On Friday, after spending the week testing the top of the trading range (line drawn from point H) on very narrow price spread, the Wyckoff Wave rallied strongly and penetrated this resistance. It closed, on increased volume, at the top of a wider price spread at an all-time high.
While that seems good news for the bulls, the Wyckoff Wave is sending both positive and negative signals. At this critical juncture, there are several different scenarios.
1. The Wyckoff Wave could continue to rally and established a Sign of Strength (Jump across the Creek). This would be followed by a reaction. If the reaction was on reduced price spread and volume and held in the area of the resistance line, this would be an important Last Point of Support and the Wyckoff Wave would leave the trading range and continue this long and wonderful bull market.
2. On Monday if the Wyckoff Wave continues to rally it will encounter supply. We will see a narrowing of price spread, high-volume in a poor close. This would indicate an upthrust. If the Wyckoff Wave upthrusts the trading range it will at least react back into the range and possibly signal the end of the bull market.
3. The Wyckoff Wave could continue to rally on a lack of demand ( relatively narrow price spread and lower volume). It would create another new resistance point in this long trading range. As you can see by the attached chart, this has already happened at the first point H, point B and the second point H on the daily vertical line chart. This would simply continue the sideways movement as we wait for decisive ending action.
4. On Monday, the Wyckoff Wave would experience a gap opening to the downside and simply return to the trading range. The gap opening negates the upthrust scenario.
Now, let’s review both the positives and negatives emanating from the Wyckoff Wave.
One important positive is the relationship between the Wyckoff Wave and its Optimism – Pessimism Index. When the Wyckoff Wave moved into new high ground on Friday, there was a major change in that relationship.
For several days, the market’s effort, represented by the O – P Index, had outstripped its results, represented by the Wyckoff Wave. When the Wyckoff Wave moved into new high ground, not only were they back in harmony, but the O – P Index was now leading the Wyckoff Wave. Using Wyckoff market analysis, this is considered a very bullish indication.
The Wyckoff Wave moved into new high ground on wide price spread and increased volume. This indicated the presence of good demand. This strong demand was not present on three earlier occasions when the Wyckoff Wave left its trading range to the upside.
The Force Index, which is a measure of investor sentiment, is presenting strong positive readings. This is a bullish indicator. It also has an impact on the Technometer. This will be discussed later in this post.
As a result of Friday’s market action, the short-term trend of the market was changed from neutral to up.
Unfortunately for the bulls, there are also some negative indications that suggest the Wyckoff Wave may be running into more resistance.
The Technometer is in a dangerously overbought condition. This normally suggests a reaction is imminent. However, when the Force Index produces these strong positive readings, there is a mitigating impact on the potential reaction. In cases like this the reaction would b him e expected to be relatively narrow and short.
However, even though the Force Index has an impact on any reaction, a dangerously overbought Technometer makes it difficult for the Wyckoff Wave to continue its rally.
The Wyckoff Wave is approaching the supply line of its long-term up trend channel. This is shown on the weekly vertical line chart. This, coupled with the dangerously overbought Technometer does not give the Wyckoff Wave much room to continue its rally.
While Friday’s market action was on wide price spread and increased volume, the weekly chart shows a different story. This past week the Wyckoff Wave rallied on decreased price spread and volume. In fact, during the last two weeks, the Wyckoff Wave has rallied on reduced price spread and volume This suggests a lack of demand.
These weekly chart readings are important as the Wyckoff Wave is in a position to make a significant impact on the intermediate and long-term trends of the market.
So, based on the above, which of the four scenarios will succeed?
In my opinion, the upthrust scenario has the lowest probability of success. So far, there has been no change in character from the bullish signals the market has been sending throughout this trading range.
The relationship between the Wyckoff Wave and the O – P Index is extremely important, especially when doing intermediate and long-term analysis. Rarely, if ever, do we see a significant change in direction when the O – P Index is leading the Wyckoff Wave.
In each of its previous moves into new high ground, the Wyckoff Wave did not move in the definitive manner that it did on Friday. The presence of strong demand, as the Wyckoff Wave penetrated the resistance, suggests it will simply not put in a new trading range top and then continue to move sideways.
This leaves us with the “Jumped across the Creek” and “reaction back into the trading range” scenarios.
Either demand will continue or be completely withdrawn. While this question will be answered when the market opens on Monday, Friday’s strong close suggests demand is still present and the Wyckoff Wave will continue to rally and put in a potential Sign of Strength.