The Wyckoff Wave and the Technometer

Click Here For Wyckoff Wave Chart 07-06-12

This week, the stock market, as measured by the Wyckoff Wave, had one of its best days of the year and then reacted sharply. I would suspect that many non-Wyckoff traders took positions to the upside on Monday or even on Tuesday and were very disappointed.

On the other hand, Wyckoff traders not only did not take any new positions to the upside, but instead saw short term opportunities to the down side. Many acted on those opportunities and are enjoying their profits. What did they see that others did not?

One extremely helpful Wyckoff tool that helps determine both major and minor turning points is the Technometer. The Technometer is a five day moving average that is compiled using intra-day volume. It identifies times when the market for an individual stock is either overbought or oversold. When this happens, a change in market direction often follows.

When the Technometer reaches 50, it is considered to be in an overbought condition. When the Technometer reaches 42, it is considered to be in a slightly oversold condition and when it reaches 38, it is considered to be in a significantly oversold condition.

Several excellent examples of this are found on the attached chart of the Wyckoff Wave.

Let’s start with point F. The Wyckoff Wave broke through the support at the bottom of the trading range at point F. This was going to be either a spring or a Sign of Weakness (fall through the ice). The Wyckoff trader looked at the Technometer and saw it was at 37. The Wyckoff Wave was extremely oversold. This would suggest we were looking at a spring. The next day, the Wyckoff Wave rallied on reduced spread and volume. This was not a positive indication. However, the Technometer reading was 35.45. This is a dangerously oversold condition and the Wyckoff Wave could be expected to rally. And rally it did, all the way to point I.

The Wyckoff Wave rallied off the spring at point F, tested the spring at point H and began to rally. Were we going to break through the trading range to the upside? Was this a Sign of Strength?

Once again, the Technometer provided some clues. Three days before point I, the Wyckoff Wave rallied on widespread, but decreased volume. This suggested a lack of supply and gave the Wyckoff Wave another chance to continue the rally. However, that day’s Technometer reading was 58. The Wyckoff Wave was in a dangerously oversold condition. Although it tried to rally and put in a good day at point I, the goose had already been cooked. The Wyckoff Wave reacted sharply to point J. It then rallied briefly to point K and reacted sharply to point L.

The rally to point K allowed the drawing of a short-term down trend channel. It appears on the attached chart in red.

Was the Wyckoff Wave now going to continue to definitively leave the trading range to the down side? Once more, the Technometer provided some answers.

The day before point L, the Technometer moved into a significantly oversold condition. It had a reading of 37.61. On the day of point L, the Wyckoff Wave tried to rally and then reacted on wider spread and slightly decreased volume. However, the Technometer reported a 35.41 reading. This put the Wyckoff Wave in an very dangerously oversold condition. The Wyckoff Wave then rallied sharply to point M.

Once again the Technometer offered some clues to a turning point. The day before point M, the Technometer had an overbought reading of 51.18. It remained overbought (51.29) at point M. It then reacted sharply to point N.

At point N, the Technometer reading was 37.75. This oversold condition suggested it would be difficult for the Wyckoff Wave to react much farther. That proved to be correct as the Wave rallied to point O.

Now we are back to last Monday’s market action. The day was unbelievably strong and everyone was quite excited about the market. In addition, the Technometer was only at 48.85. This is considered to be a neutral condition and the Technometer was not yet giving us a clue that the market might reverse direction.

On Tuesday, the day following point O, the Wyckoff Wave reacted on slightly reduce spread and reduced volume. This could be considered a positive day as the market action suggested a lack of supply. However, some eyebrows were raised as the Technometer moved into an overbought condition at 51.68. This was a minor clue that trouble could be lying ahead. If nothing else, the market had to put in a good day on Wednesday to continue the rally.

Not only did it fail to do that, but the Technometer ballooned to 55.16. This is a dangerously oversold condition and strongly suggested the market would be unable to continue to rally. Wyckoff short term bears took positions to the down side and are enjoying their short-term profits.

A couple of very, very important points. While it is a terrific trading tool, the Technometer is not a mechanical indication of exactly when the market will turn. While it is reasonably accurate, there were several other Wyckoff indicators that confirmed the Technometer readings, in the examples above. These include price spread and volume analysis, the inability to reach supply or support lines and divergences relating to the Technometer and another Wyckoff tool, the Force Index. These are all commented on more extensively in the daily Pulse of the Market report.

Where will the Wyckoff Wave go from here? After reacting on Thursday and Friday, the Technometer remains in an overbought condition. The Wyckoff Wave did see some support at the L – N support line. The Wave is also at or near a couple of important support areas. However, we have no indication of an immediate turnaround.

I would suspect that short-term Wyckoff traders will watch the market closely, but their profits ride and see what the Technometer has to say.