On Monday and Tuesday the Wyckoff Wave completed its reaction off the late December high at point L. It returned to its short-term down trend channel and Tuesday’s low tested the channel’s support line. It also tested an earlier low at point K.
This reaction was on wide price spread and volume. Although the Technometer was in a dangerously oversold condition, the Wyckoff Wave rallied off that support on Wednesday and continued its up move on Thursday.
While demand was present, it did not match the quality of the earlier supply.
On Friday the Wyckoff Wave reacted on fairly wide price spread and relatively high, but reduced volume. It is now sitting in the middle of its trading range and Wyckoff traders need to wait and let the market tell them what is going to happen next.
The Wyckoff Wave’s sideways movement presents an opportunity to write about trading ranges. As a general rule stocks spend about 75% of the time in a trading range. While we are always looking for that wonderful up or down move, the reality is the market spends most of its time moving sideways.
Trading ranges are defined by resistance levels at the top and support levels at the bottom. Unfortunately, as the market moves up and down within the trading range, these levels change. On the attached chart there are eight resistance and support levels that are represented by horizontal green lines.
I have always felt it is important to keep support and resistance lines, in both trading ranges and trend channels on the vertical line chart for a long time. It is important to analyze their behavior as stocks approach the important areas of resistance and support.
The first support line was established, at point U, on March 3, 2014. Then, for the next 10 months, as the Wyckoff Wave moves up and down, new support and resistance lines are identified.
There were times that the Wyckoff Wave moved into new high ground. These can be seen at points H (May 2014), B and the second H (November 2014). While some may have thought these were signs of strength (jumps across the creek), the price spread and volume indicated that the expected demand was not present. Without demand, the Wyckoff Wave fell back into the trading range. However, a new resistance level was established.
The same is true at the bottom of this trading range. On the reaction from point T to point W, the Wyckoff Wave penetrated a support line. This was a potential spring. However, demand was withdrawn after one day and the Wyckoff Wave back to the top of the trading range at point X. Price spread and volume was relatively narrow and it was difficult to call the move a sign of strength.
Instead of springing the support, the Wyckoff Wave was simply testing the support drawn from point U. It simply rallied off that support and continued in its trading range.
Sometimes the Wyckoff Wave throws a curveball. This happened at point E. The Wyckoff Wave reacted sharply from point D on good price spread and increasing volume. It penetrated the support line at the bottom of the trading range on good price spread and volume. It then rallied off it’s low at point E. This appeared to be a classic shakeout or #1 spring.
However, shakeout’s or #1 springs must be tested. This one was not. That was the first warning sign.
The Wyckoff Wave then rallied back to the top of the trading range at point F. Notice the reduced volume levels as the Wave approached the top of the trading range.
After a brief reaction to point G, the Wyckoff Wave rallied into new high ground. Once again, notice the reduced price spread and volume. Demand simply was not present. In fact it began to be withdrawn as the Wyckoff Wave passed the halfway point on the way to the top of the trading range.
The only thing accomplished was that the Wyckoff Wave put in a new high and a new top of the trading range. This is the horizontal line drawn from point H.
We now have a trading range with the resistance level at point H and a support level at point E. Does this mean the ending action, when it comes in the form of a spring or anupthrust, must involve these two resistance and support lines?
The answer is no. This is why all the earlier resistance and support lines are continued on the vertical line chart. It is extremely important to watch how the Wyckoff Wave behaves as it approaches to test or penetrate one of these resistance or support lines.
It is extremely interesting to note that the Wyckoff Wave rallied off point K. Point K is part of the original support line and, with the two exceptions discussed above, has been an important part of this trading range. If the Wyckoff Wave reacts and springs the support line, puts in a successful secondary test and a sign of strength with good demand, this could be the beginning of an important move to the upside.
However, the Wyckoff Wave has not given us any indication that that will happen. The reaction to point K simply tells us supply is present. The rally to point L indicates demand is still present.
However, the reaction to point M indicates supply has not dried up. Thursday’s and Friday’s rally indicate the presence of demand. The presence of both demand and supply simply indicate the Wyckoff Wave is moving up-and-down of the trading range and there is no indication that a significant move in either direction is imminent.
This is how trading ranges work. However, the good Wyckoff student should always have certain scenarios in the back of their minds. This allows the development of expectations about how the market will behave if the scenarios are going to come to fruition. If the scenarios play out, new positions can be taken
This analysis of trading ranges gives Wyckoff students a head start on identifying the next important move.