The Wyckoff Wave – Can we learn from recent history?

Click Here For Wyckoff Wave Chart 02-17-12

This week, just like the last two, the Wyckoff Wave moved sideways in a very narrow trading range. After having what appeared to be an upthrust at point U (on the daily chart) and shown as S on the weekly chart, the Wyckoff Wave was unable to substantially weaken the short term support line P – R (shown on the daily chart). Enough demand was present to accept all the supply that came into the market and the result has been a three-week standoff.

This past week has seen the Wyckoff Wave move within an apex formation. On Wednesday, marked by point X (daily chart), it appeared the Wave was going to leave the trading range to the down side. That didn’t happen and on Thursday and Friday the Wyckoff Wave rallied back to the top of the range. Now, both the support and supply lines of the apex have been weakened. Point X was not a spring as it did not penetrate below the low at point V.

Where do we go from here? The short-term uptrend channel has certainly been weakened. The Technometer was overbought on Thursday and nearly overbought on Friday. The Optimism – Pessimism Index has formed a short-term negative divergence with point U and W. The Force Index is testing the support line of its short-term uptrend channel. These are the negatives that can certainly justify a reaction scenario.

We also may be looking at some absorption. Every time supply appears, it is countered by demand. An argument can be made that demand is so strong that the expected reaction will simply be a sideways movement and, at any time, the Wyckoff Wave will resume its upward movement.

Either one of these scenarios is a possibility and all of us are looking for clues in each day’s market action to determine the market’s future direction.

When this happens there is a tendency to focus on the very short term direction of the market and ignore the larger picture. This loss of perspective can often cause us to miss important signals about the future direction of the stock market. Been there, done that.

When this happens to me, I find it helpful to go back and look at the longer review of the Wyckoff Wave. This week I have attached both the daily and weekly charts as well as the Point and Figure chart of the Wyckoff Wave.

Since the end of the 2008 bear market, the Wyckoff Wave has been primarily bullish. It rallied off the bottom of the bear market (not shown on this chart), went through a trading range shown on the weekly chart from point A to point B and then put in a nice rally to point G. The importance of that rally was that it exceeded the halfway point of the bear market and gave the Wyckoff Wave an opportunity to regain even more of those losses.

Having exhausted its cause, the Wyckoff Wave went through a distribution period and then reacted sharply. Again, after meeting objectives, it climaxed at point X and began a new trading range. The trading range’s ending action came in the form of the spring at point H. It is then appropriate to call the trading range to the accumulation. Therefore, we can take a count on the Wave’s 100 Point & Figure chart.

The count is taken at the 24,800 line. While there were other phases, these have been met, leaving us with two objectives. The first phase from point H to point Z gives us a count of 8400 and an objective of 33,200.

The full count, all the way over to the selling climax at point X, gives us a count of 12,400 and an objective of 37,200. On Friday the Wyckoff Wave closed at 31,445. This would suggest we still have more count to be worked out.

Let’s turn to the weekly vertical line chart of the Wyckoff Wave. After the spring at point H, the Wyckoff Wave had a Sign of Strength to point K. Then things got a little confusing. The Wave backed up to point L at the top of the creek drawn through point A and then rallied to point M. One would’ve thought this was the beginning of the markup phase. Not so.

The Wyckoff Wave then reacted back into the original trading range and saw support at point P. Notice how this support was also at the support line of the long term down trend channel that was formed way back in last spring’s distribution area. It is important to remember that on a long-term basis that down trend channel still comes into play.

Was point P a major Last Point of Support? Point P was reached on widespread, but decreased volume. The decreased volume was a little deceiving as point P was reached on the day after Thanksgiving, which was a partial trading day and therefore, had extremely low volume.

The Wyckoff Wave rallied strongly off point P. We certainly had a higher bottom so it would be appropriate to draw trend lines through points H and P, with a parallel supply line drawn through K. Because of the action surrounding point P, it is difficult to call it a last point of support, but the trend lines still should be in effect.

While the Wyckoff Wave has certainly rallied from the spring at point H, we have not yet seen a true last point of support. As evidenced by the recent market action, supply has not dried up. The Wyckoff Wave has also weakened its short-term up trend channel, but did not confirm it had been broken. It is also moving towards the H – P support line on the weekly chart.

This sideways movement has also created a cause on the Wyckoff Wave 100 Point & Figure chart. Presently, there is a 210 point count on the 31,400 line, giving us an objective of 29,300. If this count is taken from the 31,500 line the objective becomes 29,400. If this objective is worked out to the down side, it takes us back to the support/resistance line drawn through K. If this was done on reduced spread and volume, we would have the long-awaited last point of support. We would also have a huge upside objective.

Will the Wyckoff Wave react or will it simply absorb the supply and move toward its yet to be reached objectives?

I would suggest there is still a fair amount of overhanging supply that needs to be transferred to stronger hands. Many investors are still holding positions taken before the 2008 bear market and may feel, especially based on domestic and international conditions, that this is the time to finally get out. In addition, those who bought them last spring, just before the reaction to point X, have a chance to get out even. These basic Wyckoff principles suggest the reaction scenario still has the highest probability.

Regardless, it certainly appears the Wyckoff Wave is going to go higher before any substantial reaction. It is also helpful that the questionable economic condition creates negative news and feelings about investing in the stock market. It is in times like these that strong hands pounce and money is made.