evening, one thing jumped out. The Technometer reading was 37.06. Anything below 38 is considered dangerously oversold. The Technometer is part of the Trend Barometer indices that were developed in 1934. For over 75 years it has been uncannily accurate in identifying turning points. When used in conjunction with the Force Index, it also gives an indication of the strength of the rally or reaction after the turning point.
Despite the significant presence of supply, the dangerously oversold condition of the Technometer suggested we could be experiencing a shakeout. A shakeout is also a number one spring. That evening, in my daily market letter, I advised that we could be seeing a shakeout and this could be possible ending action.
A shakeout needs to be followed by a good rally. While the day following point F wasn’t terrific, the next day was and we saw good price spread and volume to the upside. The Wyckoff Wave returned to the trading range, which is now identified with a support line at point V and resistance drawn from point A.
The shakeout will have to be tested, but the reaction expected by many traders did not happen and the Technometer gave us an important clue.
In the past few weeks I have received several e-mails from people questioning the Technometer, the Optimism – Pessimism Index and the Force Index. Many felt these were mechanical indicators and not in concert with true Wyckoff teachings. Because of that, I wanted to share portions of an Evans Echoes lecture given by Mr. Evans almost 50 years ago. I have transcribed the lecture and it appears below in italic type.
This is the story of the Wyckoff trend barometer.
The Wyckoff Trend Barometer was invented by a Wyckoff student whose name was H. P. (Toby) Warey
in 1934. Mr. Warey, who was an outstanding electrical engineer, approached Mr. Robert Stanlaus then president of Wyckoff Associates. Mr. Stanlaus was one of Richard Wyckoff’s assistants who ran Wyckoff Associates, which later became Stock Market Institute, after Mr. Wyckoff’s passing.
Toby Warey said “Stan, I’ve got a Trend Barometer.” Stanlaus’ reply was paraphrased as follows: “Toby Warey, I would buy you dinner, I would take you to the ball game, I would do almost anything that you ask me to do, but please don’t ask me to look at a Trend Barometer.
You see, almost all of us, somewhere on the line get an idea which we feel will be a mechanical gimmick that will help us catch all market changes without even thinking
Everyone at Wyckoff Associates knew hundreds of students who have done the same thing. Naturally, Mr. Stanlaus had been exposed to almost all of them to the point he was almost saturated with these ideas.
Toby Warey said, “Stan, when you learn where I get my information and what I use for my formula, I believe that you will listen. Everything I use in the construction of my indices have been taken from the Wyckoff Wave chart. I use a modified version of the engineers physics formula for force and momentum as the basis of my entire work.” Stanlaus, who also had been an electrical engineer, before he became a Wyckoff student, said, “let me see it.”
Robert Stanlaus knew the scientific value of the wave chart. He also new that any knew index would have to have for its foundation the information that the Wyckoff Wave offered. Because he was an electrical engineer he also knew the importance of the idea of using force and momentum. They had their meeting together. The trend barometer was explained and the trend barometer was put in the hands of Wyckoff students in 1934.
I have seen hundreds of things which are supposed to be similar, but they’re all gone and the Wyckoff trend barometer is being used today by more people than ever before. Because it is totally based on the intraday fluctuations of the Wyckoff Wave or any stock, it is not a mechanical device, but an important tool that will help Wyckoff students identify important turning points and the potential strength and weakness of rallies and reactions.
I have always found the Technometer and Force Index to be terrific tools in helping me identify changes in the market. However, they are not mechanical. Sometimes the Technometer will become oversold a few days before the change in direction. Some days it becomes oversold right at the change of direction. These tools must be used in conjunction with our Wyckoff studies. To consider them to be mechanical indicators would be a major mistake and to interpret them that way could be a very expensive proposition.
Now, back to the chart.
The Wyckoff Wave has rallied off the shakeout at point F. Friday’s action, a decline on decreased spread and volume, suggests some demand is still present. The Wave may be beginning its reaction to test the shakeout, or it may be resting and will attempt to rally some more early next week.
Either way, it doesn’t really matter. The shakeout needs to be tested and at some point, in the near future, this will happen. The test will give us one of three different results.
1. The test can be successful and the Wyckoff Wave will rally and hopefully put in a Sign of Strength, a Last Point of Support and begin a new rally to the upside.
2. The tests will be successful, but the low will be below point F. This is considered a weak test of the shakeout. When this happens we can expect a second test to confirm or deny its success.
3. The test will fail and the Wyckoff Wave will begin a downtrend. If this happens, a supply line of the downtrend channel will be drawn from point E and the high of the rally off point F. A parallel support line will be drawn from point F.
Once again, it will be important to keep a close eye on the Technometer during the test. If the Technometer, once again, moves into an oversold condition, and the reaction is on reduced spread and volume, we can expect a successful test. This will be even more significant if the Technometer becomes more oversold than it was at point F, but the Wyckoff Wave is higher than at point F.
We are at an interesting and important juncture. While we must pay very close attention to price spread and volume, the Technometer can give us some important clues to the market’s next direction.