Back on February 20th the Wyckoff Wave penetrated the top of the trading range (line drawn from point H on the attached daily chart) at point 1. It then moved sideways for the next nine trading days. It closed at 44, 243
During the next eight trading days, it penetrated the top of the trading range three times. The final time being last Thursday. Thursday’s close was 43, 271. This represented a whopping gain of 28 points.
In addition, with one exception, which was this past Wednesday, the Wyckoff Wave traded on very narrow price spread.
When a stock or index penetrates the top of the trading range, many traders automatically look for a major Sign of Strength (jump across the Creek) or an upthrust.
A Sign of Strength happens when strong demand, that is represented by wide price spread, and strong volume, comes into the market and aggressively drives the stock or index into new high ground.
An upthrust is when a stock or index attempts to move through the top of the trading range and runs into a very strong supply. This is represented by a narrowing of the price spread, high-volume and a poor closing price.
Even though the Wyckoff Wave spent a great deal of time attempting to penetrate the top of the trading range, neither of these things happened. On Thursday, it made one final attempt as the Wyckoff Wave reacted and then took a running start towards the top of the trading range. Unfortunately, there was no follow through and the attempt failed.
On Friday, good supply came into the market and the Wyckoff Wave appears to be reacting back into the trading range. Notice the strong volume and increased spread, especially compared to Thursday’s market action.
This is a difficult time for any trader. The Wyckoff Wave could have made a strong statement that would’ve been extremely bullish or very, very bearish. Yet, it didn’t. It simply appears to be reacting back into the trading range where it will continue until there is some sort of ending action.
Ending action would be a spring (bullish) or an upthrust (bearish).
Fortunately, the Wyckoff trader has an excellent tools to help them navigate these potentially treacherous waters.
Let’s start with the Technometer. The Technometer is a Wyckoff tool that helps the trader identify overbought and oversold conditions in a stock or index. Any number below 42 is considered to be oversold. If the Technometer moves above 50, the stock or index is considered to be in an overbought condition.
At point 1, as the Wyckoff Wave penetrated the top of the trading range, the Technometer reading was 57.47. This is a dangerously overbought condition.
Technometer readings can be further refined when compared with the Force Index.
If the Technometer is in an overbought condition and the Force Index is producing positive or very low negative readings, there is a mitigating impact on the overbought Technometer.
This means the expected rally will not be particularly long or deep.
With the exception of two trading days, the Technometer remained in an overbought condition from point 1 over to point R.
During that time the Force Index was producing lower positive numbers. It went from + 174 at point 1 down to +73 at point R. While the mitigating impact on the Technometer was still in place, it was reducing in strength.
When the Wyckoff Wave reacted on Friday, even though the Technometer remained in an overbought condition, the Force Index began producing negative readings.
This opens the door for a continued reaction.
When a stock or index is in a clearly or dangerously overbought condition on the Technometer (readings from 52 and above), it is very difficult for a stock or index to advance. This dramatically reduced the probability of a Sign of Strength.
An upthrust happens when demand drives the stock into new high ground and suddenly it is met with strong supply. The relatively narrow price spread and low volume indicated this was not happening. This dramatically reduced the probability of an upthrust.
Because of that, Pulse of the Market subscribers received a short-term sell signal back in late February. While they had to ride out a few days of sideways movement, they will most probably see some good profits as a reward for their patience.